A&F week 5

quick ratio (acid test ratio) equation

(current assets - inventories) / current liabilities

profitability ratios

1. gross profit margin 2. operating profit margin 3. ROCE 4. ROSF

Accounting for depreciation is concerned with __________ the expense of owning the asset. A. maximising B. minimising C. reducing D. allocating

d. allocating

efficiency ratios

1. average inventories turnover period 2. average settlement period for receivables 3. average settlement period for payables 4. sales revenue to capital employed 5. sales revenue per employee

financial ration classifications

1. profitability 2. liquidity 3. efficiency 4. financial gearing 5. investment

inventories turnover period equation

= (inventory / cost of sales) x 365

Return on shareholders funds (ROSF) equation

= (profit for the year / owners equity) x 100

average settlement period for payables equation

= (trade payables / cost of sales ) x 365

average settlement period for receivables equation

= (trade receivables / sales revenue) x 365

return on capital employed (ROCE) equation

= [operating profit (before interest and tax) / equity + non-current liabilities] x 100

equation for equity

= ordinary share capital + retained earnings + reserves

sales revenue to capital employed equation

= sales revenue / (equity + non-current liabilities)

sales revenue per employee equation

= sales revenue / number of employees

gross profit margin equation

=[gross profit / sales (turnover)] x100

operating (net) profit margin equation

=[operating profit (net profit before interest and tax)] / sales] x 100

Which ONE of the following features of 'cash equivalents' is incorrect? A. Highly liquid B. Subject to insignificant risks of changes in value C. Held for meeting short-term commitments D. Held for long-term investment purposes

d. held for long-term investment purposes

JK Builders Co purchases a new excavator costing 40,000. Its expected useful life is ten years, at which point it is anticipated that the excavator will have a residual value of 8,000. If the reducing balance method of depreciation is used, applying an annual depreciation rate of 15%, what is the annual depreciation charge in Year 2? A. £ 6,000 B. £ 5,100 C. £ 3,400 D. £ 4,335

B. £ 5,100

A business buys a machine for £ 18,204 and estimates its residual value at £1,942. It is depreciating the asset over a nine-year period by the straight-line method. What is the total depreciation charge after three years have elapsed from the purchase date? A. £6,715 B. £5,421 C. £6,068 D. £1,807

B. £5,421

Which ONE of the following describes the depreciation method where each year's expense over the life of the asset is the same? A. Straight line method B. Depreciable amount method C. Reducing balance method D. Residual value method

a. straight line method

The essential difference between the statement of cash flows and the income statement is that: A. the income statement is based on the accruals concept, whereas the statement of cash flows reports cash received and paid B. the income statement is prepared for external users, whereas the statement of cash flows is prepared for internal users C. the statement of cash flows is a forecast of the future, where as the income statement reports on historical events D. the statement of cash flows only deals with items measurable in money terms, whereas the income statement also includes nonmonetary items.

a. the income statement is based on the accruals concept, whereas the statement of cash flows reports cash received and paid

If a company buys a machine for £12,000 with an estimated useful life of 4 years and a residual value of £4,000, what is the annual depreciation charge if calculated on a straight line basis? a) £2,000 b) £4,000 c) £1,000 d) £3,000

a. £2,000

current ratio equation

current assets / current liabilities

liquidity ratios

current ratio and quick ratio (acid test ratio)

Which ONE of the following is not one of the four components needed to calculate depreciation of a newly acquired non-current (fixed) asset? A. The original cost (or fair value) of the asset B. The useful life of the asset C. The estimated residual (disposal) value D. The value of the asset it has replaced E. The depreciation method to be used

d. the value of the asset it has replaced

understanding sales revenue to capital employed

higher ratio is preferred because it suggests that assets are being used productively to generate revenue

understanding current ratio

the higher the ratio, the more liquid the business is considered to be (less than 1:1 is concerning)

understanding acid test ratio

the minimum ratio for this test is 1:1