Departamento de Gestión de Empresas

Enpresen Kudeaketa Saila

FACULTAD DE CIENCIAS ECONOMICAS Y EMPRESARIALES

DEPARTAMENTO GESTION DE EMPRESAS 1 2 3 4
ADE/ECONOMICS INTERNATIONAL GROUP
FINANCIAL STATEMENT ANALYSIS – FINAL EXAM DECEMBER 21, 2018 1 1 1
LAST NAME_________________________________________
FIRST NAME__________________

The exam is made up of two parts. For PART II you must use the financial statements of ADIDAS Group in the
appendix. PART 1: 20 points. PART 2: 12 points. Total = 32 points.
PART I
1. Which of the following sequences is correct regarding the steps in the financial statement analysis process?
a) BSA/FA/AA/PA
b) PA/BSA/AA/FA
c) AA/BSA/AA/FA
d) None of the above is correct.

2. Analysts will always give a selling recommendation when they know that the intrinsic value of a company is
lower than its market price (T/F). Illustrate your answer with a real-life situation debated in class.

3. Which of the following statements is true?

a) Because accrual accounting deals with expectations of future cash consequences of current events, it is
subjective and relies on a variety of assumptions.
b) Cash accounting reports the full economic consequences of the transactions undertaken in a given
period.
c) If analysts had to choose only one performance indicator, they would always prefer cash flow from
operations over net income.
d) A good analyst assumes that all noise is always previously removed if the auditor is good.

4. Consider the following two statements:

S1: “In countries with a model of strong legal protection of investors’ rights, information intermediaries play a
smaller role in preventing lemons problems than in countries with a model of weak legal protection of
investors’ rights.”
S2: “The extent to which financial statements accurately reflect the consequences of managers’ operating,
investment and financing decisions is a function of characteristics of the accounting environment and
managers’ accounting strategy.”
a) Both statements are true
b) Statement 1 is true but statement 2 is false
c) Statement 2 is true but statement 1 is false
d) Both statements are false

5. Choose True/False for each of the following statements related with the IAS-1
-Establishes specific formats to fill out for the Balance Sheet, Income Statement and Cash Flow Statement (T / F)
-Assumes accrual basis of accounting for all financial statements except for the Balance Sheet (T / F)
-Companies have to inform about net income but not about comprehensive income. (T / F)
-The IAS-1 applies only for general-purpose financial statements (T / F)
6. Match the following companies with their corresponding key accounting policies and degree of flexibility
(low/medium/high)
C1. Lloyds banking group A1. Loan loss reserves
C2. Huawei (Chinese telecommunications) A2. PPE accounting
C3. Tesco (UK grocery retailer) A3. Revenue recognition
C4. Netflix (US entertainment industry) A4. R&D

7. Name four potential “red flags” pointing to questionable accounting quality.

8. Which of the following statements is true regarding the operating section of the income statement?
a) IFRS do not allow firms to classify their expenses by function.
b) IFRS allow firms to classify their expenses by function but only if they provide a disclosure note with a similar
classification by nature.
c) IFRS do not allow firms to classify their expenses by nature.
d) IFRS allow firms to classify their expenses by nature but only if they provide a disclosure note with a similar
classification by function.

9. Describe briefly what the HP – Autonomy case consisted of and why it is a good illustration of the importance
of accounting analysis.

10. Building upon “room for discretion” allowed by current IFRS, choose >/</= to evaluate the comparison in
each case (assume IFRS in all cases):

Purchase of raw material in € (functional currency) > < = Purchase of raw material in $ (foreign currency)
Depreciation of a plant asset > < = Impairment of a plant asset
Goodwill originated in a business combination > < = Goodwill generated internally
Loss on an unfinished litigation process > < = Loss on a litigation process already ruled out
Historical cost for plant assets > < = Fair value for plant assets

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11. (2 POINTS) Presented below is information related to Battery Group in 2017.
Sales revenue €1,680,000
Cost of goods sold 840,000
Selling and administrative expenses 300,000
Gain on sale of plant assets 180,000
Unrealized gain on non-trading equity securities (available for sale) 60,000
Financing costs 40,000
Loss on discontinued operations 80,000
Allocation to non-controlling interest 24,000
Dividends declared and paid 48,000
Required:
Compute the following amounts: (Tax rate = 30%)
(a) income from operations, (b) net income, (c) net income attributable to Battery Group’s controlling
shareholders, (d) comprehensive income, and (e) retained earnings balance at December 31, 2017.
(Note: consider Beginning Retained Earnings = 0).

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12. (3 POINTS)
Jamison Corp.'s statement of financial position accounts as of December 31, 2019 and 2018 and information
relating to 2019 activities are presented below.
December 31,
2019 2018
Assets
Plant assets €3,400,000 €2,000,000
Accumulated depreciation (900,000) (900,000)
Patent 180,000 200,000
Long-term investments 460,000 600,000
Inventory 1,380,000 1,200,000
Accounts receivable (net) 1,620,000 1,020,000
Cash 440,000 200,000
Total assets €6,580,000 €4,320,000

Equity and Liabilities

Share capital-ordinary, €10 par €1,600,000 €1,400,000
Share premium-ordinary 800,000 500,000
Retained earnings 1,880,000 980,000
Accumulated OCI (40,000) —
Notes payable l-t (nontrade) 580,000 —
Accounts payable 1,760,000 1,440,000
Total equity and liabilities €6,580,000 €4,320,000

Information relating to 2019 activities:

Net income for 2019 was €1,500,000.
Cash dividends of €600,000 were declared and paid in 2019.
Equipment costing €1,000,000 and having a carrying amount of €320,000 was sold in 2019 for €360,000.
A long-term investment with a €100,000 carrying amount was sold in 2019 for €320,000. The additional decrease
in this item was a downward fair value adjustment at the end of 2019 that bypassed the income stament.
20,000 ordinary shares were issued in 2019 for €25 a share.
The note payable was issued to the BNP bank on January 01, 2019 for €565,000 and by the end of 2019 had
accrued implicit interest for €15,000.

Required: Prepare the Statement of Cash Flows for the year 2019

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 13. Eli Lilly & Co. is one of the biggest US pharmaceutical multinationals. The group spent $20,000, $40,000 and
$48,000 in research & development in 2016, 2017, and 2018, respectively but US GAAP do not allow for any
capitalization of R&D. As an analyst, you assume that these are investments with an expected life of five years
that occur evenly throughout the year. If you decide to consider them as an intangible asset, your adjustments on
the balance sheet Dec. 31, 2018 will increase assets in…
a) $26,800
b) $43,200
c) $81,200
d) $108,000

14. As an analyst you have decided to capitalize the operating leases of Meliá Hotels on its Balance Sheet
Dec.31, 2017. In the notes to the 2017 financial statements, the company has determined five yearly future
minimum lease payments of €5,000 each beginning on December 31, 2018. The analyst does not know the
average implicit rate in these contracts but has estimated that the incremental borrowing rate for the company is
8 percent. Consequently, and if the analyst disregards any possible income statement effect prior to this year, the
balance sheet Dec.31, 2017, will adjust…
a) Increase plant assets and increase in lease liabilities for €25,000
b) Increase plant assets and decrease in lease liabilities for €25,000
c) Increase plant assets and increase in equity for €19,963
d) Increase plant assets and increase in lease liabilities for €19,963

15. Considering that Meliá Hotels reports rent expense for €5,000 for the year 2018, that no new lease contracts
are signed during this year and that the remaining useful life of the assets under lease is 8 years since the end of
2017, the adjustment to be made to Meliá Hotels in 2018’s net income will be (tax rate 20%).
a) Increase net income for €726
b) Decrease net income for €726
c) Increase net income for €908
d) Decrease net income for €908

16. As a last question regarding Meliá Hotels, what will be the effect on Deferred Tax Liabilities derived from
the above adjustments on Dec.31, 2018’s balance sheet?
a) Increase DTL for €182
b) Decrease DTL for €182
c) Increase DTL for €3,403
d) Decrease DTL for €3,403

17. Hertz’s fleet of vehicles has a residual value of €400, a beginning of the year book value of €8,240, and an
initial cost of €20,000. Hertz uses an annual depreciation percentage of 40%. Its statutory (and effective) tax rate
is 30 percent. The analyst wants to compare Hertz with Europcar. The latter is in the same industry but applies a
20% annual depreciation percentage. What adjustments will the analyst make to Hertz’s beginning non-current
assets and retained earnings if he/she assumes that Europcar’s depreciation percentage is the most adequate to
compare both companies?
a) Increase non-current assets by €5,880; increase retained earnings by €1,764
b) Increase non-current assets by €5,880; increase retained earnings by €4,116
c) Decrease non-current assets by €5,880; decrease retained earnings by €4,116
d) Increase non-current assets by €4,000; increase retained earnings by €1,764

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PART II (1 point/answer)
Have a look at ADIDAS Group’s financial statements taken from its 2017 annual report (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 parent company (Adidas AG) owns 100% of their subsidiaries (T/F, explain)

3. What accounting standards have been followed for their preparation?

4. Give an opinion on the global financial position (1 to 5) for the group in 2016? Has it changed in 2017?

5. What relevant external growth acquisition did the Group make in 2006?

6. Is there any short-time plan for selling an important division?

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7. Expenses by function are presented neither in the Income Statement nor in the disclosure notes. (T/F, explain)

8. Prove mathematically the main equation in the Balance Sheet and in the Cash Flow Statement for 2017.

9. I can assure you that Adidas has recognized OCI over the course of 2017. Shouldn,t we see it on the Balance
Sheet? Give some reason for this 2017’s OCI recognition.

10. As an analyst, how do you see 2017’s Cash Flow Statement? Is if very different from 2016?

11. Are there any investments in associates or joint ventures? (20-50%, equity method)

12. The interest coverage ratio shows a very negative pattern. (T/F, explain)