Chapter 34 - Analysis Of Published Accounts Flashcards
(35 cards)
Current Ratio
A ratio that compares the current assets with the current liabilities of the business.
Current Ratio Formula
Current Assets / Current Liabilities ( 2 : 1 )
Acid Test Ratio
Compares liquid assets to current liabilities.
Acid Test Ratio Formula
Liquid Assets / Current Liabilities ( Liquid Assets = Current Assets - Inventory ) ( 1.5 :1 )
Profitability
A relative measure of a business’s ability to make profit from sales or a capital investment.
Gross Profit Margin Ratio
A ratio that compares gross profit ( profit before deduction of overhead expenses ) with revenue.
Gross Profit Margin Ratio Formula
Gross Profit / Revenue * 100
Operating Profit Margin
A ratio that compares operating profit for the year with revenue
Operating Profit Margin Formula
Operating Profit / Revenue * 100
Return On Capital Employed
A ratio that compares operating profit and the capital employed in the business
ROCE Formula
Operating Profit ( Net Profit ) / Capital Employed * 100
Capital Employed
The total value of all long-term finance invested in a business.
Methods to increase profit margins
- Reduce direct costs
- Increase Prices
- Cut interest cost
- Reduce overhead costs
Rate Of Inventory Turnover
The number of times in a year that inventory is bought in and sold.
Rate if IT Formula
Cost of sales / Average Inventory
Average Inventory
Inv @ Start + Inv @ End / 2
Trade Receivables Turnover ( Days )
The average time taken ( In days ) to receive payment from customers who have bought products on credit.
Trade Receivables Turnover Formula
Trade Receivables / Credit Sales * 365
Trade Payables Turnover ( Days )
The average time taken in days to pay suppliers for supplies bought on credit.
Trade Payables Formula
Trade Payables / Credit Purchases * 365
Credit Purchases
The value of materials and other supplies bought by a business on credit ( over one year ) .
Gearing Ratio
A ratio that measures the proportion of capital employed in the business that is financed by long-term borrowing (non-current liabilities ).
Gearing Ratio
Non-current liabilities / Capital Employed * 100
Share Price
THe quoted price of one share on the stock exchange.
