INDIVIDUAL REFLECTIVE ASSIGNMENT / ESSAY (QUESTIONS)
Individual student is required to write a reflective essay or “self-reflect” to demonstrate student knowledge, experience, development and lessons learned in Financial Statement Analysis. In this reflective assignment/essay, student need to reflect on specific personal experiences, transformative moments and/or their intellectual growth from completing the course.
QUESTION ONE [Total: 100 marks]
CASE STUDY BIBI JAKEL BHD (Formerly Komdar Bhd )
Aiden had been employed by Komdar Bhd for nearly 20 years, serving in a variety of engineering and manufacturing positions for the company. The company owner decided to put the company up for sale, and Aiden was eager to buy it, since he knew he could do a better job of managing and running it than was presently being done. There was potential for additional sales; and cost savings through production efficiencies, superior customer service, and reduced administrative expenses (the owner was quite generous to himself) would be easy to accomplish. Aiden had no doubt that he could improve things dramatically within a year, and growth possibilities after the first year were extremely attractive.
Aiden did not have strong financial skills, but he knew that he had to put together some kind of projected figures to set goals for the company and to satisfy his financial backers, who were members of his family and also not financially sophisticated. Exhibit A.1 shows the income statement projections that Aiden prepared.
Based on this projection, which he felt was realistic, Aiden did not do any further financial studies, nor did his financial supporters request any more data. Their feeling was that the combination of the sales growth and the attractive improvement in profitability would be enough to avoid any financial difficulties. Unfortunately, these projections proved insufficient. Aiden did not take into consideration three significant factors: (1) He would have to invest in excess of RM500,000 in plant and equipment to gain all the efficiencies and throughput expansion he required; (2) to gain the new customers required to achieve the sales target, he would have to extend 30-day credit terms to all customers; and (3) it would take time to ramp up to RM300,000 monthly sales necessary to attain the RM360,000 target figure.
As Komdar Bhd, the company enjoyed a unique position demand for its products exceeded ability to supply. The company was able to sell all of its monthly production of about RM1,000,000 on a continuing basis. Komdar Bhd required cash payment at time of delivery to virtually all customers, and was still able to sell 100 percent of its output. Aiden, however, wanted to increase sales and net profits and recognized the existence of increased competition and other changes in the marketplace. He not only saw the need to retain present customers but also to acquire new customers. To accomplish his goals, he knew he would have to offer credit terms for payment and would have to absorb the cost of carrying the significant increase in accounts receivable investment.
Aiden was fully aware of the plant and equipment investment and the accounts receivable factors, but he did not understand the cash flow ramifications they would have on his fledgling business. He simply assumed the profit generated from the new sales would produce enough cash to cover any requirements he would face. He had not taken the ramping factor into consideration at all. If he had done a balance sheet
projection, even without taking the ramping into account, the pro forma balance sheet figures in Exhibit A.2 would have appeared, allowing him to plan for the cash shortage contingency.
From the pro forma balance sheet, it is clear that Aiden could have anticipated a significant problem with cash. Without that projection, however, Aiden only discovered the problem once in the middle of it. Fortunately, because some of his relatives were willing to guarantee Aiden’s loan, he was able to get a RM300,000 line of credit from his bank and to increase his long-term loan by RM100,000. To complete the picture of his first year of operation, in Exhibit A.3 Bibi Jakel’s actual financial results are shown compared to the projected figures and to the prior year numbers. Part of Aiden’s problem (and the solution to his critical needs) was borrowing. At January 1, 2021, assumed a loan of just over RM1,000,000 with a monthly payment of RM16,000 including interest at 8,5 percent. He added RM100,000 to the loan on April 1, 2021, which increased the monthly payment to RM25,000 but did not change the interest rate. He also negotiated a RM1,500,000 line of credit at a rate of 9 percent. The actual cash flow and forecasted are shown in Exhibit A.4.
From these figures, it is clear that Aiden made good progress towards achieving his goals. During the year, however, his cash flow difficulties forced him to defer the purchase of certain equipment that he needed, and the impact on future years may be severe. He did a good job controlling expenses and inventory, but his accounts receivable went through the roof. As a result, he is now dealing with a significant line of credit (and related interest charges). He has financed the rest of his requirements partly from the profits he was able to attain and from the addition to his bank loan, but also by not paying his vendors on time. His accounts payable balance has increased dramatically, and is now about 85 percent higher than it should be. Aiden’s phone is surely ringing off the hook with angry and frustrated vendors who are looking for payment. Additionally the bank is pressuring him, insisting that he zero out the line of credit for at least one month before they will consider another year’s extension. Because of his cash flow problems, Aiden smart quickly. He decided he needs a reliable cash flow projection for next year, particularly since he wants to catch up on his fixed asset expenditures as well as make additional investments.
The preparation of this kind of a forecast is not difficult once the basic assumptions and estimates are developed. The picture such a forecast provides the management of the organization is invaluable. The prospect of an excess amount of cash is an opportunity that should be used to the fullest advantage, while a cash shortfall needs to be recognized early and handled wisely to minimize the cost to the organization and to avoid the disaster of not being able to pay off obligations. Either way, typical income statement projections and pro forma balance sheets are not enough. Cash is the ultimate determinant of survival, success, or failure. *****Please find Exhibit A1-A4 in the Appendixes
a) Describe the business environment relevant to the case study by examine the nature business of the company and its competitors. Also, evaluating the market and customer base of the company above.
b) Compare cash flows from operating, investing, and financing activities from the company above. Furthermore, by considering the operating, investing and financing issues from the company, develop a residual income model to evaluate the company stock value. (Note: Student needs to justify such the cost of equity, growth rate themselves by appropriate and reasonable assumptions.) (20 marks)
c) You are a financial analyst for Bibi Jakel Bhd, explain what the potential earnings management activities were for this company. Justify your answer by providing appropriate reasons base on the company current business model, financial data and other evidences or any reasonable assumptions.
d) Besides cash flow analysis, the other financial statement analysis also vital and important for the company. Write a review based on THREE (3) journal articles from year 2013 onwards related to ONE (1) of the topics below.
(i) Equity and credit analysis
(ii) Business and geographical segment analysis
(iii) Common size analysis
(iv) Business combination and Special Purpose Entity
Remarks: Choose one topic above and the review should analyse each aspect of the article individually then conclude the review by analysing the article as a whole. Always start with an introduction that explains who the author then, mention the title of the article and provide brief explanation of what the article is about and why it's important. (40 marks)
Bibi Jakel Bhd and Komdar Bhd
Income statement for the years ending 31 December 2020 & 2021
Komdar Bhd(actual) Bibi Jakel (projected) 31/12/2020 31/12/2021
RM'000 % RM'000 %
Sales 2,400.5 100 3,600 100
Cost of goods sold 1,687.2 70.3 2,380 66.1
Gross Profit 713.3 29.7 1,220 33.9
Selling & general expenses 494.9 20.6 500 13.9
Operating profit 218.4 9.1 720 20
Taxes 79 3.3 260 7.2
Net Income 139.4 5.8 460 12.8
Exhibit A.1: Income statements actual and projected
Bibi Jakel Bhd
Pro Forma Balance Sheets as at 31 December 2020
ASSETS RM'000 %
Cash -185 -12.2
Account Receivable 375 24.8
Inventory 480 31.8
Total Current assets 670 44.4
Others assets 840 55.6
TOTAL ASSETS 1,510 100
Accounts payable & Accruals 250 16.6
Other current liabilities 80 5.3
Total current liabilities 330 21.9
Other liabilities 180 11.9
TOTAL LIABILITIES 510 33.8
Total stockholder equity 1,000 66.2
TOTAL LIABILITIES AND EQUITY 1,510 100
Exhibit A.2. Pro Forma Balance Sheets
Income statement for the year ending
Bibi Jakel Bhd Bibi Jakel Bhd Komdar Bhd
31/12/2020 31/12/2021 31/12/2020
Actual Projected Actual RM'000 % RM'000 % RM'000 %
Sales 3,014.7 100 3,600 100 2,400.5 100
Cost of goods sold 2,058.1 68.3 2,380 66.1 1,687.2 70.3
Gross Profit 956.6 31.7 1,220 33.9 713.3 29.7
Selling & general
expenses 463.4 15.4 477.6 13.3 473.9 19.7
Interest expenses 32.6 1.1 22.4 0.6 21.0 0.9
Operating profit 460.6 15.2 720 20 218.4 9.1
Taxes 182.4 6 260 7.2 79 3.3
Net Profit 278.2 9.2 460 12.8 139.4 5.8
Exhibit A.3. Income Statement actual and projected
Bibi Jakel Bhd Cash Flows for the year
Net cash flow from operating activities 31/12/2020
Net cash flow from Investing activities -145 -30
Net cash flow from financing -65 -35
Beginning cash and cash equivalent 1,665 1,650
Ending cash and cash equivalent 1,650 1,740
Exhibit A.4. Cash Flow statements actual and projected