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Accounting > Accounting Term 3 Ratios > Flashcards

Accounting Term 3 Ratios Flashcards

1
Q

Financial reports definition

A

Financial reports are one means of communicating information, and the use of ratios greatly assists with the analysis and interpretation of these reports.

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2
Q

Financial Stability definition

A

The financial stability ratios give an indication of the short-term liquidity and the long-term solvency of the enterprise.

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3
Q

The current ratio definition

A

This ratio indicates the ability of an enterprise to meet its short-term financial obligations.

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4
Q

Generally accepted current ratio

A

2:1

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5
Q

Quick ratio definition

A

The quick ratio measures the ability of a business to meet its immediate financial obligations.

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6
Q

Equity ratio definition

A

This ratio indicates the extent to which the owner has financed the business’s assets as opposed to using alternative source of finance - borrowings

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7
Q

Debt ratio definition

A

This ratio indicates the way in which the business is financed and the extent of the business’s borrowings in relation to its assets.

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8
Q

Profitability definition

A

Profitability is the ability to earn income within the current financial structure capacity.

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9
Q

Gross profit ratio definition

A

The gross profit ratio indicates the ability of an enterprise to generate an acceptable net profit, return on owner’s investment and whether it can meet its other operating expenses.

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10
Q

Net profit ratio definition

A

The purpose of the net profit ratio is to show the effectiveness of managers to minimise expenses per dollar of sales.

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11
Q

Rate of return on owners equity ratio definition

A

The rate of return on owner’s equity ratio indicates the return on the owner’s investment in the business.

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12
Q

Rate of return on total assets ratio definition

A

The rate of return on total assets ratio indicates the ability of the enterprise to generate profits using its assets.

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13
Q

Management effectiveness definition

A

Effectiveness of management policies is the measurement of how proficient managers, have been in directing and maintaining set policies.

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14
Q

Rate of turnover of inventories ratio definition

A

The rate of turnover of inventories ratio details how many times initial inventory are replaced.

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15
Q

Rate of turnover of accounts receivable ratio definition

A

The rate of turnover of accounts receivable ratio indicates the period of collection of accounts receivable.

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16
Q

Current ratio strategies

A

increase current assets

Decrease current liabilities - short term loans into long term loans

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17
Q

Quick ratio strategies

A

Increase current assets such as cash

Decrease current liabilities

18
Q

Equity/Debt ratio strategies

A

Decrease debt through repayments
Minimise the need to hold large assets
Minimise the need to borrow beyond the 50:50 balance of debt/equity

19
Q

Gross profit ratio strategies

A

Increase selling price
Reduce COGS
Find a cheaper supplier for goods sold

20
Q

Net profit ratio strategies

A

Increase sale revenue

Reduce expenses

21
Q

Rate of return on OE strategies

A

Decrease owner’s investment if is considered to be overcapitalised
Increase net profit
The owner could contribute more capital of undercapitalised

22
Q

Rate of return on total assets ratio strategies

A

Increase net profit

Decrease average total assets

23
Q

Inventories strategies

A

Sell more inventories through targeting customers via phone sales, advertising or changing pricing policy
Quit items which are not moving quickly while ensuring a good supply of the most popular inventory items.

24
Q

Account receivable strategies

A

Tighten credit policy and communicate this to debtors
Follow up late payers by phone, email and letter if necessary
Offer discounts for early cash settlement
Use bright stickers on statements to debtors to remind them of overdue status of accounts
If bad debts are a concern, then are policies for determining who will receive credit being followed: Do they need review?

25
Q

Title

A

Evaluation of Financial Position - Name and Date

26
Q

Summary

A

State the level of operation - acceptable, not acceptable
Compare to industry - compares favourably or unfavourably
Recommendations have been made to address the issues that have arisen

27
Q

Introduction

A

Financial reports are one means of communication information, and the use of ratios greatly assists with the analysis and interpretation of these reports. Three areas; financial stability, earning capacity and effectiveness of management policies assist with analysing and interpreting the financial position of the firm. Each of these will be addressed independently in this report.

28
Q

Financial stability ratio structure

A

Define financial stability
Cover the following for each ratio: (current, quick, equity and debt)
State the 2017 figure
Compare to industry average and 2016
State what is acceptable
What strategies can be used to improve this ratio?
What events or accounts have cause this result
Include in your discussion - relevant horizontal and vertical analysis

29
Q

Current ratio what does high or low mean?

A

High ratio - high degree of assurance that current liabilities can be paid out of current assets.
Low ratio - Low of above

30
Q

Quick ratio what does high or low mean?

A

High - high degree of assurance that current liabilities can be paid out of current assets
Low - business is depending on inventory turnover to pay current debts

31
Q

Equity ratio what does high or low mean?

A

High - most funds are being provided by the owner

Low- most being provided by borrowings

32
Q

Debt ratio what does high or low mean?

A

Low - assets are being funded by the owner

High - assets being funded by borrowings

33
Q

Gross profit ratio what does high or low mean?

A

High - Business can easily cover all of its expenses; has the capacity to earn an acceptable net profit and an adequate return on investment
Low - business will have difficulty in covering other expenses; a net loss may occur; there is an adequate return on investment.

34
Q

Net profit ratio what does high or low mean?

A

High - operating revenue is high and operating expenses are low
Low - selling margin is very low; volume of sales is low compared to fixed costs; expenses are too high when compared to sales

35
Q

Rate of return on Owners Equity what does high or low mean?

A

High - may indicate management efficiency

Low - could be more beneficial for the owner to invest elsewhere

36
Q

Rate of return on Total Assets ratio what does high or low mean?

A

High - good performance of assets; effectiveness use of firm’s assets to generate profit
Low - Ineffective use of firm’s assets; poor performance of assets

37
Q

Management effectiveness paragraphs structures

A

Define effectiveness of management policies
Cover the following for each ratio:
- state the 2017 figure
- state what the ratio shows
- Compare to industry average and 2016
- State what is acceptable
- What strategies can be used to improve the ratio?
- What accounts or events have caused this result?
- Include your discussion - relevant horizontal and vertical analysis

38
Q

Inventories what does high or low mean?

A

High - fast moving inventory; shortage of inventory available for sale
Low - slow moving inventory; large holding of inventory ready for sale

39
Q

Accounts receviable what does high or low mean?

A

High - tight and effective credit policy

Low - loose credit policy; in danger of a high number of bad debts

40
Q

Conclusion structure

A

STATEMENTS COVERING ALL RATIOS

  • Is the business able to meet its immediate and short term debts?
  • How the business is funded - internal or external and is there a balance?
  • The level of gross profit - satisfactory, unsatisfactory, good, excellent
  • Net Profit - what has happened, compare to industry average
  • Rate of Return on OE and total assets - what has happened, how does it compare to industry
  • Inventory turnover - has it improved
  • Accounts receivable - does the credit policy need urgent attention

Accounting (9 decks)

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