Appunti Principles of international accounting - a.a. 2022/2023

EXERCISE 1 - Ratio Analysis

The Comment

This is the common format at the exam. In general the gross profit or operating income is not calculated. This is the income statement of Villa Tool Company over the period of time 2011-2012. First, we analyse all the components, then calculate the ratio.

• Selling and administrative expenses: other operating expenses
• Operating income: earnings before interests and expenses because it is the income before interest expenses and taxes expenses
• Interest expense: it is not an operating expense
• Income tax expenses: or just tax expenses

On both fiscal year the company produce a profit that it is increasing from the first to the second fiscal year. All the component of the income statement are increasing. So, may the company have an increasing profitability performance? It may be but it is better to calculate the ratios.

Then, we analyse the statement of financial position or balance sheet over the same period.

• Plant assets: long-term assets
• Inventory,

accounts and short-term investments: short-term assets, BUT short-term investments are not marketable (not substitutes of cash) > they derive from extra cash that is used/invested to acquire some shares of a company that is listed, the company will transfer/sell these shares within one year. All component except cash is increasing- Equity= share capital + retained earnings > share capital is decreasing (shareholders may have left company) - Bonds payable (obbligazioni): long-term debt external fundings that, in this case, do not change because company has not given back any principle amount but it did not acquire new bounds > different from short-term investments because bounds payable is long-term debt, it should not change within two years. - Income taxes payable and account payables are current liabilities (short-term) > there is an increase on both. These are all the ratios, at the exam you have not to calculate, understand and comment all of them. Always in the order: profitably,liquidity and solvency.- PROFITABILITY: Are all the components homogenous? No.23When I look to gross profit margin and net profit margin between the two yearsthere is not a relevant change because on average the gross profit margin is alwaysaround 43-44% and net profit 15%. What is significant is the reduction of profitfrom gross to net > the other operating expenses (selling and administrativeexpenses) play a significant role in the reduction of net profit margin, at leastaround 20 points. Return on equity and assets: both are decreasing but the mostsignificant reduction is ROE, around 6 points > the company is able to returnshareholders with profit but it is less efficient in this rewarding in the second year.The decreasing of Assets Turnover is also a result of ROA’s decreasing. Even thoughthe Assets Turnover is always around 2 (for 1E of total assets I am able to produce2E of sales).- LIQUIDITY: the cash ratio, current ratio and acid test ratio do not change. Itseems that the company has the same performance within the two years. It is able to cover the short-term liability, with including and excluding inventories because current ratio and acid test ratio are both higher than 1. When I do not consider inventories as component of current assets I have a reduction but the ratio is always higher than 1. When I look the number of days, I notice that it is always around 3 weeks that company needs for collecting cash, around 5 weeks for the payment of its short-term obligations and around 1 month and half that it keeps on stock its stuff. The company is able to renovate the inventories a couple of times because the number of days is lower than the number of days company needs to meet its short-term obligations. This trend could be connected to the fact that there is no change in the first three liquidity ratios. - SOLVENCY: the gearing ratio is lower than 1. That means that internal fundings are higher than external. It is decreasing because given thesame amount of external fundings I had a decreasing of share capital moving to the first to the second year. Indeed, when I look to the interest cover I have a reduction of operating income because the increase of interests expenses is higher than the increase of operating income.

EXERCISE 2 - Ratio Analysis

The Comment

Income Statement 24

I notice that all components of all items in the income statement are increasing, also the net income (not a huge increase), on both years company ends with a profit

Balance Sheet

When I look to total assets, all the values are increasing. When I look to equity, share capital does not change. When I look to liabilities external fundings is increasing.

- PROFITABILITY: We notice that some ratios are decreasing, some are increasing and one is stable. By looking to GPM And NPM I notice that GPM is decreasing by 2 points while NPM is increasing by less than 1 point, because the main driver of this different direction on the two ratios is not the increase reported ion

income of sales, but there different percentage with which COGS and other expenses considered for the calculation of NPM are increasing. In the first case, even though I notice that both net sales and COGS are increasing, the increase of COGS is higher than the increase of sales and this explain why I have the reduction. When I consider the NPM, the fact that I have an increase it means that the increase of sales is higher than the increase of all the expenses I consider. When I move between the two (from GPM to NPM), I see that it is always this important reduction due to the expense that are included in the calculation of NPM other than costs. When I look at ROE and ROA, the ROE is a bit higher than the increase of ROA. While ROA is always around 8%, ROE is higher than 10% in the second year > the rewarding of shareholders is higher than. The ability of the company to produce profit to reuse its assets. The explains by the AT that is higher than 1 and does not change over time.

- LIQUIDITY: In

the first ratio, why I do not consider short-term investments?Because they are not substitutes of cash > they are not marketable securities,short-term investments are short-term purchases from other companies. However,short-term investments are considered in the calculation of acid test ratio andcurrent ratio because they are current assets. I notice that I do not haveimportant changes over the two fiscal year related to liquidity ratios. In particular,cash ratio is lower than 1 and does not change (how much quickly the company isable to meet its short-term obligation). Current ratio: there are not significantchanges, it is important that ratio is higher than 1. When I move to acid test ratio,the ratio is lower than 1 > whiteout considering inventories, the company is not soefficient to produce cash for meeting its short-term obligations. When I have thisreduction of liquidity, I can say that it is important because at the end I obtain aratio in terms of acid test ratio that

is lower than 1. RCP is around 1 month and half and does not change, IT 2 months and half, more than 3 months and half for PCP > consequence of the performance in terms of liquidity that does not change (either in positive or negative way). Given the PCP, this company may be part of sector, for sure it is not agrifood company, not mobile company or heavy construction, not automotive, not retail company.

SOLVENCY: Share capital does not change, it has an increase of bounds payable > the ratio is lower than 1, it means that policy of company is more to use internal than external fundings, I have an increase in the second year because the shareholders equity does not change but I have an increase of external funding. However, this increase is quite significant because I have an increase of gearing ratio that is 10 points. When I look to interest cover, I do not notice any changes because I have an increase of operating income and an increase of interest expense and the fact that the final

Result of ratio I always 18? It means that the percentage of ratio goes in the same direction (positive) and the same percentage.

EXERCISE 3 - Ratio Analysis

The Comment

Income statement

What I can say by looking the income statement, I have a reduction on profit, operating and net income. It seems that from the first to the second year is less efficient in producing a profit with a different perspective.

Balance sheet

When I move to balance sheet, I see that the items within the assets that are decreasing are short-term investments and cash; by looking at equity and liabilities, both internal and external are increasing, other are decreasing, excepting for retained earnings. In this case, RE is decreasing because the net income is decreasing. RE is the result of revenues - expenses - payments of dividends. It could be if there are no payment to the dividends.

- PROFITABILITY: Indeed, my expectation of a less performing profitability efficiency is confirm by the calculation of all profitability ratios

that are all decreasing except Assets Turnover (which is lower than 1); Gross Profit Margin and Net Profit Margin are decreasing (NPM= -15%); ROE and ROA are also decreasing for around 5-6 points; the Assets Turnover does not change but it is much lower. Not very good performance in terms of profitability.

- LIQUIDITY: cash does not change, slight increase of current ratio and acid test ratio, but this reduction is more important than in the previous example, because the value is between 2 to a ratio that is lower than 1 (more than 1 point). The fact that current ratio is higher than 1 is a good point, because this means that it is able through its current assets to meet its current liabilities. Receivable collection period and payables collection period are both increasing, the stock of stuff is on the contrary decreasing (Inventory Turnover). I have a good balance between internal and external fundings, I have a reduction because the increasing of shareholders equity is higher than the

e the financial statements of companies operating in different countries, we need to consider the differences in financial reporting. These differences can be attributed to both intra-country factors and inter-country factors. Intra-country differences are influenced by factors within a country, such as the accounting system and the main users of financial statements, which are often the tax authorities. These factors can result in different accounting standards and practices. Inter-country differences, on the other hand, are caused by rules governing company groups and individual companies, as well as different sets of financial standards. In the case of company groups, each individual company prepares its own financial statement, but there is also a consolidated financial statement that sums up the results of all the individual companies within the group. This is because some companies operate as part of a group, with a holding company overseeing the financial statements of all the companies within the group. Understanding these differences in financial reporting is crucial when analyzing the financial statements of companies operating in different countries. It allows for a more accurate comparison and evaluation of their financial performance.