Ratio Analysis and Evaluation of Corporate Reporting in Wesfarmers

ACCT100
Unit Name: Introduction to Accounting

Contents
Introduction......................................................................................................................................3
Answer 1: Ratio Analysis................................................................................................................3
Part 1.i: Calculation of Ratios......................................................................................................3
A: Liquidity Ratios.......................................................................................................................3
B: Profitability Ratios..................................................................................................................3
C: Solvency Ratios.......................................................................................................................3
Part 1.ii: Comment on the overall performance of the company using above ratios..................4
Answer 2: Limitations to be considered while Ratio Interpretation................................................7
Answer 3: Evaluation of Corporate reporting and examples from the annual report of
Wesfarmers......................................................................................................................................8
Conclusion.....................................................................................................................................10
References......................................................................................................................................11
Appendix........................................................................................................................................12

Introduction
Financial statement analysis helps to review the financial performance of the company
and allows management with all necessary information required to make decisions for future
performance of the company. The purpose of this assignment is to review the financial statement
of any ASX listed company for the period of year 2017-18. For this purpose, Wesfarmers has
been selected and annual report of year 2018 has been extracted from company website to make
the review. Wesfarmers is among the top ASX listed company and it belongs to retail industry of
Australia. Financial statement analysis of Wesfarmers has been performed through use of ratio
analysis technique as it is the best method available to make review of financial statement
analysis. This report will also explore the limitations of using the ratio analysis as the tool of
interpreting the financial statement analysis. This report will also evaluate the corporate
reporting requirement for analyzing the entity’s performance with context to planet and people
for the chosen company.
Answer 1: Ratio Analysis
Part 1.i: Calculation of Ratios
A: Liquidity Ratios
Liquidity Ratios
Ratios Formula 2017 2018
Current Ratio Current Assets/Current Liabilities 0.93 0.87
Quick Ratio Quick Assets/Current Liabilities 0.30 0.27
(Annual Report, 2018)
B: Profitability Ratios
Profitability Ratios
Ratios Formula 2017 2018
Net Profit Ratio Net Profit/Net Sales Revenue 4.25% 3.89%
Asset Turnover ratio Net Sales/Average total assets 1.60 1.74
Return on total assets Net Profit/ Average total assets 6.82% 6.76%
Return on ordinary shareholders’
equity
Net profit/ Average Shareholder's
Equity 11.77% 11.15%
Earnings per ordinary share (EPS)
Profit Available for
shareholders/WANS
$
2.54
$
1.06
(Annual Report, 2018)
C: Solvency Ratios
Solvency Ratio
Ratios Formula 2017 2018

Debt Ratio Total Liabilities/Total Assets 0.40 0.38
Debt to Equity Ratio Total Liabilities/Shareholder's Equity 0.68 0.62
Times interest earned ratio EBIT/Interest Expenses 16.84 19.25
(Moles and Kidwekk, 2011)
Part 1.ii: Comment on the overall performance of the company using above ratios
Liquidity Analysis: The liquidity position of the company can be evaluated with the
calculation and interpretation of the following ratios as stated below:
2017 2018
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00 0.93 0.87
0.30 0.27
Liquidity Ratios
Times
(Annual Report, 2018)
 Current Ratio: The current ratio has been developed for the purpose of providing an
assessment of the current assets possessed by a company in relation to its current
liabilities. The current ratio of Wesfarmers over the financial period 2017-2018 is less
than 1 which indicates a financial risk present within the company for not meeting its
current liabilities in the future period of time. Also, the ratio has depicted a decrease over
the selected financial period from 0.93 to 0.87 which refers that its current liabilities are
increasing as compared with its current asset base (Davies and Crawford, 2011).
 Quick Ratio: The ratio depicts the ability of a company to meet its short-term liabilities
with the use of its most liquid asset resources such as accounts receivable and cash
equivalents. The ratio for the company has decreased from the financial year 2017 to the
financial year 2018 from 0.30 to 0.27 which means that its liquid resources have declined