Analysis and interpretation of financial statements

As a general rule price earnings ratios for industrial companies are commonly between:

10-15 times

If a company has equal amounts of debt and equity its ratio of total liabilities to total equity will be m

100%

If the stock market price of a share on 30 June is $15 and the earnings per share for the year is $1, the price-earnings ratio at 30 June is:

15:1 The formular for the price earnings ratio is market price/ earnings per share =$15/$1=15:1

If a company's earnings per share is 0.65c and the current market price of a share is $3 the price earnings ratio is:

4.6 times

If creditors allow 30 days from the date of purchase before requiring payment, it takes, on average 45 days to sell inventory, and debtors take, on average, 42 days to pay their accounts, the length of the cash cycle is:

57 days. The formular for the cash cycle is turnover of inventory plus turnover of debtors less turnover of creditors = 45+42-30=57 days

What is the equity ratio: Total assets: $500 000 Total liabilities: $150 000 Share capital and reserves: $350 000

70% The formular for the equity ratio is total equity divided by total assets =$350 000/$500 000=70%

A change in a firm's gross profit margin from 28% to 29.5% indicates:

An inprovement in the margin

Sales revenue divided by average total assets measures:

Asset turnover. The ratio helps to assess the entity's efficiency in generating sales per dollar of investment in assets

Times inventory turnover is measures as:

Cost of sales divided by average inventory

The formular for the current ratio is:

Current assets divided by current liabilities. For example $200/$100=2:1, which is two dollars of current assets for each dollar of current liabilities

The ratio that is not a measure of asset efficiency is:

Current ratio. Current ratio is a measure of liquidity

An increase in reported profit from $150 000 in the previous year to $200 000 in the current year:

Does not necessarily mean that profit has increased

A group of ratios that are particularly concerned with how efficiently management is managing the assets invested in the entity are:

Efficiency ratios

Capital structure ratios, such as the debt to equity ratio, can also be refered to as:

Gearing ratios They help measure exposure to financial risk

What type of analysis is being conducted if the numbers in the current period are conpared with the equivelant numbers in the preceding period?

Horizontal analysis: Horizontal analyis involves calculating the percentage changes in various financial statement amounts from year to year

A change in the inventory turnover period from 35 days to 31 days indicates:

Inventory is being sold faster

The formular for dividend per share is:

Is total dividends paid or provided to ordinary shareholders divided by the weighted number of ordinary shares on issue

If the debtors turnover ratio changes from 45 days to 48 days this indicates that:

It is taking longer to collect money from trade debtors

Company A has a debt ratio of 55% and company B has a debt ratio of 65%. Company A is:

Less reliant in borrowings than company B with debt ratio of 55%

The current ratio is a measure of:

Liquidity The current ratio is a measure of current assets per dollar of current liabilities and is used to determine an entity's liquidity ie: ability to meet short term debts

The ratio, return on assets, is the product of the:

Profit margin and the asset turnover ratio

If profit is $21 000, after deducting interest of $5000, and average total assets are $150 000, calculate return on assets to assess profitability from a management view point:

Return on assets equals profit before interest and tax divided by average totoal assests multiplied by 100/1=$21 000+0/$150 000x100/1=17.3%

Net tangible asset backing per share indicates:

The book value of the company's tangible assets per ordinary share

The dividend payout ratio measures:

The proportion of the current year's profits that are distributed as dividends to shareholders. For example, a dividend payout ratio of 70% of current profits are distributed to share holders as dividends and 30% are retained for use within the company.

To calculate a trend it is necessary to have at least:

Three years data

In a vertical analysis of a balance sheet, the base to which current liabilities are compared is:

Total assets

When conducting vertical analysis on the balance sheet all items are normally expressed as a percentage of:

Total assets

Which group of users of financial statements would be most intersted in the entity's ability to pay for their purchases within the normal credit period?

Trade creditors

A benchmark with which ratios can be compared is:

Useful benchmarks with which ratios can be compared are prior year ratios for the same entity, ratios of competitors and industry averages

What type of analysis is being conducted when every item in the income statement is expressed as a percentage of total income?

Vertical analysis: Vertical analysis compares the itmes in a financial statement to an anchor item in the same report; in the case of the income statement this is total income

An excess of current assets over current liabilities is refered to as:

Working capital