Accounting Project Question 4,8,12

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$’000
4.
(a) How much do customers owe the HTL Group as at 2009 year-end?
$92,439
How much does HTL Group expect to collect?
$86,651
What accounts for the difference between the two numbers?
$5788
(b) What is the total amount of trade receivables-related impairment
expense recorded by the Group for the 2009 year?
Allowance for Doubtful Accounts @ Dec 31, 2008 $7,297
Write-offs $3,690
Unadjusted balance @ Dec 31, 2009 $3,607
Adjusted balance @ Dec 31, 2009 $5,788
Trade receivables-related impairment expense=$5,788-$3,607=$2,181
Allowance for Doubtful Accounts
2009 Write-offs $3,690 Dec
31,2008 $7,297
Unadjusted Balance @
Dec 31,2009 3,607
2009
Expense 2,181
Dec 31,2009 Adjusted
Balance 5,788

(c) Compute the average collection period for the Group for 2008 and
2009. Comment on the quality of the Group’s trade receivables over the
two years.
Calculate for Days’ Sales in Receivables( Receivable Collection
Period)
I. Receivable Turnover=Sales/Average Receivables
II. Days’ Sales in Receivables=365/Receivables Turnover
2008:
Average Net Receivables=$58,878
Net Sales=$204,026
Receivable Turnover=$204,026/$58,878=3.47 times
Receivable Collection Period=365/3.47=105.19 days
2009:
Average Net Receivables=$86,651
Net Sales=$223,729
Receivable Turnover=$223,729/$86,651=2.58 times
Receivable Collection Period=365/2.58=141.47 days
Comment:
In the year 2009, it takes longer for the Group to collect its average
level of receivables than in the year 2008, which means that less cash
is available to pay bills and expand.




8.
(a) Besides the stated liabilities on the HTL Group’s 2009 balance
sheet, state and quantify three possible future cash outflows that the
Group had as at the balance sheet date but which were not reported as
liabilities.
(b) Explain generally and concisely why the items identified in (a)
above were not reported as liabilities.

General reason:
A contingent liability is a potential liability that arises from past
events and depends on a future event for confirmation of the
liability. There is no need to report a contingent liability in the
financial statements if the probability of a loss is considered
remote.
I. Deferred income tax: $2,251,000
At the balance sheet date, the Group has estimated unrecognized tax
losses of approximately $23,344,000, which can be carried forward and
used to offset against future taxable income subject to meeting
certain statutory requirements by those subsidiaries in their
respective countries of incorporation. The Group has determined that
the undistributed earnings of these subsidiaries will not be
distributed in the foreseeable future.
II.Dividends to shareholders:$8,309
Dividends to the shareholders are recognized when the dividends are
approved for payment.
The directors have recommended a final and special tax exempt dividend
for the financial year ended 31 December 2009 of 2 cents per ordinary
share each totaling 4 cents per ordinary share to be approved at the
AGM to be held on 29 April 2010, which will be accounted for in the
shareholders’ equity as am approportion of retained profits in the
financial year ending 31 December 2010.
III.Credit risk: $9,776
The Group’s trade receivables that are unsecured and past due but not
impaired is totaling $9,776. They are substantially from companies
with a good collection track record with the Group. Fixed deposits
that are neither past due nor impaired are mainly deposits with
reputable banks with high credit-ratings and no history of default.

(c) in general, why is it important to disclose items identified in
(a) above in the financial statements even though they are not
recognized?
If the future payment is probable and can be reliably estimated or
reasonably possible,
There is contingent liability, the nature of which should be disclosed
in the notes to financial statements together with the financial
impact. In this way, the creditors, potential creditors, investors,
shareholders and other decision-makers are provided with the actual
financial position of the Group, so that they are able to make correct
decisions. It is also important for the Group to provide reliable and
relevant accounting statistics according to the accounting principles.

12.
Using the income statement, notes thereto and other relevant
information, evaluate the financial performance (profitability) of the
HTL Group for 2008 and 2009. Support your evaluation with relevant
ratios and other relevant analysis. Show your computations.
TIE(Times-interest-earned) ratio=Operating income/Interest expense
The ratio measures the number of times that operating income can cover
interest expense. Therefore, the TIE ratio is also called the interest
coverage ratio. A high TIE ratio indicates ease in paying interest
expense; a low value suggests difficulty.
$’000
TIE for 2008:
Interest expense: $5,503
Income from operations: $204,026+$5,217=$209,243
TIE ratio=$209,243/$5,503=38.02times
TIE for 2009:
Interest expense: $3,820
Income from operations: $223,729+$20,150=$243,879
TIE ratio=$243,879/$3,820=63.84times
The Group is at a stronger financial position in 2009 than in 2008. It
is much easier for the Group to pay interest expense.

Supporting:
Current ratio=Total current assets/Total current liabilities
Current ratio measures the company’s ability to pay current
liabilities with current assets. A high current ratio means that the
business has plenty of current assets to pay current liabilities.
2008 current ratio=$343,330/$224,631=1.53
2009 current ratio=$391,529/$209,349=1.87
The current ratio for 2009 is higher than that of the year 2008, so
the Group’s ability to pay current liabilities with current assets is
stronger in 2009.

Debt ratio=Total liabilities/Total assets
Debt ratio indicates the proportion of a company’s assets that is
financed with debts.
Debt ratio for 2008=$233,379/$447,103=0.52
Debt ratio for 2009=$243,604/$486,570=0.50
The debt ratio for financial year 2009 is lower than that of 2008
which indicates that the Group is at a stronger financial position.
What else, traditionally, a debt ratio of 0.5 is considered ideal.






Calculate for Days’ Sales in Receivables( Receivable Collection
Period)
Receivable Turnover=Sales/Average Receivables
Days’ Sales in Receivables=365/Receivables Turnover
2008:
Average Net Receivables=$58,878
Net Sales=$204,026
Receivable Turnover=$204,026/$58,878=3.47 times
Receivable Collection Period=365/3.47=105.19 days
2009:
Average Net Receivables=$86,651
Net Sales=$223,729
Receivable Turnover=$223,729/$86,651=2.58 times
Receivable Collection Period=365/2.58=141.47 days
Although the receivable collection period for the year 2009 is higher
than that of the year 2008, but taking the impact of the economic
meltdown,it is acceptable that the receivable collection period is
longer in 2009.