RATIO ANALYSIS\

 Ratio Analysis

A financial ratio is a relationship of two values of financial statements. Ratios basically are mathematical expressions, which are calculated to derive certain conclusion. The ratio may be expressed as number of times, proportion or percentage. There are number of ratios, but which to consider for a particular type of analysis is left to the personal judgement of the analyst. As a matter of fact, all the ratios are for different purposes and have different objectives.

	Uses of Ratios.
Sr. No.
1	Ratios offer help in intra firm comparisons, industry comparison and
	also for inter-firm comparison.
2	Financial position of the entity can be studied.

	3.0 Limitations & problems of Ratio analysis:
Sr. No.	Limitations
1	Ratios are based on financial statements, so contain almost all of the deficiencies of those accounts.
2	Some ratios are open for manipulation and need to be interpreted with care. E.g. stock levels may be kept artificially low at year-end, creating an impression of high efficiency in this area.
3	Inter-firm comparisons are faced with the problem that different organizations might use rather different accounting policies. E.g. depreciation methods etc.
4	Detailed knowledge of a company’s markets is seldom obtainable from the published accounts, but is extremely important for assessing future profitability.
5	Ratios are useful when comparing similar organizations operating under similar conditions. Comparisons with different types of organizations can be misleading.
6	There is a real danger that ratio analysis can lead to conclusions, which are over-simplified. e.g. high current ratio.

 Types of Ratios.  Interpretation of various Ratios:  Other Ratios:

Sr. No.	Type of Ratio	Various ratios
1	Turnover Ratios	Debtors, Creditors, Inventory
2	Liquidity Ratios	Current, Acid test
3	Profitability Ratios	Gross profit, Net profit
4	Solvency Ratios	Debt Equity, Interest coverage, DSCR

Sr. No.	Ratios	Formula / Interpretation
1.0	Turnover Ratios:
1.1	Debtors Turnover Ratio	Average Debtors x 365 divided by Sales. Average Collection period.
1.2	Creditors Turnover Ratio.	Average Creditors x 365 divided by Credit purchases. Average payment period.
1.3	Inventory Turnover Ratio.	Average inventory x 365 divided by material cost Holding period of stock

Sr. No.	Ratios	Formula / Interpretation
2.0	Liquidity Ratios:
2.1	Current Ratio	Current Assets / Current Liabilities.
2.2	Acid Test Ratio	Quick Assets / Quick liabilities.
	Cash Ratio	Cash & cash Equivalent/current Liabilities

Sr. No.	Ratios	Formula / Interpretation
3.0	Profitability Ratios:
3.1	Gross Profit Ratio	Gross profit / Net sales x 100
3.2	Net Profit Ratio	Net profit / Net sales x 100
3.3	Material cost ratio	Material cost / Net sales x 100
3.4	Expenses Ratios	Expenses / Net sales x 100
3.5	Return on Capital	PBIT / Capital employed x 100
3.6	Return on Proprietor’s Funds	PAT / Proprietor’s Funds

Sr. No.	Ratios	Formula / Interpretation
4.0	Solvency Ratios:
4.1	Debt Equity Ratio	Total outside debt / Equity or Shareholders’ funds.
4.2	Proprietary Ratio	Proprietor’s funds /Total Assets x 100
4.3	Interest coverage Ratio	PBIT / Fixed interest charges
4.4	Debt coverage Ratio	PATID / (Interest + Repayment installments)

Notes	Ratio	Components
1	Average debtors	Opening debtors + Closing debtors divided by 2
2	Current assets	Stock + debtors + cash & bank balance + loans & advances + Prepaid expenses
3	Current liabilities	Creditors + BP + O/S expenses + IT payable + Dividend payable + Bank overdraft ( not if permanent)
4	Quick Assets	Current Assets less ( Stock + prepaid expenses)
5	Quick Liabilities.	Current liabilities less Bank overdraft
6	Gross Profit	Sales less material cost.
7	Net Profit	Sales less all expenses + any other income.
8	Debt	Long term loans + debentures + Bank overdraft
9	Equity	Equity share capital + Preference share capital +Free Reserves – (Accumulated losses + deferred revenue expenditure) = Net worth = Proprietor’s funds.
10	PBIT	Profit before Tax + interest.
11	PATID	Profit after Tax + Interest + Depreciation. = Annual cash flow.
12	PAT	Profit less I. Tax.
13	Capital employed	Net Fixed Assets + Current assets less Current liabilities.

Sr. no.	Ratio
1.0	Turnover Ratios:
1.1	Debtors Turnover Ratio: This ratio measures the average number of day’s credit given to debtors. It helps to assess the efficiency of the
	debt collection department. Debt collection period should be kept as low as possible, consistent with maintaining customer goodwill and market trend.
1.2	Creditors Turnover Ratio: This ratio measures the average number of days credit is exploited from suppliers. Credit given by suppliers depends on various factors such as demand & supply position of material, industry trends, competition etc.
1.3	Inventory Turnover Ratio: This ratio measures the average number of days for which stock is held. It helps to assess the efficiency of stock
	utilization. Various factors affect the stock level held by the
	organization such as product, production-seasonal or otherwise,
	demand pattern, competition, funds availability etc.

2.0	Liquidity Ratios:
2.1	Current Ratio: This ratio is concerned with the assessment of an
	organization's ability to meet its short-term obligations. The ratio must be high enough for safety. However, high current assets do not normally lead to high profits in themselves, so the usual trade-off between risk and return exists. Industry norm is 2:1
2.2	Acid Test Ratio: This ratio is also concerned with short-term liquidity. In a sense it is more appropriate measure since liquid assets represent the source of funds from which current liabilities will probably be met. Industry norm is 1:1
3.0	Profitability Ratios:
3.1	Gross Profit Ratio: GP / Margin on sales
3.2	Net Profit Ratio: Net profit on sales. It indicates organization's ability
	to generate profits from sales.
3.3	Material cost ratio: Material cost to sales
3.4	Expenses Ratios: Expenses to sales.
3.5	Return on Capital: This ratio is expressed as a percentage. Generally
	higher the return the better.
3.6	Return on Proprietor’s Funds: This ratio provides a measure of the
	percentage return on the investment made by the owners.
4.0	Solvency Ratios:
4.1	Debt Equity Ratio: This ratio is concerned with establishing the relationship between external and internal long-term financing. The
	use of long-term debt in the capital structure has both advantages and
	disadvantages, and in practice the level of debt actually existing is the
	result of a balancing process. The main advantage of debt is that it
	provides an opportunity for greater returns to shareholders. Industry norm is 2:1
4.2	Proprietary Ratio: It measures the owner's contribution of funds.
4.3	Interest coverage Ratio: This ratio measures the safety available to
	Bank for recovery of interest. Industry norm is 2:1
4.4	Debt coverage Ratio: This ratio measures the safety available to Bank
	for recovery of interest & loan installment. Industry norm is 2.5 : 1

6.1	Employees Ratios:
¾	Sales per employee:	Sales / staff strength
¾	Sales generation:	Sales / salaries & wages
¾	Profit per employee:	PBT / staff strength
¾	Profit generation:	PBT / salaries & wages
¾	Remuneration level:	Salaries & wages / staff strength
6.2	Shareholder's Ratios:
¾	Earnings per share:	PAT less Pref. Dividend / number of shares
¾	Dividend per share:	Dividend / Number of shares
¾	Dividend pay out ratio:	Dividend / Earnings per share
¾	Dividend yield:	Dividend per share / Market price per share
¾	Book value per share:	Ordinary shareholder's equity / number of shares
¾	Price-earnings ratio:	Market price per share / Earnings per share.

summary of ias/ifrs

ACCA F7 EXAM TIPS

ACCA Exam Tips Paper F7 Dec 2013 examinations

1.     Consolidated Statement of Financial Position AND Statement of Income, mid-year acquisition, share for share exchange, nci value based on share price, fair value upward adjustments, intra-group sales and pups, goodwill impairment

2.     Statements of Financial Position, Income AND Changes in Equity, list of  balances, problems with revenue recognition (consignment goods), inventory adjustment, TNCA revaluation, depreciation straight line and reducing balance, loan interest accrual, tax provision and deferred tax movement

3.     20 mark cash flow (last time there was a question WITHOUT interpretation was December 2011) with a part b 5 mark chat

4.     15 mark question covering 2 or 3 IAS with short, relatively straight- forward calculations. Possibles?  Could be anything, but here are 3 wild guesses:- subsequent events, leasing and borrowing costs

5.     10 mark question – could be something like development expenditure, complex depreciation question or (relatively easy) earnings per share

f7 mock 1 answers pg(1-12)

 BUDGETING CMA ESSAY TYPE QUESTIONS.

ACCA MOCK 1

PURP CONSOLIDATION

ACCA

http://www.accaglobal.com/

Master Budget

MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

EXERCISES AND PROBLEMS

164.  Spirit Company sells three products with the following seasonal sales pattern:

                                                                           Products

         Quarter                                  A                     B                     C

         1                                          40%                 30%                 10%

         2                                          30%                 20%                 40%

         3                                          20%                 20%                 40%

         4                                          10%                 30%                 10%

         The annual sales budget shows forecasts for the different products and their expected selling price per unit as follows:

                                    Product             Units               Selling Price

                                       A                   50,000                         $ 4

                                       B                 125,000                          10

                                       C                   62,500                            6

         Required:

         Prepare a sales budget, in units and dollars, by quarters for the company for the coming year.

         Answer:                             First            Second              Third            Fourth

                                              Quarter          Quarter          Quarter          Quarter            Total

         Product A:

                  Sales (units)            20,000             15,000             10,000               5,000          50,000

                  Price                         x   $4               x   $4               x   $4               x   $4            x   $4

                  Sales ($)               $80,000           $60,000           $40,000           $20,000      $200,000

         Product B:

                  Sales (units)            37,500             25,000             25,000             37,500        125,000

                  Price                         x $10               x $10               x $10               x $10            x $10

                  Sales ($)             $375,000         $250,000         $250,000         $375,000   $1,250,000

         Product C:

                  Sales (units)              6,250             25,000             25,000               6,250          62,500

                  Price                         x   $6               x   $6               x   $6               x   $6            x   $6

                  Sales ($)               $37,500         $150,000         $150,000           $37,500      $375,000

                  Total dollars       $492,500         $460,000         $440,000         $432,500   $1,825,000

        
165. Lubriderm Corporation has the following budgeted sales for the next six‑month period:

                           Month                                         Unit Sales

                           June                                                   90,000

                           July                                                  120,000

                           August                                            210,000

                           September                                       150,000

                           October                                           180,000

                           November                                       120,000

         There were 30,000 units of finished goods in inventory at the beginning of June.  Plans are to have an inventory of finished products that equal 20% of the unit sales for the next month.

         Five pounds of materials are required for each unit produced.  Each pound of material costs $8.  Inventory levels for materials are equal to 30% of the needs for the next month.  Materials inventory on June 1 was 15,000 pounds.

         Required:

         a.      Prepare production budgets in units for July, August, and September.

         b.      Prepare a purchases budget in pounds for July, August, and September, and give total purchases in both pounds and dollars for each month.

         Answer:

         a.                                                                             July            August      September

                  Budgeted sales                                         120,000           210,000           150,000

                  Add: Required ending inventory               42,000             30,000             36,000

                  Total inventory requirements                   162,000           240,000           186,000

                  Less: Beginning inventory                         24,000             42,000             30,000

                  Budgeted production                               138,000           198,000           156,000

         b.                                                                             July            August      September

                  Production in units                                   138,000           198,000           156,000

                  Targeted ending inventory in lbs.^*           297,000           234,000         ^**252,000

                  Production needs in lbs.^***                        690,000           990,000           780,000

                  Total requirements in lbs.                         987,000        1,224,000        1,032,000

                  Less: Beginning inventory in lbs.         ^****207,000           297,000           234,000

                  Purchases needed in lbs.                          780,000           927,000           798,000

                  Cost ($8 per lb.)                                             x $8                 x $8                 x $8

                  Total material purchases                      $6,240,000      $7,416,000      $6,384,000

                  ^*        0.3 times next month's needs

                  ^**     (180,000 + 24,000 - 36,000) times 5 lbs. x 0.3

                  ^***     5 lbs. times units to be produced

                  ^****   (690,000 x .3) = 207,000 lbs.

        

166.  Gerdie Company has the following information:

                           Month                                Budgeted Sales

                           March                                              $50,000

                           April                                                  53,000

                           May                                                   51,000

                           June                                                   54,500

                           July                                                    52,500

         In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month's cost of sales.

         Required:

         Prepare a purchases budget for April through June.

         Answer:                                                    April                May                June            Total

         Desired ending inventory                     $  9,180           $  9,810           $  9,450       $   9,450

         Plus COGS                                             31,800             30,600             32,700          95,100

         Total needed                                           40,980             40,410             42,150        104,550

         Less beginning inventory                          9,540               9,180               9,810            9,540

         Total purchases                                     $31,440           $31,230           $32,340       $ 95,010

167.  Picture Pretty manufactures picture frames.  Sales for August are expected to be 10,000 units of various sizes.  Historically, the average frame requires four feet of framing, one square foot of glass, and two square feet of backing.  Beginning inventory includes 1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing.  Current prices are $0.30 per foot of framing, $6.00 per square foot of glass, and $2.25 per square foot of backing. Ending inventory should be 150% of beginning inventory. Purchases are paid for in the month acquired.

         Required:

         a.      Determine the quantity of framing, glass, and backing that is to be purchased during August.

         b.      Determine the total costs of direct materials for August purchases.

         Answer:

         a.                                                                      Framing               Glass          Backing

                  Desired ending inventory*                          2,250                  750                  750

                  Production needs (10,000 units)**            40,000             10,000             20,000

                  Total needs                                                 42,250             10,750             20,750

                  Less: Beginning inventory                           1,500                  500                  500

                  Purchases planned                                      40,750             10,250             20,250

         b.      Cost of direct materials:

                           Framing (40,750 x $0.30)                                  $12,225.00

                           Glass (10,250 x $6.00)                                         61,500.00

                           Backing (20,250 x $2.25)                                    45,562.50

                                Total                                                            $119,287.50

                  *1,500 x 1.5 = 2,250

                       500 x 1.5 = 750

                  **10,000 x 4 = 40,000

                      10,000 x 1 = 10,000

                      10,000 x 2 = 20,000

168.  Michelle Enterprises reports the year-end information from 20x2 as follows:

                  Sales (100,000 units)                                                                  $250,000

                  Less: Cost of goods sold                                                             150,000

                  Gross profit                                                                                  100,000

                  Operating expenses (includes $10,000 of Depreciation)               60,000

                  Net income                                                                                 $  40,000

         Michelle is developing the 20x3 budget. In 20x3 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%.  Cost of goods sold as a percentage of sales is expected to increase to 62%.  Other than depreciation, all operating costs are variable.

         Required:

         Prepare a budgeted income statement for 20x3.

         Answer:

Michelle Enterprises

Budgeted Income Statement

For the Year 20x3

         Sales (95,000 x $2.75)                                                            $261,250

         Cost of goods sold (20x3 sales x 62%)                                    161,975

         Gross profit                                                                                 99,275

         Less: Operating expenses [($0.50 x 95,000] + $10,000)            57,500

         Net income                                                                               $ 41,775

169.  Brad Corporation is using the kaizen approach to budgeting for 20x5. The budgeted income statement for January 20x5 is as follows:

                  Sales (240,000 units)                                                                  $720,000

                  Less: Cost of goods sold                                                             480,000

                  Gross margin                                                                                240,000

                  Operating expenses (includes $64,000 of fixed costs)                192,000

                  Net income                                                                                 $  48,000

         Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month.

         Required:

         Prepare a kaizen-based budgeted income statement for March of 20x5.

         Answer:

         Sales                                                                                              $720,000

         Less: Cost of goods sold ($480,000 x 0.99 x 0.99)                        470,448

         Gross margin                                                                                   249,552

         Operating expenses [($128,000 x 0.99 x 0.99) + $64,000]            189,453

         Net income                                                                                    $  60,099

170. Allscott Company is developing its budgets for 20x5 and, for the first time, will use the kaizen approach. The initial 20x5 income statement, based on static data from 20x4, is as follows:

                  Sales (140,000 units)                                                                  $420,000

                  Less: Cost of goods sold                                                             280,000

                  Gross margin                                                                                140,000

                  Operating expenses (includes $28,000 of depreciation)              112,000

                  Net income                                                                                   $28,000

         Selling prices for 20x5 are expected to increase by 8%, and sales volume in units will decrease by 10%.  The cost of goods sold as estimated by the kaizen approach will decline by 10% per unit.  Other than depreciation, all other operating costs are expected to decline by 5%.

         Required:

         Prepare a kaizen-based budgeted income statement for 20x5.

         Answer:

         Sales (126,000 x $3.24)                                              $408,240

         Less: COGS (126,000 x $1.80)                                    226,800

         Gross margin                                                                 181,440

         Operating expenses ($28,000 + $79,800)                     107,800

                  Net income                                                         $  73,640