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ACCG100 Lecture Notes - Lecture 8: Financial Statement, Profit Margin, Net Profit

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orchidgiraffe317
15 Mar 2020
School
Macquarie University
Department
Accounting and Corporate Governance
Course
ACCG100
Professor
Colly He

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Document Summary

Lecture 8 (02/05/2019) financial accounting for business: interpreting financial. 26534$ are important, but they tend to be of limited usefulness when viewed in isolation e. g. million profit is it good or bad. Relationships between items in the financial statements are important making comparison. There are lots of different methods, but we will only cover ratio analysis in accg100. A ratio is the mathematical relationship between two different quantities. Can be used to show relationships among items of financial statement data. Expressed in terms of percentages, rates or proportions. Three different types of ratio: profitability ratio. Measure operating success of an entity for a given time period. Return on assets; indicates the amount of net profit generated by each dollar invested in assets. Profit is calculated as the last number reported in your financial statement. Average of total assets is reporting period, adding the opening balance and closing balance and dividing it by 2.

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Related Questions

The financial statements for Armstrong and Blair companies are summarized here:
Armstrong
Company		 Blair
Company
Balance Sheet
Cash $ 27,000 $ 14,000
Accounts Receivable, Net 32,000 22,000
Inventory 84,000 24,000
Equipment, Net 164,000 284,000
Other Assets 37,000 400,000
Total Assets $ 344,000 $ 744,000
Current Liabilities $ 84,000 $ 34,000
Note Payable (long-term) 44,000 354,000
Total Liabilities 128,000 388,000
Common Stock (par $10) 142,000 192,000
Additional Paid-in Capital 22,000 102,000
Retained Earnings 52,000 62,000
Total Liabilities and Stockholders’ Equity $ 344,000 $ 744,000
Income Statement
Sales Revenue $ 426,000 $ 786,000
Cost of Goods Sold 237,000 397,000
Other Expenses 152,000 307,000
Net Income $ 37,000 $ 82,000
Other Data
Estimated value of each share at end of year $ 18 $ 27
Selected Data from Previous Year
Accounts Receivable, Net $ 12,000 $ 30,000
Inventory 84,000 37,000
Equipment, Net 164,000 284,000
Note Payable (long-term) 44,000 62,000
Total Stockholders’ Equity 223,000 432,000

The companies are in the same line of business and are direct competitors in a large metropolitan area. Both have been in business approximately 10 years and each has had steady growth. Despite these similarities, the management of each has a different viewpoint in many respects. Blair is more conservative, and as its president said, “We avoid what we consider to be undue risk.” Both companies use straight-line depreciation, but Blair estimates slightly shorter useful lives than Armstrong. No shares were issued in the current year and neither company is publicly held. Blair Company has an annual audit by a CPA, but Armstrong Company does not. Assume the end-of-year total assets and net equipment balances approximate the year’s average and all sales are on account.
Required:
1.

Calculate the following ratios.

TIP: To calculate EPS, use the balance in Common Stock to determine the number of shares outstanding. Common Stock equals the par value per share times the number of shares. (Use 365 days in a year. Round your intermediate calculations and your final answers to 2 decimal places.)
Ratio Armstrong Company Blair Company
Tests of Profitability:
1. Net Profit Margin 8.69 % 10.43 %
2. Gross Profit Percentage % %
3. Fixed Asset Turnover
4. Return on Equity % %
5. Earnings per Share
6. Price/Earnings Ratio
Tests of Liquidity:
7. Receivables Turnover
Days to Collect
8. Inventory Turnover
Days to Sell
9. Current Ratio
Tests of Solvency:
10. Debt-to-Assets