ELE 2EMT Engineering Management Accounting – Lecture 4 George Alexander G.Alexander@latrobe.edu.au http://www.latrobe.edu.au/eemanage/ 17 August, 2007 Last week A closer look at why we classify certain expenditure as capital expenditure - assets The importance of accurately valuing assets
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Assets = Liabilities + Net Worth
Net Worth = Assets - Liabilities
Net Worth also called:
Owner’s Equity or Proprietorship
A = L + P
P = A - L
Profit = Sales - Costs
Net Sales $ 707,500
Less cost of goods sold $ 340,000
Gross Margin (gross profit) $ 367,500
Less operating expenses $ 325,500
Net Profit $ 42,000
Note: Tax is calculated on the Net Profit
Gross Margin Percentage is the percentage of revenue available to cover expenses and provide profit after the cost of goods sold has been paid.
Gross Margin Percentage =
= 0.52 or 52%
The Net Profit Percentage (Net Income ratio) identifies the percentage of profit from each sales dollar.
Net Profit Percentage =
= 0.06 or 6%
The Operating Expenses Percentage is the percentage of operating expenses needed from each sales dollar.
Total Operating Expenses
Operating Expenses Ratio =
or in percentage 46%
All publicly listed companies provide access to their financial reports on their web sites –
and so on.
ROA = Net Profit / Total Assets
Suppose that the total assets for the organisation is $425,000 and the net profit is $42,000.
ROA = 42,000 / 425,000 = 0.0988 or 9.88 %
ROI = Net Profit / Net Worth
This shows the profitability of shareholders’ equity.
Suppose that the total assets for the organisation is $425,000, the net profit is $42,000 and the total liabilities are $200,000.
ROI = 42,000 /( 425,000 – 200,000) = 0.187
Earnings per share
Earnings per share
These need to be viewed cautiously as they are sensitive to initiatives such as outsourcing, and can vary greatly with the nature of the business – e.g.capital vs labour intensive.
The Stock (Inventory) Turnover Ratio indicates the number of times stock turns over (sold) during the period specified in the profit and loss statement. The calculation is done in two steps as follows:
Beginning Stock + Ending Stock
Average Stock =
$100,000 + 160,000
Stock Turnover Ratio (Retail) =
= 5.44 times per period
Cost of Goods Sold
Stock Turnover Ratio (Cost) =
= 2.62 times per period
(P1 - P2) / P1Price Elasticity
E = Elasticity
Q1 = Initial quantity demanded
Q2 = New quantity demanded
P1 = Initial price
P2 = new price
= - 0.5
(5 - 6) / 5
- 0.2Example Price Elasticity Calculation
Suppose that the initial price was $5 and the initial quantity demanded was 100 units. If the price was raised to $6 and the quantity demanded declined to 90 units, then the Price Elasticity would be:
Normally stated as 0.5
Annual holding costs as a percentage of cost of one unit
x Cost of one unit in dollarsExample
Annual demand 5,000 units
Unit cost of the merchandise $ 1.50
Per-unit holding costs $ 0.30 (20% of unit cost)
(warehousing, insurance, etc.)
Cost of placing an order $ 5.00