Interpretation Last Minute Revision

Question 1

Problem with FV?

Answer 1

Tries to mask performance

Question 2

Low liquidity ratios?

Answer 2

Liquidity problems

Question 3

Too high liqudiity ratios?

Answer 3

Poor use of funds

Question 4

Deterioration in current ratio but not quick ratio?

Answer 4

Inventory obsolescence

Question 5

Effect of leasing assets on ROCE?

Answer 5

Increases capital employed, therefore reduces ROCE

Question 6

Reducing amount of assets in ROCE?

Answer 6

Increases ROCE

Question 7

Revaluation of assets in ROCE?

Answer 7

Decreases ROCE

Question 8

Invest in new asset close to year end ROCE?

Answer 8

Decreases ROCE as not all profits are determined

Question 9

ROCE broken into parts

Answer 9

Profit margin * asset turnover

Question 10

Asset turnover?

Answer 10

Revenue / capital employed

Question 11

Higher payables?

Answer 11

Improved liqudiity as more cash is available

Question 12

What is working capital cycle?

Answer 12

How long it takes a transaction to generate cash

Question 13

Levels of inventory and discounts on purchase?

Answer 13

Discounts on purchasing inventory increases it

Question 14

Settlement discounts in receivables and revenue?

Answer 14

Reduces revenue and receivables collection

Question 15

Generous payment terms and receivables?

Answer 15

Increases collection periods

Question 16

If entity is receiving settlement discounts from suppliers (payables)

Answer 16

Reduces payables

Question 17

What do settlement discounts do?

Answer 17

Speed up the conversion process

Question 18

Increase in gearing (debt and equity)

Answer 18

Increased debt and a reduction in equity

Question 19

Decrease in gearing (debt and equity)

Answer 19

Repayment of borrowings
Rights issue of shares

Question 20

Revaluation of assets and gearing?

Answer 20

Decreases gearing as equity increases. Operating profit also decreases

Question 21

Reasons for increase in interest cover?

Answer 21

Lower profits
Higher finance costs

Question 22

Settlement discounts?

Answer 22

Reduce receivables and payables

Question 23

High payables?

Answer 23

Extended credit terms
More purchasing

Question 24

Low payables?

Answer 24

Fast payments
Less purchases

Question 25

Calculate working capital?

Answer 25

Inventory + receivables - payables

Question 26

What is the working capital cycle?

Answer 26

Difference between current assets and liabilities

Question 27

Increasing in working capital and liquidity?

Answer 27

Decreases liquidity

Question 28

What does bonus issue always cause?

Answer 28

A dilution. As shares are the same but earnings decrease

Question 29

The possible results of a rights issue?

Answer 29

Can be dilutive depending on how proceeds are used

Question 30

When is AVCO better than FIFO (industry)

Answer 30

Industries where inventory costs fluctuate significantly

Question 31

FIFO when prices are rising?

Answer 31

There is more profitability than AVCO

Question 32

Where does AVCO improve on FIFO?

Answer 32

Ignores one-off events that affect profit

Question 33

FIFO when prices are falling?

Answer 33

There is less profitability than AVCO

Question 34

Asset turnover?

Answer 34

Revenue / (total assets - current liabilities)

Question 35

Does disposal improve liquditiy?

Answer 35

Yes as there's more cash to meet obligations

Question 36

Discounted selling prices affect the inventory holding period?

Answer 36

Reduce the inventory holding period

Question 37

Advantages of cash flow?

Answer 37

Usability Shows daily operations Avoids misleading

Question 38

Comparability affects?

Answer 38

Accounting policies

Question 39

What does understandability and timeliness relate to?

Answer 39

Users of financial statements

Question 40

What does relevance relate to?

Answer 40

Materiality

Question 41

What does faithful representation relate to?

Answer 41

Reflects economic substance rather than legal form

Question 42

When a subsidiary doesn't contribute a lot to sales?

Answer 42

It is a bad subsidiary

Question 43

Exiting from a lease?

Answer 43

Decreases finance costs

Question 44

Sharp decrease in cash?

Answer 44

Decreases liquidity

Question 45

What is another term for credit sales in receivables working?

Answer 45

Revenue

Question 46

Difference in industries?

Answer 46

Analysis might be irrelevant

Question 47

Issue with PE ratio?

Answer 47

Can be manipulated for better results

Question 48

How should influences be discovered?

Answer 48

Through business factors and accounting policies

Question 49

What may a retailer have over a manufacturing business?

Answer 49

Higher turnover but lower margins

Question 50

Another term for cash consdieration payable?

Answer 50

Deferred consideration

Question 51

Deferred tax provision always provided?

Answer 51

Yes

Question 52

Paying back a loan just before year end does what?

Answer 52

Reduces gearing

Question 53

When can a company take out of borrowings?

Answer 53

When gearing decreases

Question 54

How does acquiring another company affect revenue and profit?

Answer 54

No effect on revenue, but increases profit

Question 55

Value for money objectives?

Answer 55

Economy Effectiveness Efficiency

Question 56

Risk for business diversifying for ROCE?

Answer 56

Resource structure will likely change, more apparent if made at end of year

Question 57

IFRS 5 discontinued operation criteria?

Answer 57

Separate major line Acquried exclusively for resale Single co-ordianted plan

Question 58

Issue with disposing a subsidiary? (comparability)

Answer 58

Assets and liabilities are not comparable

Question 59

Are preference shares involved in gearing?

Answer 59

Yes

Question 60

Increase in gearing?

Answer 60

Issuing a loan note or obtaining a bank loan Leases If retained earnings were to fall due to dividend payments

Question 61

Decrease in gearing?

Answer 61

Repayment of borrowings A rights issue of shares, not a bonus issue

Question 62

Revaluation of assets affect on gearing?

Answer 62

Increases equity, therefore DECREASES gearing

Question 63

When are carrying amonuts of assets greater (depreciation method)

Answer 63

depreciated on a reducing balance basis rather than a straight-line basis (over the same useful life)

Question 64

Large increase in capital employed reason?

Answer 64

Issuing of shares