Topics › Financial Statement Analysis
Introduction to Financial Statement Analysis: practice question
Verano Foods: credit review before a bond purchase
Osric Havel is a credit analyst at Norlake Credit Partners, a bond fund that is considering buying bonds issued by Verano Foods, a listed grocery chain that reports under IFRS. Havel begins with Verano's annual report for the year ended 31 December 20X5, which contains the financial statements and notes, management's commentary on results, and the independent auditor's report.
The auditor, Quill & Harrow, was unable to obtain sufficient appropriate audit evidence about the inventories held by Verano's newly acquired overseas distribution subsidiary. Judging the possible effects to be material but not pervasive, the auditor issued a qualified opinion. During the year Verano also revalued a portfolio of retail properties upward by $34 million, and the resulting surplus is included in the movements shown in Exhibit 1.
Between annual reports, Havel tracks Verano's interim reports and press releases for developments that could affect creditworthiness. For the review itself, he plans to convert the reported statements of Verano and two peer companies into common-size statements and to compute leverage and coverage ratios before forming a view on the proposed bond purchase.
| Item | Amount |
|---|---|
| Equity, 1 January 20X5 | 812 |
| Net income | 96 |
| Revaluation of retail properties (surplus) | 34 |
| Dividends declared | (40) |
| Proceeds from shares issued | 60 |
Using the movements listed in Exhibit 1, Verano's total shareholders' equity at 31 December 20X5 is closest to:
- $868 million
- $928 million
- $962 million
Show answer and explanation
Correct answer: C
Working: Ending equity = 812 + 96 + 34 - 40 + 60 = 962; other comprehensive income is part of equity, so the revaluation surplus is included.
Explanation: Closing equity equals opening equity plus every listed movement: 812 + 96 net income + 34 revaluation surplus - 40 dividends declared + 60 share issuance = 962, because other comprehensive income accumulates within equity. The $928 million figure omits the $34 million surplus, treating other comprehensive income as if it bypassed equity. The $868 million figure omits both the surplus and the $60 million received from issuing shares, counting only income and dividends.
More Financial Statement Analysis practice Try a mock exam
More free Financial Statement Analysis questions
- For the year ended 31 December 20X6, Roscoe Pharmaceuticals reports net income of $1,800,000 and…
- Halstock Media pays its staff on the fifth business day of each month for the month just ended.…
- At 31 December 20X6, Selby Wholesale reports gross trade receivables of $512,000 and an allowance…
- Quill & Harrow's opinion would most likely have been a disclaimer of opinion instead of a qualified…
- In Verano's statement of cash flows for the year ended 31 December 20X5, the $60 million of cash…