Fin 601 - Finance Exam

FIN 601

Principles of Finance

DIGITAL ANSWER SCRIPT

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Part 1:

Q. 1: B

     Q.2: D

Q. 3:E

      Q. 4: E

Q. 5: A

Q. 6:A

Q. 7:C

Q. 8:B

Q. 9: E

Q. 10:A

Q. 11: C

Q. 12:D

Q. 13: E

Q. 14:A

Q. 15:C

Part 2:

Q. 1-a:

Performance ratio is type of Key Financial Ratio which shows efficiency and effectiveness of the Organization and can be presented by Gearing Ratio, Number of days Credit Granted, Number of days Credit Taken, Stock Turnover and Overheads as Percentage of Turnover.

Based on results after performed calculations we can determine if Organization’s profitability and efficiency is non-performing, is stagnated and / or it has a strong performance / financial growth.

Q. 1-b:

To find out if an Organization is performing well we should calculate following Ratios:

• Gearing Ratio;
• Number of Days Credit Granted;
• Number of Days Credit Taken;
• Stock Turnover;
• Overheads as a Percentage of Turnover.

1. Gearing Ratio can be calculated through presented below formula:

Gearing = Total Borrowings / Net Worth.

Calculated Ratio will show how much Organization is Borrowing to Gear performed business. In other words, by having calculated Gearing Ratio we can see the degree to which company’s activities are funded by owner’s funds comparing to creditor’s funds.

1. Number of Days Credit Granted can be calculated by following formula:

Number of Days Credit Granted = (Trade Debtors / Annual Sales) x 365 Days

This Ratio measures the effectiveness of the Organization’s Debt Collection. It sets out the relationship between debtors and sales made on credit. Also, it shows how quickly clients are paying their invoices.

1. Number of Days Credit Taken can be calculated through following formula:

Number of Days Credit Taken = (Trade Creditors / Annual Purchases) x 365 Days

This Ratio measures Effectiveness of the Organization’s Liabilities Payment. It sets out the relationship between creditors and purchases made on credit. Additionally, it shows how quickly the Organization is paying its Liabilities.

1. Stock Turnover can be determined by next formula:

Stock Turnover = Cost of Goods Sold / Average Stock Value.

This Ratio measures how quickly the Organization turns over Stock into Sales. Also, it shows the Sales Efficiency in the Market. Normally the definition of involved Stocks includes:

• Finished Goods;
• Work in Progress;
• Raw Materials.

1. Overheads as Percentage of Turnover can be calculated by the below formula:

Overheads as Percentage of Turnover = Operating Expenses / Average Stock Value.

This Ratio measures how Efficiently the Organization is running its Operation. Usually, definition of Overheads refers to Operating Expenses and includes:

• Rent;
• Utility Bills;
• Wages;
• Administrative Expenses.

Q. 1-c:

The formula of the Gearing Ratio is presented below:

Gearing = Total Borrowings / Net Worth.

Calculated Ratio will show how much Organization is Borrowing to Gear performed business. In other words, by having calculated Gearing Ratio we can see the degree to which company’s activities are funded by owner’s funds comparing to creditor’s funds.

Q. 1-d:

The Cash flow statement is part of least used financial essential statements. It shows categories based on which company acquired and spent its cash during a given span of time. Expenditures are shown on the statement as negative figures, and sources of income are shown as positive. The bottom lines in each category is simply the net total of inflows and outflows, and it can get either positive or negative value.