Analysis and evaluation of financial information (AS Level) flashcards

Topic 8: Analysis and evaluation of financial information

ROCE for a sole trader and for a limited company in 9615

Sole trader: profit for the year ÷ (capital + non-current liabilities) × 100, with no interest added back. Company: profit from operations ÷ (equity + non-current liabilities) × 100.

Profit for the year $27,000; owner's capital $165,000; long-term loan $15,000. Sole trader ROCE?

27,000 ÷ 180,000 × 100 = 15.00%.

Gross profit $45,000; cost of sales $150,000. Markup and gross profit margin?

Markup 45,000 ÷ 150,000 × 100 = 30.00%. Revenue $195,000, so margin 45,000 ÷ 195,000 × 100 = 23.08%.

Convert a 45% margin to a markup, and a 20% markup to a margin

Markup = 45 ÷ 55 × 100 = 81.82%. Margin = 20 ÷ 120 × 100 = 16.67%.

Current assets $48,000 (inventory $20,000); current liabilities $32,000. Both liquidity ratios?

Current ratio 1.5 : 1. Liquid capital ratio 28,000 ÷ 32,000 = 0.88 : 1.

Average inventory $15,000; cost of sales $135,000. Inventory turnover in times and days?

9 times; 15,000 ÷ 135,000 × 365 = 40.6 days.

Capital gearing for NCL $60,000, issued share capital $150,000, reserves $90,000

60,000 ÷ 300,000 × 100 = 20.00%.

Trade payables $16,200; credit purchases $197,100. Trade payable days?

16,200 ÷ 197,100 × 365 = 30.0 days.

Effect on liquidity ratios: paying a current liability from cash; receiving a long-term loan

Paying a current liability raises a ratio above 1 : 1 and lowers one below 1 : 1. A long-term loan raises both liquidity ratios, with no effect on profit.

Which ratios does a bank lender watch, and which a trade supplier?

Lender: capital gearing, current ratio and liquid capital ratio. Trade supplier: liquid capital ratio and trade payable days.

Gross profit margin 32%; profit in relation to revenue 7%. Expenses in relation to revenue?

32 − 7 = 25%.