英国国际会计研究生课程International Financial Analysis---国际财务分析习题.doc

International Financial Analysis国际财务分析习题1（含答案）Tutorial 1 QuestionsAccounting Analysis and Accounting AdjustmentsQuestion 1 a)If management reports truthfully, what economic events are likely to prompt the following accounting changes? 1. Increase in the estimated life of depreciable assets.2. Decrease in the allowance for doubtful accounts as a percentage of gross trade receivables. 3. Recognition of revenues at the point of delivery, rather than at the point cash is received. 4. Capitalization of a higher proportion of development expenditures. b)What features of accounting, if any, would make it costly for dishonest managers to make the same changes without any corresponding economic changes? Question 2 The conservatism (or prudence) principle arises because of concerns about managements incentives to overstate the firms performance. Joe Banks argues, “We could get rid of conservatism and make accounting numbers more useful if we delegated financial reporting to independent auditors rather than to corporate managers.” Do you agree? Why or why not? Question 3. Dutch Food retailer Royal Ahold provides the following information on its finance leases: Finance lease liabilities are principally for buildings. Terms range from 10 to 25 years and include renewal options if it is reasonably certain, at the inception of the lease, that they will be exercised. At the time of entering into finance lease agreements, the commitments are recorded at their present value using the interest rate implicit in the lease, if this is practicable to determine; if not the interest rate applicable for long-term borrowings is used. The aggregate amounts of minimum lease liabilities to third parties, under non-cancelable finance lease contracts and operating lease contracts for the next five years and thereafter are as follows:Year Ending December 31, Finance Leases Operating Leases 2006 182 686 2007 176 641 2008 172 579 2009 168 525 2010 156 489 Thereafter 1,753 4,560 Total 2,608 7,480 Interest portion(1,245)Present value of net minimum finance leasepayments1,362What interest rate does Ahold use to capitalize its finance leases? Use this rate to capitalize Aholds operating leases at December 31, 2005. Record the adjustment to Aholds balance sheet to reflect the capitalization of operating leases. How would this reporting change affect Aholds Income Statement in 2006.To estimate the interest rate that equates the value of finance lease payments to the reported value of 1,362, students should make the following assumption about how to split the 2011 and subsequent payments over time: the lease payments in 2011 and subsequent years are equal to the lease payment in 2010 (i.e. 156).Question 4.In early 2003 Bristol-Myers Squibb announced that it would have to restate its financial statements as a result of stuffing as much as $3.35 billion worth of products into wholesalers warehouses from 1999 through 2001. The companys sales and cost of sales during this period was as follows:2001 2000 1999 Net sales $18,139 $17,695 $16,502 Cost of products sold 5,454 4,729 4,458 The companys marginal tax rate during the three years was 35 percent. What adjustments are required to correct Bristol-Myers Squibbs balance sheet for December 31, 2001? What assumptions underlie your adjustments? How would you expect the adjustments to affect Bristol-Myers Squibbs performance in the coming few year?Question 5Before going public in year 2001, OpticNet plc was expensing its fibre network research and development costs. In year 2001 the company listed on AIM market. Although the majority of firms in the same technology sector capitalise similar costs (and then expense them over 4 years using the straight-line amortisation) for financial reporting purposes, OpticNet plc decided to continue expensing these costs.OpticNet Plc: expensing vs amortisation199819992000200120022003Net profit as reported5,50070009,020R&D as reported13001,20019603,2002,7603,490a) Restate net profits reported by OpticNet plc for 2001, 2002 and 2003, to make them comparable with those reported by the industry competitors. Compute the percentage differences of the originally reported and the adjusted net profit. The corporate tax rate is 30%.b) Which of the two accounting treatments understates the reported profits?c) All other things being equal, what would be the effect of this restatement on the reported equity, cash flow from operations, investing cash flow, gearing ratios, net profit margin ratio?Tutorial 1 SolutionsQuestion 1 Answera)1. Managers may increase the estimated life of depreciable assets when they realize that the assets are likely to last longer than was initially expected. For example, Delta Airlines extended the estimated life of the Boeing 747, a relatively new product, by 5 years when Delta found out that some of the first Boeing 747s manufactured were still flying in commercial service. Excellent maintenance and less usage than initially expected may also prompt corporate managers to extend the estimated life of depreciable assets.2. The firms change of customer focus may prompt managers to decrease the allowance for uncollectible receivables. For example, when a firm gets large sales orders from reliable customers such as Tesco and Volvo, it does not have to reserve the same percentage of allowance used for small (or high default risk) customers.3. Revenues can be recognized when the customer is expected to pay cash with a reasonable degree of certainty. Suppose that a company re-evaluated its customers credit and found out that its customers financials improved significantly. In dealing with that customer, the company can recognize revenues at the point of delivery rather than at the point when cash is received, because the risk of cash collection is no longer significant.4. According to IAS No. 38, costs incurred on product development (after the establishment of technical feasibility and commercial feasibility) are to be capitalized. Technical feasibility is considered to be established when the firm has completed a product design. Commercial feasibility is established when the uncertainty surrounding the development of new products or processes is sufficiently reduced. If the company completes the product design earlier than it initially expected, it can capitalize a higher proportion of development costs during that period.b) Third-Party Certification. Public companies are required to get third-party certification (auditors opinion) on their financial statements. Unless the accounting policy changes are reasonably consistent with underlying economic changes, auditors would not provide clean auditors opinion. A qualified auditors opinion will penalize the company by increasing its cost of capital. Reversal Effect. Aggressive accounting choices may inflate net profit in the current period but they hurt future net profit due to the nature of accrual reversal. For example, aggressive capitalization of software R&D expenditures may boost current period earnings but it will lower future periods net profit when the capitalized costs have to be subsequently written-off. Investors Lawsuit. If a company disclosed false or misleading financial information and investors incurred a loss by relying on that information, the company may have to pay legal penalties. Labor Market Discipline. The labor market for managers is likely to penalize individuals who are perceived to be unreliable in their dealings with external parties.Question 2 AnswerWe dont agree with Joe Banks because the delegation of accounting decisions to auditors may reduce the quality of financial reporting. Auditors possess less information and firm-specific business knowledge than corporate managers when portraying the economic reality of a firm. The divergence between managers and auditors business assessments is likely to be most severe for firms with distinctive business strategies or ones which operate in emerging industries. With such an information disadvantage, even if auditors report truthfully without having any incentive problem, they cannot necessarily choose “better” accounting methods and accruals than corporate managers do. Auditors also have their own incentive to record business transactions in a mechanical way, rather than using their professional judgment, which leads to poor quality of financing reporting. For example, auditors are likely to choose accounting standards that require them to exercise minimum business judgment in assessing a transactions economic consequences, especially given their legal liability risk. The current debate on market value accounting for financial institutions illustrates this point. While there is considerable agreement that market value accounting produces relevant information, auditors typically oppose it, citing concerns over audit liability.Question 3 AnswerUnder the above assumption, the appropriate interest rate is 9.06%:Year Reported Payment Assumed Payment PV factor PV 2006 686 182 0.9169 166.88 2007 641 176 0.8408 147.97 2008 579 172 0.7709 132.60 2009 525 168 0.7069 118.75 2010 489 156 0.6481 101.11 2011 and subsequent 4,560 156 0.5943 92.71 156 0.5449 85.01 156 0.4997 77.95 156 0.4582 71.47 156 0.4201 65.53 156 0.3852 60.09 156 0.3532 55.10 156 0.3239 50.52 156 0.2969 46.32 156 0.2723 42.48 156 0.2497 38.95 37 0.2289 8.47 1,362For operating leases, the average contract life appears to be shorter. This is based on the relatively small balloon value for lease payments beyond 2011. If we make the same assumption about payments after 2011 for operating leases, the present value of operating leases using a 9.06% discount rate is as follows:Year Reported Payment Assumed Payment PV factor PV 2006 686 686 0.9169 629.01 2007 641 641 0.8408 538.92 2008 579 579 0.7709 446.36 2009 525 525 0.7069 371.11 2010 489 489 0.6481 316.94 2011 and subsequent 4,560 489 0.5943 290.61 489 0.5449 266.47 489 0.4997 244.33 489 0.4582 224.04 489 0.4201 205.43 489 0.3852 188.36 489 0.3532 172.71 489 0.3239 158.36 489 0.2969 145.21 159 0.2723 43.29 4,241Note that the assumed average economic life of the operating leases is 14.33 years (14 + 159/489).The adjusted balance sheet for December 31, 2005 is as follows:Income Statement Cost of Sales: Lease expense Depreciation expense (1/14.33*4,241) -686 +296 Interest Expense (.0906*4,241) +384 Tax Expense (35% of sum) -2.1 Net Profit -3.9 Question 5 Answera)To use the method of comparables we need to make sure that accounting measures for the firm and for the industry are presented on the same basis. OpticNets earnings are based on the expensing of R&D, while other firms in the same industry capitalise R&D costs. The