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ACCOUNTING PRINCIPLES (ACCT5001)

Semester 2, 2002
GROUP ASSIGNMENT PART A (5%)
Due: 6:00pm Tuesday, 3rd September 2002

Place assignment in Assignment Locker 9 located on the ground floor


of the Faculty of Economics and Business Building (corner Rose
Street and Codrington Street). NB: Do not place your assignment in
the lockers in the Merewether Building.

The following students participated in the preparation of this


assignment.
SID NAME (Please print) SIGNATURE

_______ _____________________________ __________________

_______ _____________________________ __________________

_______ _____________________________ __________________

_______ _____________________________ __________________

_______ _____________________________ __________________

Please circle your assignment company:


Fosters Limited/ GUD Holdings

Please circle the lecture time when you


would prefer receiving return of your
assignment: Tuesday 12-3
Tuesday 6-9
Wednesday 1-4
PART A – Section 2: ANSWER SUBMISSION SHEET
2001 2000 1999
LIQUIDITY ANALYSIS
Current ratio 1.56 to 1 1.34 to 1 1.08 to 1
Quick ratio 0.78 to 1 0.83 to 1 0.52 to 1
Cash flow from operations to current liabilities 23.2% 48.5% 37.2%
ratio
Accounts receivable turnover ratio 8.09 Times 8.25 Times 7.78 Times
Accounts payable turnover ratio 3.09 Times 2.90 Times Data N/A
Inventory turnover ratio 1.70 Times 2.04 Times Data N/A

SOLVENCY ANALYSIS
Times interest-earned ratio 3.47 to 1 4.19 to 1 4.5 to 1
Debt service coverage ratio 0.30 Times 0.37 Times 0.32 Times
Debt-to-assets ratio 0.59 to 1 0.55 to 1 0.45 to 1
Debt-to-equity ratio 1.44 to 1 1.21 to 1 0.82 to 1

PERFORMANCE ANALYSIS
Return on assets 12.1% 13.0% 11.7%
Asset turnover 0.58 Times 0.63 Times 0.599 Times
Return on sales 20.7% 20.5% 19.4%
Return on common stockholders' equity 15.4% 17.2% 14.1%
Dividend payout ratio 62.5% 58% 60%
Gross profit margin ratio 53.6 % 53.2% Data N/A
Return on Assets

Return on Assets = Operating Profit Before Interest And Tax Expense


Average Total Assets

This number tells one how well the company utilizes what its got. For an investment decision
one needs to know how much profit the company makes on its assets, i.e. the higher the ROA
the higher the return.

Asset Turnover

Asset turnover ratio = Net Sales


Average Total Assets

This ratio, which is simply sales divided by assets, can show both how capital intensive a
business is, and how well it uses assets to produce revenue.

Return on Sales (ROS)

Return on sales = Operating Profit Before Interest And Tax Paid


Net Sales
Net income as a percentage of sales. The figure shows that for every sale a company has
made a profit. Therefore the higher the return on sales the more profit a company is making.

Return On Common Stockholders’ Equity

Return On Common = copy of D


Stockholders’ Equity

Measures the return to equity owners and represents their measure of profitability. When
compared to the return on assets, this ratio indicates degree of financial leverage.

Dividend Payout ratio

Dividend Payout ratio = Common Dividend per share


Earnings per share

Dividend payout ratio shows the percentage of the earning that is paid out as dividends.
i.e. the higher the percentage the greater the dividend paid out to stockholders.
Gross Profit Margin Ratio

Gross Profit Margin Ratio = Net Income


Net Sales

Success of a company from the sales it made. The higher this figure is the more profitable the
company is.

Confirm w/ D
LIQUIDITY DEFINITIONS

Current Ratio

Total Current Assets


Total Current Liabilities

This is a rough indication of a firm’s ability to service its current obligations.

A higher ratio shows stronger liquidity; however composition and quality of current assets is

critical.

Quick Ratio

Quick Assets
Current Liabilities

A conservative view of creditors’ protection, since inventory and prepaid items may not always

be liquid. Generally, ratio less than 1:1 implies dependency on inventory and other current

assets to liquidate short-term debt.

Cash Flow From Operations To Current Liabilities Ratio

Net cash provided by operating activities


Average current liabilities
It measures the ability of a company to meet current debt from cash assets. This is a useful

ratio in investment decisions because since the payment of most debt is by cash a ratio that

involves cash gives a better variation of the company ‘s ability to pay its debts.

Accounts Receivable Turnover Ratio

Net Credit Sales


Average Accounts Receivable

It measures the number of times accounts are received or collected.

It indicates the number of times it takes receivables to turn into cash per year, however further

attention should be paid to credit terms, billing procedures, trends, and industry average.
Accounts Payable Turnover Ratio

Cost of Goods Sold


Coverage Accounts Payable
It measures the number of times accounts are paid in an accounting period.

It indicates the number of turns per period of time it takes for the company to pay its payables

and should be compared to credit terms.

Inventory Turnover Ratio Measures

Cost of Goods Sold


Average Inventory

The number of times inventory is sold in an accounting period.

Indicates the number of times the business liquidates its inventory over a period and whether

too little or too much inventory is carried.