Seminar 08 Week 09 - 0902

Seminar 08 Week 09 - 0902 - S OLUTIONS TO SELF STUDY...

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Unformatted text preview: S OLUTIONS TO SELF STUDY QUESTIONS 1 The adjustment required is to decrease assets and decrease retained earnings in the current period. In presenting financial statements for 2009 the comparative figures for a 2008 should be adjusted by decreasing assets and increasing expenses with resulting decreases in profit and closing retained earnings for 2008. 4 (a) Comparison of financial information can be made on an intracompany basis, an intercompany basis, and an industry average basis (or predetermined norms). An intracompany basis compares the same item with prior periods or with other financial items in the same period. An intercompany basis compares the same item with other companies’ published reports. The industry average and predetermined norm compare the item with the industry average, such as statistics compiled by Dun & Bradstreet or by industry associations. (b) 5. The intracompany basis of comparison is useful in detecting changes in financial relationships and significant trends within a company. The intercompany basis of comparison provides insight into a company’s competitive position. The industry averages provides information as to a company’s relative performance within the industry. Horizontal analysis (also called trend analysis) measures the dollar or percentage increase or decrease of an item over a period of time. In this approach, the amount of the item on one statement is compared with the amount of that same item on one or more earlier statements. Vertical analysis expresses each item within a financial statement in terms of a percentage of a relevant total or other common basis within the same statement. Page 2 of 6 E xercise 12.7 a) Perth Diners Ltd Condensed Balance Sheet as at 30 June 2011 Horizontal Analysis 80,000 90,000 40,000 210,000 Increase/ (Decrease) 8,000 (9,000) (9,000) (10,000) % change from 2010 10.0% (10.0%) (22.5%) (4.8%) 48,000 150,000 12,000 210,000 4,000 (15,000) 1,000 (10,000) 8.3% (10.0%) 8.3% (4.8%) 2011 2010 Current assets Property, plant & equipment (net) Intangibles Total assets 88,000 81,000 31,000 200,000 Current liabilities Non-current liabilities Shareholders’ equity Total liabilities & equity 52,000 135,000 13,000 200,000 b) Perth Diners Ltd Condensed Balance Sheet as at 30 June 2011 Vertical Analysis 2011 $ 2010 Percent $ Percent Current assets Property, plant & equipment (net) Intangibles Total assets 88,000 81,000 31,000 200,000 44.0% 40.5% 15.5% 100.0% $80,000 90,000 40,000 210,000 38.1% 42.9% 19.0% 100% Current liabilities Non-current liabilities Shareholders’ equity Total liabilities & equity $52,000 135,000 13,000 200,000 26.0% 67.5% 6.5% 100.0% 48,000 150,000 12,000 210,000 22.9% 71.4% 5.7% 100% Page 3 of 6 P roblem Set A 12.3 Emu Ltd a) 2010 2009 1) Profit margin ratio $120, 000 = 16.2% $740, 000 $100, 000 = 15.2% $660, 000 2) Gross profit ratio $320, 000 = 43.2% $740, 000 3) $210, 000 = 31.8% $660, 000 Asset turnover $740, 000 $660, 000 = 1.0 times = 1.1 times ⎡ $795, 000 + $665, 000 ⎤ ⎡ $533, 000 + $665, 000 ⎤ ⎢ ⎥ ⎢ ⎥ 2 2 ⎣ ⎦ ⎣ ⎦ 4) Earnings per share $120, 000 = $3.75 per share [31,984] 5) $100, 000 = $3.33 per share 30, 000 Price-earnings ratio $15.00 = 4.0 times $3.75 6) $10.00 = 3.0 times $3.33 Cash dividend payout ratio $20, 000 ** = 17% $120, 000 $13, 000* = 13% $100, 000 Calculations **($200,000 + $120,000 - $300,0000) 7) (b) *($113,000 + $100,000 - $200,000) Debt to total assets $155, 000 = 19.5% $795, 000 $165, 000 = 24.8% $665, 000 The underlying profitability of the company appears to have improved. For example, profit margin and gross profit ratio have both increased. The earnings per share has increased even though there are more shares in the denominator. In addition, the company’s price-earnings ratio has increased, which suggests that investors may be looking more favourably at the company. Also, the company appears to be involved in attempting to reduce its debt burden as its debt to total assets has decreased. B uilding Business Skills 12.2 Page 4 of 6 Zhang Ltd a) 1) 2010 Profit margin $6,723 = 1.1% $624,576 2009 $3119 = 0.6% $548,864 Sales revenue = 627,708-39-470-823-1800 = 624,576 2) = 550324-60-600-300-500 = 548,864 Return on Shareholders’ Equity – profit from continuing operations $6,723 $3,119 = 5.4% = 2 .5 % ($123,874 + $125,623) / 2 ($125,623 + 124,000 ) / 2 Return on Shareholders’ Equity – using profit for the period) $1,500 $2,619 =1.2% = 2.1% ($123,874 + $125,623) / 2 ($125,623 + $124,000) / 2 3) Return on Assets using profit after tax from continuing operations $6,723 $3,119 = 2.2% = 0.9% (($291,680 + $333,352) / 2 (($333,352 + $333,000) / 2 Return on Assets using profit after tax using profit for the period $1,500 $2,619 = 0.5% = 0 .8 % (($291,680 + $333,352) / 2 (($333,352 + $333,000 ) / 2 4) Times Interest Earned (using profit from continuing operations before finance cost and tax expense) $11,723 + $8,529 $5,830 + $6,440 = 2.4 times = 1.9 times $8,529 $6,440 A comparison of Zhang Ltd’s profitability ratios for 2009 and 2010 could be quite misleading if the effect of the discontinuing operations were not taken into account. Using profit for the period gives the impression that Zhang’s profitability is declining as the return on shareholders’ equity and return on assets decline. However, when profit from continuing operations is used the reverse trend is observed, that is, profitability is improving as evidence by the increase in the return on shareholders’ equity and the return on assets. The profit margin also shows improvement during this period. Page 5 of 6 b) 1) Inventory Turnover for 2010 $279,519 = 3.9 times ($55,117 + $88,853) / 2 2) 3) c) Receivables Turnover for 2010 $624,576 = 11.2 times ($47,583 + $63,908) / 2 Gross Profit Rate 2010 $624,576 − $279,519 = 55.2% $624,576 2009 $548,864 − $233,313 = 57.5% $548,864 Profitability has been improving and this has contributed to an improvement in Zhang Ltd’s ability to cover its interest expense. Although the gross profit rate decreased in 2010, this was offset by an increase in sales revenue which resulted in an increase in the dollar amount of gross profit. Zhang Ltd has discontinued some operations that appear to have been draining profitability. Although improved, interest cover is still low and should be monitored closely. Also, the inventory turnover is slow, indicating that Zhang has enough inventory in stock to cover approximately three months’ sales. Unless there is a long lead time for inventory acquisition or uncertainties about sources of supply, there may be scope for more efficient inventory policies. Page 6 of 6 ...
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