Question 1 (10 marks) The following summarised balance sheets (years ending 31 December) are presented for Zippy Software, a firm established in 2010 to develop office administration software. The firm went public via an IPO in 2011. All numbers are in $000's. 2013 2014 2015 Current Assets: 70,000 40,000 16,000 Receivables 42,000 62,000 70,000 Inventory 26,000 30,000 32,000 138,000 132,000 118,000 Cash 86,000 90,000 96,000 Non-current Assets Plant & Equipment (net) Capitalised Research & Development 64,000 84,000 150,000 288,000 174,000 306,000 105,000 201,000 319,000 Current Liabilities: Accounts Payable 26,000 180,000 36,000 180,000 42,000 180,000 Debt Non-current Liabilities Owners Equity Contributed capital Retained earnings* 30,000 52,000 30,000 60,000 30,000 67,000 288,000 306,000 319,000 10,000 10,000 10,000 Dividends paid * The only changes in the retained earnings balance are for the addition of annual income and the payment of dividends (as indicated). Page 2 of 8 eased from $2.00 to $3.50, while the roximately 30%. However, while the Share price has fallen from $3.50 to $2.20. During 2014 and 2015, Zippy's share price increased from $2.00 to corresponding increase in the market index was approximately 30%. Howev market has risen slightly during 2016, Zippy's share price has fallen tro One of your friends who happens to be a senior manager at Zippy tells you su by this. How can a firm with a sound track record of earnings growth and dividends suddenly be "punished" by the market. Your friend mentions that she say securities analyst on a website state that since the release of the 2015 financial resums, the market views Zippy as having a "low quality of earnings". She is puzzled by this term. Required: 1. Explain to your friend what 'earnings quality' means and why it is important. (4 marks) 2. An analyst believes that Zippy's Capitalised Research & Development cost has been impaired and should be written down by $5 million. Assuming 30% tax rate, please list all the adjustments to accounting numbers to recognize the impairment. (6 marks) Question 1 (10 marks) The following summarised balance sheets (years ending 31 December) are presented for Zippy Software, a firm established in 2010 to develop office administration software. The firm went public via an IPO in 2011. All numbers are in $000's. 2013 2014 2015 Current Assets: 70,000 40,000 16,000 Receivables 42,000 62,000 70,000 Inventory 26,000 30,000 32,000 138,000 132,000 118,000 Cash 86,000 90,000 96,000 Non-current Assets Plant & Equipment (net) Capitalised Research & Development 64,000 84,000 150,000 288,000 174,000 306,000 105,000 201,000 319,000 Current Liabilities: Accounts Payable 26,000 180,000 36,000 180,000 42,000 180,000 Debt Non-current Liabilities Owners Equity Contributed capital Retained earnings* 30,000 52,000 30,000 60,000 30,000 67,000 288,000 306,000 319,000 10,000 10,000 10,000 Dividends paid * The only changes in the retained earnings balance are for the addition of annual income and the payment of dividends (as indicated). Page 2 of 8 eased from $2.00 to $3.50, while the roximately 30%. However, while the Share price has fallen from $3.50 to $2.20. During 2014 and 2015, Zippy's share price increased from $2.00 to corresponding increase in the market index was approximately 30%. Howev market has risen slightly during 2016, Zippy's share price has fallen tro One of your friends who happens to be a senior manager at Zippy tells you su by this. How can a firm with a sound track record of earnings growth and dividends suddenly be "punished" by the market. Your friend mentions that she say securities analyst on a website state that since the release of the 2015 financial resums, the market views Zippy as having a "low quality of earnings". She is puzzled by this term. Required: 1. Explain to your friend what 'earnings quality' means and why it is important. (4 marks) 2. An analyst believes that Zippy's Capitalised Research & Development cost has been impaired and should be written down by $5 million. Assuming 30% tax rate, please list all the adjustments to accounting numbers to recognize the impairment. (6 marks)