ACCT 220 Lecture Notes - Lecture 2: Current Liability, Financial Statement, Income Statement
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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
COMPREHENSIVE INCOME STATEMENT | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$M | Percentage | $M | 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 | 2 | 0.09% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange differences arising from translation of foreignoperation | 1 | 0.04% | -23 | -0.97% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax on the above items | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3 | 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% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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. |
Industry Average | |||||||||||||||
Financial Ratios | ã | 2015 | ã | 2016 | ã | 2017 | ã | ||||||||
Liquidity | ã | ã | ã | ||||||||||||
Accounts receivables turnover(times) | 8.08 | ã | 6.34 | ã | 5.11 | ã | 9.4 | ||||||||
Average Collection Period (days) | 45.17 | ã | 57.59 | ã | 71.46 | ã | 38.8 | ||||||||
Inventory turnover (times) | 7.81 | ã | 5.85 | ã | 4.54 | ã | 3.8 | ||||||||
Average days in inventory (days) | 46.73 | ã | 62.37 | ã | 80.35 | ã | 96.1 | ||||||||
Current ratio (times) | 2.04 | ã | 1.70 | ã | 1.53 | ã | 1.6 | ||||||||
Quick or Acid-test ratio (times) | 0.99 | ã | 0.80 | ã | 0.71 | ã | 0.8 | ||||||||
Solvency | ã | ã | ã | ||||||||||||
Debt to Equity Ratio | 94.7% | ã | 164.1% | ã | 229.8% | ã | 0.667 | ||||||||
Times interest earned (times) | 5.99 | ã | 4.26 | ã | 4.19 | ã | 3.4 | ||||||||
Profitability | ã | ã | ã | ||||||||||||
Gross profit ratio (%) | 29.7% | ã | 29.5% | ã | 29.8% | ã | 5.4% | ||||||||
Profit margin (%) [before tax] | 2.2% | ã | 2.5% | ã | 3.5% | ã | 4.4% | ||||||||
Asset Turnover | 2.26975906 | ã | 1.977221 | ã | 1.705226 | ã | 1.8 | ||||||||
Return on assets (%) [before tax] | 7.5% | ã | 7.5% | ã | 9.0% | ã | 8.0% | ||||||||
Return on equity (%) [before tax] | 14.7% | ã | 19.8% | ã | 29.6% | ã | 17.10% | ||||||||
Price to earnings ratio | $ 24.46 | ã | $18.62 | ã | $10.37 | ã | |||||||||
Cash Flow Statement | ã | ã | ã | 2016 | ã | ã | 2017 | ã | ã | ||||||
Cash, beginning of year | ã | $ 1,512.00 | ã | $ 1,176.00 | ã | ||||||||||
Operating Activities | |||||||||||||||
Net Income | ã | $ 1,627.00 | ã | $ 2,827.00 | ã | ||||||||||
Plus Depreciation | ã | $ 908.00 | ã | $ 1,292.00 | ã | ||||||||||
Minus increase in accounts receivable | ã | $ (4,034.00) | ã | $ (5,648.00) | ã | ||||||||||
Minus increase in inventory | ã | $ (3,302.00) | ã | $ (4,732.00) | ã | ||||||||||
Minus increase in prepaid expenses | ã | $ (1,360.00) | ã | $ (1,700.00) | ã | ||||||||||
Plus increase in accounts payable | ã | $ 2,388.00 | ã | $ 3,997.00 | ã | ||||||||||
Plus increase in income taxes payable | ã | $ 252.00 | ã | $ - | ã | ||||||||||
Plus increase in accruals & other cur.Liab. | ã | $ 1,365.00 | ã | $ 1,656.00 | ã | ||||||||||
Net Cash from operating activities | ã | $ (2,156.00) | ã | ã | $ (2,308.00) | ã | ã | ||||||||
Investment Activities | |||||||||||||||
Fixed asset acquisitions | ã | $ (2,780.00) | ã | $ (3,838.00) | ã | ||||||||||
Change in intangible assets | ã | $ (21.00) | ã | $ (17.00) | ã | ||||||||||
Change in all other noncurrent activities | ã | $ (467.00) | ã | $ (195.00) | ã | ||||||||||
Net Cash from investing activities | ã | $ (3,268.00) | ã | ã | $ (4,050.00) | ã | ã | ||||||||
Financing Activities | |||||||||||||||
Change in notes payable | ã | $ 2,038.00 | ã | $ 3,080.00 | ã | ||||||||||
Change current maturities--L.T.D. | ã | $ 452.00 | ã | $ 786.00 | ã | ||||||||||
Change in long-term debt | ã | $ 3,160.00 | ã | $ 3,250.00 | ã | ||||||||||
Change in Com Stock & paid-in cap | ã | $ - | ã | $ - | ã | ||||||||||
Dividends paid | ã | $ (562.00) | ã | $ (837.00) | ã | ||||||||||
Net Cash from financing Activities | ã | $ 5,088.00 | ã | $ 6,279.00 | ã | ||||||||||
Net Change in Cash | ã | $ (336.00) | ã | $ (79.00) | ã | ||||||||||
Cash, end of year | ã | $ 1,176.00 | ã | $ 1,097.00 | ã |
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.
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)