BAC2684 Financial Statement Analysis

Trimester 1 2022/23

Tutorial 1 (Chapter 1)
1. Describe business analysis and identify its objectives.

2. Identify and discuss the 4 major activities of business enterprise.

3. Huff Company and Mesa Company are similar firms that operate in the
same Industry. The following information is available:

HUFF MESA
2006 2005 2004 2006 2005 2004
Current ratio 1.6 1.7 2.0 3.1 2.6 1.8
Acid-test ratio 0.9 1.0 1.1 2.7 2.4 1.5
Acct Receivable turnover 29.5 24.2 28.2 15.4 14.2 15.0
Inventory turnover 23.2 20.9 16.1 13.5 12.0 11.6
Working capital ($) 60,000 48,000 42,000 121,000 93,000 68,000

Required

a) Write a half page report comparing Huff and Mesa using the available
information. Your discussion should include their ability to meet current
obligations and to use current assets efficiently.

4. The balance sheet and income statement for Chico Electronic are
reproduced below (tax rate is 40%)

Chico Electronic
Balance Sheet ($ thousands)
As of December 31
Year 4 Year 5
Assets RM RM
Current Assets
Cash 683 325
Accounts Receivables 1,490 3,599
Inventories 1,415 2,423
Prepaid expenses 15 13
Total current assets 3,603 6,360
Property, Plant and equipment, net 1,066 1,541
Other assets 123 157
Total assets 4,792 8,058

1
 Year 4 Year 5
RM RM
Liabilities & Share-holders Equity
Current Liabilities
Notes payable to bank - 875
Current portion of long-term debt 38 116
Accounts payable 485 933
Estimated Income tax liability 588 472
Accrued expenses 576 586
Customer advance payment 34 963
Total current liabilities 1,721 3,945
Long-Term Debt 122 179
Other liabilities 81 131
Total Liabilities 1,924 4,255

Shareholders’ equity
Common stock, RM 1.00 par value; 1,000,000
Shares authorized; 550,000 & 829,000
outstanding respectively 550 829
Preferred stock, Series A 10%; RM25 par
value
25,000 authorised; 20,000 & 18,000
outstanding respectively 500 450
Additional paid in capital 450 575
Retained earnings 1,368 1,949
Total shareholders’ equity 2,868 3,803

Total liabilities and shareholders’ equity 4,792 8,058

Chico Electronic
Income Statement ($ thousands)
As of December 31
Year 4 Year 5
Assets RM RM
Net sales 7,570 12,065
Other Income, Net 261 345
Total Revenue 7,831 12,410
Costs of Goods Sold 4,850 8,048
General Adm. And marketing expenses 1,531 2,025
Interest expense 22 78
Total Cost and Expenses 6,403 10,151
Net income before tax 1,428 2,259
Income tax 628 994
Net Income 800 1,265

2
Required

1. Compute and interpret the following financial ratios of the company for
Year 5.
a) Acid-Test Ratio
b) Return on assets
c) Return on common equity
d) Earnings per Share
e) Gross profit margin ratio
f) Times earned interest
g) Days to sell inventory
h) Long-term debt to equity ratio
i) Total debt to equity
j) Sales to end-of-year working capital

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 BAC2684 Financial Statement Analysis
Trimester 1 2022/23

Tutorial 2 (Chapter 10)

1. Twilight is a public listed manufacturing company. Its summarized financial
statements for the year ended 30 September 2013 and 2012 are:

Income statements for the year ended 30 September:

2013 2012
RM’000 RM’000
Revenue 59,000 72,000
Cost of sales (51,000) (52,000)
Gross profit 8,000 20,000
Distribution costs (2,100) (1,600)
Administrative expenses (9,800) (7,800)
Investment income 100 400
Finance costs (1,200) (1,000)
Profit (loss) before taxation (5,000) 10,000
Income tax (expense) relief 800 (3,000)
Profit (loss) for the year (4,200) 7,000

Statements of financial position as at 30 September:

2013 2012
RM’000 RM’000 RM’000 RM’000
Assets
Non-current assets
Property, plant and equipment 35,200 49,000
Investments at fair value 4,800 8,000
through profit or loss
40,000 57,000

Current assets
Inventory 4,400 3,800
Trade receivables 4,400 5,600
Tax asset 1,200 nil
Bank 2,400 12,400 200 9,600
Total assets 52,400 66,600

4
 Equity and liabilities
Equity
Equity shares of RM1 each 26,000 24,000
Share premium 2,000 Nil
Revaluation reserve nil 9,000
Retained earnings 7,200 13,000
35,200 46,000

Non-current liabilities
Bank loan 8,000 10,000
Deferred tax 2,400 10,400 1,400 11,400

Current liabilities
Trade payables 6,800 5,600
Current tax payable nil 6,800 3,600 9,200
Total equity and liabilities 52,400 66,600

Note: To indicate number days used as basis to calculation 360 days.

Required:
(a) Compute the followings ratio for year 2013:
i. Working capital
ii. Current ratio
iii. Acid test ratio
iv. Accounts receivables turnover
v. Collection period of receivables
vi. Inventory turnover
vii. Days to sell inventories
viii. Debt-to-equity ratio
ix. Times related earned
x. Working capital turnover

2. Ian Manufacturing Company was organized five years ago and

manufactures toys. Its most recent two years’ balance sheet and income
statements are reproduced below:

5
 Ian Manufacturing Company
Balance Sheet
June 30, Year 5 and Year 4
Year 5 Year 4
Assets RM RM
Cash 12,000 15,000
Accounts receivable, net 183,000 80,000
Inventory 142,000 97,000
Other Current Assets 5,000 6,000
Plant & Equipment.net 160,000 110,000
Total Assets 502,000 308,000

Liabilities and equity

Accounts payable 147,800 50,400
Income tax payable 30,000 14,400
Long term liabilities 120,000 73,000
Common stock, RM 5.00 par value 110,000 110,000
Retained earnings 94,200 60,200
Total liabilities and equity 502,000 308,000

Ian Manufacturing Company

Condensed Income Statement
June 30, Year 5 and Year 4
Year 5 Year 4
RM RM
Net sales 1,684,000 1,250,000
Cost of goods sold (927,000) (810,000)
Gross profit 757,000 440,000
Marketing & Administration cost (670,000) (396,700)
Operating Income 87,000 43,300
Interest cost (12,000) (7,300)
Income before income tax 75,000 36,000
Income tax (30,000) (14,400)
Net Income 45,000 21,600

Note:
1. All sales are on account
2. Long-term liabilities are owned to the company’s bank
3. Terms of sales are net 30 days

Required
6
 (a) Compute the following ratios for year 5:

(1) Working Capital

(2) Current ratio
(3) Acid test ratio
(4) Accounts receivable turnover
(5) Collection period of receivables
(6) Inventory turnover
(7) Days to sell inventory
(8) Debt-to-equity ratio
(9) Times Interest Earned

3. The following information relates to the draft financial statements of

Deltoid. Summarized statements of financial position as at:

31 March 2010 31 March 2009

RM’000 RM’000 RM’000 RM’000
Assets
Non-current assets
Property, plant and 19,000 25,500
equipment

Current assets
Inventory 12,500 4,600
Trade receivables 4,500 2,000
Tax refund due 500 nil
Bank nil 17,500 1,500 8,100
36,500 33,600

Equity and liabilities

Equity
Equity shares of RM1 each 10,000 8,000
Share premium 3,200 4,000
Retained earnings 4,500 7,700 6,300 10,300
17,700 18,300

Non-current liabilities
10% loan note Nil 5,000
Finance lease obligations 4,800 2,000
Deferred tax 1,200 6,000 800 7,800

Current liabilities
10% loan note 5,000 nil

7
 Tax Nil 2,500
Bank overdraft 1,400 nil
Finance lease obligations 1,700 800
Trade payables 4,700 12,800 4,200 7,500
Total equity and liabilities 36,500 33,600

Summarized income statements for the years ended:

31 March 31 March
2010 2009
RM’000 RM’000
Revenue 55,000 40,000
Cost of sales (43,800) (25,000)
Gross profit 11,200 15,000
Operating expenses (12,000) (6,000)
Finance costs (1,000) (600)
Profit (loss) before tax (1,800) 8,400
Income tax relief (expense) 700 (2,800)
Profit (loss) for the year (1,100) 5,600

The followings supporting information are available:

 Term of sales are net 30 days
 One-year equals to 360 days.
 Interest expense is RM 60,000 for year 2010.
Required:
Compute the followings ratio for year 2010

a) Working capital
b) Current ratio
c) Acid test ratio
d) Accounts receivables turnover
e) Collection period of receivables
f) Inventory turnover
g) Days to sell inventories
h) Debt-to-equity ratio
i) Times related earned
j) Working capital turnover

BAC2684 Financial Statement Analysis

8
 Trimester 1 2022/23

Tutorial 3 (Chapter 8)
1. How is return on invested capital used as an internal management tool?

2. Why is return on invested capital one of the most relevant measures of a

company’s performance? How do we use this measure in our analysis of
financial statements?

3. Matrix Company produces a electronic processor and sells it wholesale to

manufacturing and retail outlets at RM 10.00 each. For the year ending 31
December, the company sold 500,000 processors. Fixed costs for the year
totaled RM 1,500,000, including interest costs on its 7.5% debentures.
Variable costs are RM 4.00 per processor. The company employs 20
workers, each earning RM 35,000 for the year.

Assets RM Liabilities & equity RM

Current Assets Current liabilities
Cash Long-term 7.5%
700,000 debenture 2,000,000
Receivables 6% preferred stock,
10,000 shares, RM100
1,000,000 par value 1,000,000
Other 800,000 Common stock 1,800,000
Total Current Assets 2,500,000 Retained earnings 1,200,000
Fixed assets (net) 5,500,000
Total Assets 8,000,000 Total liabilities & equity 8,000,000

Required:

1. Compute return on net operating assets at year-end (RNOA)

2. Compute return on common equity at year-end (ROCE)

3. What do the ratios above tell you?

Note: Assume all assets and current liabilities are operating. Tax rate is 50%

4. Selected income statement and balance sheet data from Merck & Co. for
Year 9 is reported below:

9
 Merck & Company Inc
Year 9 Selected Financial Data
Income Statement Data RM
Sales revenue 7,120,000
Depreciation 230,000
Interest expense 10,000
Pre-tax income 2,550,000
Income taxes 900,000
Net Income 1,650,000

Merck & Company Inc

Balance Sheet Data
RM
Current assets 4,850,000
Fixed assets, net 2,400,000
Total assets 7,250,000
Current liabilities 3,290,000
Long-term debt 100,000
Shareholders’ equity 3,860,000
Total liabilities & shareholders’ equity 7,250,000

Required

1. Calculate the return on common equity for Year 9 using year end amounts.

2. Disaggregate Merck’s ROCE into operation (RNOA) and non-operating

components

Note: Assume all assets & liabilities are operating and a 35% tax rate.

5. The following is the extract of the financial statement from Texas Telecom
Inc. for year 5 and year 9 are reproduced here.

Income statement data Year 5 Year 9

RM’000 RM’000
Revenues 542 979
Operating Income 35 68
Interest expense 7 0
Pre-Tax income 28 68
Income taxes 14 34
Net Income 14 34

Balance Sheet data

Long – term operating assets 52 63

10
 Working capital 123 157
Total Liabilities 50 0
Total shareholders’ equity 125 220

Required:
a) Calculate return on common equity and disaggregate (ROCE) return on
capital employed for year 5 and 6 using end-of-year values for computation
requiring an average (assume fixed assets and working capital are operating
and a 50% tax rate).

b) Comment on the company’s use of financial leverage.

6. Rose Co.’s condensed balance sheet for Year 2 is reproduced below:

Assets $
Current assets 250,000
Non-current assets 1,750,000
Total assets 2,000,000
Liabilities & equity
Current liabilities 200,000
Non-current liabilities (8% bond) 675,000
Common stock-holder’s equity 1,125,000
Total Liabilities & equity 2,000,000

Additional information:

 Net income for the year 2 is $157,500

 Income tax rate is 50%
 Amounts for total assets and SH equity are the same for Year 1 and 2.
 All assets and current liabilities are considered to be operating.

Required:

a) Determine whether leverage (from long term debt) benefits Rose’s

Shareholders?

b) Compute Rose’s NOPAT and RNOA (use ending NOA)

c) Demonstrate the favorable effect of leverage given the disaggregation of

ROCE and your answer to part (b).

BAC2684 Financial Statement Analysis

Trimester 1 2022/23
11
 Tutorial 4 (Chapter 7)

1. The balance sheet of Barrier Corporation as of December 31, Year 2, and

Year 1, and its statement of income and retained earnings for the year
ended December 31, Year 2 is as follow:

Barrier Corporation
Balance Sheet
December 31, Year 2 & Year1
Increase
Year 2 Year 1 (decrease)
RM RM RM
Assets
Cash 275,000 180,000 95,000
Accounts Receivable 295,000 305,000 (10,000)
Inventories 549,000 431,000 118,000
Investment in Ort Inc. at equity 73,000 60,000 13,000
Land 350,000 200,000 150,000
Plant & Equipment 624,000 606,000 18,000
Accumulated depreciation (139,000) (107,000) (32,000)
Goodwill 16,000 20,000 (4,000)
Total Assets 2,043,000 1,695,000 348,000

Liabilities & Stockholders’ Equity

Accounts payable 604,000 563,000 41,000
Accrued expenses 150,000 - 150,000
Bond’s payable 160,000 210,000 (50,000)
Deferred income tax 41,000 30,000 11,000
Common stock, par $10 430,000 400,000 30,000
Additional paid – in capital 226,000 175,000 51,000
Retain earnings 432,000 334,000 98,000
Treasury stock, at cost - (17,000) 17,000
Total liabilities and equity 2,043,000 1,695,000 348,000

Barrier Corporation
Statement of Income & Retain Earning
December 31, Year 2

12
 RM RM
Net Sales 1,937,000
Undistributed income from Ort Inc 13,000
Total Net Revenue 1,950,000
Cost of sales (1,150,000)
Gross Income 800,000
Depreciation Expense 32,000
Amortization of goodwill 4,000
Other expenses (including income tax) 623,000 (659,000)
Net income 141,000

Retained earnings, January 1, Year2 334,000

475,000
Cash dividend paid (43,000)
Retained earnings, December 31, Year 2 432,000

Additional information
 Capital stock is issued to provide additional cash.
 All accounts receivables and payables relate to operations.
 Accounts payable relate only to the items included in the cost of
sales.
 There are no non-cash transactions.

Required
Determine the following amounts:

a) Cash collected from sales during Year 2.

b) Cash payments on accounts payable during Year 2.
c) Cash receipts during year 2 not provided by operations.
d) Cash payments for non-current assets purchased during Year 2.
e) Prepare a statement of cash flow (indirect method) for Barrier
corporation.

2’. JETT CORPORATION

BALANCE SHEET AS AT 31 DECEMBER

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 RM RM
Year 1 Year 2
Cash 34,000 34,500
Account Receivable, Net 12,000 17,000
Inventory 16,000 14,000
Investment (long-term) 6,000 -
Fixed Assets 80,000 93,000
Accumulated depreciation (48,000) (39,000)
100,000 119,500

Account Payable 19,000 12,000

Bonds payable 10,000 30,000
Common Stock 50,000 61,000
Retained Earning 21,000 28,000
Treasury stock - (11,500)
100,000 119,500

Additional data for the period January 1, Year 2 through December 31, Year 2
are:
1. Sales on account, RM70,000
2. Purchases on account, RM40,000
3. Depreciation, RM5,000
4. Expenses paid in cash, RM18,000 (including RM4,000 interest and
RM6,000 taxes)
5. Decrease in Inventory RM2,000
6. Sales of fixed assets for RM6,000 cash, cost RM21,000 and two-thirds
depreciated (gain of loss included in income)
7. Purchase of fixed assets for cash, RM4,000
8. Fixed assets are exchanged for bonds payable of RM30,000
9. Sale of Investment for RM9,000 cash
10. Purchase of treasury stock for cash RM11,500
11. Retire bonds payable by issuing common stock RM10,000
12. Collection on accounts receivable RM65,000
13. Sold unissued common stock for cash, RM1,000
Required

a) Prepare a statement of cash flows (indirect method) for the year ended
December 31, Year 2
b) Prepare a side-by-side comparative statement contrasting two bases of
reporting (i) Net Income and (2) cash flow from operation
c) Which of the two financial reports in (b) better reflect profitability?
Explain

14
3’. MEGAH CORPORATION
BALANCE SHEET AS AT 31 MARCH

2010 2009
Asset
Current Assets
Cash 10,240 10,000
Account Receivable 48,640 40,000
Inventories 56,627 39,500
Prepaid Expenses 11,000 10,000
126,507 99,500
PPE 411,000 390,000
Accumulated Depreciation (250,000) (233,000)
NBV 161,000 157,000
Other Assets, Net Amortisation 26,000 27,000
Total Assets 313,507 283,500

Liabilities & Equity

Notes Payable 31,000 30,000
Account Payable 42,450 39,500
Accrues Liabilities (interest) 18,000 21,569
Income Tax Payables 9,500 8,900
Long Term Debt 99,000 87,000
Deferred tax Liabilities 9,070 10,000
Other NCL 5,000 4,340

Share Capital 16,500 15,000

Share Premium 26,000 21,000
Retained Earnings 56,987 46,191
Total liabilities & shareholders’ equity 313,507 283,500

INCOME STATEMENT FOR THE YEAR ENDED MARCH 2010

RM

Sales 512,000
Cost of Goods Sold (404,480)
107,520
Selling & Administrative Expenses (61,440)
Interest Expenses (12,320)
Profit before Tax 33,760
Tax (12,322)
Profit After Tax 21,438

Note: Dividends paid during 2010 are RM10,642

15
Required

Prepare a statement of cash flows (indirect method) for the year ended
December 31, 2010

4. MARLOON CORPORATION

BALANCE SHEET AS AT 31 DECEMBER

RM RM
2008 2009
Cash 240,000 120,000
Account Receivable, Net 360,000 450,000
Simple Investment 1,000,000 1,050,000
Inventory 750,000 1,053,000
PPE 4,500,000 6,438,000
Accumulated depreciation (1,500,000) (1,740,000)
Goodwill 1,010,000 980,000
6,360,000 8,351,000

Account Payable 360,000 590,000

Bonds payable 300,000 700,000
Deferred Tax Liability 240,000 260,000
Share Capital 2,400,000 3,200,000
Additional paid-Up Capital 900,000 1,300,000
Retained Earning 2,160,000 2,301,000
6,360,000 8,351,000

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2009

RM
Sales 19,950,000
Cost of Goods Sold (11,101,000)
8,849,000
Selling & Admin Expenses (7,030,000)
Operating income 1,819,000
Equity in earnings of simple investment 52,000
Profit before taxation 1,871,000
Tax (920,000)
Net income 951,000

Additional information:

16
1. Company sold machinery bought at RM36,000, for RM18,000, resulting in a
RM2,000 gain on income statement.
2. RM810,000 in dividends was paid in 2009.
3. Selling & admin Expense includes RM50,000 of interest expenses and
amortization expenses of RM30,000.
4. Cost of goods sold depreciation of RM260,000.
5. Income tax expenses includes deferred tax liability of RM20,000.
6. Collected proceed from sale of long-term investment of RM 18,000 and
received cash dividends of RM 2,000 in 2009.

Required

Prepare a statement of cash flows (indirect method) for the year ended
December 31, 2009

Tutorial 5 (Chapter 9)

17
1. What are some of the uses of prospective analysis?

2. Why are short-cash forecasts important for the analysis of financial

statements?

3. The following comparative income statement and balance sheet is

provided for Drink-Ho Pte Ltd:

Income Statement Year 2 Year1

$ $
Net Sales 20,092 19,889
Cost of goods sold 6,044 6,204
Gross Profit 14,048 13,685
Selling, general and administrative expense 7,893 9,221
Depreciation and amortization expense 803 773
Interest expense (revenue) (308) 292
Income before tax 5,660 3,399
Income tax expense 1,691 1,222
Net Income 3,969 2,177
Outstanding shares 3,491 3,481

Balance Sheet Year2 Year1

Cash 1,934 1,892
Receivables 1,882 1,757
Inventories 1,055 1,066
Other current assets 2,300 1,905
Total Current Assets 7,171 6,620

Property, Plant & Equipment 7,105 6,614

Accumulated depreciation 2,652 2,446
Net property, plant & equipment 4,453 4,168
Other non-current assets 10,793 10,046
Total Assets 22,417 20,834

Accounts payable & accrued liabilities 3,679 3,905

Short-term debt & current maturity of long-term debt 3,899 4,816
Income tax liabilities 851 600
Total current liabilities 8,429 9,321
Deferred Income tax and other liabilities 1,403 1,362
Long-term debt 1,219 835
Total non-current liabilities 2,622 2,197

Common stock 873 870

Capital surplus 3,520 3,196
Retained earnings 20,655 18,543
18
Treasury Stock 13,682 13,293
Shareholders’ equity 11,366 9,316
Total liabilities and equity 22,417 20,834

Required

a. Use the following ratios to prepare a projected Income Statement and

Balance Sheet and Statement of Cash Flow.

Items %
Sales growth 1.02
Gross profit margin 69.92
Selling, general & administration expense/sales 39.28
Depreciation expenses/Prior-year PPE gross 12.14
Interest expense/Prior-year long term debt 5.45
Income tax expense/Pre-tax expense 29.88
Accounts receivable turn over 10.68
Inventory turn over 5.73
Accounts payable turn over 1.64
Tax payable/Tax expenses 50.33
Total assets/stockholders’ equity (financial leverage) 2.06
Dividends per share 1.37
Capital expenditure/Sales 5.91

Note:

1. There are no changes in the following balance sheet items for the projected
balance sheet from year 2:

i. Others (current assets)

ii. Other assets
iii. Short-term debt & current maturity of long-term debt
iv. Deferred Income taxes & other liabilities
v. Long-term debt
vi. Common stock
vii. Capital surplus
viii. Treasury stock

BAC2684 Financial Statement Analysis

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19
Tutorial 6 (Chapter 2)
1. Describe and explain the two (2) main financial reporting framework
(standards) for companies in Malaysia.

2. Explain historical cost and fair value models of accounting. What explains
the move towards fair value accounting.

3. Explain why cash flow measures of performance are less useful than
accrual-based measures.

4. Accrual accounting requires estimates of future outcomes. For example,

the reserve for bad debts is a forecast of the number of current receivables
that will ultimately prove uncollectible. Identify and explain 3 reasons why
accounting information might deviate from underlying economic reality.

5. The following information is extracted from the annual report of ABC Pte.
Ltd. The information is in millions, except per share data:

Fiscal Year Y9 Y8 Y7 Y6 Y5 Y4
Net income 31.2 64.2 51.0 30.6 36.1 43.7
Cash from (used by) 74.3 (26.9) 121.8 41.4 64.5 22.4
operation
Net cash flow 0.03 (86.5) 75.7 11.8 (16.1) (1.2)
Free cash flow* 27.5 (74.6) 103.3 27.5 2.4 5.1
Market price per share (end 32.375 39.312 28.375 14.625 16.125 24.375
of Fiscal year)
Common shares outstanding 30.1 31.0 32.4 33.7 34.8 35.9
*defined as: cash flow from operation-capital expenditure-dividends

Required:

a) Calculate: - net income per share and market price per share
- cash from operations per share and market price per share
- net cash flow per share and market price per share
- free cash flow per share and market price per share

b) Which of the measures extracted from the annual report appear to best changes
in stock price?

BAC2684 Financial Statement Analysis

Trimester 1 2022/23

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Tutorial 7 (Chapter 3)
1. Explain the difference between operating and financing liabilities.

2. What are the major forms of financing liabilities? Which is long term and
which are short term?

3. Explain a loss contingency. Provide examples. Explain the two conditions

necessary before a company can record a loss contingency against income.

4. On January 1, Year 1, Burton Company leases equipment from Nelson

Company for an annual lease rental of RM 10,000. The lease term is five
years, and the lessor’s interest rate implicit in the lease is 8%. The lessee’s
incremental borrowing rate is 8.25%. The useful life of the equipment is five
years, and its estimated residual value equal its removal cost. Annuity tables
indicate that the present value of an annual lease rental of RM1 (at 8% rate) is
3.993. The fair value of the lease equipment equals the present value of
rentals.

Required:

a) Prepare a lease amortization schedule (table form) for the above lease.

b) Prepare accounting entries to record the lease for the 1st Year only.

c) Construct a table showing the payments of interest and principal made

every year for the five-year lease term.

d) Discuss the income and cash flow implications from this capital lease.

BAC2684 Financial Statement Analysis

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Tutorial 8 (Chapter 4)
1. Manufacturers report inventory in the form of raw materials, work-in-process,
and finished goods. For each category, discuss how an increase might be
viewed as a positive or negative indicator of future performance depending on
the circumstances that lead to the build-up.

2. Describe the inventory cost flow assumptions of:

 FIFO
 LIFO
 Average cost

3. Didi Company sells many products. Sol is one of its popular items. Below is an
analysis of the inventory purchases and sales of Didi for the month of
September.

Purchases Sales
Date Description Units Unit Cost Units SP/Unit
Sept 1 Beginning 100 RM50
invt
Sept 3 Purchases 70 RM70
Sept 4 Sales 80 RM125
Sept 10 Purchases 200 RM85
Sept 16 Sales 90 RM130
Sept 19 Sales 50 RM125
Sept 25 Sales 40 RM135
Sept 30 Purchases 40 RM80

a) Using the FIFO assumption, calculate the amount charged to cost of goods sold
for September. (Show all your calculations)
b) Using the LIFO assumption, calculate the amount assigned to the inventory on
hand on September 31. (Show all your calculations)
c) Calculate gross profit for September 31 using Average Cost method. (Show all
your calculations)

Note: LIFO inventory is disallowed in Malaysia. Only FIFO and average inventory is allowed.

4. Angry Bird Co. a profitable company, built and equipped a $2m plant brought
into operation early in 2001. Earning of the company (before depreciation on
the new plan and before income tax) is projected at $1.5m at 2001, $2m at

22
 2002, $2.5m at 2003, $3m at 2004 and $3.5m at 2005. The company can use
straight line, double declining balance, or sum of the year digit for the new
plant. Assume the plan’s useful life is 10 years (without salvage value) and
income tax rate of 50%. Compute separately for each of three methods: a)
depreciation, b) income taxes, c) net income and d) cash flows (assumed equal
to net income before depreciation) for the years 2001-2004.

5. Assumed that the machine costing $300,000 and having a useful life of 5 year
(without salvage value) generates a yearly income before depreciation and
taxation of $100,000. Compute the annual rate of return on this machine (using
the beginning of the yearbook value as the base) for each of the following
depreciation method (assume a 25% tax rate): a) straight line and b) sum-of-
the-years’ digits.

AC2684 Financial Statement Analysis

Trimester 1 2022/23

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Tutorial 5 (Chapter 6)-Additional Topic
1. The following information was taken from Wiwi’s financial statements as
of December 31, 2011.
RM
Preferred stock – 100,000 shares authorized, 2,000,000
issued and outstanding; RM20 par value; RM21
liquidation value
Common stock, par value RM0.50. Authorized 250,000
1,000,000 shares; issued – 500,000 shares
Capital contributed in excess of par value 5,000,000
Retained earnings (500,000)
Treasury stock, at cost (50,000 shares) (500,000)
Total stockholders’ equity 6,250,000
Required:

a) Calculate book value per share of common stock.

b) Assume that the company also had RM1,000,000 worth of

convertible at one RM1,000 bond into 200 shares of stock. There are
also stock options to buy 100,000 shares at a price of RM5 per share.
The stock is currently trading at RM30 per share. Recalculate you
answer to part (1) taking into account dilutive effects of the above.

c) Explain why we should calculate book value per shares.

2. The following information was obtained from AA Corporation’s annual

report.

Common stock: shares outstanding:

RM
Balance in January 600,000
April 1 – issued in conversion of preferred stock 300,000
July 1 – issued for cash 100,000
Balance on December 31 1,000,000
Preferred stock: shares outstanding
RM10 par 8%, each convertible into three common
shares
Shares Outstanding, January 1 275,000
Converted on April 1 (into 300,000 common) (100,000)
Shares Outstanding at year-end 175,000

Options
100,000 options each to purchase one common share at RM80 per share.

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 None have been exercised.

Additional Information:
Average for End of
Year Year
Market prices of common stock for Year RM84 RM86
Preferred dividends paid in year RM80,000
Net Income RM1,200,000

Required:
a) Compute weighted-average number of common shares outstanding for
the year
b) Compute basic EPS
c) Compute diluted EPS
Note: Company issues more preferred stock and uses proceeds to reduce
accounts payable. Indicate the effect on Earnings per share.

3. The following financial data is provided for Global Inc:

Global Inc
Capital Structure and Earnings for the Year 2010
Number of common shares outstanding on December 31, 2010 2,700,000
Number of common shares outstanding during the year (weighted
Average 2,500,000
Market price per common share on December 31, 2010 RM 25.00
Weighted-average market price per share during the Year 2010 RM 20.00

Output outstanding during the Year 2010:

Number of shares issuable on exercise of option 200,000
Exercise price RM 15.00

Convertible bonds outstanding (December 31, 2010, issue date):

Number of convertible bonds 10,000
Shares of common issuable on conversion (per bond) 10
Coupon rate 5%
Proceeds per bond at issue (at par value) RM 1,000
Net income for year 2010 RM6,500,000
Tax rate for the year 40%

Required

Based on the information given, calculate:

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a. Basic earnings per share for the Year 2010

b. Diluted earning per share for the year 2010

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