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University of Leicester MN7403

Accounting & Finance for Managers

· 案例展示

Accounting & Finance for Managers
Online Assessment August 2020
INSTRUCTIONS TO CANDIDATES
This assignment contributes 100% to the overall weighting of the module marks.
You must answer only THREE questions.
Section A: You must answer question ONE (50 marks).
Section B: Answer ANY TWO out of FOUR questions.
(Each question carries 25 marks).
Format
You must use Microsoft Word to write the answers and submit your document in this
format (You cannot take photos of handwritten documents and upload these).
References
Where appropriate, the answers should be fully referenced throughout and contain a bibliography.
The assignment must be submitted via Turnitin.
Please ensure that you are saving your submission title as your student number and module
code: e.g. 19XXXXXXX MN7403.
Please also ensure that you are saving your document as a single file.
Please use Google Chrome when completing your assessment, where possible.
2
SECTION A
Question 1
Using the Annual Report extracts for Air China (see below) and any other relevant information
from the Annual Report 2019, you are required to write a report on the financial performance of
Air China.
REQUIREMENTS:
(a) For each of the two years ended 31 December 2019 and 2018, calculate the following
ratios to help you to form the basis of your report.
1. Return on Equity (use profit before taxation)
2. Return on Equity (use profit after taxation)
3. Net profit margin (use profit after taxation)
4. Asset Turnover (revenue/equity)
5. Operating profit margin
6. Current Ratio
7. Average debtors’ collection period
8. Gearing (short and long-term borrowings/equity)
9. Price Earnings Ratio (share price/ earnings per share)
Ratios required for part (a) must be calculated and not extracted from external
databases.
Your calculations must be done to the nearest RMB million.
All workings must be clearly shown. You should calculate all ratios to nearest
1 decimal place.
(Calculation of ratios: 16 marks)
(b)Evaluate the performance of Air China in the following areas, using ratios you have
calculated above:
- Profitability
- Liquidity/Solvency
- Long term financial structure
- Investors’ perspective
(Analysis of performance: 14 marks)
3
(c) Critically discuss the limitations of using ratio analysis as a basis for the evaluation
of financial performance. In your discussions, you should incorporate examples from
Air China.
(10 marks)
(d) Air China was affected by the COVID-19 epidemic, and as a result, the aviation demand
dropped sharply for the first Quarter ended 31 March 2020 (1 January 2020 – 31 March
2020). During this period, the Group’s total revenue was RMB17, 256 million (compared
to RMB 32,554 million for the same period in the previous year). This resulted in a net
loss for the group of RMB 4,805 million for the period.
Operating gearing (or operational gearing) refers to the mix of fixed and variable costs in a
business and its ability to use its fixed costs to generate a profit.
Required

(i)Explain what is meant by operating gearing, and giving reasons, explain whether the
level of operating gearing for Air China is high or low.

(Note: you are not required to calculate the operating gearing level).

(ii)With regard to Air China’s operating gearing level, discuss the implications of the
COVID -19 epidemic on the company’s financial performance.

(10 marks)
(TOTAL 50 MARKS)
4
Air China Lecture Case Study: Extracts from financial statements for the year ended 31
December 2019 (available from http://www.airchina.com.cn/en/investor relations/index.shtml )
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6
7
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Additional Notes: Air China (Year Ended 31 December 2019)
1. Summary Financial Information
2. Operating Expenses (page 34)
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3. Dividends
4. The Share prices for Air China on the Shanghai Stock Exchange for Air China were:
31 December 2018 = 9.69 RMB per share.
31 December 2019 = 7.62 RMB per share.
(Source: https://sg.finance.yahoo.com/quote/601111.SS?p=601111.SS&.tsrc=fin-srch )
10
SECTION B
ANSWER ANY TWO QUESTIONS
Question 2
Preparers of financial statements are interested in creating the financial statements to suit their
own needs.
Mary Barth (2018, p.76) states:
“Financial reporting, particularly profit or loss, is important, which creates incentives for firms and
managers to manage it.Financial reporting requires judgement to implement, which creates
opportunity.
Combine incentives and opportunity and you get earnings management. The use of judgement in
accounting creates scope for earnings management, yet the use of judgement is the only way
financial reporting can convey information…The question is what to do about it, if anything?”
Mary E. Barth, (2018) “The Future of Financial Reporting: Insights from Research”, ABACUS (A Journal of
Accounting, Finance and Business Studies), Vol.54, No.1, 2018.
Required:
Critically discuss the view that financial statements are not credible, reliable or useful, because
creative accounting (earnings management) is inevitable due to the problems of the use of
judgements in financial reporting.
(TOTAL 25 MARKS)
Question 3
Businesses often need external funds to maintain their operations and invest in future growth. The
funding of a business is vitally important.
Required:
(a) Briefly explain the main benefit for companies having debt finance (loans and borrowings) and
discuss the possible risks and problems facing companies that have very high levels of
gearing, particularly where there is intense competition in the market and/or where there is a
downturn in the economy.
(13 marks)
(b) Ordinary share capital and retained earnings are two main sources of equity finance for a
company.
Discuss the advantages and disadvantages of each of these sources.
(12 marks)
(TOTAL 25 MARKS)
11
Question 4

(a)Nan Chen is a farmer who owns a farm with an area 150 Acres. This year she has farmed it
with the following vegetable crops:

Bok Choy Eggplant Carrots Cabbage

Acres20604030
Yield per acre (tonnes)881010

£ £ £ £

Selling price per tonne
Variable costs per acre:
Fertiliser
110130120120
25203020
Seeds20203025
Pesticides15102025
Direct wages400380500500

The fixed overhead costs are at £70,000 per year.
Required:
1. Calculate the anticipated profit for the current year.
(Note: For each crop, you should first calculate the contribution per acre and then calculate
the total contribution for each crop)
2. Specify which of the above vegetable crops would be most profitable to produce next year
(It may be assumed that any part of the farm can be used to grow any crop).
3. Calculate the break-even point in £’s of sales of the crop that you have identified in part (2)
above.
4. Calculate the maximum profit for the next year subject to Nan Chen’s desire to produce at
least 80 tonnes of each crop.
(12 marks)
(b) Although break-even analysis can provide useful insights concerning the relationship
between cost, volume and profit, it does have its limitations. Discuss limitations of
break-even analysis for decision making.
(13 marks)
(TOTAL 25 MARKS)
12
Question 5
The directors of Kish Limited are considering two investment proposals, details of which are as
follows.
Project Alpha Project Beta
£000 £000
Initial investment 300 270
Net cash inflows year 1 50 90
Net cash inflows year 2 75 90
Net cash inflows year 3 100 90
Net cash inflows year 4 125 80
Net cash inflows year 5 150 80
Net sale proceeds of project assets at the
end of year 5 60 20
Required
a) Using the above information, for each of the projects Alpha and Beta, calculate:
i) The Accounting Rate of Return.
ii) The Payback Period.

iii)The Net Present Value using a discount rate of 12%.
Note: Extract of Present Value Tables are on page 13.

(14 marks)
b) State, with reasons, which ONE of the two investment projects the directors of Kish
Limited should accept.
(5 marks)
d) Discuss why the Net Present Value method of investment appraisal is considered to be
theoretically superior to other methods that are found in practice.
(6 marks)
(TOTAL 25 MARKS)
END OF QUESTIONS
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Extract of Present Value Tables

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