Analytical Procedures

Question 1

What are analytical procedures

Answer 1

Evaluation of financial information through studying financial and non-financial data.

Question 2

Return on capital employed formula

Answer 2

Profit before interest and tax/ ( Total assets- current liabilities or equity+NCL)

Use of resources

Question 3

Return on shareholder funds

Answer 3

Profit for period/ share capital + reserves

Use of resources

Question 4

Gross profit percentage

Cost of sales percentage

operating cost percentage

Answer 4

Gross profit x100/ revenue

Look at profitability before overheads

Cost of sales x100/ revenue

Look at cost and revenue relationship

operating cost x 100/ revenue

Assess cost and revenue relationship

Question 5

Net margin/operating margin

Answer 5

Profit before int and tax x 100/ Revenue

Assess profitability after overheads

Question 6

Liquidity ratios

Answer 6

Current ratio= Current assets/ current liabilities

Ability to pay CL

Quick ratio= (receivables+ current investment+ cash)/ current liabilities

-No inventory

Ability to pay CL from
liquid assets

Question 7

Long term solvency

Answer 7

Gearing ratio= NCL/ Equity+NCL

Assess reliance on external finance

Interest cover= Interest/ Profit before interest

Ability to pay interest

Question 8

Efficiency ratios- net asset turnover

Answer 8

Revenue/ capital employed

Revenue generated from asset base

Question 9

Inventory turnover

Answer 9

Cost of sales/Inventory

Assess inventory level held

Question 10

Inventory days

Answer 10

Inventory/cost of sales x365

Assess how long it takes until turn over inv

Question 11

Trade receivable collection period

Trade payable collection period

Answer 11

Trade receivable 365/ credit sales

Ability to turn receivables to cash

Trade payables x 365/ Credit Purchases

Ability to pay suppliers.