Accounting

Question 1

Basic Accounting Principles

Answer 1

Dual Aspect Concept - each transaction has 2 sides
Money Measurement concept - each transaction is measured in money
Accounting entity concept - personal and business separate
Prudence - conservatism
Consistency and comparability

Question 2

Depreciation Formula

Answer 2

straight line = (cost - disposal value)/useful economic life
reducing balance method = depreciation rate x book value at start of year

Question 3

ROCE

Answer 3

shows how efficiently a company uses its capital to generate profits
ROCE = operating profit/capital employed
(capital employed = assets - current liabilities)

Question 4

Asset turnover

Answer 4

Revenues/capital employed
capital employed = assets - current liabilites

Question 5

Return on equity

Answer 5

Net profit/Equity

Question 6

Equity Multiplier

Answer 6

Total assets/shareholders funds

Question 7

Dupoint Analysis

Answer 7

Net Profit Margin x Total asset turnover x equity multiplier

Question 8

Net profit margin

Answer 8

not profit/revenues

Question 9

Operational Gearing Ratio

Answer 9

a profitability ratio
(revenues - variable costs)/profit before tax

Question 10

Breakeven Point

Answer 10

fixed costs/sales revenue per unit - variable costs per unit

Question 11

Drivers of Growth in Sales

Answer 11

Volume - increase marketing spend, launch new products
fixed cost per unit will decrease - can lower breakeven
point
price - offer an improved product, enhance brand value
lower break even point as increase contribution per unit
consider price elasticity to demand

Question 12

Current Ratio

Answer 12

current assets/current liabilities

Question 13

Quick ratio/acid test ratio

Answer 13

(current assets - inventory)/current liabilities

Question 14

Receivables collection period

Answer 14

trade receivables/revenue x 365

Question 15

payables payment period

Answer 15

trade payables/cost of good sold x 365

Question 16

Inventory days

Answer 16

inventory/cost of goods sold x 365

Question 17

Debt to equity

Answer 17

considers risk to equity shareholders
(debt + preference share capital)/equity shareholders funds - preference share capital

Question 18

Interest Cover

Answer 18

how easy it is for company to pay interest
(𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒑𝒓𝒐𝒇𝒊𝒕 + 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆 + 𝒐𝒕𝒉𝒆𝒓 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔)/
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒑𝒂𝒚𝒂𝒃𝒍𝒆

Question 19

Asset Cover

Answer 19

how easily if the company was to wind up can they pay their debt
(𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 − 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔)/
𝑳𝒐𝒂𝒏𝒔 𝒑𝒂𝒚𝒂𝒃𝒍𝒆

Question 20

EPS & Diluted EPS

Answer 20

maximum amount ordinary shareholder could receive as a
dividend if they paid all profits as shareholder
𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒂𝒕𝒕𝒓𝒊𝒃𝒖𝒕𝒂𝒃𝒍𝒆 𝒕𝒐 ordinary 𝒔𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔/
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒘𝒆𝒊𝒈𝒉𝒕𝒆𝒅 𝒏𝒐 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆𝒔 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒊𝒏 𝒕𝒉𝒆 𝒑𝒆𝒓𝒊𝒐𝒅

diluted EPS potential worst case scenario going forward
diluted EPS if everything that can be is converted to shares

Question 21

Restated EPS

Answer 21

𝑹𝒆𝒔𝒕𝒂𝒕𝒆𝒅 𝑬𝑷𝑺 =
𝑶𝒓𝒊𝒈𝒊𝒏𝒂𝒍 𝑬𝑷𝑺/
𝑩𝒐𝒏𝒖𝒔 𝑭𝒓𝒂𝒄𝒕𝒊𝒐𝒏

For a Rights Issue:
𝐵𝑜𝑛𝑢𝑠 𝐹𝑟𝑎𝑐𝑡𝑖𝑜𝑛 =
𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑟𝑖𝑐𝑒/
𝑇𝐸𝑅𝑃

For a Bonus Issue / Stock Split:
𝐵𝑜𝑛𝑢𝑠 𝐹𝑟𝑎𝑐𝑡𝑖𝑜𝑛 =
number of shares after issue/number of shares before issue

Hint:
The bonus fraction will
always be >1

Question 22

nil paid right/price

Answer 22

TERP - subscription cost

Question 23

Tail Swallowing

Answer 23

number of rights to sell = rights price/TERP x rights entitlement

Question 24

Dilutive EPS for convertibles

Answer 24

To calculate diluted eps for a convertible:
1. Calculate interest saved from conversion to ordinary shares
2. Deduct corporation tax from that saving
3. Add interest saving to normal profit
4. Calculate total new number of shares (original plus shares from the convertible)
5. Divide new profit (3) by total new number of shares (4)

Question 25

Earnings Yield

Answer 25

EPS/share price

Question 26

P/E

Answer 26

Share Price/EPS

Question 27

Dividend Yield

Answer 27

Net dividend per share/share price

Question 28

Dividend Cover

Answer 28

EPS/Net dividend per share or 𝑵𝒆𝒕 𝒆𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝒂𝒕𝒕𝒓𝒊𝒃𝒖𝒕𝒂𝒃𝒍𝒆 𝒕𝒐 𝒔𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔/𝑻𝒐𝒕𝒂𝒍 𝒐𝒓𝒅𝒊𝒏𝒂𝒓𝒚 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅

Question 29

Benefits And Limitations Of Ratio Analysis

Answer 29

 Use historic data – not predictive  Different industries have different characteristics  Companies within the same sector may be at different stages  Profitability – different business model, no account taken of future economic events, management changes etc.  Liquidity - no account taken of macro economic environment  Accounting policies may differ  Window dressing - putting figures in best light  Circular transactions - e.g. to create extra revenue but which have no validity  Bed and breakfast transactions - e.g. sell before year end, but then buy back after year end  Distortions - e.g. use of year-end balance to analyse full year’s transactions or not comparing like with like only looking at 2 years - one may be a blip