Interpreting Company Accounts - 10%

Question 1

What is the purpose of ratios

Answer 1

To analyse a company’s financial statements

Question 2

What are the three profitability ratios ?

Answer 2

• gross profit margin
• operating profit margin
• net profit margin

Question 3

What is the gross profit margin formula

Answer 3

Gross profit / revenue x 100 = x%

Question 4

What is the operating profit margin formula

Answer 4

Profit from operations / revenue X 100 = X%

Question 5

Net profit margin ratios formula

Answer 5

Profit from operations / revenue X 100 = X%

Question 6

What does the return on capital employed ratio tell us ?

Answer 6

It tells us how well the total capitals employed has been utilised. It judges profits earned in relation to the size of the business

Question 7

What are the 2 profitability ratios

Answer 7

ROCE - Return on capital employed

Non current asset turn over

Question 8

Non current asset turn over formula

Answer 8

Turnover / non-current asset x 100 = x%

Question 9

What does the non current asset turn over tell us ?

Answer 9

• it shows the turnover that is generated from eas $1 worth of assets employed
• the higher the turnover per $1 invested the more efficient the business is.

Question 10

Return on capital employed formula

Answer 10

Profit from operations / total equity + non current liabilities X 100 = X%

Question 11

ROCE formula no .2 calculation

Answer 11

Profit from operations / total assets - current liability x 100 = x%

Question 12

What are the 5 liquidity ratios

Answer 12

Current ratio
Inventory turnover
Quick ratio ( acid test ratio)
Trade receivable collection period
Trade payable payment period

Question 13

What is the current ratio ?

Answer 13

This ratio should be more than 1:1
It gives an indication of the companies margin of safety

Question 14

Current ratio formula

Answer 14

Current assets / current liabilities = x:1

Question 15

What is inventory turnover

Answer 15

This shows the average number of times per year that all inventory is sold

Question 16

Inventory turn over formula

Answer 16

Cost of sales / inventories = x times

Question 17

What is the quick ratio ( acid test ratio )

Answer 17

This ratio recognises that inventory takes time to convert to cash. By excluding inventory the ratio is prudent

Question 18

Quick ratio / acid test ratio formula

Answer 18

Current assets - inventory / current liabilities = x:1

Question 19

What is trade receivables collection period ?

Answer 19

This shows the average credit period taken by customers

Question 20

Trade receivable’s collection period formula

Answer 20

Trade receivables / revenue X 365 days = X days

Question 21

What is a trade payable payment period ?

Answer 21

This shows the average credit period taken from suppliers

Question 22

Trade payable payment period formula

Answer 22

Trade payable / cost of sales X 365 days = X days

Question 23

What is gearing ?

Answer 23

Gearing compares how the long term capital of a business is provided though loan, and how much equity ( ordinary shares and reserves figure from the SOFP )

• A low gearing is <50%
  -Neutrally geared at 50%
• highly geared is >50%

Question 24

Gearing formula

Answer 24

Non- current liabilities / total equity + non current liabilities X 100 = X%

Question 25

What is interest cover ?

Answer 25

This shows whether a company its earning enough profits before interest and tax to pay its interest costs comfortably

Question 26

Interest cover formula

Answer 26

Profit from operations / finance costs = X times