February 2021 is the financial year-end of Yellowwood Ltd. The company has promised the financial analysts and traders, earnings per share (EPS) growth of 12.5%. In January 2021 management discontinue a product line, which resulted in possible obsolete stock to the value of R2.5m. If management provide the full provision for obsolete stock, the earnings per share target of 12.5% will not be met. Management decided not to raise any provision to ensure the earnings per share target of 12.5% is achieved

Required: 1. Do you agree with management decision? Discuss. (5)

2. Identify assets, liabilities, income, expenses which are overstated or understated. (4)

3. Identify 3 ratios which have been impacted by managements decision and indicate if they were overstated or understated. (6)

4. Name 5 short comings in the use of earnings per share as the only measure for profitability. (5)