Accounting policies similar to both companies

The following information is common to both companies and should be considered in conjunction with the
financial statements that follow:

 June 30 Balance day

 Both companies use FIFO for inventory valuation

 Provision for warranties is calculated on the basis of the percentage of last year’s claims relative to
total sales. Warranty claims are included in the Cost of Sales figures.

 All sales are made on credit and have terms of 30 days.

 Both companies offer the same annual leave, sick leave and long service leave entitlements for
permanent staff. In addition both companies pay minimum superannuation as required by law.

 Occupancy expenses relate to items such as water usage, electricity, gas, cleaning etc.

 Both companies are private companies where the main shareholders also manage the company.
They are also paid a wage as managers.

 Other Current Assets include prepaid expenses, and inventory paid for but not yet received, these
are not readily convertible into cash.

 Being small propriety companies they are not required to prepare financial reports by the
Corporations Act and thus are not required to be audited. The reports provided are what been
obtained from the companies’ internal reports and what has been supplied to ASIC.

 Both companies have a debt covenant on their finance requiring that the debt ratio remains under
85% as per the balance sheet. A breach requires full repayment of the debt within 30 days.

 2/3rds of revenue is earned during the 2nd and 3rd quarters of the financial year.

 All figures are in thousands (‘000).

 The par value (face value) of each share is $1 in both companies, with all shares being ordinary
shares.
Company B – Income Statement for the years ending 30 June

Year 2012 2011 2010 2009 2008

‘000 ‘000 ‘000 ‘000 ‘000

Sales Revenue $10,409 $10,017 $9,429 $8,918 $8,470

Cost of sales $4,536 $4,410 4130 3920 3976
Gross profit $5,873 $5,607 $5,299 $4,998 $4,494

other incomes $0 $0 $0 $0 $0

Gross Revenue $5,873 $5,607 $5,299 $4,998 $4,494

Expenses
Administrative $574 $525 $455 $392 $350
Depreciation/Amortisation $70 $129 $178 $220 $250
Sales and Marketing $477 $465 $451 $425 $420
Occupancy expenses $786 $737 $609 $574 $539
Employee Costs $2,556 $2,480 $2,418 $2,325 $2,085

Total expenses $4,463 $4,336 $4,111 $3,936 $3,644

EBIT $1,410 $1,271 $1,188 $1,062 $850

finance costs $680 $701 $708 $732 $750

profit before tax $730 $570 $480 $330 $100

income tax $219 $171 $144 $99 $30

profit after tax $511 $399 $336 $231 $70

Company B – Balance Sheet as at 30 June for the year
Year 2012 2011 2010 2009 2008
‘000 ‘000 ‘000 ‘000 ‘000
Current Assets
Trade and other receivables (net) $1,274 $1,246 $1,148 $1,113 $1,057
Inventories $833 $889 $917 $1,057 $1,106
Other assets $182 $168 $154 $147 $133
Total Current Assets $2,289 $2,303 $2,219 $2,317 $2,296

Non-Current Assets
Property $4,865 $4,765 $4,675 $4,625 $4,450
Plant and Equipment (net) $1,403 $1,473 $1,602 $1,780 $2,000
Intangible Assets $400 $400 $400 $400 $400
Total Non-Current Assets $6,668 $6,638 $6,677 $6,805 $6,850
Total Assets $8,957 $8,941 $8,896 $9,122 $9,146

Current Liabilities
Trade and other payables $1,156 $1,154 $1,124 $1,154 $1,046
Interest-bearing loans and borrowings $507 $423 $417 $360 $318
Income Tax Payable $64 $59 $47 $42 $26
Provisions $397 $376 $355 $334 $285
Total Current Liabilities $2,124 $2,012 $1,943 $1,890 $1,675

Non-Current Liabilities
Interest-bearing loans and borrowings $4,350 $4,574 $4,609 $4,777 $5,250
Provisions $1,130 $950 $801 $701 $574
Total Non-Current Liabilities $5,480 $5,524 $5,410 $5,478 $5,824
Total Liabilities $7,604 $7,536 $7,353 $7,368 $7,499

Net Assets $1,353 $1,405 $1,543 $1,754 $1,647

Equity
Contributed equity $350 $350 $350 $350 $350
Reserves $735 $665 $575 $525 $350
Retained profits $268 $390 $618 $879 $947
Total Equity $1,353 $1,405 $1,543 $1,754 $1,647
Company B - Key points from the notes to the financial statements.

 Company B advertises itself as the most price-competitive business in Melbourne and will undercut
any genuine quote from a competitor.

 To help keep costs down it imports most of its supplies from Asia, only purchasing locally when
cheaper to do so.

 Only management and office staff are employed on a permanent basis. All other staff are employed
casually to increase the flexibility of their workforce so that they only need to pay employees when
work is available.

 Most of the provisions (90%) are for warranties (products sold come with a 5 year warranty) with the
remainder being employee benefits for the permanent staff.

 Administrative expenses comprise 60% office expenses with the remainder being for doubtful debts
and debt collection expenses.

 Company B owns its own land and buildings; these are valued at fair value and are revalued every year
by a professional valuer on balance day. The reserve is an Asset Revaluation Reserve.

 The last major asset purchase was their factory equipment purchased 7 years ago. These assets have
an estimated life of 10 years and are being depreciated using the reducing balance method.

 Company B operates via an overdraft, paying all suppliers within a discount period if offered. The
overdraft is included in current interest-bearing loans and borrowings, with a note as following:

2012 2011 2010 2009 2008

‘000 ‘000 ‘000 ‘000 ‘000

Overdraft $207 $169 $190 $192 $185

Current amount of Non-Current interest bearing $300 $254 $227 $168 $133
Liabilities

Total $507 $423 $417 $360 $318

 The company directors (thus managers) have declared the reports being true and fair, but as they are
not required to be independently audited have decided not to do so in interest of cost savings.

 The only related party transaction is that the professional valuer used is the sister-in-law of the
managing director, her husband is the CFO, and are the two largest shareholders.

 The shareholders are asking for a total of $1.47 million for all shares in Company B as of balance day.
Year 2012 2011 2010 2009 2008
Sales Revenue 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of sales 43.58% 44.03% 43.80% 43.96% 46.94%
Gross profit 56.42% 55.97% 56.20% 56.04% 53.06%

other incomes 0.00% 0.00% 0.00% 0.00% 0.00%

Gross Revenue 56.42% 55.97% 56.20% 56.04% 53.06%

Expenses
Administrative 5.51% 5.24% 4.83% 4.40% 4.13%
Depreciation 0.67% 1.29% 1.89% 2.47% 2.95%
Sales and Marketing 4.58% 4.64% 4.78% 4.77% 4.96%
Occupancy expenses 7.55% 7.36% 6.46% 6.44% 6.36%
Wages 24.56% 24.76% 25.64% 26.07% 24.62%

Total expenses 42.88% 43.29% 43.60% 44.14% 43.02%

EBIT 13.55% 12.69% 12.60% 11.91% 10.04%

finance costs 6.53% 7.00% 7.51% 8.21% 8.85%

profit before tax 7.01% 5.69% 5.09% 3.70% 1.18%

income tax 2.10% 1.71% 1.53% 1.11% 0.35%

profit after tax 4.91% 3.98% 3.56% 2.59% 0.83%

Dividends
Opening Retained Profit $390 $618 $879 $947
Add Profit $511 $399 $336 $231
Reserve transfers $0 $0 $0 $0
Available $901 $1,017 $1,215 $1,178
less dividends $633 $627 $597 $299
Closing retained profit $268 $390 $618 $879
Year 2012 2011 2010 2009 2008
Sales Revenue 122.89% 118.26% 111.32% 105.29% 100.00%
Cost of sales 114.08% 110.92% 103.87% 98.59% 100.00%
Gross profit 130.69% 124.77% 117.91% 111.21% 100.00%

other incomes 100.00% 100.00% 100.00% 100.00% 100.00%

Gross Revenue 130.69% 124.77% 117.91% 111.21% 100.00%

Expenses
Administrative 164.00% 150.00% 130.00% 112.00% 100.00%
Depreciation 28.00% 51.60% 71.20% 88.00% 100.00%
Sales and Marketing 113.57% 110.71% 107.38% 101.19% 100.00%
Occupancy expenses 145.83% 136.73% 112.99% 106.49% 100.00%
Wages 122.59% 118.94% 115.97% 111.51% 100.00%

Total expenses 122.48% 118.99% 112.82% 108.01% 100.00%

EBIT 165.88% 149.53% 139.76% 124.94% 100.00%

finance costs 90.67% 93.47% 94.40% 97.60% 100.00%

profit before tax 730.00% 570.00% 480.00% 330.00% 100.00%

income tax 730.00% 570.00% 480.00% 330.00% 100.00%

profit after tax 730.00% 570.00% 480.00% 330.00% 100.00%

Year 2012 2011 2010 2009 2008
Current Assets
Cash and cash equivalents 0.00% 0.00% 0.00% 0.00% 0.00%
Trade and other receivables 14.22% 13.94% 12.90% 12.20% 11.56%
Inventories 9.30% 9.94% 10.31% 11.59% 12.09%
Other assets 2.03% 1.88% 1.73% 1.61% 1.45%
Total Current Assets 25.56% 25.76% 24.94% 25.40% 25.10%

Non-Current Assets
Property, Plant and Equipment (net) 54.32% 53.29% 52.55% 50.70% 48.66%
Intangible Assets 4.47% 4.47% 4.50% 4.39% 4.37%

Total Non-Current Assets 74.44% 74.24% 75.06% 74.60% 74.90%

Total Assets 100.00% 100.00% 100.00% 100.00% 100.00%

Current Liabilities
Trade and other payables 12.91% 12.91% 12.63% 12.65% 11.44%
Interest-bearing loans and borrowings 5.66% 4.73% 4.69% 3.95% 3.48%
Income Tax Payable 0.71% 0.66% 0.53% 0.46% 0.29%
Provisions 4.43% 4.21% 3.99% 3.66% 3.12%
Total Current Liabilities 23.71% 22.50% 21.84% 20.72% 18.32%

Non-Current Liabilities
Interest-bearing loans and borrowings 48.57% 51.16% 51.81% 52.37% 57.40%
Provisions 12.62% 10.63% 9.00% 7.68% 6.28%
Total Non-Current Liabilities 61.18% 61.78% 60.81% 60.05% 63.68%
Total Liabilities 84.89% 84.29% 82.66% 80.77% 81.99%

Net Assets 15.11% 15.71% 17.34% 19.23% 18.01%

Equity
Contributed equity 3.91% 3.91% 3.93% 3.84% 3.83%
Reserves 8.21% 7.44% 6.46% 5.76% 3.83%
Retained profits 2.99% 4.36% 6.94% 9.64% 10.35%
Total Equity 15.11% 15.71% 17.34% 19.23% 18.01%
Year 2012 2011 2010 2009 2008
Current Assets
Cash and cash equivalents 0.00% 0.00% 0.00% 0.00% 0.00%
Trade and other receivables 120.53% 117.88% 108.61% 105.30% 100.00%
Inventories 75.32% 80.38% 82.91% 95.57% 100.00%
Other assets 136.84% 126.32% 115.79% 110.53% 100.00%
Total Current Assets 99.70% 100.30% 96.65% 100.91% 100.00%

Non-Current Assets
Property, Plant and Equipment (net) 109.33% 107.08% 105.06% 103.93% 100.00%
Intangible Assets 100.00% 100.00% 100.00% 100.00% 100.00%

Total Non-Current0 Assets 97.34% 96.91% 97.47% 99.34% 100.00%

Total Assets 97.93% 97.76% 97.27% 99.74% 100.00%

Current Liabilities
Trade and other payables 110.52% 110.33% 107.46% 110.33% 100.00%
Interest-bearing loans and borrowings 159.43% 133.02% 131.13% 113.21% 100.00%
Income Tax Payable 243.81% 224.76% 180.00% 160.00% 100.00%
Provisions 139.30% 131.93% 124.56% 117.19% 100.00%
Other Financial liabilities 100.00% 100.00% 100.00% 100.00% 100.00%
Total Current Liabilities 126.79% 120.10% 116.00% 112.82% 100.00%

Non-Current Liabilities
Interest-bearing loans and borrowings 82.86% 87.12% 87.79% 90.99% 100.00%
Provisions 196.86% 165.51% 139.55% 122.13% 100.00%
Total Non-Current Liabilities 94.09% 94.85% 92.89% 94.06% 100.00%
Total Liabilities 101.40% 100.49% 98.05% 98.25% 100.00%

Net Assets 82.16% 85.32% 93.68% 106.51% 100.00%

Equity
Contributed equity 100.00% 100.00% 100.00% 100.00% 100.00%
Reserves 210.00% 190.00% 164.29% 150.00% 100.00%
Retained profits 28.31% 41.19% 65.25% 92.84% 100.00%
Total Equity 82.16% 85.32% 93.68% 106.51% 100.00%
 2012 2011 2010 2009
ROA 15.76% 14.25% 13.19% 11.63%
ROE 37.06% 27.07% 20.38% 13.59%
GPM 56.42% 55.97% 56.20% 56.04%
PM(EBIT) 13.55% 12.69% 12.60% 11.91%
PM(NPAT) (not needed) 7.01% 5.69% 5.09% 3.70%

Current Ratio 1.08 1.14 1.14 1.23 :1

Quick Ratio 0.60 0.62 0.59 0.59 :1

Acc Rec Turn (not needed) 8.26 8.37 8.34 8.22 times
Av collection period 44.18 43.62 43.76 44.41 days
Inventory Turnover (not needed) 5.27 4.88 4.18 3.62 times
Av time to sell 69.28 74.74 87.23 100.70 days
Asset Turnover 1.16 1.12 1.05 0.98 times

Debt 84.89% 84.29% 82.66% 80.77%

Equity 15.11% 15.71% 17.34% 19.23%
Debt to Equity 5.62 5.36 4.77 4.20
Interest Coverage 2.07 1.81 1.68 1.45 times

Net tangible asset backing per share $2.72 $2.87 $3.27 $3.87
Earnings per share $1.46 $1.14 $0.96 $0.66
Dividends per share $1.81 $1.79 $1.71 $0.85
Dividend pay-out ratio 124% 157% 178% 129%
Price earnings ratio 2.88 share price unknown
Share Price $4.20 share price unknown