ACCT 220 Lecture Notes - Lecture 2: Current Liability, Financial Statement, Income Statement

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ivoryduck883

27 May 2016

School

CSUN

Department

Accounting and Information Systems

Course

ACCT 220

Professor

Doron

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Document Summary

The difference between current liabilities and long-term liabilities is that current will be earned within the year while long-term will not. Current assets should be earned within the year. Long-term means that that asset, liability, investment, etc. will be used in more than one year. Note payable when someone loans you money. Account payable is when you buy supply on credit. Ratio analysis expresses the relationship among selected items of financial statement. A ratio expresses the mathematical relationship between one quantity and another. Eps (earnings per share) measures the profitability of a company. Eps = (net income preferred stock dividends) / (average common shares outstanding) Working capital = current assets currents liabilities. Liquidity ratios measure the short term ability to pay maturing obligations and to meet unexpected needs for cash. Current ratio = (current assets) / (current liabilities) Solvency ratios are the ability to pay interest as it comes due.

Related Questions

Common Size Income statement
	2017		2016
	$M	Percentage	$M	Percentage
Operating revenue	2319	100%	2375	100%
Operating expenses	-1666	-71.84%	-1725	-72.63%
Earnings before interest, tax, depreciation, amortisation,changes in fair value of hedges and other signifcant items(EBITDAF)	653	28.16%	650	27.37%
Depreciation and amortisation	-264	-11.38%	-236	-9.94%
Impairment of assets	-10	-0.43%	-4	-0.17%
Loss on sale of assets	-4	-0.17%	-1	-0.04%
Net change in fair value of electricity and other hedges	-76	-3.28%	-15	-0.63%
Operating profit	299	12.89%	402	16.93%
Finance Cost	79	3.41%	80	3.37%
Interest Income	2	0.09%	2	0.08%
Net change in fair value of treasury instruments	55	2.37%	-68	-2.86%
Net profit before tax	277	11.94%	256	10.78%
Income tax expense	-80	-3.45%	-71	-2.99%
Net proft after tax attributed to the shareholders of the parentcompany	197	8.50%	185	7.79%
Earnings per share (EPS) attributed to ordinary equityholders of the parent	cents		cents
Basic and diluted earnings per share	7.7	0.33%	7.2	0.30%

COMPREHENSIVE INCOME STATEMENT

2017

2016

Percentage

Net profit after tax

197

8.50%

185

7.79%

Other comprehensive income

Intems that will not be reclassifed to profit or loss

Asset revaluation

428

18.46%

889

37.43%

Defferred tax on the above item

-120

-5.17%

-248

-10.44%

Items that may be reclassified to profit or loss

308

641

Net gain on cash flow hedges

0.09%

Exchange differences arising from translation of foreignoperation

0.04%

-23

-0.97%

Income tax on the above items

0.13%

-23

-0.97%

Other comprehensive income for the year, net of tax

311

13.41%

618

26.02%

Total comprehensice income for the year, net of tax attributedto shareholders of parent company

508

21.91%

803

33.81%

BALANCE SHEET

	2017		2016
	$M	Percentage	$M	Percentage
Current Assets
Cash and cash equivalents	80	0.92%	118	1.38%
Trade receivables	260	3.00%	194	2.27%
Financial Instruments	59	0.68%	71	0.83%
Other assets	32	0.37%	23	0.27%
Total Current Assets	432	5.00%	406	5.00%
Non-current assets
Property, plant and equipment	7961	91.88%	7771	91.02%
Intangible assets	58	0.67%	47	0.55%
Deferred tax	43	0.50%	40	0.47%
Financial Instruments	172	1.98%	274	3.21%
Total non-current assets	8234	95.00%	8132	95.00%
Total assets	8665	100.00%	8538	100.00%
Current Liabilities
Payables and accuals	296	3.42%	205	2.40%
Employee entitlements	15	0.17%	15	0.18%
Current portion of termborrowings	170	1.96%	214	2.51%
Finance lease payable	1	0.01%	1	0.01%
Financial Instruments	67	0.77%	48	0.56%
Current tax payable	30	0.35%	30	0.35%
Total current Liabilities	579	6.68%	513	6.01%
Non-current liabilities
Term borrowings	1022	11.79%	1000	11.71%
Deferred tax	1710	19.73%	1617	18.94%
Provisions	9	0.10%	8	0.09%
Finance lease payable	46	0.53%	47	0.55%
Financial Instruments	124	1.43%	203	2.38%
Term payables	93	1.07%	100	1.17%
Total non-current liabilities	3004	34.67%	2975	34.84%
Total liabilities	3583	41.35%	3488	40.85%
Net assets	5082	58.65%	5050	59.15%
Shareholders' equity
Share capital	1598	18.44%	1597	18.70%
Reserves	3484	40.21%	3453	40.44%
Total shareholders' equity	5082	58.65%	5050	59.15%

Using the following financial ratiosfor 2016 and 2017 periods, and other associated

information available in the publicdomain, assess the financial health of MEL from the

view of an investor.

Liquidity ratios

b) Asset management efficiencyratios

c) Profitability ratios

d) Market ratios

Assume you are a banker evaluating aloan request from Meridian Energy Limited

(MEL) for $220 million. ConsideringMELâs recent earnings announcements and

earnings forecast updates, what wouldbe your concerns in deciding on approval or

denial of the loan request? Use thecompanyâs capital structure ratios for 2016 and 2017

in your explanation.

Accounts receivables turnover(times)

Average Collection Period (days)

Inventory turnover (times)

Average days in inventory (days)

Current ratio (times)

Quick or Acid-test ratio (times)

Times interest earned (times)

Gross profit ratio (%)

Profit margin (%) [before tax]

Return on assets (%) [before tax]

7.5%

9.0%

8.0%

Return on equity (%) [before tax]

Price to earnings ratio

Cash, beginning of year

Minus increase in accounts receivable

$ (4,034.00)

$ (5,648.00)

Minus increase in inventory

$ (3,302.00)

$ (4,732.00)

Minus increase in prepaid expenses

$ (1,360.00)

$ (1,700.00)

Plus increase in accounts payable

$ 2,388.00

$ 3,997.00

Plus increase in income taxes payable

$ 252.00

$ -

Plus increase in accruals & other cur.Liab.

$ 1,365.00

$ 1,656.00

Net Cash from operating activities

$ (2,156.00)

$ (2,308.00)

Investment Activities

Fixed asset acquisitions

$ (2,780.00)

$ (3,838.00)

Change in intangible assets

$ (21.00)

$ (17.00)

Change in all other noncurrent activities

$ (467.00)

$ (195.00)

Net Cash from investing activities

$ (3,268.00)

$ (4,050.00)

Financing Activities

Change in notes payable

$ 2,038.00

$ 3,080.00

Change current maturities--L.T.D.

$ 452.00

$ 786.00

Change in long-term debt

$ 3,160.00

$ 3,250.00

Change in Com Stock & paid-in cap

Net Cash from financing Activities

4. What is your assessment of the manner in which HTCM ismanaging its assets? Pay attention to both trends and industryaverages.

SOLVENCY (Financing of Assets)

5. What is your assessment of the manner in which HTCM isfinancing its assets? Pay attention to both trends and industryaverages. What is the relationship between the debt to equity ratioand times interest earned as these relate to HTCM? And is there anyother possible explanation (outside of the firmâs financialstatements) for the observed trend in times interest earned?

PROFITABILITY

6. What can you say about HTCMâs gross profit ratio and netprofit ratio? Explain any patterns observed.

7. How are HTCMâs net profit ratio, and asset turnover ratioaffecting the firmâs pre-tax return on assets (ROA) and return onequity (ROE)? What is your overall assessment of the firmâsprofitability, including its earnings per share (EPS)?

CASH FLOW

8. Referring to HTCMâs statement of cash flow for 2016 and 2017,assess HTCMâs cash flow situation noting both inflows andoutflows?

OVERALL EVALUATION

9. Based on your answers to the questions above, what is youroverall evaluation of HTCMâs financial condition? (Pull all youranalysis together in answering this question.)

10. What is the marketâs assessment of HTCMâs financialcondition? Explain. Does the marketâs assessment confirm or refuteyour analysis?

11. Based on your evaluation of HTCM and the marketâs assessmentof the firm, would you accept employment with the company?Explain.

coraldinosaur635

Question 1 (40 marks)

You are the audit manager of a medium-sized firm and have just received a package from Rachel Jones, the financial controller of KidSpace Ltd., an electronic toy manufacturer. This is your firmâs first year as auditor of KidSpace Ltd. The information below was prepared for a board meeting and Rachel, the acting Chief Financial Officer, felt it might be useful to you in preparation of the forthcoming audit for the year ended 30 June 2017.


KidSpace Ltd.
Statement of Financial Position $'000s

Current assets	2017	2016	2015
Cash	1,586	1,743	830
Accounts receivable and other receivables	13,734	11,200	9,623
Inventory	16,498	11,731	7,197
Total current assets	31,818	24,674	17,650
Non-current assets
Property, plant and equipment	14,606	12,840	9,572
Long-term loan receivable	5,200	3,600	3,300
Intangible assets	1,400
Total non-current assets	21,206	16,440	12,872
Total assets	53,024	41,114	30,222
Current liabilities
Trade payables and other payables	9,012	6,288	2,021
Provisions	4,875	3821	4577
Total current liabilities	13,887	10,109	6,598
Non-current liabilities
Long-term loan	20,000	16,000	12,000
Total liabilities	33,887	26,109	18,598
Net assets	19,137	15,505	11,624
Shareholder's equity
Share capital	2,000	2,000	2,000
Retained earnings	17,137	12,505	9,624
Total shareholder's equity	19,137	14,505	11,624

KidSpace Ltd.
Income Statement $'000s
	2017	2016	2015
Sales revenue	76,945	74,927	89,735
Cost of sales	51,840	51,765	63,066
Gross profit	25,105	23,162	26,669
Depreciation	5,595	4,332	2,796
Inventory obsolescence	990	1,173	670
Selling expenses	2,405	3,153	3,317
Administrative expenses	8,925	8,727	11,516
Finance costs	1,040	1,275	1,140
Total expenses	18,955	18,660	19,439
Profit before tax	6,150	4,502	7,230
Tax expense	1,518	1,621	2,386
Profit after tax	4,632	2,881	4,844

Notes:
Trade Receivables	12,034	10,655	9,300
Pre-paids	1,600	500	300
Other receivables	100	45	23
Total Trade & other receivables	13,734	11,200	9,623

Inventory
Raw Materials	6,599	5,866	3,845
WIP	4,333	2,588	1,550
Inventory held for sale	6,699	3,520	1,972
	17,631	11,974	7,367
Provision for Inventory obsolescence	(1,133)	(243)	(270)
Total inventory	16,498	11,731	7,197

Ratios	2017	2016	2015
Profit ratio	7.99%	6.01%	8.06%
Return on shareholder equity	24.20%	19.86%	41.67%
Quick Ratio	0.99	1.18	1.54
Times Interest Earned	6.91	4.53	7.34
Accounts Receivable Turnover (times)	6.78	7.51	9.33
Asset Turnover	1.45	1.84	2.94
Inventory Turnover (times)	3.50	5.35	8.76

During a brief telephone call with Rachel, you made the following notes:

1. One of the conditions of the long-term loan is that the company is not to exceed a debt-to equity ratio of 2:1 at any time and they must maintain a current ratio of 2:1. The loan is reviewed each year on 31 July.
2. Provision for obsolescence of finished inventory held for sale and work-in-progress is provided for at a flat rate of 10%. The amount provided in previous years was 20%. Rachel said that the company believes it has been overly conservative in previous years and 10% is a more realistic level, given the nature of its products.
3. To combat declining sales a senior management incentive scheme based on sales and profit levels was introduced in July 2016.
4. The long-term loan receivable is from a company involved in the development and production of computer software. It is owned by one of the directors.

Required:

a) Identify and explain what the inherent risks for KidSpace Ltd. that you will need to consider. (6 marks)
b) From the information provided, perform additional preliminary analytical procedures:
i) Simple comparison (3 marks)
ii) Current ratio (1 mark)
iii) Return on assets (1 mark)
iv) Gross profit ratio (1 mark)
v) Debt-to-equity ratio. (1 mark)

c) Drawing on information from a) & b), identify and justify:

i) Three key account areas that would require special attention during the audit of the 30 June 2017 financial statements. Also, indicate if those accounts are likely to be over or understated. (12 marks)
ii) Two key assertions at risk for each of those account areas. (12 marks)

d) Identify and discuss any going concern issues to be considered at this stage?. (3 marks)

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ACCT 220 Lecture Notes - Lecture 2: Current Liability, Financial Statement, Income Statement

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