

Study with the several resources on Docsity
Earn points by helping other students or get them with a premium plan
Prepare for your exams
Study with the several resources on Docsity
Earn points to download
Earn points by helping other students or get them with a premium plan
Community
Ask the community for help and clear up your study doubts
Discover the best universities in your country according to Docsity users
Free resources
Download our free guides on studying techniques, anxiety management strategies, and thesis advice from Docsity tutors
A tutorial from an msc finance course focusing on financial statement analysis. It includes a case study with questions related to quality of earnings issues and earnings smoothing. The case study discusses four issues: nonrecurring gains, lower tax rate, currency translations, and share buybacks. Additionally, the tutorial explains the concept of earnings smoothing and why a company would want its profit figures to appear consistent from year to year.
Typology: Study Guides, Projects, Research
1 / 2
This page cannot be seen from the preview
Don't miss anything!
MSc Finance
Tutorials week commencing Monday 30 th November 2009
a) Identify four quality of earnings issues reported in the case and discuss the analysts’ concern about each.
Question 2
Rogan
Interest payable
Debt % In terest
De velop men t loan 6,0 00,0 00 11% 66 0,00 0
M ortgag e de bt 10,0 00,0 00 9% 90 0,00 0
De bent ures 40,0 00,0 00 10% 4,00 0,00 0
In terest p aya ble 5,56 0,00 0
Capi ta lise d intere st
De velop men t loan 6,0 00,0 00 11% 66 0,00 0
De bent ures 4,0 00,0 00 10% 40 0,00 0
Ave ra ge b alance 10,0 00,0 00
Ca pit alised int erest 1,06 0,00 0
Interest ex pense 4,50 0,00 0
Q3: Track plc.
The most important thing about this question is to demonstrate your understanding of earnings smoothing and why a company would want its profit figures to appear consistent from year to year. In an exam situation, marks would be awarded for insightful discussion rather than a “correct” answer.
Two things you should immediately note:
Answers to parts i to iv:
i) No change (2002 is consistent with previous years)
ii) No change (change in depreciation policy never affects cash flows)
iii) Initial rise (lower depreciation charge) and then probably smoothing effect as new assets are recognised and push up depreciation. Under the old depreciation policy, the completion of construction plans would have meant a
corresponding large increase in the depreciation expense in any given year (and thus a fall in observed profit).
Additionally, however, it would be expected that completion of the construction around 2005 would lead to increases in profit (through attraction of new customers and a more efficient use of new assets). Together these outcomes would cause a fluctuation in profit under the old policy. The introduction of the new policy entails that there is a time delay in providing for depreciation until completion of the new assets, so the rise in profits and the rise in depreciation will offset each other because they will both occur in the same year, and, that depreciation when it does begin in 2005 will be a much smaller sum because of the extended asset lives being used. The overall effect of this policy change then, is to prevent observed profits from fluctuating. Without a reasonably detailed examination it will appear to investors that the profit figure is reliable over time and thus a safer investment.
iv) No change (see ii).