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Flashcards · 7127 · Topic 17

Interpretation, analysis and communication of accounting information flashcards

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Topic 17: Interpretation, analysis and communication of accounting information

EPS: formula, and EPS for profit after tax £450,000 and 3,000,000 ordinary shares
Profit after tax in pence ÷ number of issued ordinary shares. 45,000,000p ÷ 3,000,000 = 15.00p.
P/E ratio for EPS 15p and a share price of 240p
Current market price ÷ EPS = 240 ÷ 15 = 16.00 times.
Dividend yield for a dividend per share of 6p and a share price of 240p
Dividend per share ÷ market price × 100 = 6 ÷ 240 × 100 = 2.50%.
Dividend cover for profit after tax £450,000 and ordinary dividends paid £180,000
Profit after interest and tax ÷ ordinary dividends paid = 2.50 times.
Interest cover for profit before interest and tax £360,000 and interest payable £45,000
360,000 ÷ 45,000 = 8.00 times.
A 1-for-2 bonus issue is made on 3,000,000 shares. Profit after tax stays at £450,000. New EPS?
4,500,000 shares. 45,000,000p ÷ 4,500,000 = 10.00p. No cash moves.
Interest cover vs capital gearing
Interest cover uses the income statement: can the interest be paid this year? Gearing uses the statement of financial position: how much long-term finance is borrowed?
Why should EPS not be compared between two companies?
They have different numbers and nominal values of shares, so EPS sizes are not comparable. Compare one company's EPS over time.
The five external stakeholders named in 7127
Customers, suppliers, government, lenders and the local community.
A company's P/E rises while its EPS is unchanged. What has happened?
The share price has risen: the market expects more growth or sees less risk.
Effect of a revaluation of non-current assets on profit, cash, gearing and ROCE
No effect on profit or cash. Equity rises, so gearing and ROCE fall.
Computerised vs manual records: one strength and one risk of each
Computerised: fast, arithmetic always correct, reports on demand; but hacking, system failure and "garbage in, garbage out". Manual: low cost; but slow, with arithmetic errors possible.

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