Part 7: Chapter 47 An introduction to the analysis and interpretation of accounting statement

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Part 7 Chapter 47An introduction to the
analysis and interpretation of accounting
statement

• By Nenae 11gs

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What are ratios use for?

• To compare business whether which are getting
  more profit

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Who are interest in these ratio?

• Shareholders
• Lenders
• Customers
• Suppliers
• Employees
• Government
• Competitors

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Categories of ratio

• Profitability ratios
• Liquidity ratios
• Efficiency ratios
• Shareholder ratios
• Capital structure ratios
• Other ratios

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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.
• z

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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.

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Efficiency ratios

• 1. 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

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Shareholder ratios

• 1. 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 years 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 profit 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

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Capital structure ratios

• -Gearing long term loans preference shares x
  100
• ordinary share capital reserves preference
  shares long term liabilities
• Or in shorter formula Prior charge capital x 100
• total capital

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Other ratios

• 1. Operating profit/loan interest
• 2. Total external liabilities/shareholders funds
• 3. Shareholders funds/total assets

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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

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Questions.?
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Income Statement
Sales 555,000
Less COGS
Opening inventory 100,000
Add Purchases 200,000
300,000
Less closing inventory (60,000)
(240,000)
gross profit 315,000
Less depreciation 5,000
wages, salaries, commission 165,000
other expenses 45,000 (215,000)
Net profit 100,000
Statement of financial position
non-current asset
equipment at cost 50,000
less depreciation to date (40,000) 10,000
current asset
inventory 60,000
a/c receivable 125,000
bank 25,000 210,000
total assets 220,000
current liabilities
a/c payable (104,000)
net assets 116,000

financed by-
capital
balance at start of year 76,000
add net profit 100,000
176,000
less drawing (60,000)
total capital 116,000
Calculate 1a). Rate of return of net profit on
capital employed (average of capital) 1b). Gross
profit margin 1c). Net profit margin 1d).
Inventory turnover 1e). Current ratio 1f). Acid
test ratio 1g). a/c receivable/sales ratio 1h).
a/c payable/purchases ratio
1a). 100,000/(76,000116,000/2) 104.2 1b).
315,000/555,000x100 56.8 1c).
100,000/555,000x100 18 1d). 240,000/(100,00060
,000/2) 3 times 1e). 210,000/104,000 2.02
1 1f). (210000-60000)/104,000 1.44 1 1g).
125,000/555,000x12 2.7 months 1h).
104,000/200,000x12 6.24 months
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• Net profit after interest and tax and preference
  dividends 300,000
• Number of ordinary share issued 500,000
• Market price per share 4.20
• Gross divided per share 20
• Interest 10,000
• Ordinary dividends paid and proposed 120,000

2a). 300,000/50,000 60 2b). 4.20/0.6 7 2c).
0.20/4.20 4.76 2d). 300,000 10,000/120,000
2.58 times 3).30,000/210,000 14.3

• 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?