Company Accounts and Financial Statement Analysis
Company Accounts and Financial Statement Analysis
This domain tests limited-company accounts and the calculation and interpretation of accounting ratios. Questions often require share capital, reserves, dividends, debentures, and ratios such as gross profit margin and current ratio.
Core rules
- A company is a separate legal entity; owners are shareholders.
- Share capital is capital contributed by shareholders; retained earnings are accumulated profits.
- Dividends are distributions of profit, not expenses.
- Debentures are long-term borrowings, not share capital.
- Financial statement analysis compares profitability, liquidity, efficiency and gearing.
- Gross profit margin = Gross profit / Revenue x 100. Net profit margin = Net profit / Revenue x 100.
- Current ratio = Current assets / Current liabilities. Quick ratio = (Current assets - Inventory) / Current liabilities.
- ROCE = Operating profit / Capital employed x 100.
Worked example
Revenue RM500,000; cost of sales RM300,000; gross profit RM200,000; net profit RM60,000. Gross profit margin = 40%; net profit margin = 12%. Current assets RM120,000, inventory RM40,000, current liabilities RM80,000. Current ratio = 1.5:1; quick ratio = (RM120,000 - RM40,000) / RM80,000 = 1.0:1. If operating profit is RM80,000 and capital employed RM300,000, ROCE = 26.7%.
Traps
- Treating dividends as an expense.
- Adding share premium to profit.
- Classifying debentures as equity.
- Using closing inventory in the quick ratio.
Key points
- Dividends are not expenses
- Debentures are liabilities
- Gross margin uses gross profit
- Quick ratio excludes inventory
- ROCE compares profit with capital employed