Kindly refer to the images below. Read and analyze the given data and answer the question that follow with a thorough explanation. Attach necessary computation if needed.

answer the 3 questions given on the last 3 images.

>. O D l U) LIJ U) 'I O with these being accounted for as cash ow hedges, and are considered effective instruments. In addition to qualitatively reviewing the adopted accounting policies, quantitative analysis of the resulting financial information is also important. This may involve consideration of income, cash flow, accruals and revenue or expense items, either separately or together. Presented in Figure 01.15 is NOPAT and cash flow from operations (CFOPS) for the period 2010-18. This highlights operating profit after tax at a peak of $1182.3m in 2016 after dramatically declining to $120.Bm in 2012, with a slight rebound to $136.9m in 2013. Over this same period, cash flow from operations was less volatile, but still recorded substantial variations, peaking at $3413m in 2018 after a low of $2643m in 2014 followed by a modest increase to S1227m in 2016. These changes correspond with the changes in the industry environment described earlier. The reasonably close association between NOPAT and CFOPS suggests that earnings are of a relatively 'high' quality. FIGURE c1.15 Operating profit and cash flow from operations, 20051 8 4000 3000 2000 1000 0 -1000 2005 2006 2007 2000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Cash Flow from Operations Operating Profit A limited analysis of components of income, and consideration of how this might be impacted by accruals, is possible and for demonstration purposes fuel expense is reviewed here. Fuel expense has been selected as it is one of the more economically signicant expenses, with variations materially impacting income. It is also potentially subject to manipulation through decisions on the valuation of inventories and the realisation of hedge contract gains or losses. Fuel expenses for the years 2005-18 are presented in Figure 01.16, which clearly shows a signicant variation in expenses. However, this can be due to changes in fuel prices, exchange rates and level of operation. The impacts of these factors are shown in Figure C1.17, which displays fuel expense adjusted for the level of operation, measured by ASK and fuel prices expressed in Australian dollars. There is a clear correspondence between the two, suggesting that the major causes of variation in fuel expense are both the level of business activity and fuel prices. Source: Qantas Airways Ltd FIGURE CI .16 Fuel expense, 2005-18 5000 4500 4000 3500 3000 g 2500 2000 1500 1000 500 Source: Qantas Airways Ltd Part B Accounting analysis The nancial statements represent a window on the activities of the rm. and accounting analysis is concerned with determining the quality of information provided by such a view. This requires consideration of a number of factors, including what has influenced the managers' accounting policy choice, noise from accounting policy choice, and forecast errors. FIGURE C1.17 Comparison of fuel expense and fuel price, 2000-13* 140 0.035 120 - 0.03 100 0.025 80 - -0.02 60 - 0.015 40 -0.01 20 0.005 0 2012 2011 2007 2009 2010 2000 2013 2008 Fuel Expense/ASK Fuel Price (AUD) *Later updates are unavailable Source: Qantas Airways Ltd Summary When compared to some competitors, Qantas' accounting policies might be considered aggressive. In other areas, however, Qantas is simply following industry standard practices. It must also be recognised, though, that in some cases accounting practices may be universally aggressive in the airline industry. Nevertheless, the association between NOPAT and CFOPS provides some comfort that the financial statements are accurately reflecting Qantas' performance. Concerns remain in regards to the accounting practices adopted for financial instruments and hedges and the potential for these to materially distort reported performance. Accordingly, these accounting practices and the related note disclosures should be subject to careful scrutiny.3 Update the accounting analysis in Part B for the most recent Qantas annual report available to you, and re- evaluate Qantas's accounting policies for the current year.Motivations for managing the financial reporting and disclosures For Qantas, a clear example of a prot announcement being affected by non-nancial circumstances was the 1993 nancial result. This featured large write-offs and abnormal items, and was identified in the media as an 'earnings bath'. The circumstances of the announcement were that Gary Pemberton and James Strong had both recently been appointed as Chairman and CEO, respectively, and the firm was in the lead-up to its IPQ and ASX listing. Management were looking to signal to potential investors that hard decisions had been made, and would continue to be made, to reform what had previously been a public sector organisation in order to ensure its profitability. In a similar vein, it is notable the 2000 prot announcement was the nal full year of tenure for both Pemberton and Strong, and Qantas reported a record prot of $762.8m, an increase of 15.1% on 1999. Conversely. the 2001 profit announcement was the rst annual profit announcement to be made by the new management team of Margaret Jackson (chairman) and Geoff Dixon (chief executive), and Qantas announced a profit decline of 19.7%. However, the extent to which this decline can be attributed to deliberate financial reporting decisions of new management is difficult to determine, as this period coincided with the increase in competition through the commencement of operations by both Impulse Airlines and Virgin Blue. In the half-year ended 31 December 2001 there was also further incentive for Qantas to reduce reported income. At the same time as Qantas was due to make its profit announcement, it was engaged in negotiations with unions in an attempt to limit wage and salary increases, which was an integral component of Qantas' strategy for reducing its cost structure. Consequently, whether Qantas could afford to pay substantial increases was central to the negotiations. Furthermore, with the nancial collapse of Ansett, and Qantas assuming a dominant market position. Qantas was under close supervision by the ACCC. This reinforced the motivation not to report a strong prot performance in the period. In November 2008, Alan Joyce was appointed CEO, and this was again accompanied by a major fall in operating profitability (84%). However, it must be noted that there was also a signicant change in operating conditions, thus the decline is not entirely attributable to the change of management. Rather, the departure of the former CEO QUESTIONS Use the analysis presented in this case, and any recent material available to you. 1 Select one accounting policy that was analysed in this case, and make an adjustment to the account of 10% of the recorded figure in either direction. Follow through the effect of this adjustment to the financial statements.2 Apart from the accounting policies identied in Part 3, what are likely to be policies that should be closely watched by auditors and analysts for a company in the airline industry? Why have you chosen each of them? Geoff Dixon could be described as opportunistic. This was further seen in the lack of a rebound in earnings over subsequent years. In 2011. there was a period of protracted industrial dispute followed by the grounding of the entire Qantas fleet. and the threat of lockout of employees by management. During this time. Qantas incurred significant financial losses. In such a circumstance there is a clear incentive for management to minimise protability in order to constrain union wage demands, enhance the possibility of receiving government support. and to accelerate the recognition of expenses. Despite having remained profitable during the GFC. the 2011-12 financial year saw Qantas post a $245 million loss. its first loss since full privatisation in 1995. Continued growth in the industry and cost reduction strategies have enabled Qantas to turn this poor result into a small prot of $560 million in 2015. and to increase that result to $980 million in 2018. Noise from accounting policy choice and forecast error Having considered the environment within which financial reporting occurs, we must shift our attention to evaluating the accounting policies adopted and their application. This involves identifying changes in accounting policies and key accounting policies and then considering whether these accounting practices are overly 'aggressive' in recognising income. This involves comparing Qantas with other firms in the same industry. It is unlikely, however, that rms will actively engage in earnings management through accounting policy choice. as the nature and impact of accounting policy changes are mandated disclosures. Rather, earnings management is more likely to be achieved by applying accounting policies (Le. accruals) and this requires more quantitative analysis. There were no changes in accounting policy in the Qantas Financial Report for the year ended 30 June 2018. From 2019. there will be changes caused by applying the new accounting standards AASB 15 Revenue from Contracts with Customers and AASB 16 Leases. Revenue recognition practices are disclosed in note 29(F). Passenger and freight revenues are recognised when passengers or freight are uplifted. This practice would be expected to generate signicant unearned revenues in the balance sheet. and consistent with expectation these totalled $3939m (23.1% of total revenues) at 30 June 2018. This was a slight increase from 2017 when the balance was $3685m (22.9% of total revenues). As tickets are pre purchased and are commonly non-refundable. this is a relatively conservative practice. However. it is standard in the airline industry. The most significant expense category for Qantas is staff costs. representing S4300m in 2018. The accounting practices applied to employee benefits are disclosed in Note 29(N) and are consistent with AASB119. Staff redundancy expenses of $43m (Note 1) were recognised in the income statement and this is consistent with the stated objectives of reducing the size of its workforce. This was a reduction on the previous year's value of $48m. Nevertheless. at balance date the provision amounted to $183m (Note 16). indicating that these plans had yet to be fully realised. Finally. superannuation commitments are disclosed in Note 23. This highlights plan assets at fair value of S 2468m. and leaving a deficit of $4644m. Problematically. the balance sheet (Notes 13 and 16) recognise net superannuation prepayments less liabilities of $292m. therefore actuarial losses of $690m'9 are unrecognised. This was up from $557m in 2017. As expected of a company with property. plant and equipment recorded at $1 2851 m. the depreciation expense is significant. The basis for determining depreciation is outlined in Note 290). Aircraft and engines are the most significant depreciable asset amounting to $10749m1 or 83.6% of total assets at 30 June 2018. These are depreciated over a period of 2520 years with a residual value of 010%. This compares to a depreciation period of 1520 years and a 510% residual value at Singapore Airlinesfn Therefore. this accounting practice at Qantas may be less conservative than practices employed by other firms in the airline industry. but at the same time allows Qantas considerable exibility in this aspect of its accounting policy. At 30 June 2018. the value of outstanding operating lease commitments was $1288m. of which $1179m related to non-cancellable operating leases. Although this was a decrease on the previous year at $1364m, it was down significantly from 2016. when the figure was $1468m. with $1366m non-cancellable. Qantas is also exposed to signicant interest rate. foreign currency and fuel price risks. Interest rate risks arise from the high value of noncurrent assets and the necessary debt (or lease) funding. From the notes to the nancial statements. it is apparent that Qantas actively manages these risks. At 30 June 2018. the value of financial instruments was net assets of $527m. an increase from sum in 2017.22 There are material gains and losses recognised in comprehensive income that are consistent >- G D I U) LLI (I)