Interpretation Rote Flashcards by Nick Duley

What if a company hasn’t owned another company for very long?

Returns from acquisition won’t be instant

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Trade payables increase?

Having trouble paying suppliers

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What is unwise to do when working capital is needed?

To pay a dividend

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If acquisition was funded by a share issue instead of loan notes?

Returns would have been diluted

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Period prior to disposal calculation?

Current year - prior year

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What should be considered if there is high gearing?

Which industry

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Reason for a higher ROCE?

Better asset turnover

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When using a ratio (answering)?

Compare result, explain the cause and effect in the analysis

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if there is insufficient evidence to make a conclusion?

Note this in the analysis

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Going from consolidated profit to single entity profit?

Add back depreciation and unwinding of discount
Deduct post-acq profit and savings

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Decline in interest cover?

Decrease in profit from operations
An increase in finance costs

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Profit from disposal?

Improves profit on operations

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What can a disposal do?

Improve liquidity (e.g. disposal)

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Net current liability meaning?

Less than 1

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Cause of poor liquidity?

Overdraft balance
High payables

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If subsidiary sold on last day of the year?

It will be included in financial statements of the first year

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Not possible to compare signle entity to group (transactions)

Intra-group transaction are eliminated. However, single entity includes

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Not possible to compare signle entity to group (change in equity)

Group equity increased by NCI and RE of sub

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Risk with an increase in revenue?

Management must review the individual revenue streams

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Sharp decrease in membership and sundries reasons?

Quality of services
Lack of demand

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Increase in share capital and increase in gearing throguh taking out a loan?

Helped liquduity but reduced profitability as there’s interest charges

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What is a negative action to increase the cash flow when a business is struggling

Issuing share capital and increasing loans

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Provision affect on profitability?

Reduces it as costs need to be paid

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Calculate increase/decrease in cash? (For liquduity)

Operating activities + investing activities + financing activities

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Reasons behind an accounts receivable increase?

New revenue streams for the business

Purchasing inventory at high-volume close to year-end?

Can't be used to pay suppliers

Short-term finance example?

Bank overdraft

Long-term finance example?

Loans

Operating profit far larger than operating cash flow?

Company can't seem to cover day-to-day operations

Potential problem with issuing shares?

Shareholders earnings can become diluted

If shareholders aren't receiving dividends?

They will share their holdings

Issue with not receiving settlement discounts?

Have to pay more to suppliers, thereby impacting profitability

Negative operating cash?

Always bad

Positive investing cash?

Can be good, depends on operating

Positive financing cash?

Can be good, depends on operating

Issue with only positive financing and investing but negative operating?

Businesses may only have that because of proceeds

Reason for losing out on settlement discounts?

Not paying suppliers early

How do leases affect PBIT?

Increase it as they are now depreciation and interest expense

Trade payables increase?

Could mean company is having difficulty paying suppliers on time

Issue with ROCE if acquisition was near beginning of the year?

There will be less return as less months profits are used

If acquisition was funded through a share issue (shareholders)?

Shareholders returns are diluted

If acquisition was funded through loan notes (shareholders)?

Servicing debt may take priority, therefore shareholders receive less

What will an acquisition do in terms of profitability?

If it was done later in the year, more profitabiltiy will be recorded

Removal of a lease liability decreases?

Non-current liabilities

Disposal affects?

Operating profit positive

Intragroup (consolidation and single)

Consolidation: Removed Single: Remain

What must be done to comepnsate increased borrowings?

Increase working capital efficiency Reduce costs

When looking at the profit figure?

Always compare it with previous years and note the movement

Is a new discount from sub related to itnragroup?

Yes

Poor performance from subsidiary?

Impacts parent during consolidation

What does an impairment loss decrease?

Equity through revaluation and the assets

Settlement discount affect on current ratio?

Makes cash received lower than receivables. This decreases the current ratio

Bonus issue of ordinary shares and cash?

Generates no cash at all

Rights issue of ordinary shares and cash?

Increases cash and share capital

What does working capital efficiency represent?

How well a company manages its short-term assets and liabilities to support its day-to-day operations

What does a higher payable period mean?

Allows company to hold onto cash much longer, improving liquidity

Excessive inventory affect on working capital?

Excess inventory ties up cash which can be used elsewhere in the business

What does a shorter receivables collection period allow?

Faster cash inflows, which improves liquidity and working capital efficiency

Increase in working capital (receivables collection)

Change in credit policy Inefficiencies in AR Seasonal variation in sales

Decrease in working capital (receivables collection)

Effective AR management Negotiated payment terms with suppleirs and discounts for early payments Improved inventory management

Increase in working capital (payables payment)

Increase in purchases due to higher purchasing activity from company (seasonal fluctuations) Inventory build up Extended payment terms

Decrease in working capital (payables payment)

Timely payment of payables Reduced purchases from the company Negotiated discounts offered by suppliers for early payment

Increase in working capital (inventory holding)

Slow-moving inventory Excess inventory Obsoleste inventory

Decrease in working capital (inventory holding)

Improved inventory management Improved logistics and transportation efficiency Better supplier relationships

Decrease in gross profit margin?

Offering discounts can stimulate sales but also leads to lower selling price Write-offs of inventory Higher sale of low margin items compared to high margin items

Increase in gross profit margin?

Inventory management Favourable term1s with suppliers (volume discounts) Differentiation through unique products

What factors affect EPS?

Profit Shares

What can mitigate a fall in ROCE?

An increase in net assets turnover

Do assets held at historical cost affect ROCE?

Yes, it overstates it

Additional goodwill in consolidation?

Investment cost more than the net assets

Why is measuring benefit of an investment difficult in consolidation?

Intragroup has been eliminated

Reasons for a decrease in profitability but an increase in revenue?

Failing gross profit and operating profit

Potential reason for sharp decrease/increase in operating profit?

One-off cost or disposal

When there is a discount adjustment?

Relates to cost of sales

Cost of sales: £72000 Archway buys 50% of its purchases for resale from Cardol Co one of its rivals and receives a bulk buying discount of 10% off normal prices

Debit £4000 COS CALC 72000 * 50% = 36000 36000/90% - 36000 = $4000

Sales revenue would be 5% lower than currently?

Sales revenue * 95%

Revaluation gain restated if revaluation at start of period single entity?

Deducted from NCA for next period

Depreciation restated?

Added to NCA

Charge to cost of sales restated single entity?

Added to cost of sales

Do accounting policies distort differences?

Yes

Should comparative size of company be considered in an analysis?

Yes, one might be new and expanding. Anotehr might be old and stagnating

If reporting date coincides with end of reporting period?

inventory levels are lower than average Trade receivables higher than average

FIFO and WAC COS?

FIFO gives a lower cost of sales than WAC, therefore higher profitability ratios

Cost vs revaluation model?

Cost gives lower depreciation and therefore higher profits

Expenditure charge to SPL calculation?

Opening balance - closing balance

Netting off approach government grant?

Cost - grant. Then depreciated

Overstatement in opening inventory

Debit COS Thereyb reduces gross profit

Impairment effect on ROCE and gearing?

Increases the ratios

Revaluation effect on ROCE and gearing?

Decreases the ratios

Closing inventory understated?

Decreases current assets, therefore understates current ratio

How is control established?

Through reference to voting shares

Why are settlement discounts beneficial for AR?

Allows customers to pay faster

Acquisition funded through loan notes? (Priority)

Servicing of debt will take priority, therefore shareholders will receive less

Foreign currency risk?

Affects operating expenses

What does removing a lease liabiltiy do for non-current liabilities?

Decrease them

Interpretation Rote Flashcards

(95 cards)