国际会计第七版英文版课后答案(第九章)

Chapter9

InternationalFinancialStatementAnalysis

DiscussionQuestions

1.a.Businessstrategyanalysis

Difficultiesincross-borderbusinessstrategyanalysis:Identifyingkeyprofitdriversandbusinessriskintwoormorecountriescanbedaunting.Businessandlegalenvironmentsandcorporate

objectivesvaryaroundtheworld.Manyrisks(suchasregulatoryrisk,foreignexchangerisk,andcreditrisk)needtobeevaluatedandbroughttogethercoherently.Insomecountries,sourcesofinformationarelimitedandmaynotbeaccurate.

b.Accountinganalysis

Difficultiesinaccountinganalysis:Twoissuesareimportanthere.Thefirstiscross-countryvariationinaccountingmeasurementquality,disclosurequality,andauditquality.Nationalcharacteristicsthatcausethisvariationincluderequiredandgenerallyacceptedpractices,

monitoringandenforcement,andextentinmanagerialdiscretioninfinancialreporting.Thesecondissueconcernsthedifficultyinobtaininginformationneededtoconductaccounting

analysis.ThelevelofcredibilityandrigoroffinancialreportinginAnglo-Americancountriesgenerallyismuchhigherthanthatfoundelsewhere.Infact,financialreportingqualitycanbesurprisinglylowinbothdevelopedandemerging-marketcountries.

c.Financialanalysis(ratioanalysisandcashflowanalysis)

Difficultiesinfinancialanalysis:Extensiveevidencerevealssubstantialcross-countrydifferencesinprofitability,leverage,andotherfinancialstatementratiosandamountsthatresultfromboth

accountingandnon-accountingfactors.Differencesinfinancialstatementitemscausedby

nationaldifferencesinaccountingprinciplescanbesignificant,andunpredictableinamount.

Evenafterfinancialstatementamountsaremadereasonablycomparable,interpretationofthoseamountsmustconsidercross-countrydifferencesineconomic,competitive,andotherconditions.

d.Prospectiveanalysis(forecastingandvaluation)

Difficultiesinprospectiveanalysis:Exchangeratefluctuations,accountingdifferences,differentbusinesspracticesandcustoms,capitalmarketdifferences,andmanyotherfactorshavemajor

effectsoninternationalforecastingandvaluation.Applicationofpricemultiplesinacross-bordersettingrequiresthatthedeterminantsofeachmultiple,andreasonswhymultiplesvaryacross

firms,bethoroughlyunderstood.Nationaldifferencesinaccountingprinciplesareonesourceofcross-countryvariationsintheseratios.

Finally,allfourstagesofbusinessanalysismaybeaffectedby:

i.informationaccess,

ii.timelinessofinformation

iii.foreigncurrencyissues

iv.differencesinfinancialstatementformats

v.languageandterminologybarriers.

2.Herewewillconsidertheinformationneedsofinvestors,creditors,regulators,andcompetitors.

Investorshavehighinformationneedsatallstagesofbusinessanalysis.Theyneedtobeabletoaccuratelyassessthemeritsofthecompany’sbusinessstrategy,thequalityofitsaccounting,thecompany’sfinancialstrength,anditsfutureprospects.Sinceeachstepinthebusinessanalysis

processbuildsonitspredecessors,eachstepiscriticalinitsturn.Itcan’tbesaidthatanyonestepismoreorlessimportantthantheothers.

Creditorsneedtogothroughmuchthesameanalysis,butareadvantagedinthatthroughdirect

contactwiththecompaniestheyoftenhavemoreextensiveanddetailedinformationthando

investors.Thegoalofanalysisisalsooftensomewhatdifferent.Manyinvestors,hopingthattheirshareswillincreaseinvalue,areinterestedinprospectiveanalysis.Thecreditor’sinterestismoreoftenlimitedtobeingsure(withamarginofsafety)thattheloanwillberepaid.Forthecreditor,theaccountinganalysis,financialanalysis,andforecasting,allareimportant;valuationislessso.

Regulatorshavemuchdifferentinterests.Sinceregulatorshavenodirectinterestinthefuture

earningsofthecompaniestheyregulate,aprospectiveanalysis(inmostcases)isoflimitedvaluetothem.However,ifregulatorsneedtobeawareofthefinancialstrengthofthecompaniestheyregulate,theywillneedtoconductaccountinganalysisand(inmanycases)financialanalysis,

particularlywhenassessinghowmuchofaneconomicburdencanbeimposedoncompaniesresultingfromaparticularregulation.

Competitorsareintenselyinterestedinfindingoutasmuchaboutacompanyaspossible.

Businessstrategyanalysisofone’scompetitorsisanimportantpartofformulatingone’sownbusinessstrategy,especiallyintermsofassessingstrengthsandweaknesses.Accountingandfinancialanalysisalsocanuncoverstrengthsandweaknesses.Prospectiveanalysismaybe

importantifamergeroracquisitioniscontemplated.

3.Informationaccessibilityisamajorconditionforanefficientcapitalmarket,thatis,

informationmustberapidlyanalyzedandmadeavailabletoinvestorscapableofactingonit.IntheUnitedStatesandotherbroadly-basedfinancialmarkets,awholeindustryspecializingin

informationanalysisanddisseminationhasdeveloped.Similarinvestmentanalysisservicesinmanynon-U.S.capitalmarketsareatanearlierstageofdevelopment.

4.Investmentanalysisalmostalwaysinvolvespairedcomparisons,evenifthebenchmarkalternativeistodonothing.Inevaluatingtheriskandreturncharacteristicsofanon-domesticcompanydifferencesinaccountingmeasuresofriskandreturnareoftendueasmuchto

differencesinmeasurementrulesbetweencountriesastheyaretorealeconomicdifferences.

Corporatetransparencycompoundstheproblembydeprivinganalystsofinformationnecessarytoadjustfornationalmeasurementdifferences.Manyanalystsconsiderthedisclosureissuetobeevenmoreimportantthanmeasurementdifferences.

5.OnewayofcopingwithGAAPdifferencesistorestateforeignaccountingmeasurestoan

internationallyrecognizedsetofprinciplesorthereportingframeworkoftheinvestor’shome

country.Analternativetackistodevelopadetailedunderstandingofaccountingpracticesintheinvestee’scountry.

Studentswilldefinitelydisagreeonthisone.Eventuallysomewillofferacompromise:usetheformercopingmechanismiftheinvesteecompanyisbeingcomparedwithafirmintheinvestor’shomecountryandadopta“multipleprinciplescapability”whencomparingtheinvesteecompanytoanothercompanyinthesamecountry.Anothertackwouldbetoexaminewhoismakingthe

marketfortheinvestee’sshares.Iflocalinvestorsaremakingthemarket,oneshouldnotignorelocalnorms.However,ifinvestorsintheinvestor’scountryaremakingthemarket;e.g.,U.S.institutionalinvestors,thenrestatementtotheinvestor’shomecountryGAAPmakessense.

6.Prospectiveanalysisinvolvesforecastingafirm’sfuturecashflowsandthenvaluingthose

cashflows.Asfuturecashflowestimatesarebasedonaccountingmeasurements,differencesinmeasurementrulesbetweencountriescomplicatethiseffort.Therangeofaccountingchoices

availableabroadaddtothiscomplexity.However,measurementdifferencesareonlyoneofthevariablesthatcomplicatesprospectiveanalysis,Differencesinenvironmentalvariablessuchasratesofinflation,sovereignrisk,businesspractices,andinstitutionscomplicatebothforecastingandvaluation.Differentinstitutionsincludefinancialnorms,taxregimesandmarket

enforcementmechanisms.Intermsofvaluation,whileP/Emultiplesmaybepopularinone

country,discounteddividendsmaybemorepopularinanother.Eveniftwocountriesemploythesamevaluationframework,differencesininvestmenthorizonsandmethodsofcalculating

discountrates/costofcapitalwillvary.

7.Translationofforeignfinancialstatementsfortheconvenienceofdomesticreadersis

fundamentallydistinctfromthetranslationofbranchorsubsidiaryaccountsforpurposesof

consolidation.Inthelattercase,translationinvolvesaremeasurementprocess.Inmostcountries,foreignaccountsfirstarerestatedtotheaccountingprinciplesoftheparentcountrypriorto

restatementtoparentcurrency.Conveniencetranslationsmerelyinvolvearestatementprocessin

thesensethatforeignaccountsaremultipliedbyaconstanttochangethecurrencyofdenominationfromdomesticcurrencytothecurrencyofthereader’sdomicile.

8.Rulesofthumbcanvarysubstantiallyfromonecountrytoanotherduetobothaccountingandnon-accountingfactors.Japanprovidesastrikingexample.ManyJapanesecompaniesare

membersoflargetradinggroups(keiretsu)withlargecommercialbanksattheircore.Keiretsuoftenpostponeinterestandprincipalpayments,sothatlong-termdebtinJapanworksmorelikeequityintheUnitedStates.Short-termdebtisattractivetoJapanesecompaniesbecauseshort-termobligationstypicallyhavelowerinterestratesthanlong-termobligations,andnormallyarerenewedor“rolledover”ratherthanrepaid.Thus,debthasamuchdifferentnatureandpurposeinJapanthanintheUnitedStates.

Theacidtestratiospecificallyinvolvescash,marketablesecuritiesandreceivablesasthe

numeratorintheequation,andcurrentliabilitiesasthedenominator.Butwhatcountsascurrentliabilitiesversuslong-termdebt(orhowlong-termdebtisviewed)isverydifferentinJapanthanintheU.S.InJapan,highshort-termdebtislesslikelytoindicatealackofliquidity,forthe

reasonsstatedabove.Banksoftenarewillingtorenewtheseloansbecauseitallowsthemto

adjusttheirinterestratestochangingmarketconditions.Thus,short-termdebtworkslikelong-termdebtelsewhere,andJapanesecompaniescanoperatesuccessfullywithaquickratioata

levelthatwouldbeentirelyunacceptableintheUnitedStates.Note,however,thatbankingpracticesinJapanarechangingrapidly,andthetoleranceinJapanforhighlevelsofdebtfinancingmaywelldecreaseinthefuture.

9.Importantrecommendationsincludethefollowing:

•Beawarethatnationaldifferencesinaccountingmeasurementrulescanadd“noise”toreportedperformancecomparisons.Thereadershouldbepreparedtounwindaccountingdifferenceswherenecessary.

•Useastructuredapproach,suchastheonepresentedinthischapter,toensurethatallrelevantfactorsareconsidered.

•Cashflow-relatedmeasuresarelessaffectedbyaccountingprincipledifferencesthanareearnings-basedmeasures,thusmakingthempotentiallyvaluableininternationalanalysis.

•Auditqualityvariesdramaticallyacrosscountries.Becomefamiliarwiththelevelofauditqualityinaparticularcountrybeforereachingconclusionsusingfinancial

statementspreparedbycompaniesinthatcountry.

•Corporatetransparencyalsovariesdramaticallyacrosscountries.Besuretoassess

accuratelythequalityoffinancialdisclosuresbeforereachingconclusionsbasedonthem.

•Aboveall,appreciatethatmeasurementanddisclosurepracticesareenvironmentally

based.Appreciationforinstitutionaldifferenceswillgreatlyaidinproperinterpretationofaccountingbasedperformanceandriskmeasures.

10.ThefollowinglistdescribesingeneralfashionwhatprobableeffecttheDutchtranslationpracticewouldhaveonselectedfinancialratiosincomparisonwiththetemporalmethod.The

analysisassumesthattheoriginalfinancialstatementsofthetwocompaniesareidenticalinallrespectssaveforthecurrencytranslationmethodused.Inventoriesareassumedtobecarriedatcost.

-Devaluation__Revaluation

Currentratio(liquidity)decreaseincreaseInv.Atmktgoesdown

Invatmktgoesup

Debtratio(solvency)increasedecrease

LossgoesinATAsoeq.smaller

Gaininataeqlrg.

Fixedassetturnover(efficiency)increasedecrease

Netsales/assetsassetssmallersoinc.

Assetslargersodec.

Returnonassets(profitability)increasedecrease

lossnotinincome

Gainnotinincome

Ascanbeseen,thecurrentratemethodcanhaveasignificanteffectonkeyfinancialindicators.Accordingly,securityanalystsmustbecarefultodistinguishbetweenthecurrencyinwhichaforeignaccountisdenominatedandthecurrencyinwhichitismeasured.

11.Theattestfunctioniswhatgivescredibilitytothefinancialstatements.Ifthisfunctionis

importantinthedomesticcase,itisevenmoreimportantinternationallywherestatementreadersareseparatedfromthecompaniestheyareinterestedinnotonlybyphysicaldistancebutalsobyculturaldistance.

12.Internalcontrolisanactivityperformedbyafirm’sinternalauditorsthathelpstoassurethat

management’spoliciesandproceduresarebeingcarriedouteffectively,thatfinancial

transactionsarebeingproperlyreportedbothinternallyandexternallyandthattheassetsofthefirmaresafeguarded.Internalcontrolisrelieduponbyafirm’sexternalauditorsindeterminingtowhatextenttheirworkshouldreplicatetheworkoftheinternalauditor.Theroleofthe

internalauditorhasbecomeevenmoreimportantinassuringthereliabilityofmanagement’s

financialrepresentationsowingtothelargenumberoffinancialscandalsthathasrockedtheU.S.andotherfinancialmarketsduringthestartofthisdecade.RecentlegislationintheU.S.,whichisincreasinglybeingemulatedelsewhere,hasmademanagementresponsibleforassuringthat

theirsystemofinternalcontrolsarenotonlyinplacebutareworkingwell.Thishasbeen

necessarytoreduceinvestoruncertaintyregardingthequalityandreliabilityofafirm’spublishedfinancialaccounts.

Intheabsenceofastrongsystemofinternalcontrols,investorswilladoptamorepassive

approachtoinvestingasopposedtorelyingonfirm-specificinformation.Thisinvolvestakingamutualfundapproachtoinvestingwhichattemptstodiversifyawayinformationrisk,althoughatthecostoflesserperformance.

Exercises

1.ThetrendofdividendsfromaU.S.dollarperspectivecanbeascertainedbytranslatingthe

pesodividendstreamusingthe$/Pexchangerateprevailingatthebeginningofthetimeseriesortheend.Useoftheendingexchangerateprovidesthefollowingtrenddata:

20X6

20X7

20X8

Netincome(P)8,50010,80015,900

Dividends(Pmill’s)2,5503,2404.770

Dividends($000)8501,0801,590

Percentagechange---27.1%47.2%

2.HowthestatementofcashflowsappearinginExhibit9.5wasderived:

Beg.Bal.DR.CR.End.Bal.

Cash

Newfixedassets

ST$payable

LTdebt

Capitalstock

2,400

8,500

500

4,800

3,818

(3)2,695

(2)555

(3)1,584

3.990

10,640

500

6,384

3,818

Retainedearnings1,782(1)2502,030

Translationadjustment1,898

Sources

of

Funds

Uses

of

Funds

Sources:

Netincome

Depreciation

IncreaseinLTdebt

TranslationadjustmentUsesoffunds:

Increaseinfixedassets

Netincreaseincash

(1)250

(2)555

(3)1,584

(4)1,898

4,287

4,287

(3)2,695

2,695

1,592

4,287

3.ConsolidatedFundsStatement

(figuresappearinginparenthesesdenotechangesdueprimarilytotranslationeffects)

Sources:

Netincome250

Depreciation555

IncreaseinLTdebt1,584(1,584)

Translationadjustment1,898(1,898)

lessintercompanypayable138

Usesoffunds:

Increaseinfixedassets2,695(2,695)

Netincreaseincash1,590(924)

The$924translationeffectisthatpartofthe$1,898gainonthetranslationofnetworthwhichisrelatedtothetranslationofcash.Itisderivedasfollows.

a.Openingcashof24,000kronatranslatedat.10Openingcashretranslatedat12/31at.133

Gain

b.6,000kronaincreaseincashduringtheyear

initiallytranslatedat.111

6,000kronaretranslatedat12/31at.133

Gain

Totaltranslationgainapplicabletocash

=$2,400

=3,192

792

=$666

=798

132

924

4.Yes,InfosysaddedvalueforitsshareholdersasitsEVAwasapositiveRPE1,540.Operatingincomemorethancoveredthecompany’scostofdebtandequity.

5.Debit:Costofgoodssold¥250,000,000

Taxespayable87,500,000

Credit

Inventories

Taxexpense

¥250,000,000

87,500,000

6.a.

20X6

20X7

20X8

Salesrevenue(£)23,50028,65033,160

Salesrevenue($)49,35063,03053,056

b.

Percentagechange20X7/20X6Pounds21.9%

Dollars27.8%

20X8/20X7

15.7%

-15.8%

Thetwotimeseriesdonotmoveinparallelfashionbecauseofchangesinexchangeratesusedtoperformtheconveniencetranslations.

c.Thisproblemcanbeminimizedbytranslatingthetimeseriesusingthe20X6exchangerateorbyusingthe20X8exchangerate.Trendanalysiscanalsobeperformedinthelocalcurrency.

7.a.ROE(perSwedishGAAP)=4,709/88,338=5.3%

ROE(perU.S.GAAP)=3,127/84,761=3.7%

b.SomestudentswillfavorusingtheROEbasedonSwedishGAAP,especiallyifVolvo’sperformanceisbeingcomparedwiththatofanothercompanyinSweden.Otherswill

favorbasingtheirperformanceassessmentonROEperU.S.GAAP,especiallyifVolvoisbeingcomparedtoaU.S.counterpart.Thelatteratleastminimizestheapplesto

orangesissue.Itisnotclearwhichviewpointiscorrect,andthisquestionshouldprovokegooddiscussionofthevalueofrestatedaccountingnumbers.

c.EvenifstudentsallagreedthatanROEbasedonU.S.GAAPwerepreferable,theuserofthisinformationshouldtakeintoaccountallinstitutionalconsiderations,suchas

differencesintaxlaws,financialnormsandbusinesspracticesthataffectallratiosintheSwedishbusinessenvironment.Intheabsenceofsuchanalysis,restatedratiosarelikelytobemisinterpreted.

8.AssessingreasonsforP/Eratiotrendsandcross-countrycomparisonsisdifficult.The

textdiscussestwostudiesthathaveanalyzeddifferencesinP/EratiosbetweenJapanandtheUnitedStatesinthelate1980s.Thestudiesdiffergreatlyintheirexplanationsofthe(then)muchhigherJapaneseP/Eratios,andneitherstudyclaimstoexplainmorethanapartofthedifference.Partbutnotallofthereasonswereattributabletoaccounting

measurementdifferences.Wesuspectthatdifferencesininstitutionalfactorsprobablyexertthedominantreasonforobserveddifferencesinternationally.

9.Studentsanswerswillnaturallyvary.However,theyshouldrecognizethatauditpractice

areinfluencedasmuchbydifferencesinsocial,economicandpoliticalenvironmentsasaremeasurementstandards.Theyshouldalsorecognizethatstandardsettingisasmuchapoliticalprocessasitisaprocessoflogicorsoundprinciples.

10.JudgingfrominformationprovidedinExhibit9-22,liabilitycasesvaryfarmoreby

countrythanbyauditor–with35casesintheU,.S.,overtwiceasmanyasinthenext

highestcountry(theU.K.,with17).Noauditfirmshadcasesineverycountry,andthetotalnumberforeachauditorisrelativelysimilar,rangingfrom11(ArthurAndersen)to18(KPMG).ThecountrywhereliabilitycaseswereleastfrequentwastheNetherlands,withonlyonecase.

Why?LawsandregulationsintheAnglo-Americancountries,includingtheUnited

States,stressinvestorprotection.Thisplacesmoreliabilityontheauditorandmakesiteasierforcompaniesorshareholderstobringorproveasuit.Inresponsetothethreatoflitigation,auditorsareprobablymorecarefulintheUnitedStates,andmorewillingto

subjectthemselvestostrictregulations.

Implications?Itisreasonabletoarguethatfinancialreportingqualityispositivelycorrelatedwithfrequencyofauditlitigation.Forexample,thepatternsofauditorlitigationshowninthetableaboveareconsistentwiththerelativelyhighfinancialreportingqualityfoundintheU.S.,theU.K.,AustraliaandCanada.

11.Studentopinionsarelikelytovaryonthisoneaswell.Somewillargueforopinions

coinedbyprivateprofessionalbodies.Others,inlightofEnron,et.al.,willoptformorelegalopinions.Intheend,studentsshouldconcludethatenforcementmechanismsarealsoveryimportant.RecentU.S.indictmentsofcompanyofficersforaccounting

violationsaswellasmandatedprisontermsisunprecedented.Togetherwithincreasingrecoursetothecourtsbyaggrievedinvestors,theimbalancebetweenanauditor’s

responsibilityandauthorityisbeingredressed.

12.Reasonablecriteriaforjudgingthemeritsofadatabaseforcompanyresearchinclude(butarenotlimitedto):

-coverage(numberofcompanies,countries,yearsofdata).

-amountofinformationforeachcompany(numberoffinancial,market-basedmeasurespercompany).

-reliability,easeofuse,languagetranslations,searchfeatures.

-cost(areonlysomeofthedata“freelyavailable?”).

-accessandlinkstootherWebsitesprovided?

Case9-1

Sandvik

1.a.ThereareseveraladvantagesthataccruetoSwedishfirmsemployingthesystemofspecialreserves.First,politicaldividendsaccruetofirmsthataligntheirgoalswiththoseofthe

government.Second,therearetaxadvantagesasexpensesrecognizedinestablishingareservearetaxdeductible.Third,theuseofreservingallowscompaniestomanagetheirearnings.

Disadvantagesincludetheriskofreducingacompany’sreportingcredibilitywiththe

internationalinvestingcommunity.This,inturn,maylimitthecompany’sexternalfinancingflexibility.

2.Thegovernmentbenefitsfromthereservingsysteminthatithasallyinmaintainingfullemployment.Thatistosay,itsmacroeconomictoolkitisexpandedinthatityetanothervehicleformanagingtheeconomyinadditiontomonetaryandfiscalpolicy.

3.Theuseofreservesmakesitdifficultforstatementreaderswhoareunfamiliarwith

Swedishreportingpracticestoassesstheriskandreturnattributesofthefirm.Forexample,itwillnotbecleartowhatextentobserveddifferencesinfinancialratiosbetweenaSwedish

companyandanon-Swedishcompanyareduetoaccountingdifferencesasopposedtorealeconomicdifferencesintheattributesbeingmeasured.

4.TheuseofreserveshadadampeningeffectonSandvik’sreportedearnings.

5.TheentriesusedtoincreasethereservescanbedeterminedbyexaminingthechangeinUntaxedReservesinthebalancesheetaswellasexaminingtherelevantnotestothefinancialstatements.Theentrieswere:

Depreciationexpense172

Excessdepreciationreserve172

Otherexpenses13

Otheruntaxedreserves13

6.