FACULTAD DE CIENCIAS ECONOMICAS Y EMPRESARIALES

DEPARTAMENTO GESTION DE EMPRESAS

ADE/ECONOMICS INTERNATIONAL GROUP
FINANCIAL STATEMENT ANALYSIS – FINAL EXAM DECEMBER 16, 2020

LAST NAME_________________________________________

FIRST NAME__________________
The exam is made up of two parts. For PART II you must use the financial statements of Ryanair Group in the
appendix. PART 1: 26 points. PART 2: 15 points. Total = 41 points.

PART I (18 Questions)

(All questions 1 point unless specified. Multiple choice only ONE correct. No negative)

1. Is it enough with good accounting standards for the financial reporting process to be successful?

2. Assign 0-5 to the following transactions in Danone (French food manufacturer) using “room for managerial
discretion” as a criterion. (5 = maximum room for managerial discretion).
Lease agreements signed before 2019
Brand-names recognized in a business combination (where not in the acquired company’s balance sheet)
Valuation of ending inventory.
Sales of dairy products to a grocery store.
Amortized cost adjustment in the book value of a liability.

3. Choose True/False for each of the following statements related with the IAS-1
- Includes specific guidance to prepare each of the 4 compulsory financial statements. (T / F)
- Establishes that the Statement of OCI and the Income Statement have to be always presented separately (T / F)
- The IAS-1 is also known as the Conceptual Framework (T / F)
- Establishes specific and restricted formats to be filled out for the preparation of financial statements (T / F)
- Requires only one year’s data in the financial statements. (T / F)

4. How many situations do you know that give rise to the recognition of OCI?

5. Do you know of any European company that has ever engaged in off-balance sheet financing?
Question 6. (4 points)
Wang Corporation is a German retailer whose capital consists of 40,000 ordinary shares. At December 31,
2022 an analysis of the accounts reveals the following information.. (Tax rate = 30%)
Sales revenue €1,100,000
Purchases discounts 18,000
Loss on sale of French logistic delegation (significant segment) 40,000
Selling expenses 128,000
Purchases 642,000
Cash (excess) 20,000
Accounts receivable 90,000
Share capital 400,000
Accumulated depreciation 180,000
Sales returns & allowances 50,000
Dividends revenue 8,000
Inventory (Jan.01, 2022) 152,000
Inventory (Dec.31,2022) 125,000
Unearned revenue 27,600
Interest payable 1,000
Land 370,000
Patents 100,000
Retained earnings (Jan.01,2022) 290,000
Interest expense 17,000
General & administrative expenses 150,000
Dividends (declared) 29,000
Allowance for doubtful accounts 5,000
Notes payable (maturity 7/1/25) 250,000
Machinery and equipment 450,000
Equity investments (<20% trading) 40,000
Accounts payable 60,000
Cash (necessary) 40,000

Required
- Prepare the income statement for the year 2022 (including EPS)
- Compute the following Balance Sheet items as of Dec.31, 2022
Equity
Non-current assets
Working capital

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7. Match the following companies with their corresponding issues as commented during the course..
C1. Autonomy I1. Capitalizes only a minor part of their expenditures.
C2. Enron I2. Cash hoarder.
C3. Pescanova I3. Up to three different forms of revenue manipulation
C4. Apple I4. Very coarse fraud.
C5. Bayer I5. Turned the Big 5 into Big 4.

8. Which of the following is not a clear reason for a buyback?

a) Decrease the EPS ratio
b) Return cash to shareholders
c) Avoid and unwelcome shareholder.
d) Be prepared to sell shares to managers if necessary.

9. Which of the following is not true…?

a) Adjusting the book value, if necessary, is one the roles of a financial analyst.
b) Looking for the most appropriate intrinsic value is one the roles of a financial analyst.
c) Evaluating how cheap/expensive is the market price is one the roles of a financial analyst.
d) Providing written evidence that the company has properly applied the accounting standards is one of
the roles of a financial analyst.
e) All of the above are true.

10. As regards the accounting standards’ setting process…

a) Since 2005 all Spanish companies’ single-entity accounts have to apply the IFRS issued by the IASB.
b) Since 2005 all European companies’ single-entity accounts have to apply the IFRS issued by the IASB.
c) Since 2005 all worldwide companies’ single-entity accounts have to apply the IFRS issued by the IASB.
d) None of the above.

11. Comment on the following statement: “Accounting conventions and regulations that leave management
no accounting discretion lead to more useful financial statements than accounting conventions and
regulations that do grant accounting discretion.”

12. Explain briefly the relationship between book, intrinsic and market value in the dot.com boom and crash

13. Name 3 potential “red flags” pointing to questionable accounting quality.

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14. Which of the following will not prove useful for managing your earnings (either up or down)?
a) Increasing the estimated salvage value of equipment.
b) Missing the comparison with Net Realizable Value in the valuation of inventory.
c) Storing sealed empty boxes in your warehouse.
d) Ignoring the existence of temporary differences in the recognition of corporate income tax.

15. The information included in the cash flow statement is different from that of the Income Statement
because…
a) Income statement is accrual-based and operating activities mostly.
b) Cash flow statement is cash-based and operating activities mostly.
c) Unlike cash flow statement, income statement is not affected by accounting standards.
d) None of the above.

16. Which of the following statements is not true?

a) Managers of firms that are close to violating accounting-based debt covenants have an incentive to
manage earnings upwards.
b) In share-for-share mergers managers of the target firm have an incentive to overstate their firm’s
accounting performance.
c) Managers have an incentive to understate accounting performance shortly before a stock option
plan is going to be executed.
d) Managers who aggressively manage their firm’s taxes have an incentive to consistently understate
their firm’s accounting performance.

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Question 17. (4 points)
Condensed financial statement information and additional data for Fairchild Company for the year 2020 are
presented below (in €)
Balance Sheet (Dec. 31)
2020 2019
Equipment, net ................................................. 74,000 73,300
Land................................................................... 33,100 94,500
Investments (l-t) ................................................ 10,300 5,600
Inventory ........................................................... 78,400 80,700
Receivables ....................................................... 63,800 43,700
Prepaid expenses .............................................. 3,100 2,200
Cash ................................................................... 53,100 21,000
TOTAL .................................................. 315,800 321,000

Share capital–ordinary ...................................... 59,400 52,000

Retained earnings ............................................. 105,300 73,000
Bonds payable .................................................. 15,000 12,000
Notes payable l-t ............................................... 47,200 94,000
Notes payable s-t .............................................. 14,000 19,000
Accounts payable .............................................. 33,100 49,800
Income tax payable ........................................... 13,200 14,400
Salaries payable ................................................ 4,400 6,800
Dividends payable ............................................. 24,200 0
TOTAL .................................................. 315,800 321,000

Additional data for the year 2020:

a. Net income, €80,700.
b. Depreciation expense on equipment, €13,900.
c. Purchased long-term investment, €4,700.
d. Sold land for €54,900 including €6,500 loss
e. Acquired equipment by issuing long-term note payable, €14,600
f. Repaid long-term note payable, €61,400
g. Received cash for issuance of common stock, €2,400
h. Declared dividends, €48,400. Only half were paid before the end of 2020.
i. Paid short-term note payable by issuing common stock, €5,000
j. The increase in bonds payable corresponds to the accruing of implicit interest to apply amortize
cost as subsequent valuation.
Required:
Prepare the Cash Flow Statement for the year 2020

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Question 18 (3 points)
Novartis is a Swiss pharmaceutical group that applies IFRS. The company enjoys two patents. The first one is the
final outcome of an R&D project for which the company spent (evenly throughout the year) €8,000 (research
phase 2017) and €6,000 (development phase 2018). Following IFRS, Novartis capitalized only a sixth of the
development costs and applies 5-year straight-line amortization. The second patent, acquired in a business
combination, was recognized for its fair value €2,000 on January 01, 2020 and is amortized in eight years. As an
equity analyst you consider that all costs of the R&D project should have been capitalized. You also consider that
the useful file of the second patent should be five years instead of eight. What will be the adjustments in the
Balance Sheet Dec. 2019 and 2020 and in the Income Statement 2020? (Tax rate = 30%).

Balance sheet (Dec.31, 2019)?

Balance Sheet (Dec. 31, 2020)?
Income Statement (year 2020)?

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PART II (15 Questions, 1 point/answer)
Have a look at Ryanair Group’s financial statements (see appendix) and give a brief answer to each of the
following questions:

1. How would you prove that these financial statements are consolidated? (heading is not allowed as an answer)

2. Does the parent company own 100% of the subsidiaries?

3. What accounting standards have been followed for their preparation? (Justify your answer)

4. What is the global financial position (1 to 5) for the group? Would you deem it very risky?

5. What are the group’s most important assets? Does it make sense?

6. Prove mathematically the main equation in the Balance Sheet and in the Cash Flow Statement for 2020.

7. As an analyst, would you give a positive view of Ryanair’s Cash Flow Statement ?

8. Disclosure notes will offer no information about expenses by nature (T/F, explain)

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9. The group has used the indirect method for its operating cash flow. Give an illustration of each of the three
categories of adjustments to net income.

10. Ryanair does not have any plans for disposing of significant assets in the short-term (T/F, explain)

11. Are there any temporary differences in computation of income tax payable? Only taxable?

12. Are there any lease agreements? How have they been considered in each of the three financial statements?

13. Are there any private pension funds? Are they overfunded or underfunded?

14. Would you say aggressive inorganic growth (high prices) has been the key strategy of the Ryanair group over
the last years?

15. Could you figure out any reasons for the increase in the interest coverage ratio? Was it trustworthy before
2020?

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