Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Accounting 1 > Ratio Analysis > Flashcards

Ratio Analysis Flashcards

1
Q

why are ratios calculated for several different time periods

A

to enable users to make comparisons to see if ratios are rising, falling or staying the same

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

what are the advantages of using ratios

A

easy to calculate and understand

simplify data into key indicators to hghlight trends and variances

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

what are the three types of ratios

A

efficiency
profitability
performance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

what are the profitability ratios

A

gross profit percentage
operating profit percentage
return on capital employed
return on ordinary shareholders’ funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

what does the gross profit percentage asses

A

how efficiently entities are controlling their production costs/ costs of buying goods for resale

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

how to calculate gross profit percentage

A

gross profit / revenue x100%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what are some possible reasons for changes in gross profit %

A

selling prices rising faster/more slowly than costs of goods sold

rising/falling in prices of materials/goods brought in

increased/decreased productivity in the workforce

supplier bulk discounts reduce costs

bulk discounts to customer reduce revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what does the operating profit assess

A

changes in distribution and selling costs and admin expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

how to calculate operating profit %

A

operating profit / revenue x 100%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

what does return on ordinary shareholders funds assess

A

the amount of profit for the period available to owners with their average investment in the business during that same period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

how to calculate return on ordinary shareholders’ funds

A

profit for the year/ total equity x100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What does return on capital employed assess

A

measures the returns to all suppliers of long-term finance before any deductions for interest payable on borrowings, or payments of dividends to shareholders, are made

ie how high are turns from their capital structures

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

how to calculate the return on capital employed

A

operating profit/(equity + non current liabilities) x100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

what are some problems associated with the return on capital employed

A

not all assets used to generate profit are presented in entities’ SoFPs

SoFP figures do not represent current values

All figures need adjusting for inflation

Total shareholder return is a better indicator of investment returns available from companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

what do efficiency ratios measure

A

how effectively and productively the resources of the organisation are being used in the generation of revenue and profit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what are the two types of resources used in measuring efficiency ratios

A

non current assets

employees

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

what are the efficiency ratios

A

non current asset turnover
revenue per employee
sales per employee

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

what does no current asset turnover measure

A

efficiency of the non current assets being used to generate sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

how to calculate the non current asset turnover

A

revenue/ non current assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

how might the non current assets turnover be inaccurate

A

careful of when assets were bought. If they are still valued at their cost price this is inaccurate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

how to calculate revenue per employee

A

revenue / #employees

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

how to calculate profit per employee

A

profit /#empoyees

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

where can # of employees be found

A

annual report

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

what are the performance ratios

A 
dividend per share
earnings per share
price earnings ratio
dividend yield
dividend cover
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

what does earnings per share measure

A

profit earned during each accounting period by an ordinary share

if all profits were paid out as dividends, what would be paid out to shareholders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

how to calculate earnings per share

A

profit after tax / #ordinary shares

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

why is earnings per share an important figure for the stock market

A

will determine share prices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

what does price earnings ratio measure

A

how many years of current period earnings are represented in today’s share price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

what does a higher price earnings ratio mean

A

higher confidence in the company

steady profits as dividends from these shares are more certain

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

what does a lower price earnings ratio mean

A

volatile profits and dividends will be much less certain

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

how to calculate price earnings ratio

A

market value of one ordinary share / eps

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

what does dividends per share measure

A

the dividends in pence paid out on each ordinary share

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

the ideal circumstance for the shareholders is that the dividends per share increases or decreases each year

A

increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

how to calculate dividends per share

A

total ordinary dividends/ # ordinary shares x100pence

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

how to calc the dividend pay out ratio

A

dividend per share / earnings per share x 100%

36
Q

what does the dividend pay out ratio measure

A

the % of earnings per share distributed as dividend per year

37
Q

how do the dividend yields compare to interest rates in a bank account

A

is it better to put the money into a bank account with an interest rate or is it better to risk putting them into shares and potentially getting higher yields

38
Q

how to calculate dividend yeild

A

dividend per share / current market price of one ordinary share x100

39
Q

how to calculate dividend cover

A

profit after tax / total ordinary dividend

40
Q

what does dividend cover measure

A

how many times the current year ordinary dividend can be paid from profit for the year

41
Q

when does overtrading occur

A

where a business is operating at a level of activity that cannot be supported by the amount of finance that has been committed

42
Q

what does overtrading result in

A

liquidity problems

suppliers withholding supplies

43
Q

what is liquidity

A

entities’ ability to raise cash to pay off liabilities as they become due for payment , if unable to generate this cash, it cannot pay debts or survive so will file for bankruptcy

44
Q

do retailers generate cash quickly or slowly

A

quickly as customers pay cash for goods

45
Q

do manufacturers generate cash quickly or slowly

A

slowly as sell to customers on credit and so have to wait for payment

46
Q

what does current ratio measure

A

how msny €s of current assets an entity has for each € of liabilities

determines if the organisation has enough short term assets from which to meet short term liabilities

47
Q

how to calculate current ratio

A

current assets/current liabilities

48
Q

what is the recommended ratio for current assets to current liabilities

A

2:1

49
Q

what is the current ratio determined by

A

how quickly cash is generated

50
Q

what does quick ratio measure

A

assumes that inventory will not sell as quickly

current assets to current liabilities

51
Q

how to calculate quick ratio

A

current assets - inventories / current liabilities

52
Q

what is the recommended quick ratio

A

1:1

53
Q

what is working capital

A

current assets - current liabilities

54
Q

what do working capital ratios measure

A

how quickly inventory is sold, how quickly trade receivables are turned into cash and how quickly trade payables are paid

55
Q

what are the 3 working capital ratios

A

inventory days
receivable days
payables days

56
Q

what does inventory days measure

A

the average stockholding period

57
Q

is higher or lower inventory days bette

A

lower

58
Q

how to calculate inventory days

A

closing inventory/cost of sales x365

59
Q

why is it better to have a higher turnover of stock

A

cash more readily

less risk of deterioration of stock

lower storage costs

60
Q

what does receivables days measure

A

the average credit period taken by credit customers

61
Q

how to calculate receivables days

A

closing trade receivables/credit sales x365

62
Q

does a business usually want higher or lower receivables days

A

lower

63
Q

if the receivable days are getting too high, what incentives can be used to help reduce inventory days

A

discounts

64
Q

what do payables days measure

A

average credit period taken by an entity to pay its suppliers

65
Q

how to calculate payables days

A

closing trade payables / cost of sales x365

66
Q

ideally how should payables be paid

A

using money received from receivables

67
Q

what is the cash conversion cycle

A

how quickly inventory is turned into trade receivables and these trade receivables are turned unto cash with is used to pay trade payables

68
Q

how to calculate cash conversion cycle

A

inventory days + receivable days - payable days = cash conversion cycle

69
Q

is a short cash cycle or longer better

A

shorter

70
Q

what are the long term solvency ratios

A

gearing ratio
debt ratio
interest cover

71
Q

what is long term solvency

A

an organisation’s ability to meet the interest on repayment of long term, non current liabilities as they fall due

72
Q

what is financial stability

A

the avoidance of excessive borrowings, consistency of demand for products and services and the ability to innovate to stay relevant

73
Q

what does gearing ratio measure

A

total borrowings as a percentage of equity

measure of risk

74
Q

how to calculate gearing ratio

A

long+short term borrowings / equity x100

75
Q

what does the debt ratio measure

A

the number of euros of liabilities to euros of assets

76
Q

how to calculate the debt ratio

A

total liabilities / total assets

77
Q

is a lower or higher debt ratio better

A

lower as it is more secure as there are more assets to cover the liabilities

78
Q

what does interest cover measure

A

how many times interest payable on borrowings can be paid from operating profit

79
Q

is a higher or lower interest cover better

A

higher

indicated that they can continue to make interest payments into the future

80
Q

how to calculate interest cover

A

profit before interest and tax/interest expense

81
Q

what else can be used to measure long term financial stabliity

A

how consistent is demand

how strong are cash flows

how many years before the repayment of borrowings is due, is the interest rate fixed or variable

82
Q

what compnies should ratios be compared to

A 
those:
in similar industry
in similar locations
of similar size
with the same accounting period
83
Q

what else should the ratios be compared to other than other companies

A

against budgeted/planned data

against industry averages

84
Q

what is the cash flow cycle of retailers

A 
goods purchased on credit from suppliers
->
goods sold to customers for cash
->
cash used to pay suppliers and other claims
85
Q

what does the cash flow cycle look like for manufacturers

A

raw materials purchased on credit from suppliers
->
raw materials turned into finished goods
->
finished goods sold on credit to customer
->
cash used to pay suppliers and other credits
->
customers pay what is owed on due date

86
Q

when borrowing risk should be evaluated by:

A 
affordability 
interest
repayment dates
operating cash inflows (how much cash will be on hand)
consistency of product demand
87
Q

if cost of sales is not provided how should working capital ratios be calculated

A

using revenue

Accounting 1 (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions