Industry Analysis (Section C)

Question 1

Which businesses have high assets?

Answer 1

Manufacturing businesses, service businesses have low assets

Question 2

Do manufacturing businesses have high depreciation?

Answer 2

Yes

Question 3

Which businesses have high inventory?

Answer 3

Manufacturing businesses, service business have less inventory

Question 4

Which businesses have a high cost of sales?

Answer 4

Manufacturing

Question 5

Comparison of entites in two periods?

Answer 5

Change in product mix, receivables and payables
Acquisition of major new PPE
DIsposal of PPE

Question 6

Change in product mix cause?

Answer 6

New competitors entering the market or because of changes in societal demands

Question 7

Change in receivables?

Answer 7

New customers are gained or existing customers must be offered extended redit terms

Question 8

Change in suppliers?

Answer 8

New suppliers are being used to fulfil changes in product mix

Question 9

Acquisition of new PPE affects?

Answer 9

Asset turnover
Operating profit margin (because of depreciation)
ROCE

Question 10

When is the financing of new asset important?

Answer 10

If cash, this affects cash flows
Affects interest cover if acquired through lease or a loan

Question 11

What does gain or disposal in asset result in?

Answer 11

A gain or loss on disposal which has impact on operating profit margin
Asset turnover
ROCE

Question 12

One off events when comparing one entity over same period?

Answer 12

An impairment loss which increased expenses and therefore reduced operating profit margin

Question 13

When comparing two entites in the same period?

Answer 13

Whether there are any differences in accounting policies

Question 14

What is a key reason for return on assets or return on equity differences?

Answer 14

Accounting for non-current assets at cost vs fair value

Question 15

Comparison of entity with sector averages?

Answer 15

Firms may have different year-ends which could skew the comparison

Question 16

Seasonal trade and the affect on sector averages?

Answer 16

Receivables and inventories balances at year end

Question 17

What must discussion focus on in consolidation?

Answer 17

The acquisition exclusively

Question 18

Acquisition discussion points (margins)

Answer 18

Acquired subsidiary might have different margins or operate at a different sector

Question 19

Acquisition discussion points (intra-group)

Answer 19

Some transactions such as intra-group sales or unrealised profit must be eliminated

Question 20

Acquisition discussion points (fees)

Answer 20

One-off fees related to the acquisition

Question 21

Acquisition discussion points (subsidiary acquired)

Answer 21

The subsidiary acquired may have different payment terms for receivables and payables

Question 22

Acquisition discussion points (gearing ratio)

Answer 22

Shares issued to acquire subsidiary may impact the gearing ratio

Question 23

Acquisition at start of year?

Answer 23

There is consistency between CSPLOCI and CSFP

Question 24

Acquisition at mid year?

Answer 24

False impression of receivables collection period

Since CSPLOCI includes results post-acq and CSFP includes all assets and liabilities

Question 25

Acquisition at end of year?

Answer 25

Skews ratio which increase in assets and liabilities Increase in assets and liabilities but not the profits

Question 26

Mid-year disposal in consolidation?

Answer 26

CSPLOCI contains results of subsidiary up until date of disposal whereas CSFP not contain any assets or liabilities of subsidiary since it has been disposed

Question 27

How to analyse statement of cash flows?

Answer 27

Look at operating activities, investing activities and financing activities

Question 28

Cash flow from operaitons source?

Answer 28

How much cash the business can generate from its core activities

Question 29

If a company offers 60 days instead of 30 days credit terms (cash flows)?

Answer 29

Cash sales will decrease as the company is collecting less cash

Question 30

Cash flows from investing source?

Answer 30

Are one-off items

Question 31

A reason for the entity increasing investing activities but performing bad?

Answer 31

Forced to sell assets and rent then back to generate cash flows to allow to continue to trade

Question 32

Cash flows from financing source?

Answer 32

Are one-off items

Question 33

An example for financing activities?

Answer 33

A new loan increases cash, great if proceeds are used to invest in new assets, negative if proceeds are needed for company to continue trading

Question 34

Potential interest of shareholders?

Answer 34

Performance of management during the year Decision to buy, hold or sell shares

Question 35

Potential interest of investors?

Answer 35

Future growth and profit potential Investment decision

Question 36

Potential interest of banks and capital providers?

Answer 36

Ability to pay existing interest and loan capital Decision whether to grant further loans

Question 37

Potential interest of employees?

Answer 37

Company stability as an employer Wage negotiation

Question 38

Potential interest of management?

Answer 38

Weak performing areas that need attention Whether targets met

Question 39

Potential interest of suppliers?

Answer 39

Creditworthiness as a customer

Question 40

Potential interest of government?

Answer 40

Statistics Decision whether to award a grant