Analyzing Statements of Cash Flows: 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.