Chapter 19

Question 1

What are the four separate stages of gartner data analytics model?

Answer 1

Descriptive
Diagnostic
Predictive
Prescriptive

Question 2

What are the key areas to consider when performing analysis?

Answer 2

Identification of user
Understanding nature of business
Identification of relevant data sources
Numerical analysis of data available
Interpretation of analysis results

Question 3

What is data analytics used for?

Answer 3

Help with analysis of financial statements and improve user understanding

Question 4

What are the profitability ratios?

Answer 4

GPM%
ROCE

Question 5

What can financial statements be used to analyse?

Answer 5

Performance
Position
Adaptability
Prospects

Question 6

What are the liquidity ratios?

Answer 6

Current ratio
Quick ratio

Question 7

What are the efficiency ratios?

Answer 7

Working Capital ratios
Asset turnover ratio

Question 8

What are the capital structure ratios?

Answer 8

Gearing
Interest Cover

Question 9

How do you calculate GPM%?

Answer 9

Gross profit/revenue x 100

Question 10

How do you calculate ROCE?

Answer 10

Operating profit/capital employed x 100

Question 11

What would cause a change in the GPM%?

Answer 11

Change in product mix
e.g. selling more of a product with higher margin
Changes in direct costs
Changes in selling price
Changes in waste

Question 12

What would cause a decrease in operating profit margin?

Answer 12

Increase in operating costs could by caused by redundancy payments

Question 13

What would cause a decrease in ROCE?

Answer 13

Acquisition of Non current assets towards end of period

Question 14

What are exceptional items?

Answer 14

One-off or irregular events that may distort picture presented within financial statements

Question 15

What does ROCE show?

Answer 15

Overall performance of the entity

Question 16

What is EBITDA?

Answer 16

Earnings before interest, tax, depreciation and amortisation

Question 17

Where should analysis of liquidity start?

Answer 17

Review of bank balance

Question 18

What does current ratio compare?

Answer 18

Current assets to current liabilities

Question 19

When is there a risk of overtrading?

Answer 19

When entity grows rapidly

Question 20

What does quick ratio compare?

Answer 20

Current assets excluding inventory to current liabilities

Question 21

What does asset turnover measure?

Answer 21

How much revenue is being generated from overall capital invested

Question 22

What is overtrading?

Answer 22

Inventory, receivables and payables increase but decline in cash and we may be unable to pay suppliers debt

Question 23

How do we calculate gearing?

Answer 23

Debt/(Debt + equity)

Question 24

How do we calculate interest cover?

Answer 24

Operating profit/Finance costs

Question 25

How do we calculate dividend cover?

Answer 25

Profit for the year/dividend

Question 26

How do we calculate average rate of borrowing?

Answer 26

Finance cost/borrowing

Question 27

What is gearing an important measure of?

Answer 27

Risk

Question 28

How do we calculate dividend cover?

Answer 28

Profit for year/dividend

Question 29

What does low interest cover indicate?

Answer 29

Entities struggling to earn profit to cover interest payment

Question 30

What does increased gearing indicate?

Answer 30

Increased risk of default of loan finance

Question 31

What is the limitations of financial reporting data?

Answer 31

Historic data Only financial information Lack of detailed information

Question 32

What may cause difficulties in drawing comparisons between entities?

Answer 32

Changes in entities business Different accounting policies Different accounting practices Different activities

Question 33

What is creative accounting?

Answer 33

Timings of transactions delayed/sped up to improve results Classification of items Revenue recognition policies Managing market expectations

Question 34

What are the limitations of financial reporting information?

Answer 34

Timeliness Size of entity Comparability Verification

Question 35

What are some examples of non-financial information?

Answer 35

Market share Key employee information Sales Mix Product range Size of order book

Question 36

What are some examples of additional financial information?

Answer 36

Budgeted figures Other management information Industry avarages Figures for a similar entity Figures for entity over longer period of time

Question 37

What is overtrading indicated by?

Answer 37

High profits and low cash generation Large increases in inventory, receivables and payables

Question 38

What areas should be reviewed to effectively analyse cash flows?

Answer 38

Cash generated from operations Investing activities Financing activities Net cash flow

Question 39

If depreciation is less that investment what does it indicate?

Answer 39

Entity investing at greater rate than current assets wearing out

Question 40

If depreciation is more than investment what does it indicate?

Answer 40

Non-current assets base of entity is not being maintained

Question 41

What are some financing activities?

Answer 41

Changes in financing Cash payments to settle outstanding debts New finance raised through loans or share issue