Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

accounting theory > analysis of accounting statements > Flashcards

analysis of accounting statements Flashcards

ratio

1
Q

Profitability

A

profitability ratio is to assess a business’s ability to generate earning as compared to its expenses
and other relevant costs incurred during a specific period of time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

profitability ratios (6) MMSSRR

A
  • margin / gp margin to sales
  • markup / gp markup to sales
  • sales margin / net profit margin to sales
  • selling and distribution /net profit to expense
  • return on capital employed
  • rate of inventory turnover
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

markup % formula

A

gross profit / cost of sales *100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

margin % formula

A

gross profit / revenue *100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

sales margin % formula

A

poty / revenue *100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

selling and distribution % formula

A

poty / expense *100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

return on capital employed formula

A

poty / capital employed *100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

rate of inventory turnover % formula

A

cos / average inventory *100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

capital employed formulas (2)

A
  1. usually use, Total Assets - Current Liabilities
  2. long-term investment, Fixed Assets + Working Capital
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Ways to increase/improve profitability of a business (4)

A

 By increasing sales.
 By reducing cost of goods sold.
 By reducing expense.
 Advertising campaign boost up sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Liquidity

A

Liquidity is the ability to meet short term (1) debts as they fall due (1)
Current assets less current liabilities (1) AO1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Ways to improve liquidity (4)

A

 By investing more into other business which shows the proper utilization of liquid cash.
 by selling existing fixed assets which are under-utilized.
 by injecting more capital from personal funds.
 improving rate of stock turnover. Rate of stock turnover can = by increasing sales and reducing the purchase of stock at the same time within a given time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

high liquidity when?

A

(working capital ratio 5:1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Disadvantage of high liquidity (2)

A

 High closing stock which indicates unpopular goods for the business in market, also increase the warehouse
expenses.
 High debtors which increase the chance of risk of bad debt.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Benefits of ratio analysis (5)

A
  • They provide a basis for comparing performance year on year.
  • It enables comparison to be made with competitors.
  • Ratios is needed to forecast future performance.
  • They will focus on management attention on key areas such as profitability and liquidity.
  • It is useful for external users of financial information
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

limitations of ratio analysis (4)

A
  • do not consider non-financial factors such as social and ethical issues.
  • High skills are required for the analysis and evaluation of ratios correctly.
  • Ratios use historic data which may not reflect the future performance.
  • Different businesses may use different accounting policies when calculating ratios
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

margin %

A

gross profit margin to sales, gross profit every $100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

markup %

A

gross profit markup to sales, gross profit to the cost of the sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

sales margin %

A

net profit for every $100 in sales

20
Q

selling and distributing %

A

net profit margin to sales, net profit for every $100 in sales

21
Q

return on capital employed

A

net profit made for every $100 employed

22
Q

rate of inventory turnover + ideal ratio

A

how efficiently a business manages its inventory, sales compared to inventory

2:1

23
Q

liquidity ratios (4)

A
  • current ratio / working capital
  • liquid acid test / quick ratio
  • debtors and creditors collection period
24
Q

current ratio formula

A

current assets / current liabilities

25
Q

standard current ratio

A

2:1

26
Q

current ratio use

A

general measure of a company’s ability to pay short-term obligations (due within a year)

27
Q

acid test ratio formula

A

current assets - closing inv / current liabilities

28
Q

acid test ratio standard

A

1:1

29
Q

acid test use

A

measure of liquidity that excludes slow-to-sell inventory from current assets, only current assets that are cash or can be quickly changed to cash, shows sufficient highly liquid assets to cover its short-term liabilities

30
Q

debtors and creditors collection period formula

A

debtors / creditors (÷) credit sales/ purchase * 365 days / 12 months

31
Q

debtors and creditors collection period use

A

Measures how long it takes a company to collect cash from customers (debtors) and how long it pays its suppliers (creditors).

32
Q

standard tr dr payment receiving period

A

28 days

33
Q

what does Lower Debtors Collection Period show

A

Indicates faster cash flow from sales.

34
Q

what is trade receivable

A

amount owed to a business

35
Q

what is Trade Receivable Collection Period

A

measures the average time it takes a company to collect payment from customers after a sale is made

36
Q

disadvantage of trade receivable collection period increasing (2(

A
  • When trade receivables increase, it means there’s a larger amount of due customer invoices. This translates to a longer period for the company to collect all that money.
    -will require credit control.
37
Q

credit control policies (2)

A
  • Monitoring outstanding invoices, sending payment reminders, and following up on overdue accounts.
  • Establishing clear guidelines for extending credit
38
Q

what does Shorter Creditors Payment Period show

A

May strain relationships with suppliers, but can improve cash flow in the short term.

39
Q

ideal debtors and creditors collection period

A

the debtors collection period should be shorter than the creditor payment period to ensure a positive cash flow cycle.

40
Q

How to improve rate of stock turnover

A

Rate of stock turnover can be improved by increasing sales and reducing the purchase of stock at the same time
within a given time.

41
Q

how to interpret profitability ratios

A

Higher ratios generally indicate better profitability

42
Q

how to interpret liquidity ratios

A

A current ratio above 1 and an acid-test ratio above 1 are generally good signs of liquidity

43
Q

bank balance and liquidity

A
  • if bank balance positive (dr) good.
  • consider the amount of bank balance tho, as small values may make payment difficult
44
Q

use of ratios to make future financial predictions

A
45
Q

how to write ratio analysis answers (3)

A
  • First compare profitability
  • compare liquidity using figures
  • Given overall discussion based on your profitability and liquidity which one is better (strong
    reasons are recommended for your justification).

accounting theory (5 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions