Accounting Ratios & CVP Analysis WBS EMBA

Question 1

Name 5 types of accounting ratios

Answer 1

Solvency ratios
Liquidity ratios
Investment ratios
Profitability ratios
Activity ratios

Question 2

Explain what a SOLVENCY ratio is

Answer 2

The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-term and long-term liabilities.

Question 3

Name 2 types of SOLVENCY ratios

Answer 3

Gearing ratio

Interest cover ratio

Question 4

How to calculate the ‘gearing ratio’

Answer 4

debt / equity

Question 5

How to calculate the ‘interest cover ratio’

Answer 5

PBIT /

interest

Question 6

Explain what LIQUIDITY ratios are

Answer 6

Ratios that determine a company’s ability to pay off its short-term financial obligations.

Question 7

Name 2 types of LIQUIDITY ratios

Answer 7

Current ratio

Acid test ratio (or liquid ratio or quick ratio)

Question 8

How to calculate ‘current ratio’

Answer 8

current assets /

current liabilities

Question 9

How to calculate ‘acid test ratio’

Answer 9

current assets (excluding inventories) /
current liabilities

Question 10

Explain what an INVESTMENT ratio is

Answer 10

A ratio that can be used by shareholders to assess the returns on their investment.

Question 11

Name 4 INVESTMENT ratios

Answer 11

Earnings per share (EPS)
Price to earnings ratio (P/E ratio)
Dividend yield ratio
Dividend payout ratio

Question 12

How to calculate ‘earnings per share’ (or EPS)

Answer 12

PAT /

number of shares

Question 13

How to calculate ‘price to earnings ratio’ (or P/E)

Answer 13

market price per share /

earnings per share

Question 14

How to calculate ‘dividend yield ratio’

Answer 14

dividend per share /
market price per share

x 100

Question 15

How to calculate ‘dividend payout ratio’

Answer 15

dividends announced for the year /
PAT

x 100

Question 16

Explain what PROFITABILITY ratios are

Answer 16

Ratios used to evaluate the profitability of the business

Question 17

Name 6 PROFITABILITY ratios

Answer 17

Return on equity (ROE)
Operating profit margin
Gross profit margin
Expenses to sales
Return on capital employed (ROCE)
Asset turnover

Question 18

How to calculate ‘return on equity’ (ROE)

Answer 18

PAT x 100 /

equity

Question 19

How to calculate ‘return on capital employed’ (ROCE)

Answer 19

PBIT x 100 /
capital employed

where capital employed = total assets - current liabilities

Question 20

How to calculate ‘gross profit margin’

Answer 20

gross profit /
sales

x 100

Question 21

How to calculate ‘operating profit margin’

Answer 21

PBIT /
sales

x 100

Question 22

How to calculate ‘asset turnover’

Answer 22

sales /

total assets

Question 23

How to calculate ‘expenses to sales’

Answer 23

expenses /

sales

Question 24

Explain what ACTIVITY ratios are

Answer 24

Ratios used to measure the efficiency with which resources are used within the business.

Question 25

Name 5 ACTIVITY ratios

Answer 25

``` Inventory days (or stock) Debtor days (or accounts receivable days) Creditor days (or accounts payable days) Sales revenue to capital employed Sales revenue per employee ```

Question 26

How to calculate 'inventory days' (or stock)

Answer 26

inventory x 365 / | cost of sales

Question 27

How to calculate 'debtor days' (or accounts receivable days)

Answer 27

debtors x 365 / | sales

Question 28

How to calculate 'creditor days' (or accounts payable days)

Answer 28

creditors x 365 / | cost of sales

Question 29

How to calculate 'sales revenue to capital employed'

Answer 29

sales revenue / | share capital + reserves + non-current liabilities

Question 30

How to calculate 'sales revenue per employee'

Answer 30

sales revenue / | number of employees

Question 31

Calculate 'break even point'

Answer 31

Fixed costs / | Contribution

Question 32

Calculate 'contribution per unit'

Answer 32

Sale price per unit - variable cost per unit

Question 33

Calculate 'margin of safety'

Answer 33

(Expected sales - break even sales) / | Expected sales

Question 34

Calculate 'operating leverage'

Answer 34

Contribution / | Net profit

Question 35

Calculate 'contribution per £ sales'

Answer 35

Sales - variable costs / | Sales