Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 6- 1 Chapter 6 Analysis of basic financial statements
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 6- 2 Objectives Explain the importance of comparisons and trends in financial statement analysis. Calculate the ratios related to the profitability and financial stability of a business, from a given set of financial statements.
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 6- 3 Objectives (continued) Analyse a given set of financial statements in terms of: – Managerial performance – Earning capacity – Financial risk – Shareholder return. Prepare a report evaluating a business’s results and future prospects
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 6- 4 Comparisons and trends in financial statement analysis Most businesses analyse their performance for the year by using the ratio analysis approach. Presents results are compared with: results obtained from previous years activities industry averages results from creditors absolute standards.
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 6- 5 Calculating ratios Profitability ratios help management to evaluate profitable the activities of the business have been. Financial stability ratios show either short term or long term positions.
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 6- 6 Calculating ratios (continued) The main groups of ratios are: Liquidity (short term) Activity (short term, and profitability) Leverage (long term) Profitability (profitability) Market related (profitability)
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 6- 7 Liquidity ratios (short-term stability) Working capital ratio = Current assets Current liabilities Quick assets ratio = Current assets - Inventory Current liabilities - Overdraft
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 6- 8 Activity ratios Inventory turnover = Cost of goods sold Average inventory Accounts receivable turnover = Credit sales Average accounts receivable Average collections period =Average accounts receivable Average daily credit sales
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven 6- 9 Activity ratios (continued) Total assets turnover = Sales Average total assets Fixed assets turnover = Sales Average fixed assets
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Leverage ratios Debt to assets ratio= Total debt X 100 (gearing ratio) Total assets 1 Earnings coverage ratio = Long-term debt X 100 Shareholders’ funds 1
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Profitability ratios Net profit margin ratio = NPAT* X 100 Sales 1 Return of shareholders funds =Net profit after tax X 100 Shareholders funds 1 Gross profit ratio = Gross profit X 100 Sales 1 * Net Profit After Tax
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Profitability ratios (continued) Operating expense ratio =Operating expenses X 100 Sales 1 Return on total assets =Net profit after tax X 100 Total assets 1
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Market related or performance-related ratios Earnings per ordinary share – Net profit after tax – preference dividends/no. of ordinary shares on issue Price earnings ratio – Share market price / earnings per share Dividend yield ratio – Dividend per share / share market price
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Market related or performance- related ratios (continued) Insert example 1 and solution page 86 and 87
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Market related or performance- related ratios (continued)
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Market related or performance- related ratios (continued)
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Market related or performance- related ratios (continued)
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Market related or performance- related ratios (continued)
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Market related or performance- related ratios (continued)
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Market related or performance- related ratios (continued)
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Market related or performance- related ratios (continued)
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Market related or performance- related ratios (continued)
Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting for Business - A non-accountant’s guide 2/e by Jopling, Lucas and Norton Slides prepared by Rick Nieuwenhoven Analysing and preparing a report A report should include a title stating what the report is, who prepared it and whom prepared it. It must contain the following conclusions: solvency of the business inventory is turning over adequately account receivable turnover analysis selling price decisions short and long term profitability decisions management analysis investor summary.