ACCT10002 Lecture Notes - Lecture 1: Corporations Act 2001, Profit Margin, Comprehensive Income

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amaranthbadger280

19 Jun 2018

School

University of Melbourne

Department

Accounting

Course

ACCT10002

Professor

Warren McKeown

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Introductory Financial Accounting

Lecture 1: Introduction to financial reporting

Calculations

Profitability:

Return on Assets (ROA)- a measure of operating success- indicates the amount of net profit

generated by each dollar invested in assets.

Profit margin- measures percentage each sales dollar that results in profit.

Liquidity:

Working Capital- measures short-term ability of an entity to pay it’s maturing obligations and

to meet unexpected needs for cash.

Current ratio- current assets available to service current liabilities.

Solvency:

Debt to total assets ratio- a measure of an entity’s ability to survive over a long period of time.

Measures a percentage of assets financed by creditors rather than shareholders.

Financial reporting

Propose of GPFR to provide financial information useful to existing and potential investors, creditors

and lenders in their decision making in providing resources to the entity.

Based on estimates, judgements and models.

Conceptual framework

Defines elements of financial statements

1. Statement of profit or loss: reports revenue less expenses

2. Statement of changes in equity: reports total comprehensive income and other changes in

equity

3. Statement of financial position: reports assets, liabilities and equity

4. Statement of cash flows: reports information regarding cash receipts and cash payments.

Fundamental qualitative characteristics:

1. Relevance- information capable of making a difference in the decisions made by users. Has a

predictive/ confirmatory value.

2. Faithful Representation- complete, neutral and free from error.

Enhancing qualitative characteristics:

1. Comparability- with other entities or years

2. Timeliness- in good time to make decisions.

3. Verifiability- reach consensus

4. Understandable- clear and concise

5. Materiality- would omission influence decision makers?

Timeliness and cost vs. benefit constraints exist. Professional judgement is always exercised and there

are always choices that are made in standards.

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Document Summary

Return on assets (roa)- a measure of operating success- indicates the amount of net profit generated by each dollar invested in assets. Profit margin- measures percentage each sales dollar that results in profit. Working capital- measures short-term ability of an entity to pay it"s maturing obligations and to meet unexpected needs for cash. Current ratio- current assets available to service current liabilities. Debt to total assets ratio- a measure of an entity"s ability to survive over a long period of time. Measures a percentage of assets financed by creditors rather than shareholders. Propose of gpfr to provide financial information useful to existing and potential investors, creditors and lenders in their decision making in providing resources to the entity. Fundamental qualitative characteristics: relevance- information capable of making a difference in the decisions made by users. Has a predictive/ confirmatory value: faithful representation- complete, neutral and free from error.

Related Questions

I am having a problem getting my memo right for this math done already class, I have the math done. Heres the directions and Ill post the memo outline they gave us and the math I have doneI have to tell them yes on the loan as you will see in my answer to Part 3

Precision company wishes to expand but needs a $300,000 loan. The bank requests that Precision prepare a balance sheet and key financial ratios. Precision has kept formal records and is able to provide financial statements as of December 31, 2017. The industry debt ratio averages 45.00%. The industry return on assets is 2.0%.

You represent Ideal Bank and will present your findings in a memo to report the ratios for Precision, and identify the conclusion of your opinion reached from your analysis of the companyâs financials. The memo is to be copied and distributed to the VP of Ideal Bank, so a well-written and detailed memo is crucial. Your memo will be crucial to bank leadersâ decision to lend Precision the $300,000.

Make sure you use complete sentences. Check your work for proper spelling, grammar and punctuation.

Part 1(a) - Return on Total assets

Return on Total Assets = (Earning Before Income And Taxes)/Total Assets*100

Total Assets = $1684000

Earning before Interest and Taxes = $185000

Return on Total Assets = ($185000/$1684000)*100 = 10.99%

Part 1(b) - Its Building Block is Profitability. Profitability ratios measure the how effectively company uses its assets in generating revenue. The ratio explain the relationship between income and Resources.

Company is generating more return on total assets than the industry average. Industry average is 2% and company's return on total assets is 10.99%

Also company is having the very high profit Margin, High Return on Equity. Hence overall Position regarding Profitability is Higher than Industry's average

Part 2(a) - Debt Ratio = Total Debts/Shareholders Equity

Total Debts = $400000

Shareholders Equity = $1019000

Debt Ratio = ($400000/$1019000)*100 = 39.25%

Part 2(b) - Its Building Block is Solvency. Solvency ratio determines the ability of company to meet the liabilities of long term debts. It analyses that whether company has sufficient cash flows to repay the long term debts.

Company debt ratio is 39% which is lesser than Industry Average ratio. It says that company better manages its long term debt financing. Lower debt equity ratio is better. And debt equity ratio of more than 50% is considered unhealthy. Hence company is very much performing better than its Industries sector.

Part 3- Yes, Company is highly able to get the loan of $300000. Company is performing better than Industry averages in terms of profitability and Solvency. Also Company has current ratio of more than 2.0 which says that company has high liquidity. Hence company is Growing in business and has strong financials better than industry average. Hence Company can get the loan of $300000 for expansion

Precision Company

Memorandum

To: Recipient Name

From: Your Name

CC: CC Name

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ACCT10002 Lecture Notes - Lecture 1: Corporations Act 2001, Profit Margin, Comprehensive Income

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