ACC600 Accounting Fundamentals Management

Running head: ACCOUNTING FUNDAMENTALS
Accounting fundamentals
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Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................5
Answer 3....................................................................................................................................7
Answer 4....................................................................................................................................9
Answer 5..................................................................................................................................10
Reference..................................................................................................................................13

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API Limited or the Australian Pharmaceutical Limited is the parent company of Soil
Pattinson Chemist and Pharmacist Advice and Priceline Pharmacy. Various services provided
by the company include the delivery of wholesale products, marketing programs, advisory
services for business and retail services (API, 2018). Nick Scali Limited along with its
subsidiaries is engaged in retailing and sourcing the household furniture and associated
accessories all over New Zealand and Australia. It provides chairs, dining tables, lounges,
coffee tables, TV Units, rugs, pendants, mirrors and lamps. It sells its product through
physical stores as well as through online (Nickscali.com.au, 2018). JB Hi FI is engaged in
retailing of the home consumer products. It has 2 segments – New Zealand and Australia. It is
engaged in selling the consumer electronic services and goods that includes audio equipment,
televisions, software, computer, compact discs, blue rays and digital versatile discs
(Jbhifi.com.au, 2018). The Reject shop Limited is engaged in discount variety retail shops all
over Australia. Various products the company deals with include hardware, basis furniture,
home wares, confectionary, kitchenware, household cleaning products and snack foods
(Rejectshop.com.au, 2018). Super Retail Group Limited is engaged in retail industry
primarily. Main activities of the company includes retailing of the auto accessories and parts,
equipments, tools, camping, retailing of the boating, fishing equipment, apparel, bicycles and
retailing equipment (Superretailgroup.com.au, 2018). Blackmores Limited is engaged in
selling, developing and marketing natural health products for animals as well as humans all
over New Zealand, Australia and Asia. It offers various products for different conditions
related to bones, joints, arthritis, brain health, muscles, flu, cold, immunity, exercise, energy
and digestive health (Blackmores.com.au, 2018).
Answer 1
Formula for computing ratios –

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Ratio Formula
Net profit margin Net profit / sales
Current ratio Current assets/current liabilities
Inventory turnover Cost of goods sold/average inventory
Asset turnover ratio Net sales/average total assets
Leverage ratio Total liabilities/total assets
Return on equity Net profit/total equity
Return on total assets Net profit/total assets
Earnings per share Given
Net debt to equity ratio Total liabilities / total equity
Total return to
shareholders
(Closing price of stock-opening price of stock + divided paid)/
opening price of stock
Ratio computation –
API Limited
2014-15 2015-16 2016-17
Net profit margin 0.01 0.01 0.01
Current ratio 1.28 1.33 1.32
Inventory turnover 8.51 8.64 8.78
Asset turnover ratio 2.63 2.75 2.80
Leverage ratio 0.62 0.63 0.62
Return on equity 0.09 0.10 0.09
Return on total assets 0.03 0.04 0.04
Earnings per share 0.09 0.11 0.11
Net debt to equity ratio 1.66 1.70 1.62
Total return to shareholders 1.41 0.35 -0.20
Nick Scali Ltd
2014-15 2015-16 2016-17
Net profit margin 0.11 0.13 0.16
Current ratio 1.64 1.58 1.56
Inventory turnover 2.84 3.20 3.16
Asset turnover ratio 1.77 1.87 1.79
Leverage ratio 0.52 0.53 0.50
Return on equity 0.37 0.45 0.53
Return on total assets 0.18 0.21 0.27
Earnings per share 0.21 0.32 0.46
Net debt to equity ratio 1.09 1.10 0.99
Total return to shareholders 0.33 0.60 0.42

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JB HI Fi Limited
2014-15 2015-16 2016-17
Net profit margin 0.04 0.04 0.03
Current ratio 1.62 1.57 1.32
Inventory turnover 6.09 6.03 6.26
Asset turnover ratio 4.16 4.19 3.27
Leverage ratio 0.62 0.59 0.65
Return on equity 0.40 0.38 0.20
Return on total assets 0.15 0.15 0.07
Earnings per share 1.36 1.52 1.54
Net debt to equity ratio 1.61 1.45 1.87
Total return to shareholders 0.08 0.47 0.14
The Reject Shop Limited
2014-15 2015-16 2016-17
Net profit margin 0.02 0.02 0.02
Current ratio 1.82 1.49 1.63
Inventory turnover 4.18 4.61 4.74
Asset turnover ratio 3.36 3.49 3.53
Leverage ratio 0.41 0.41 0.38
Return on equity 0.10 0.13 0.09
Return on total assets 0.06 0.07 0.05
Earnings per share 0.49 0.59 0.43
Net debt to equity ratio 0.70 0.70 0.62
Total return to shareholders -0.28 1.18 -0.58
Super Retail Group Ltd
2014-15 2015-16 2016-17
Net profit margin 0.04 0.03 0.04
Current ratio 1.72 1.70 1.68
Inventory turnover 2.56 2.72 2.77
Asset turnover ratio 1.42 1.54 1.58
Leverage ratio 0.51 0.53 0.51
Return on equity 0.11 0.09 0.13
Return on total assets 0.05 0.04 0.07
Earnings per share 0.41 0.32 0.52
Net debt to equity ratio 1.06 1.13 1.06
Total return to shareholders 0.07 0.17 -0.05

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Blackmores Limited
2014-15 2015-16 2016-17
Net profit margin 0.10 0.14 0.09
Current ratio 1.63 1.54 1.81
Inventory turnover 3.79 2.76 2.35
Asset turnover ratio 1.78 1.97 1.64
Leverage ratio 0.55 0.59 0.57
Return on equity 0.35 0.56 0.33
Return on total assets 0.16 0.23 0.14
Earnings per share 2.71 5.81 3.43
Net debt to equity ratio 1.20 1.44 1.32
Total return to shareholders 2.33 0.87 -0.40
Answer 2
Return on equity - ROE is the profitability measure used for computing the dollar of profit
generated by the company with each dollar of the shareholder’s equity. It is considered as an
important measure for any entity as it can be compared with the peers and higher ROE
represents better financial position. Hence, it is used for comparing the performances of the
company. ROE is calculated through dividing the net profit by shareholder’s equity (Greco,
Figueira & Ehrgott, 2016). If year 2017 is considered it can be identified that the ROE for the
companies are as follows –
 API Limited – 0.09
 Nick Scali Ltd – 0.53
 JB Hi Fi Ltd – 0.20
 The Reject Shop Limited – 0.09
 Super Retail Group Limited – 0.13
 Blackmores Limited – 0.33
However, while computing return on equity, only net profit and equity is taken into
consideration. If the company raises additional amount through borrowing for purchasing the

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plant and equipment it will increase the amount of total assets as well as total liabilities.
However, it will not have any impact on net profit as well as on total equity. Hence, if the
company raises additional $ 200 million through borrowing for purchasing the plant and
equipment it will not have any impact on the return on equity (Uechi et al., 2015).
Debt to equity ratio – D/E ratio is used to measure the leverage position of the entity and it
computes the weight of total debts against weights of total equity. It highlights the company’s
capital structure to determine whether the debt proportion is higher or the equity proportion.
Generally, the high D/E ratio signifies that the entity may not be able to earn sufficient cash
for satisfying the obligation of debt. However, the low D/E ratio may signify that the entity is
not availing the advantage of enhanced profits as that may bring the financial leverage.
Investors as well as the lenders prefer low D/E ratio as their interests are protected in better
way in case the business declines. Hence, the entity with high debt to equity ratio will not be
able to attract the additional fund, if any, required for business operation. D/E ratio is
computed through dividing the total liabilities including short term as well as long term
borrowings and other payables by shareholder’s equity. Hence, if the amount of liabilities
increases it will increase the D/E ratio. In the given case, the company borrowed $ 200
million for investing in plant and equipment. It will have direct impact on D/E ratio of the
companies as follows –
Company name D/E ratio (before) D/E ratio (after)
API Limited 1.62 1.98
Nick Scali Ltd 0.99 3.84
JB Hi Fi Limited 1.87 2.11
The reject Shop Limited 0.62 2.10
Super Retail Group Ltd 1.06 1.32

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Blackmores Limited 1.32 2.44
From the above table it can be identified that for all the companies’ debt to equity
ratio has been increased after including $ 200 million loan in debt component. Therefore, it
can be stated that raising additional capital through loan or borrowing will increase the debt
to equity ratio of the company which in turn will make the company more leveraged.
Answer 3
Comparing and contrasting the financial performance of the companies
 Net profit ratio – net profit margin signifies the profit remained with the firm after
paying all the expenses from revenues. It can be found that the net profit margin for
API Limited remained same at 1%, for Nick Scali Ltd it increased from 11% to 16%,
for JB Hi Fi Limited it reduced from 4% to 3%, for The Reject Shop Limited it
remained same at 2%, for Super Retail Group Ltd it remained same at 4% and for
Blackmores Ltd it reduced from 10% to 9% over the period from 2015 to 2017.
Hence, in terms of profitability Nick Scali Ltd is in best position and API Limited is
in worst position among all (Nickscali.com.au, 2018).
 Current ratio – it represents the ability of the company to pay off its short term
obligation with the short term assets available with it. If all the companies are
compared it can be observed that all the entities are able to pay off the short term
obligations with its current assets as their current ratio for all the years are more than
1. However, in terms of liquidity Blackmores position is best and JB Hi Fi Limited’s
position is worst as its current ratio has been reduced from 1.67 to 1.32 over the years
from 2015 to 2017 (Miller-Nobles, Mattison & Matsumura, 2016).

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 Inventory turnover ratio – it measures the efficiency in terms of the times the
company is able to sell or replace its inventories during the particular period of time,
generally a year. If all the companies are compared it can be observed that API
Limited is most efficient selling or replacing its inventories as compared to others as
for all the 3 years its inventory turnover ratio is more than 8 times. Conversely, Super
Retail Group Ltd is least efficient as for all the 3 years its inventory turnover ratio is
less than 3 times (Wahlen, Baginski & Bradshaw, 2014).
 Asset turnover ratio – it is used for measuring the sales value generated by the
company as compared to the asset’s value. It is used as the indicator for the efficiency
with which the entity deploys its assets for generating revenue. If all the companies
are compared it can be observed that JB Hi Fi Limited is most efficient in deploying
it’s assets as compared to others as for 2015 and 2016 its asset turnover ratio is more
than 4 times and for 2017 it is 3.27 times. Conversely, Super Retail Group Ltd is least
efficient as for all the 3 years its asset turnover ratio is less than 2 times
 Leverage ratio – it is used for measuring the leverage level of the company that is the
debt component as compared to the assets. Higher the ratio, the company is
considered as more leveraged. It can be found that among all the 6 companies, JB Hi
Fi Limited is highly leverages as compared to others and The Reject Shop Limited is
lower leveraged among all (Xu et al., 2014).
 Return on equity – ROE is the profitability measure used for computing the dollar of
profit generated by the company with each dollar of the shareholder’s equity. It can be
found that among all the 6 companies, return on equity for Nick Scali Ltd is highest
followed by Blackmores Limited. On the other hand, return on equity for API Limited
is lowest followed by Super Retail Group Ltd.

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 Return on total assets – it is used to measure earnings of the company as compared to
its assets. it measures the performance of the company through comparing the net
income generated by it as compared to the capital investment in assets. It can be
found that among all the 6 companies, return on total asset for Nick Scali Ltd is
highest whereas the same is lowest for API Limited (Vogel, 2014).
 Earnings per share – it can be identified that the earnings per share for Blackmores
Ltd is highest among all whereas it is lowest for API Limited (API, 2018).
 Net debt to equity ratio – D/E ratio is used to measure the leverage position of the
entity and it computes the weight of total debts against weights of total equity. It
highlights the company’s capital structure to determine whether the debt proportion is
higher or the equity proportion. Higher debt equity ratio represents that the company
is exposed to interest risk (Arsad, Shaari & Isa, 2017). It can be identified that JB Hi
Fi Limited’s D/E ratio is highest and therefore its position is worst among all. On the
other hand, The Reject Shop’s D/E ratio is lowest among all and therefore its position
is best among all.
Answer 4
Total return to shareholders ratio
It is used to measure the performance of various company’s shares and stocks over the
particular period of time. It combines the appreciation or depreciation in share price and
dividends paid to the shareholders and are expressed in terms of annualized percentage
(Evans & Mathur, 2014). For all the 6 companies following changes have been found in
terms of total return to shareholder ratio over the last 3 years period –
 API Limited – from 1.41 in 2015 it has been reduced to 0.35 in 2016 and further
reduced to - 0.20

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 Nick Scali Ltd – from 0.33 in 2015 it increased to 0.60 in 2016, however fell to 0.42
in 2017.
 JB Hi Fi Ltd – from 0.08 in 2015 it increased to 0.47 in 2016, however fell to 0.14 in
2017 (Jbhifi.com.au, 2018).
 The Reject Shop Limited – from -0.28 in 2015 it increased to 1.18 in 2016, however
fell to 0.58 in 2017 (Rejectshop.com.au, 2018).
 Super Retail Group Limited – from 0.07 in 2015 it increased to 0.17 in 2016, however
fell to -0.05 in 2017.
 Blackmores Limited – from 2.33 in 2015 it reduced to 0.87 in 2016 and further fell to
-0.40 in 2017.
Answer 5
API Limited
The market value can be stated as stagnant during 2014-15, 2015-16 and 2016-17.
This is evident with decrease in the total return to shareholders. In 2016-17 this value is
depicted to be negative in nature. It needs to be also seen that the Earnings per share of the
company is seen to be stagnant in 2015-2017. The net profit margin has also not increased
which shows the value of the company to be cheap. However, API has performed fairly well
in terms of current ratio and inventory management (Karadag, 2015).
Nick Scali Ltd
The market performance was favourable from 2014-2016. However, in terms of the
market performance in 2016-2017, the company’s market share along with other ratios
decreased as well. This is evident with inventory turnover increase from 2014-15 to 2015-16,
however it decreased in 2016-2017. The company has been able to keep a positive trend in

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terms of Net profit margin, Return on equity and Return on total assets. This shows that the
company can be marked as expensive (Zietlow et al., 2018).
JB HI Fi Limited
The market performance is inferredwith a growing trend from 2014-2017. The
performance in 2016-2017 is seen to be decreasing in nature for all the ratios. The market
performance in this aspect is recognised to be decreasing with the evaluation based on
decreasing total return to shareholders. However, in terms of the EPS the company has shown
some significant improvement from 2014-2017. The profit, current ratio, and asset turnover
ratio of the company has significantly reduced. Therefore, the company needs to be
categorised as cheap.
The Reject Shop Limited
The market performance of the company needs to be identified as reducing in terms of
EPS and Total returns to shareholders. Moreover, the net profit margin ratio of the company
is seen to be stagnant from 2014-2017.The current ratio of the company is depicted with a
linear trend. Despite of few setbacks, the overall ratio analysis of the company can be
considered to bepositive in nature. Therefore, the company needs to be categorised as
expensive (McKinney, 2015).
Super Retail Group Ltd
The market performance of total returns to shareholders is identified to be negative in
terms of Total return to shareholders. The increase trend of EPS shows that the company is
competent in earning more equity capital. The increasing trend of the profitability ratios
along with the other ratios shows that the company needs to be categorised as expensive.
Blackmores Limited

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The overall market performance of the company is following a negative trend. This is
evident with both negative returns to the shareholders and EPS. Moreover, the net profit of
the company is also depicted to be fluctuating in nature. This is considered to be particularly
negative for the future prospect. The leverage ratio and Return on equity is also seen to be
decreasing in nature. The overall depiction of the market performance and ratio analysis
shows that the company is identified to be cheap in nature (Renz, 2016).

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Reference
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http://www.api.net.au/about-us/
Arsad, R., Shaari, S. N. M., & Isa, Z. (2017, November). Comparative study on DuPont
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Managerial Accounting: The Managerial Chapters. Pearson.

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Nickscali.com.au. (2018). Nick Scali | Lounge, Dining & Occasional Furniture | Nick Scali
Furniture. [online] Retrieved 3 November 2018, from https://www.nickscali.com.au/
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