I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART H: INTERPRETATION OF FINANCIAL STATEMENTS 

 

480

 

 

Users of financial statements can gain a better understanding of the significance of the information in 

financial statements by comparing it with other relevant information. 

 

Ratios provide information through comparison. 

 

Profitability ratios include: 

 

– 

Return on capital employed 

 

– 

Net profit as a percentage of sales 

 

– 

Asset turnover ratio 

 

– 

Gross profit as a percentage of sales 

 

Liquidity and working capital ratios include: 

 – Current 

ratio 

 

– 

Quick ratio  

 

– 

Receivables collection period 

 

– 

Payables payment period 

 

– 

Inventory turnover period 

 

Debt and gearing/leverage ratios include: 

 – Debt 

ratios 

 – Gearing 

ratio/leverage 

 – Interest 

cover 

 

You must be able to interpret financial data as well as calculate ratios. 

 

Ratio analysis has limitations. 

 

1 

Apart from ratio analysis, what other information might be helpful in interpreting a company's accounts?  

2 

What is the usual formula for ROCE?  

3 

ROCE can be calculated as the product of two other ratios. What are they?  

4 

Define the 'debt ratio'.  

5 

What is the relationship between 'gearing' and 'leverage'?  

6 

What are the formulae for: 

(a) 

The current ratio?  

(b) 

The quick ratio?  

(c) 

The accounts receivable collection period?  

 

(d) 

The inventory turnover period? 

 

 

 

 

 

 

 

QUICK QUIZ

CHAPTER ROUNDUP 

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CHAPTER 26  

//

  INTERPRETATION OF FINANCIAL STATEMENTS 

 

481 

 

1 

 

Commentary accompanying financial statements 

 

Age and nature of company's assets 

 

Future developments affecting the company 

 

Events after the reporting period, contingencies and other items disclosed in notes to the financial 

statements 

2 

employed

 

Capital

tax

 

and

 

interest

 

before

 

Profit

 

3 

employed

 

Capital

Sales

Sales

PBIT 

 

4 

Ratio of company's total debts to its total assets 

5 Gearing 

= 

capital

 

Total

capital

 

Loan

 

 Leverage 

= 

capital

 

Total

capital

Equity 

 

6 

(a) 

Current assets/current liabilities 

(b) 

Current assets minus inventories/current liabilities 

(c) 

Trade receivables/credit sales  365 

 

(d) 

Inventory/cost of sales  365 

 

 

 

 

 

Now try ... 

 

Attempt the questions below from the Practice Question Bank 

 

Qs 98 – 100 

 

 

 

 

 

 

 

 

 

ANSWERS TO QUICK QUIZ 

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PART H: INTERPRETATION OF FINANCIAL STATEMENTS 

 

482

 

 

BPP Tutor Toolkit Copy

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483 

 

 

Practice question and answer bank

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PRACTICE QUESTION AND ANSWER BANK 

 

484

 

 

 

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PRACTICE QUESTION BANK 

 

485 

1 

Which of the following are true of sole traders?  

1 

A sole trader's financial statements are private; a company's financial statements are sent 

to shareholders and may be publicly filed  

2 

Only companies, and not sole traders, have capital invested into the business 

3 

A sole trader is fully and personally liable for any losses that the business might make; a 

company's shareholders are not personally liable for any losses that the company might make 

A 

1 and 2 only  

B 

2 and 3 only  

C 

1 and 3 only  

D 

1, 2 and 3  

 

(2 marks) 

2 

Who is responsible for the preparation of the financial statements of a company? 

1 

The finance department 

2 

The board of directors 

3 

The external auditors 

A 

1 only  

B 

1 and 2 only  

C 

2 only  

D 

1, 2 and 3  

 

(2 marks) 

3 

Which TWO of the following are advantages of trading as a partnership? 

1 

Additional capital can be raised because more people are investing in the business 

2 

A partnership has a separate legal identity from the individual partners 

3 

Partners have limited liability and are not personally liable for the debts of the partnership 

4 

A partnership is not required to make its financial accounts publicly available 

A 1 

and 

2 

B 1 

and 

4 

C 

2 and 4  

D 

2 and 3  

 

(2 marks) 

4 

Which TWO of the following are disadvantages of trading as a limited liability company? 

1 

The shareholders of the company have limited liability for the debts of the company 

2 

A company must publish annual financial statements 

3 

Raising finance is easier as a company, as more shares can be issued 

4 

The financial statements of larger limited liability companies must be audited 

A 1 

and 

2 

B 1 

and 

4 

C 

2 and 3  

D 

2 and 4  

 

(2 marks) 

5