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46 Study notes Paper F2 Financial Management

46 Study notes Paper F2. Financial Management l Meaning: how confident the market is in the F2 students know that their grasp of ratio analysis business. The larger the figure, the more that is sure to be examined, yet many still let marks go shareholders are prepared to pay for a share in begging for the want of proper calculations. Here's a that company compared with the firm's historic top-five countdown of the worst-understood ratios earnings. The P/E ratio is a relatively new entry to the chart. By Jayne Howson 4. Non-current-asset (NCA) turnover Freelance lecturer specialising in Financial l Calculation: the NCA turnover (a number) is Management , reporting and tax, and a marker for derived by dividing the revenue shown on the Paper F2 company's income statement by the total figure T. for non- current assets on its statement of finan . hose students preparing to sit the F2 cial position. This ratio is rarely calculated cor . Paper will know that question 7 has rectly. The figure for non-current assets should always been a 25-mark analysis and not include Investments in associate , because interpretation question.

46 l Meaning: how confident the market is in the business. The larger the figure, the more that shareholders are prepared to pay for a share in that company compared with the firm’s historic

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Transcription of 46 Study notes Paper F2 Financial Management

1 46 Study notes Paper F2. Financial Management l Meaning: how confident the market is in the F2 students know that their grasp of ratio analysis business. The larger the figure, the more that is sure to be examined, yet many still let marks go shareholders are prepared to pay for a share in begging for the want of proper calculations. Here's a that company compared with the firm's historic top-five countdown of the worst-understood ratios earnings. The P/E ratio is a relatively new entry to the chart. By Jayne Howson 4. Non-current-asset (NCA) turnover Freelance lecturer specialising in Financial l Calculation: the NCA turnover (a number) is Management , reporting and tax, and a marker for derived by dividing the revenue shown on the Paper F2 company's income statement by the total figure T. for non- current assets on its statement of finan . hose students preparing to sit the F2 cial position. This ratio is rarely calculated cor . Paper will know that question 7 has rectly. The figure for non-current assets should always been a 25-mark analysis and not include Investments in associate , because interpretation question.

2 The exam the revenue figure doesn't include revenue gen . iner expects candidates to include erated from that investment (it appears further some ratio calculations in their down the income statement). answers, followed by a report explaining how the l Meaning: how the use of NCAs generates reve . company concerned has been performing. nue. In theory, a large number is better for the The number of marks available for the ratio cal company, but remember that the figure can be culations will be indicated in the question. This distorted by the policy of revaluations as well as gives an idea of the number of ratios that need to by the age of these assets. be calculated. Traditionally, this has been between six and eight. The examiner therefore expects six 3. Gearing to eight ratios to be calculated correctly for the l Calculation: the gearing ratio is derived either two accounting periods under consideration. It is by dividing the company's debt by its equity up to you to choose the ratios, but you should take (giving a number) or by dividing the debt by the these from under each of the headings profitabil sum of the debt and the equity (giving a percent.)

3 Ity , solvency and liquidity . One mark will be age). Gearing is an old favourite on the chart. Use awarded for each correct ratio, based on the finan whichever method you like to calculate it unless cial statements in the question, calculated for both the examiner specifies the one to apply. Equity is periods. So your answer will be either right or the figure for total equity on the statement of fin . wrong it's all or nothing. ancial position. Debt is the figure for long-term Over the past few F2 sittings it's become clear debt on the statement of Financial position. This that there are some ratios that candidates keep includes pension liabilities. An overdraft should getting wrong. So here I will count down the top also be included in the debt figure if it's being used five most incorrectly calculated ratios and offer as a long-term source of finance, but not if it's a some advice on how to get them right in future. It's very short-term measure. If in doubt, your answer widely agreed that if you know the formulas you should set out your reasons for including or exclu.

4 Will be able to interpret them more meaningfully. Gearing is an ding the overdraft. old favourite l Meaning: how the organisation is financed. A. 5. Price/earnings (P/E) ratio on the chart. high number suggests that the company relies on l Calculation: the P/E ratio (a number) is derived Use whichever long-term debt to fund its activities rather than by dividing a firm's share price by its earnings per method you relying on funds provided by shareholders. share (EPS). The share price will be given. EPS is like to calculate earnings divided by the number of ordinary shares. it unless 2. Interest cover The earnings figure is the profit available to ordi the examiner l Calculation: interest cover (a number) is derived nary shareholders profit after tax and divi specifies the by dividing the company's operating profit by the dends due to irredeemable-preference shareholders. one to apply' finance charge. This has been in the top three of Further reading CIMA Official Study Text Financial Management (2012-13 edition), Kaplan Publishing, 2012.

5 Study notes 47. problem ratios for several sittings. Operating profit Capital employed is the total funds used to gener . is also described as profit before interest and tax ate the profit total equity plus non-current (PBIT) and is found on the income statement. This liabilities in the statement of Financial position. figure should not include any profit/loss from As with the gearing ratio, the overdraft should be Investments in associate . The finance charge is included in this figure if the company is using it the interest payable shown on the income statement. as a long-term source of finance, but not if it's only l Meaning: how comfortably the company can a short-term measure. Investments in associate . cover its interest payments from profits. A high should be deducted from the figure. number suggests there should be few problems. l Meaning: how efficiently the company is gen . It's nothing to do with cash and ability to pay. erating profits from the Financial resources avail.

6 Able to it. A large percentage is a good result, but 1. Return on capital employed (ROCE) this ratio can be distorted by revaluation policies l Calculation: the ROCE (a percentage) is derived and the age of assets. by dividing the company's operating profit by the Students often believe that the calculation of capital employed. This has been top of the chart accounting ratios is not important as long as they for umpteen consecutive sittings. Students often interpret them correctly. That may be true in prac . get the top and bottom lines of the formula wrong. tice, but in the world of the F2 Paper it is certainly The operating profit is the same figure as that used not true. To maximise your chances of success in for the interest cover ratio it's found on the the exam, calculate ratios in the traditional way income statement and is also known as the PBIT. the examiner expects it. Towers, C-62, G Block, Bandra Knowledge Village, Zemlyanoj Val 9, GLOBAL CONTACT Kurla Complex, Bandra (East), Al Sofouh Road, Dubai, Moscow 105064.

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