PROJECT OVERVIEW AND ADMINISTRATION

Objective

The project provides students with an important opportunity to ‘learn by doing’ . You will be asked to apply most of the analysis from the first six seminars to an Australian public company.

Start working on the project early. Leaving it to the last minute will be stressful and may result in poor performance.

Company

You need to analyse the financial statements of Adairs Limited (ASX ticker: ADH). The financial statements and notes in Excel format and the annual reports for Adairs Limited for FY 19, FY 20, and FY 21 will be shared with you on Learn.UQ.

Deliverables

The project consists of both short answer questions and Excel spreadsheet work. Please submit answers to short answer questions in one Word or PDF document (PDF document is recommended) and answers to spreadsheet questions in one Excel workbook, as indicated in the questions.

Page Limits

I have specified page limits for the questions that are to be answered in the Word document. These are maximum page limits. I will enforce maximum page limits by simply not marking any material that appears beyond the page limit for a particular question. You do not necessarily need to write as much

as the page limit if you can provide a correct, but succinct, answer.

Cover pages and references lists are not counted towards the page limit.

Formatting

Your written answers should be in A4 page size, in Times New Roman font, 12pt font size, at least single line-spacing, margins at least 2cm on all sides.

Please clearly separate and label your written answers to each question.

Your Excel file should be formatted neatly and following the conventions described in class.

Marking Guide

A marking guide is provided at the end of the document. This contains the number of marks assigned to each part of the project.

Frequently Asked Questions (FAQ)

I may issue, and regularly update, an FAQ addressing frequently asked questions about the project. Please ensure that you check the Assessment tab on Learn.UQ on a regular basis.

Submission of the Project

The project is to be completed individually.

The due date for the project is 13:00 (Monday) September 19, 2022.

Cover Page

Please include a cover page at the beginning of your Word or PDF document with your name and student number. This is not strictly necessary, as Learn.UQ manages assignment submissions and matches them to students, but it provides a useful backup for me to identify the author of each submission.

Please include your name and student number in the excel file as well in “Student Details” worksheet.

Project Submissions Instructions

For the project, please submit two files by the submission date/time:

-     Your written answers must be submitted through the Turnitin link on Learn.UQ. Please use a format that Turnitin can accept, such as a Word document or PDF.

-     Your Excel file must be submitted through the Blackboard submission link on Learn.UQ.

Note that both your written report and Excel workings must be submitted to achieve any marks. This is because I need to see your workings for financial calculations.

Retention of Submission Receipts

Please keep all submission receipt numbers provided by submission systems such as Turnitin and Learn.UQ as proof of your submission.

Email Backstop

If you encounter any problems with the submission systems (Turnitin and Learn.UQ), please alert technical support and me of the problem. (You may email me a copy of your assignment if you have trouble submitting through the normal systems and if you are concerned about incurring a late penalty due to technical problems.1)

Late Submission of Assessment

Unless you have an approved extension, you will lose 10% of your assessed grade for the assignment for each 24-hour period (or part thereof) after the designated due date-time that your submission remains outstanding.2   Your submission time is based on the later of when your written component is submitted and when your Excel file is submitted, so please make sure to submit both on time. To be clear, you will  incur  a  late  submission penalty  even if one  component  is  submitted  on time  and the  other component is submitted late. Please note that the 10% penalty rate for submission are set by UQ policy, not by me.

Multiple Submission ‘Attempts’

Some submission systems, e.g. Learn.UQ, allow students to submit multiple ‘attempts’ at an assessment before the due date. Only the most recently submitted attempt will be graded, unless otherwise agreed between the course coordinator and the student involved.

For the avoidance of doubt, in the event that a student submits the assignment on time and then submits a different version of their assignment late, I will mark the late submission applying the normal late penalty.

Applyingfor an Extension

I do not decide on extensions. These are decided by UQ professional staff. Please see the instructions in Section 5 of the ACCT7106 ECP.

Getting Started

To help you, I will provide my spreadsheet for JB Hi-Fi, which you can adapt to the allocated company.

DETAILED PROJECT INSTRUCTIONS AND MARKING GUIDE

Complete the following tasks in your Word document or Excel workbook as indicated in the question

A. Understanding the Business

Answer the following questions in your Word document:

1.   Summarise in one-three sentences, what the company does/what is its business model/how does it make money?

2.   What are the company’s main brands, products and services? Describe them.

3.   Where are the company’s production facilities or offices or stores located? What markets does it sell to?

4.   Name two competitors for the company and explain how/why they compete.

Focus on direct competitors first (e.g. Coles is a direct competitor for Woolworths), but if there are no  direct  competitors, you might  have  to  consider  indirect  competitors  (e.g.  Beacon Lighting is the only large, specialist retailer of light fittings in Australia, but it faces competition from retailers that sell a variety of products, including light fittings, such as Bunnings and IKEA).

Page limit: 1 pages (A4; Font: Times New Roman 12pt)

Make sure to include in-text references or footnotes to your sources of information. Make sure to provide answers in your own words, rather than copying-and-pasting from sources.

Tips:  See  my practical  advice  for researching  a  company  in the Appendix  of Lecture  1  Slides, ‘Researching Australian Companies’ on Learn.UQ. You will need to consult sources such as the company’s website, annual reports, industry reports, etc.

B. Industry Analysis (Class 1)

Answer the following questions in your Word document:

B Porter’s Five Forces

Pick two of the Porter’s Five Forces that you think have the biggest impact on the main industry in which the company competes. Describe how these two forces impact the company and its industry.

Page limit: 1 page (A4; Font: Times New Roman 12pt)

Make sure to include in-text references or footnotes to your sources of information. Make sure to provide answers in your own words, rather than copying-and-pasting from sources.

If the company operates across multiple industries, answer B only for the main industry it operates in, which will generally be the industry where the most revenue is generated (clearly identify what this is in your answer).

Tips: Follow the approach in Class 1 (my JB Hi-Fi example) and in the set reading by Palepu et al. (link on Learn.UQ). You should consult multiple sources of information, such as the company’s annual reports and industry reports from IBISWorld.

C. Reformulation and Accounting Analysis (Classes 2-5)

You will be given an Excel file with the raw financial statements and notes for the company, which you should use as inputs in the reformulation and valuation. This information was obtained from 2019, 2020 and 2021 annual reports of the company. These annual reports have been shared with you on Learn.UQ under Assessment tab. You should go through the annual reports carefully to better understand the company’s accounting.

Answer the following in your Excel workbook in the indicated worksheet/tab:

C1 Balance Sheet Reformulation (Excel worksheet: BS_R)

•    Reformulate the Balance Sheet (including any relevant information in the notes), following the approach taught in class, for FY183, FY19, FY20 and FY21.

•    For ambiguous accounts, state any assumptions you made with justifications in the Excel file next to the relevant account (in red text). You should consult the annual reports to help you to interpret the accounts.

•    Ensure you provide workings for how you separated operating and financing cash.

•    Ensure you utilise any relevant footnote information.

C2 Income Statement Reformulation (Excel worksheet: IS_R)

•    Reformulate  the  Income  Statement/Statement  of  Comprehensive  Income  (including  any relevant information in the notes), following the approach taught in class, for FY19, FY20 and FY21.

•    For ambiguous accounts, state assumptions you made with justifications in the Excel file next to the relevant account (in red text). You should consult the annual reports to help you to interpret the accounts.

•    Ensure you utilise any relevant footnote information.

C3 Equity Statement Reformulation (Excel worksheet: EQ_R)

•    Reformulate the Equity Statement (including any relevant information in the notes), following the approach taught in class, for FY19, FY20 and FY21.

•    For ambiguous accounts, state assumptions you made with justifications in the Excel file next to the relevant account (in red text). You should consult the annual reports to help you to interpret the accounts.

C4 Cash Flow Statement Reformulation (Excel worksheet: CF_R)

•    Reformulate the  Cash Flow  Statement  (including  any relevant  information  in the notes), following the approach taught in class, for FY19, FY20 and FY21.

•    For ambiguous accounts, state assumptions you made with justifications in the Excel file next to the relevant account (in red text). You should consult the annual reports to help you to interpret the accounts.

C5 Check Financial Statement Relations (Excel worksheet: Relations)

•    Calculate FCF = OI (after tax) – Change in NOA for all three years using inputs from your reformulated Income Statement and Balance Sheet.

•    Calculate FCF = NFE (after tax) – Change in NFO + d or Change in NFA – NFI (after tax) + d for all three years using inputs from your reformulated Income Statement, Balance Sheet and Equity Statement.

•    Calculate Change in CSE for all three years using data from your reformulated Balance Sheet.

•    Calculate Change in CSE = CI – d using data from your reformulated Income Statement and Equity Statement.

•    If your two FCF calculations produce different numbers, double-check that your reformulation is correct. If it is correct, explain why there is a difference between the two FCF numbers.

o Hint: this may be due to dirty surplus gains/losses recognised directly in equity.

•    If your two Change in CSE calculations produce different numbers, double-check that your reformulation is correct. If it is correct, explain why there is a difference between the two FCF numbers.

o Hint: this may be due to dirty surplus gains/losses recognised directly in equity.

Tips: Follow the approach in Classes 2-5 and my JB Hi-Fi example spreadsheet. Use the Penman (2013) textbook as an additional source, but note that we are not doing everything described in the textbook.

Please follow the Excel formatting convention described in lectures and in the document ‘ACCT7106 Excel Formatting Conventions’ . There are marks allocated for correct Excel formatting.

D. Ratio Analysis (Class 6)

Answer the following in your Excel workbook. Please label the Excel worksheet as indicated in each part of the question:

D1 Ratio calculations (Excel worksheet: Ratios)

•    Calculate RNOA and ROCE for 2019, 2020 and 2021 following the approach taught in class. Use averages in the denominators, e.g. average NOA and average CSE.

•    First-level break-down: calculate FLEV, NBC (or RNFA) and SPREAD for 2019, 2020 and

2021. Show that: ROCE = RNOA + FLEV x SPREAD (ifthe firm has NFO) or ROCE = RNOA

– FLEV x SPREAD (if the firm has NFA).

•    Second-level break-down: calculate PM and ATO for 2019, 2020 and 2021. Show that: RNOA = PM x ATO.

•    Break-down RNOA into the different components of OI (after tax) scaled by average NOA: Core OI from Sales (after tax)/AvgNOA, Core Other OI (after tax)/AvgNOA, Unusual OI (after tax)/AvgNOA, Operating OCI (after tax)/AvgNOA.

•    Calculate the year-to-year change in important line items that affect RNOA, such as: sales, gross margin, NOA, etc.

Answer the following in your Word document

D2 RNOA interpretation

•    Explain the operation factors/reasons for changes in RNOA over the year period FY19-FY21. You will need to research what happened to the company over this period to understand the major causes of changes in RNOA (e.g. “the company opened ten new stores, driving an increase in sales (2021 Annual Report)”). Refer to your calculations in D1 to support your answer, e.g. the breakdown of RNOA into PM and ATO.

•   Your explanations must be supported by evidence. Make sure to include in-text references or footnotes to your sources of information. Make sure to provide answer in your own words.

D3 ROCE interpretation

•    Consider the first-level break-down: ROCE = RNOA + FLEV x SPREAD. How does financial leverage affect the company’s ROCE over the three-year period FY19-FY21? Has financial leverage  increased  or  decreased  ROCE  compared  to  RNOA?  Why?  If there  have  been significant changes in financial leverage, discuss why they occurred. Make sure to assess and discuss the effects that changes in accounting standards may have had.

•   Your explanations must be supported by evidence. Make sure to include in-text references or footnotes to your sources of information. Make sure to provide answer in your own words.

You may need to refer to the commentary at the beginning of the company’s annual report, company’s investor presentation, earnings conference call transcripts or newspaper reports to discover the cause of changes in the company’s performance and financial leverage.

Page limit: 2 pages (A4; Font: Times New Roman 12pt)

Tips: Consult Class 6 to help you. You do not have to do the third-level break-down or analyse operating leverage as discussed in Class 6 and Penman (2013) Chapter 12.

All Parts of the Assignment:

•    Marks will be awarded for clear and correct English expression. Please ensure your Word document is carefully proof-read.

•    Marks will be awarded for ensuring your Excel file is correctly formatted and clearly presented. Please follow the Excel conventions described at the end of Lecture 3 and applied throughout the course.

•    Marks  will  be  awarded  for  correct  and  complete  referencing  of sources.  See  below  for referencing requirements.

Referencing and Research Requirements

Some parts of this assignment require students to conduct relevant research about the company. For written answers, evidence of appropriate research and understanding of the company is included in the marks  allocated  to  the  question.  Appropriate  references  help to provide  evidence  that  you have conducted research to support your answers. There are also a small number of marks allocated to proper referencing formats/conventions.

Research

I expect you to conduct research into the company, its industry and its operating environment. To be clear, I do not want you to reference academic research (e.g. journal articles), unless they are highly relevant to the company or the point you are making. This is a practical course, not an academic research course. The emphasis of your research  should be on practical materials,  such as, annual reports, company presentations, company websites, industry reports, newspaper articles, analyst reports etc.

Source of information should be credible. For example, materials produced by a company, by a major industry research provider  (e.g. IBISWorld), by a major financial institution, by a  financial  data platform (e.g. Morningstar or CapitalIQ), or by a mainstream newspaper are credible  sources of information. Examples of low credibility sources include (but are not limited to): Wikipedia, obscure websites not associated with a credible source, articles from obscure news organisations, and essays available on cheating websites such as ‘Coursehero’ or ‘Fern Fort University’ . To be clear, references to low credibility sources will not be taken as evidence of research and will generally result in low grades. In addition, much of the information available from low-credibility sources is also low-quality and so relying on this information will usually result in low grades.

Referencing

Proper referencing is crucial for two reasons:

•     To comply with plagiarism rules.

•     To provide evidence that you have conducted research in answering your questions.

You must follow one of the following two approaches to referencing for the project:

•     Brief in-text references AND a reference list. The in-text reference should be brief but clear, while the reference list should provide sufficient detail for me to locate the source information. Use one consolidated reference list for the whole project, rather than a reference list for each answer.

•     Footnote references with similar detail to a reference list. You may use standard footnote referencing conventions like ‘ibid’ if you like.

In-text references and footnotes should be included in every sentence where you make a claim that requires supporting evidence. Do not simply put one reference at the end of an entire paragraph or page.

Please include the page number or numbers when referencing a lengthy document, such as an annual report, investor presentation or industry analysis document. If you are referring to a note to the financial

statements, you can also mention the note number instead of a page number.

References are essential for direct quotes, for example:

JB Hi-Fi describes its one ofthe competitive advantages as follows: “#1player in the Australian market with the opportunityforfurther consolidation” (2020 Annual Report, p. 19).

References should also be used when you make a claim about a company, its industry or environment that requires some evidence to support it, for example:

JB Hi-Fi has a 33.2% market share in Domestic Appliance Retailing (IBISWorld Industry Report G4221a, p. 33).

Most of JB Hi-Fi’s revenue is generated in Australia (2020 Annual Report, p. 70). The following is an example of what to avoid:

In the future, more and more people will choose to travel by air, or prefer aircraft as the main long-distance transportation.

This is a claim without any evidence to support it. Who says that ‘more and more people will choose to travel by air’? A statement like this needs to be supported by a reference or by a surrounding sentence which provides evidence.

Certain claims are so self-evident or obvious that they don’t need a supporting reference. However, note that these should generally form only a small part of your answer. For example:

Qantas faces virtually no threat of substitutes on most of its international flights, as Australia’s major population centres are geographically distance from most overseas destinations, so that travelling by other means (e.g. by ship) would take a prohibitively long time.

It is obvious the Australia is geographically isolated from most overseas destinations, so no reference would be needed for this claim. But be careful with relying on a statement being obvious. It is generally better to provide a reference.

There is also no need to put a reference if you are citing the lecture slides or the textbook, unless you

are directly quoting.