ACCG100 Lecture Notes - Lecture 8: Current Liability, Profit Margin, Financial Statement
1 Sep 2018
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Week 8: Financial accounting for business; interpreting financial
statements
Why analyse financial statements?
- Money $$ is important but useless when viewed in isolation
➔ Eg $20000 profit – is this good or bad?
▪ The answer depends on what you compare it to
- Relationships between items in the financial statements are important – making
comparison
Analysing financial statements
- Ratio analysis
➔ A ratio is a mathematical relationship between two different quantities
➔ Can be used to show relationships among items of financial data
➔ Expressed in terms of percentages, rates or proportions
➔ Interpreting ratios = need to compare
- 3 different types of ratios;
➔ Profitability ratio
▪ Return on assets
▪ Profit margin
➔ Liquidity ratio
▪ Current ratio
➔ Solvency ratio
▪ Debt to total assets ratio
Profitability ratio
- Measure operating success of an entity for a given time period
- Profit comes from P&L
➔ Return on assets : indicates amount of net profit generated by each dollar
invested in assets
➔ Profit margin : indicates amount of net profit generated by each dollar of sales
profit
Return on assets = average of total assets
profit
Profit margin = net sales
Document Summary
Week 8: financial accounting for business; interpreting financial statements. Money 24506 is important but useless when viewed in isolation. Eg profit is this good or bad: the answer depends on what you compare it to. Relationships between items in the financial statements are important making comparison. A ratio is a mathematical relationship between two different quantities. Can be used to show relationships among items of financial data. Expressed in terms of percentages, rates or proportions. Profitability ratio: return on assets, profit margin. Solvency ratio: debt to total assets ratio. 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. Return on assets = average of total assets. Profit margin : indicates amount of net profit generated by each dollar of sales profit. Measures short-term ability of entity to pay its maturing obligations and to meet unexpected needs for cash.
