Faculty of Creative Industries & Business Department of Accounting and Finance Bachelor of Business ACTY 7292 Financial Statement Analysis Final Exam Date: Wednesday 1 st July 2015 Start time: 8.30AM 11.40AM Time allowed: 3 hours, plus 10 minutes reading time Total marks: 100 marks Weighting: 40% of course Instructions: Answer ALL questions. Answer the questions directly in the answer booklet provided. Please write clearly. You may use a translation dictionary A formula list is provided at the end of this exam. Summary of paper: Question Type/Topic Marks Suggested Time (minutes) 1 Prospective Analysis 30 54 2 Financial Statements and Analysis 30 54 3 Risk 15 27 4 Analysing Other Activity 15 27 5 Accounting Analysis and Financial Statements 10 18 Total 100 180
Question 1 30 Marks Prospective Analysis Part A Answer the following questions in relation to prospective analysis. a) Briefly explain the importance of prospective analysis in the context of financial statement analysis. b) Prospective analysis normally begins by estimating future expected sales. Explain why this is the case and discuss the factors that analysts take into account when forecasting sales. Part B You have been provided with the following financial data including the income statement and balance sheet for Richard Parker Enterprises for the 2013, 2014 and 2015 financial years. Richard Parker Enterprises Performance Statement $(000) 2013 2014 2015 Sales 7,658 7,912 8,467 Cost of Goods Sold 5,167 5,265 5,643 Gross Margin 2,491 2,647 2,824 Selling, general and administrative expenses 1,291 1,326 1,402 Depreciation and Amortisation Expenses 120 135 141 Financial Expenses 78 87 93 Profit before tax 1,002 1,099 1,188 Income Tax Expense 341 374 404 Income (loss) from extraordinary and discontinued operations 732 239 (170) Profit after tax 1,393 964 614 Dividend 700 756 708 Outstanding shares 1,900 1,900 1,930 Ratios Sales Growth 3.32% 7.01% Gross profit margin 33.46% 33.35% Selling, general and administrative expenses/sales 16.76% 16.6% Depreciation Exp/Gross Prior Year PP&E 3.03% 3.03% Interest Expense/Prior year long term debt 4.39% 4.59% Income tax expenses/pretax income 34.00% 34.00% Page 2 of 9
Richard Parker Enterprises Balance Sheet $(000) 2013 2014 2015 Cash 1,004 1,176 1,325 Accounts Receivables 655 687 723 Inventory 358 379 411 Other Current Assets 139 143 146 Total Current Assets 2,156 2,385 2,605 Property Plant and Equipment 4,459 4,659 4,817 Accumulated Depreciation (2,452) (2,587) (2,728) Net property plant and equipment 2,007 2,072 2,089 Other Assets Total Assets 4,163 4,457 4,694 Accounts Payables 238 261 280 Long term debt (current portion) 287 250 238 Accrued Expenses 176 188 203 Income Taxes and others 67 72 83 Total Current Liabilities 768 771 804 Deferred income taxes and other liabilities 122 125 118 Long term debt 1,695 1,775 2,080 Total Liabilities 2,585 2,671 3,002 Equity Contributed Equity 1,122 1,122 1,122 Retained Earnings 456 664 570 Total Shareholders Equity 1,578 1,786 1,692 Total Liabilities and Shareholders Equity 4,163 4,457 4,694 0 0 0 Ratios Accounts Receivables T/O rate 11.517 11.711 Inventory T/O rate 13.892 13.730 Accounts Payable T/O rate 20.17 20.15 Accrued Expenses T/O rate 42.09 41.71 Taxes payable/tax expenses 19.27% 20.55% Dividends per share $ 0.40 $ 0.37 Capital Expenditure (CAPEX) (000) 200 158 CAPEX/Sales 2.53% 1.87% Answer the following questions. a) Use the information in the above tables to forecast the performance statement for the 2016 financial year. (You should show your workings and present your 2016 performance statement in the same layout as that given in the first table) b) Use the information in the above tables to prepare a forecasted balance sheet for 2016. (You should show your workings and present the 2016 balance sheet in the same format as the balance sheet shown in the second table.) [10 marks] [12 marks] Page 3 of 9
Question 2 30 Marks Financial Statements and Analysis Infratil Limited Answer the following questions in relation to the Infratil Limited 2015 financial statements (attached). a) Provide a brief outline of the company in terms of the products or services they provide and the industry and market in which they operate. b) Comment on the financial performance of the company for the year ended 31 March 2015. As part of your answer you should make reference to the relevant financial statement and use no fewer than two performance ratios. c) Comment on the capital structure of the company as at 31 March 2015. As part of your answer you should make reference to the relevant financial statement and use no fewer than three ratios. d) Comment on the liquidity status and performance of the company for the year ended 31 March 2015. In your answer you should make reference to the relevant financial statement and use no fewer than three ratios. e) Comment on any other aspect of the financial report that you feel is significant including, but not limited to, assets efficiency, risk and non-recurring items. [8 marks] [8 marks] [6 marks] Page 4 of 9
Question 3 15 Marks Risk Answer the following questions. a) Use an example to illustrate the three components of risk and the general approach to managing it. b) Identify and discuss two approaches or methods used to measure risk. [2 marks] c) Briefly discuss financial and operating risk in the context of a firm and explain the factors resulting in its existence. d) Briefly discuss the three components of foreign exchange risk and outline the possible strategies that may be used to manage it. [6 marks] Question 4 15 Marks Analysing Other Activity Answer the following questions. a) Use an example to illustrate a contingent asset or liability and outline the possible impact that it may have on your analysis of the financial statements. b) Explain the meaning and general purpose of off balance sheet financing and provide an example to illustrate this. c) When analysing the equity section of the balance sheet and statement of changes in equity, what should analysts be looking out for and why? d) Briefly discuss the notion of income in advance and explain its potential implications for financial statement analysis. e) Briefly discuss what analysts should look out for when analysing the intangibles for an organisation. [2 marks] Page 5 of 9
Question 5 10 Marks Accounting Analysis and the Financial Statements Answer the following questions. a) Briefly discuss the notion of capitalization versus expense and its potential impact on: [5 marks] 1. Income 2. Return on Investment 3. Solvency ratios 4. Operating cash flows b) Identify and discuss three reasons why it is often necessary to recast the financial statements as part of the analysis process. c) Why should analysts look carefully when analyzing impairment disclosed in the financial statements? [2 marks] End Page 6 of 9
Common Analysis & Interpretation Ratios Common Analysis & Interpretation Ratios PROFITABILITY OPERATING PERFORMANCE Revenue growth rate Gross Profit Margin Operating profit margin Net Profit Margin Current year revenues Prior year revenues Prior year revenues Gross Profit Revenues Net operating income (EBIT) Revenues Net Profit (NPAT) Revenues PROFITABILITY ASSET UTILIZATION Accounts receivable turnover Inventory Turnover Total asset turnover Sales Average Accounts Receivable Cost of Goods Sold Average Inventory Sales Average total assets PROFITABILITY RETURN ON INVESTMENT Rate of Return on Assets (ROA) Operating Profit (EBIT) Average Total Assets Return on Assets (ROA) (alternative approach) Rate of Return on Ordinary Shareholder s Equity (ROE) Return on Equity (ROE) (alternative approach) Rate of Return on Sales x Asset Turnover Ratio Net Profit (or NPAT) Average Ordinary Shareholder s Equity Return on Assets x Financial Leverage Multiplier CREDIT (RISK) ANALYSIS LIQUIDITY Net Working Capital (NWC) Current Assets Current Liabilities Page 7 of 9
Common Analysis & Interpretation Ratios Current Ratio Quick Ratio (Acid Test) Current Assets Current Liabilities Current Assets Inventories - Accruals Current Liabilities Bank O/D CREDIT (RISK) ANALYSIS LIQUIDITY CONT D Average Inventory Period (AAI) Average Inventory x 365 Cost of Goods Sold Average Collection Period (ACP) Average Payment Period (APP) Average Accounts Receivable x 365 Revenues Average Accounts Payable x 365 Cost of Sales Operating Cycle (OC) Cash Conversion Cycle (CCC) Average Inventory Period + Average Collection Period Average Inventory Period + Average Collection Period - Average Payment Period Cash flow to debt ratio Cash Cover (Short Term Liquidity) Cash Cover (Long Term Solvency) Cash Cover (Long Term Solvency) Cash flow Total liabilities Cash Flow from Operations Current Liabilities Cash Flow from Operations Total Liabilities Cash Flow from Operations Capital Expenditure CREDIT (RISK) ANALYSIS CAPITAL STRUCTURE & SOLVENCY Debt to Equity Ratio Interest Coverage (Times Interest Earned) Total Debt (usually interest bearing debt) Total Equity Operating Profit (EBIT) Annual Interest Paid MARKET MEASURES Price to Earnings Ratio (P/E) Market Price per Share Earnings per Share Page 8 of 9
Common Analysis & Interpretation Ratios Earnings per Share Earnings Yield Dividends per Share Dividend Yield Dividend Payout Ratio Market to Book Ratio Net Profit (NPAT) Number of Ordinary Shares Earnings per share Market Price per Share Divdends paid to ordinary shareholders Number of Ordinary Shares Dividends per Share Market Price per Share Dividends Net Profit Market Price per Share Book value per share VALUATION S Fixed Asset monitoring Valuation Dividend Discount Model Accumulated Depreciation Original Cost of PPE P0 = D1 / ke or P0 = D1 / (ke g) Valuation FCFE Model VE = FCFE1 / ke or VE = FCFE1 / (ke g) Valuation FCFF Model VF = FCFF1 / WACC or VF = FCFF1 / (WACC g) P/E Ratio (alternative approach) P/E = (1 + g) / (ke g) Page 9 of 9