ASSIGNMENT

TASK UNDERSTANDING COMPANY ACCOUNTS AND REPORTS 2011 LECTURER-IN-CHARGE: DR MATTHEW HAIGH Obtain the published Financial Statements (Income Statement, Balance Sheet, Cash Flow Statement, and certain other statutory reports), and the other reports that accompany the Financial Statements, produced by two companies of your choice. The reports of each company should be published in the same reporting period year or periods (you may analyse the companies over more than one reporting period if you wish). The companies you choose should be in the same industry sector (use the MSCI Global Industry Classification Standard). Required: Produce a report on the relative investment attractiveness of both companies. Analyse the data using the following schematic: 1. 2. Identify the financial reporting period. (2 marks) Identify the basis of the accounting treatments used (found in the Accounting Policy Note to the Financial Statements) and the nature of the Audit Opinion that accompanies the Financial Statements. (8 marks) Identify where and how accounting policies and accounting treatments between the two companies differ. (10 marks) Using book-keeping entries, adjust the Financial Statements of one or both of the companies for the differences you have noted in Step 3 above. (20 marks) Use three sets of appropriate financial ratios to assess the financial performance and financial structure of each company, and the investment prospects of each company. (20 marks) Combine Step 4 above with a cash flow analysis of each company. (10 marks) Analyse narrative material accompanying the Financial Statements such as the Directors Report, the Management Discussion and Analysis section of the Annual Report, the Corporate Governance Statement, environmental and workplace safety compliance reports, and the Social Responsibility Report. (10 marks) Use the results of Steps 16 above to compare the two companies. What are the risks of each company, from an investors perspective? (10 marks) Make a recommendation whether an investor should buy shares in each company, hold onto shares they may already have in each company, or sell shares they may already have in each company. Justify your recommendation using the results of Steps 18 above. (10 marks)

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Expected word length: 1500 words.

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GUIDE TO ANSWERING THE ASSIGNMENT Step 4. When adjusting for noted differences in accounting policies and accounting treatments to assist comparability, first calculate reporting materiality (for balance sheet items, 5% and greater of total assets is material; for income statement items, use 1% of gross trading revenue) Step 5. The financial ratios you use should be guided by a common-size analysis of the main financial items in the Financial Statements. A common-size analysis is used to provide focus to the subsequent ratio analysis. Assessing financial performance using ratio analysis means to calculate profitability ratios AND liquidity-related ratios. Investment ratios include revenue returns on assets flowing to both debtholders and shareholders. Step 6. Cash flow analysis means to do two things:

1. First, examine the Reconciliation of Net Income to Net Cash Flow From Operating Activities(this is an additional Financial Statement. It can be found in the Notes to the Cash Flow Statement) and 2. Second, use financial ratios to determine the cashflow period in the working capital cycle. Step 7. Examining narrative material accompanying the Financial Statements means to consider directors information disclosures on: company strategies operational and market risks, and how each company manages t hose risks exposure to multiple capital markets

You should also consider here: differences in market capitalization (number of shares on issues multiplied by the share price), the geographical spread of each company, and the ages of the companies. : MARKS WILL BE AWARDED FOR APPROPRIATE USE OF LANGUAGE AND FORMATTING AS WOULD SUIT A PROFESSIONAL INVESTMENT REPORT. EXPECTED LENGTH: 3000 WORDS.

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