Assignment 1 (20%, due 8:55 am Friday 13 March)
Question 1.
Zac Zaccary is a senior analyst, and your manager, at Top Notch Fund Managers. He, gently, throws a copy of the 2014 annual report of The Warehouse Group Limited on to your desk and states “the Five Year Summary shows that profit after tax increased from $60 million in 2010 to $78 million in 2014, but they also report an ‘adjusted’ net profit which decreased from $83 million to $61 million over the same period. As investors, which figure should we pay attention to? At the same time, operating cash flow decreased from $129 million to $77 million over the same period. I wonder what has caused that? I would like you to look at profitability, cash flow and liquidity.”
He continues “The group made some big acquisitions in the last couple of years. How well are those turning out? Retailers’ operating margins are always pretty small, and if the new acquisitions are not profitable, they can drag the whole group down. Have the managers been able to protect or improve profits from the older stores and also get good results from the new businesses? And how is the efficiency of operations trending?” Required:
A fund operated by Top Notch Fund Managers is a potential substantial investor in The Warehouse Group, and Zac must advise the fund managers whether to invest. Draw up the memo that you would send to Zac to address his questions. Your analysis should cover the issues he has raised, with particular attention to profit, efficiency and liquidity.
Indicative length: 1,000 words – a few pages. Note that a 5-year summary is provided in the “Corporate Governance and Statutory Disclosures” document on Stream; the financial statements are more detailed but cover only two years. To answer the question fully, you will need to research information from sources beyond those that we have provided in this course; you should reference your sources properly. A marking rubric for this assignment is provided below; we will use this for marking, and the feedback will consist of your marks for each item in the rubric, with brief additional comments where appropriate. You should consider this when deciding how to approach the assignment. Guidance on how to structure a management memo is also available on Stream.
Question 2.
Mighty Ltd acquired all the shares of Matey Ltd on 31 January 2015 for $600,000 cash. The statements of financial position of the two companies at that date were
Current Assets Cash
Accounts receivable
Non-current assets
Land
Plant and equipment, net Investment in Matey Ltd
TOTAL ASSETS Mighty Ltd
$
10,000
220,000
550,000
750,000
600,000 2,130,000 Matey Ltd
$
20,000
70,000
80,000
175,000
345,000
110.309 1 Assignment 1 2015
Mighty Ltd
$ Matey Ltd
$
Accounts payable 180,000 75,000
Wages payable 73,000 60,000
Share capital 1,000,000 150,000
Retained earnings 877,000 60,000
TOTAL LIABILITIES AND EQUITY 2,130,000 345,000
The fair value of the land of the two companies is
Land, fair value 600,000 150,000
For all other assets and liabilities, the book value is equal to the fair value.
Required:
1) Present the consolidated statement of financial position for Mighty and Matey at 31 January 2015.
2) Explain to an investor what the consolidated figure for Land represents. That is, is the land valued at historic cost, revalued to fair value, or some other basis of value?
Presentation hint: Use tabs, not spaces, to line up items in journal entries and financial statements. Word processors provide left tabs (good for aligning text), decimal tabs (good for aligning dollar amounts), right tabs, centre tabs, and vertical bars (good for separating parts of a statement that fit side by side). The use of tables can be a good alternative to tabs, but tables are more complex when different lines have different layouts.
110.309 2 Assignment 1 2015