SLBC100: Accounting 1

Assignment

Collaborate SessionMay 2014

Due date: 9 am (AEST) Monday 19 May 2014

Weighting: 25%

Assignment

Ratio Analysis

Ratio Computation

Calculate the ratios for 2010, 2011 and 2012: Ratios are on page 2 of the assignment (see next slide) Include your ratio calculations in the appendix Group the ratios under the headings profitability, efficiency,

liquidity and capital structure Calculate the ratios to 2 decimal points

IMPORTANT: Show the formula for each ratio. e.g. Accounts payable turnover (days) = (Average Accounts Payable/Credit Purchases) x 365

Use average figures where required – not year end figures

Requirements

Ratios to be calculated:1) Return on assets2) Return on equity3) Gross profit margin4) Net profit margin5) Asset turnover ratio (times)6) Inventory turnover (days)7) Accounts receivable turnover (days)8) Current ratio9) Quick asset ratio10)Gearing ratio11)Debt to Equity

Requirements

Discussion

What each ratio tells you about the business Whether the ratio is favourable or unfavourable Whether the ratio is improving or declining over the years

Whether the finance will be granted or not, with reasons-discuss how the ratios influence the bank’s decision to approve or decline the finance application

Discuss in general terms how the company can meet the payment obligations if the finance application is approved

Requirements

Present in business report format Reports should be single spaced, with main

headings in bold type Executive Summary Introduction Body – analysis, interpretation, evaluation,

discussion Conclusion and/or recommendations

Report Structure

750-1000 words (+/- 10 %) Excludes:

Executive Summary Graphs, Tables, Diagrams, Figures Appendices Table of Contents Title page

Word Limit

Follow submission requirements Word limit: 750 – 1000 words (+/- 10%) Make sure you read and follow all the

instructions carefully, for example: Swinburne now uses Turnitin to provide

personalised feedback and allows you to check the originality of your assessments.

Instructions on how to use this are found under the Assessment tab, or copy this link into your browser.

To Avoid Penalties

Requires more than mere ratio calculation Emphasis on interpretation, evaluation,

discussion & reporting to show us your understanding

Reports will be assessed for clarity of expression, correct grammar and correct spelling

Note:

Concise - short sentences that get right to the

point Headings and sub-headings – improve readability Tables, graphs – to visually present data &

findings Selective underlining/highlighting for emphasis Follow the guidelines on the marking rubric and

stick to what is being asked. Include additional information only if relevant.

Tips

SOME DETAILS ON RATIOS YOU ARE REQUIRED TO COMPUTE

RATIOS

•This ratio indicates the amount of sales generated for every dollar's worth of assets the business has.

•It is an indication of how efficiently the business is at using its assets in generating sales or revenue – generally, the higher the number the better.

Return on Assets

• The profit generated by the business expressed as a percentage of shareholders equity. • This ratio measures the businesses profitability - how much profit has been made with

the money shareholders have invested. • Ordinary Share Capital = Issued Capital• Retained Earnings = Reserves • TIP – The average will be the average of the whole year ((so beginning balance which is

end balance from previous year + ending balance of the year) / 2 )

Return on Equity

• This ratio provides the percentage of total sales revenue that the business retains after subtracting the direct costs associated with producing the goods and services sold by the business. The higher the percentage, the more the business keeps for each dollar of sales to service its other expenses and obligations.

Gross Profit Margin

• This ratio reveals the overall profitability of the business (before interest and tax have been paid)

Net Profit Margin

• This efficiency ratio reveals how many times a year the business turns over its assets – convert them into sales

• Note - this ratio is explained on p306 of your textbook, but not very clearly.• It is different to the Asset TO Period which is Av Total Assets / Sales x 365• We will provide a worked example in excel which shows the difference but

they work in reverse to each other – if assets increase the Asset TO Period increases, and the Asset TO Times decreases

Asset Turnover Ratio Times

Asset Turnover Times = SalesAverage Total Assets

• This ratio gives investors an idea of how long it takes the business to turn its inventory (including goods that are work in progress, if applicable) into sales. Generally, the lower (shorter) the ratio the better, but it is important to note that the average ratio varies from one industry to another.

Inventory Turnover Period

Accounts Receivable Turnover (days)

• This ratio focuses on the time it takes for debtors to pay their accounts. The ratio indicates whether debtors are being allowed excessive credit. A high figure (more than the industry average) may suggest that you have problems with your debt collection procedures or the financial position of major customers.  This ratio is important to businesses as efficient and timely collection of customer debts is a vital part of cash flow management.

Current Ratio

• The ratio is generally used to give an indication of the businesses ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).

• This ratio measures the businesses short-term liquidity.

• It tells you whether the business is able to meet its short-term obligations using its most liquid assets. The higher the quick ratio, the better the position of the business.

• This is a stronger measure of liquidity compared to the current ratio as inventory can be harder to sell/convert to cash.

Quick Asset Ratio

• The gearing ratio looks at the financial leverage of the business. It compares the proportion of equity vs. debt that the business is using to finance its assets.

• A high ratio often indicates that the business has been aggressive in financing growth via debt. This can be an issue due to interest expenses, especially in volatile economic times.

Gearing Ratio

Debt to Equity Ratio = Total Debt Total Equity

• The debt-to-equity ratio looks at the financial leverage of the business. It answers the questions, what proportion of the businesses assets has been funded via debt?

• A high debt/equity ratio often indicates that the business has been aggressive in financing growth via debt. This can be an issue due to interest expenses, especially in volatile economic times.

Debt to Equity Ratio

Swinburne Guidance: Report Structure Marking guide (Rubric) – attached at the end

of the assignmenteLAs will use this to grade assignment

Example reportActual student report from previous period (different scenario)

Additional resources

To Pass: Attempt at discussing performance Some reference to ratios Basic summary included Report format mostly followed

Marking Guide

For Distinction: Comprehensive discussion - show solid understanding of

concepts and ratios Good use of facts from company information to support

findings Correct report format Well written summary – clear and concise Concise clear writing style Excellent presentation – layout; use of graphs, etc.; easy to

read. Include additional info (relevant) Suggest other helpful information for more comprehensive

complete analysis

Marking Guide

To Fail: Inadequate discussion – merely describing

results Limited explanation Little or no reference to ratios

Marking Guide

You can also post your questions on Black board.

Good luck!

QUESTIONS?