Below are the questions for the case study and I need your help.

Please complete the following questions from

Forge Group Ltd Case Study (A)The Revealing Nature of Numbers (attached to this posting)

Please structure your paper with subheadings. For example, the first question is:

a. State the accounting equation at the beginning and end of the year and the changes between the beginning and end of the year.

So, your subheading would be:

Part a. The accounting equation at the beginning and end of the year

Complete Part 1 ONLY - note that Idropped some of the questions, so only answer the followingquestions, not all subsections of Part 1 listed in the case. Skip d, i, and k

1. READING FINANCIAL STATEMENTS

Refer to FGL's June 30, 2013, financial reports and answer the following questions:

a. State the accounting equation at the beginning and end of the year and the changes between the beginning and end of the year.

b. State the changes in the company's equity during 2013. Speculate on why the change.

c. What is the main asset the company owns, and what is its value? Compare this to the total equity. State your conclusion from this comparison.

d. Skip

e. Outline the largest expenses on the income statement. Compare them to the cash, debtors, creditors, and inventory balances. Comment on this comparison.

f. State the total revenue and net profit attributable to members of FGL and earnings before interest and tax (EBIT).

g. Compare the net profit with the net cash flows from operating activities. Which amount is larger? Is this normal?

h. Examine the Reconciliation of Cash Flows from Operations with the net profit after tax (NPAT). Outline the three major reconciliation items, and state how they changed.

i.Skip

j. Outline the changes that have occurred in the company's financing activities. State your opinion on the appropriateness of the quantum of the dividends paid to shareholders.

k. Skip

Grading Rubric

Answered the case questions80

ISSN 1940-204X Forge Group Ltd Case Study (A) The Revealing Nature of Numbers Suzanne Maloney University of Southern Queensland Toowoomba, Australia, 4350. Suzy.Maloney@usq.edu.au THE FORGE GROUP LTD SUMMARY are strict compliance, regulatory, environmental, and tax requirements on those operating in the sector. The governments of many countries publicly funded a number of large scale infrastructure projects in the aftermath of the Global Financial Crisis (GFC) to stimulate the economy. Joint ventures and public/private partnerships are common in the industry to reduce the risk of large-scale projects and to ensure adequate capital and expertise. Major contracts generally involve a number of different companies with primary contractor and sub-contractor status, all tendering and quoting on various stages of work in a project. This makes the industry highly competitive, and therefore it is vital to have appropriate costing and project management expertise. Mining companies also took advantage of the cheaper finance post GFC and the upswing in demand for minerals and resources. Large-scale mining projects have been the driving force for some economies, especially in Australia. But with the construction of a number of the large projects nearing completion (and moving into production phase), there is a drop in engineering and construction spending. In Australia in 2013-2014, engineering and construction spending was $128 billion, dropping $1 billion from the previous year. This increased competition in the sector and, therefore, demand for lower-priced contracts and shorter completion times. The market value of engineering and construction companies are based partly on their future secured order book. \"Order book\" is a term used in the engineering and In 2012-2013, Forge Group Limited had more than 2,000 employees working across eight countries on four continents. The pride in the growth story is evident, as Forge Group's 2012 Annual Report (released in September 2013) lists accomplishments in what is described as a groundbreaking year. The main milestones give a snapshot of the types of projects the company was involved in (see Figure 1). At the time of listing (June 26, 2007), Forge Group Ltd (FGL) shares traded for $0.56. (All monetary amounts discussed herein are in Australian dollars. To convert to another currency, visit www.x-rates.com.) The shares peaked at $6.98 on March 6, 2013, valuing the company at $600 million. In less than a year, FGL was placed in a trading halt (February 11, 2014). Voluntary administrators and receivers were appointed. THE ENGINEERING AND CONSTRUCTION INDUSTRY The engineering and construction sector provides significant economic activity in many countries. Large-scale engineering and construction projectsincluding highways, bridges, railways, airports, harbors, production facilities, and office and apartment buildingsprovide employment opportunities and attract large capital investment. The quantum of resources employed in this industry and the profound affect they have on society means that there IM A ED U C ATIO NA L C A S E JOURNAL 1 VOL. 8, N O. 1, ART. 2, MARCH 2015 2 0 1 5 I MA Figure 1: The Year in Review Source: Forge Group Ltd 2013 Annual Report, www.openbriefing.com/AsxDownload.aspx?pdfUrl=Report%2FComNews%2F20130829%2F01438557.pdf, pp. 4-5. construction sector to capture the company's future work and the dollar value of the work. The future work is contracted through the normal selling of services and through \"tendering\" for large-scale works needed by governments and large private companies. If a project is very large, it may be divided into segments with a separate tender process for each segment. Companies have to carefully consider the risk attached to each segment of the larger project and the interrelationship of each of the segments. A company can be held liable to another company if their segment completion is delayed and the other company cannot complete its work on time, as per their contract, because of the delay. For example, when building a tunnel, the riskier segment may be blasting the rock and strengthening the actual tunnel. Excavating the ground and surfacing the road may not carry the same risk but could be held up if the blasting and strengthening is not completed on time. In comparison to a retail or manufacturing concern, the products being sold are large capital works that tend not to be completed within a neat 12-month period. This IM A ED U C ATIO NA L C A S E JOURNAL means that there needs to be payment points built into the contracts. These are called \"milestones.\" Once a project milestone is reached, it triggers a point when the engineering and construction company can invoice the purchaser and recognize the revenue in its accounts. The product cost (Cost-of-Goods-Sold) expensed against this revenue will contain material, labor, equipment costs, and sub-contractor costs. These costs are all capitalized into inventory at the time they are incurred but not expensed until they reach a milestone. A lot of dollars, long-term time horizons, subjective milestones, and the application of large capital equipment costs contribute to the overall business risk in the sector. Many companies have suffered as a result of stalled projects, unforeseen circumstances or problems, poor costing of the work, and mismanaged cash flow. Within the industry, there is usually significant take-over activity. This is driven in part by companies not performing well and/or insolvency and also by normal merger and acquisition activity. Smaller companies find it difficult to compete with larger companies for the larger projects 2 VOL. 8, N O. 1, ART. 2, MARCH 2015 SHARE MARKET INFORMATION and generally need to combine or merge in some way or stay small. This adds further risk and places the financial statements and the order book under increased scrutiny as business valuations rely on this information. The historical share price chart since listing is shown in Figure 2. THE FORGE GROUP LTD (FGL) Figure 2: FGL Share Price The company was a success story. It listed on the Australian stock exchange on June 26, 2007, from a private construction company called AiConstruction. It was a well-run company that needed access to more capital if it was to continue to grow. Within a year, it made its first acquisition by taking over Abesque Engineering. The company survived the Global Financial Crisis and leveraged to the subsequent mining and construction boom led by China's appetite for minerals and resources. Over the next few years, the company grew organically and in April 2010 another construction company called Clough bought 13% (10.5 million shares) of FGL ordinary shares, thus becoming the largest shareholder. Clough continued to purchase shares in FGL until it divested its total holding of 35% in March 2013. Clough management explained its divestment by indicating that expectations of joint ventures between the two companies did not eventuate, and, therefore, the equity holding was cashed in to allow the pursuit of other objectives. In January 2012, FGL undertook a major acquisition by purchasing CTEC Pty Ltd. In essence, the acquisition meant taking over two major projects. The Diamantina Power Station (DPS) Project in Queensland, Australia, and the West Angelas Power Station (WAPS) Project in the Pilbara region of Western Australia. It was expected that these major projects would add $7.5 million and $10.8 million to earnings before interest, tax, depreciation, and amortization (EBITDA) in 2012 and 2013, respectively. The purchase price was $16 million up-front with further payments due on the meeting of specified performance targets (total paid was $32.26 million). This increased FGL's order book significantly, and FGL's share price rose in response. In June 2013, FGL acquired Taggart Global for $43 million. This purchase meant that FGL was now diversifying into asset management and into other economies. IM A ED U C ATIO NA L C A S E JOURNAL $8 $7 Closing Price $6 $5 $4 $3 $2 $1 3 27 /2 01 2 6/ 27 /2 01 1 6/ 27 /2 01 0 6/ 27 /2 01 9 6/ 27 /2 00 8 6/ 00 /2 27 6/ 6/ 27 /2 00 7 $0 The market closing prices, major announcements, and significant shareholding changes are listed in chronological order in Table 1. CTEC PURCHASE In the wash up of the demise of FGL is the attention being paid to two main contracts: The Diamantina Power Station (DPS) Project in Queensland, Australia, and the West Angelas Power Station (WAPS) Project in the Pilbara region of Western Australia. Both projects were acquired after FGL took over CTEC Pty Ltd on January 13, 2012. The purchase of CTEC was to change the business model by bringing sub-contracting work in-house with the intended consequence of taking out the \"middle man\" and thereby increasing earnings (by negating sub-contractor margins). The CTEC purchase payment terms required an upfront payment of $16 million with subsequent payments conditional on meeting performance criteria (possible further payment of $40 million in total). CTEC's prior year (June 30, 2011) EBIT was $2 million, with expected EBITDA at year end 2012 and 2013 to be $18.4 million and $24.8 million, respectively. The DPS and WAPS projects were to increase this expected EBITDA by $7.5 million in 2012 and $10.8 million in 2013. 3 VOL. 8, N O. 1, ART. 2, MARCH 2015 Table 1. Timeline of Forge Group Ltd (FGL) Date Closing Market Major Announcement/Change June 27, 2007 $0.56 FGL listed on Australian Stock Exchange June 30, 2008 $0.78 June 30, 2009 $0.43 Global Financial Crisis impact April 6, 2010 $2.96 Clough purchases 10.5 million shares for 13% ownership June 30, 2010 $2.66 June 30, 2012 $5.46 June 30, 2012 $4.37 January 13, 2012 $5.25 FGL purchases 100% of CTEC Pty Ltd for $32.26 million March 6, 2013 $6.98 Peak share price March 26, 2013 $6.05 Clough sells FGL shares at $6.05 ($187 million, 35% of FGL) May 17, 2013 FGL awarded major contract (Dugald Rover) June 3, 2013 FGL acquires Taggart Global (U.S. company) at $43 million July 2, 2013 FGL awarded major contract (TAN Burrup plant) June 30, 2013 $4.09 August 29, 2013 Annual Report released NPAT at $63 million, equity at $213.5 million, dividend at $0.14 per share September 2, 2013 $1.47 billion joint venture with Duro Felguera announced (value to Forge is $830 million - order book now at $2.1 billion) September 12, 2013 FGL awarded major contract (Yandicooogina for Rio Tinto - $100 million contract) September 19, 2013 FGL major contract terminated (Dugald River) October 7, 2013 FGL declares $50 million in major contracts in U.S. and Australia since June 1, 2013 November 4, 2013 $4.18 Trading halt November 5, 2013 ANZ Bank (major financier) appoints KordaMentha to review books November 28, 2013 FGL Market Announcement: -ANZ Bank supports and negotiates new finance facilities -Considering equity capital raising -Identifies underperforming assets (i.e., CTEC projects) -Negotiates agreements with customers and sub-contractors -Normal operations for other parts of business November 28, 2013 $0.69 FGL Market Announcement: -$127 profit write down on two large contracts (Diamantina Power Station and West Angelas Power Station; $45 million to complete both projects) -Challenging liquidity period (net cash flow Nov. and Dec.) -ANZ Bank continued support with some adjustment to finance facilities -Business as usual November 28, 2013 $0.69 Trading halt lifted December 4, 2013 FGL Market Announcement: -\u0007In response to ASX query, indicated became aware of problems with Diamantina Power Station and West Angelas Power Station projects in late Sept. with margin erosions due to cost overruns and delays causing the profit downgrade. Costing analysis during Oct. and Nov. led to requested trading halt and profit downgrade in Nov. December 17, 2013 FGL awarded major $40 million contract in North American coal sector January 10, 2014 $1.25 Trading halt until January 14, 2014 January 14, 2014 $1.02 Trading halt until January 28, 2014 January 24, 2014 January 28, 2014 $0.90 February 10, 2014 $0.92 February 11, 2014 Trading ceases Board appoints administrators, and secured creditors appoint receivers. IM A ED U C ATIO NA L C A S E JOURNAL 4 VOL. 8, N O. 1, ART. 2, MARCH 2015 DPS AND WAPS COSTING AND BUDGETING Instead cost overruns and poor budgeting meant that the projects' revised 2013 estimates showed a $61 million project margin loss for the DPS project and a $41.7 million project margin loss on the WAPS project. The cost overruns on these two projects lead to the profit downgrade and contributed to the resulting shortage of cash. Added to that was the discovery of an early payment to the vendors of CTEC Pty Ltd before its performance conditions were met. Further, the payment of bonuses to the previous Managing Director, Peter Hutchinson, of $375,000 was made for a successful acquisition and integration. These payments are the subject of further investigations by the liquidator. In any business the costing and budgeting systems are critical to success. The FGL administrator report for 2013/2014 (year ending January 2014) shows that the: \t\u0007 Actual work-in-progress income for the period was $126 million below management forecast. \t\u0007 Labor costs were $70 million over budget. \t\u0007 Material costs were $55 million over budget. \t\u0007 Work-in-progress overheads were $22 million over budget. FINANCIAL INFORMATION The financial statements for 2010-2014 are presented in Tables 2-5. Table 2. Comprehensive Income Statement (in thousands of Australian dollars) Revenue June 30, 2010 June 30, 2011 June 30, 2012 June 30, 2013 Unaudited January 31, 2014 $246,169 $421,595 $774,879 $1,054,100 $520,041 9,696 15,000 (125,171) (211,000) (516,867) (656,334) (79,194) (157,191) (164,502) (256,515) (3,218) (5,159) (16,292) (21,361) (582) (5,380) (12,711) (21,033) 257 188 $64,182 $93,665 Cost of sales (711,430) Changes in inventories of finished goods and WIP Materials, plant, and contractor costs Employee benefits expense Depreciation and amortization Consulting fees Provision for impairment losses (1,628) (304) Other expenses (7,132) (8,043) Other gains and losses 537 Expenses Results from Operating Activities Finance income $40,059 $54,898 1,023 3,079 5,698 6,939 Finance costs (716) (711) (2,850) (4,816) Net finance income $307 $2,368 $2,848 $2,123 (513) 3,052 (5,679) Share of profit/(loss) of associates and jointly controlled entities Net Profit Before Tax $40,366 $56,753 $70,082 $90,109 Income tax expense (10,915) (17,920) (20,780) (27,190) (2,301) $29,451 $38,833 $49,302 $62,919 $(326,463) (346) (1,946) (310) 1,826 $29,105 $36,887 $48,992 $64,745 Net Profit After Tax Foreign exchange differences (net of tax) Total Comprehensive Income IM A ED U C ATIO NA L C A S E JOURNAL 5 VOL. 8, N O. 1, ART. 2, MARCH 2015 $(324,162) Table 3. Balance Sheet (in thousands of Australian dollars) June 30, 2010 June 30, 2011 June 30, 2012 June 30, 2013 $51,921 $78,285 $51,091 $90,728 72,500 2,748 Unaudited January 31, 2014 Current Assets Cash and cash equivalents Short-term deposits $15,316 Trade and other receivables 42,162 49,542 196,884 83,254 103,279 Inventories and WIP 14,621 29,622 11,331 150,491 40,616 Other assets 2,246 1,574 2,487 1,560 (23,415) Noncurrent assets classified as held for sale 6,900 $159,023 $334,293 $331,316 $135,796 73,293 Current tax assets 2,535 Total Current Assets $117,850 Noncurrent Assets Trade and other receivables Term deposits Property, plant, and equipment Deferred tax assets 1,424 10,468 26,789 36,577 67,736 71,546 1,827 2,043 4,273 9,124 Investments accounted for using equity method Intangibles 7,051 14,260 2,545 15,621 15,637 48,243 40,332 44,237 54,257 144,108 132,894 163,760 $162,087 $213,280 $478,401 $464,210 $299,556 299,909 Other assets 90,467 Total Noncurrent Assets Total Assets Current Liabilities Trade and other payables 52,968 72,845 267,169 219,568 Borrowings 2,789 3,272 8,734 11,139 Current tax liabilities 8,644 6,387 8,367 525 755 825 3,970 $64,926 $83,259 $285,095 $234,677 4,901 17,453 14,547 51 2,793 1,067 Provisions Other liabilities 63,731 Total Current Liabilities $363,640 Noncurrent Liabilities Trade and other payables 9,246 Borrowings Deferred tax liabilities Investments accounted for using the equity method 1,517 308 489 493 164 299 489 493 Total Noncurrent Liabilities $3,785 $5,559 $29,981 $16,107 Total Liabilities 68,711 88,818 315,076 250,784 415,824 Net Assets 93,376 124,426 163,325 213,426 (116,268) 42,839 44,294 45,430 45,430 42,768 Provisions Other liabilities 50,667 $52,184 Equity Issued capital Profit reserve Reserves Retained earnings Total Equity Number of shares Share price 62,919 1,034 (912) (1,221) 1,471 49,505 81,080 119,116 103,606 (159,036) 93,376 124,462 163,325 213,426 (116,268) 70,699,487 81,541,569 86,169,014 86,169,014 86,169,014 $2.66 $5.46 $4.37 $4.20 IM A ED U C ATIO NA L C A S E JOURNAL 6 VOL. 8, N O. 1, ART. 2, MARCH 2015 Table 4. Statement of Cash Flows (in thousands of Australian dollars) 2010 2011 2012 2013 Cash Flows from Operating Activities Receipts from customers 245,418 431,399 744,720 1,176,226 Payments to suppliers and employees (215,240) (373,464) (631,924) (1,113,073) Other revenue 943 638 Income taxes paid (670) (20,390) (21,537) (45,231) $30,451 $38,183 $91,259 $17,922 (8,371) (11,257) (39,737) (19,521) 224 6,485 500 869 1,023 3,079 5,649 7,379 (86,760) 73,545 Net cash flows provided by operating activities Cash Flows from Investing Activities Payments for property, plant, and equipment Proceeds from disposal of property, plan, and equipment Interest received Term deposits matured/expired Amount received from joint ventures 130 Acquisition of investments or associates (205) (3,439) (7,124) (1,898) (123,787) 18,907 1,458 Payment of deferred consideration (19,798) Net cash flows provided by/used in financing activities $42,604 Cash Flows from Financing Activities Proceeds from issue of share capital Proceeds from borrowings Repayment of borrowings (4,131) Interest paid Dividends paid Net cash provided by/used in financing activities Net increase/decrease in cash and equivalents Cash and equivalents at beginning of year Effect of exchange rate changes (3,464) 1,136 23,011 9,152 (4,698) (9,654) (271) (658) (2,850) (4,877) (3,419) (7,257) (11,265) (15,510) $11,086 $(9,921) $5,334 $(20,889) 34,413 26,364 (27,194) 39,637 17,440 51,921 78,285 51,091 $78,285 $51,091 $90,728 67 Cash and equivalents at end of year $57,920 Table 5. Reconciliation (in thousands of Australian dollars) Profit for the year after tax Depreciation and amortization 2010 2011 2012 2013 $29,450 $38,832 $49,302 $62,919 21,361 3,217 5,159 16,292 907 (1,815) (43,488) 28,409 (25,202) (7,380) (154,393) 119,258 Decrease/Increase in inventories and WIP (9,696) (15,000) 18,291 (139,160) Decrease/Increase in other current assets (104) 671 (913) 927 Increase in deferred tax assets (779) (215) (2,231) (4,851) Decrease/Increase in trade and payables 21,881 19,877 203,417 (37,123) Decrease/Increase in current tax liabilities 10,649 (2,311) 1,980 (10,903) 2,742 (1,727) Other noncash differences Decrease/Increase in trade debtors and receivables Decrease/Increase in deferred tax liabilities 64 Increase in other provisions 64 365 260 86 $30,451 $38,183 $91,259 $17,922 Net cash inflow from operating activities IM A ED U C ATIO NA L C A S E JOURNAL 7 VOL. 8, N O. 1, ART. 2, MARCH 2015 QUESTIONS 3. FINANCIAL STATEMENT ANALYSIS a.\t\u0007 For the years ending June 30, 2013, and June 30, 2011, compute and discuss the return on equity (ROE), return on assets (ROA), profit margin ratio, asset turnover ratio, current ratio, cash flow ratio, debt-to-equity ratio, interest coverage ratio, debt coverage ratio, NTAB, EPS, DPS and the PER. b.\t\u0007 Discuss the major differences between your analysis of the June 30, 2013, report and the June 30, 2011, report (prior to the takeover of CTEC). Appraise the problems faced by FGL management in light of your analysis. c.\t\u0007 Using the January 31, 2014, unaudited financial information, compute the ROE, ROA, profit margin ratio, asset turnover ratio, current ratio, cash flow ratio, debt-toequity ratio, interest coverage ratio, debt coverage ratio, NTAB, EPS, DPS and the PER. Comment on the ratio analyses performed. 1. READING FINANCIAL STATEMENTS Refer to FGL's June 30, 2013, financial reports and answer the following questions: a.\t\u0007 State the accounting equation at the beginning and end of the year and the changes between the beginning and end of the year. b. \u0007State the changes in the company's equity during 2013. Speculate on why the change. c.\t\u0007 What is the main asset the company owns, and what is its value? Compare this to the total equity. State your conclusion from this comparison. d.\t\u0007 Outline the \"other\" item that makes up comprehensive income. Why is it important to segregate this amount on the income statement? e.\t\u0007 Outline the largest expenses on the income statement. Compare them to the cash, debtors, creditors, and inventory balances. Comment on this comparison. f.\t\u0007 State the total revenue and net profit attributable to members of FGL and earnings before interest and tax (EBIT). g.\t\u0007 Compare the net profit with the net cash flows from operating activities. Which amount is larger? Is this normal? h. \u0007Examine the Reconciliation of Cash Flows from Operations with the net profit after tax (NPAT). Outline the three major reconciliation items, and state how they changed. i. \u0007Comment on the changes discovered in the cash flow/ profit reconciliation amounts from part h. j.\t\u0007 Outline the changes that have occurred in the company's financing activities. State your opinion on the appropriateness of the quantum of the dividends paid to shareholders. k.\t\u0007 State what investment activity FGL undertook in 2013. Was there a net investment or a divestment? 4. COMPANY GROWTH a.\t\u0007 Outline and compare two types of company growth strategies. b.\t\u0007 Hypothesize why it is important to compute financial metrics that link the income statement and the balance sheet to help understand the growing business. Use the FGL example to test your hypothesis. REFERENCES Forge Group Ltd 2013 Annual Report, www.openbriefing. com/AsxDownload.aspx?pdfUrl=Report%2FComNews%2F2 0130829%2F01438557.pdf. Forge Group Ltd 2011 Annual Report, http://hotcopper.com. au/threads/ann-2011-annual-report-to-shareholders.1552428/ Martin Jones, Andrew Saker, and Ben Johnson, \"Consolidated Group Report by Administrators pursuant to Section 439A(4)(a) of the Corporations Act 2001,\" Ferrier Hodgson, March 10, 2014, www.ferrierhodgson.com/au/~/ media/Ferrier/Files/Documents/Corp%20Recovery%20M atters/Forge%20Group/439A%20Report%20Pack.pdf. 2. WORKING CAPITAL MANAGEMENT a.\t\u0007 Explain the concept of working capital, and outline the working capital accounts on the balance sheet. b.\t\u0007 Discuss why it is important for firms to manage their working capital. In your discussion, comment on the level of working capital needed and steps that firms can take if their working capital is insufficient. c.\t\u0007 Demonstrate how working capital is related to cash and profit. d.\t\u0007 Compute the operating cash cycle for FGL for the years 2011, 2012, and 2013. Outline and discuss the implications of this computation. IM A ED U C ATIO NA L C A S E JOURNAL 8 VOL. 8, N O. 1, ART. 2, MARCH 2015 ABOUT IMA (Institute of Management Accountants) IMA, the association of accountants and financial professionals in business, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession. Globally, IMA supports the profession through research, the CMA (Certified Management Accountant) program, continuing education, networking and advocacy of the highest ethical business practices. IMA has a global network of more than 75,000 members in 120 countries and 300 professional and student chapters. Headquartered in Montvale, N.J., USA, IMA provides localized services through its four global regions: The Americas, Asia/Pacific, Europe, and Middle East/Africa. For more information about IMA, please visit www.imanet.org IM A ED U C ATIO NA L C A S E JOURNAL 9 VOL. 8, N O. 1, ART. 2, MARCH 2015