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Flashcards · YAC11 · AS Topic 1.5

Analysis of accounting statements (AS Level) flashcards

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Topic 1.5: Analysis of accounting statements

ROCE for a sole trader or partnership: formula and its parts
NPBI ÷ capital employed × 100. NPBI = profit for the year + loan interest. Capital employed = capital (for a partnership, capital and current accounts) + non-current liabilities.
Capitals 60,000 and 45,000; current accounts 3,000 Cr and 1,500 Dr; bank loan 20,000; profit 19,200 after loan interest 1,200. ROCE?
Capital employed 60,000 + 45,000 + 3,000 − 1,500 + 20,000 = 126,500. NPBI 20,400. ROCE 20,400 ÷ 126,500 × 100 = 16.13%.
Opening inventory 18,000, closing 22,000, cost of sales 160,000. Inventory turnover?
Average inventory 20,000. 160,000 ÷ 20,000 = 8 times.
Current assets 54,000 (inventory 21,000); current liabilities 30,000. Current and liquid ratios?
Current ratio 54,000 ÷ 30,000 = 1.80 : 1. Liquid ratio 33,000 ÷ 30,000 = 1.10 : 1.
Convert a 60% mark-up to a margin, and a 20% margin to a mark-up
Margin = mark-up ÷ (100 + mark-up) × 100 = 60 ÷ 160 × 100 = 37.5%. Mark-up = margin ÷ (100 − margin) × 100 = 20 ÷ 80 × 100 = 25%.
Trade receivables 15,600; credit sales 189,800. Collection period?
15,600 ÷ 189,800 × 365 = 30 days. Use credit sales, not total revenue.
Gross profit % is steady but profit for the year as a % of revenue falls. What does it suggest?
Expenses have grown faster than revenue. Look for the expense that rose.
The current ratio rises but the liquid ratio stays flat. What does it suggest?
A build-up of inventory: liquidity looks better than it really is.
Projection: revenue 400,000, gross margin 25%, target inventory turnover 6 times, opening inventory 46,000. Closing inventory?
Cost of sales 300,000. Average inventory 300,000 ÷ 6 = 50,000. Closing = 2 × 50,000 − 46,000 = 54,000.
Three limits of ratio appraisal
Any three: the SOFP shows one date that may not be typical; different inventory and depreciation methods; inflation distorts comparisons; non-financial factors are ignored; a projection depends on its assumptions.

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