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ACCT7101 Accounting – Assignment

Financial Report Analysis and Business Decision Making

Due Date for Submission: 1:00pm Thursday 10 October 2024

(Weight: 25% of Final Grade)

Aims of this assignment

This assignment aims to develop your

a) ability to understand and analyse financial reports,

b) skills and knowledge to compare financial information of two listed companies, and

c) capacity to evaluate financial information and synthesise financial and non-financial information to make business decisions.

This assignment is to be completed on an individual basis.

Your submitted assignment must be entirely your own work. You may seek guidance from lecturers, tutors or fellow students to clarify concepts or the application of concepts to the financial statements in general. In addition, please look at the "Frequently Asked Questions (FAQs)" document uploaded on Blackboard, which may have the clarifications you need. Advice that is clearly associated with the assignment tasks cannot be sought or provided.

Plagiarism is the submission of work or ideas which are not your own but for which academic credit is claimed. It is important that you review the University’s policy on plagiarism. The originality of your assignment will be assessed by the Turn-it-in system. Information from the course profile relating to plagiarism is reproduced below. Please note that it isstrictly prohibited to use the AI technologies to develop your answers.

Plagiarism

The University has adopted the following definition of plagiarism:

Plagiarism is the act of misrepresenting as one's own original work the ideas, interpretations, words or creative works of another. These include published and unpublished documents, designs, music, sounds, images, photographs, computer codes and ideas gained through working in a group. These ideas, interpretations, words or works may be found in print and/or electronic media.

Students are encouraged to read the UQ Student Integrity and Misconduct policy (http://ppl.app.uq.edu.au/content/3.60.04-student-integrity-and-misconduct) which makes a comprehensive statement about the University's approach to plagiarism, including the approved use of plagiarism detection software, the consequences of plagiarism and the principles associated with preventing plagiarism.

Assignment overview

You have been randomly assigned two ASX listed companies that operate in the same industry (Company A and Company B). See the file “Allocation of companies to students” under the Assessment tab on Blackboard to find your companies.

Obtain each of your company’s annual reports for the 2023, 2022, and 2021 financial years from the company’s website or www.asx.com.au. The annual reports contain the chairperson’s report, directors’ report and financial statements (Statement of Financial Position, Statement of Profit or Loss, Statement of Changes in Equity, Statement of Cash Flows and Notes to the Financial Statements). The financial statements include comparative figures from the prior year, therefore, you will have data for four financial years: 2023, 2022, 2021 and 2020.

Research the financial press and other sources of available information to familiarise yourself with the industry in which your allocated companies operate and with company specific factors that may have or will affect either company’s performance.

Two business scenarios are described below. Scenario 1 relates to Company A only and Scenario 2 involves Company A and Company B. Knowledge of the industry, company specific context and their financial data will be important inputs that inform the decision that you recommend in relation to each scenario.

Scenario 1

Company A has submitted an application to the Bank of Brisbane for a loan. The amount of the loan is equal to40% of total shareholders’ equity at the end of the financial year 2023. The purpose of the loan is to fund expansion of Company A’s operating capacity. The loan term sought is 10 years and the loan would be secured against company’s property.

Assume you are a branch lending officer of the Bank of Brisbane who assesses loan applications. The lending officer must make a recommendation to the head office lending manager advising whether the loan application from Company A should be accepted or rejected.

Scenario 2

Both Company A and Company B have offered St. Lucia Investments Limited, a listed investment company (LIC), a private placement of ordinary shares. The amount of share offer is equal to30% of total shareholders’ equity of each company at the end of the 2023 financial year. St. Lucia Investments Ltd can afford either of the two private placements. The purpose of an increase in equity for each company is to raise funds to finance an expansion of operating capacity.

Assume you are an investment manager at St. Lucia Investments Ltd who evaluates private equity placements. St. Lucia Investments Ltd has limited funds available for investing decisions. The manager must make a recommendation to the board of directors advising whether to accept Company A’s offer to sell to St. Lucia Investments a new issue of ordinary shares and reject Company B’s offer, or accept Company B’s offer to sell to St. Lucia Investments a new issue of ordinary shares and reject Company A’s offer or alternatively reject both offers.

Assignment tasks

Before commencing work on the tasks below, refer to themarking rubric for the criteria and standards that will be applied in the assessment of your assignment. See Blackboard.

1. Company background research                                                                         (8 marks)

Review Company A’s and Company B’s annual reports, articles in the financial press and other sources of information. Write a short response to each item below to build background knowledge of each company and their industry.

(a) Describe the operating activities of each company noting similarities and differences between Company A and Company B.

(b) Identify two common economy wide factors and two common industry factors thatcould impact on the financial performance and position of two companies. Also identify two specific factors whichcould impact the financial performance and position of company A and B, respectively. (In total, you should identify and analyse, at least, eight factors.)

2. Financial ratio analysis                                                                                        (8 marks)

Calculate financial statement ratios for the 2023, 2022 and 2021 years for Company A and Company B respectively. Use the Excel template provided on Blackboard under the Assessment tab to present the analysis in a table. Obtain data for the ratios from the financial statements and notes to the accounts. You may add to this template (calculate additional ratios). See further instruction in the template.

Additionally, use horizontal analysis to present the trend in sales revenue and net profit for Company A and B respectively, assuming 2021 as the base year.

3. Lending decision                                                                                                (12 marks)

Write a business memorandum to the Bank of Brisbane head office loan manager from the branch bank lending officer in Scenario 1. The memorandum must address the following points below.

(a) Evaluate and discuss your assessment of the ability of Company A to repay the loan and interest. Make a recommendation toaccept or reject the 10-years term loan application from Company A and justify your recommendation. Use knowledge that you have acquired in your company research from Q1 and refer to relevant ratios calculated in Q2.

(b) Briefly discuss Company A’snet cash flows from operating, investing and financing activities and the trends evident over the last three years. Explain how this analysis is consistent with your accept or reject recommendation.

(c) The use of estimates, cost, alternative accounting methods, the presence of atypical data, and diversification of firms have been cited as factors that limit the usefulness of financial statement analysis. In your recommendation, please discuss the limitation of your financial statement analysis. Identify ratios and explain how one or more of thelimiting factors can affect the usefulness of that ratio.

4. Investment decision                                                                                           (12 marks)

Write a business memorandum to St. Lucia Investments Ltd’s board of directors from the investment manager in Scenario 2. The memorandum must address the points below.

(a) Use the most relevant financial ratios to analyse and compare trends in profitability and risk of Company A and Company B for the 2023, 2022 and 2021 years. Discuss your assessment of relative profitability and risk of both companies.

(b) Recommend whether St. Lucia Investments should invest in Company A or Company B or alternatively reject both offers. Justify the recommendation based on the evaluation of risk and profitability of each company and other relevant background information obtained from the annual reports and other sources. Use knowledge that you have acquired in your company research from Q1 and refer to the relevant ratios calculated in Q2.

(c) Explain the meaning of the price earnings (PER) ratio and EPS. Describe three year trends in these ratios for Company A and B and discuss their relevance to the investment decision.

Assignment administration

Format

Submit your work as a single PDF document. Include your student number and name as aheader to the document.

Your written responses to Assignment tasks 1, 3 & 4 are limited to a maximum of 5 pages (Times Roman 12 point, 1.5 line spacing and minimum, 2 cm on each margin). Any submitted text exceeding this limit will NOT be assessed.

Attach the Excel table of financial ratios for Assignment Task 2 as the 6th, 7th and 8th pages of the document (excluded from page limit).

Attach a Reference List as the 9th page of the document. All sources used must be referenced using a consistent academic reference style (e.g. APA 7th edition). See the UQ referencing style guide in the library https://guides.library.uq.edu.au/referencing. To reference from an annual report, use the ASX Code of the company, year of the annual report and page number, e.g. COL 2023, p30).

Submission

Submit your assignment before or on the due date. Follow the instructions below .

(a) Submit the assignment electronically as a PDF to the Turn-it-in link in the course Blackboard, under the “Assessment” tab, then under “Assignment: Financial Report Analysis and Decision Making” folder. Follow the submission instructions.The title of your assignment in the Turn-it-in Submission Page must be theASX code of your assigned Company A. Do not add anything else in the title. For example, Origin Energy Ltd's title would beORG.

 (b) When submitting the assignment, you can test it for text matching by submitting it and reviewing the report. Up to the due date, you can resubmit your assignment at any time (if you make changes to it). The system simply deletes your earlier version and replaces it with the resubmitted version.

Late submission

An assignment submitted after the due date and time for which no extension has been granted prior to the due date will incur a late submission penalty. The penalty is applied at the rate of 5% of the total available marks for the assignment for each calendar day or part thereof that the assignment remains overdue.

Extension of due date

Requests for granting an extension to the due dates must be made at least 24 hours prior to the submission date. The request must contain documentation satisfactorily supporting the request. Please refer to the Electronic Course Profile (ECP) Section 5.4 to understand the procedure for requesting an extension.

Assessment criteria

The criteria and standards that will be applied in the assessment of this assignment are available on Blackboard (under the “Assessment” tab). Review the rubric before you commence work to ensure you understand the requirements of the assessment and how it will be assessed.

Feedback on the assessment of your assignment will be available via Turn-it-in.

	Fail: 1	Pass: 2	Good: 3	Very Good: 4
1. (a) Description of Company A and B - similarities and differences	Descriptions are incomplete. No similarities or differences identified.	Descriptions are sound. A similarity or difference identified.	Descriptions are detailed. Similarities or differences identified.	Descriptions are complete. Comparative analysis of similarities and differences in terms of their products/services, markets, and location.
1. (b) Economic, industry and company specific factors that could affect financial performance or position.	No factors were identified or factors identified are not related to Company A or B.	At least two factors were identified including appropriate references.	At least four relevant economic, industry or company specific factors for Company A and B were identified.	Two relevant economic, two industry and two company specific factors for Company A were identified. Two company specific factors for Company B were identified. An explanation of how these factors could affect the financial statements of Company A and Company B is provided.
2. (a) Financial ratios for Company A.	Maximum of 7 different ratios that have errors in their calculation.	Maximum of 3 different ratios that have errors in their calculation.	No errors in the calculation of ratios.	In addition to the standards for "Good", no errors in horizontal analysis.
2. (b) Financial ratios for Company B.	Maximum of 7 different ratios that have errors in their calculation.	Maximum of 3 different ratios that have errors in their calculation.	No errors in the calculation of ratios.	In addition to the standards for "Good", no errors in horizontal analysis.
3. Scenario 1 - Memorandum from lending officer (a) Evaluation of the ability of Company A to repay the loan and interest.	1) Ratios chosen are not the most relevant to evaluate the ability of the company to repay the loan and interest. 2) Ratios are described without comparison.	1) The appropriate ratios to evaluate ability to repay loan and interest were chosen. 2) A comparison of appropriate ratios is provided with some explanation of the effect on the ability to repay loan and interest.	In addition to the standards for "Pass", a discussion comparing trends in the ability to repay loan and interest is included.	1) In addition to standards for "Good", an interpretation of general trends of Company A including a conclusion for the evaluation of the ability to repay loan and interest of Company A based on this interpretation is provided. 2) A decision was made and justified based on conclusion.
3. Scenario 1 - Memorandum from lending officer (b) Analysis of cash flows from operating, investing and financing activities for Company A.	Cash inflows and cash outflows from operating, investing and financing activities not correctly identified.	Major cash inflows and cash outflows from operating, investing and financing activities and their changes were identified from the Statement of Cash Flows for three years.	In addition to standard for "Pass", changes in cash inflows and cash outflows of major items were analysed to explain changes in operating, investing and financing activities.	In addition to standard for "Good", a discussion on how the analysis of cash inflows and cash outflows is relevant to assessing the ability of Company A to repay loan and interest is provided and which supports (or not) the conclusion based on ratio analysis.
3. Scenario 1 - Memorandum from lending officer (c)Limitation of financial statement analyses	1) Ratio was not chosen. 2) Incorrect explanation on the limitation.	Ratio was properly chosen but explanation on the limitation was incorrect.	In addition to the standards for "Pass", provide a justified interpretation of the limitations.	In addition to standard for "Good", discuss its effect on the decision to accept/reject the 10-years term loan to Company A.