Unit 5 Company Reports - BFA103 FINANCIAL ACCOUNTING AND...

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BFA103 FINANCIAL ACCOUNTING AND DECISION MAKING TUTOR NOTES Unit 5 –Company Statements Suggested Solutions Discussion Questions 6.1 A financial ratio is simply a comparison between two financial magnitudes within the financial reports of an entity that provides valuable insights into the financial performance or position of the entity. 6.2 Without a standard of comparison ratios provide little insight. For example is a ‘gross profit margin’ of 23% acceptable or a ‘debtors turnover’ of 5 times reasonable or a ‘current ratio’ of 1.7 times secure. Comparison should be made with: (a) Terms (i.e. what credit period is offered) (b) Budget (i.e. plan) (c) Past periods/intertemporal (i.e. trend) (d) Other firms in the same industry (intra-industry or interfirm comparison) 6.3 The fact that a business operates on a low profit margin indicates that a small percentage of profit is being produced for each $1 of sales generated. However, this does not necessarily mean that the return on capital employed will be low as a result. If the firm has a high asset turnover than this can compensate for the low profit margin and generate a satisfactory
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Unit 5 Company Reports - BFA103 FINANCIAL ACCOUNTING AND...

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