1. Should I use net profit for the year or net profit from continuous 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.
2. 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, 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. When expenses are classified by nature, 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 in the income statement 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 in your sheet of ratio calculations pointing out what figure you used to calculate the ratio.
3. Which revenue should be considered to calculate gross margin percentage, profit margin and days sales in receivables?
For the calculation of gross margin percentage and days sales in receivables use sales revenue according to the information provided in the income statement excluding “other revenue”. For profit margin use total revenues.
4. 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. It should be included in net profit after tax but the analysis has to include a comment on their effect on profits if the effect is relevant.
5. Should I use the formula provided in the formulae sheet to calculate the ratios?
Yes. You have to use the formula provided in the formulae sheet to calculate the ratios and use the ending balance of the balance sheet accounts included in the ratios if it is not “average”. If for some extraordinary circumstances you cannot use the formula provided and you have to change it you must explain this in the Appendix.
6. Should I include the rubric in my assignment?
No. The rubric is included in the Turnitin system for marking your assignment.
7. 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 can be confirmed looking at the notes or at the statement of changes in equity in the retained profits column (accumulated losses).
8. 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.
9. 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, because you are comparing a one year period for both companies and the same financial year even though the end of each financial year is different.
10. Should I use “net profit attributable to members of the company” or “net profit after income tax” to calculate ratios?
You should use net profit after income tax. In some cases, as the Reject Shop, profit for the period attributable to shareholders of the company is the same as net profit after income tax.
11. I find the ratios defined in the formula template are different from other ones 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 is to be consistent in the definition of the ratio when we compare the ratios at different years or the ratios 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 defined which formula you have to use to calculate your ratios and also we clarified or provided guidance on what figures you should use. So, even though it would not be incorrect to define your ratios in a different way you have to follow the formulas provided for the assignment (and not the formulas from the textbook, lecture notes, etc.) and the guidance from FAQs.
12. 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 or I have to make assumption on interest expense as financial cost which listed in the statement?
It is okay to assume so if it is proper and reasonable. Please indicate what you assume in the footnotes to Appendix.
13. Should I type my name and student ID on the assignment? Do I need to have any cover sheet when I submit my assignment?
No. A clean report without any personal information is more appreciated.
14. I need help while 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 will I get these values?
You could find market value from Google Finance or other sources as it is on the fiscal period end, while you are expected to calculate book value per share based on what you have learned in the course.
15. How to 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 use net sales if credit sales is not available. Please indicate what you assume in the footnotes to Appendix.
16. How to define “Net receivable”? Could I use net trade receivable?
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.
17. How to define “profit before interest and tax” if company only reports “interest expense” and “profit after tax”? Could I define it as the sum of interest expense and profit after tax? I find it is not 100% right as I cannot get the tax effect from interest expense.
You could calculate in this way. Please indicate how you calculate in the footnotes to Appendix.
18. Does “interest expense” include the effect of “interest income”? Can I “net financial cost”?