Corporate Accounting and Financial Statement Analysis Assignment

Question 1 - Tang's summarized financial statements for the years ended 31 March 20x2 and the comparative figures are shown below.

The following information is relevant:

Depreciation/amortization charges for the year ended 31 March 20x2 were:

There were no sales of non-current assets during the year, although the property has been revalued.

The following additional information has been obtained in relation to the operations of Tang plc for the year ended 31 March 20x2:

(i) On 1 June 20x1, Tang won a tender for a new contract to supply Jetside with aircraft engines that Tang plc manufactures under a recently-acquired licence. The bidding process was very competitive and Tang plc had to increase its manufacturing capacity to fulfil the contract.

(ii) Tang also decided to invest in Raremetal by acquiring 8% of its equity shares in order to secure supplies of specialised materials used in the manufacture of the engines. No dividends were received from Raremetal nor had the value of its shares changed since acquisition.

(iii) Tang revalued its property during the year to facilitate the issue of the 10% loan notes.

On seeing the results for the first time, one of the company's non-executive directors is disappointed by the current year's performance.

Required:

(a) Explain how the new contract and its related costs may have affected Tang's operating performance, identifying any further information that may be useful to your answer.

Your answer should be supported by calculating appropriate ratios in profitability, solvency and fixed asset turnover but ratios and analysis of working capital are not required.

(b) Do an analysis on the cash flow statement and give your recommendation on what should have been done to prevent the deterioration of cash and cash equivalents from the previous year.

Question 2 -

(a) Define the term "quality of earnings". Is it a desirable trait?

(b) Discuss the four (4) techniques that management can use to improve a company's reported earnings performance in the short run.

(c) Give four (4) examples of low-quality earnings components.

Question 3 -

(a) What are "free cash flow"? Explain the difference between a company operating cash flow and its free cash flow.

(b) Reported earnings numbers often contain three (3) distinctly different components, each subject to a different earnings capitalization rate:

(i) A permanent earnings component, which is expected to persist into the future and is therefore valuation-relevant. In theory, the multiple for this component should approach 1/r.

(ii) A transitory earnings component, which is valuation-relevant but is not expected to persist into the future. Because transitory earnings result from one- time events or transactions, the multiple for this component should approach 1.0.

(iii) A value-irrelevant earnings (or noise) component, which is unrelated to future free cash flow or future earnings and therefore, is not pertinent to assessing current share price. Such earnings components should carry a multiple of zero.

Above statements are extracted from the title, Financial reporting & Analysis by Revsine, Collins, Johnson, Mittelstaedt: "Research on Earnings and Equity valuation".

Required: Name the elements of the multiple-step income statements that correspond to the three earnings components listed under (i) to (iii) above. Briefly explain your selection.