12. Interpretation of Financial Statements
1. Lectures
1-1 Introduction and Types of Analysis [I]
1-2 Ratios, Types and Formulas [I]
Query:
1. Why Capital Employed includes Non Current Liability as well?
2. And if we are taking Non Current Liability, why aren't we taking Current Liability? in Capital Employed.
3. Shall we take Non Current Provisions in Long Term Debts?
Response:
1. Capital employed is about long term finance invested in an entity (by owners or by others).
2. Current liabilities are not long term finance (they are separately considered in liquidity analysis or working capital efficiency).
3. Should not be taken for the purpose of capital employed.
Note: There are no standards for ratio analysis and interpretation (except IAS 33 for EPS), variations in formula, inclusion, exclusion is common and subjective.
1-3 Uses and Limitations [I]
1-4 Impact of specific transactions on ratios [I]
1-5 Limitations of Financial Statements and Ratios [O]
1-6 Window dressing [O]
2. Comprehensive Examples
2-1 Q&A Ali & Bashir (ICAP Spring 2016) [I]
2-2 Q&A Hassan Limited (ICAP Autumn 2016) [I]
2-3 Q&A Dairy Foods Limited (ICAP Spring 2017) [R]
2-4 Q&A Progressive Steel Limited (ICAP Autumn 2017) [R]
2-5 Q&A Boom Limited (ICAP Spring 2018) [R]
2-6 Q&A SK Limited (ICAP Autumn 2018) [R]
2-7 Q&A Keyboard Limited (ICAP Spring 2019) [R]
2-8 Q&A Shispare and Trivor (ICAP Spring 2020) [I]
2-9 Q&A Limitations (ICAP Autumn 2020) [X]
2-10 Q&A Epivac Limited (ICAP Spring 2021) [I]
2-11 Q&A Lithops Limited (ICAP Autumn 2021) [O]
2-12 Q&A Qamar Limited (ICAP Spring 2022) [R]
2-13 Q&A Hittite Limited (ICAP Spring 2023) [I]
2-14 Q&A Whale Limited (ICAP Autumn 2023) [O]
3. Objective Based Q&A
3-1 MCQs [1 to 20] [R]
3-2 MCQs [21 to 34] [O]
Query: Hello Sir, i have doubt in few questions.
1. In an attempt to increase sales revenue during the year, C Co offered extended credit terms to its major customers. Whilst many major customers took advantage of the extended credit period, C Co did not increase its volume of sales.
What impact did this have upon the current ratio?
A. There was no change to the current ratio.
B. It is not possible to determine the impact on the current ratio as there is insufficient information available.
C The current ratio increased
D The current ratio decreased
The answer given is C and the explanation given is "If credit customers take advantage of extended credit periods, this will increase trade
receivables. If all other factors remain unchanged, there will be an increase in current assets and, consequently, in the current ratio".
But i think the answer is A since question mentioned “did not increase its volume of sales”, hence the trade receivables should remain the same and hence the current asset remains. Can you please help me out sir🙏🏻
Response: Option c and related explanation is correct.
Let's assume we sell Rs. 100 goods everyday (i.e. annual Rs. 36,500) and allow receivables to pay in 10 days time (At any given time, and at year-end, the receivables would be equal to 10 days sale i.e. Rs. 1,000).
Now we do not change volume of sales but allow 15 days.
So, we sell Rs. 100 goods everyday (i.e. annual Rs. 36,500) and allow receivables to pay in 15 days time (At any given time, and at year-end, the receivables would be equal to 15 days sale i.e. Rs. 1,500).
Same volume of sales also meant that there is no change in inventory level and trade payables etc. (as mentioned in explanation: if all other factors remain unchanged)