+MIS770:Analytical Skills for ManagersModule 1, Topic 1Deakin University CRICOS Provider Code: 00113B+Module 1, Topic 1Module 1 Business Performance Metrics and Data PresentationTopic 1 covers:a. Foundation Mathematicsb. Percentagesc. Ratios and Proportions2Deakin University CRICOS Provider Code: 00113B+Topics1a Foundation Maths1b Percentages1c Rates and Proportions2a Simple Interest2b Compound Interest2c Annuities2d Depreciation3a Graphing3b Intro to Stats3c Visual Presentation of Data3d Analysis of Frequency Data4a Measures of Central Tendency4b Measures of Variation5a Sampling5b Elementary Probability6a Normal Distribution6b Confidence Intervals7a Hypothesis Testing8a Correlation8b Regression Analysis9 Time Series and Trend Analysis10 Index Numbers3Module 1 Business Performance Metrics and Data PresentationModule 2 Descriptive Measures, Probability Theory and InferencesModule 3 Trend Analysis and ApplicationDeakin University CRICOS Provider Code: 00113B+a. Foundation MathematicsObjectivesAt the completion of this section you should be able to undertake calculations involving: whole numbers fractions decimals exponents scientific notationDeakin University CRICOS Provider Code: 00113B+1.1 Whole numbers The decimal system consists ofNumerals Symbols, i.e. 0, 1, 2, 3are numerals Represent natural numbers or whole numbers Used to count whole objects or fractions of themIntegers Another name for whole numbers positive integers (greater than zero) negative integers (less than zero)5Deakin University CRICOS Provider Code: 00113B+Basic Mathematical Operations6 There are four basic mathematical operations that can be performed on numbers: Multiplication: represented by or Division: represented by eitheror Addition: represented by Subtraction: represented by +/*Deakin University CRICOS Provider Code: 00113B+Rules for Mathematical OperationsOrder of operations Multiplication and Division BEFORE Addition and Subtraction However, to avoid any ambiguity, we can use parentheses (or brackets), which take precedence over all four basic operations For example 5 + 4 9can be written as 5 + (4 9) to remove this ambiguity As another example, if we wish to add numerals before multiplying, we can use the parentheses as follows: 7393 13 3 ) 9 4 (= = +Deakin University CRICOS Provider Code: 00113B+Rules for Mathematical Operations (cont) MultiplicationThere are several ways of indicating that two numbers are to be multiplied e.g. 4 multiplied by 6 can be expressed asMultiplying the same signs gives a positive resultMultiplying different signs gives a negative result86 ) 4 ( ) 6 ( 4) 6 )( 4 (6 44 * 6 6 * 44 6 6 4ororor 30 6 5 + = + +20 4 5 = Deakin University CRICOS Provider Code: 00113B+Rules for Mathematical Operations (cont) DivisionThere are several ways of indicating that two numbers are to be divided e.g. The number to be divided (6) is called the numerator or dividend The number that is to be divided by (3) is called the denominator or divisor The answer to the division is called the quotientDividing the same signs gives a positive resultDividing different signs gives a negative result936, 3 / 6 , 3 6 236+ =2163 =Deakin University CRICOS Provider Code: 00113B+Rules for Mathematical Operations (cont) AdditionAddition does have symmetry E.g. like signsuse the sign and addunlike signsuse sign of greater and subtract SubtractionTwo signs next to each otherminus and a minus is a plus ( 3) = 3minus and a plus is a minus (+3) = 3105 6 6 5 + = +Deakin University CRICOS Provider Code: 00113B+1.2 Fractions A fraction can be either proper or improper:Proper fractionnumerator less than denominator e.g.Improper fractionnumerator greater than denominator The number on top of the fraction is called the numerator and the bottom number is called the denominator The denominator cannot be zero, because if it is, the result is undefined11238156,5223,96249856,3256,23Deakin University CRICOS Provider Code: 00113B+Addition and Subtraction of Fractions Same denominatorsStep 1:Add or subtract the numerators to obtain the new numeratorStep 2:The denominator remains the same Different denominatorsStep 1:Change denominators to lowest common multiple (LCM)(LCM is the smallest number into which all denominators will divide)Step 2:Add or subtract the numerators to obtain the new numerator121871182518 15 4 6659231= =+ += + +Deakin University CRICOS Provider Code: 00113B+Multiplication and Division of Fractions MultiplicationStep 1: Multiply numerators to get new numeratorStep 2: Multiply denominators to get new denominatorStep 3: Use any common factors to divide the numerator and denominator, to simplify the answer DivisionStep 1: Invert the second fractionStep 2: Multiply it by the first fraction13Deakin University CRICOS Provider Code: 00113B+1.3 Decimals Any fractions can be expressed as a decimal by dividing the numerator by the denominator A decimal consists of three components:an integerthen a decimal pointthen another integer e.g. 0.3, 1.2, 5.69, 45.687 Any zeros on the right-hand end after the decimal point and after the last digit do not change the numbers valuee.g. 0.5, 0.50, 0.500 and 0.5000 all represent the same number14Deakin University CRICOS Provider Code: 00113B+Rules for Decimals Addition and subtractionAlign the numbers so that the decimal points are directly underneath each other Example of an addition Step 1: align Step 2: add15672 . 1 34 . 0 3 . 2 : + + Add Question{312 . 4672 . 1 34 . 0 3 . 2{Deakin University CRICOS Provider Code: 00113B+Rules for Decimals (cont) Multiplication Step 1: Count the number of digits to the right of each decimal point for each numberStep 2: Add the number of digits in Step 1 to obtain a number, say xStep 3: Multiply the two original decimals, ignoring decimal pointsStep 4: Mark the decimal point in the answer to Step 3 so that there are x digits to the right of the decimal point16Deakin University CRICOS Provider Code: 00113B+Rules for Decimals (cont) DivisionStep 1: Count the number of digits that are in the divisor to the right of the decimal point. Call this number xStep 2: Move the decimal point in the dividend x places to the right (adding zeros as necessary). Do the same to the divisorStep 3: Divide the transformed dividend (Step 2) by the transformed divisor (which now has no decimal point)The quotient of this division is the answer17Deakin University CRICOS Provider Code: 00113B+1.4 Exponents An exponent or power of a number is written as a superscript to a number called the base The base number is said to be in exponential form This tells us how many times the based is multiplied by itselfe.g. Exponential formanwhere a is the basewhere n is the exponent or power188 2 2 2 23= =Deakin University CRICOS Provider Code: 00113B+Rules for Exponents Positive exponentsIf numbers with same base,anand am, then product will have the same base. The exponent will be the sum of the two original exponents For the quotient, if the two numbers have the same base, the exponent will be the difference between the original exponentsA number in exponential form is raised to another exponent; the result is the original base raised to the product of the exponents19m n m na a a+= n m n ma a a= ( )nmmna a =Deakin University CRICOS Provider Code: 00113B+Rules for Exponents (cont) Negative exponentsA number expressed with a negative exponent is equal to the reciprocal of the same number with the negative sign removed20nnaa1=Deakin University CRICOS Provider Code: 00113B+Rules for Exponents (cont) Fractional exponentsExponents can be expressed as a fractionn is of the form(where k is an integer) is said to be the kth root of a. The kth root of a number is one such that when it is multiplied by itself k times, you get that number21k1kka a =1( ) ( )nmmnnma a a1= =ka1Deakin University CRICOS Provider Code: 00113B+Rules for Exponents (cont) Zero exponentAny base raised to the power of 0 equals 1Except for, which is undefined2210= a00Deakin University CRICOS Provider Code: 00113B+1.5 Scientific Notation Scientific notation is a shorthand way of writing very large and very small numbers It expresses the number as a numeral (less than 10) multiplied by the base number 10 raised to an exponent The rule for writing a number N in scientific notation is:where: N = the digit before the reference position, followed by the decimal point and the remaining digits in number Nc = the number of digits between the reference positionand the decimal point23cN N 10' =Deakin University CRICOS Provider Code: 00113B+1.5 Scientific Notation (cont) When c is positiveIf the decimal point is to the right of the reference position, the value of c is positive e.g. 6325479.3 in scientific notation = When c is negativeIf the decimal point is to the left of the reference position, the value of c is negative e.g.0.0005849 in scientific notation =24610 3254793 . 6 410 849 . 5Deakin University CRICOS Provider Code: 00113B+Types of data Data can be classified as being categorical or numerical The statistical analysis that is appropriate depends on the type of data In general, there are more alternatives for statistical analysis when the data are numerical25Deakin University CRICOS Provider Code: 00113B+Types of data: Categorical Labels or names used to identify an attribute of each entity Often referred to as qualitative data Can be recorded in either numeric or nonnumeric format Appropriate statistical analyses are rather limited Usually counted or expressed as a proportion or a percentage26Deakin University CRICOS Provider Code: 00113B+Types of data: Numerical Numerical data indicate how many or how much:Discrete: if measuring how manyContinuous: if measuring how much Often referred to as quantitative data Ordinary arithmetic operations are meaningful for quantitative data27Deakin University CRICOS Provider Code: 00113B+Types of data: Numerical (cont) Numerical data can be converted to categorical dataeg. Salary can be converted into Low, Middle and Highbut cannot covert High Salary back into a specific salary figure A common mistake is to treat data collected using a rating/ranking (eg. Likert) scale as numerical data (this can only be justified in certain circumstances)28Deakin University CRICOS Provider Code: 00113B+Scales of measurement Scales of measurement include:NominalIntervalOrdinalRatio The scale determines the amount of information contained in the data The scale indicates the data summarization and statistical analyses that are most appropriate29Deakin University CRICOS Provider Code: 00113B+Nominal Data are labels or names used to identify an attribute of the entity A nonnumeric label or numeric code may be usede.g. Customers can be classified by their geographical location (New South Wales, Victoria, Western Australia, South Australia, Tasmania, ACT and NT)30Deakin University CRICOS Provider Code: 00113B+Ordinal The data have the properties of nominal data and the categories have a meaningful rank A nonnumeric label or numeric code may be used.e.g. Rating customer service as Poor, Average, Good, Very Good or Excellent Ordinal data have no fixed unit of measurement. Thus cannot make meaning statements about the difference between categoriese.g. Cannot say that the difference between Excellent and very Good is the same as between Good and Average31Deakin University CRICOS Provider Code: 00113B+Interval The data have the properties of ordinal data, and the interval between observations is expressed in terms of a fixed unit of measure Interval data are always numeric and have no true Zeroe.g. Both Fahrenheit and Celsius scales represent specific measure of distance degrees of temperature but have no true zero Thus cannot make meaningful ratiose.g. We cannot say that 50 degrees is twice as hot as 25 degrees32Deakin University CRICOS Provider Code: 00113B+Ratio The data have all the properties of interval data and the ratio of two values is meaningful This scale must contain a zero value that indicates that nothing exists for the variable at the zero pointe.g.SalaryYearsEmployed$43,0002$72,0003.5$48,5001233Deakin University CRICOS Provider Code: 00113B+Scales of measurement - SummaryDifferences between measurements, true zero existsDifferences between measurements but no true zeroOrdered categories (rankings, order or scaling) Categories (noordering or direction)Highest Level(Strongest form of measurement)Lowest Level(Weakest form of measurement)Ratio DataOrdinal DataNominal DataInterval Data34Deakin University CRICOS Provider Code: 00113B+Scales of measurement - SummaryNumerical DataCategorical DataExamplesHeight, age, monthly sales, delivery timesTemperature in degrees Celsius, standardised exam scoreService quality rating,student letter gradesMarital status,customerslocation, suppliers nameRatio DataOrdinal DataNominal DataInterval Data35Deakin University CRICOS Provider Code: 00113B+Foundation Mathematics Summary A thorough knowledge of fractions, decimals and exponents is essential for an understanding of basic mathematical principles You should not be too reliant on modern technology to solve every problem You are far better prepared if you are also aware of the processes that the calculator is undertaking when performing calculations36Deakin University CRICOS Provider Code: 00113B+b. PercentagesObjectivesAt the completion of this section you should be able to: understand and use percentages apply percentages to common commercial situations calculate commission (including brokerage) calculate discounts (including chain, trade and cash discounts) calculate tax (including GST, personal tax, company tax, FBT and land tax) calculate profit and loss calculate stamp dutyDeakin University CRICOS Provider Code: 00113B+2.1 Conversion to and from percentages Conversion of a fraction to a percentageMultiply by 100 and use % sign e.g. Conversion of a decimal to a percentageMultiply by 100 by moving the decimal point 2 places to the right and then add a % sign e.g.38% 5 . 62 10085percentage a as85Express= =% 9 . 26 100 269 . 0269 . 0= percentage a as ExpressDeakin University CRICOS Provider Code: 00113B+2.1 Conversion to and from percentages(cont) Conversion of a percentage to a fractionDivide by 100 and remove % sign, then simplify e.g. Conversion of a percentage to a decimalDivide the percentage by 100 by moving the decimal point 2 places to the left, and then remove the % sign e.g.39251810072fraction a as 72% Express= =453 . 0 100 3 . 45% 3 . 45= decimal a as ExpressDeakin University CRICOS Provider Code: 00113B+2.2 Commission An agent is paid a commission when he or she sells goods and services Commission can be paid by looking at either afixed amount (irrespective of sales)straight commission with no fixed amountwhere: S = sale amount R = rate of commission per sale F = fixed amount paid (irrespective of sales) C = commission earned40( ) R S F C + =R S = CDeakin University CRICOS Provider Code: 00113B+2.2 Commission (cont) BrokerageBrokerage is commission paid to a stockbroker who acts on a clients behalfBrokerage rates vary according to the type of transaction, but general rules that apply are: when selling, brokerage is subtracted from the proceeds of the sale when buying, brokerage is added to the amount that you must pay for the stock or shares41Deakin University CRICOS Provider Code: 00113B+2.3 Discounts Discount is an inducement for the customer to make a purchaseFor example:two for the price of onean advertised special with an expiry datea fixed amount off the pricea reduction in the unit price if large quantities are purchased On some occasions there may be more than one discount on an item. These multiple discounts are called chain discounts A reduction in price is referred to as a discount and is often expressed in the form of a percentage42Deakin University CRICOS Provider Code: 00113B+2.3 Discounts (cont) A reduction in price is referred to as a discount and is often expressed in the form of a percentageto calculate the amount of discountwhere: L= list price D = amount of discount R = rate of discount DP = discount pricethe rate of discount is:the amount of discount is:the discount price (or net price) is:43LDR =L R D =D L DP =Deakin University CRICOS Provider Code: 00113B+2.3 Discounts (cont) Trade discountA special discount when goods and services are purchased from one business by another business a builder purchasing timber from a timber yard a service station obtaining tyres from a manufacturer an electrician purchasing cables and switches from an electrical supplierA typical trade discount would range between 10% and 25%, depending on the trade and the itemThe method for calculating trade discounts is the same as in the previous examples44Deakin University CRICOS Provider Code: 00113B+2.3 Discounts (cont) Cash discountA form of discount that is given if the purchaser pays in cash or by chequeThe percentage of the discount may depend on how quickly the bill is paid For example, a supplier of electrical goods informs retailers that the following discounts are available for early payment of purchases:Within 7 days 10.0 %Within 14 days 7.5 %Within 28 days 2.5 %45Deakin University CRICOS Provider Code: 00113B+2.4 Goods and Services Tax (GST) An Australian broad-based tax of 10% on most supplies of goods and services The GST replaced a number of other taxes, including wholesale sales tax, that were applied at varying rates to a range of products The amount of GST payable can be calculated easily by working out 10% of the cost of the goods or service To work out how much a customer has paid in GST, divide the final price by 1146GST priceinclusive GST= 11Deakin University CRICOS Provider Code: 00113B+2.5 Personal income tax Individuals who receive income are liable for personal income tax DefinitionsGross income is the total amount received or accruedAssessable income is gross income less exempt incomeAllowable deductions are costs of producing income and certain concessional deductionsTaxable income is assessable income less allowable deductionsTax payable is tax according to the table on taxable income less rebates47Deakin University CRICOS Provider Code: 00113B+2.5 Personal income tax (cont) The tax-free threshold for most resident individuals is $18,200 Taxpayers are subject to a Medicare levy, normally calculated at the rate of 1.5% of your taxable income48Deakin University CRICOS Provider Code: 00113B+2.6 Company tax A company is a distinct legal entity with its own income tax liability that is separate from personal income tax The income tax of companies is calculated on taxable income, which is the income earned by the company less any allowable deductions The amount of tax to be paid is reduced by any PAYG (pay as you go) installments paid during the year The general rate of tax payable by companies on 201314 income is 30%49Deakin University CRICOS Provider Code: 00113B+2.7 Fringe Benefits Tax (FBT) FBT is an Australian government tax paid on certain benefits employers provide to their employees in place of, or in addition to, salary FBT is separate from income tax FBT is payable by the employer and is based on the taxable value of the various fringe benefits provided The rate of FBT is currently aligned with the top marginal income tax rate and was set at 46.5% in 20121350Deakin University CRICOS Provider Code: 00113B+2.8 Land tax Land tax is a state tax levied on the owners of land in various states of Australia A principal place of residence (your home) or land used for primary production (a farm) is exempt from land tax You may be liable for land tax if you own or part-own:vacant land, including vacant rural landa holiday homeinvestment propertiescompany title unitsresidential, commercial or industrial units51Deakin University CRICOS Provider Code: 00113B+2.8 Land tax (cont) Land tax is calculated on the combined value of all the taxable land you own The land tax threshold varies from state to state For example, for 2012 it was $396,000 in New South Wales$250,000 in Victoria$316,000 in South Australia$600,000 in Queensland52Deakin University CRICOS Provider Code: 00113B+2.9 Profit and loss The actual profit is the difference between the price the item is sold for (the selling price) and the cost of that item (the cost price) An item may be sold for an amount that is less than the cost price. The profit is therefore negative and is referred to as a loss The actual cost of an item is often difficult to calculate, since it involves not only the cost of obtaining the item from the supplier but other costs as well53Deakin University CRICOS Provider Code: 00113B+2.9 Profit and loss (cont) These include the general costs of running a business: wagesinsurancetaxesstationeryequipment electricityrentother overhead expenses54Deakin University CRICOS Provider Code: 00113B+2.9 Profit and loss (cont) The following definitions will be useful for profits:SP = selling price (not including any applicable GST)CP = cost priceP = actual profit (when the value of SP exceeds the value of CP)Ps= profit rate (or mark-up rate) expressed as a fraction of selling pricePc= profit rate (or mark-up rate) expressed as a fraction of costprice(The profit rates expressed as percentages are 100 Ps and 100 Pc, respectively)55Deakin University CRICOS Provider Code: 00113B+2.9 Profit and loss (cont) The following definitions will be useful for loss:L= actual loss (when the value of CP exceeds the value of SP)Ls = loss rate (or mark-down rate) expressed as a fraction of selling priceLc = loss rate (or mark-down rate) expressed as a fraction of cost price(The loss rates expressed as percentages are 100 Ls and 100 Lc , respectively)56Deakin University CRICOS Provider Code: 00113B+2.9 Profit and loss (cont) The following relationships hold:57CPPPSPPPCP SP Pcs== =CPLLSPLLSP CP Lcs== =Deakin University CRICOS Provider Code: 00113B+2.10 Stamp duty Stamp duty is a tax on transactions that is levied by the individual states in Australia Stamp duty is really a tax on the document of transfer (the title transfer), and not on the property itself Stamp duty on vehiclesStamp duty is based on the market value of the vehicle or the price that was paid, whichever is greater Stamp duty on real estateStamp duty is payable on the purchase price of property58Deakin University CRICOS Provider Code: 00113B+2.10 Stamp duty (cont) The amount payable depends on the price of the property and which state it was bought in59Deakin University CRICOS Provider Code: 00113B+Percentages Summary The application of percentages in modern business practice is widespread and this chapter has presented some of the more common examples The introduction of the GST into Australia was part of significant tax reform including substantial personal income tax cuts and the removal of a number of indirect taxes In using the taxation tables and related information, it is important to be aware that rates charged may vary from year to year60Deakin University CRICOS Provider Code: 00113B+c. Ratios and ProportionsObjectivesAt the completion of this section you should be able to: calculate ratios and proportions calculate and apply profit ratios calculate and apply efficiency ratios calculate and apply liquidity ratiosDeakin University CRICOS Provider Code: 00113B+4.1 Ratios and Proportions A ratio is a method of comparing two or more numbers or rates A proportion represents the relative contribution of a quantity to the whole The value of a proportion should lie between 0 and 162Deakin University CRICOS Provider Code: 00113B+4.1 Ratios and Proportions (cont) Ratios are often reduced to proportionsIf two quantities X and Y occur in the ratio a:b respectively, then: X occurs in the proportion of the time Y occurs in the proportionof the time63b aa+b ab+Deakin University CRICOS Provider Code: 00113B+4.1 Ratios and Proportions (cont) Similarly, suppose that the three quantities X, Y and Z occur in the ratio a : b : c respectively. This means that theproportion that X occurs is the proportion that Y occurs isproportion that Z occurs is This notion is easily extended to as many quantities as desired64c b aa+ +c b ab+ +c b ac+ +Deakin University CRICOS Provider Code: 00113B+4.1 Ratios and Proportions (cont) RatesWhen comparisons involving large numbers are made, ratios are used to express the rate at which events take place e.g. The rate at which a car uses fuel is expressed as a rate in the form:litres per 100 kilometres In the case above, the first number is a non-integer and the second number in the ratio is a base figure such as a standard unit of measurement65Deakin University CRICOS Provider Code: 00113B+4.1 Ratios and Proportions (cont) Hence, a rate is really a ratio expressed with a specified base Ratios with common last numbers may also be used to compare several items to indicate the percentage difference between one figure and anotherFor example: The first driver used 8.9 litres of fuel to drive 100 kilometres and the second driver used 9.4 litres of fuel to drive 100 kilometres We can therefore use these ratios as a basis of comparison for fuel economy66Deakin University CRICOS Provider Code: 00113B+4.2 Profit Ratios Profit ratios express the relationship of profit to some financial quantity (e.g. total assets or sales) The financial position of a company is indicated by a balance sheet A balance sheet lists the resources of value (assets) and liabilities. An important issue is whether the company has the assets to cover its liabilities The components of a profit and loss statement (or income statement) for a business produce the ratio of net profit to sales67Deakin University CRICOS Provider Code: 00113B+4.2 Profit Ratios (cont) Asset turnoveran asset is a resource of value controlled by a business cash bank deposits inventory receivablesthis ratio measures sales to total assets and is known as the total asset turnover 68assets totalsalesturnover asset Total =Deakin University CRICOS Provider Code: 00113B+4.2 Profit ratios (cont)Example:A company that sells mainframe computers has total sales of $3,400,000 in a period and assets of $1 200 000. Find the total asset turnoverSolution:e.g. total asset turnover equals 283.3%. This means that there was a 283.3% turnover in sales in relation to assets69833 . 2000 , 200 , 1 $000 , 400 , 3 $assets totalsalesturnover asset Total===Deakin University CRICOS Provider Code: 00113B+4.2 Profit ratios (cont) The aim of any asset management is to determine the use being made of assets to an organisation and to uncover any trend in the make-up of the total asset base The total turnover measures the overall effectiveness of a companys current management A company with a low net profit margin should have a larger total asset turnover than a company with a high net profit margin70Deakin University CRICOS Provider Code: 00113B+4.2 Profit ratios (cont) The return on investment for a company may be broken down into its profit margin and asset turnover components as follows71turnover asset totalsalesprofit netassets totalsalessalesprofit netassets totalprofit netinvestment on Return = ==Deakin University CRICOS Provider Code: 00113B+4.3 Efficiency ratios An efficiency ratio of a company reflects its ability to achieve the maximum return for the lowest possible level of assets A measure of the efficiency of a companys stock control is given by the stock turnover (or inventory turnover), where:where the cost of goods sold is found from the profit and loss statementand722stock closing +=stock openingstock Averagestock averagesold goods of costoverStock turn =Deakin University CRICOS Provider Code: 00113B+4.3 Efficiency ratios (cont) Debtor turnovera measure of the operating efficiency of the credit policy of a business is the debtor turnover (or accounts receivable turnover)the debtor turnover uses gross figures and any bad debts are not deducted73receivable accounts gross averagesales credit gross=Deakin University CRICOS Provider Code: 00113B+4.3 Efficiency ratios (cont) The debtor turnover may also be expressed in terms of the average collection period (in days) The debtor turnover measures the effectiveness of credit control This ratio also indicates whether a company may be extending its credit facilities beyond an acceptable limit74turnover detor365= period collection AverageDeakin University CRICOS Provider Code: 00113B+4.4 Liquidity ratios Liquiditythe ability of a company to pay its immediate debts There are two methods to measure this ability. They are Current-asset ratio and Acid-test ratioCurrent-asset ratioindicates how well current liabilities are covered by current assets defined as75abilities current lisets current asset ratioCurrent-as =Deakin University CRICOS Provider Code: 00113B+4.4 Liquidity ratios (cont) If a company has a high current-asset ratio, it mayindicate that the company is able to meet its obligations Whether a current-asset ratio is acceptable or not depends on how readily stock and accounts receivable can be converted into cash and how quickly cash flows in from sales This ratio can be used to compare companies of varying sizes as well as to measure the liquidity of the same company from year to year76Deakin University CRICOS Provider Code: 00113B+4.4 Liquidity ratios (cont)Acid-test ratio The acid-test ratio includes assets that are expected to be turned into cash and liabilities that are due to be repaid within 12 mths Liquidity may be more immediately measured by excluding the less liquid current assets and less urgent current liabilitiesfor example current assets that may be excluded include inventory and hire-purchase debtors current liabilities excluded include bank overdrafts 77Deakin University CRICOS Provider Code: 00113B+4.4 Liquidity ratios (cont) The acid-test ratio (or quick-test ratio) is defined as The acid-test ratio gives an indication of a companys ability to use its own liquid assets to meet its immediate financial commitments It also provides a better indication than the current-asset ratio of the companys ability to pay short-term debts78overdraft bank s liabilitie currentinventory assets currentratio test - Acid=Deakin University CRICOS Provider Code: 00113B+Other ratios Other ratios that reveal trends over time:Debt/equitytests the leverage of an entity Proprietary ratioindicates long-term financial stabilityReturn on investmentinterest to current and potential shareholdersRate of returnindicates that the dollar value of profits is less important than the rate of return79Deakin University CRICOS Provider Code: 00113B+Ratios and Proportions Summary We have calculated ratios and proportions which included rates We have calculated and applied profit ratios, which included asset turnover and returns on investment We have calculated and applied efficiency ratios like debtor turnover. Also included was stock turnover and average stock We have calculated and applied liquidity ratios such as current-asset ratio and acid-test ratio80Deakin University CRICOS Provider Code: 00113B+Readings Croucher, J.S. (2013). Introductory Mathematics and Statistics. 6th Edition. McGraw-Hill, Australiaa. Foundation MathematicsRead Chapter 1, Sections 1.1 to 1.4 and 1.7b. PercentagesRead Chapter 2, Sections 2.1 to 2.11c. Ratios and ProportionsRead Chapter 4, Sections 4.1 to 4.581Deakin University CRICOS Provider Code: 00113B+Calculating percentage changes What would the percentage change be if a companys profit tripled? x 1001= % changeif profit increased from $150 million to $450 million, the % change would be:= 450 150150x 1001= 300150x 1001= 200 or 200% increaseDeakin University CRICOS Provider Code: 00113B+Calculating percentage changes (cont) What would the percentage change be if a companys profit halved? x 1001= % changeif profit decreased from $150 million to $75 million, the % change would be:= 75 150150x 1001= 75150x 1001= -50 or 50% decreaseDeakin University CRICOS Provider Code: 00113B+Calculating percentage changes (cont) What would the percentage change be if a companys profit turned into a loss? x 1001= % changeif profit decreased from $150 million to a loss of $75 million, the % change would be:= 75 150150x 1001= 225150x 1001= -1.5 or 150% decreaseDeakin University CRICOS Provider Code: 00113B+Calculating percentage changes (cont) What would happen to my water usage if the amount of water I used dropped 20% from one period to the next and then in the following period, increased 20%. In absolute terms, would my usage Drop, Increase or stay the Same?= 100 litres x -20% = -20 Litres = 100 20 = 80 litres= 80 litres x 20% = 16 Litres = 80 + 16 = 96 litres Why isnt my water usage the same if the % decrease and increase were the same? The base (denominator) changed from 100 to 80