ACCT7101 Accounting – Assignment #2
Financial Report Analysis and Business Decision MakingQuestions
(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.
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 These include published and unpublished documents,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
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.
You have been randomly assigned two ASX listed companies that operate in the same
industry (Company A and Company B). See the file “Companies allocated to students” under
the Assessment tab on Blackboard to find your companies.
Obtain each of your company’s annual reports for the 2017, 2018, and 2019 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 three financial years: 2017, 2018 and 2019.
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.
Company A has submitted an application to the Brisbane Bank for a loan. The amount of the
loan is equal to 40% of total shareholders’ equity at the end of the 2019 financial year. 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 property.
Assume you are a branch lending officer of Brisbane Bank 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.
Both Company A and Company B have offered Capital Investments Limited, a listed
investment company (LIC), a private placement of ordinary shares. The amount of share offer
is equal to 30% of total shareholders’ equity of each company at the end of the 2019 financial
year. Capital 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
Assume you are an investment manager at Capital Investments Ltd who evaluates private
equity placements. Capital Investments 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 Capital Investments a new issue of ordinary shares and
reject Company B’s offer, or accept Company B’s offer to sell to Capital Investments a new
issue of ordinary shares and reject Company A’s offer or alternatively reject both offers.
Before commencing work on the tasks below, refer to the marking 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 economy wide factors and two industry factors that could impact on the
financial performance and position of two companies and two specific factors which could
impact on 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 2019, 2018 and 2017 years for Company A and
Company B. 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.
3. Lending decision (12 marks)
Write a business memorandum to the Brisbane Bank head office loan manager from the
branch bank lending officer in Scenario 1. The memorandum must address the following points
a) Evaluate and discuss your assessment of the ability of Company A to repay the loan and
interest. Make a recommendation to accept 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’s net 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 the limiting factors can
affect the usefulness of that ratio with reference to literature (accounting texts excluding
Carlon et al. or journal articles).
4. Investment decision (12 marks)
Write a business memorandum to Capital Investments Limited’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 2019, 2018 and 2017 years. Discuss your assessment
of relative profitability and risk of both companies.
b) Recommend whether Capital 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 with reference to literature (accounting texts other than Carlon et al. or journal
articles) 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.
Submit your work as a single PDF document. Include your student number and name as a
header to the document.
Your written responses to Assignment tasks 1, 3 & 4 are limited to a maximum of 4 pages
(Times Roman 12 point type, 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 5th & 6th pages of the
document (excluded from page limit).
Attach a Reference List as the 7th page of the document. All sources used must be referenced
using a consistent academic reference style (e.g. Harvard Style of referencing). See
Blackboard for information on the UQBS preferred format (Writing Guide). To reference from
an annual report use the ASX Code of the company, year of the annual report and page
number, e.g. COL 2019, p23).
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