3/30/22

Welcome to ACC10007
Financial Information for Decision Making

Session 7 – Video 1
Financial Statement Analysis

Presented by:
Dr John Webster and Alan J Serry

Acknowledgement of Country
We respectfully acknowledge the Wurundjeri People of the Kulin Nation, who
are the Traditional Owners of the land on which Swinburne’s Australian
campuses are located in Melbourne’s east and outer-east, and pay our
respect to their Elders past, present and emerging.

We are honoured to recognise our connection to Wurundjeri Country,

history, culture, and spirituality through these locations, and strive to ensure
that we operate in a manner that respects and honours the Elders and
Ancestors of these lands.

We also respectfully acknowledge Swinburne’s Aboriginal and Torres Strait

Islander staff, students, alumni, partners and visitors.

We also acknowledge and respect the Traditional Owners of lands across

Australia, their Elders, Ancestors, cultures, and heritage, and recognise the
continuing sovereignties of all Aboriginal and Torres Strait Islander Nations.

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Learning Objectives
Video 1

1. Describe the nature and purpose of financial statement analysis

2. Define, calculate and interpret the ratios that measure liquidity

Video 2

3. Define, calculate and interpret the ratios that measure asset efficiency
4. Link liquidity and asset efficiency in your analysis

Video 3
5. Steps to think about when performing ratio analysis

The need for financial statement analysis

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The need for financial statement analysis

Read alone, financial statements provide some helpful information

for decision making,

but they are much more useful if compared to other data.

One commonly used tool for comparison is:

Ratio analysis

The need for financial statement analysis

Ratio Analysis

Expresses the relationship among selected items of

financial statement data.

Data items can be selected from one, or a

combination, of

– income statement
– balance sheet
– statement of cash flows

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The need for financial statement analysis

Interpreting Ratios

§ Interpreting financial information requires the application of

judgement

§ Looking at one ratio in isolation has limited usefulness

§ Need criteria (i.e. benchmarks) against which to judge performance

The need for financial statement analysis

Having Ratios alone is NOT enough

IF I TOLD YOU SOMEONE RAN THE

100M IN 20 SECONDS
IS THAT GOOD OR BAD?

BAD GOOD

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The need for financial statement analysis

Benchmarks

§ Consider the trend in the ratio over 2 or more years (intra-entity

basis).

§ Compare with one or more major competitors (inter-entity

basis)

§ Consider industry averages (broader economic trends) in the

analysis of each ratio

The Categories of Financial Statement Analysis

Analysing financial statements involves evaluating four characteristics of

an entity:

Liquidity Short term ability of entity to pay its debts by using its
quantity of assets to generate
CASH

Asset Efficiency (speed) with which we use our assets to

generate
Efficiency CASH

Capital Long term ability of entity to pay its debts and survive
Structure (solvency)
RISK

Profitability Operating success of the entity

EFFICIENCY

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Liquidity Ratios

The survival of the entity depends on its ability to generate cash to pay its debts when they fall
due (its liquidity).

Current ratio (or working capital ratio) indicates:

$ of current assets per $ of current liabilities.

Current ratio
Current assets
= 𝒙 times
Current liabilities

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Liquidity Ratios

The survival of the entity depends on its ability to generate cash to pay its debts when they fall
due (its liquidity).

Quick ratio (or acid-test ratio) measures:

$ of current assets available (excluding inventory) to service each $ of current liabilities.

Quick ratio
Current assets – Inventory = 𝒙 times
Current liabilities

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Liquidity Ratios

The survival of the entity depends on its ability to generate cash to pay its debts when they fall
due (its liquidity).

Cash flow ratio indicates an entity’s ability to cover its current obligations from
operating activity cash flows.

Cash flow ratio

Net cash flows from operating activities
= 𝒙 times
Current liabilities

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Liquidity Analysis

• Example — analysis of liquidity of JB Hi-Fi Ltd:

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Learning Objectives
Video 1

1. Describe the nature and purpose of financial statement analysis

2. Define, calculate and interpret the ratios that measure liquidity

Video 2

3. Define, calculate and interpret the ratios that measure asset efficiency
4. Link liquidity and asset efficiency in your analysis

Video 3
5. Steps to think about when performing ratio analysis

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Thank You

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Welcome to ACC10007
Financial Information for Decision Making

Session 7 – Video 2
Financial Statement Analysis

Presented by:
Dr John Webster and Alan J Serry

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Learning Objectives
Video 1

1. Describe the nature and purpose of financial statement analysis

2. Define, calculate and interpret the ratios that measure liquidity

Video 2

3. Define, calculate and interpret the ratios that measure asset efficiency
4. Link liquidity and asset efficiency in your analysis

Video 3
5. Steps to think about when performing ratio analysis

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Asset Efficiency Ratios

Efficiency (speed) with which we use our assets to generate CASH

Times Inventory Turnover:

It is common to calculate the no. of times on average that inventory turns over (ie. is sold)
during a year.

Times inventory turnover

Cost of sales
= 𝒙 times
Average inventory

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Asset Efficiency Ratios

Efficiency (speed) with which we use our assets to generate CASH

Days Inventory:
indicates the average period of time it takes to sell inventory.

Days Inventory
365 = 𝒙 days
Times Inventory Turnover

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Asset Efficiency Ratios

Efficiency (speed) with which we use our assets to generate CASH

Times Debtors Turnover:

It is common to calculate the no. of times on average that trade debtors turns over during a
year ie. The number of times, on average, that debtors settle their accounts during the period

Times debtors turnover

Sales Revenue
= 𝒙 times
Average trade debtors

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Asset Efficiency Ratios

Efficiency (speed) with which we use our assets to generate CASH

Days Debtors:
indicates the average period of time it takes collect our trade debtors.

Days Debtors
365 = 𝒙 days
Times Debtors Turnover

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The Activity Cycle (operating cycle)

Days inventory and days debtors ratios:

Days inventory and days debtors turnovers can be considered together to reflect the
entity’s activity cycle (also referred to as the operating cycle).

Days inventory Days debtors

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Asset Efficiency Analysis

• Example — analysis of asset efficiency of JB Hi-Fi Ltd:

Times Inventory Turnover Times Inventory Turnover

5384.1 4397.5
= 𝟔. 𝟏𝟓 times = 𝟔. 𝟐𝟓 times
(891.1 + 859.7)/2 (859.7 + 546.4)/2

Days Inventory Days Inventory

365 365
= 𝟓𝟗 days = 𝟓𝟖 days
6.15 times 6.25 times
Times Debtors Turnover Times Debtors Turnover

6854.3 62 days 5628.0 61 days

= 𝟏𝟐𝟑. 𝟕𝟐 times = 𝟏𝟑𝟏. 𝟑𝟒 times
(56.6 + 54.2)/2 (54.2 + 31.5)/2
Days Debtors Days Debtors
365 365
= 𝟑 days = 𝟑 days
123.72 times 131.34 times

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Linking Ratios

Liquidity Ratios Asset Efficiency Ratios

Tells us the size of the pool of Tells us the speed with which we can convert our
cash producing assets cash producing assets to cash

large fast

small

slow

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Learning Objectives
Video 1

1. Describe the nature and purpose of financial statement analysis

2. Define, calculate and interpret the ratios that measure liquidity

Video 2

3. Define, calculate and interpret the ratios that measure asset efficiency
4. Link liquidity and asset efficiency in your analysis

Video 3
5. Steps to think about when performing ratio analysis

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Thank You

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Welcome to ACC10007
Financial Information for Decision Making

Session 7 – Video 3
Financial Statement Analysis

Presented by:
Dr John Webster and Alan J Serry

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Learning Objectives
Video 1

1. Describe the nature and purpose of financial statement analysis

2. Define, calculate and interpret the ratios that measure liquidity

Video 2

3. Define, calculate and interpret the ratios that measure asset efficiency
4. Link liquidity and asset efficiency in your analysis

Video 3
5. Steps to think about when performing ratio analysis

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Steps to think about when performing

Financial Statement Analysis
Step 1 Analyse individual ratios one at a time against available benchmarks

a Use wording such as “This ratio tells us:

the number of $’s of top line for every $1 of bottom line”
or the number of times, on average, we …..”

b All other things being equal

the bigger this ratio, the better (or worse) because
the more (or less) the Magic Word

What is the magic word?

liquidity Cash (size of pool)
asset efficiency Cash (speed of conversion)
capital structure Risk
profitability Efficiency

c Thus A is better of than B because (use figures)

Step 2 LINKS between ratios and ratio categories

Step 3 Limitations

Step 4 Conclusion

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Al and John’s DO and DON’T words

CURRENT RATIO

CURRENT ASSETS/CURRENT LIABILITIES

RATIOS COMPANY A 2/1 COMPANY B 6/1

INDUSTRY AVERAGE 10/1

A and J’s DON’T WORDS A and J’s DO WORDS

INCREASE / DECREASE (NEVER!!) BETTER / WORSE
GOOD / BAD IMPROVING /
DETERIORATING
BIGGER / SMALLER
IMPROVING /
HIGHER / LOWER WORSENING

GREATER / LESS

FASTER / SLOWER

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Learning Objectives
Video 1

1. Describe the nature and purpose of financial statement analysis

2. Define, calculate and interpret the ratios that measure liquidity

Video 2

3. Define, calculate and interpret the ratios that measure asset efficiency
4. Link liquidity and asset efficiency in your analysis

Video 3
5. Steps to think about when performing ratio analysis

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Thank You

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