BAFS Elective Part Accounting Module Financial Accounting Topic
BAFS Elective Part Accounting Module Financial Accounting Topic A 04: Financial Analysis Technology Education Section Curriculum Development Institute Education Bureau, HKSARG April 2009
Accounting Ratios Profitability Ratios Liquidity Ratios Management Efficiency Ratio BAFS Elective Part Learning and Teaching Example
Profitability Ratios Gross Profit Ratio Gross Profit Sales X 100% Net Profit Ratio Net Profit Sales X 100% BAFS Elective Part Learning and Teaching Example
Liquidity Ratios Current Ratio Current Assets Current Liabilities X 100% Liquid Ratio (Quick Ratio / Acid Test Ratio) Current Assets Inventory Current Liabilities X 100% BAFS Elective Part Learning and Teaching Example
Management Efficiency Ratios Credit Period Allowed to Debtors Stock Turnover Rate Average Accounts Receivable Cost of goods sold Average Stock Sales X 365 days Credit Period Received from Creditors Average Accounts Payable Purchases X 365 days Return on Capital Employed Profit before interest and tax Owners’ equity + preference shares + long term liabilities X 100% BAFS Elective Part Learning and Teaching Example
Activity 1: Matching (Refer to Student Worksheet P. 1) Topic A 04 Financial Analysis BAFS Elective Part Learning and Teaching Example
Activity 1: Matching ANSWER Match the following ratios with the correct formulas: Current Asset Gross Profit Ratio Current Liabilities Profit before interest & tax Net Profit Ratio Current Ratio Liquid Ratio Stock Turnover Rate Debtors collection period Creditors repayment period Return on capital employed Topic A 04 Financial Analysis Equity, Preference shares X 100% & LT Liabilities Net Profit X 100% Sales Average Accounts Receivable Sales Gross Profit Sales X 365 days X 100% Cost of goods sold Average Stock Current Assets - Inventory Current Liabilities Average Accounts Payable X 365 BAFS Elective Part days Learning and Teaching Example Purchase Learning and Teaching Example
Activity 2: Problem Solving • Refer to Student Worksheet P. 2 -3 • Calculation of the accounting ratios BAFS Elective Part Learning and Teaching Example
Activity 2: Suggested ANSWER Calculate the following ratios of two companies: Ratios North Ltd South Ltd Gross Profit Ratio 65% 57. 4% Net Profit Ratio 8. 6% 14. 6% Current Ratio 6. 0: 1 2. 7: 1 Quick Ratio 4. 8: 1 2. 2: 1 Stock Turnover Rate 4. 0 times 4. 5 times Credit Period Allowed to Debtors 113 days 73 days Credit Period Received from Creditors 79 days 169 days Profitability Liquidity Management Efficiency Return on Capital Employed 10% 6. 7% BAFS Elective Part Learning and Teaching Example
Activity 3: Case Study You are the financial manager of ME Video Game Company Limited. Your staff has calculated accounting ratios of the company and its competitor, Play. Game Company Limited. Based on her workings, please advise your boss which one is better by putting a chop (WIN/LOSE/DRAW) next to that ratio. Topic A 04 Financial Analysis BAFS Elective Part Learning and Teaching Example
Activity 3: Case Study You are the financial manager of ME Video Game Company Limited. Your staff has calculated accounting ratios of the company and its competitor, Play. Game Company Limited. Based on her workings, please advise your boss which one is better by putting a chop (WIN/LOSE/DRAW) next to that ratio. Ratios Profitability Gross Profit Ratio Possibly ME Video Game Co Ltd sells video games at a higher price! the purchase game Co is lower MEOr Video Game Coprice Ltd of video Play. Game Ltd than that of Play. Game Company ! 25% 20% 12. 5% Current Ratio 9: 1 4: 1 Quick Ratio 4: 1 1: 1 Net Profit Ratio Liquidity BAFS Elective Part Learning and Teaching Example
Activity 3: Case Study It is rarely to have an equivalent NP ratio for You are the financial manager of ME Video Game Company Limited. Your staff has different companies. calculated accounting ratios of the company and its competitor, Play. Game Company They have the same Limited. Based on her workings, please advise your boss which one is better by putting a proportion between chop (WIN/LOSE/DRAW) next to that ratio. the net profit figure and the sales figure for Ratios ME Video Game Co Ltd both Play. Game Co Ltd companies. Profitability Gross Profit Ratio 25% 20% 12. 5% Current Ratio 9: 1 4: 1 Quick Ratio 4: 1 1: 1 Net Profit Ratio Liquidity BAFS Elective Part Learning and Teaching Example
Activity 3: Case Study You are the financial manager of ME Video Game Company Limited. Your staff has calculated the accounting ratios and its competitor, Play. Game Company Limited. Based on the calculations, please advise management which company is better by chopping (WIN/LOSE/DRAW) the ratio. Ratios ME Video Game Co Ltd Play. Game Co Ltd Profitability Gross Profit Ratio ME Video Game 25% Co Ltd’s current ratio of 20% 9 is far greater than required. It could be because too much money is Ratios for Net Profit Ratiolying idle or inventory 12. 5% levels are high. Quick 12. 5% ME is also higher than necessary! ME may encounter bankruptcy risk! Liquidity Current Ratio 9: 1 4: 1 Quick Ratio 4: 1 1: 1 BAFS Elective Part Learning and Teaching Example
Activity 3: Case Study Ratios Management Efficiency Stock Turnover Rate ME Video Game Co Play. Game Co Ltd Too much Ltd stock is lying idle! Beware of obsolete stock! 3 times 4. 8 times Credit Period Allowed to Debtors 114 days 61 days Credit Period Received from Creditors 60 days 40 days 24% 34% Return on Capital Employed BAFS Elective Part Learning and Teaching Example
Activity 3: Case Study Ratios ME Game Co collection! Play. Game Co Ltd Not. Video efficient in debt Ltd may result in bad debts! Poor credit controls Management Efficiency Stock Turnover Rate 3 times 4. 8 times Credit Period Allowed to Debtors 114 days 61 days Credit Period Received from Creditors 60 days 40 days 24% 34% Return on Capital Employed BAFS Elective Part Learning and Teaching Example
Activity 3: Case Study Ratios ME Video Game Co Ltd Play. Game Co Ltd 3 times 4. 8 times Credit Period Allowed to Debtors 114 days 61 days Credit Period Received from Creditors 60 days 40 days 24% 34% Management Efficiency Stock Turnover Rate ME settles accounts payable slowly and can have more $$$ (working capital) for daily operations! Return on Capital Employed BAFS Elective Part Learning and Teaching Example
Activity 3: Case Study Ratios ME Video Game Co Ltd Play. Game Co Ltd 3 times 4. 8 times 114 days 61 days 24% 34% Management Efficiency Stock Turnover Rate Credit Period Allowed to Debtors ME has managed a lower return! Unable to make efficient use of resources to Credit Period Received 60 generate days income! 40 days from Creditors Return on Capital Employed BAFS Elective Part Learning and Teaching Example
Summary of Lesson 1 Accounting Ratios Profitability Ratios Current Ratio Net Profit Ratio Topic A 04 Financial Analysis Gross Profit Ratio Management Efficiency Ratio Liquidity Ratios Stock Turnover Rate Liquid Ratio Credit Period Allowed to Debtors Credit Period Received from Creditors Return on Capital Employed BAFS Elective Part Learning and Teaching Example
Preparation for next lesson BAFS Elective Part Learning and Teaching Example
Activity 4: Group Discussion and Presentation You are the financial controller of North Ltd or South Ltd. Your boss would like you to comment on the performance of the company with industry level and bring out the improvement directions and methods. Here are the industry ratios: Ratios Toy Industry Profitability Gross Profit Ratio 50% Net Profit Ratio 10% Liquidity Current Ratio Quick Ratio 3: 1 1. 5: 1 Management Efficiency Stock Turnover Rate 5 times Credit Period Allowed to Debtors 2 months Credit Period Received from Creditors 2 months Return on Capital Employed 10% BAFS Elective Part Learning and Teaching Example
Activity 4: Group Discussion and Presentation Here are the background of two companies: North Ltd: Target Customers: Teenager/infant/baby Price range: $200 - $500 Products: Basketball & football sportswear, Sports equipment, Trendy sports clothes Remarks: strong marketing strategies, invites “Stars” as spokespersons, advertises in different channels, good in design History: about 5 years South Ltd: Target customers: Adult/Elderly Price Range: above $800 Products: Golf/Tennis/Casual sportswear, Golf/Tennis Equipment Remarks: many loyal high-class customers, good quality, suppliers give longer credit payment periods History: long history BAFS Elective Part Learning and Teaching Example
Activity 4: Group Discussion and Presentation North Ltd: Group 1: Profitability Group 2: Liquidity Group 3: Management Efficiency BAFS Elective Part Learning and Teaching Example
Activity 4: Group Discussion and Presentation South Ltd: Group 4: Profitability Group 5: Liquidity Group 6: Management Efficiency BAFS Elective Part Learning and Teaching Example
Activity 4: Group Discussion and Presentation Conclusion Profitability North Ltd South Ltd Liquidity North Ltd South Ltd Management Efficiency North Ltd South Ltd BAFS Elective Part Learning and Teaching Example
Activity 5: Debate ‘Ratios analysis is the best method to evaluate financial performance!’ BAFS Elective Part Learning and Teaching Example
Activity 5: Debate ‘Ratios analysis is the best method to evaluate financial performance!’ Topic A 04 Financial Analysis BAFS Elective Part Learning and Teaching Example
Activity 5: Debate ‘Ratios analysis is the best method to evaluate financial performance!’ Topic A 04 Financial Analysis BAFS Elective Part Learning and Teaching Example
Summary of Lesson 2 l l Ratio analysis has benefits and limitations. However, without ratios, comparisons are difficult to make between different financial statements and stakeholders do not have enough information for decision-making. With ratios, financial statements can be interpreted and applied to satisfy user requirements. So, ratio analysis is still the common method to effectively evaluate companies. Topic A 04 Financial Analysis BAFS Elective Part Learning and Teaching Example
The End Topic A 04 Financial Analysis BAFS Elective Part Learning and Teaching Example
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