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Week 10 Lecture Notes - Ratio Analysis

# Week 10 Lecture Notes - Ratio Analysis - THE UNIVERSITY OF...

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THE UNIVERSITY OF NEW SOUTH WALES School of Accounting ACCT 1501: Accounting and Financial Management 1A Week 10 Ratio Analysis - Basic Student Handout Contents: 1. Introduction 2. Tutorial questions – Week 11 3. Lecture examples 4. Lecture slides Lecturer: Per Tronnes School of Accounting UNSW Blackboard: http://elearning.unsw.edu.au

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1. Introduction In this week’s lectures, you will learn to perform some basic financial statement analysis, especially ratio analysis, to assess the performance and viability of a company. By the end of this week, you should be able to calculate and interpret some basic ratios reflecting a company’s performance, activity, liquidity, financial structure, etc. You should be able to analyse what impact accounting transactions and policy choices have on various ratios. You should also be able to understand the limitations of ratio analysis, because we are reliant on the historical information provided by the company and that the quality of this information is very much affected by accounting measurement issues and accounting policy choices made by management. Learning objectives At the end of this topic, you should be able to: 1. Explain the purpose and limitations financial statement analysis 2. Identify types of ratios and their usefulness 3. Calculate and interpret the key financial ratios 4. Understand the impact of transactions on ratios Required readings Trotman & Gibbins Chapter 14: pages 615-631 Other References: Deegan, Craig. 2007. Australian Financial Accounting, 5 h Edition, North Ryde: McGraw Hill Australian Pty Ltd
2. Tutorial Questions – Week 11 Preparation Questions Tutorial Questions Students should attempt these questions before the tutorial. Students should attempt these questions before the tutorial. T&G DQ14.4, 14.5,14.6 & 14.9 T&G P14.4 & P14.11 T&G Case 14A T&G DQ14.1,14.3&14.7 T&G P14.6 & P14.16 Prepare before tutorial

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3. Lecture Examples (please bring your calculator to the lecture.) Use the Balance Sheets and Income Statements of Woolworths (attached) to calculate the following ratios : Performance Ratios : Return on Assets = Earnings Before Interest and Tax Total Assets Woolworths 2007 2006 Return on Assets Return on Equity = Operating Profit after Tax Shareholders’ Equity Woolworths 2007 2006 Return on Equity Profit Margin = Operating Profit after Tax Sales Woolworths 2007 2006 Profit Margin Gross Margin = Gross Profit Sales Woolworths 2007 2006 Gross Margin
Activity/Turnover Ratios : Total Asset Turnover = Sales Total Assets Woolworths 2007 2006 Total Asset Turnover Inventory Turnover = COGS Average Inventory Inventory= \$1969.6 million in the 2005 Balance Sheet: Woolworths 2007 2006 Inventory Turnover Days in Inventory Debtors Turnover = Credit Sales Average Trade Debtors Assume that 2% of Woolworths’ sales in 2007 were on credit: Woolworths 2007 Debtors Turnover Days in Debtor

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Liquidity Ratios : Current Ratio = Current Assets Current Liabilities
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Week 10 Lecture Notes - Ratio Analysis - THE UNIVERSITY OF...

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