Departamento de Gestión de Empresas

Enpresen Kudeaketa Saila

FACULTAD DE CIENCIAS ECONOMICAS Y EMPRESARIALES

DEPARTAMENTO GESTION DE EMPRESAS
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ADE/ECONOMICS INTERNATIONAL GROUP 1 1 1
FINANCIAL STATEMENT ANALYSIS – FINAL EXAM JANUARY 08, 2020

LAST NAME_________________________________________

FIRST NAME__________________
The exam is made up of two parts. For PART II you must use the financial statements of THOMAS COOK in the
appendix. PART 1: 26 points. PART 2: 14 points. Total = 40 points.

PART I (Unless otherwise, 1 point each)

1. (2 points)
Write a brief paragraph on the HP-Autonomy case (include incentives, source of noise, actual practices and
legal consequences).

2. Assign 0-5 to the following transactions in Fomento de Construcciones y Contratas, SA (Spanish building
company) using “room for managerial discretion” as a criterion. (5 = maximum room for managerial
discretion).
Purchase of raw material (invoice received)
Revenue recognition.
Litigation process related with fraudulent public work assignment.
Recognition of goodwill internally generated.
Recognition of goodwill generated in inorganic growth.
3. Choose True/False for each of the following statements related with the IAS-1
Does not include specific guidance to prepare the Balance Sheet (T / F)
States that not all financial statements must be prepared under the accrual basis of accounting. (T / F)
Establishes maximum content for the financial statements established by specific formats. (T / F)
Requires data for at least three consecutive years in the financial statements. (T / F)
4. As regards the accounting standards’ setting process…
a) IASB and IFRS are the two main accounting standard setting bodies in the world.
b) IASB are issued by the IFRS.
c) US GAAP are issued by the FASB.
d) Local Spanish accounting standards are issued by the IASB.
5. Accumulated other comprehensive income and Other comprehensive income can be considered synonyms
(T/F). Explain.
6. Big multinationals that recognize their lease agreements as operating….
a) Increase their liabilities in their reported balance sheet.
b) Practice off-balance sheet financing.
c) Are most typically in industries like car manufacturing, building and electricity.
d) Will go on doing it in the future.

7. (3 points)
Given the following balances for Leong Corporation as of December 31, 2019, compute Working capital, Non-
current assets and Equity.

Equipment ¥ 40,000
Interest Expense 2,400
Interest Payable 600
Retained Earnings (Begining balance) 1,000
Dividends 50,400
Land 157,320
Inventory 102,000
Bonds Payable (due in 3 years) 78,000
Notes Payable (due in 6 months) 24,400
Share Capital–Ordinary 60,000
Accumulated Depreciation - Equipment 10,000
Prepaid Advertising 5,000
Revenue 351,400
Buildings 81,400
Supplies 1,860
Income Tax Payable 3,000
Utilities Expense 1,320
Advertising Expense 1,560
Salaries and Wages Expense 53,040
Salaries and Wages Payable 900
Accumulated Depreciation - Buildings 15,000
Cash 40,000
Depreciation Expense 8,000

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8. (2 points)
Why is a very expensive buyback unfavorable for a company? Can you illustrate with an example (JE are also
welcome)?

9. (2 points)
Why were there differences between book value, intrinsic value and market value in the dot-com companies
that caused the 2000’s market crash?

10. Rules-based accounting standards….

a) Are more commonly found in the Europe than in the rest of the world.
b) Make auditing more difficult.
c) Usually occupy more pages than principles-based standards.
d) Always lead to more noise in the financial statements than principles-based standards.

11. Match the following companies with their corresponding key accounting policies and degree of flexibility
(1 low flexibility -5 high flexibility)
C1. H&M (Swedish fast fashion store) A1. Loan loss reserves
C2. Bank of Scotland A2. Brand-building efforts
C3. Intel (US semiconductor chips) A3. PPE accounting
C4. Aldi (German discount supermarket chain) A4. R&D accounting

12. Name 4 potential “red flags” pointing to questionable accounting quality.

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13. (2 points)
Presented below is information (in thousands) related to Chen Company.
Retained earnings, December 31, 2018 ¥ 650,000
Sales revenue 1,400,000
Selling and administrative expenses 240,000
Loss on disposal of significant segment unit (pre-tax) 260,000
Cash dividends declared and paid by Chen 33,600
Cost of goods sold 830,000
Rent revenue 120,000
Impairment loss 90,000
Interest expense 10,000
Instructions
Prepare the income statement for the year 2019. Assume a 30% tax rate.

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14. (4 points)
Condensed financial statement information and additional data for SALVAZ Company for 2019 and 2020 are
presented below (in €)
Balance Sheet (Dec. 31)
2020 2019
Plant assets ....................................................... 1,790 1,700
Accumulated depreciation ................................ (1,200) (1,170)
Investments....................................................... 1,300 1,470
Inventory ........................................................... 1,600 1,900
Receivables ....................................................... 1,000 1,300
Prepaid expense................................................ 750 0
Cash ................................................................... 1,910 1,100
TOTAL .................................................. 7,150 6,300

Share capital–ordinary ...................................... 1,900 1,700

Share premium-ordinary ................................... 100 0
Retained earnings ............................................. 2,450 1,900
Bonds payable .................................................. 1,400 1,650
Accounts payable .............................................. 1,100 800
Accrued liabilities .............................................. 200 250
TOTAL .................................................. 7,150 6,300

Income statement (yr.2020)

Sales 6,900
Cost of goods sold (4,500)
Selling & administrative expenses (1,030)
Loss on sale of plant asset (30)
Income from operations 1,340
Interest expense (100)
Gain on sale of investments 110
Income before income tax 1,350
Income tax expense (540)
Net Income 810

Additional data for the year 2020:

New shares were issued at 150% in exchange for a plant asset.
A plant asset was sold at the beginning of the year. Its initial cost was 210 and its accumulated
depreciation was 120. It was sold at a loss.
Investments were sold at a gain.
Part of the bond indenture issued at par in 2017 was amortized during 2020.
Payout ratio = 32.1%
Required:
Prepare the Cash Flow Statement for the year 2020

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15. (3 points)
ASTRAZENECA Ltd. Is a UK pharmaceutical company that applies IFRS. The company spent (evenly over the
course of each year) €2,000, €3,000 in research and €4,000 in development in an R&D project that covers the
years 2016 and 2017 (research), and 2018 (development). The company was allowed to capitalize only a fourth
of the development costs. As an equity analyst you judge the project very positively and think that it should be
capitalized entirely using a 5-year straight-line method for their amortization. (Tax rate = 30%). What will be the
adjustments in the Balance Sheet Dec. 2017 and 2018 and in the Income Statement 2018?

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PART II (1 point/answer)

Have a look at Thomas Cook’s financial statements (see appendix) and give a brief answer to each of the
following questions:

1. How would you prove that these financial statements are consolidated? (heading is not allowed as an answer)

2. The group does not own equity investments at a 20-50% stake (T/F, explain)

3. What accounting standards have been followed for their preparation? (Justify your answer)

4. Are there private pension plans in this group? Are they overfunded or underfunded?

5. What is the group’s most important asset? Be as concrete as possible.

6. What is the global financial position (1 to 5) for the group in 2014? Has it changed in 2015?

7. There is no need for disclosure notes to offer information about expenses by nature (T/F, discuss)

8. How much has the company spent in advertising in 2015?

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9. How would you approach Ebitda for the year 2015?

10. Can you name a situation that gave rise to a taxable temporary difference in the company?

11. Prove mathematically the main equation in the Balance Sheet and in the Cash Flow Statement for 2015.

12. The group has used the direct method in all three sections of its Cash Flow Statement (T/F, explain)

13. Identify one adjustment for each of the three categories in the operating section of the Cash Flow
Statement.

14. Considering the bankruptcy of the company in September 2019, which of the three financial statements at
your disposal (BS, IS and CFS) would be better anticipating the disaster? Discuss

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