ACCG101 Lecture Notes - Lecture 8: Profit Margin, Current Liability, Financial Statement

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limehound700

30 May 2018

School

Macquarie University

Department

Accounting and Corporate Governance

Course

ACCG101

Professor

All

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Week 8 Interpreting Financial Statements

Ratio Analysis

- 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

Profitability Ratios

- Measure operating success of an entity for a given time period

Return on assets

- Indicates amount of net profit generated by each dollar invested in assets

-    



Profit margin

- Indicates amount of net generated by each dollar of sales

-    



Liquidity Ratios

- Measures short-term ability of entity to pay its maturing obligations and to

meet unexpected needs for cash

Current ratio

- Indicates how much current assets exceeds current liabilities on a dollar-for-

dollar basis (rule of thumb is normally 1:5:1).

-    



Solvency Ratios

- Measures ability of entity to survive over a long period of time

Debt to total assets ratio

- Measures percentage of assets financed by creditors rather than stakeholders

- The higher the ratio, the greater the risk that entity may be unable to pay its

debts as they become due

-    



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Document Summary

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. Measure operating success of an entity for a given time period. Indicates amount of net profit generated by each dollar invested in assets. (cid:1870)(cid:1857)(cid:1872)(cid:1873)(cid:1870)(cid:1866) (cid:1867)(cid:1866) (cid:1853)(cid:1871)(cid:1871)(cid:1857)(cid:1872)(cid:1871) = (cid:3028)(cid:3049)(cid:3032)(cid:3045)(cid:3028)(cid:3034)(cid:3032) (cid:3047)(cid:3042)(cid:3047)(cid:3028) (cid:3028)(cid:3046)(cid:3046)(cid:3032)(cid:3047)(cid:3046) Indicates amount of net generated by each dollar of sales. Measures short-term ability of entity to pay its maturing obligations and to meet unexpected needs for cash. Indicates how much current assets exceeds current liabilities on a dollar-for- dollar basis (rule of thumb is normally 1:5:1). Measures ability of entity to survive over a long period of time. Measures percentage of assets financed by creditors rather than stakeholders. The higher the ratio, the greater the risk that entity may be unable to pay its debts as they become due.

Related Questions

Tying the Ratios Together

The DuPont equation shows the relationships among asset management, debt management, and

-Select-liquiditymarketprofitabilityCorrect 1 of Item 1 ratios. Management can use the DuPont equation to analyze ways of improving the firm's performance. Its equation is:

Ratio analysis is important to understand and interpret financial statements; however, sound financial analysis involves more than just calculating and interpreting numbers. -Select-QuantitativeQualitativeForeignCorrect 2 of Item 1 factors also need to be considered.

Quantitative Problem: Rosnan Industries' 2014 and 2013 balance sheets and income statements are shown below.

Balance Sheets:
	2014	2013
Cash and equivalents	$60	$45
Accounts receivable	275	300
Inventories	375	350
Total current assets	$710	$695
Net plant and equipment	2,000	1,490
Total assets	$2,710	$2,185

Accounts payable	$150	$85
Accruals	75	50
Notes payable	110	135
Total current liabilities	$335	$270
Long-term debt	450	290
Common stock	1,225	1,225
Retained earnings	700	400
Total liabilities and equity	$2,710	$2,185

Income Statements:
	2014	2013
Sales	$2,000	$1,500
Operating costs excluding depreciation	1,250	1,000
EBITDA	$750	$500
Depreciation and amortization	100	75
EBIT	$650	$425
Interest	62	45
EBT	$588	$380
Taxes (40%)	235	152
Net income	$353	$228

Dividends paid	$53	$48
Addition to retained earnings	$300	$180

Shares outstanding	100	100
Price	$25.00	$22.50
WACC	10.00%

What is the firmâs 2014 current ratio? Round your answer to two decimal places.

The 2014 current ratio indicates that Rosnan has -Select-insufficientsufficientCorrect 1 of Item 3 current assets to meet its current obligations as they come due.

What is the firmâs 2014 total assets turnover ratio? Round your answer to four decimal places.

Given the 2014 current and total assets turnover ratios calculated above, if Rosnanâs 2014 quick ratio is 1.0 then an analyst might conclude that Rosnanâs fixed assets are managed -Select-efficientlyinefficientlyCorrect 1 of Item 4.

What is the firmâs 2014 debt-to-capital ratio? Round your answer to two decimal places.
%

If the industry average debt-to-capital ratio is 30%, then Rosnanâs creditors have a -Select-smallerbiggerCorrect 1 of Item 5 cushion than indicated by the industry average.

What is the firmâs 2014 profit margin? Round your answer to two decimal places.
%

If the industry average profit margin is 12%, then Rosnanâs lower than average debt-to-capital ratio might be one reason for its high profit margin.
-Select-TrueFalseCorrect 1 of Item 6

What is the firmâs 2014 price/earnings ratio? Round your answer to two decimal places.

Using the DuPont equation, what is the firmâs 2014 ROE? Round your answer to two decimal places.
%

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ACCG101 Lecture Notes - Lecture 8: Profit Margin, Current Liability, Financial Statement

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