A 86045 Accounting and Financial Reporting 20172018 Session

A 86045 Accounting and Financial Reporting (2017/2018) Session 4 Review Session Paul G. Smith B. A. , F. C. A.

SESSION 4 OVERVIEW A 86045 Accounting and Financial Reporting 2

Session 4 Overview Mins Session overview and objectives 5 Double entry bookkeeping - recap 15 Multiple choice questions 40 Ratio analysis, trend analysis, common size analysis 20 Required reading and research assignment for next session 5 Summary and overview of session 5 Revenues 5 90 A 86045 Accounting and Financial Reporting 3

Course Objectives At the end of this course students will be able to: • Read and perform a high level interpretation of the financial statements of companies applying international accounting standards • Identify and evaluate the impact on a companies accounts of alternative accounting methods • Carry out a high level assessment of the economic- financial position of a company reporting under IAS/IFRS. A 86045 Accounting and Financial Reporting 4

Course Overview 1. Financial reporting under IFRS 14. Construction contracts 2. Financial analysis: Ratio analysis 15. Other Non-financial liabilities 3. Financial analysis: Segments and EPS 16. Review session 4. Review session 17. Mid term test 5. Revenues 18. Financial Instruments 1 PGS 6. Costs and expenses 7. Taxation - Direct and Indirect PT PGS 19. Financial Instruments 2 20. Review session 8. Non-current assets - Intangible assets 21. Cash Flow Statement 9. Non-current assets - Tangible assets 22. Group accounts/Business comb 10. Financial leases 23. Review session 11. Impairment of assets 24. Review session 12. Review session 25. Final test PT PGS 13. Inventories A 86045 Accounting and Financial Reporting 5

SESSION 3 RECAP AND PRE-WORK A 86045 Accounting and Financial Reporting 6

Sessions 3 Summary • Financial analysis, ratio analysis, trend analysis, common size analysis • Earnings per share • Operating Segments • Importance of industry context and understanding A 86045 Accounting and Financial Reporting 7

Session 4 Pre-work • Reading – Melville Chapters 23, 24 – IAS 33 – IFRS 8 • Exercises – Melville • Textbook Chapters 23, 24 • Website Multiple choice Chapters 23, 24 – Course exercises EX 3 A 86045 Accounting and Financial Reporting 8

Session 4 Review • Reading – Melville Chapters 1, 2, 3, 4, 8, 21, 22 – IAS 1 • Exercises – Melville • Textbook Chapters 3, 22 • Website Multiple choice Chapters 1, 2, 3, 4, 21, 22 – Course exercises Ex 1, EX 2 A 86045 Accounting and Financial Reporting 9

BOOKKEEPING - RECAP A 86045 Accounting and Financial Reporting 10

Bookkeeping - Recap • 1. Income tax charge for the year of € 250, 000 • 2. Credit sale of goods for € 500, 000 • 3. Goods returned by customer for € 50, 000 and in good condition. • 4. Legal expenses incurred by a company but not yet billed by its lawyer for € 7, 500 • 5. Advertising expenses incurred for an advertising campaign that starts the following year • 6. Payment by cheque of a suppliers invoice for € 25, 000 • 7. Bank transfer received from customer in payment of its outstanding balance of € 50, 000 • 8. Purchase of plant & equipment on credit for € 100, 000 A 86045 Accounting and Financial Reporting 11

REVISION QUESTIONS SESSIONS 1 -3 A 86045 Accounting and Financial Reporting 12

Melville Multiple Choice • • Ch 1. Regulatory Framework Ch 2. IASB Conceptual Framework Ch 3. Presentation of Financial Statements Ch 4. Accounting Policies, Accounting Estimates and errors Ch 21. Related Parties and Changes in Foreign Exchange Rates Ch 22. Ratio Analysis Ch 23. Earnings Per Share Ch 24. Segmental Analysis A 86045 Accounting and Financial Reporting 13

FINANCIAL STATEMENTS A 86045 Accounting and Financial Reporting 14

Financial Statements • Statement of profit or loss and other comprehensive income (By nature or by destination) • Statement of financial position (Current/Noncurrent distinction or Liquidity) • Statement of changes in shareholders’ equity • Statement of cash flows (Direct or indirect method) • Notes to the financial statements A 86045 Accounting and Financial Reporting 15

Good Group (International) Limited • • Source: www. ey. com IFRS Core Tools Library Consolidated statement of profit or loss (expenses by function) Consolidated statement of profit or loss (expenses by nature) Consolidated statement of other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows (indirect method) Consolidated statement of cash flows (direct method) Index to notes to the consolidated financial statements A 86045 Accounting and Financial Reporting 16

FINANCIAL ANALYSIS A 86045 Accounting and Financial Reporting 17

Ratio analysis SM 1 Research assignment template Company 2014 Income Statement € millions 74, 097 2, 221 Total revenues 76, 318 (59, 270) Gross profit 17, 048 Net sales Other revenues Cost of sales Operating expenses Research & development Selling, general and administrative expenses Depreciation, ammortization and provisions Other income (expense) Operating profit Finance income (expense) Share of result of associated companies Pre-tax profit Income tax Net profit continuing operations Discontinued operations Net profit (13, 281) (1, 381) 149 2, 535 (563) 37 2, 009 (709) 1, 300 67 1, 367 Statement of financial position Non-current assets Goodwill Intangible assets Property, plant & equipment Investments Loans and advances to customers Deferred taxes Other Current assets Inventories/Long-term contracts Trade receivables Loans and advances to customers Other current assets Short-term investments Cash Assets held for disposal Total assets Profitability Gross margin Operating margin Net profit margin Return on equity Return on Capital employed (ROCE) Liquidity Current ratio Quick ratio Efficiency ratios Asset Turnover Inventory holding period (DOI) Inventory turnover Trade receivables collection period (DSO) Trade payable payment period (DPO) Current liabilities Short-term Borrowings Trade payables Consumer credit finance Income taxes Provisions Other current liabilities Liabilities held for disposal Non-current liabilities Long-term Borrowings Provisions Consumer credit finance Pensions and employee benefits Other Shareholders' equity Total equity and liabilities Investment ratios Earnings per share (EPS) Price Earnings ratio (P/E) Dividend cover Dividend yield Debt/Equity ratio (Gearing) Interest cover Number of shares outstanding Share price Market capitalization Dividend per share 2014 € millions 8, 228 1, 315 12, 272 1, 767 2, 560 759 1, 340 28, 241 6, 213 2, 260 3, 420 2, 493 3, 113 49 17, 548 45, 789 1, 757 13, 384 3, 718 1, 172 3, 022 1 23, 054 6, 815 3, 581 1, 589 523 12, 508 10, 228 45, 790 734, 913, 909 25. 30 18, 593, 321, 898 0. 68 Other Effective tax rate R&D as a % of revenues Intangibles as a % of total assets Intangibles as a % of equity Market Capitalization as a % of Equity A 86045 Accounting and Financial Reporting 18

Trend analysis SM 2 Company % Change On PY 2014 2013 Income Statement Net sales Other revenues Total revenues Cost of sales Gross profit Operating expenses Research & development Selling, general and administrative expenses Depreciation, ammortization and provisions Other income (expense) Operating profit Finance income (expense) Share of result of associated companies Pre-tax profit Income tax Net profit continuing operations Discontinued operations Net profit 0% -6% 0% -1% 1% 2% -4% #DIV/0! 7% -22% 23% 19% 12% 23% -78% 0% € millions 74, 097 2, 221 76, 318 (59, 270) 17, 048 (13, 281) (1, 381) 149 2, 535 (563) 37 2, 009 (709) 1, 300 67 1, 367 -1% 3% -1% 1% -5% -6% #DIV/0! 62% -18% -58% 158% 66% 286% -71% 1% % Change On PY 2012 € millions 74, 299 2, 375 76, 674 (59, 828) 16, 846 € millions 75, 021 2, 309 77, 330 (60, 659) 16, 671 (13, 034) (1, 432) (13, 688) (1, 518) 2, 380 (722) 30 1, 688 (631) 1, 057 306 1, 363 1, 465 (883) 72 654 (380) 274 1, 069 1, 343 Statement of financial position Non-current assets Goodwill Intangible assets Property, plant & equipment Investments Loans and advances to customers Deferred taxes Other Current assets Inventories/Long-term contracts Trade receivables Loans and advances to customers Other current assets Short-term investments Cash Assets held for disposal Total assets Profitability Gross margin Operating margin Net profit margin Return on equity Return on Capital employed (ROCE) Liquidity Current ratio Quick ratio Efficiency ratios Asset Turnover Inventory holding period (DOI) Inventory turnover Trade receivables collection period (DSO) Trade payable payment period (DPO) 23% 3% 2% 13% 15% 0. 8 0. 5 2. 6 38 9. 5 11. 1 82. 4 Investment ratios Earnings per share (EPS) Price Earnings ratio (P/E) Dividend cover Dividend yield Debt/Equity ratio (Gearing) Interest cover 1. 93 13. 1 2. 8 2. 7% 0. 7 4. 5 Other Effective tax rate R&D as a % of revenues Intangibles as a % of total assets Intangibles as a % of equity -35% 0% 21% 93% Current liabilities Short-term Borrowings Trade payables Consumer credit finance Income taxes Provisions Other current liabilities Liabilities held for disposal Non-current liabilities Long-term Borrowings Provisions Consumer credit finance Pensions and employee benefits Other 2014 € millions 2013 € millions 1% -71% -10% -118% -8% 18% -17% -11% 8, 228 1, 315 12, 272 1, 767 2, 560 759 1, 340 28, 241 8, 277 767 11, 109 809 2, 381 931 1, 146 25, 420 -8% -2% -6% -30% 35% 84% 3% 6, 213 2, 260 3, 420 2, 493 0 3, 113 49 17, 548 5, 738 2, 213 3, 221 1, 915 0 4, 757 302 18, 146 -5% 45, 789 43, 566 -4% -18% -12% -9% 96% -7% 1, 757 13, 384 3, 718 1, 172 0 3, 022 1 23, 054 1, 683 12, 854 3, 145 1, 045 0 2, 763 24 21, 514 10% 1% 10% 6, 815 3, 581 1, 589 0% Shareholders' equity Total equity and liabilities -19% -5% 523 12, 508 10, 228 45, 790 7, 550 3, 618 1, 765 0 521 13, 454 8, 598 43, 566 Number of shares outstanding Share price Market capitalization Dividend per share -2% 11% -10% 707, 397, 621 25. 30 17, 897, 159, 811 0. 68 694, 925, 592 28. 81 20, 020, 806, 306 0. 62 A 86045 Accounting and Financial Reporting 19

Common size analysis SM 3 Company 1 (Year to December) € millions 2014 2013 % Change Income Statement Net sales Other revenue on PY Total revenue Cost of Sales Gross profit/margin Operating expenses Selling, general and admin expenses Depreciation, ammortization & provisions Other income (expense) Operating profit/income Finance income (expense) Shares of results of associates and equity investees Income before taxes Income taxes Profit from continuing operations Discontinued operations Profit for the year Group Non controlling interests Profitability Return on capital employed (ROCE) Return on equity Gross profit margin Operating margin Net profit margin Liquidity Current ratio Quick ratio(acid test) Efficiency Asset turnover Inventory holding period Inventory turnover Trade receivables collection period (DSO) Trade payable payment period Investment ratios Earnings per share Price earnings ratio Dividend cover Dividend yield Capital gearing ratio Interest cover Market Capitalization as a % of Equity 0% -1% 1% 2% -4% 7% -22% 23% 19% 12% 23% -78% 0% on PY -1% 1% 74, 299 2, 375 76, 674 (59, 828) 16, 846 75, 021 2, 309 77, 330 (60, 659) 16, 671 (13, 281) -5% (13, 034) (1, 381) 149 2, 535 (563) -6% (1, 432) 62% -18% -58% 158% 66% 286% -71% 1% 37 2, 009 (709) 1, 300 67 1, 367 1, 249 118 1, 367 Company 1€ millions 2014 2013 2012 % Change on PY 74, 097 2, 221 76, 318 (59, 270) 17, 048 Company 2 (Year to February) £ millions 2014 2013 % Change 2012 % Change on PY 62, 284 63, 557 63, 406 0% -1% 5% 63, 557 (46, 832) 16, 725 63, 406 (47, 424) 15, 982 -2% -1% -6% 62, 284 (46, 541) 15, 743 (13, 688) 65% (19, 983) 10% (12, 107) (11, 056) (1, 518) -22% (1, 552) -22% (1, 987) (2, 544) 2, 380 (722) 1, 465 (883) -320% 32% (5, 792) (571) 10% 9% 2, 631 (432) 2, 382 (397) 30 1, 688 (631) 1, 057 306 1, 363 1, 263 101 1, 364 72 654 (380) 274 1, 069 1, 343 1, 259 83 1, 342 -122% -382% -289% -399% -95% -694% (13) (6, 376) 657 (5, 719) (47) (5, 766) (5, 741) (25) (5, 766) -17% 10% -34% 25% -37% 3942% 60 2, 259 (347) 1, 912 (942) 970 974 (4) 970 72 2, 057 (529) 1, 528 (1, 504) 24 28 (4) 24 Balance sheet/Statement of financial position Assets Goodwill Other intangible assets Property, plant & equipment Investment property Investments in JVs and associates Other investments Company 2 £ millions 2014 2013 % Change on PY 10% -5% 197% 8, 228 1, 315 12, 272 296 1, 471 8, 277 767 11, 109 313 496 -1% 3, 771 3, 795 -17% -28% 229% -4% 20, 440 164 940 975 24, 490 227 286 1, 015 Loans and advances to customers Deferred tax assets Other Non-current assets 8% -18% 17% 11% 2, 560 759 1, 340 28, 241 2, 381 931 1, 146 25, 420 22% 604% 3% -7% 3, 906 514 1, 546 32, 256 3, 210 73 1, 496 34, 592 Inventories Trade receivables Loans and advances to customers Other current assets Short-term investments Cash and cash equivalents Assets held for sale Current assets Total assets Liabilities and Shareholders' Equity Short-term borrowings Suppliers and other creditors Consumer credit financing Income taxes Other Liabilities held for sale Current liabilities Long-term borrowings Provisions Consumer credit financing Other Non-current liabilities Share capital Reserves Shareholders equity - Group 8% 2% 6% 30% 6, 213 2, 260 3, 420 2, 493 5, 738 2, 213 3, 221 1, 915 -35% -84% -3% 5% 3, 113 49 17, 548 45, 789 4, 757 302 18, 146 43, 566 -17% -3% 3% 84% -42% -14% -94% -23% -12% 2, 957 2, 121 3, 814 169 593 2, 165 139 11, 958 44, 214 3, 576 2, 190 3, 705 92 1, 016 2, 506 2, 487 15, 572 50, 164 4% 4% 18% 12% 9% -96% 7% -10% -1% 1, 683 12, 854 3, 145 1, 045 2, 763 24 21, 514 7, 550 3, 618 1, 765 521 13, 454 1, 810 6, 034 7, 844 5% -6% 2% -81% 118% -100% -7% 6% 64% 2, 008 9, 922 7, 020 95 760 5 19, 810 10, 651 5, 537 1, 910 10, 595 6, 858 494 349 1, 193 21, 399 10, 073 3, 376 0% -7% 1% 22% 17% 1, 757 13, 384 3, 718 1, 172 3, 022 1 23, 054 6, 815 3, 581 1, 589 523 12, 508 1, 837 7, 353 9, 190 93% 23% 0% -53% -52% 1, 145 17, 333 406 6, 665 7, 071 594 14, 043 405 14, 310 14, 715 Shareholders equity Total Liabilities & Shareholders Equity 38% 19% 5% 1, 037 10, 227 45, 789 754 8, 598 43, 566 -100% -52% -12% 7, 071 44, 214 7 14, 722 50, 164 Number of Shares o/s at Dec 31 Weighted average number of shares o/s Share price Dec 31 Dividend per share Market capitaization (millions) 2% 2% -12% 10% -11% 734, 913, 909 707, 397, 621 25. 3 0. 68 18, 593. 32 723, 984, 192 694, 878, 802 28. 81 0. 62 20, 857. 98 0% 8, 095, 821, 091 0% 8, 107, 000 -27% 245. 4 -92% 1. 16 -26% 19, 867. 14 8, 095, 821, 091 8, 068, 000 335. 15 14. 76 27, 000 Non-controlling interests A 86045 Accounting and Financial Reporting -1% 20

Good Group Exercise Research assignment template Company Good Group % Change On PY 2016 % Change On PY 2015 Net sales Other revenues Total revenues Cost of sales Gross profit Operating expenses Research & development Selling, general and administrative expenses Depreciation, ammortization and provisions Other income (expense) Operating profit Finance income (expense) Share of result of associated companies Pre-tax profit Income tax Net profit continuing operations Discontinued operations Net profit 14% 3% 12% 6% 37% #DIV/0! 29% #DIV/0! -105% 24% 2% 5% 25% 39% 21% -217% 27% € millions 161, 927 18, 535 180, 462 (136, 549) 43, 913 (32, 429) (118) 11, 366 (928) 671 11, 109 (3, 098) 8, 011 220 8, 231 #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! % Change On PY 2013 Income Statement € millions 142, 551 17, 914 160, 465 (128, 386) 32, 079 Statement of financial position Non-current assets Goodwil Intangible assets Property, plant & equipment Investments Investment properties Deferred taxes Other (25, 120) 2, 195 9, 154 (912) 638 8, 880 (2, 233) 6, 647 (188) 6, 459 Current assets Inventories/Long-term contracts Trade receivables Loans and advances to customers Other current assets Short-term investments Cash Assets held for disposal Total assets Profitability Gross margin (Gross profit/Revenues) Operating margin (Operating profit/Revenues) Net profit margin (Net profit/Revenues) Return on equity (Net profit/Shareholders' equity) Return on Capital employed (PBIT/Shareholders' equity + Long-term debt) Liquidity Current ratio (Current assets/Current liabilities) Quick ratio (Current assets - inventory/Current liabilities) Efficiency ratios Asset Turnover (Sales/Non-current assets) Inventory holding period (DOI) (Cost of sales/inventory x 365) Inventory turnover (Cost of sales/inventory) Trade receivables collection period (DSO) Trade payable payment period (DPO) Investment ratios Earnings per share (EPS) (Net income/Weighted average number of shares outstanding) Price Earnings ratio (P/E) (Share price/EPS) Dividend cover (Earnings per share/Dividend per share Dividend yield (Dividend per share / Share price) Debt/Equity ratio (Gearing) /Long-term debt/Shareholders' equity) Interest cover (Profit before interest and taxation/interest expense) Other Effective tax rate (Income tax expense/Profit before taxation)*-1 R&D as a % of revenues (R&D expenses/Sales) Intangibles as a % of total assets (Goodwill and intangible assets/Total assets) Intangibles as a % of equity (Goodwill and Intangible Assets/Shareholders' equity) Market capitalization as a % shareholders' equity % % % Current liabilities Short-term Borrowings Trade payables Consumer credit finance Income taxes Provisions Other current liabilities Liabilities held for disposal Ratio: 1 Non-current liabilities Long-term Borrowings Provisions Consumer credit finance Pensions and employee benefits Other Times Days Currency Times % Ratio Times #DIV/0! 145% 36% 27% 11% 5% 84% 41% 2016 € millions 2015 € millions 6, 019 32, 979 3, 187 8, 893 383 6, 425 57, 886 2, 461 24, 329 2, 516 7, 983 365 3, 491 41, 145 -3% 15% #DIV/0! 48% 260% 15% #DIV/0! 30% 23, 762 25, 672 24, 585 22, 290 244 551 17, 112 13, 554 80, 895 165 153 14, 916 34% 138, 781 103, 254 79% -6% #DIV/0! -1% 767% 122% #DIV/0! 55% 5, 500 19, 444 3, 078 20, 730 3, 511 850 779 13, 125 43, 209 3, 563 98 351 27, 820 -3% 2432% #DIV/0! 2% 132% 21, 152 1, 950 21, 703 77 2, 977 2, 886 27, 643 47, 791 103, 254 19, 064, 000 8. 00 152, 512, 000 1. 01 1, 034 Shareholders' equity Total equity and liabilities 31% 34% 3, 050 6, 690 32, 842 62, 730 138, 781 Number of shares outstanding Share price Market capitalization Dividend per share R&D Expenditues 9% 25% 36% -90% 116% 20, 797, 000 10. 00 207, 970, 000 0. 097 2, 235 62, 109 % % % A 86045 Accounting and Financial Reporting 21

SUMMARY, VALIDATION AND PREWORK SESSION 5 A 86045 Accounting and Financial Reporting 22

Validation Sessions 1 -3 • • Regulatory Framework (Chapter 1) IASB Conceptual Framework (Chapter 2) Presentation of Financial Statements (Chapter 3) Accounting Policies, Accounting Estimates and Errors (Chapter 4) Related Parties, Changes in Foreign Currencies (Chapter 21) Ratio Analysis (Chapter 22) Earnings Per Share (Chapter 23) Segmental Analysis (Chapter 24) A 86045 Accounting and Financial Reporting 23

Overview of Session 5 • In Session 5 we will look at revenues and the rules relating to when revenue should be recognized • Revenues are normally the largest number in the income statement and also the most susceptible to fraud and/or manipulation. • We will use the companies selected by students to understand industry differences A 86045 Accounting and Financial Reporting 24

Session 5 Pre-work • Reading – Melville International Financial Reporting - A Practical Guide • None – International accounting standards • None • Research Assignment – RA 3 For your chosen company, prepare a brief presentation summarizing the company’s business model i. e. how the company generates revenues and what its accounting policy(ies) for revenue recognition is (are). A 86045 Accounting and Financial Reporting 25

RA 3 Template General Revenue Recognition Accounting Policy (if any) Type of revenue Basis of revenue recognition A 86045 Accounting and Financial Reporting 26