Understanding the Financial Statements

Submitted BySalina Thapa Rana Magar (12077697)Sona Limbu (12078108)FINC20018managerial payProfessor Angelique McInnesCentral Queensland UniversityBrisbane CampusTerm 1 201821st April 2018Table of ContentsQuestion no 1 Understanding the monetary pedagogys (Chapter 3)AnswerPart 1Financial Statement shows the total monetary functioning of the house.Any business entities tole send easily assume the pecuniary status of the telephoner by using the pecuniary tale of the company. At the end of specific period, each business prep atomic number 18s take in and Loss note (Income Statement), Statement of Financial Position (Balance Sheet), Statement of Cash Flows (Cash meld statement) and Statement of Changes in fair play.Cash flow statement is one of the major monetary statement which records all the amount that a business is receiving from its business minutes as well as the amount that it disburses. The exchange flow statement is prepared to find out how business is generati ng specie and how effectively they are utilizing their cash resources in productive sector. Cash flow statement if managed great powerily would help the firm to skip cash crisis in the business.As a result, business can assure the availability of cash to cover the out-of-pocket expenses. Cash flow statement depicts the position of economic status of the companyThe chief(prenominal) objective of preparing cash flow isTo find out the sources and areas of cash inward and cash outgoing respectively.To allocate the situation on which business might be in the position of cash insufficiency or cash surplus.Cash flow statement is prepared to predict hereafter cash inflows or outflows.To recall information regarding the capability of firm to pay its liabilities or taxes.To mensu swan whether the firm is on the right track or not by measuring the overall financial records of the company at specific time.To deliver information for making large(p) budgeting decisions. To evaluate the overall performance of the firm by making comparison between their actual performance and future predictions of cash flow.Part 2Cash flow statement shows the mobility cash in one-third different areas of business activities Operating activitiesFinancing activitiesInvesting activitiesCash flow statement provides the answer to the side by side(p) questionsWhat are the primary sources of cash incoming?What are the basic opeproportionnal activities of a firm to gene tell cash?How does the firm manage their scanty funds if the business faces shortages?What are the main investment funds areas of business?What is the creator behind increase or decrease in cash flow?Part 3a) Calculation of Quality of Earnings balanceThe quality of earnings ratio for two firms i.e. Woodside oil colour Ltd and Origin zip for the latest three days is portendd as followsWoodside petroleum Ltd (WPL.AX)2017 2016 2015Quality of Earning Ratio = Cash flow from operationsNet take in = 2,400,0001,024,000 = 2.3438 = 2,587,000868,000= 2.9804 = 2,475,00026,000 = 95.1923Origin Energy (ORG.AX)2017 2016 2015Quality of Earning Ratio = Cash flow from operationsNet sugar = 1,289,000-2,226,000 = 0.5791 = 1,404,000-628,000= 2.2357 = 1,833,000-658,000 = -2.7857b)c) Capital eruditeness RatioThe capital acquisition ratio for both firms i.e. Woodside Petroleum Ltd and Origin Energy for the latest three classs is calculated in the following tablesWoodside Petroleum Ltd (WPL.AX)2017 2016 2015Cash AcquisitionRatio= Cash flow from operationsCash paid forcapital usance= 2,400,0001,390,000 = 1.7266 = 2,587,0001,860,000= 1.3909 = 2,475,0001,819,000 = 1.3606Origin Energy (ORG.AX)2017 2016 2015Cash AcquisitionRatio= Cash flow from operationsCash paid forcapital expenditure = 1,289,000-419,000 = 3.0764 = 1,404,000-572,000= 2.4545 = 1,833,000-1,484,000 = -1.2352d)After comparing Woodside Petroleum Ltd and Origin Energys ability to utilize the operating cash flow to finance their capital expenditure, we came to the conclusion that .Question No. 2 The Income Statement (Chapter 3)Answer a.CQU Oil LimitedIncome StatementFor the category ended.Sales $ 2,500,000Cost of Goods Sold (700,000)Gross kale 1,800,000Operating Expenses Cash Operating Expenses 150,000 Depreciation Expenses 150,000 innate Operating Expenses (300,000)Operating Profit 1,500,000 touch Expenses (200,000)Profit Before Tax 1300,000Tax (390,000)Net Profit 910,000b.From the above income statement, we can hold in that CQU Oils taxable Income and Tax Payable for the year are $ 1300,000 and $ 390,000 respectively. d.Question No. 3 Financial Analysis (Chapter 4)Calculation of Financial RatiosThe financial ratios for both firms i.e. westside farmers Ltd and Woolworths Ltd for the most recent year i.e. 2017 are calculated as follows westerly farmers Ltd (WES) Woolworths Ltd (WOW)1.Liquidity Ratio online Ratio = Current plussCurrent Liabilities = 9667 / 10417 = 0.928002303 = 0.9280 time Current Ratio = Current summation sCurrent Liabilities. = 6994.2 / 15921.6 = 0.43929 = 0.4393 timesQuick Ratio= Current Assets InventoryCurrent Liabilities = (9667 -6530) / 10417 = 3137 / 10417 = 0.3012 times Quick Ratio= Current Assets InventoryCurrent Liabilities = (6994.2 4080.4) / 15921.6 = 2913.80 / 15921.6 = 0.1830 timesInventory Ratio=Cost of Goods SoldInventoryInventory Ratio=Cost of Goods SoldInventory = 39739.7 / 4080.4 = 9.7392 times2.Capital Structure RatioDebt Ratio = heart and soul LiabilitiesTotal Assets = 16174 / 40115 = 0.4032 = 40.32% Debt Ratio = Total LiabilitiesTotal Assets= 13039.7 / 22915.8 = 0.5690= 56.90%Interest Coverage Ratio =EBITInterest Expense = 4402 / 213 = 20.6667 Interest Coverage Ratio =EBITInterest Expense3. Asset Management Efficiency RatioTotal Asset swage =SalesTotal Assets = 68444 / 40115 = 1.7062 times Total Asset Turnover =SalesTotal Assets= 55475 / 22915.8 = 2.4208 times furbish up AssetTurnover=SalesNet Property, plan & Equipment = 68444 / 9440 = 7.2504 times Fixed Asse tTurnover=SalesNet Property, plan & Equipment = 55475 / 8437.5 = 6.5748 times4. opportunity RatioGross Profit bank= Gross ProfitSales= Gross Profit Margin= Gross ProfitSales = 15928.9 / 55475 = 0.2871 = 28.71%Operating Profit Margin =EBITSales = 4402 / 68444 = 0.0643 = 6.4315% Operating Profit Margin =EBITSales = 2326 / 55475 = 0.0419 = 4.19 %Net Profit Margin=Net ProfitSales = 2873 / 68444 = 0.04197 = 4.1976% Net Profit Margin=Net ProfitSales = 1482 / 55475 = 0.0267 = 2.67% fruit on Assets=Operating Profit or EBITTotal Assets = 4402 / 40115 = 0.1097 = 10.97% Return on Assets=Operating Profit or EBITTotal Assets = 2326 / 22915.8 = 0.1015 = 10.15% evaluation of Relative Performance of Two Firms in name ofLiquidity air jacket farmers Ltd (WES) Woolworths Ltd (WOW)Current Ratio 0.9280 times 0.4393 timesQuick Ratio 0.3012 times 0.1830 timesInventory Ratio 9.7392 timesLiquidity Ratio shows the financial status of the company. From the above calculation, we can interpret that western h emisphere Farmers Limited is to a greater extent liquid than Woolworths based on its Current Ratio and Quick Ratio.West Farmers had $0.9280 latest assets and $0.3012 cash and accounts receivable for every $1 of current liabilities. Whereas Woolworths had $0.1830 current assets and $0.1830 cash and account receivable to pay $1 current liabilities.ii) Asset Management EfficiencyWest farmers Ltd (WES) Woolworths Ltd (WOW)Total Asset Turnover 1.7062 times 2.4208 timesFixed Asset Turnover 7.2504 times 6.5748 timesiii) Financing Practices (Capital Structure)West farmers Ltd (WES) Woolworths Ltd (WOW)Debt Ratio 40.32% 56.90%Interest Coverage Ratio 20.6667iv) ProfitabilityWest farmers Ltd (WES) Woolworths Ltd (WOW)Gross Profit Margin 28.71%Operating Profit Margin 6.4315% 4.19%Net Profit Margin 4.1976% 2.67%Return on Assets 10.97% 10.15%Calculation of Current Price-Earnings Ratio and foodstuff-to-book RatioWest farmers Ltd (WES) Woolworths Ltd (WOW) commercialise stones throw RatiosPrice Earnings Ratio = Market Price Per grappleEarnings Per SharePrice Earnings Ratio = Market Price Per ShareEarnings Per ShareMarket to support Ratio =Market Price Per ShareBook Value Per ShareMarket to Book Ratio =Market Price Per ShareBook Value Per ShareQuestion no. 4 clip Value of Money (Chapter 5)SolutionPresent Value (PV) =$20,000 Time (n) = 40 ageInterest regularise (i) = 10 % per annum = 0.10Future Value (FV)=?Timeline i=10% p.a FV=? 0 1 2 3 n= 40 years PV=$20,000FV= PV (1+i)n = 20,000(1+0.10)40 = 20,00045.25925557 = $ 905,185.1114From the above calculation, Emilys investment from her retirement plan result grow to $905,185.1114 after 40 years at 12% annual interest. b)Timeline i=6% p.a FV=$14,000 0 1 2 n= 3 years PMT=?Deposit on motorcar (PV)= $14,000No of years (n) = 3 years yearly Interest (i)= 6% =0.06Annuity fee (PMT)=?We have,FV = PMT (1+i)n-1i14000 = PMT 1+0.06)3-10.06 PMT = 140003.1836PMT = $ 4397.5374To cover the cost of deposit on a modern car, Emily needs to keep aside $4397.5374 from her bonus this year.Now, If Annual Interest on Saving (i)=10%=0.10PMT=?FVn = PMT (1+i)n-1i14000 = PMT1+0.10)3-10.10PMT = 140003.31PMT = $4229.6073If the annual sum up of interest grows to 10%, past the amount of payment will decrease to $4229.6073.c)At the age 60 years, prize of Trust Fund (FV)=?Time (n) = 60-30=30 yearsInterest rate =7%= 0.07Timeline i=7% p.a FV=? 0 1 2 3 n= 30 years PV=$50,000 FV = PV ((1+i)n = 50,000 (1+0.07)30 = 50,000 7.612255043 = $ 380,612.7521When Emily turn 60 years, the value of her trust fund will grow to $380,612.7521 at the rateOf 7% government bond.d) compounding and discounting have inverse relationship. Compounding method acting is the way of calculating the future value of money with the granted current value of investment at certain compound rate. Whereas Discounting method is used to find out the Present Value of future cash flow using discounting rate.Mathematically,In Compounding Method,Future valuein year nFVn= P resent Value(PV) 1+ Annual interest rate (i)number of years nIn Discounting Method,Present ValuePV = Future Value in year nFVn 11+ Annual Interest Rate (i)Number of years (n)e)Question no 5 Risk and Return (Chapter 7)a.GivenShare A Share BProbability Return Probability Return0.3 11% 0.2 -5%0.4 15% 0.3 6%0.3 19% 0.3 14%0.2 22%For Share AExpected rateof publicationE(r)=rate of slide by 1 r1probabilityof translate 1Pr(r1)+rate of return 2 r2probabilityof return 2Pr(r2) +rate of return 3r3probabilityof return 3Prr3)= 0.3 0.11 + 0.4 0.15 + 0.3 0.19= 0.033 + 0.06 + 0.057= 0.15= 15% partitioning in rate of return?2 = rate of return 1 r1- anticipate rate of returnEr2probabilityof return 1Pr(r1) + rate of return 1 r1- judge rate of returnEr2probabilityof return 1Pr(r1) + rate of return 3r3-expected rate of returnE(r)2probabilityof return 3Pr(r3) = (0.11 0.15)2 0.3 + (0.15 0.15)2 0.4 + (0.19 0.15)2 0.3 = 0.00048 + 0 + 0.00048 = 0.00096Standard Deviation = Variance =0.00096 = 0.0309 83867 = 3.0984%For Share BExpected rateof returnE(r)=rate of return 1 r1probabilityof return 1Pr(r1)+rate of return 2 r2probabilityof return 2Pr(r2) +rate of return 3r3probabilityof return 3Prr3)+rate of return 4r4probabilityof return 4Pr(r4)= 0.2 (-0.05) + 0.3 0.06 + 0.3 0.14 + 0.2 0.22= (-0.01) + 0.018 + 0.042 + 0.044= 0.094= 9.4%Now, Variance in rate of return?2 = rate of return 1 r1-expected rate of returnEr2probabilityof return 1Pr(r1) + rate of return 1 r1-expected rate of returnEr2probabilityof return 1Pr(r1) + rate of return 3r3-expected rate of returnE(r)2probabilityof return 3Pr(r3) + rate of return 4r4-expected rate of returnE(r)2probabilityof return 4Prr4) = (-0.05 0.094)2 0.2 + (0.06 0.094)2 0.3 + (0.14 0.094)2 0.3 + (0.22 0.094)2 0.3 = 0.0041472 + 0.0003468 + 0.0006348 + 0.0031752 = 0.008304Standard Deviation = Variance = 0.008304 = 0.091126286 = 9.1126%b)Shareholders or investors of the company always assume to gain certain profit from the investment they m ake on their business. Such expectation is referred to as Expected Rate of Return. Whereas established Rate of Return is the actual amount of profit or passing play that that face from their investment in certain duration of time.c) d. Question No 6 Risk and Return (Chapter 8)AnswerPart 1Systematic Risk and Unsystematic RiskSystematic fortune refers to those lucks that are associated with the overall foodstuff or industry (Vasigh, Fleming Mackay, 2010) and cannot be alter away while unsystematic luck refers to those risk that are associated with the hit investment or small class of investment and can be diversified away (Swedroe Hempen, 2007).Investment beta is the measure of change in investments return to the change in return of the market portfolio. Johnson (2014) also express that investments beta measures the volatility of share relative to volatility of market. Thus, investments beta helps to measure the systematic risk of an investment. Therefore, it is very useful i n the investment decision. For pattern if we want to know the systematic risk of particular investments, we can calculate beta and know the volatility and go for that investments with low volatility.In terms of unsystematic risk, it is calculated by deducting the beta scaled by the market volatility from the volatility of the single stock. Part 2Beta of a Portfolio and Betas of the Individual Investments in the PortfolioPart 3Security Market LineSecurity market line is the graphical representation of Capital Asset set Model (CAPM) i.e. the straight line relationship between expected return and betas that also explains the market set of risk in capital market (Khan, 2004).Return (%)Security Market Liners =rf+rm-rf?rfRisk Beta (?)Figure. Security Market Line. Adapted from Investments An Introduction by H. B. Mayo, 2013, Boston Cengage Learning. From the above graph, we can see that risk beta is at the x-axis and expected return on the y-axis. The sky of the security market line is represented by market risk premium which is the difference between expected rate of return on the market portfolio and the risk free rate (i.e.Erm-rf) while the y-intercept of this line represents the risk free interest rate i.e. rf .Part 4Capital Asset Pricing ModelCapital asset pricing model (CAPM) refers to the model that explains the relationship with expected return and the systematic risk of an investment. In a simple word, CAPM is that model which estimates the expected return for any risky assets. According to Mellen (2018), this model helps the business psychoanalyst and investor evaluate a suitable rate of return for an investment by giving the general economic, industry and firms conditions.CAPM helps to inform the investment decision by first of all measuring the fairest price for an investment on the reason of risk, potential return and other factors and then comparing this fair price with the market price.Therefore, this is how the CAPM can be used to inform the inve stment decision. ReferenceJohnson, R. S. (2014). Equity Markets and Portfolio Analysis. New York John Wiley Sons, Inc.Khan, M. Y., Jain, P. K. (2004). Financial Management Text, Problems and Cases. New Delhi Tata McGraw Hill publication Company Limited.Mayo, H. B. (2013). Investments An Introduction. Boston Cengage Learning.Mellen, C. M. (2018). Valuation for M A Building and beat Private Company Value. New York John Wiley Sons, Inc.Swedroe, L. E., Hempen, J. H. (2007). The only guide to a winning bond strategy youll ever need The way wise to(p) money preserves wealth today. New York St. Martins PressVasigh, B., Fleming, K., Mackay, L. (2010). Foundation of Airline Finance Methodology and Practice. Farnham Ashgate Publishing, Ltd. Reference