Accounting Statement Analysis Assignment

Accounting Statement Analysis

Introduction
The present report is developed for undertaking a financial analysis of a publicly listed
company in Australia. This has been carried out by the help of ratio analysis that provides an
assessment of the key financial performance of the selected company. The ratio analysis mainly
examines the liquidity and profitability position of the company through calculation of key ratios
in each category. Also, it provides a discussion in relation to the type of non-financial
information that may be useful for deciding about investment in the shares of the company. Also,
it presents an evaluation of the business scenario relating to lengthening the lives of assets for
reduction of depreciation expenses in order to increase the profitability. The report discusses the
ethical issues in relation to this business scenario.
Part 1: Financial Analysis of Wesfarmers Group
Brief Overview of Wesfarmers
Wesfarmers Limited, an ASX listed Australian company is recognized to be supermarket
retail giant within the country. The company is actively involved in carrying out diverse
operations including supermarkets, liquor, hotels, convenience stores, home improvement and
office supplies. It is recognized to be one of the largest financial companies within Australia in
terms of revenue and sales.
Ratio Analysis
The analysis of the key financial ratios of the company has been undertaken as follows:
Liquidity Ratio
Wesfarmers Financial Data for year 2016 and 2017
Financial Items 2016 2017
Amount in AUD $ m
Current Assets $ 9,684.00 $ 9,667.00
Current Liabilities $ 10,424.00 $ 10,417.00
Inventories $ 6,260.00 $ 6,530.00
Quick Assets $ 3,424.00 $ 3,137.00

Liquidity Ratios 2016 2017
Current ratio 0.93 0.93
Quick ratio 0.33 0.30
Current Ratio: The current ratio provides a measure of the current assets of the company in
comparison to the current liabilities (Bromwich and Bhimani, 2005). The formula used for
calculation of the current ratio can be depicted as follows:
Current Ratio=Current Assets/Current Liabilities
The current ratio calculated for the year 2016 and 2017 is 0.93 as depicted in the above
table. Thus, it can be said that the company maintained a stagnant growth rate in its liquidity
position for meeting its current obligations with its current asset base as reflected from the below
graph:
2016 2017
0.93
0.93
0.93
Current ratio
Current ratio
Quick Ratio: The ratio provides an overall assessment of the ability of a company to meet
effectively its short-term obligations with maintaining an adequate base of most liquid assets
(Damodaran, 2011). The formula used for calculation of quick ratio is as follows:

Quick Ratio= (Cash + Marketable Securities + Accounts Receivable)/Current liabilities
The quick ratio of the company calculated for the year 2017 is 0.30 and for the year 2016
is 0.33 and thus it can be said that the ratio has declined slightly but Wesfarmers have maintained
steady growth rate in its quick ratio.
2016 2017
0.28
0.30
0.32
0.34
Quick ratio
Quick ratio
As such, it can be said on the basis of overall discussion of the liquidity position of the
Wesfarmers that its ability to meet its short and long-term obligations is remaining steady and it
is not able to increase its efficiency for meeting its obligations with the sue of liquid assets. It is
not good for the future growth of the company as it need to improve its liquid position to
minimize the risk of default on its credit obligations as they become due (Lumby and Jones,
2007).
Solvency Ratio
Wesfarmers Financial Data for year 2016 and 2017
Financial Items 2016 2017
Amount in AUD $ m
Long Term Debt $ 5,671.00 $ 4,066.00
Shareholders' Equity $ 22,949.00 $ 23,941.00
Total Assets $ 40,783.00 $ 40,115.00
Interest Paid $ 308.00 $ 264.00

EBIT $ 1,346.00 $ 4,402.00
Solvency Ratios 2016 2017
Debt Ratio 0.14 0.10
Debt to Equity Ratio 0.25 0.17
Times interest earned ratio 4.37 16.67
Debt Ratio: It is a financial ratio used for measuring the extent of leverage on a company and can
be calculated by the use of following formula:
Debt Ratio=Total Debt/Total Assets
The debt ratio of the company has decreased significantly from the year 2016 to 2017 as
depicted in the above table. Thus, it can be stated that the proportion of assets of the company
financed by debt is decreasing and this means that it is relying less on the use of debt in its
capital structure (Wesfarmers: Annual Report, 2017).
2016 2017
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
Debt Ratio
Debt Ratio
Debt to Equity Ratio: It is a financial ratio used for indicating the relative proportion of equity
and debt used for financing the assets of a company. The ratio can be calculated by the use of
following formula:

Debt to Equity Ratio= Debt/Shareholder’s Equity
The debt to equity ratio of the company has decreased from 0.25 in the year 2016 to 0.17
in the year 2017. This clearly indicates it has incorporated less use of debt in its capital structure
which indicates less financial risk for the company (Wesfarmers: Annual Report, 2017).
2016 2017
0.00
0.05
0.10
0.15
0.20
0.25
Debt to Equity Ratio
Debt to Equity Ratio
Time Interest Earned Ratio:
Time interest earned ratio also known as interest coverage ratio can be regarded as a
measure adopted by a company for meeting its debt obligations. It can be calculated by the use of
following formula:
Time interest earned ratio=Income before interest and income taxes/Interest Expense
The time interest ratio of the company has increased from 4.37 in the year 2016 to 16.67
in the year 2017. This indicates that its ability to meet its debt obligations have increased
significantly and this indicates a potential sign of growth and development (Lumby and Jones,
2007).

2016 2017
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
Times interest earned ratio
Times interest earned ratio
Thus, it can be stated on the basis of solvency ratio’s calculated for Wesfarmers that it
possess strong capability for meeting its debt obligations as it has maintained an optimum
balance of debt and equity in its capital structure (Wesfarmers: Annual Report, 2017). Also, it is
adopting less use of debt in its capital structure and therefore there is less financial risk for the
investors to invest in the shares of the company (Davies and Crawford, 2011).
Profitability Ratio
Wesfarmers Financial Data for year 2016 and 2017
Financial Items 2016 2017
Amount in AUD $ m
Net Profit $ 407.00 $ 2,873.00
Total Assets $ 40,783.00 $ 40,115.00
Net Revenue $ 65,981.00 $ 68,444.00
Shareholders' Equity $ 22,949.00 $ 23,941.00
Weighted Average number of ordinary shares $ 1,123.00 $ 1,128.00
Profitability Ratios 2016 2017
Net Margin Ratio 0.62% 4.20%
Asset Turnover Ratio 1.62 1.71
Return on total assets 1.00% 7.16%

Return on ordinary shareholders’ equity 1.77% 12.00%
Earnings per ordinary share (EPS) $ 0.36 $ 2.55
Net Margin Ratio: It assesses the ability of a company to realize profit from sales. It can be
calculated by the use of following formula:
Net Margin Ratio=Net Profit/Revenue
2016 2017
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
Net Margin Ratio
Net Margin Ratio
The net margin ratio of the company has increased significantly from 0.62 in the year
2016 to 4.20 in the year 2017. This indicates that its ability to realize profit from the collected
revenue has increased to a large extent.
Asset Turnover Ratio: Return on total assets can be regarded as the ability of a company to use
its assets effectively for generating earnings (Madura, 2014). The formula for calculation of the
ratio can be stated as follows:
Asset Turnover Ratio=Sales/Average Total assets
The ratio of the company ahs increased significantly from the year 2016 to 2017
indicating that its efficiency to realize revenue from the use of asset has improved (Wesfarmers:
Annual Report, 2017).

2016 2017
1.56
1.58
1.60
1.62
1.64
1.66
1.68
1.70
1.72
Asset Turnover Ratio
Asset Turnover Ratio
Return on Total assets: It indicates the efficiency of a company to generate capital in relation to
its investment incurred in its asset base (Moles and Kidwekk, 2011). It is calculated with the use
of following formula:
Return on total assets: Earnings before interest and Taxes (EBIT)/Total Assets
2016 2017
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
Return on total assets
Return on total assets
The ratio has increased significantly from the year 2016 to the year 2017 as depicted in
the above table and thus indicates strong financial position of the company to realize larger
profits in comparison to sales.

Return on Ordinary Shareholder equity and EPS of the company has also increased significantly
from the year 2016 to the year 2017 indicating that its ability to create value for shareholders
have increased to large extent (Wesfarmers: Annual Report, 2017).
2016 2017
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Return on ordinary shareholders’
equity
Return on ordinary
shareholders’ equity
2016 2017
$-
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Earnings per ordinary share (EPS)
Earnings per ordinary
share (EPS)
Thus, it can be stated from the overall analysis carried out in terms of ratio that
Wesfarmers liquidity, solvency and profitability position is very good and is on increase as
indicated from ratio analysis. This, investors are recommended to invest in the company as it is

expected to provide larger returns in near future based on its positive signs of growth and
development (Wesfarmers: Annual Report, 2017).
Part 2: Importance of non financial information
The pertinent non-financial information that must be relevant for the end-users to take
decisions regarding investment in the company can be discussed as follows:
 Corporate Governance: The Corporate Governance Principles are necessary to be
implemented by a corporation for providing standard rules of conduct for carrying out
business operations. It defines the standard values and principles that need to be
maintained by the leaders as well as employees for carrying out their job roles and
responsibilities. Wesfarmers, an ASX listed corporation, need to implement the standard
corporate governance principles as provided by the ASX Council for maintaining the
trust and confidence of the stakeholders. Thus, investors by examining the compliance of
the company by the standard governance framework can gain pertinent non-financial
information about the ethical rules and procedures adopted for performing the business
activities. This will ensure that the financial results disclosed by the company are
accurate and reliable.
 Sustainability Performance: The analysis of the corporate sustainability report of
Wesfarmers will facilitate the investors to gain an analysis into the measures adopted by
the company for promoting the social, environment and community development. It will
depict the information related to the actions implemented by the company for supporting
the long-term development of its partners, suppliers and customers. The sustainability
performance of the company need to be analyzed by the investors for ensuring that it is
carrying out its business procedures in an ethical way that promotes its long-term growth
and development (Krantz, 2016).
 Accounting Standards & Policies: Wesfarmers need to develop its financial reports as per
the AASB standards and Corporations Act 2001. As such, the investors before deciding
to invest in the company need to gain an analysis into the accounting policies and
methods adopted by the company for development of its financial reports. The
compliance with the standard accounting principles and methods will ensure that the

financial results provided are reliable and faithfully presented to the investors (Brigham,
and Michael, 2013).
Part 3: Ethical consideration while changing the estimate useful life of assets
In order to determine the useful life of assets, the business companies tend to adopt the
use of historical information about the same type of assets. The managing director in the given
scenario has instructed the company to increase the useful life of assets for reduction in the
depreciation expenses and thus increasing its profitability. As such, the ethical issue involved in
the given case is changing the useful life of fixed assets as an asset after attaining the end of its
useful life period is not subjected to any depreciation expense. Thus, increasing the useful life of
assets is unethical as it will provide a false profitability position of the company to the end-users.
The inflation in the earnings is only for short-term basis as it will subsequently demand the
purchase of new assets which would begin with depreciation expenses causing reduction in
profitability position of the company (Brealey, Myers and Marcus, 2007).
Conclusion
It can be stated from the overall discussion held in the report that Wesfarmers financial
performance is very strong as indicated on the basis of ratio analysis reflecting its good sign of
potential growth. In addition to this, the investors can adopt the use of non-financial information
discussed in the report for gaining an in-depth analysis of its performance in the long term.
Lastly, the increase in the life of assets for inflation in earnings is regarded to be unethical on the
part of managing director of a company.

References
Brealey, R., Myers, S.C. and Marcus, A.J., 2007. FundamentalsofCorporate Finance. Mc Graw
Hill, New York.
Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Cengage
Learning.
Bromwich, M. and Bhimani, A., 2005. Management accounting: Pathways to progress. Cima
publishing.
Damodaran, A, 2011. Applied corporate finance. John Wiley & sons.
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
Krantz, M. 2016. Fundamental Analysis for Dummies. John Wiley & Sons.
Lumby,S and Jones,C. 2007. Corporate finance theory & practice. Thomson.
Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.
Moles, P. and Kidwekk, D. 2011. Corporate finance. John Wiley &sons.
Wesfarmers: Annual Report. 2017. [Online]. Available at:
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0 [Accessed on: 17 May 2018].