培训课程
Paper1.1相关 Interpretation of accounts讲义
Interpreting financial statements usually means comparison -- comparison of the results of one company with those of another, or comparison of the results of the same company for several years. Comparisons may also be made between a company's results and budgeted figures or published industry averages.
It is to make this comparison process easy that we use ratios or percentages, because it is only possible to compare two companies of unequal size if their position and results are presented in ratio or percentage terms.
Users of accounting information are interested in four main things:
l Profitability
l Liquidity
l Management efficiency
l Risk
l The return on their investment - shareholders will be interested in it
Measuring profitability
1.The gross profit percentage:
2.Net profit as a % of sales (net profit before interest)
Possible causes of a variation in gross profit percentage from one year to another are:
Increase in costs not passed on proportionally to customers by an increase in prices;
Taking on sales contracts at lower than normal profit margin;
Change in the mix of sales 9selling more of high profit lines and less of low profit lines or vice versa);
Error in stocktaking
Error in cut-off procedure (including in sales, the sale of an item not included in purchases because the invoice for the purchase was received late)
A company with a low margin --
A company with high fixed costs --
3.return on capital employed (ROCE)
4. return on owners' equity (ROOE)
There are several points to note about these calculations:
(a) You must include all the reserves along with the share capital. The share capital itself is meaningless as a measure of the shareholders’ participation.
(b) Share capital plus reserves plus long-term loan capital is the same as fixed assets plus net current assets.
(c) If there are preference shares, they will be included in ratio 1 but the shares and the dividend on them will be deducted along with the long-term loan capital and its interest. Ratio 2 is then the return for the ordinary shareholders.
(d) Ratio 2 could be taken using the profit after tax. It doesn’t really matter too much whether you take pre-tax or post-tax profit. It is simpler to take the post-tax figure if there are preference shares and hence preference dividend.
(e) Ratio 1 is usually referred to as Return on Capital Employed (ROCE) and Ratio 2 as Return on Owners’ Equity (ROOE).
Limitations in the calculation of ROCE and ROOE
These ratios are obviously very important to users, but there are plenty of difficulties with them.
(a) Problems with the profit
(i) When comparing two or more companies, accounting policies will almost certainly vary and adjustments will be needed;
(ii) Historical cost accounting tends to overstate profit because depreciation is based on original cost, not current value, and because holding gains on stock are included in reported profit;
(iii) Profit may be after charging exceptional items which distort comparisons.
(b) Problems with the capital employed
If using historical cost accounting (HCA) the capital employed is likely to be understated, the use of HCA has a double effect. As explained in (a) (ii) the profit tends to be overstated while the capital employed is understated. The two effects together can lead to a considerable overstatement of the ROCE and ROOE.
Liquidity
To measure a company's ability to pay its debts as they fall due in several ways.
The traditional approach is to look at the relationships between current assets and current liabilities (CA/CL) and between 'quick' assets and current liabilities
(QA/CL).
Current ratio
Quick ratio
Efficiency
All the first three of these ratios may be distorted if the trade is seasonal. In each case we are comparing a figure as at the end of a year with a value for the whole year. Stock levels may fluctuate widely during the year in response to seasonal variations, and you do not get a usable figure by taking he average of opening and closing values, because both may seasonally high or low.
The way to reflect this point in an examination answer is to calculate the ratio normally, then refer in your interpretation of it to several possible explanations of an especially high or low value.
Example extract from an examination answer:
'… the average peroiod of credit given to customers in 98 days. This could be due to poor credit control but the figure may be distorted by the seasonal nature of the trade. More investigation is needed before drawing a firm conclusion.'
Measuring risk
Gearing: Loan capital plus preference share capital
plus ordinary share capital plus reserves
Return for investors
1.Dividend yield
2.Earning yield
3.P/E ratio
4.Earning per share
5. Dividend cover
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