ACC1002 PROJECT - CHALLENGER

Question 1
Challenger s external/independent auditors are RSM Chio Lim LLP, and the Partner in charge of audit is Woo E-Sah.

The role of external auditors is to examine financial statements, to verify that they are prepared according to generally accepted accounting principles. (tb pg 6). The audit opinion that Challenger got was unqualified. This means that Challenger s financial statements, balance sheet and statement of changes in equity were prepared in accordance with the Financial Reporting Standards (FRS) in Singapore and the Accounting Standards Act.

An unqualified auditor s opinion indicates that external users can rely on the fairness of the financial statements, balance sheet and statement of changes in equity. The auditor s opinion is important to investors as it gives them confidence in the accuracy of the figures reported. Thus, this enables them to make a more informed analysis of the current and future profitability of the company, aiding them in making better investment decisions. It is also important to creditors, who may want to determine the likelihood of Challenger being able to repay future debts, if any, and gain confidence in making future loans to them.

Question 2
There are two accounting methods for revenue recognition, i.e. accrual basis accounting and cash basis accounting. Under accrual basis accounting, revenue is recognized when earned and expenses when incurred. On the other hand, under cash basis accounting, revenue is recognized when cash is received and expense is recorded when cash is paid. Since Challenger adopts the accrual basis accounting method (Sec 1:46, note 2), inflows and outflows of cash do not directly affect Challenger¶s revenue recognition principle. For example, if Challenger were to provide a service to its customers and the customer has yet to pay up, the revenue earned would still be recognized even though there is no inflow of cash. Similarly, if Challenger has incurred an expense but has yet to pay upfront, the expense will still be recognized even though there is

this will look good to current investors and future investors. In addition. Question 4b Question 5a Challenger depreciates its plant and equipment using the straight-line depreciation method. This method is appropriate because Challenger is in the IT electronics industry. inventories acquired at the beginning of the fiscal year are likely to be sold sooner.Salvage Value . which divides the depreciation equally throughout the plant and equipment s life. the receipts and payments of cash have no impact on Challenger¶s revenue recognition. making computation easy and convenient. Question 3 Question 4a Challenger uses the First-in-first out (FIFO) method. Straight line depreciation expense = Cost . hence yielding the highest gross profit and net income. it does not matter whether Challenger uses FIFO or Last-in-first out (LIFO) because first or older costs will be similar to the latest or recent costs. Hence. given that costs of consumer electronics are relatively steady. Financially. using the FIFO method over other inventory cost methods will assign the lowest amount to cost of goods sold. Hence. where inventories become outdated very quickly. However. given that Challenger is a listed company.no outflow of cash.

It also properly matches depreciation expense with the related revenue.html#ixzz1HmNDL2cj) However. it makes Challenger look better to current and potential investors. Units-of-production method offers a more accurate estimate of the asset s useful life and depreciation expense because it is based on usage. which are potential obligations that depend on a future event arising out of a past transaction or event. which Challenger can use for investments. Question 6 Yes. greater tax savings. Challenger is a publicly listed company.Useful life This policy is reasonable as Challenger belongs to the IT electronics industry. they are recorded as liabilities. where usage of plant and equipment is relatively constant from one year to the next (unlike other industries such as manufacturing or construction.com/accounting-articles/straightline-or-double-down-depreciation-method1320996. Furthermore. This results in lower net profits and thus. Hence. Financially. On the other hand.articlesbase. Since these can be reasonably estimated.8% 12. it is reasonable that they adopt this method of depreciation because it allows them to report a higher net income in the earlier years to the stockholders. . units-of-production and Double Declining Balance (DDB).3 to 10 years 100%/10%= 10 years 100%/33% = 3 years Shortest useful life is 3 years. DDB reports higher depreciation expense in the early periods of the asset s useful life.5% to 33% 10% to 33% Useful life of Challenger s plant and equipment . Challenger needs to weigh the trade-offs in choosing this method over the other 2 depreciation methods. where usage of equipment depends on demand). Challenger made provisions for several contingent liabilities. (http://www. Do pie charts X 2 Property Renovations Plant & Equipment 3.

Challenger owns 100% of all its subsidiaries. the financial statements presented cover both the parent and the Group s subsidiaries.Challenger introduced the Star-shield warranty in 2009. (Sec 1:45 . (Sec:1:44) Question 7b Yes. except for the following: Incall Systems Pte Ltd (acquired 4 June 2008) Singapore Telephonic call centre and data management services (PS Phuan & Co). Since goodwill is an intangible asset and is measured as the excess of the cost of an acquired entity over the value of the acquired net assets (subtracting the market value of a company s individual net assets (excluding goodwill) from the purchase price of the company). (Sec 1:45 .Note 1) Challenger uses the consolidation accounting method for its consolidated financial statements. the fact that goodwill on acquisition amounts to $535000 (Sec 1:85) suggests that Challenger has paid more than the market values of their subsidiaries net assets. (Check again) Question 8 . Dr Warranty Expense Cr Estimated Warranty Liability 1063 1063 Corporate guarantee given to bank in favour of a subsidiary in 2008 and 2009 Dr Cr Cash 350 Notes/ Accounts Payable 350 ** Supporting subsidiaries with deficits 1080 (2009) 528 000 (2008) (GARETH TO CHECK .Note 2) With reference to the data given on the effective percentage of equity held by Group (Sec 1:74 .Note 16).HOW TO WRITE JOURNAL ENTRIES) Question 7a Yes. These include the financial statements of the Company and all of its directly and indirectly controlled subsidiaries.

also known as accounts payable. Hence the existence of these trade payables mean that some inventories could have been purchased on credit terms of 30 days. particularly its ability to pay its bills and its solvency. In addition.789M of trade payables. a healthy cash flow would suggest to shareholders that Challenger is doing well.Note 26) Trade payables. lenders. refers to money owed to creditors. we realize that the decrease in cash and cash equivalents has been mainly due to payment of dividends. and not shown in the CFS. If the company does not keep up a constant rate of dividend. not just using cash. vendors or suppliers for products or services rendered. it is bad news for shareholders as dividend policy is a strong indication of future profitability. and capital expenditure incurred . it must also be noted that net cash flow from operating activities in 2009 had actually declined (from $14572000 in 2008 to $8308000 in 2009). However. This expansionary strategy has resulted in increased revenue (from $168723000 in 2008 to $191559000 in 2009) and profit net of tax (from $5981000 in 2008 to $11145000 in 2009) and is likely to continue result in increased profits in the future (provided that Challenger will be able to control its operating expenses and costs of goods purchased) Since dividends issued to shareholders are largely based on profits of the company. (Sec 1:85 .Question 9a I disagree because judging from the increase in PPE (from $4674000 in 2008 to $11119000 in 2009) and inventories (from $9229000 in 2008 to $15368000 in 2009). acquisition of buildings. it is apparent that Challenger has been using the cash and cash equivalents for investment in building and new retail outlets. which might have led to a decrease in dividends paid in that year because of lesser cash available for distribution. This would be recorded in the accounts payable account. There is also an outstanding balance of 16. Question 9b I disagree because the company may have bought inventories on credit as well. Note 28E (Sec 1:90) In addition. it will be good news to them if Challenger is able to increase revenue by reinvesting some of previous years¶ profits. cash and cash equivalents also helps determine the short-term viability of a company. Hence.

747. 993 = 2. we can conclude that the changes in cash amounts are not solely from purchases in inventories alone. These interim dividends are paid out of undistributed profits (reserves) brought from previous periods.747. Thus. Question 10 Interim Dividends are declared and distributed before the company s annual earnings have been known.745 5.742.748 Total dividends = 2747.916 = $ 2.012 X 228.747. 543 Total interim dividends = $0.516 = 5490.747 2. 916 b) Dr Dr Common interim dividend payable Common final dividend payable Cr Cash 2.742.916 + 2742.for new retail stores (Sec 1: 13). 543 = 2. 916 5. CALCULATED VALUES Dividend rate per share = 1.432 = $ 5. 516 2.2 cents Number of shares issued at end of year 2008 = 228.012 X 228. (Sec 1:56) NOTE 14 Sec 1:71 Calculated figures a) Dr Cr Cr Retained earnings Common interim dividend payable Final dividend payable 5.516 = $ 2743 Number of shares issued at end of year 2009 = 228. 432 2.492 2.742.490.490. 490 Dividends on equity are recognized as liabilities when declared. 516 2. 993 Total final dividends = $0.492 . 432 ACTUAL FIGURES FROM FS a) Dr Cr Cr Retained earnings Common interim dividend payable Final dividend payable 5.747 2.745 b) Dr Dr Common interim dividend payable Common final dividend payable Cr Cash 2. Interim dividends are recognized when declared by the Directors.

In other words. even though the company may be earning high profits or income. how do we use the values to support our answer?) Question 12a Net profit margin = Net income / Net sales Note: Challenger s net sales is its group revenue 2009 Net profit margin = 11145 / 191559 0. earnings per share will be low and this will be bad news for the shareholder. it is the amount of income attributable to one share of common stock. if the amount of shares issued is large. profit net of tax and total comprehensive income do not take the amount of shares issued by the company into account.05818 = 6% 2008 Net profit margin = 5981 / 168723 0. the existing shareholder can measure the value of earnings that he ³owns´ in addition to the earnings of the company as a whole. Hence. In contrast. (pls check the accuracy of this. By examining the company's earnings using its EPS.03544 = 4% . Also.Question 11 Judging the profitability of a company by its earnings per share (EPS) will be most useful to the existing shareholder because EPS measures the amount of income earned per each share of a company¶s outstanding common stock.

588 = 6 days 2008 Trade receivable turnover = 1684 / 168723 x 365 3. 26548 or 26286) 2008 ROE = (5981-0) / 20984 0.2850 = 29% Quick ratio = Quick assets / Current liabilities 2009 Quick assets = Current assets .4198 = 42% (Gareth. pls check do we use total equity or total shareholders fund. i.Trade receivable turnover = (Ending accounts receivable / Sales on account) x 365 2009 Trade receivable turnover = 2933 / 191559 x 365 5.Inventories = 40076 15368 = 24708 Quick ratio = 24708 / 25690 .e.643 = 4 days Return on equity (ROE) = (Net income stockholders equity Preferred dividends) / Average common 2009 ROE = (11145 0) / 26548 0.

56 2008 Current ratio = 39564 / 25168 1.96 2008 Quick assets = Current assets .559 = 1.571 = 1.205 = 1.Inventories = 39564 9229 = 30335 Quick ratio = 30335 / 25168 1.57 Question 12b Inventory turnover = Ending inventory / Cost of goods sold x 365 Cost of goods sold (COGS) = (Ending inventory / Inventory turnover) x 365 (SIying I think the formula is: Inventory Turnover = COGS / Average Inventory) 2009 COGS = (6131 / 36) x 365 62161.9617 = 0.5 = $62162 .21 Current ratio = Current assets / Current liabilities 2009 Current ratio = 40076 / 25690 1.0.

14 times (Gareth.5511 = 0.2214 = 0.2008 COGS = (1085 / 25) x 365 = $15841 Question 12c(i) Total asset turnover = Net sales / Average total assets (Net sales = Group Rev?) 2009 Total asset turnover = 11145 / ((53913 + 46748) / 2) 0.22 times (Gareth. pls check if this is correct) 2008 Debt ratio = 25764 / 46748 0.1400 = 0.5075 = 0.51 (Gareth. pls check if this is correct) Question 12c(iii) .55 (Gareth. pls check if this is correct) 2008 Total asset turnover = 5981 / ((46748 + 38663) / 2) 0. pls check if this is correct) Question 12c(ii) Debt ratio = Total liabilities / Total assets 2009 Debt ratio = 27365 / 53913 0.

6754 = 67.2214 = 22. pls check if this is correct) 2008 Times interest earned = (7989 + 4) / 4 1998.25 = 1998 (Gareth.1% 2008 Return on total assets = 5981 / ((46748 + 38663)) / 2) .6% Question 12c(v) Return on total assets = Net Income / Average total assets 2009 Return on total assets = 11145 / ((53913 + 46748)) / 2) 0.9061 = 90. pls check if this is correct) Question 12c(iv) Gross margin ratio = (Net sales Cost of goods sold) / Net sales 2009 Gross margin ratio = (191559 62162) / 191559 0.5% 2008 Gross margin ratio = (168723 15841) / 168723 0.Times interest earned = Income before interest expense and income taxes / Interest expense 2009 Times interest earned = 13652 / 0 = 0 (Gareth.

58 0. pls check if this is correct) 2008 BV per common share = 20781 / 1676775 0.02091 = $0.06093 = 0.06093 = 0.01 per share (Gareth.06 2008 PE ratio / 2.2925 / 4.0% Question 12c(vi) Book value (BV) per common share = Shareholders equity applicable to common shares / Number of common shares outstanding 2009 BV per common share = 26286 / 1257056 0.0.8 0.06 .01239 = $0.02 per share (Gareth.1400 = 14. pls check if this is correct) Question 12c(vi) Price-Earnings (PE) ratio = Current market price of one share / Earnings per share 2009 PE ratio = 0.

000 60.000 1.000 100.000 $ $ 160.500 40.000 289.000 $ 40. net Inventory Prepaid expenses Total current assets Property and equipment: Land Buildings and equipment. net Total property and equipment Total assets $ 12.000 85.000 2009 Increase (Decrease) Amount % $ 23.000 3.000 $ $ 315.700 .700 $ 40.000 80.000 125.000 $ 155.Question 13 2010 Assets Current assets: Cash Accounts receivable.200 $ 164.000 120.