wrong answers in tutorials/ practice exam

Question 1

is the revaluation model allowed to be recognised and where are its FV adjustments recognised
1. PPE
2. goodwill
3. investment properties
4. biological assets
5. inventory

Answer 1

1. can be recognised under FV, losses recognised through NPAT and gains recognised in OCI
2. Goodwill, cannot be recognised under FV but can be impaired
3. investment properties, measured at FV and gains/losses recognised in NPAT
4. inventory, cannot be recognised at FV but can be impaired

Question 2

what are the different forms of real earnings mangement?

Answer 2

1. cutting discretionary expenditures ( R&D, advertising, marketing)
2. selling assets that have appreciated (under FV model) or whos historical cost has not been updated
3. sales pull in (getting customers to buy what should have been next years sales within the previous year by offering discounts)

Question 3

what are the different levels of FV and what is the concern?

Answer 3

1. Level 1 FV (find same item on market and value FV of net assets based on that-observable input)
2. Level 2 FV(find a similar item on the market and value FV of net assets based on that with internally generated adjustments-observable input)
3. Level 3 FV( FV of net assets is adjusted solely on estimations and an internal model-non observable inputs)

Level 3 will be more reliable if
* an independent auditor checks the reasonableness of the assumptiosn
* an independent valuer, values the assets and is willing to sign their name on the report
* there is no collusion betweent any groups regarding the valuation

Question 4

when does management have an incentive to understate/ overstate FV of tangibes, and FV on intangibles

Answer 4

1. management will try to understate definite life tangibles/intangibles to minimise depreciation/ amortisation expense
2. management willt try to overstate undefinite life intangibles

management may ‘take a bath’ by claiming impairment if indefinite life intangibles to boost future OI

Question 5

explain the relationship with the ROCE formula
ROCE= RNOA + FLEV x ( RNOA- NBC)

Answer 5

• investors can borrow using the cost of debt to boost their operating income to get a higher RNOA( ensuring the spread is positive) and then can boost their ROCE over their RNOA

Question 6

how to calculate Rd for the WACC calculation

Answer 6

nbc=NFE after tax/ NBC
rd= nfe after tax/ nbc

Question 7

how to calculate NBC?

Answer 7

NFE (after tax) / AVG NFO

Question 8

how to calculate ROCE

Answer 8

CI/AVE CSE

Question 9

How to calculate RNOA?

Answer 9

OI(after tax)/ AVG NOA

Question 10

how to calculate PM?

Answer 10

OI(after tax)/ sales

Question 11

ATO

Answer 11

sales/ AVG NOA

Question 12

should the same forecasts be used for unusual operating income and operating OCI, and at what value?

Answer 12

yes, at 0 it should be forecasted

Question 13

is non cash investing/ financing transactions ommited from CF statement?

Answer 13

Yes

Question 15

what does freedom foos illegaly do?

Answer 15

recognised bill and hold sales inapropriately

Question 16

is CSE often negative for companies, with it being an issue for P/B multiples?

Answer 16

No,that is not true , CSE is usually positive

Question 17

if you are forecasting a companys and its capital structure cannot be forecasted and the horizon may be too short, what is the best valuation model?

Answer 17

REOI model given its unlevered and reoi model poerms better whne horizon is too short

Question 18

when is a income statement done by nature or function?

Answer 18

by nature (D& A, and emplouyee benefits line item are broken out as indiviaual line items on the face of the income statement)
, otherwise is by function

Question 19

when the questions asks you to value a company at a certain time when do you use multiples or a model

Answer 19

Depends on the question if it gives you the Re its an indicator they want you to use P/E multiple to determine the valuation, otherwise another model may be used i.e DDM if dividends given

Question 20

why is CI not a good measure of Operating income

Answer 20

• it include OCI which fluctuates unpredictably, CI is levered reflecting finance costs and is not a function of Operating income
• Ci reflects the effects of unusual items

Question 21

how to see if the the assumptions for FCF are correct

Answer 21

input the assumtions in the FCF formula, if the relationship doesnt hold then the assumptions are not correct

Question 22

how to calculate any part of CSR if no statemnent of equity given

Answer 22

• use whats given and just calculate individual parts , usually CI will be given and change in CSE can be calculated

Question 23

should ATO be made a percentage

Answer 23

no

Question 24

what is the first level du pont breakdown, and why might be hard to interpret sometimes

Answer 24

ROCE= RNOA x FLEV(RNOA - NBC)
* if they have NFE and AVG NFA this is very hard to explain and not easy to interpret

Question 25

a company that generates postive OI may generate negative FCF because :

Answer 25

• earnings management in manipulating accruals (change in NOA> OI after tax)
• company is growing rapidly

fcf= OI(after tax) - change in NOA

Question 26

how would you conduct DCFC valuation for a company that will have negative FCF for the next five years

Answer 26

• forecast beyond 5 years into the steady state when the companys fcf shoudl be positive, growing at the terminal growth rate, the FCF must be positive for the DFCF valuation to be meaningful.

Question 27

whats the difference when a company recognises a fv loss as a reversal of prior incremental reval, vs just making a normal fv loss

Answer 27

*taken through OCI when reversing a incremental revaluation
taken through P& L normally (NPAT)

Question 28

how to use a business combination to boost next years profit

Answer 28

• Minimise the fair value of depreciable/amortisable assets acquired in the business
  combination. This will reduce future depreciation and amortisation charges. The acquisition
  date fair value of the machinery and customer relationships should therefore be minimised.
• Minimise the fair value of accounts receivable and inventory. When the inventory is sold,
  COGS will be understated, boosting future profit. When more accounts receivable is collected
  than expected, the company will either recognise a gain from reversing the overstated
  provision for doubtful debts or will reduce expenses because it will not need to top up the
  provision for doubtful debts as much.