UNIVERSITI TUNKU ABDUL RAHMAN, ACADEMIC YEAR 2012/2013 APRIL EXAMINATION UKFF3083 FINANCIAL STATEMENT ANALYS) FRIDAY, 26 APRIL 2013 TIME: 9.00AM ~ 11.30AM (2.5 HOURS) BACHELOR OF SCIENCE (HONS) ACTUARIAL SCIENCE BACHELOR OF SCIENCE (HONS) FINANCIAL MATHEMATICS Instructions to candidates Section A: [Total: 40 marks] This ONE (1) question is compulsory and MUST be answered. Section B: [Total: 60 marks} TWO (2) questions ONLY to be answered. This question paper consists of 4 questions on 8 printed pages2 ATEMENT ANALYSIS [KFF3083 FINANCIA\ Section A ~ Answer ALL questions. (Compulsory) {Total 40 marks] Ql. Following are Techno's condensed consolidated statement of financial position and condensed consolidated statement of operations, in millions (unaudited), STATEMENT OF FINANCIAL POSITION Prior annual results (RM) Fy0s [FY0s [FYO3 | FY02_ [FY01 ASSETS: _ Cash and eash equivalents 4317/4232 | 3641 4910 Short term investments 406 273 525 Accounts receivables, net 2586 | 2269 4 Inventories 306 278) 400 — Other 1304 | 1416 | 1467 TOTAL CURRENT | 8.924) 7.877 [9726 ASSETS a P&Enet 1317__| 913 996 Investments 6770 | 5267 2418 Other non current assets 391 366 530 TOTAL ASSETS 1931 | 15470 [13670 LIABILT 889! 5989 [5075 | 4286 ‘Accrued and other [saa [3580 [3044 [2444 [2492 TOTAL CURRENT 14136 | 10896 [8933 | 7519 | 6778 LIABILITIES t _ | Long term debt 305 | 505 520 509 Other non current 2089 | 1630 802 761 | liabill _ _ _ TOTAL LIABILIT 16730_| T3037 3841 “| STOCKH 6485 | 6280 4694 EQUITY: TOTAL LIABILITIES i AND STOCKHOLDERS | EQUITY, ‘This question paper consists of 4 questions on 8 printed pages3 UKFF3083 FINANCIAL STATEMENT ANALYSIS, STATEMENT OF OPERATIONS i] Annual Results (RM) FY0s | FY0d V FY02 FYOI Income Statement I Net revenue 31168 | 31888 __ Sequential Growth _ Y/Y Growth 2.3% 26.2% Cost of revenue 25661 25445 Gross Margin 3507 6443 SG&A 2784 3193 R&D 452 482_| Special charges 105 ‘otal operating expenses 3718 3780 | Operating income 1789 2663 Investment and other (58) 531 income,net, | Income before income tax & | 4445 | 3724 3027 | 1731 3194 change in accounting principle Lncome tax provision 1402 [1079 485 958 | | Cumulative effect of change - - - 59 in accounting principle _ _ Net income 3043 2645 2122 1246 _ 2177 15% | 24.6% | 70.3% | 42.8% | _30.7% Required: (a) Using the above information, calculate the following ratios for FY02 to FY0S: i, Current ratio fi, Quick ratio iii, Working capital iv. Days in accounts receivable Days supply in inventory Days in accounts payabie Net days working capital Long-term debt to assets ratio Debt to equity ratio. X. Liabilities to total assets (20 marks) This question paper consists of 4 questions on 8 printed pages4 FF3083 FINANCIAL STATEMENT ANALYSIS wued) (b) Comment on the changes to Techno's liquidity risk. (6 marks) (©) Comment on the changes to Techno's solveney risk (4 marks) (d) Describe the limitations of the current ratio as a measure of liquidity and what is the appropriate use of the current ratio as a measure of liquidity? (10 marks) [Total: 40 marks] This question paper consists of 4 questions on & printed pagesUKEF3083 FINANCIAL STATEMENT ANALY! Secti a 5 n B— Answer TWO (2) questions only. [Total: 60 marks} (a) (b) (©) L3 Sports, a wholesaler that has been in business for two years, purchases its inventories from various suppliers. During these two years, each purchase has been at a lower price than the previous purchase. L3 uses the lower of (FIFO) cost or market method to value its inventories. The original cost of the inventories exceeds its replacement cost, but it is below the net realizable value (also, the net realizable value less a normal profit margin is lower than replacement cost for the inventories.) Required: i, Explain the criteria used in determining costs to include in inventory. (4 marks) ii, Why is the lower of cost or market rule used in valuing inventory? (3 marks) iii, At what amount should L3 report its inventories in the balance sheet and explain the application of the lower of cost or market rule in this situation (4 marks) iv. Explain what would be the effect on ending inventories and net income for the second year had L3 used the lower of (average) cost or market inventory method instead of the lower of (FIFO) cost or market inventory method? (4 marks) Earnings are extremely important to a publicly traded company and the creditors and investors of the company. However, looking at earnings without regard to the quality of those earnings is hazardous to the health of creditors and investors. i, Why is the determination of eamings quality and persistence important? ii, Explain recasting of the income statement and give THREE (3) examples of items that are recasted. xplain adjusting of the income statement and give THREE (3) examples of items that are recasted. (9 marks) Explain why might an analysis of the financial statements need to adjust the book value of assets by giving THREE (3) examples of the need for possible adjustments to book value. (6 marks) [Total: 30 marks] This question paper consists of 4 questions on 8 printed pages6 UKFF3083 FINANCIAL STATEMENT ANALY! Section B (Continued Q2. (a) (b) (c) Chloe Bhd shows that the following condensed income statement information for the year ended December 31, 2012: Income before extraordinary gain RM30,000 Plus: Extraordinary gain, net of tax expense of RM2,000 5,000 Net Income RM35,000 ‘The company declared dividends of RM3,000 on preferred stock and RMS5,000 on common stock. At the beginning of 2012, 20,000 shares of common stock were outstanding. On July 1, 2012 the company issued 1,000 additional common shares. The preferred stock is not convertible Required: Compute the earnings per share (3 marks) How much of the earnings per share appears to be recurring? (3 marks) Explain the effects of financial leverage on earnings and when is the use of financial leverage advantageous and disadvantageous? (6 marks) State TWO (2) approaches to examining a firm’s long term debt paying ability and discuss why each of these approaches gives an important view of a firm’s ability to carry debt. (6 marks) You are given the following data for Gracil Company Sdn Bhd. for 2010, 2011 and 2012 (amount in thousands). [ 2012 2011 2010 1 ‘Net Income RM445 RM402_ RM345 ‘Average number of 135 134 | 132 ‘common shares outstanding _ | Average common. RM1231 RM964, RM735, shareholder equity _| a i, Calculate ROCE for the three years. (3 marks) ii, Calculate basic EPS for the three years. (3 marks) iii, Interpret your findings for both ROCE and EPS (6 marks) [Total: 30 marks] ‘This question paper consists of 4 questions on 8 printed pages7 UKFF3083 FINANCIAL STATEMENT ANALYSIS Section B ( nued) Q3. (a) (i) You are analyzing ABC Company, a computer manufacturer. You notice that inventory turnover this year is significantly lower than prior years, Provide three explanations that would be consistent with this observation. Explain whether these would be of concem to you and what the effect might be on next period's financial results. (6 marks) (i) You are analyzing ABC Company, a computer manufacturer. You notice that accounts receivable turnover this year is significantly lower than prior years. Provide three explanations that would be consistent with this observation, Explain whether these would be of concern to you (6 marks) (b) Below is the income statement and balance sheet of Clarissa Sdn Bhd. Tacome Statement for the year ended September 30, 2012 (RM in thousa | 2011 2012 __| _ 500,000 I 512,000 : Costs of sales | (395,000) [ (404.480) ‘Gross Margi “| 105,000 | 107,520 Sel (60,000) (61,440) “Administrative | | Income before interest 45,000 | 46,080 and taxes, | [Interest expense (12,320) Tncome before income | 33,760 taxes ee ee a (12,812) (012,322) Ee 22,289 21438 | { | 2011 2012 ASSETS | Current Assets Prepaid expenses 11,000 Total Current Assets 126,507 | | Property, plant and | 390,000 411,000 equipment __| [Accumulated depreciation | (233,000) 250,000 Property, plant and 157,000 161,000 equipment, net ft Other assets, net 27,000 26,000 [amortization _| _ Total Assets 283,500 | 313507 Liabilities and ‘This question paper consists of 4 questions on 8 printed pages8 UKFF3083 FINANCIAL STA’ NT ANALYSIS [Shareholders Equity Current Liabilities - id ‘Current portion of long term 12,000 13,000 debt _ "Notes payable 30,000 31,000 ‘Accounts payable 39,500. ‘Accrued liabilities 21,569 Income taxed payable 8,900 Total Current Liabilities 111,969 | Longtermdebt 87,000 Non-current deferred income [10,000 | tax Other non-current Tiabilities 4340 Shareholders equity = Common stock-Class A 3,000 Capital in excess of par 21,000 Retained earnings 46,191 70,191 283,500 313,507 From this information prepare a statement of cash flows for the year ended September 30, 2012. (using Indirect method) (18 marks) [Total: 30 marks] "This question paper consists of 4 questions on 8 printed pages