The University of Melbourne
Department of Accounting
ACCT 90002 Financial Statement Analysis
Final Examination: Guidelines and Advice
The following points are worth noting for the final examination:
1. Total time allocated for the examination is 210 minutes which includes reading time to
complete.
2. The method of assessment is an Assignment which is located on the CR Canvas Learning
Platform. After clicking the link for exam, you will be directed to Gradescope. You need to
complete the exam and submit your answers through Gradescope.
3. Once you start the examination you have 210 minutes.
4. The final examination is graded out of 100 marks, which accounts for 55% of final grade for
this subject.
5. The final examination consists of 7 questions in total, which are short answer questions
(including calculation).
6. How to answer question in Gradescope:
• First choice: For the final exam, you need to type your answers in a word document
and then convert it to PDF, and submit via Gradescope. Only PDF file is accepted in
the submission.
• Second choice: You can also handwrite your answer in a piece of paper and upload
HANDWRITTEN answers. You need to scan your handwritten answers to a PDF file
and upload a PDF to the corresponding question. DO NOT simply take a photo of your
work, you MUST scan your work using a scanner or mobile devices via a scanner app.
Only acceptable file type is PDF.
• For some questions, answer box is given so that you can directly type your answers in
the answer box.
7. Please write down your student ID and question number on the first page of each question if
your answer needs to be uploaded as PDF file.
8. You are recommended to submit one question once you complete that one just in case you don’t
have time to submit all questions at the end.
9. Once you submit your answer for each question, you can revise and resubmit your answers.
Only the last version will be saved.
10. The short answer questions need to be detailed and calculations should be provided when
required.
11. Be sure to have access to a watch / timer and be sure to have a calculator.
12. A very important site to visit before the ACCT 90002 Financial Statement Analysis.
https://students.unimelb.edu.au/your-course/manage-your-course/exams-assessments-and-
results/exams
Student ID No.
Student ID No. (words)
THE UNIVERSITY OF MELBOURNE
Department of Accounting
Final Examination – Semester 2, 20222
Subject Code ACCT 90002 Examiners use only
Financial Statement Analysis Question Marks Actual
1 13
Reading Time 15 minutes 2 10
Uploading time 15 minutes 3 7
Exam Duration 3 hours 4 15
5 30
Open book status Online OpenBook 6 10
7 15
Total 100
This exam contains 7 questions (100 marks)
Authorised Materials:
• This exam is an online open book with limited time exam.
Instructions to Students:
• All questions on this examination paper are compulsory.
• Failure to submit your answers online within the limited time will result in your answer being
unmarked and grade being deducted.
QUESTION 1 Introduction and Theoretical Framework (13 marks)
Do you agree or disagree with the following statements? Why or why not? Explain.
(a) Financial statement analysis is a powerful method in valuation which holds true in all
forms of market efficiency. (4 marks)
(b) There is no way to predict whether the price of stocks and bonds will go up or down
over the next few days or weeks. (3 marks)
(c) Best accounting practices should be able to completely remove managerial
discretionary over financial reporting. (3 marks)
(d) Firms’ financial reporting often does not meet the clean surplus accounting assumption.
However, analysts can still rely on this assumption for valuation purposes. (3 marks)
QUESTION 2 Accounting Analysis (10 marks)
(a) In 2009, Apple implemented new accounting rules in recognizing revenues from multiple
deliverables (MDs) in which Apple is required to estimate the standalone price for the
software upgrade and recognize that amount over the 24-month estimated life of
iPhone/Apple TV while recognizing the “residual” selling price for the hardware
immediately at the sale. In comparison, the old accounting rules required Apple to recognize
the aggregate amount of revenue over a 24-month period following a straight-line method.
Required:
Discuss whether and how the new accounting rules on MDs affect Apple managers’
discretion over revenue recognition. (4 marks)
(b) Everyday Coffee Co. implemented a coffee voucher redemption system. The rule was that
for every 5 units of purchase (@ 5 dollars per unit) the client was given a free voucher for a
unit of coffee which could be redeemed anytime during the following one year.
The company’s current accounting treatment at the client’s purchase of each of the first
five (5) units of coffee was:
Dr. Cash 5 dollars per unit
Cr. Revenue 5 dollars per unit
Then the company booked the following journal entry at the client’s redemption of the
voucher:
Dr. Revenue (to offset the previously booked revenue) 5 dollars per unit * 1 unit
Cr. Revenue 5 dollars per unit * 1 unit
Required:
Please evaluate the firm’s current accounting practices for these transactions and provide
correct journal entries. (6 marks)
QUESTION 3 Price-Earnings Multiple (7 Marks)
(a) In practice, it is common to observe price-earnings ratios measured as current period price
divided by trailing twelve months (or most recent annual) earnings per share. Identify and
explain Three potential flaws inherent in this measurement of the price-earnings ratio as a
valuation multiple. (3 marks)
(b) Identify Two economic factors that will drive a firm’s price-earnings ratio to be higher
than that of other firms in the same industry. (2 marks)
(c) Identify Two economic factors that will drive a firm’s price-earnings ratio to decrease
over time. (2 marks)
(Note: Economic factors are those non-accounting factors that affect P/E ratio. A greater
degree of accounting conservatism regarding accelerated depreciation of PP&E is an
accounting factor that affects P/E ratios.)
Question 4: Financial Analysis (15 marks)
Use the financial statements of Flight Center Travel Group Ltd. in the Appendix to answer
the following questions:
(a) Calculate the ROE for Flight Centre for both 2019 and 2020 at levels 1 and 2 of the
Du Pont Method. Comment on the change from the year 2019 to 2020. (Hint: Use
opening balances of balance sheet items in the calculation. The 2019 beginning
amount of Total Equity is $1,514,555 thousand and Total Assets is $3,398,999
thousand). (7 marks)
(b) Calculate the approximate rate of interest paid by Flight Centre in 2020. ‘Borrowings’
and ‘Lease liability’ on the balance sheet are interest-bearing while other liability
items on the balance sheet are non-interest bearing. ‘Financial costs’ on Statement of
Profit or Loss is the net interest expense. Using ending balances of balance-sheet
items in the calculation.) (1 mark)
(c) Based on the information in the Statement of Cash Flows, identify THREE channels
through which Flight Center achieved an increased balance of ‘Cash and cash
equivalents’ in FY 2020 compared with FY 2019. (3 marks)
(d) Based on the information in Note B1 in the Appendix, identify FOUR reasons for the
significantly lower Net Profit relative to Cash Flow from Operating Activities in FY
2020 (using FY 2019 as reference). (4 marks)
Question 5 Prospective analyses (30 marks)
In this question, please rely on FY 2019 financial statements of Flight Center Travel Group
Ltd. in the Appendix to prepare the Condensed financial statements and conduct prospective
analyses given the FY 2020 financial statements were significantly affected by Covid 19
(Simply put, ignore the FY 2020 financial statements in Question 5).
Required:
(a) Compile condensed balance sheet and condensed income statement based on the
information of FY 2019 given for Flight Center Travel Group Limited, i.e., financial
statements for FY 2019. (8 marks)
Hint:
(1) Effective income tax rate is 23%.
(2) ‘Financial costs’ on Statement of Profit or Loss is the net interest expense.
(2) ‘Borrowings’ and ‘Lease liability’ on the balance sheet are interest-bearing while other
liability items on the balance sheet are non-interest bearing.
(3) Non-controlling interests MUST be considered as equity.
(b) Calculate the fundamental value of Flight Center’s equity per share using the 2019 financial
statements, the abnormal earnings model, and a forecast horizon of three years. The
assumptions used are stated blow. Show all your calculations. Keep at least two digits after the
decimal point. (22 marks)
Hint:
(1) You are required to apply continuity correction.
(2) At the end of the 2019 fiscal year, Flight Center has 100,893 thousand (’000) shares
outstanding.
Also given:
• Net interest expense after tax = Net interest expense * (1 – Tax rate)
• Net operating profit after taxes = Net income + Net interest expense after tax
• Operating working capital = (CA – Cash and marketable securities) – (CL – Short term
debt)
• Net long-term (non-current) assets = Total long-term assets – Non-interest bearing long-
term liabilities
• Net debt = Total interest-bearing liabilities – Cash and marketable securities
• Net (operating) assets = Operating working capital + Net long-term (non-current) assets
• Net capital = Net debt + Shareholders’ equity
Assumptions for valuation
(1) Assume the net profit margin ratio (=Profit after income tax/Revenue) is constant at the FY 2019 level
over the forecast horizon period.
(2) Assume the Net operating asset turnover ratio (Sales/Beginning net operating assets) is constant at the
year 2020 level during the forecast horizon period.
(3) Analyst forecasts after publication of the 2019 financial statements:
Annual sales growth for next three years following 2019 4%
Dividend payout ratio (% of income) 2020 15%
(Dividend payout ratio (% of income) 2021 16%
Dividend payout ratio (% of income) 2022 18%
Risk free-rate of return 2.5%
Beta (β) of Flight Centers Ltd. 1.6
Market portfolio return 7.5%
Growth in abnormal earnings after 2022 3.0%
Question 6: Brokerage and Analyst （10 marks）
The following extracts comes from an article entitled ‘Stock Analysts Are More Biased Than
You Think’, by Wayne Duggan (U.S. News, 10 August 2017)
Wall Street equity research analysts are often cited as the primary voice of insight when it
comes to predicting the stock market. These analysts routinely pen in-depth reports on
individual stocks that include buy/sell/hold ratings, price targets, earnings forecasts and other
potentially useful information for investors and clients.
However, the average investor reading summaries of these reports in the news or listening to
analyst commentary and recommendations on financial TV networks may not realize that some
analysts may not have an objective opinion on the stocks they discuss.
Required:
(a) Why does the article say “some analysts may not have an objective opinion on the
stocks they discuss.”? (4 marks)
(b) Discuss the typical differences between the information disclosed by analysts and those
by managers in management guidance. What’s the relationship between them? (4 marks)
(c) Shares of Zoom closed down 16% on Tuesday 23 August 2022, a day after the company
released second-quarter results that missed analysts’ revenue estimates. What do you
think are the possible reasons for the share price drop of a company after missing
analysts’ forecasts? (2 marks)
QUESTION 7: ESG (15 marks)
(a) The manager of Brunswick Ltd is not convinced of the scientific evidence behind climate
change, and does not think that it is necessary to adopt changes in the company’s operations
which would decrease its greenhouse gas (GHG) emissions. Brunswick Ltd’s financial
manager, however, has argued that if the company does not try to decrease its GHG emissions,
the company’s carbon footprint will begin to appear on its Balance Sheet with the introduction
of a carbon emissions trading scheme.
Required
Explain what the financial manager means by a ‘carbon footprint appearing on the Balance
Sheet’ and whether this ‘footprint’ would be visible to investors. (7 marks)
(b) The following extract comes from a recent article in Australian Financial Review:
An energy company borrowed $150 million from financial institutions for the company’s
project to recommission a coal-fired power station. The energy company’s chief executive had
said at least one of its lenders had required the company to not disclose its involvement. That
lender was revealed as one of the Big-Four banks in Australia. The bank recently topped the
Dow Jones Sustainability Index as the best bank on sustainable issues globally, leading
Greenpeace Australia to yesterday label the bank as ‘hypocritical’. However, this bank denied
trying to hide its involvement. Another Big-Four bank in Australia who is not involved in this
project last week said it would avoid providing funding to coal-fired power stations.
Required:
Having read the above extract, answer the following questions:
(1) Social contract theory says that people live together in society in accordance with an
agreement that establishes moral and political rules of behavior. With the concept of the
‘social contract’ in mind, why would banks prefer not to disclose information about funding
coal-fired power plants? (3 marks)
(2) Do you think that the perceived legitimacy of the bank involved would be impacted by the
information provided in the article? (2 marks)
(3) How do you think the bank involved would respond to the information provided within
the article? (3 marks)
t '
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1;
[. -
STATEMENT OF PROFIT OR LOSS
Revenue A2 1,898,085
Fair value (loss)/gain on change in control A3 (3,138)
Other income A3 196,944
, Share of (loss)/profit of joint ventures and associates E1 (5,047)
Employee benefits F1 (1,491,455)
Sales and marketing (170,451)
Tour & hotel operations - cost of sales (129,856)
Amortisation and depreciation B7 / F7 (237,027)
Finance costs A4 (38,253)
Impairment charge A5d (217,117)
Other expenses A4 (651,969)
(Loss) / Profit before income tax (849,284)
Income tax credit I (expense) F12 187,175
(Loss) / Profit after income tax (662,109)
(Loss)/ Profit attributable to
Company owners (662,166)
Non-controlling interests 57
(662,109)
Earnings per share for (loss) I profit attributable to the ordinary,equity holders of the company:
Basic earnings per share F2 (552,1)
Diluted earnings per share F2 (552,1)
'Restated as required by AASB 133 Earnings per share for placement and entitlement offer during the current period, Refer to note F2 for details,
The above consolidated statement of profit or loss should be read in conjunction with the accompanying notes.
34 ANNUAL REPORT 2020 FLIGHT CENTRE TRAVEL GROUP
3,055,268
20,318
34,923
1,147
(1,591,965)
(194,111)
(157,231)
(82,370)
(25,592)
(29,777)
(687,153)
343,457
(79,283)
264,174
263,825
349
264,174
224,2
223,1
I
\
f
BALANCE SHEET
ASSETS
Current assets
Cash and cash equivalents
Marketable securities
Trade receivables
Contract assets
Other assets
Assets held for sale
Other financial assets
Current tax receivables
Derivative financial instruments
Total current assets
Non-current assets
Property, plant and equipment
Intangible assets
Right of use asset
Other assets
Other financial assets
Investments in joint ventures and associates
Deferred tax assets
Derivative financial instruments
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Trade and other payables
Contract liabilities
Contingent consideration
Lease liabilit
Borrowin s
Provisions
Current tax liabilities
Derivative financial instruments
Total current liabilities
Non-current liabilities
Trade and other payables
Contract liabilities
Contingent consideration
Lease liability
Borrowings
Provisions
Deferred tax liabilities
Derivative financial instruments
Total non-current liabilities
Total liabilities
Net assets
EQUITY
Contributed equity
Treasury shares
Reserves
Retained profits
Equity attributable to the Company owners
Non-controlling interests
Total equity
The above consoli'dated balance sheet should be read m con1unction with the accompanying notes.
�
NOTES 2020 2019
S'OOO $'000
B1 1,867,307 1,172,252
B2 8,078 115,447
F3 319,596 559,420
F4 96,515 356,124
FS 38,365 71,315
FS 20,850
C3 22,811 13,243
58,685 12,452
C2 5,432 7,494
2,437,639 2,307,747
F6 153,392 239,868
AS 761,864 768,635
F7 371,391
FS 6,396 11,543
C3 3,847 8,022
E1 34,760 85,549
F12 229,499 72,050
C2 278
1,561,427 1,185,667
3,999,066 3,493,414
F8 1,203,010 1,517,845
F9 235,762 68,660
A7 3,278 15,400
F7 134,219
B4 211,668 84,710
F10 65,456 54,894
1,244 10,769
C2 2,185 2,797
1,856,822 1,755,075
F8 59,530
F9 40,597 48,469
A7 297 3,181
F7 392,442
B4 250,514 100,375
F10 43,720 48,098
F12 20,032 16,368
C2 1,456
749,058 276,021
2,605,880 2,031,096
1,393,186 1,462,318
D4 1,094,095 405,626
D4 (11,993)
F11 11,172 15,397
287,717 1,053,010
1,392,984 1,462,040
202 278
1,393,186 1,462,318
ANNUAL REPORT 2020 FLIGHT CENTRE TRAVEL GROUP 37