Accounting P2 PLEASE PLEASE HELP!

[luissuarez7]

Okay, so I am having massive problems in the topic 'accounting ratios'. The paper is on Monday and I don't get if someone is playing a huge prank on me .

Basically, everywhere I see net profit ratio is Net profit MINUS interest over sales. In every question I have seen so far that is NOT the case.

HOWEVER, in the same question, for instance November 2006 Q2 in return on total capital employed they HAVE added back interest to the net profit figure. Previously, in two parts, namely, net profit ratio and return on owners capital employed that is not the case.

Then in November 2002 Q2 again they have NOT added back interest to the net profit in the net profit ratio but something has made them add it back in the return on total assets and return on net assets.

That's not where it all ends though, as in June 2003 Q2 for some reason they have added back interest to the Net profit figure FOR NET PROFIT RATIO EVEN THOUGH IN THE PREVIOUS TWO CASES THEY HADN'T.

Sorry for the long read but I REALLY REALLY need to find what the problem is. Is there something very obvious I am missing or what?

 

[luissuarez7]

please? someone?

 

[raza-rocker]

for ur prob nov 2006 p2
for return on capital employed we take profit before interest and tax (PBIT) [which will be more clear to u in A2 cash flows]
this means adding back interest and tax back into the net profit as they have been debited or counted as expenses when preparing income statement or u may say profit and loss account

in nov 2002 p2 q2
yes when always calculating ratio of net profit we will never add or credit interest again to the net profit
but when calculating return on net assets and return on total assets we will add or credit the interest and tax again to reach net profit before interest and tax (PBIT)

for june 2003 p2 q2 .. the marking scheme is wrong as marking scheme is not always correct and if you will take the net profit (means not adding or credit interest to tax back the net profit ) you will get the ration near to the same as given in the marking scheme and it says not averages so it means your answer will be acceptable

please focus on the formulas and what examiner is asking to u
for accurate formulas refer to book H.Randall or browse the internet and will also find about the concept of the formula that why we have to add or credit interest and tax to the net profit again once we have deducted or debited it
anything else ?? ... best of luck

 

[luissuarez7]

THANK YOU SO MUCH for your input and effort Raza. I would appreciate it if you can add back some more. You say that when calculating net profit ratio interest doesn't have to be added back. In H Randall the formula for Net profit ratio is Profit before interest and tax over sales. :%)

Moreover, the formula given by cambridge is NPBI over sales as well. So is there something i'm missing out here or what? Doesn't that clearly mean that in Net profit ratio you DO have to add back interest?

 

[raza-rocker]

THANK YOU SO MUCH for your input and effort Raza. I would appreciate it if you can add back some more. You say that when calculating net profit ratio interest doesn't have to be added back. In H Randall the formula for Net profit ratio is Profit before interest and tax over sales. :%)

Moreover, the formula given by cambridge is NPBI over sales as well. So is there something i'm missing out here or what? Doesn't that clearly mean that in Net profit ratio you DO have to add back interest?

no the concept i told you is correct
and ur point is valid when we have prepaid interest paid and debited or deducted in profit and loss account
so we will add or credit it back (only prepaid , not the current year )

anything else ?
just read H.randall and follow it .. its the best book and if u follow it , im sure you will rock in the exam