Week 2

Question 1

Who is the annual report read by?

Answer 1

Investors, lenders, advisors, suppliers, government and competitors

Question 2

Balance sheet equation

Answer 2

Assets = liabilities + equity

Question 3

Liabilities

Answer 3

money legally owned to suppliers

Question 4

Equity

Answer 4

Shareholders own/funds, share capital/premium, any profit kept back or retained earnings

Question 5

SOFP

Answer 5

CA + NC = CL + NCL + E

Question 6

Net working capital equation

Answer 6

CA - CL

Question 7

Why is positive net working capital preferred?

Answer 7

It means enough cash will be available to pay off liabilities arising

Question 8

Book value

Answer 8

Accounting figures drawn from Accounting Standards

Question 9

Market value

Answer 9

Value based on prices or market valuations

Question 10

Market value equation

Answer 10

Market price x number of shares

Question 11

Net income (profit for the year)

Answer 11

Revenues - expenses

Question 12

Income statement

Answer 12

Measures performance over a specific period

Question 13

Three important considerations

Answer 13

Non cash items
Time
Cost

Question 14

Total cash flow

Answer 14

Cash flow from operating activities + investing activities + financing activities

Question 15

Ratio analysis

Answer 15

Simplify data into key indicators to highlight trends and variances in profitability, financial strength and ability, cash flow generation

Question 16

Trend analysis

Answer 16

Same company, different time periods

Question 17

Peer analysis

Answer 17

Several companies e.g. in same sector

Question 18

Ratio analysis: short term solvency equation

Answer 18

Working capital management / cash position

Question 19

Short term solvency: higher liquid ration (>1)…

Answer 19

The more solvent the company is in short term

The less risk of financial distress in short term

Question 20

Short term solvency ratios

Answer 20

Current, quick and cash ratio

Question 21

Ratio analysis: financial leverage

Answer 21

Long term solvency
Assets v liability
Assets v equity
Liability v equity

Question 22

Financial leverage: lower the debt-equity ratio or equity multiplier / or higher interest cover ratios

Answer 22

The more solvent the company is in long term

The lower risk of financial distress in the long term

Question 23

Ratio analysis: asset turnover

Answer 23

Efficient use of assets, investments

Question 24

Asset turnover ratios

Answer 24

Inventory turnover
Days' sales in inventory
Receivables turnover
Days' sales in receivables
Total asset turnover

Question 25

Inventory turnover

Answer 25

High I.T indicates efficient inventory management

Question 26

Inventory and receivables days

Answer 26

Lower I & RD means lower funds locked up in inventory/receivables

Question 27

Total asset turnover

Answer 27

Indicates sales generated per unit of asset. High AT indicates efficient management of assets

Question 28

Ratio analysis: profitability ratios

Answer 28

Profit margin
ROA
ROE

Question 29

Profitability ratios measure…

Answer 29

How efficiently firm uses its assets and manages its operations

Question 30

Profit margin

Answer 30

Higher the better

Question 31

ROA

Answer 31

Measure of profit generated per unit value of assets

Question 32

ROE

Answer 32

Measure of profit generated per unit value of equity