Professional Documents
Culture Documents
External Users
Resource providers
e.g. shareholders, potential investors, lenders, creditors, employees
REVIEW FROM WEEK 1 USERS & USES OF FINANCIAL INFORMATION Users want information about the entitys
Financing Activities Investing activities Operating activities
A) FINANCIAL STATEMENTS
This information is provided in the following statements: Income Statement Reports financial performance by reporting income less expenses for a particular period Statement of Changes in Equity Reports profit and other changes in equity for a period Statement of financial position (prior 1 January 2009 Balance Sheet) Reports assets and claims to those assets at a particular point in time Statement of Cash Flows Reports cash receipts and payments for a period dissected into operating, investing & financing activities
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Income statement
Purpose is to report success or failure of the entitys operations for a period of time It is the entitys income earned less expenses incurred, over the period of time. The difference (profit) adds to the equity (or wealth) of the business
Income statement
Presentation WONG PTY LTD Income Statement for the month ended 31 October 2010 Service revenues $10 600 Expenses Salaries expense $3 200 Supplies expense 1 500 Rent expense 900 Insurance expense 50 Interest expense 50 5 740 Depreciation expense 40 Profit before tax 4 860 Tax expense 2 000 Profit $ 2 860
Retained earnings refers to accumulated profit which has not been distributed to shareholders
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I E = Profit
A
Resources
Eq
EQUITY
ASSETS =
LIABILITIES +
Owned/controlled owed to other entities that belongs to owners (creditors & lenders) (capital+profit-drawing) OR: by the entity
Obligations/debt
Residual remaining
internal sources)
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contd
b)
$ 9 550
A = L + Eq
contd
Liabilities Trade and other payables Financial liabilities Tax liabilities Provisions
A lack of cash from operations has to be financed from financing and disinvesting activities
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PSA1.5
PSA1.4
www.aasb.gov.au
assumes the business will continue to operate for at least 18 the next accounting period.
Qualitative characteristics
Relevance
materiality information needs to be disclosed if its omission or misstatement could influence decision making
Reliability
free from material error and bias faithful representation
Cost principle
all assets are initially recorded at their cost not what you think they are worth. Existence of asset not recognised without cost
Comparability
between entities and for one entity over time
Understandability
to the users of the financial information
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Profitability
Measures operating success of an entity for a given time period
Profitability continued
2. Profit margin
Measures percentage each sales dollar that results in profit Profit Net Sales Example:
($ in thousands) 2008 $18 616 $305 591 $6 596 $78 840 = 6.1% 2007 $16 390 $273 405 $8 664 $77 202 = 6.0% Fantastic Holdings
1. Return on assets
Indicates amount of net profit generated by each dollar invested in assets Net Profit Average Total Assets
.
Example:
2008 $18 616 = 19.3% ($103 960 + $89 323)/2 $6 596 = 22.8% ($28 326 + $29 618)/2
2007 $16 390 = 20.0% ($89 323 + $74 842)/2 $8 664 = 32.1% ($29 618 + $24 432)/2
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Nick Scali
= 8.4%
= 11.2%
Nick Scali
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Liquidity
Measures short-term ability of entity to pay its maturing obligations and to meet unexpected needs for cash
Liquidity continued
2. Current Ratio
Measures short ability to meet current obligations Current assets Current liabilities
.
1. Working Capital
Current Assets Current Liabilities
Example:
Fantastic Holdings (year ending 30 June 2008) Working Capital = $70 812 000 $29 401 000 = $41 411 000
Example:
($ in thousands) Fantastic Holdings 2008 $70 812 = 2.41:1 $29 401 1.74:1 2007 $58 978 = 2.29:1 $25 797 1.76:1
Nick Scali
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Liquidity
continued
Solvency
Measures ability of an entity to survive over a long period of time
$17 072 = 0.62 times $13 675 = 0.55 times ($29 401 + $25 797)/2 ($25 797+ $23 952)/2 0.52 times 0.80 times
Nick Scali
Nick Scali
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A higher ratio indicates solvency risk because the entity has fewer assets available for creditors.
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Solvency continued
2. Cash debt coverage
Indicates entitys ability to generate sufficient cash to meet long term needs
$17 072 = 0.43 times $13 675 = 0.41 times ($42 225 + $37 531)/2 ($37 531 + $29 888)/2 0.52 times 0.79 times
Nick Scali
Do Week 2 self-study questions Check solutions on Blackboard after doing the questions yourself Complete reflective, self-evaluation and learning strategies exercise Skim read Chapter 2, Start with Summary of Learning Objectives, pp.114 Obtain a copy of Week 3 lecture material from Blackboard to bring to class Think about what groups you want to form to work on the group assignment.
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A higher ratio indicates better solvency as the entity is generating cash to meet is long-term needs.
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