Introduction to Financial Statement Analysis: practice question

Financial Statement Analysis · Introduction to Financial Statement Analysis · Question ID fsa-s01b-4

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.

Exhibit 1: Verano Foods, extract from the statement of changes in equity, year ended 31 December 20X5 ($ millions)

Item	Amount
Equity, 1 January 20X5	812
Net income	96
Revaluation of retail properties (surplus)	34
Dividends declared	(40)
Proceeds from shares issued	60

Compared with Verano's annual report, its interim reports are best described as:

more timely but generally reviewed rather than audited
audited on the same basis as the annual financial statements
issued only in years when the company raises new debt

Show answer and explanation

Correct answer: A

Explanation: Interim (quarterly or half-year) reports appear more frequently than the annual report and so are more timely, but they are generally subject to a review at most rather than a full audit, so their figures carry less assurance. The audit opinion covers the annual financial statements, so the interim statements are not audited on the same basis. Companies must publish interim reports as a routine reporting obligation, not only when they raise debt.

More Financial Statement Analysis practice Try a mock exam

Introduction to Financial Statement Analysis: practice question

Verano Foods: credit review before a bond purchase

More free Financial Statement Analysis questions