Introductory Accounting

This study material provides an overview of introductory accounting and explores the concept of ratio analysis. It discusses the importance of annual reports, independent auditor's report, and shareholder information in decision making. The material also covers key financial ratios such as profit margin, return on equity, current ratio, debt to asset ratio, and debt to equity ratio. Suitable for students studying accounting or finance.

Introductory Accounting
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Table of Contents
Other information in the Annual Report..........................................................................................3
Ratio Analysis..................................................................................................................................4
References........................................................................................................................................7
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Other information in the Annual Report
Annual report contains financial information and other informations which provides a
basis to investor decision making. The report summarizes the performance of the company,
directors declaration, independent auditor's declaration, independent auditor's report, directors
report, remuneration report, securities exchange and shareholders information (Company's
Reporting, 2020).
This helps the people who are impacted by the decisions of the organisations to analyse
the performance and make the decisions related to investment.
Director's report
The business operations of the organisations was impacted with the retirement of the
director Mr. Eugene Shi on May 2, 2019. The operations of Santos were focussing on Cooper
basin which produces oil and gas, Queensland and NSW which produces natural gas, Papua New
Guinea, Northern Australia and Timor Leste and Western Australia. The Net profit more as the
losses during the financial year was controlled. Santos has a business model of low cost and have
a goal of maximizing growth and profits of shareholders. Their long term goal is to supply
Natural gas to the world and have complete ownership. They are having operational risk of
technical and engineering, licence to operate and cyber security.
Remuneration report
This is important for the shareholders as the organisations should take care of its
employees. Santos focussed on improved performance and safety of the employees, strategies for
the appraisal and maintained the cash flow of the organisation. The organisation used
performance indicators of the employees and it included the business strategy of Santos to
transform and grow the business by motivating the employees. The remuneration of Santos is of
three types fixed remuneration, long term remuneration, short term remuneration. They motivate
it employees by adding other benefits like giving commission to qualified employees, promoting
their innovation in the organisation, etc.
Independent auditor's declaration and report
The directors of Santos has declared that the auditors independent requirements will have
no contraventions according to the Corporation Act of 2001 and related to the audit and in
relation to the professional conduct of applicable code.
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The report of the independent auditors is according to the independent requirement of
Corporation Act 2001. The auditors report can be referred to as an official opinion that is usually
issued by either an external or external auditor. It outlines the accuracy as well as quality of the
different financial statements like balance sheet, cash flow statement, note to financial statements
etc. that are prepared by an organization. The report serves to be the primary source of
communication between the users of those financial statements as well as the auditor. The most
standard form of auditor's reports that is used is referred to as a clean auditor's report and any
changes made to the same are referred to as reservations.
Securities exchange and shareholders information
The shareholders of the company is given the power to make decisions as they have the
shares of the organisation and Santos is focussing on taking decision as it impacts the functions
of its shareholders. The information of the organisations reveals its financial position and give
them voting rights. The share prices are listed in the securities exchange and the shareholders
choose to invest when the organisations make profits (SHAREHOLDER INFORMATION,
2020.). The organisations need to make strategies to increase profits so that they can make its
shareholders satisfied by the decisions and they organisation can grow and expand its business.
The information of shareholders can help them revealing the position of the organisation to the
shareholders.
Ratio Analysis
Ratio are quantitative method used to gain insights into the liquidity, efficiency and
profitability of the company (Tsuji, 2018). The information is obtained from Balance Sheet and
Income Statement. Ratios of Santos for the year 2018 and 2019 are stated below (Amounts are
stated in US$million):
Profit Margin
It is a profitability ratio used to analyse what percentage of sales is turning into profit.
Profit margin are used by management, creditors and investors to assess company's financial
health, management skill and growth potential.
Profit Margin = Net Profit / Net Sales
2019 2018
Net Profit 674 630
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Net Sales 4033 3660
Profit Margin 16.71% 17.21%
It is clearly seen above that for both the years profit margin stands at around 17%. To be
precise it was 16.71 % in 2019 and 17.21 % in 2018 which means that margin is decreased but
since the decrease is not substantial and stands around 0.5% only, company needs not worry
much. But, this shall make management vigilant about their financial performance.
Return on Equity
This is a financial ratio which is used to assess effectiveness of management in using
company's assets to create profits (Sakaki, 2019). It is also called as return on net assets.
ROE = Net income / Average Shareholders Equity
2019 2018
Net income 674 630
Average Shareholder Equity 7474.5 7215
Return on Equity 9.02% 8.73%
From above it can be clearly seen that company has improved its return on equity from
last year which shows that company is using it net income in terms of average shareholder equity
better than last year. It shall also be noted the whether ROE is deemed good or bad depends on
competitor's ROE as well.
Current Ratio
It is a liquidity ratio that is used to measure how much current assets are able to finance
current liabilities. It helps investors understand more about a company's ability to cover its short
term debt liability.
Current Ratio = Current Assets / Current Liabilities
2019 2018
Current Assets 2180 2226
Current Liabilities 1319 1854
Current Ratio 1.65 1.2
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Generally a ratio of 2:1 is considered as best but an industry average or slightly higher
than industry average is considered acceptable. But also, a very high current ratio indicates that
management may not be using their assets efficiently.
Debt to Asset Ratio
It is a leverage ratio that is used to determine the relativeness to total assets to total debts
of the company. This show the financial stability of a company.
Debt to Asset Ratio = Total Liabilities / Total Assets
2019 2018
Total Liabilities 8833 9532
Total Assets 16509 16811
Debt to Asset Ratio 0.54 0.57
It is said that higher the ratio, higher the degree of risk of investing in the company. It can
be seen from above almost 54% of debt is financed by assets which was almost 57% earlier.
Thus, it can be said that company has improved its ratio.
Debt to Equity Ratio
It is also a leverage ratio which is used the determine how much part of debt is financed
by equity. It reflects the ability of equity to cover outstanding debts.
Debt to Equity ratio = Total Liabilities / Total Equity
2019 2018
Total liabilities 8833 9532
Total Equity 7676 7279
Debt to Equity Ratio 1.15 1.31
High ratio shows higher amount of debt is financed by equity. This can be a indication of
higher risk to shareholders. From above it can be company has improved its debt to equity ratio.
This ratio is quite difficult to compare with industry average as level of debt varies from
company to company.
Cash Flow to revenue
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This is a performance ratio that is used to measure relation of operating cost to total
revenue of the company. It provides the information about company's financial condition to
management and investors.
Cash Flow to Revenue = Operating Costs / Total Revenue
2019 2018
Operating Cost 2129 2048
Total Revenue 4186 3773
Cash Flow to Revenue 0.51 0.54
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References
Books and Journal
Tsuji, C., 2018. Return transmission and asymmetric volatility spillovers between oil futures and
oil equities: New DCC-MEGARCH analyses. Economic Modelling.74. pp.167-185.
Sakaki, H., 2019. Oil price shocks and the equity market: Evidence for the S&P 500 sectoral
indices. Research in International Business and Finance. 49. pp.137-155.
Online
COMPANY REPORTING. 2020. [Online]. Available
through:<https://www.santos.com/investors/company-reporting//>
SHAREHOLDER INFORMATION. 2020. [Online]. Available
through:<https://www.santos.com/investors/shareholder-information/>
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