part 7: chapter 47 an introduction to the analysis and interpretation of accounting statement
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Part 7: Chapter 47 An introduction to the analysis and interpretation of accounting statement. By: Nenae 11gs. What are ratios use for?. To compare business whether which are getting more profit. Who are interest in these ratio?. Shareholders Lenders Customers Suppliers Employees - PowerPoint PPT PresentationTRANSCRIPT
Part 7: Chapter 47An introduction to the analysis and
interpretation of accounting statement
By: Nenae 11gs
What are ratios use for?
o To compare business whether which are getting more profit
Who are interest in these ratio?
o Shareholderso Lenderso Customerso Supplierso Employeeso Governmento Competitors
Categories of ratio
o Profitability ratioso Liquidity ratioso Efficiency ratioso Shareholder ratioso Capital structure ratioso Other ratios
Profitability ratios (as percentage)
1. Return on capital employed (ROCE) = net profit x 100
capital employed
This show how successful managers are at earning a profit from capital used in the business. For every $ invested, the business make …% extra.
2. Gross profit margin = gross profit x 100
sales
This show how much gross profit is made for every $ earned. For every $ make from sales, …% kept as gross profit margin.
3. Net profit margin = net profit x 100
sales
This show how much net profit is made for every $ earned. For every $ make from sales, …% is kept as net profit margin.
Liquidity ratios
1. Current ratio = current assets
current liabilities
This show how many times a business can pay its short term debts.
2. Acid ratio test = current assets – stock
current liabilities
Similar to current ratio, however without stock because some business may find it difficult to sell stock quickly.
Efficiency ratios1. Inventory turnover (times) = cost of sales
average inventory
This measure how efficient a business is at maintaining an appropriate level of inventory.
2. Accounts receivable/ sales ratio = 1: …
then translate into length of time a debtor takes to pay: 365 x 1 = …days
…
3. Accounts payable/purchases ratio = 1: …
then translate into length of time we take to pay out creditors: 365 x 1 = …days
…
Shareholder ratios1. Earnings per share (EPS) = net profit after interest and tax and preference dividends
number of ordinary shares issued
This gives the shareholder a chance to compare one year’s earnings with another in terms easily understood.
2. Price/earnings ratio (P/E) = Marketing price per share
earnings per share
The greater the P/E ratio, the greater demand for the shared.
3. Dividend yield = Gross dividend per share
market price per share
This measure the real rate of return by comparing the dividend paid to the market price of a share.
4. Dividend cover = net after tax and preference dividends
ordinary dividends paid and proposed
This gives the shareholder some idea as to the proportional that the ordinary dividends bear to the amount available for distribution to ordinary shareholders. If the dividend is to be 3 times covered, this means that one-third of the available profits is being distributed as dividends
Capital structure ratios
-Gearing = long term loans + preference shares x 100ordinary share capital + reserves + preference shares + long term liabilities
Or in shorter formula Prior charge capital x 100
total capital
Other ratios
1. Operating profit/loan interest
2. Total external liabilities/shareholders’ funds
3. Shareholders’ funds/total assets
Fixed and variable costs
Fixed costs are the cost which remain constant. This do not matter whether the activity increase or decrease.
Variable costs are the cost that change due to the increase or decrease of the activity
Questions….
?
Income Statement $ $Sales 555,000Less: COGSOpening inventory 100,000Add: Purchases 200,000
300,000Less: closing inventory (60,000)
(240,000)gross profit 315,000Less: depreciation 5,000wages, salaries, commission 165,000other expenses 45,000 (215,000)Net profit 100,000Statement of financial positionnon-current assetequipment at cost 50,000less: depreciation to date (40,000) 10,000current assetinventory 60,000a/c receivable 125,000bank 25,000 210,000total assets 220,000current liabilitiesa/c payable (104,000)net assets 116,000
financed by:-capitalbalance at start of year 76,000add: net profit 100,000
176,000less: drawing (60,000)total capital 116,000
Calculate:1a). Rate of return of net profit on capital employed (average of capital)1b). Gross profit margin1c). Net profit margin1d). Inventory turnover1e). Current ratio1f). Acid test ratio1g). a/c receivable/sales ratio1h). a/c payable/purchases ratio1a). 100,000/(76,000+116,000/2) = 104.2%1b). 315,000/555,000x100 = 56.8%1c). 100,000/555,000x100 = 18%1d). 240,000/(100,000+60,000/2) = 3 times1e). 210,000/104,000 = 2.02 : 11f). (210000-60000)/104,000 = 1.44 : 11g). 125,000/555,000x12 = 2.7 months1h). 104,000/200,000x12 = 6.24 months
Calculate:
2a). Earnings per share
2b). Price/earnings ratio
2c). Dividend yield
2d). Dividend cover
3). If prior charge capital = 30,000 and total capital = 210,000, what is the gearing?
oNet profit after interest and tax and preference dividends = $300,000oNumber of ordinary share issued = $500,000oMarket price per share = $4.20oGross divided per share = $20oInterest = $10,000oOrdinary dividends paid and proposed = $120,000
2a). 300,000/50,000 = 602b). 4.20/0.6 = 72c). 0.20/4.20 = 4.76%2d). 300,000 + 10,000/120,000 = 2.58 times3).30,000/210,000 = 14.3%