Equations

Emily Clephan
Flashcards by , created over 1 year ago

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Emily Clephan
Created by Emily Clephan over 1 year ago
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Question Answer
Gross Profit Margin Gross profit/Revenue * 100
Operating profit margin operating profit/Revenue *100
Expenses ratio operating expenses /revenue *100
Asset turnover Revenue/total equity - noncurret liabilities
Return on capital Employed Profit from operations/total equity-non current liabilities
capital employed total equity - non current liabilities
Return on total assets Profit from operations/total assets *100
Return on equity Profit after tax /Total equity *100
Earnings per share profit after tax/numer of issued ordinary shares
Liquidity ratios Current ratio Acid test ratio Quick ratio
Profitability and efficiency ratios Gross profit margin Operating profit margin Expenses Ratio Asset turnover Return on capital employed Return on total assets Return on equity Earnings per share
Return on shareholder's funds Profit after tax/ Total equity *100
Acid test ratio Current assets - inventories/current liabilities
Inventory holding period Inventories/Cost of sales *365
Assets turnover (net assets) Revenue /(total assets - current liabilities)
Gearing Non current liabilities / (total equity- non current liabilities) *100
Current ratio Current assets/current liabilities
Quick ratio current assets - inventories/current liabilities
Two fundamental characteristics Relevance and faithful representation
Income Increases in economic benefits during the accounting period in the forms of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
Inventory holding period Inventories/Cost of sale *365
Inventory turnover Cost of sales/average inventory
Receivables collection period Trade receivables/revenue *365
Payables payment period Trade payables/cost of sales *365
Working capital cycle equation Inventory days + receivable days - payable days
What is the working capital cycle Measures how long a business needs to fund is purchases of goods. Smaller the better. Need to reduce time it takes to collect debts and reduce time inventory held and increase tine it takes to pay suppliers. Reducing cycle runs risk of loosing goodwill from suppliers.
Equations that show financial position Gearing and interest cover
Gearing Non current liabilities/ Equity + non current liabilities *100
Interest cover Profit from operations/finance costs
What are the gross profit margin and operating profit margin used for? Used to make pricing decisions. Increase - due to increased selling price Decrease - increase costs or reduced sales
What does a high expenses ratio show? High ratio - operating expenses are high. NOT GOOD (admin and distribution) Remember operating expenses do not include cost of sales
What does asset turnover show Measures how much turnover is generated for ever £ of assets employed. Higher the better.
What does the return on capital employed show? Indicated how efficiently the company uses its assets. How much profit is generated for ever £1 of assets. the higher the better.
What does the current ratio show and is it better higher or lower? Indication of liquidity, how many times current liabilities are covered by current assets. Higher is better.
Quick ratio what does it show, better to be higher or lower? better is higher, shows liquidity. Inventory can take time to sell .
Inventory holding period, is this better or worse if higher or lower? The inventory period shows the average number of days inventory held before sold. We want this to be lower.
Receivables collection period, do we want this higher or lower? LOWER
Current ratio goes from 2.3:1 to 5.1:1 is this good or bad? Why? Current ratio is better - covering more liabilities with assets -if too high may indicate less efficient management of working capital
inventory turnover increases from 4 to 5.6 times, better or worse? Why? Better - selling inventories more quickly. Could be effective stock management or reduced selling prices. Lower storage costs and less risk of obsoleteness
trade receivables collection period goes from 30 to 40 days, is this better or worse? and why? This is worse because longer to collect debts. Bad for cashflow. Could have poor credit control procedures or offering longer credit terms to boost sales. Also may indicate presence of bad debts.
Trade payables went from 55 to 41, is this better or worse? and why? This is better for goodwill or supplier but worse for cashflow. Paying payables sooner. May have negotiated settlement discounts or suppliers issued shorter payment terms.
Suggest 2 ways to improve the working capital cycle and 2 problems as a result 1. Collect debts more quickly to reduce trade receivables Problem: possible loss of custoemrs 2. Increase the length of time to pay trade payables - negotiate payment terms. Problem: possible loss of supplier goodwill and settlement discounts
What does gearing Show? better to be higher or lower? Measures the financial risk of a company. Higher gearing means less profit available. LOWER THE BETTER.
Interest cover Measures how easily the company can makes its interest payments out of its profit.
Framework is broken down into sevon section 1. Objectives of financial statements 2. Users of their information 3. Underlying assumptions 4. Qualitative characteristics 5. Elements of financial statements 6. Recognition of elements of financial statements 7. Measurement of elements
The qualitative characteristics Relevance and faithful representation
The udnerlying assumptions Accruals and going concern
accrual concept Costs and revenues should be matched together and included in the period to which they relate to
going conern Assumption that the business will continue trading for the foreseeable future ( next 12 months)
Comparibility Enables users to identify and understand similarities and differences amoung items. Set standard formats of presentation and rules when preparing financial statements.
VErifiability Verifyability helps to assure users that information faithfully represents the economic reality of the transaction.
Timeliness Information is available to decision-makers in time to be capable of influencing their decisions.
Understandability Classifying, characterizing and presenting information clearly and concisely will make it
The elements of the financial statements Assets, liabilities, equity, income, expense
Define asset A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
Liabilities define A present obligation of the enterprise arising from past events, the settlements of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
Define Equity The residual interest in the assets of an entity after deducting all its liabilities
Define income Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from owners.
define expenses Decreases in economic benefits during the accounting period in the forms of outflows or depletions of assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to owners.
Recognition of the elements in the financial statements 1. meets definition AND 2. it is probable that future economic benefits associated with the item will flow either to or from the entity AND 3. The item has a cost or value that can be reliably measured.
4 ways of measurement Historical cost - original price paid Current cost - replacement cost (what it would be bought for today) Realisable value - amount you would receive if you sold the asset today Present value - measured at discounted value of all future cashflow
Bonus issue of shares, what happens? No money received To existing shareholders In proportion with existing shares
Share capital The ordinary shares of the company.
Nominal value of shares Also known as par value, is face value of shares. Decided at the time of issue and will remain the same going forward.
Market value of shares Value at which existing shares can be traded. Not reflected in financial statements
Allotted share capital The shares that have actually been issued or issued share capital. So if you have 500 of £1 shares then that is £500.
Ordinary shares Also equity shares Can Vote, No right to dividend but can receive one, Directors choose if they get paid a dividend
Preference shares No voting right Right to a fixed rate dividend Dividend must be paid before any dividend to ordinary share holders
Rights of issue of shares, what happens? Company offers shares to existing share holders. -Money received so debit bank - Share capital increases -To existing shareholders -In proportion to what they hold already
What statements show financial performance? The statement of profit or loss and comprehensive income. The statement of changes in equity
Expenses by nature, give example Telephone costs
Expenses by function, give example Administrative costs
What is cash Cash in hand and demand deposits
What is cash equivalents short term, highly liquid investments which are readily convertible into known amounts of cash