ACCOUNTING FOR MAMANGERS G 62212017

Length: / 2,000 words plus Appendices
Value: / 30 marks
Background: / Publicly listed companies produce annual reports for a range of interested parties, including existing and potential shareholders, suppliers, financiers, and regulatory authorities. Annual reports convey primarily financially-oriented information intended to shed light on organizational performance from a financial perspective. Recent evidence suggests that annual reports may mask what may be otherwise considered to be the “true” state of affairs of a firm. With this in mind, financial statements need to be read with care and evaluated critically.
China Mobile and China Unicom are both large telecommunications companies in China.[1] Both companies are majority-owned by the Chinese Government, but have a significant minority public shareholding. The publicly-owned shares of both companies are traded on the New York Stock Exchange (NYSE). The reports, including the financial statements, prepared by these companies comply fully with the NYSE’s requirements. These requirements are substantially similar to those of other exchanges around the world, including those of the Australian Securities Exchange.
Required: / Obtain the annual reports of China Mobile and China Unicomfor 2014- 2016. Reports can be downloaded from Moodle or the corporate websites.
Evaluate the annual reports from the perspective of investors in the firms. Prepare trend analyses, common size statements and financial ratio analyses for the organizations and evaluate them for their information content. Assess whether the reports provide any red flags that may have provided signals of impending financial difficulties. Comment also on the qualitative and non-financial information contained in the reports and assess the extent to which that information facilitates a clearer understanding of the companies’ financial operations. Evaluate the notes to the accounts for information that may influence the manner in which the reported financial data may be interpreted. Finally, comment on the utility of annual reports and financial statement analysis in terms of their capacityto inform the decision-making processes of investors in these two companies.

Suggested structure

  1. INTRODUCTION
  • What you are going to do
  • Why are you doing it
  • How you are doing it – brief overview of assignment
  1. CHINA’S TELECOMMUNICATIONS COMPANIES
  2. COMPANY BACKGROUNDS
  • Brief introduction about the companies and what they do

2.2FINANCIAL STATEMENT ANALYSES

2.2.1COMPANIES PERFORMANCE and POSITION

TREND ANALYSES

  • P + L –

-Discuss how the companies have performed over time.

-Include chart to compare; sales, COGS, Expenses and Net Profit as a %

-Compare with the other company.

  • B/Sheet

-Discuss how companies have grown or contracted over time

-Compare with the other company.

2.2.2COMMON SIZE STATEMENTS

  • P + L

-Discuss how the companies have improved performance relative to sales (i.e. internal efficiencies)

-Compare to the other company.

  • B/Sheet

-Discuss structure of company

-Discuss how financed etc

-Compare with the other company.

2.2.3RATIO ANALYSES

  • Profitability
  • Efficiency
  • Liquidity
  • Capital Structure
  • Market Performance

-Discuss what each group of ratios measures

-Include table with ratios (see below)

-Discuss the impact on each company and how it would affect your investment decision

-Discuss whether the ratios are good or bad

-Compare with the other company and ‘rules of thumb’.

Note:All of the above discussion points and comparisons are to be applied for all the ratios listed above in bold.

2.3 ACCOUNTING TREATMENTS AND METHODS USED

  • Discuss any changes or problems that will/may occur as a result of the methods/treatments the company used and how it would change your analysis.
  • What would the difference be if the company used a different method/rate etc?
  • Important, this is where we try to see what games the companies have played.

2.4USEFULNESS OF INFORMATION PROVIDED

  • General Purpose Financial Statements (GPFS) are prepared for users to make decisions about the allocation of scarce resources
  • Discuss how well information was presented
  • Discuss how easy it is to use information given
  • Discuss if information was hidden/buried in the reports
  • What should be included

2.5LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS

  • Historic data
  • Lack of information/disclosure
  • Year-end not typical
  • Data not comparable – A/C methods, size & diversity
  • Hidden supplementary information
  1. CONCLUSION
  • Summary of what you did
  • Summary of results
  • Implications
  • Where to next/further research

General Comments and Example

Appendices should be used for financial statements, trend statements, common-size statements and ratio calculations.However, you can use charts, figures or tables in the body of your assignment to emphasise certain points. An example follows.

EXAMPLE

Liquidity Ratios

These ratios focus on working capital and are used to determine a company’s ability to convert assets to cash such that it is able to pay liabilities as and when they fall due. Liquidity Ratios include the Current and Quick Ratios.

2009 / 2010 / 2011
Current Ratio –Your Company
- Ind. Average / 2.0:1.0
2.0:1.0 / 2.2:1.0
2.1:1.0 / 2.4:1.0
2.2:1.0
Quick Ratio - Your Company
- Other Company / 1.0:1.0
1.0:1.0 / 1.2:1.0
1.1:1.0 / 1.4:1.0
1.2:1.0

Table 1: Company Liquidity Ratio and Comparatives

Current Ratio

The Current Ratio measures a company’s ability to ….

As you can see from Table 1 above, the Current Ratio has increased from 2:1 in 2009 to 2.4:1 in 2011. The ability of the company to pay its short term debts has improved and is better than the other company, which only increased from 2:1 in 2009 to 2.2:1 in 2011 etc.

Look behind the numbers and tell the story. Ask why they are telling you what they say. The “what’s” are only the first step. Real insight comes only from the “why’s”. Avoid “elevator” analysis: “Sales went up, profits went down” means little without an explanation of the reasons. You may find the caution flags useful (see below). Generally, individual ratios are not viewed in isolation. One ratio may help to support the results of another ratio.

Checklist ofCaution Flags

Adapted from Understanding the Corporate Annual Report Nuts, Bolts, and a Few Loose Screws (Fraser and Ormiston 2003)

Below is an abbreviated list of caution flags you may like to consider when preparing your financial statement analyses.

CAUTION FLAGS - Income Statement

  • Revenue and profit growing at substantially different rates or moving in opposite directions
  • Large, unexplained reductions in discretionary items such as advertising, research and development
  • Profit margins shrinking or growing dramatically or moving in opposite directions
  • Taking large, one-time (special) charges against earnings
  • Changing accounting estimates and assumptions

CAUTION FLAGS – BALANCE SHEET

  • Reductions in the allowance for doubtful accounts when accounts receivable are increasing
  • Sales and receivables growing at substantially different rates or moving in opposite directions
  • Sales and inventories growing at substantially different rates or moving in opposite directions
  • Excessive use of "other" for material, unexplained items
  • Borrowings growing faster than assets being financed; debt rising when assets are decreasing

CAUTION FLAGS – STATEMENT OF CASH FLOWS

  • Failure to generate cash from operating activities
  • Large fluctuations in cash flow from operating activities over time
  • Net profit and cash flow from operations not tracking closely
  • Net profit and cash flow from operations moving in different directions
  • Positive cash flow from investing activities because company is selling off assets to generate cash
  • Positive cash flow from financing activities for several periods - possibly indicating borrowing needed to offset lack of internal cash generation
  • Company highlights cash flow in shareholders' letter, especially in same paragraph discussing falling stock price

CAUTION FLAGS – COMPREHENSIVE ANALYSIS

  • Changes in top company management
  • Key financial ratios indicating deteriorating trends and/or weaknesses relative to industry competitors
  • Cash flow from operations declining, negative, volatile, or not tracking with net income
  • Lack of profitability in key operating areas
  • Price to earnings ratio low relative to competitors
  • Firm's earnings less than after-tax cost of debt
  • Declining operating profits when debt is rising

Submission of Report

  • Your submission should take the form of a formal report (see structure above). You do not need to include a letter of transmittal or a glossary.
  • Your report must be typed and your discussion should be about 2000 words.
  • Your calculations including numbers and formulae of ratios must be included in the appendix. If using an Excel spreadsheet (which is recommended) you must use a format such that cell formulae are accessible.
  • Your report will be referenced where appropriate (Harvard method – no footnotes).
  • Do not include definitions of ratios in your paper. You may assume that the reader understands ratios.
  • Include tables and graphs in your discussion.
  • No two assignments should have the same or similar wording. Superficial changes will be picked up and dealt with accordingly.
  • Keep an electronic copy of your assignment.
  • Include a copy of the marking scheme(attached) as the first page of your report

Marking

Your paper will be marked out of a 100 and converted to a mark out of 30. This assignment represents 30% of your assessment for this unit. Marks will be allocated as follows:

  • Quality of report: content and discussion60%
  • Correctness of financial statement analysis calculations30%
  • Report presentation and referencing10%

ECUST FMG GROUP ASSIGNMENT 2017

MARKING SCHEME

Students’ IDs: ______

Quality of report content60%

Introduction(What, why, how & Company Background)/6

DiscussionTrend Analysis/8

Common Size/8

RatiosProfitability/4

Efficiency/4

Liquidity/4

Capital Structure/4

Market Performance/4

Accounting Treatment and Methods used/4

Usefulness of Information/4

Limitations/4

Conclusions (which company would you invest in)/6

Correctness of financial statement analysis calculations30%

Trend Analysis/5

Common Size/5

RatiosProfitability/4

Efficiency/4

Liquidity/4

Capital Structure/4

Market Performance/4

Report presentation and referencing10%

Table of Contents/2

Grammar, Spelling & Syntax/2

Referencing in paper/2

Reference list/2

Graphs & Format/2

1

[1] The value placed on China Mobile, based on the price of those of its shares that are traded in markets, is around $A280b, more than double that of BHP Billiton - $A128b.