Review of Accounting (F. Mitchell)

2010 Exam Review:


Appendix of Ratios: (N=Numerator of ratio, D=Denominator of ratio)

Overall Performance Measures

1. ROTA (Return on Total Assets)
1. N= Net Profit before Finance Cost and Tax (Income Statement)
2. D= Total Assets (Balance Sheet)
2. ROE (Return on Equity)
1. N= Net Profit after Tax (Income Statement)
2. D= Total Equity = Share Capital+Retained Profits+Revaluation Reserve (Balance Sheet)
3. Sales Growth (Year on year)
1. ((2009 Sales/2008 Sales)-1)*100% = 7.5% (Income statement)
4. Asset Growth (Year on year)
1. ((2009 Assets/2008 Assets)-1)*100%=6.6% (Balance sheet)

Profitability:

1. GPP (Gross Profit Percentage)
1. N=Gross Profit (Income Statement)
2. D=Sales (Income Statement)
2. NPP (Net Profit Percentage)
1. N=Net Profit (Income Statement)
2. D=Sales (Income Statement) 
3. S&D Cost % (Sales and Distribution Cost Percentage)
1. N=S&D Cost (IS)
2. D=Sales (IS)
4. Admin. Cost %
1. N=Admin Cost (IS)
2. D=Sales (IS)

 Asset Productivity:

1. Overall asset productivity:
1. N=Sales (IS)
2. D=Total Assets (BS)
2. Non current asset productivity:
1. N=Sales (IS)
2. D=Non-Current assets (B/S, top)
3. current asset productivity:
1. N=Sales (IS)
2. D=current assets (BS, top)

 Working Capital:

1. Inventory Days: (N/D*M)
1. N=Inventory (B/S)
2. D=Cost of Sales (I/S)
3. Multiplier=365
2. Payable Days: (N/D*M)
1. N=Trade Payables
2. D=COS (I/S)

 Liquidity:

1. Current Ratio:
1. N=current assets (bs)
2. D=current liabilities (bs)
2.  Quick Ratio:
1. N=cash (b/s)
2. D=current liabilities (b/s)

Gearing:

1. Financial Gearing:
1. N=Non Current Liabilities (ie loans) (b/s)
2. D=Liabilities including equity but excluding current liabilities (b/s)
2. Interest Cover
1. N=EBIT (Earnings before interest and taxes) (is)
2. D=Interest Costs (is)

  Balance Sheet Structure:

1. non-current assets
1. N=non-current assets (bs)
2. D=total assets (bs)
2. current assets
1. N=current assets (bs)
2. D=total assets (bs)
3. current liabilities
1. N=current liabilities (bs)
2. D=total liabilities (bs)
4. non-current liabilities
1. N=non-current liabilities (bs)
2. D=total liabilities (bs)
5. equity
1. N=total equity (bs)
2. D=total liabilities (bs)

1. Report on Performance of Nevershut Ltd.
1. attributes: 
1. profitable, although profit is decreasing
2. sales growth
3. asset growth
4. has positive operational cash flow (cash generative operations)
5. stable selling and distribution costs
6. stable asset productivity#
7. gearing is decreasing
2. focusing on negative attributes
1. ROA, ROE decreasing
1. ROA decreased from 12.6% to 6.7%, decrease of 47%
2. ROE decreased from 11.3% to 5.4%, decrease of 52%
2. decrease in ROA,ROE due to decreasing profitability as seen by gross and net profit decreases
1. this counteracts positive effect of sales growth
2. asset growth is in fact largely due to revaluations
1. 400% increase in revaluation reserve 2009 from 2008
2. 183% increase in revaluation reserve 2010 from 2009
3. poor admin cost control  with 33% increase 2010 from 2008
4. rising inventory days 12.9% increase 2010 from 2008
1. not good for firm with perishable inventory
5. rising payable days  43% increase 2010 from 2008
1. large increase in trade payables from 2009 to 2010
6. strong reduction in current and quick ratios indicating the decrease in working capital
7. Large capital outflows may be dividends which the company can ill-afford
2. Report on Shareholder's Target Price of £5/share:
1. profitability of Nevershut would have to increase to be in line with that of prospective parent company Resale PLC
2. Book Value/share
1.