ACCT7101 (Accounting)
Assignment FAQ’s
Semester 2, 2024
FREQUENTLY ASKED QUESTIONS (FAQs)
1. If the end of the financial year of one company is 31 December and the comparative
company is 30 June, can they be compared?
Yes, you can compare a one-year period of both companies although the end of each financial year is different.
2. Iam about to do ratio calculations such as Inventory Turnover, Receivable Turnover,
Return on Assets, etc. Their denominators are all average numbers, so do I need to download the 2020 annual reports in addition to 2021, 2022 and 2023 annual reports? Since I need the average of years 2020 and 2021 to calculate these ratios.
Usually, financial statements include the current financial figure as well as the previous year figure. Thus, if you would like to calculate a ratio such as inventory turnover in 2021, you can simply refer to the financial report of 2021 as it contains both results of 2021 and 2020.
3. When I was calculating the current ratio and the quick ratio, I found out that there
are two different Total Current Liabilities dollar figures for the year 2021. The Total Current Liabilities shown on the 2021 annual report is different to the Total Current Liabilities shown on the 2022 annual report. Could you explain this forme?I have also found this to be the case for some other figures in the financial statements.
The difference could be due to the restatements of which objective is to correct the errors in previously published financial statement. That is, firms may restate their financial figures of year 2021 in 2022 annual report to provide more accurate financial information to users. Please use the restated amount shown in the annual report of the following year (latest) for your analysis.
4. Should I use net profit for the year or net profit from continuing operations?
You should use net profit after tax before any other comprehensive income. In your analysis, if relevant, you can mention the effect of profits from discontinued operations.
5. If the company does not have COGS (or cost of sales) in the income statement, how
can I calculate the gross profit margin?
Service companies do not have COGS, so you cannot calculate gross profit margin.
In the income statement, expenses can be classified by nature or function. When expenses are classified by nature:
a) Manufacturers disclose “Raw materials and consumables used” plus “changes in inventory of finished goods and work in process” . In that case COGS is equal to the sum of the two amounts.
b) Retailers disclose “finished goods purchased for resale” plus “changes in inventory of goods for resale”, again COGS is the sum of the two amounts
If expenses are classified by function then COGS (or cost of sales) is required to be shown separately.
If COGS is not explicitly identified in the income statement as indicated above it is important that you add a note pointing out what figure you used to calculate the ratio.
6. Should "devaluation loss" be included in net profit after tax to calculate ratios?
Devaluation loss should be treated the same as a loss from discontinued operations. In your analysis, if relevant, you can mention the effect of profits from discontinued operations.
7. Should I use the formula provided in the “Ratio Calculation and Analysis” to
calculate the ratios?
Yes. You need to refer to the formula provided in the formula sheet to calculate the ratios and use the ending balance of the balance sheet accounts included in the ratios if it is not “average” . In case you cannot use the formula provided so you had to use other formulas, you must explain this in the Appendix or footnotes.
8. Should I include the rubric in my assignment?
No. The rubric is included in the Turnitin system for the marking of your assignment.
9. Why can a company have an increase in accumulated losses in the equity section of
the balance sheet and report a profit in the current period?
A company that has profit in the current period may increase accumulated losses in equity because of distribution of dividends that may exceed the profit for the period. This explanation will be provided via the notes to the financial statements or the retained profits column in the statement of changes in equity (accumulated losses).
10. If there is current and non-current inventory and accounts receivable, should I add
the non-current inventory and non-current accounts receivable to calculate days in inventory / days sales in receivables?
No. You should use only the current inventory and accounts receivable to calculate days in inventory / days sales in receivables.
11. Should I use “net profit attributable to members of the company” or “net profit after
income tax” to calculate ratios?
You should usenet profit after income tax.
12. I find the ratios defined in the “Ratio Calculation and Analysis” are different from
those from other texts, financial news etc. Which one is correct?
There is no single correct way to define a ratio. A ratio can be defined in many different ways depending on the purpose of the analysis, on the data you have available and on the preferences of the analyst etc. What is important here is to be consistent in the definition of the ratios when we compare them in different years or across different companies. However, having said that, for the purposes of the assignment, we have to standardise the way to calculate the ratios to have some consistency and for marking purposes between assignments for the same companies. That’s why, for the assignment, we provided the formula you can use to calculate your ratios and guidance on which figures you should use for the analysis.
13. If I could not find interest expense in those statements yet I found it in the expense
note, should I use the figure in notes orI have to make assumption on interest expense as financial cost which listed in the statement?
You should use the interest expense disclosed in the expense note. If it is not disclosed in the notes, you can assume the financial cost provided in the income statement is the interest expense, but you have to indicate what you assume in the footnotes or Appendix.
14. Do I need to have any cover sheet when I submit my assignment?
No.
15. I need a help in calculating ratios for market value measures but I am unable to find
the values of share market price and book value per share. Could you please advise from where willI get these values?
You could find market value information from ASX website, Google Finance or other financial information providers. You are expected to calculate book value per share based on what you have learned in the course. Please note that you should use the share price at the end of the financial year (e.g. if financial year ends on Sunday, you have to use the share price of Friday).
16. How do I obtain “Net Credit Sales” if the company does not report credit sales, but
only reports total net sales instead? I find both “net credit sales” and “net sales” in the formula template, but I am not able to find them both for the most of the time in annual reports.
You could usenet sales if credit sales is not available. However, please try your best effort to find relevant information in the notes to the financial statement section before making a decision. If you use net sales, please indicate what you assume in the footnotes or Appendix.
17. How doI define “Net receivable”? Could I use net trade receivables?
It is okay to include other receivable or only focus on net trade receivable. If you include other receivable, you may include other revenue or sales to define net credit sales.
18. How do I define “profit before interest and tax” if company only reports “interest
expense”, “tax expense”, and “profit after tax”? Could I define it as the sum of them? I find it is not 100% right as I cannot get the tax effect from interest expense.
You could calculate in the following way: Add together “interest expense”, “tax expense”, and “profit after tax” to get “profit before interest and tax” . Please indicate how you calculate in the footnotes or Appendix.
19. Does “interest expense” include the effect of “interest income”? Can I use “net financial cost”?
Yes, you can. Please indicate what you assume in the footnotes or Appendix.
20. If a company has "assets classified for sale" in current assets, should they be deducted
from current assets to calculate quick assets?
Yes, they should be deducted from current assets (the same as inventories) to calculate quick assets.
21. Should Ipresent ratios in decimals or percentages?
You can present ratios in decimals up to 3 decimal places (e.g. 0.143) or in percentages up to 1 decimal place (e.g. 14.3%).
22. Should we base our analysis only in the information provided by the financial statements?
No, you also need to look at any factors in the economy or the industry that may have affected the financial performance of the companies. For example, in the mining industry, if the price of commodities such as copper has gone down in the last three years it may affect the financial performance of copper mining companies. You can gain some indication about the challenges faced by your companies from reading the chairman’s or CEO’s reports and once identified, you can google for some references that explain the challenge and its effect in the industry of your companies (do not forget to include the references of your sources).