Flashcards · 9215 · Topic 5

Interpretation, analysis and communication of financial information flashcards

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Stakeholders in a business

Name the internal and the external stakeholders listed in 9215: Internal (3): employees, management, owners/shareholders. External (5): customers, suppliers, government, lenders, local community.
Interests of employees and management: Employees: job security, pay and conditions. Management: performance against targets, controlling costs, their own job or bonus.
Interests of lenders and suppliers: Lenders: repayment on the agreed dates and interest paid on time (profit before interest, existing loans, assets). Suppliers: prompt payment and continued orders (amounts owed, cash available).
Interests of government, customers and the local community: Government: taxes, law and regulation, jobs. Customers: reliable supply, fair price, quality and service. Local community: jobs, environment, local spending.
Why might shareholders and lenders disagree about a large dividend?: Shareholders receive the dividend, so their return rises. Lenders are owed fixed repayments and prefer cash kept in the business to meet them.
Profit $27,000; dividend $9,000. Retained profit, and percentage paid out?: Retained 27,000 − 9,000 = $18,000. Paid out 9,000 ÷ 27,000 × 100 = 33.3%.

Accounting ratios and financial measures

Gross profit margin and markup: Gross profit margin = gross profit ÷ revenue × 100. Markup = gross profit ÷ cost of sales × 100. Markup is the larger figure for the same trading.
Profit in relation to revenue, and return on capital employed: Profit in relation to revenue = profit from operations ÷ revenue × 100. ROCE = profit from operations ÷ capital employed × 100, where capital employed = equity + non-current liabilities. Both use profit from operations, as in the 9215 mark scheme (May/June 2026).
Current ratio and liquid capital ratio: Current ratio = current assets : current liabilities. Liquid capital ratio = (current assets − inventory) : current liabilities. Both written as x : 1.
Rate of inventory turnover, trade receivable days and trade payable days: Inventory turnover = cost of sales ÷ average inventory (times). Receivable days = trade receivables ÷ credit revenue × 365. Payable days = trade payables ÷ credit purchases × 365.
Revenue $96,000; cost of sales $72,000. Gross profit margin and markup?: Gross profit 24,000. Margin 24,000 ÷ 96,000 × 100 = 25.0%. Markup 24,000 ÷ 72,000 × 100 = 33.3%.
Converting margin to markup and back: Markup = margin ÷ (100 − margin) × 100; margin = markup ÷ (100 + markup) × 100. A 40% margin is a 66.7% markup; an 80% markup is a 44.4% margin.
Trade receivables $15,000 on credit revenue of $73,000; trade payables $6,000 on credit purchases of $43,800. Days?: Receivable days 15,000 ÷ 73,000 × 365 = 75 days. Payable days 6,000 ÷ 43,800 × 365 = 50 days. Customers take longer to pay than suppliers are paid, which squeezes cash.

Appraising performance, cash and profit

Profit compared with cash and liquidity: Profit: revenue less expenses, recorded when they arise. Cash: money actually received and paid. Liquidity: the ability to pay debts as they fall due.
Why can profit and cash differ?: Credit sales raise profit before cash arrives; depreciation lowers profit with no cash; buying non-current assets, drawings and loan repayments use cash without reducing profit; loans and capital raise cash, not profit.
A business buys inventory on credit. Effect on profit, cash and a current ratio above 1 : 1?: No effect on profit or cash. The current ratio falls, because current assets and current liabilities rise by the same amount.
Current assets $20,000, current liabilities $10,000. $5,000 is paid to trade payables from the bank. New current ratio?: 15,000 : 5,000 = 3 : 1 (up from 2 : 1). Profit does not change.
Is a higher ratio always better?: No. A very high current ratio can mean idle cash or too much inventory; very few receivable days may mean credit terms so tight that sales are lost.
Give reasons a profitable business may have a bank overdraft: Growth in receivables or inventory, buying non-current assets, large drawings, loan repayments.

Limitations of financial statements and ratio analysis

Financial limitations of financial statements and ratios: They record the past; the statement of financial position is a snapshot at one date; historical cost; estimates and policies change profit; a ratio needs a comparison and gives no reasons; averages hide detail; profit is not cash.
Non-financial factors the statements do not show: Management quality and staff skills, morale, reputation and customer service, competitors and market conditions, the wider economy, changes in law, environmental conduct, location, future plans.
Profit $30,000; capital employed $150,000 at historical cost, $240,000 at today’s values. Effect on the return?: Historical cost: 20.0%. Restated: 12.5%. The business is unchanged; only the basis of the figures differs.
Current assets $60,000, current liabilities $40,000. $20,000 of payables is paid from cash just before the year end. Effect?: The current ratio rises from 1.50 to 2.00 (40,000 ÷ 20,000) although trading is unchanged: the snapshot effect.
Why can two shops in the same trade report different profits from the same machine?: Different policies: for a $40,000 machine, 10% straight line charges $4,000 but 20% reducing balance charges $8,000 in year 1.

Computers in accounting

Advantages of computerised accounting software over manual methods: Fast posting and totals; automatic arithmetic; one entry updates many records; trial balance and statements on demand; easy storage, search and back-up; several users controlled by passwords.
Disadvantages of computerised accounting software: Cost of hardware, software, updates and training; hacking, viruses and fraud; power failure or system crash; wrong data still posted wrongly; staff resistance; back-ups must be made and kept.
When might manual methods suit a business?: When there are few transactions: they cost little and need no power, though they are slow, error-prone and hard to search.
Does software remove all errors?: No. It removes arithmetic slips, but input errors and errors of principle are still posted.
Software costs $1,500 a year and saves 200 hours at $11 an hour. Net saving?: 200 × 11 = 2,200, less 1,500 = $700 a year.