University of Economics, Prague Faculty of Finance and Accounting Department of Financial Accounting and Auditing Lesson 2: Examples and Case studies Lecturer: David Procházka Contact: Email: prochazd@vse.cz Web: https://webhosting.vse.cz/prochazd Intermediate Accounting (Master in Finance and Accounting)
1 Examples for the lecture (will be solved by lecturer) Example 1: Weighted average number of ordinary shares LISBON was engaged in following transactions with its Class A shares (ordinary shares) during 201. Date Transaction Shares issued Treasury shares Shares outstanding 01/01/201 Opening balance 2,000 300 1,700 01/06/201 New shares issued for cash 800-2,500 30/11/201 Purchase of treasury shares for cash - 250 2,250 31/12/201 Closing balance 2,800 550 2,250 Note: Treasury shares (or own shares) are equity instruments reacquired and held by the issuing entity itself or by its subsidiaries Calculate the weighted average number of ordinary shares outstanding for 201 Example 2: Basic EPS calculation with new shares issue PORTO issued 200,000 shares (at full market price) on 1 July 208. Further relevant information is as follows: 208 207 Profit attributable to the ordinary shareholders as at 31 December 7,500,000 4,600,000 Number of ordinary shares in issue at 31 December 1,000,000 800,000 Calculate the basic EPS for both years. David Procházka p. 2/24
Example 3: Bonus shares MELBOURNE has an issued capital of 100,000 shares (at par value 10), which are distributed among Mr. Alan (5,000 shares), Mrs. Betty (15,000), and Foreign investor (80,000). Shareholders decide on annual meeting in May 203, that no profit for the previous year 202 will be distributed (retained earnings 2,000,000). Furthermore, they decide that MELBOURNE will make a 1 for 1 bonus share issue. Determine the ownership interest of each shareholder in MELBOURNE before and after the issue of bonus shares. How does the bonus share issue affect the net assets of MELBOURNE? What is the difference between bonus share and share split? David Procházka p. 3/24
Example 4: Basic EPS calculation with bonus shares issue SIDNEY makes a bonus issue of one new share for every five existing shares held on 1 May 208. Further relevant information is as follows: 208 207 Profit attributable to the ordinary shareholders as at 31 December 7,500,000 4,600,000 Number of ordinary shares in issue at 31 December??? 1,000,000 Calculate the basic EPS to be presented on the face of comprehensive income statement for the period ended on 31 December 208 What was the EPS for 207 reported in the financial statements for the 207-period? David Procházka p. 4/24
Example 5: Basic EPS calculation with rights issue PERTH makes a rights issue in the proportion of one new share for each five outstanding shares. Other information: Shares outstanding before rights issue: 500 Date of rights issue: 1 January 201 Last date to exercise rights: 1 March 201 Exercise price: 5.00 Market price of one ordinary share immediately before exercise on 1 March 201: 11.00 200 201 202 Profit attributable to the ordinary shareholders as at 31 December 1,100 1,500 1,800 Number of ordinary shares in issue at 31 December 500?????? Calculate the basic EPS to be presented on the face of comprehensive income statement for the period ended on 31 December 202 What was the original EPS ratio for 200? David Procházka p. 5/24
Example 6: Diluted EPS calculation with convertible bonds HOBART issues 2,000 convertible bonds at price of 1,500 at the beginning of 207. Each bond is convertible at any time up to maturity (which is in three years) into 100 ordinary shares. 207 Profit attributable to the ordinary shareholders as at 31 December 4,600,000 Number of ordinary shares in issue at 31 December 800,000 Convertible bonds outstanding at 31 December 2,000 Interest expense on bonds for the period 180,000 Tax rate 30% Calculate the basic EPS to be presented on the face of comprehensive income statement for the period ended on 31 December 207 Calculate the diluted EPS to be presented on the face of comprehensive income statement for the period ended on 31 December 207 David Procházka p. 6/24
Example 7: Diluted EPS calculation with options On 1 January 207, BRAGA has 800,000 ordinary shares in issue. Its top managers are granted with an option compensation programme, which enables them to purchase up to 500,000 ordinary shares at the exercise price of 3 per share. 207 Profit attributable to the ordinary shareholders as at 31 December 4,600,000 Number of ordinary shares in issue at 31 December 800,000 Number of shares under option programme at 31 December 500,000 Exercise price of the option 3 Average fair value of one ordinary share for the year 5 Calculate the basic EPS to be presented on the face of comprehensive income statement for the period ended on 31 December 207 Calculate the dilutes EPS to be presented on the face of comprehensive income statement for the period ended on 31 December 207 David Procházka p. 7/24
Example 8: Statement of cash flows illustrative format Statement of cash flows for the period ended 31 December Cash flows from operating activities Cash generated from operations Interest paid* Income taxes paid* Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment Proceeds of sale of equipment Interest received* Dividends received* 000 000 () () () Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Repayment of loans () Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period () () * Might be presented differently (as sketched at the Presentation for this topic) Note: The difference between direct and indirect method relates to the first line item cash flow from operating activities, which has to be broken down into separate items depending on the approach used for the presentation David Procházka p. 8/24
Scheme for the direct presentation of cash flows Cash received from customers Cash paid to suppliers Cash paid to and on behalf of employees Cash generated from operations () () Scheme for the indirect presentation of cash flows Profit before tax Finance cost Investment income Depreciation charge Loss/(profit) on disposal of non-current assets (Increase)/decrease in inventories (Increase)/decrease in trade receivables Increase/(decrease) in trade payables Cash generated from operations () /() ()/ ()/ /() David Procházka p. 9/24
Example 9: Cash flow generated from operations MONACO has an operating profit of 625,700 in the year ended 31 December 206. The P&L for the period was charged by the depreciation of 25,800 for non-current assets and interest expense of 11,100. Additional information from the statement of financial position at 31 December 205 and 206: 31 December 206 31 December 205 Inventory 112,400 139,100 Trade receivables 200,000 205,000 Prepayments given 20,300 35,900 Trade payables 194,400 208,800 Interest accrual 10,000 15,000 What is the cash generated from operations? What is the cash flow from operating activities? David Procházka p. 10/24
Example 10: Cash flow from operating vs investing activities I MARSEILLE has acquired non-current intangible assets (not yet amortised) and inventory during the period 201. As at 31 December 201 200 As at 31 December in 201 200 Non-current assets 1,200 1,000 Share capital 1,500 1,500 Inventory 100 0 Retained earnings 0 0 Cash 330 500 Trade payables 130 0 Total 1,630 1,500 Total 1 630 1 500 Calculate the cash flows from operating vs investing activities using both direct and indirect presentation Cash flows for 201 (direct) Cash flows for 201 (indirect) Cash opening balance Cash opening balance CF from operating activities CF from operating activities CF from investing activities CF from investing activities Net decrease in cash Cash closing balance Net decrease in cash Cash closing balance David Procházka p. 11/24
Example 11: Cash flow from operating vs investing activities II Calculate the cash flows from operating vs investing activities (both direct and indirect presentation) using data from the Example 10:, if the closing balance of trade payables as at 31 December 201 consists of (a) amount of 80 due to a supplier of the intangibles; (b) amount of 50 due to a supplier of inventory. Cash flows for 201 (direct) Cash flows for 201 (indirect) Cash opening balance Cash opening balance Cash paid for inventory CF from operating activities CF from operating activities CF from investing activities CF from investing activities Net decrease in cash Cash closing balance Net decrease in cash Cash closing balance David Procházka p. 12/24
Example 12: Cash flow direct presentation (using indirect approach) ANGERS is preparing its financial statements for the year ended 31 December 201, including the statement of cash flows. Following extracts are available. As at 31 December 201 200 As at 31 December in 201 200 Property, plant, equip. 4,650 4,500 Share capital 4,000 4,000 less acc. depreciation (1,600) (1,200) Retained earnings 2,700 Trade receivables 50 0 Liabilities employees 200 300 Cash 3,700 Trade payables 400 0 Total 7,000 Total 7,000 Income statement for 201 ( ) Cash flows for 201 (direct) Wages (550) Cash opening balance 3,700 Depreciation Cash paid to employees Disposal of PPE CF from operating activities Cash receipts on disposal of PPE CAPE CF from investing activities CF from financing 0 Profit & loss for the period Net increase/decrease in cash Cash closing balance Further information: An obsolete item of non-current assets (at acquisition cost of 800 and accumulated depreciation of 700) was sold during the period for 150 and replaced by a new asset There was no profit distribution during the period All trade receivables/payables relate to the disposal/acquisition of non-current assets (i.e. there are no unpaid balances from customers/to suppliers for operating activities). Filling the missing values in the balance sheet and income statement Prepare the statement with direct presentation of cash flows David Procházka p. 13/24
David Procházka p. 14/24
2 Case studies for the seminar (to be solved by students) Case 1: Multiple choice questions 1. Which of the items below would appear under the heading cash flows from investing activities? a) Cash paid for the purchase of non-current assets b) Dividends received c) Interest paid d) Repayment of borrowings e) Property tax paid 2. Which of the items below would appear under the heading cash flows from financing activities? a) Cash paid for the purchase of non-current assets b) Dividends received c) Interest paid d) Repayment of borrowings e) Property tax paid 3. Which of the following line items could appear in a company s statement of cash flows? a) Proposed dividend b) Dividends received c) Bonus issue of shares d) Surplus on revaluation of non-current assets 4. Which of following assertions on the presentation on interest receipts in the cash flow statement is true? a) Interest received shall be presented under financing activities b) Interest received might be presented under financing activities c) Interest received might be presented under operating activities d) Interest received shall be presented under operating activities e) Interest received might be presented under investing activities f) Interest received shall be presented under investing activities 5. Part of a company s statement of cash flows is shown below: 000 Operating profit 1,255 Loss on disposal (455) Increase in receivables (198) Increase in payables 340 David Procházka p. 15/24
Which of the following criticisms of the extract presented above is valid? a) The loss on disposal should have been added, not deducted b) Increase in receivables should have been added, not deducted c) Increase in payables should have been deducted, not added d) None of the options outlined 6. TANGO presents its cash flows from operating activities indirectly. Following information is provided for the year ended 31 December 205: Profit before tax 5,600 Gains on disposal of PPE 62 Depreciation 956 Increase in receivables 268 Increase in inventories 101 Increase in payables 322 What is the cash generated from operations? a) 6,571 b) 6,541 c) 6,447 d) 5,803 7. At 1 January 200 Casey Ltd had property, plant and equipment with a carrying value of 250,000. In the year ended 31 December 200 the company disposed of assets with a carrying value of 45,000 for 50,000. The company revalued a building from 75,000 to 100,000 and charged depreciation for the year of 20,000. At the end of the year, the carrying value of property, plant and equipment was 270,000. How much will be reported in the statement of cash flows for the year ended 31 December 200 under the subtotal cash flows from investing activities? a) 10,000 outflow b) 10,000 inflow c) 35,000 outflow d) 50,000 inflow 8. For the year ended 31 December 202, SPENCER evidences the following information relating to interest (both received and paid). 202 201 Interest receivable 100,000 130,000 Interest payable 180,000 50,000 Interest income 250,000 xxx Interest expense 150,000 xxx David Procházka p. 16/24
With reference to the statement of cash flows for the period 202, which of following assertions is true? a) Interest received is higher than interest paid b) Interest received is lower than interest paid c) Interest received is equal to interest paid d) There is not enough information to determine the amount of received and paid interests 9. CASH had the following balances in its statement of financial position as at 30 June 200 and 201: 200 201 Bonds issued 150,000 130,000 Share Capital 100,000 120,000 Share Premium 35,000 45,000 How much will appear in the statement of cash flows for the year ended 30 June 201 under the subtotal cash flows from financing activities? a) 0 b) 10,000 increase c) 20,000 increase d) 20,000 decrease 10. For the year ended 31 December 204, MARK S evidences the following information relating to income taxes. 202 201 Deferred tax asset 10,000 20,000 Current tax payable 100,000 120,000 Current tax expense ( 250,000) xxx Deferred tax expense ( 10,000) xxx How much should be included in the statement of cash flows for income tax paid in the year? a) 230,000 b) 250,000 c) 260,000 d) 270,000 David Procházka p. 17/24
Case 2: IAS 7 Preparation of cash flow statement CHELSEA is preparing its annual financial statements, including statement of cash flows for the period ended on 31 December 202. Following extract from trial balance is available. Trial balance 31/12/202 31/12/201 Debit Credit Debit Credit 1 Property, plant, equipment (PPE) at cost 3,930 2,500 2 Accumulated depreciation PPE 1,560, 1,250 3 Long-term financial assets 4,500 4,500 4 Deferred tax asset 100 0 5 Inventory 0 0 6 Trade receivables (operating CF) 1,695 1,200 7 Interest receivable 100 20 8 Receivable from disposals of PPE 10 90 9 Unpaid share capital 200 0 10 Cash and cash equivalents 2,230 500 11 Share capital 1,740 1,240 12 Retained earnings for previous years 750 1,750 13 Loans and finance leases 2,100 1,000 14 Income tax payable 500 1,000 15 Liabilities to employees 80 100 16 Trade payables (operating CF) 400 1,800 17 Payables from PPE acquisitions 300 570 18 Interest liability 150 100 19 Sales of services to customers 31,500 30,000 20 Depreciation of PPE 400 500 21 Wages 19,520 25,000 22 Purchased services 5,490 1,750 23 Proceeds from disposals of PPE 45 24 Book value of disposed PPE 10 25 Interest income 200 150 26 Dividend income 300 50 27 Interest expense on loans and leases 400 200 28 F differences on trade receivables 0 100 29 F differences on cash 40 0 30 Income tax expense (current) 1,200 1,000 31 Income tax expense (deferred) 100 David Procházka p. 18/24
Based on the trial balance above, a condensed form of the balance sheet and income statement have been prepared. CHELSEA Statement of financial position for the period ended 31 December 202 As at 31 December (in ) 202 201 Non-current assets Property, plant, equipment 2,370 1,250 Financial assets 4,500 4,500 Deferred tax asset 100 0 6,970 5,750 Current assets Trade and other receivables 1,805 1,310 Cash and cash equivalents 2,230 500 4,035 1,810 Total assets 11,005 7,560 As at 31 December (in ) 202 201 Equity Share capital 1,540 1,240 Retained earnings 5,935 1,750 7,475 2,990 Current liabilities Loans and leases* 2,100 1,000 Current income tax payable 500 1,000 Employee liabilities 80 100 Trade and other payables 850 2,470 3,530 4,570 Total assets 11,005 7,560 * For the simplicity of further calculations, all loans and leases are treated as current liabilities David Procházka p. 19/24
CHELSEA Income statement for the period ended 31 December 202 For the year 202 201 Sales 31,500 30,000 Wages (19,520) (25,000) Purchased services (5,490) (1,750) Depreciation (400) (500) Other operating expenses 95 0 Interest income 200 150 Interest expense (400) (200) Dividend income 300 50 Profit before taxation 6,285 2,750 Income tax expense (1,100) (1,000) P&L for the period 5,185 1,750 Detail information regarding some transactions occurring during the year 202: 1. Property, plant, equipment New acquisitions: - on credit/by cash 730 - by leases 800 Disposals: - proceeds from disposal of PPE 45 (r. 23) - acquisition cost of disposed PPE 100 (r. 24) - accumulated depreciation of disposed PPE 90 (r. 24) 2. Financial assets Insignificant interest in another company classified as available for sale and measured at fair value through other comprehensive income No changes in period (no acquisition, no disposal, no changes in fair value) During 202, dividends received (r. 26) 3. Share capital Share capital consists of 1,240 ordinary shares at nominal value of 1 per share New issue of 500 shares at 1 per share on 1 July 202: - the issue will be completely paid in cash - partly paid on 1 September 202; remaining balance of 200 (r. 9) is due on 1 February 203 4. Loans and finance leases: A new loan from the bank agreed in 202: - total amount borrowed 900 David Procházka p. 20/24
- instalments of the loan in total amount of 400 Payments of finance leases liabilities for acquired PPE 200 5. Distributions to owners Annual general meeting took place on 25 July 202 and agreed on the dividend distribution from retained earnings at amount of 1,000 All dividends paid to shareholders by the end of 202 6. Income tax (current) A liability for the 201 tax was settled in June 202 (r. 14) Prepayments for the 202 tax duty were made throughout the period at amount of 700 7. Other The Company entered into agreement with its financing bank, based on which it has 2,000 of borrowing facilities available in next 5 years ( 800 is reserved for the investments increasing the Company s operating capacity) One of the bank accounts (with closing balance of 100) is deposited at a financial institution domiciled in the country Uncertainty ; the government has imposed a ban on the money transfers outside the country Government has granted the Company with tax relief and investment expenditure disbursement for the next year In May 202, the Company exchanged its land for the neighbouring one (a barter exchange transaction with non-commercial substance)?????? David Procházka p. 21/24
David Procházka p. 22/24
David Procházka p. 23/24
Case 3: Diluted EPS calculation with convertible bonds M UNITED issues 5,000 convertible bonds at the beginning of 207. Each bond is convertible at any time up to maturity (which is in two years) into 200 ordinary shares. 207 Profit from continuing operations attributable to the ordinary shareholders 5,000,000 Profit from discontinued operations attributable to the ordinary shareholders ( 1,000,000) Profit attributable to the ordinary shareholders 4,000,000 Comprehensive income attributable to the ordinary shareholders 4,500,000 Number of ordinary shares in issue at 31 December 1,000,000 Convertible bonds outstanding at 31 December 5,000 Interest expense on bonds for the period 800,000 Tax rate 0%????????? David Procházka p. 24/24