Financial Statement Analysis Assessment Task -
Objective -
The objective of this assessment item is to provide you with the opportunity to familiarise yourself with an annual report.
The intention of this assessment item is to enable you to familiarise yourself with the information contained in an annual report and to use relevant information in a strategy decision making situation.
While some questions can be answered by simply reading the report, others require consideration of more complex issues. For example, identifying the cause of changes in balances between years and the calculating and comparing of financial ratios.
BACKGROUND TO STUDENTS' SCOPE OF TASK:
Assume you are employed by an organisation that wants to diversity its share investment portfolio and considers Australia to be one of the more attractive markets in current economic times. That is, your organisation will be considering the attractiveness of Woolworths Ltd (e.g., return on investment, EPS, dividend yield, etc.) as part of your organisation's share investment portfolio. You are required to make recommendations about whether Woolworths Ltd would be a possible investment opportunity for your organisation.
WHAT DO YOU NEED TO DO FIRST?:
Before you can write your answers, you need to gather information for the 2016 Annual Report of Woolworths Limited and then perform some calculations. The annual report is needed for you to collect information, to complete a financial analysis, and to write your report. The majority of senior management and the board of director are not accountants and therefore require you are required to write your report to non-accountants. Some of the directors are from the building materials suppliers industry and have experience with ratios benchmarks from that industry sector. You therefore decided to provide a comparison between Reece Group and Woolworths for some comparison explanations.
Prepare your analysis, conclusion, and recommendations
Conducting a financial analysis from your discussion answers for question 1 to 7 will help support your conclusions and recommendations for question 8. The following calculations and information must be included in your analysis and report but are not an exhaustive range of discussions, analyses or interpretations of the information. That is, there may be other information that you feel are equally relevant to your analysis. Any calculations or information that you use must be taken from the consolidated figures of the 2016 Woolworths and the Reece Limited Group Annual Report.
HOW SHOULD STUDENTS APPROACH THE COMPLETION OF THIS ASSESSEMENT TASK?
To calculate the ratios required below, please use the ratio formats discussion in seminars and workshops questions. Please write your answers based the ratios and the trends in these ratios.
1. Use the Gross profit from continuing operations on page 56 of the report to calculate the gross profit margin ratio for 2015 and 2016. Is the level of profitability of Woolworths acceptable to you; if so, why, or if not, why not (e.g., what change(s) has to cause this impact on Income and expenses)?
2. Use the Profit from continuing operations before income tax expense on page 56 of the report to calculate the net profit margin ratio for 2015 and 2016. Is the level of profitability of Woolworths acceptable to you; if so, why, or if not, why not (e.g., what change(s) has occurred in the operating expenses and impairment expenses to cause this impact on this year's profit figure)?
3. Use the Total current assets and the Total current liabilities (and the items within these categories where relevant) on page 56 of the report to calculate the (1) current ratios and (2) quick (acid test) ratios for 2015 and 2016. . Is the level of liquidity of Woolworths acceptable to you; if so, why, or if not, why not (e.g., what change(s) has occurred in the current assets to cause this impact on this year's liquidity)? Have recent events with Masters Home Improvement has an impact.
4. Use the Total current assets and the Total current liabilities and the items within these categories expense on page 26 of the annual report for Reece Limited Group to calculate the (1) current ratios and (2) quick (acid test) ratios for 2015 and 2016.
5. Use the relevant information on pages 56 and 58 for the annual report of Woolworths and pages 25 and 26 of the annual report for Reece Limited Group to calculate the (1) Days' Sales in Inventory, (2) Inventory Turnover, and (3) Inventory Turnover in Days. You note that Woolworths operate every day except Christmas day and Good Friday from 8 am to 9 pm Mon day to Friday, with a 5.30 pm closing times on Saturday and Sunday. Reece operates only Monday - Friday 08:00 am - 04:30 pm, Saturday 08:00 am - 12:00 pm. For comparison consistency, you decide to use 365 days as the operating period for the denominator of any calculations for both companies.
6. Use the ratios you calculated in requirement 3, 4, and 5, explain the difference in the level of liquidity of Woolworths compared to Reece Limited Group. Provide an explanation in your report to the board of directors why the level of liquidity of Woolworths acceptable to you; if so, why, or if not, why not acceptable to you.
7. Use the information on page 26 to calculate the debt to equity and debt to total assets for 2015 and 2016. Is the level of long-term solvency of Woolworths acceptable to you; if so, why, or if not, why not? (e.g., impact of changes in debt, assets and/or equity levels)?
8. Using your answers to the previous 7 questions, form an opinion as to whether you would recommend or not recommended to your employer the purchase of Woolworths' shares. You must answer either to purchase or not to purchase based on the information you have and your conclusion using deductive reasoning that should be drawn from your 7 prior answers. Include the information and your calculations for these questions above in your analysis answers, which should then be as the basis for your conclusions and recommendations.
Attachment:- Assignment Files.rar