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Question 1 Tang's summarized financial statements for the years ended 31 March 20x2 and the comparative figures are shown below. Statements of comprehensive income for the year ended 31 March Revenue Cost of sales 20x2 20x1 $m $m 2,700 1,820 (1,890) Gross profit (1,092) 810 Distribution costs 728 (230) (130) Administrative costs (345) (200) Finance costs (40) (5) Profit before tax 195 393 Income tax expense (60) (113) Profit for the year 135 280 Other comprehensive income 80 Total comprehensive income Nil 215 280 Statements of financial position as at 31 March 20x2 $m 20x1 $m $m $m Assets Non-current assets: Property, plant and equipment 680 410 Intangible asset: manufacturing licence 300 200 Investment at cost: shares in Raremetal 230 - 1,210 610 Current assets: Inventory 200 110 Trade receivables 195 75 Bank - 395 Total assets 120 305 1,605 915 Equity and liabilities Equity: Equity shares (20x2: 350 million shares; 20x1: 250 million shares) 350 250 Reserves Revaluation 80 Retained earnings - 375 295 805 545 ACC207 Assignment 2 SIM UNIVERSITY Assignment 2 - Page 4 of 6 Non-current liabilities: 5% loan notes 100 100 10% secured loan notes 300 400 - 100 Current liabilities: Bank overdraft 110 - Trade payables 210 160 Current tax payable 80 400 110 270 Total equity and liabilities 1,605 915 Statement of cash flows for the year ended 31 March 20x2 Cash flows from operating activities: Profit before tax $m $m 195 Adjustments for: Depreciation/amortisation of non-current assets 140 Finance costs 40 Increase in inventory (90) Increase in trade receivables Increase in trade payables (120) 50 Cash generated from operations 215 Interest paid (40) Income tax paid (90) Net cash from operating activities 85 Cash flows from investing activities: Purchase of property, plant and equipment (305) Purchase of intangibles (125) Purchase of investment (230) Net cash used in investing activities (660) Cash flows from financing activities: Shares issued 100 Issue of 10% loan notes 300 Equity dividends paid (55) Net cash from financing activities 345 Net decrease in cash and cash equivalents (230) Cash and cash equivalents at beginning of period 120 Cash and cash equivalents at end of period (110) ACC207 Assignment 2 SIM UNIVERSITY Assignment 2 - Page 5 of 6 The following information is relevant: Depreciation/amortization charges for the year ended 31 March 20x2 were: $ million Property, plant and equipment 115 Intangible asset: manufacturing licence 25 There were no sales of non-current assets during the year, although the property has been revalued. The following additional information has been obtained in relation to the operations of Tang plc for the year ended 31 March 20x2: (i) On 1 June 20x1, Tang won a tender for a new contract to supply Jetside with aircraft engines that Tang plc manufactures under a recently-acquired licence. The bidding process was very competitive and Tang plc had to increase its manufacturing capacity to fulfil the contract. (ii) Tang also decided to invest in Raremetal by acquiring 8% of its equity shares in order to secure supplies of specialised materials used in the manufacture of the engines. No dividends were received from Raremetal nor had the value of its shares changed since acquisition. (iii) Tang revalued its property during the year to facilitate the issue of the 10% loan notes. On seeing the results for the first time, one of the company's non-executive directors is disappointed by the current year's performance. Required: (a) Explain how the new contract and its related costs may have affected Tang's operating performance, identifying any further information that may be useful to your answer. Your answer should be supported by calculating appropriate ratios in profitability, solvency and fixed asset turnover but ratios and analysis of working capital are not required. (65 marks) (b) Do an analysis on the cash flow statement and give your recommendation on what should have been done to prevent the deterioration of cash and cash equivalents from the previous year. (10 marks) ACC207 Assignment 2 SIM UNIVERSITY Assignment 2 - Page 6 of 6 Question 2 (a) Define the term \"quality of earnings\". Is it a desirable trait? (3 marks) (b) Discuss the four (4) techniques that management can use to improve a company's reported earnings performance in the short run. (8 marks) (c) Give four (4) examples of low-quality earnings components. (4 marks) Question 3 (a) What are \"free cash flow\"? Explain the difference between a company operating cash flow and its free cash flow. (4 marks) (b) Reported earnings numbers often contain three (3) distinctly different components, each subject to a different earnings capitalization rate: (i) A permanent earnings component, which is expected to persist into the future and is therefore valuation-relevant. In theory, the multiple for this component should approach 1/r. (ii) A transitory earnings component, which is valuation-relevant but is not expected to persist into the future. Because transitory earnings result from one-time events or transactions, the multiple for this component should approach 1.0. (iii) A value-irrelevant earnings (or noise) component, which is unrelated to future free cash flow or future earnings and therefore, is not pertinent to assessing current share price. Such earnings components should carry a multiple of zero. Above statements are extracted from the title, Financial reporting & Analysis by Revsine, Collins, Johnson, Mittelstaedt: \"Research on Earnings and Equity valuation\". Required: Name the elements of the multiple-step income statements that correspond to the three earnings components listed under (i) to (iii) above. Briefly explain your selection. (6 marks) ---- END OF ASSIGNMENT ---- Question 1 Tang's summarized financial statements for the years ended 31 March 20x2 and the comparative figures are shown below. Statements of comprehensive income for the year ended 31 March Revenue Cost of sales 20x2 20x1 $m $m 2,700 1,820 (1,890) Gross profit (1,092) 810 Distribution costs 728 (230) (130) Administrative costs (345) (200) Finance costs (40) (5) Profit before tax 195 393 Income tax expense (60) (113) Profit for the year 135 280 Other comprehensive income 80 Total comprehensive income Nil 215 280 Statements of financial position as at 31 March 20x2 $m 20x1 $m $m $m Assets Non-current assets: Property, plant and equipment 680 410 Intangible asset: manufacturing licence 300 200 Investment at cost: shares in Raremetal 230 - 1,210 610 Current assets: Inventory 200 110 Trade receivables 195 75 Bank - 395 Total assets 120 305 1,605 915 Equity and liabilities Equity: Equity shares (20x2: 350 million shares; 20x1: 250 million shares) 350 250 80 - Reserves Revaluation Retained earnings 375 295 805 545 ACC207 Assignment 2 SIM UNIVERSITY Assignment 2 - Page 4 of 6 Non-current liabilities: 5% loan notes 100 100 10% secured loan notes 300 400 - 100 Current liabilities: Bank overdraft 110 - Trade payables 210 160 Current tax payable 80 400 110 270 1,605 915 Total equity and liabilities Statement of cash flows for the year ended 31 March 20x2 Cash flows from operating activities: Profit before tax $m $m 195 Adjustments for: Depreciation/amortisation of non-current assets Finance costs Increase in inventory 140 40 (90) Increase in trade receivables Increase in trade payables (120) 50 Cash generated from operations 215 Interest paid (40) Income tax paid (90) Net cash from operating activities 85 Cash flows from investing activities: Purchase of property, plant and equipment (305) Purchase of intangibles (125) Purchase of investment (230) Net cash used in investing activities (660) Cash flows from financing activities: Shares issued 100 Issue of 10% loan notes 300 Equity dividends paid (55) Net cash from financing activities 345 Net decrease in cash and cash equivalents (230) Cash and cash equivalents at beginning of period 120 Cash and cash equivalents at end of period (110) ACC207 Assignment 2 SIM UNIVERSITY Assignment 2 - Page 5 of 6 The following information is relevant: Depreciation/amortization charges for the year ended 31 March 20x2 were: $ million Property, plant and equipment 115 Intangible asset: manufacturing licence 25 There were no sales of non-current assets during the year, although the property has been revalued. The following additional information has been obtained in relation to the operations of Tang plc for the year ended 31 March 20x2: (i) On 1 June 20x1, Tang won a tender for a new contract to supply Jetside with aircraft engines that Tang plc manufactures under a recently-acquired licence. The bidding process was very competitive and Tang plc had to increase its manufacturing capacity to fulfil the contract. (ii) Tang also decided to invest in Raremetal by acquiring 8% of its equity shares in order to secure supplies of specialised materials used in the manufacture of the engines. No dividends were received from Raremetal nor had the value of its shares changed since acquisition. (iii) Tang revalued its property during the year to facilitate the issue of the 10% loan notes. On seeing the results for the first time, one of the company's non-executive directors is disappointed by the current year's performance. Required: (a) Explain how the new contract and its related costs may have affected Tang's operating performance, identifying any further information that may be useful to your answer. Your answer should be supported by calculating appropriate ratios in profitability, solvency and fixed asset turnover but ratios and analysis of working capital are not required. (65 marks) (b) Do an analysis on the cash flow statement and give your recommendation on what should have been done to prevent the deterioration of cash and cash equivalents from the previous year. (10 marks) ACC207 Assignment 2 SIM UNIVERSITY Assignment 2 - Page 6 of 6 Question 2 (a) Define the term \"quality of earnings\". Is it a desirable trait? (3 marks) (b) Discuss the four (4) techniques that management can use to improve a company's reported earnings performance in the short run. (8 marks) (c) Give four (4) examples of low-quality earnings components. (4 marks) Question 3 (a) What are \"free cash flow\"? Explain the difference between a company operating cash flow and its free cash flow. (4 marks) (b) Reported earnings numbers often contain three (3) distinctly different components, each subject to a different earnings capitalization rate: (i) A permanent earnings component, which is expected to persist into the future and is therefore valuation-relevant. In theory, the multiple for this component should approach 1/r. (ii) A transitory earnings component, which is valuation-relevant but is not expected to persist into the future. Because transitory earnings result from one-time events or transactions, the multiple for this component should approach 1.0. (iii) A value-irrelevant earnings (or noise) component, which is unrelated to future free cash flow or future earnings and therefore, is not pertinent to assessing current share price. Such earnings components should carry a multiple of zero. Above statements are extracted from the title, Financial reporting & Analysis by Revsine, Collins, Johnson, Mittelstaedt: \"Research on Earnings and Equity valuation\". Required: Name the elements of the multiple-step income statements that correspond to the three earnings components listed under (i) to (iii) above. Briefly explain your selection. (6 marks) ---- END OF ASSIGNMENT ---- Question 1 Tang's summarized financial statements for the years ended 31 March 20x2 and the comparative figures are shown below. Statements of comprehensive income for the year ended 31 March 20x1 20x2 $m Revenue $m 2,700 1,820 Cost of sales (1,890) Gross profit 810 Distribution costs (230) (130) Administrative costs Finance costs (345) (40) (200) (5) 195 (1,092) 728 393 Profit before tax Income tax expense (60) Profit for the year 135 Other comprehensive income 80 Nil Total comprehensive income 215 280 Statements of financial position as at 31 March (113) 280 20x1 20x2 $m $m $m $m Assets Non-current assets: Property, plant and equipment Intangible asset: manufacturing licence Investment at cost: shares in Raremetal Current assets: 680 410 300 200 230 - 1,210 610 Inventory Trade receivables Bank Total assets Equity and liabilities Equity: Equity sharess (20x2: 350 million share; 20x1: 250 million shares) Reserves Revaluation Retained earnings 110 200 195 - Non-current liabilities: 100 5% loan notes 10% secured loan notes Current liabilities: Bank overdraf Trade payables Current tax payable Total equity and liabilities 300 110 210 80 395 1605 75 120 305 915 350 250 80 375 295 805 545 100 400 - 100 400 160 110 270 1605 915 Statement of cash flows for the year ended 31 March 20x2 $m $m Cash flows from operating activities 195 Profit before tax Adjustments for: 140 Depreciation/amortisation of non-current assets Finance costs Increase in inventory Increase in trade receivables Increase in trade payables Cash generated from operations Interest paid Income tax paid Net cash from operating activities Cash flows from investing activities: Purchase of property, plant and equipment Purchase of intangibles Purchase of investment Net cash used in investing activities Cash flows from financing activities: Shares issued Issue of 10% loan notes Equity dividends paid Net cash from financing activities Net decrease in cash and cash equivalents 40 (90) (120) 50 215 (40) (90) 85 (305) (125) (230) (660) 100 300 (55) 345 (230) Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 120 (110) ACC207 Assignment 2 SIM UNIVERSITY Assignment 2 - Page 5 of 6 The following information is relevant: Depreciation/amortization charges for the year ended 31 March 20x2 were: $ million Property, plant and equipment 115 Intangible asset: manufacturing licence 25 There were no sales of non-current assets during the year, although the property has been revalued. The following additional information has been obtained in relation to the operations of Tang plc for the year ended 31 March 20x2: (i) On 1 June 20x1, Tang won a tender for a new contract to supply Jetside with aircraf engines that Tang plc manufactures under a recently-acquired licence. The bidding process was very competitive and Tang plc had to increase its manufacturing capacity to fulfil the contract. (ii) Tang also decided to invest in Raremetal by acquiring 8% of its equity shares in order to secure supplies of specialised materials used in the manufacture of the engines. No dividends were received from Raremetal nor had the value of its shares changed since acquisition. (iii) Tang revalued its property during the year to facilitate the issue of the 10% loan notes. On seeing the results for the first time, one of the company's non-executive directors is disappointed by the current year's performance. Required: (a) Explain how the new contract and its related costs may have affected Tang's operating performance, identifying any further information that may be useful to your answer. Your answer should be supported by calculating appropriate ratios in profitability, solvency and fixed asset turnover but ratios and analysis of working capital are not required. (65 marks) (b) Do an analysis on the cash flow statement and give your recommendation on what should have been done to prevent the deterioration of cash and cash equivalents from the previous year. (10 marks) ACC207 Assignment 2 SIM UNIVERSITY Assignment 2 - Page 6 of 6 Question 2 (a) Define the term \"quality of earnings\". Is it a desirable trait? (3 marks) (b) Discuss the four (4) techniques that management can use to improve a company's reported earnings performance in the short run. (8 marks) (c) Give four (4) examples of low-quality earnings components. (4 marks) Question 3 (a) What are \"free cash flow\"? Explain the difference between a company operating cash flow and its free cash flow. (4 marks) (b) Reported earnings numbers ofen contain three (3) distinctly different components, each subject to a different earnings capitalization rate: (i) A permanent earnings component, which is expected to persist into the future and is therefore valuation-relevant. In theory, the multiple for this component should approach 1/r. (ii) A transitory earnings component, which is valuation-relevant but is not expected to persist into the future. Because transitory earnings result from one-time events or transactions, the multiple for this component should approach 1.0. (iii) A value-irrelevant earnings (or noise) component, which is unrelated to future free cash flow or future earnings and therefore, is not pertinent to assessing current share price. Such earnings components should carry a multiple of zero. Above statements are extracted from the title, Financial reporting & Analysis by Revsine, Collins, Johnson, Mittelstaedt: \"Research on Earnings and Equity valuation\". Required: Name the elements of the multiple-step income statements that correspond to the three earnings components listed under (i) to (iii) above. Briefly explain your selection. (6 marks) ---- END OF ASSIGNMENT