BVFA FINAL Essay - 2582 Words

22743-Business Valuation and Financial Analysis

Qinzhu Zhou 11519117
Lingling Zhou 11526795
Yaqiong Yang 11543345
Cheng Peng 11567649
Jiren Peng 11276363

Contents
Executive summary 3
1. Accounting analysis 3
1.1 Accounting flexibility and accounting strategy 3
1.2 Quality of disclosure 4
1.3 Potential red flags 4
1.4 Undo accounting distortions 4
2. Financial Analysis 4
2.1 Operating Ratio Analysis 4
2.2 Financial Ratio Analysis 5
3. Cash flow analysis 5
3.1 Operating cash flow 5
3.2 Investing cash flow 6
3.3 Financing cash flow 6
4. Sustainability 6
Appendix 7
Reference 12

Executive summary
To evaluate the accounting quality, we focus on 4 key accounting policies of SKC, including evaluating flexibility and accounting strategy. The disclosure of their performance and strategies is adequate. Although a large amount of written-off is questionable, there is no distortion in reported numbers. Financial analysis consists of operating ratio analysis and financial ratio analysis. The operating ratio of SKC is steady as a whole and indicates an increased profitability. However, some problems of SKC’s capital structure and its playability are shown through the financial ratio analysis. Cash flow analysis is significant to provide the information and the understanding of a company’s fundamental business performance. The discussion about cash flow analysis mainly focuses on three aspects, which are firm’s operating, investing and financing cash flow.
1. Accounting analysis
1.1 Accounting flexibility and accounting strategy
Key Accounting Policy
Flexibility
Evaluate accounting strategy
Revenue

SKC’s sources of revenue is from operating activities, interest, dividend and loyalty programme (revenue recognised when customers redeem loyalty). Gaming revenues represent the net game win to the casino from gaming activities.
Medium – loyalty programme would give management opportunities to manipulate numbers.
SKC does not provide specific rules for revenue recognition, especially for loyalty point redemption.
Trade receivables
SKC recognises trade receivables initially at fair value and subsequently measured at amortised cost, less provision for doubtful debts. Debts are written off when it is proved to be uncollectable.
Medium – provisions is based on the estimation of doubtful debt.
Writing off bad debt has a direct effect on the profit of the company. Managers may have incentives to manipulate the amount of provisions for doubt debt.
Intangible assets
Goodwill, casino licenses and acquired software are main intangible assets for SKC. Goodwill and indefinite casino licenses are tested for impairment annually. Finite casino licenses and acquired computer software licenses are amortised over their useful life.
High –recoverable amount of assets is based on value in use calculation, which involves estimates and assumptions.
The choice of this accounting strategy is similar to the norm in the industry. They also don't have any significant change in their estimates and assumptions in last 5 years.
Property, plant and equipment
As SKC operate casino resorts and hotel business, PPE account for around 65% of total assts. PPE are stated at historical cost less depreciation and tested for impairment. PPE is depreciated using straight line method, net of residual values, over estimated useful lives.
High – managers have flexibility to choose the method of depreciation and evaluate the residual values and useful lives of assets.
With high flexibility, managers can control the effective rate of depreciation to some extent. For example, SKC adjusted the useful life of building fit-out in FY2012. Prior to 2012, the useful life of building fit-out was 10 years, while it was changed to 5-75 years in FY2012 without explanation (Appendix 1). In comparison, Crown Limited use 45-75 years for freehold building depreciation, and Echo Entertainment Group use 10-95 years.
Foreign currency transactions
New Zealand dollars are functional and

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