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PM Chapter 15 Questions Financial Performance Measurement

VIVA

 

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Comments

  1. henrique30lucas says

    July 19, 2024 at 8:24 pm

    Hi John, for question 4 how does a NCL loan increase gearing? the double entry would net off in the BS Dr Cash or Dr NCA and Cr NCL

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    • John Moffat says

      July 20, 2024 at 9:41 am

      The double entry is not relevant.

      The long-term debt increases and the equity does not change. So there is an increase in the gearing.

      Do watch my free lectures on this again 🙂

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  2. MVILA says

    May 2, 2024 at 3:48 pm

    Thank for the explaining on question 5

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  3. Atika2 says

    September 10, 2023 at 7:08 pm

    no 5 answer please

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    • John Moffat says

      September 11, 2023 at 7:16 am

      You can see the answers by hovering over the question when you receive the quiz.

      The current ratio will decrease; the quick ratio will not change; the inventory days will decrease; the gearing will increase.

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      • MVILA says

        May 2, 2024 at 3:44 pm

        Good day Sir

        Question 5
        How does writing off inventory , not effect the quick ratio , as this results in lower inventory , therefore the assumption is that it would affect the ratio.

        Secondly
        Gearing ratio is based on long term liability over shareholders funds ,
        therefore writing off inventory reduces current assets , how does that have an effect to shareholders funds.

        Kindly assist sir

      • John Moffat says

        May 3, 2024 at 9:13 am

        1. The quick ratio does not include inventory (as explained in my free lectures).

        2. Writing off inventory reduces the assets and reduces the shareholders funds (equity). Lower equity means a higher gearing ratio.

  4. BMasora says

    November 3, 2022 at 11:07 am

    Dear Sir,
    On Q5, I do not understand how change in inventory will affect gearing.
    Thanks,
    Beatrice

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    • John Moffat says

      November 4, 2022 at 8:31 am

      Writing off inventory will decrease the profit. This will reduce the retained earnings and therefore the total value of the equity (share capital plus reserves). A lower value for the equity will mean that the gearing ratio is higher.

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  5. kvz911 says

    September 6, 2022 at 9:10 am

    Sir, In question 4 Taking a long term loan Increases our Bank or cash in Current assets Right? Shouldn’t the increase in the “numerator” of the current ratio lead to an increase in the Current Ratio??

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    • John Moffat says

      September 6, 2022 at 4:07 pm

      The question says that they are taking the loan so as to buy a non-current asset. So the cash will end up not increasing at all.

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      • kvz911 says

        September 6, 2022 at 6:58 pm

        Thank you Sir, Crystal clear now !! ?

      • John Moffat says

        September 7, 2022 at 8:41 am

        Great 🙂

  6. prakhar311 says

    July 20, 2021 at 4:40 am

    won’t raising a long term loan in order to buy an asset increase the current liabilities?(assuming we have to pay interest each year on loan)

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    • John Moffat says

      July 20, 2021 at 7:29 am

      I assume that you are referring to question 4.

      In a years time when the interest falls due the current ratio may well be affected. However simply taking a long-term loan has no affect on the current ratio when the loan is taken.

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  7. Dany@3081 says

    February 9, 2021 at 5:51 am

    Hello can you explain, how will writing off inventory not have any effect on Quick ratio? Thank you!

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    • John Moffat says

      February 9, 2021 at 7:53 am

      Inventory is not included in the calculation of the quick (acid-test) ratio. This is explained in the free lectures.

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  8. LiyaJaison says

    December 15, 2020 at 9:34 am

    Sir, In question 2,
    Don’t we need figure of inventory to calculate inventory days from the statement of financial position?

    So only ROCE would be the answer right? (Also, ROCE is an answer because it can also be calculated by asset turnover ratio and net profit margin, right?)

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    • LiyaJaison says

      December 15, 2020 at 9:52 am

      Oh sorry, I think I misread the question. Kindly apologise.

      Please answer my second question!

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      • John Moffat says

        December 15, 2020 at 3:00 pm

        However we calculate the ROCE we need to know the profit for the year and this comes from the SOPL, not from the SOFP.

  9. Nikitagarwal says

    October 18, 2020 at 5:33 pm

    Sir, one question was what will be the effect on Current Ratio if long term loans are increased..
    so as per my understanding if long term loan is increased that means cash is inflow and therefore the CA should increase…
    please correct me if wrong

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  10. Nikitagarwal says

    October 18, 2020 at 5:28 pm

    Hello Sir,
    Can you please a bit explain how Gearing ratio is affected by Inventory ?

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  11. zinmartun says

    August 14, 2020 at 4:11 pm

    Sir.., I am confusing about Q3. ROCE
    ROCE = Profit before interest and tax/ Capital Employed
    So

    PBIT/CE = Asset Turnover X GP Margin

    PBIT/CE = Sale/ CE X Gross profit (PBIT)/ Sale

    So.. should use gross profit right..?
    please kindly let me know why use net profit margin. Thank so much in advance

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    • John Moffat says

      August 15, 2020 at 8:04 am

      The net profit for management purposes is the profit before interest and tax. I explain why this is the case in my free lectures on this.

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  12. rokhan says

    May 6, 2020 at 7:42 am

    Sir, there is two gearing ratio. 1. debt/EQUITY. 2.DEBT/DEBT+EQUITY,
    How we know which ratio is required in question, as in question 4 the first ratio is required.

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    • John Moffat says

      May 6, 2020 at 7:55 am

      Question 4 does not require the first ratio. If there is more debt then the gearing will always increase whichever of the two measures is used.

      If in the exam you are required to actually calculate the ratio then the question will make it clear which way it is to be measured.

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      • rokhan says

        May 8, 2020 at 6:51 pm

        THANK YOU SIR.

  13. kingSuper says

    March 31, 2020 at 1:39 am

    Sir, may I ask what does it meant by written off inventory?I was quite confused about that.

    Thanks in advance.

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    • John Moffat says

      March 31, 2020 at 8:02 am

      Writing off inventory is reducing its value to zero (presumably because it was no longer fit to be sold).

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  14. rosscraven1 says

    November 12, 2019 at 8:47 am

    Do we get these ratios on a formula sheet during the exam?

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    • aputu says

      February 14, 2020 at 2:28 pm

      no please

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    • John Moffat says

      February 14, 2020 at 2:33 pm

      No you don’t. The formulae that you are given in the exam are on the formula sheet that is printed near the front of our free lecture notes.

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  15. alimohsinraza says

    August 22, 2019 at 8:09 pm

    sir i have a confusion. as gearing is also measured by the formula Total assets-current liabilities. in Qs 5 as we write of inventory it results in decrease of total assets so gearing should decrease…then why is the correct answer increasing ?

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    • John Moffat says

      August 23, 2019 at 9:35 am

      Gearing is not measured as total assets minus current liabilities!!

      It is measured as long-term debt divided by equity plus long-term debt. Equity plus long-term debt is equal to total assets less current liabilities. If inventory is written off then total assets less current liabilities decreases. Since this is the denominator in the formula for the gearing ratio, the gearing ratio will increase.

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      • KudishaFrancis says

        August 7, 2021 at 9:32 am

        Thank you so much for clarifying 🙂

      • John Moffat says

        August 7, 2021 at 9:50 am

        You are welcome 🙂

  16. annavera says

    February 3, 2019 at 12:24 am

    Write off inventory question Nr 5 – The correct answer is ‘Increase Gearing Ratio’.

    Please can you advise how write off inventory can influence gearing ratio?

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  17. leandrotorres22 says

    September 5, 2018 at 3:11 am

    For number 5 how does the write off of inventory increase the gearing ratio?

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    • John Moffat says

      September 5, 2018 at 6:02 am

      Writing off inventory will reduce the profit, which in turn reduces the total equity. Therefore the gearing will increase.

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      • leandrotorres22 says

        September 5, 2018 at 7:02 am

        Thank you for clarifying 🙂

      • John Moffat says

        September 5, 2018 at 2:17 pm

        You are welcome 🙂

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