The Lisbon MBA

Financial Accounting
Final Exam
2019 – March 13th
Ricardo F Reis

This test is meant to be solved in 85 to 120 mins.

You should use the next pages to answer the test, so make sure you add
your name to every one of these pages.

The space provided is indicative of the expected length of your answer and
the weight on the exam grade.

1
 PART A (80 points)
1. (20 points)

Basically, we want you to tackle why PSA moved from a negative .5% net profitability to a positive 4.5%
or a 3.5bn€ increase in net income!

ANALYSIS OF DIFFERENCES BETWEEN INCOME STATEMENT IN 2014 and 2018

Effect – Rationale – further comment on industry
Significant increase in sales (either volume or price or both!) – new models, better commercial
strategies
Gross margin per sales increased (3.4pp increase effect) – efficiency in production, could be higher
prices of cars! – still long way from industry average!!!
Contention on SG&A (2.2pp increase effect) – reduction in other admin costs, use of sales and
marketing efficiently, since cut on this was not followed by lost sales
Cut in R&D (1.4pp increase effect) – extremely efficient R&D, could be savings induced by acquisitions
(no need to do internal R&D)
(BAD NEWS) other operating expenses, but only responsible for 1.4pp damage
Overall, operation margin increase by 4.3pp – still far from industry average
Significant drop in interest expense not only relative (0.9pp), but specially in absolute terms (more than
300mn€ drop) – restructuring of debt, lowering interest significantly
Before tax profitability increased by 5.2pp to 5.3%– sum of all previously mentioned successes – still
away from 8% industry average
Maintain magnitude of income taxes s (around 600mn€ despite increase in EBT), with corresponding
relative drop as percentage of sales – effective tax rate halved! More rational tax alignment between
reporting and tax accounting.

Overall, significant increase in profitability indicates a rational and efficient management throughout all
areas of the income statement.

You are expected to provide some of these hints and basically look at the “different pieces of the pie of
sales” in the two different years.
Assessment and grading is generally subjective, but mastering the profitability ratio analysis (“pie chart
approach” – no need to draw) is essential to obtain 2/3 of the credits.
You can provide general impressions on profitability and even top the analysis with some additional
profitability ratios – ROE-ROA, but the DuPont analysis is asked for next.

2. (10 points)
We really want a simple statement that in 2014 the leverage was huge and multiplying a negative
number and in 2018 the leverage dropped significantly and multiplies a positive number.
The decrease in leverage is driven by the fact that the company has been accumulating earnings ever
since.

3. (5 points)
It is an income statement by function where depreciation is reported across the various functions, like
R&D and Selling.
Taking depreciation as an example, the depreciation of manufacturing equipment is reported under
Cost of Goods Sold whilst the depreciation of tangible assets in the headquarters’ main office is
reported as Administrative costs.

2
 4. (5 points)
Both common stock and treasury stock show the same amounts for years 2017 and 2018, showing that
the company has neither issued new shares nor acquired own shares.

5. (15 points)
Cash cycle 2014 = 84 days = A/R 108 days + Inventory 43 days – A/P 67 days
Cash cycle 2018 = -20 days = A/R 19 days + Inventory 44 days – A/P 83 days

Major improvement from the reduction of days of outstanding A/R (108 to 19 days) along with an
increase of days of outstanding A/P (67 to 83 days).

The company may have outsourced the collection of receivables as of 2015 as A/R decrease massively
from 2014 (25MM€) to 2015 (7MM€).

Also, the company might have taken advantage of the fact that they increased their business base and
another relevant brand to increase pressure on suppliers for better terms.

6. (15 points)
2017 vs 2016:
• Total assets +12.8MM€ +28%
• Intangibles +2.7MM€ +50%
• Inventories +2.4MM€ +88%
• PP&E +1.9MM€ +17%
• Goodwill +1.8MM€ +119%
• A/R +1.6MM€ +37%

• Total liabilities +10.7MM€ +35%

• Other payables +6.4MM€ +315%
• A/P +4.0MM€ +43%

7. (10 points)
Assets = Liabilities +SE
Inventory -1,521 M€ Net income -1,271
Cash (or other asset) +304 M€ (= 80% x 1,521M€)
(due to tax impact)

3
 PART A

The following information is taken and adapted from Thomson Reuters about French carmaker
Peugeot, SA (PSA) for the last 5 years.
Peugeot SA | Balance Sheet | 2018 2017 2016 2015 2014 2013
Date 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec
Assets (€ Millions)
Cash & Equivalents 15 426 11 894 12 098 10 896 9 959 7 779
Short Term Investments 129 1 548 213 562 562 970
Accounts Receivable - Trade, Gross 5 934 n.a 4 476 3 605 6 981 24 974
Provision for Doubtful Accounts (368) n.a (185) (172) (175) (143)
Total Receivables, Net 5 566 5 880 4 291 3 433 6 806 24 831
Inventories - Finished Goods 4 589 5 183 2 762 2 595 2 784 3 840
Inventories - Work In Progress 995 1 081 918 749 766 987
Inventories - Raw Materials 1 126 1 119 667 652 644 761
Inventories - Other 204 0 196 167 167 192
Prepaid Expenses 0 0 0 298 267 213
Other Current Assets, Total 111 0 43 72 76 51
Total Current Assets 28 146 26 705 21 188 19 424 22 031 39 624
Property/Plant/Equipment, Gross 46 247 n.a. 43 263 42 661 42 957 43 308
Accumulated Depreciation (32 111) n.a. (31 970) (31 767) (32 126) (32 055)
Property/Plant/Equipment, Net 14 136 13 218 11 293 10 894 10 831 11 253
Goodwill, Net 3 608 3 321 1 514 1 382 1 506 1 561
Intangibles, Net 9 201 8 176 5 454 4 769 4 348 4 028
Long Term Investments 4 306 3 982 3 685 3 346 2 389 2 069
Note Receivable - Long Term 259 0 285 0 0 0
Other Long-Term Assets, Total 2 296 2 513 1 734 9 295 20 107 1 229
Total Assets 61 952 57 915 45 153 49 110 61 212 59 764
Liabilities (€ Millions)
Accounts Payable 13 551 13 362 9 352 8 849 8 164 8 096
Accrued Expenses 1 273 0 1 019 997 983 961
Short Term Debt/Current Portion of Debt 2 496 2 936 2 069 3 564 6 777 23 377
Dividends Payable 0 0 0 0 0 0
Customer Advances 3 783 0 2 369 544 558 576
Income Taxes Payable 525 234 172 164 164 145
Other Payables 3 237 8 342 2 012 3 283 2 597 3 017
Other Current Liabilities 5 137 4 784 3 404 5 557 11 660 2 770
Total Current Liabilities 30 002 29 658 20 397 22 958 30 903 38 942
Total Long-Term Debt 5 255 4 777 4 523 4 265 6 461 7 948
Other Long-Term Liabilities, Total 7 101 6 774 5 615 9 668 13 430 5 037
Total Liabilities 42 358 41 209 30 535 36 891 50 794 51 927
Shareholders Equity (€ Millions)
Common Stock 905 905 860 808 783 355
Retained Earnings 16 795 14 357 12 108 9 985 8 784 6 823
Treasury Stock (270) (270) (238) (238) (296) (351)
Accumulated Comprehensive Income (345) (428) (73) 0 0 0
Total Shareholders' Equity 17 085 14 564 12 657 10 555 9 271 6 827
Minority Interest 2 509 2 142 1 961 1 664 1 147 1 010
Total Equity 19 594 16 706 14 618 12 219 10 418 7 837
Total Liabilities & Shareholders' Equity 61 952 57 915 45 153 49 110 61 212 59 764

Peugeot SA | Income Statement | 2018 2017 2016 2015 2014

(€ Millions) Period End Date 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec
Total Revenue 74 027 62 256 54 030 54 676 51 592
Cost of Revenue (59 233) (49 872) (43 709) (44 509) (43 032)
Gross Profit 14 794 12 384 10 321 10 167 8 560
Amortization of Intangibles (667) (936) (821) 0 0
Impairment-Assets Held for Use (524) (132) (133) (7) (33)
Research & Development (1 815) (1 396) (1 094) (1 858) (2 025)
Selling/General/Admin. Expenses, Total (6 623) (6 074) (5 171) (5 576) (5 738)
Other Operating Expenses, Total (1 121) (726) (324) (166) (77)
Gain (Loss) on Sale of Assets - Operating 312 164 101 47 119
Operating Income 4 356 3 284 2 879 2 607 806
Interest Expense (446) (238) (203) (585) (755)
Earnings Before Taxes 3 910 3 046 2 676 2 022 51
Income Taxes (615) (699) (517) (706) (306)
Net Income 3 295 2 347 2 159 1 316 (255)
Attributable to
Minority Interest 468 423 419 303 151
Shareholders 2 827 1 924 1 740 1 013 (406)

4
The following ratios also taken and adapted from Thomson Reuters help the analysis of the financial
situation of Peugeot.
Balance Sheet in % of Total Assets 2018 2017 2016 2015 2014
Assets (% of Total Assets)
Cash & Equiv. and Marketable Sec. 25.1% 23.2% 27.3% 23.3% 17.2%
Total Receivables, Net 9.0% 10.2% 9.5% 7.0% 11.1%
Total Inventories 11.2% 12.7% 10.1% 8.5% 7.1%
Total Other Current Assets 0.2% 0.0% 0.1% 0.8% 0.6%
Total Current Assets 45.4% 46.1% 46.9% 39.6% 36.0%
Property/Plant/Equipment, Total - Net 22.8% 22.8% 25.0% 22.2% 17.7%
Goodwill, Net 5.8% 5.7% 3.4% 2.8% 2.5%
Intangibles, Net 14.9% 14.1% 12.1% 9.7% 7.1%
Long Term Investments 7.0% 6.9% 8.2% 6.8% 3.9%
Total Other Non Current Assets 4.1% 4.3% 4.5% 18.9% 32.8%
Total Assets 100.0% 100.0% 100.0% 100.0% 100.0%
Liabilities (% of Total Assets)
Accounts Payable 21.9% 23.1% 20.7% 18.0% 13.3%
Other Operational Current Liab. 22.5% 23.1% 19.9% 21.5% 26.1%
Short Term Debt/Current Portion of Debt 4.0% 5.1% 4.6% 7.3% 11.1%
Total Current Liabilities 48.4% 51.2% 45.2% 46.7% 50.5%
Total Long Term Debt 8.5% 8.2% 10.0% 8.7% 10.6%
Other Long Term Liabilities, Total 11.5% 11.7% 12.4% 19.7% 21.9%
Total Liabilities 68.4% 71.2% 67.6% 75.1% 83.0%
Shareholders Equity (% of Total Assets)
Common Stock 1.5% 1.6% 1.9% 1.6% 1.3%
Retained Earnings 27.1% 24.8% 26.8% 20.3% 14.4%
Treasury Stock and Accumulated OCI -1.0% -1.2% -0.7% -0.5% -0.5%
Total Shareholders' Equity 27.6% 25.1% 28.0% 21.5% 15.1%
Minority Interest 4.0% 3.7% 4.3% 3.4% 1.9%
Total Equity 31.6% 28.8% 32.4% 24.9% 17.0%

Income Statement (in % of Total Revenues) 2018 2017 2016 2015 2014
Total Revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Revenue -80.0% -80.1% -80.9% -81.4% -83.4%
Gross Profit 20.0% 19.9% 19.1% 18.6% 16.6%
Amortization of Intangibles -0.9% -1.5% -1.5% 0.0% 0.0%
Impairment-Assets Held for Use -0.7% -0.2% -0.2% 0.0% -0.1%
Research & Development -2.5% -2.2% -2.0% -3.4% -3.9%
Selling/General/Admin. Expenses, Total -8.9% -9.8% -9.6% -10.2% -11.1%
Other Operating Expenses, Total -1.5% -1.2% -0.6% -0.3% -0.1%
Gain (Loss) on Sale of Assets - Operating 0.4% 0.3% 0.2% 0.1% 0.2%
Operating Income 5.9% 5.3% 5.3% 4.8% 1.6%
Interest Expense -0.6% -0.4% -0.4% -1.1% -1.5%
Net Income Before Taxes 5.3% 4.9% 5.0% 3.7% 0.1%
Income Taxes -0.8% -1.1% -1.0% -1.3% -0.6%
Net Income 4.5% 3.8% 4.0% 2.4% -0.5%

Additional RATIOS (adapted) Industry 2018 2017 2016 2015 2014

Profitability
Gross Margin 28.8% 20.0% 19.9% 19.1% 18.6% 16.6%
EBITDA Margin 14.7% 11.9% 10.8% 10.9% 9.8% 6.4%
Operating Margin 8.6% 5.9% 5.3% 5.3% 4.8% 1.6%
Pretax Margin 8.0% 5.3% 4.9% 5.0% 3.7% 0.1%
Effective Tax Rate 16.7% 15.7% 22.9% 19.3% 34.9% n.a.
Net Margin 5.9% 4.5% 3.8% 4.0% 2.4% (0.5%)
DuPont/Earning Power
Asset Turnover 0.76 1.24 1.21 1.15 0.99 0.85
x Pretax Margin 0.08 5.3% 4.9% 5.0% 3.7% 0.1%
x Leverage (Assets/Equity) 3.64 3.30 3.29 3.51 4.87 6.63
x Tax Complement 0.84 0.84 0.77 0.81 0.65 n.a.
ROE 18.6% 18.2% 15.0% 16.1% 11.6% (2.8%)
x Earnings Retention 0.83 1.00 1.00 0.73 1.00 n.a.
Reinvestment Rate 12.3% 18.2% 15.0% 11.7% 11.6% n.a.
Liquidity
Quick Ratio 0.85 0.71 0.65 0.82 0.66 0.57
Current Ratio 1.02 0.94 0.90 1.04 0.85 0.71
Times Interest Earned 12.3 9.77 13.80 14.18 4.46 1.07
Cash Cycle (Days) 47.8 (20.0) (16.6) (22.2) (2.0) 84.0
Leverage
Assets/Equity 3.64 3.16 3.47 3.09 4.02 5.88
Debt/Equity 0.75 0.40 0.46 0.45 0.64 1.27
Operating
Avg. A/R Days 42.3 18.9 22.9 16.3 30.5 107.9
Avg. Inventory Days 85.7 44.0 43.6 36.4 35.0 43.0
Avg. A/P Days 80.2 82.9 83.1 74.8 67.4 66.9
Bad Debt Allowance (% of A/R) 4.1% 6.2% n.a. 4.1% 4.8% 2.5%

5
 Peugeot (PSA) underwent a radical transformation. Five years ago, it was struggling in a
desperate financial situation and today it is a profitable company.

1. Looking ONLY at the income statement and related ratios describe this transformation and provide
some ideas on what may have happened. (HINT: compare 2014 to 2018, don’t waste too much time
on intermediate years). (15-20 mins)

2. Still on the remarkable evolution of Peugeot (PSA) from 2014-2018, explain in the DuPont analysis
the evolution of Leverage, and its impact on the ROE. (HINT: for 2014 use the simplified version of
the DuPont analysis, which does not disaggregate the net margin into pretax margin x tax
complement) (5-10 mins)

3. Why is there no identifiable depreciation expense in the income statement? (5 mins)

4. Common Stock increases every year until 2017, staying constant in 2018. Treasury Stock also stays
constant in 2018. What can you infer from this fact concerning the number of shares outstanding in
2018 and 2017? Briefly explain. (5 mins)

5. Once more on the outstanding progress of PSA, check the evolution of the cash cycle throughout
the five years and describe this evolution on its particular components. Provide plausible
management and strategic decisions that may have fueled this improvement, and briefly describe
consequences for the Company of this improvement. (10-15 mins)

6. In 2017, PSA acquired Opel from GM. Opel was basically bankrupt, with massive accounts payable
and debt. Look at the 2017 balance sheet and identify evidence of this trade in the different accounts.
(10-15 mins)

7. If PSA was using LIFO in their inventory valuation since the beginning of the company, the following
note would be found explaining the inventories level of 2018:

The aggregate replacement (FIFO) cost of inventories was estimated to exceed their
LIFO carrying values by €1,521 million and €1,624 million at December 31, 2018, and 2017,
respectively.

Explain how the A = L + E equation at the end of 2018 would be different, if LIFO was used. (Assume
the company every year paid a 20% tax rate on its income since the beginning). (5-10 mins)

6
 Part B (30 mins)

1. In the PSA financial statements, you find the term “Accrued Expenses” in the Balance sheets. This refers to
which of the following situations:
a. Expenses incurred, not yet recognized in the I/S, and not yet paid in cash.
b. Expenses incurred, recognized in the I/S, but not yet paid in cash.
c. Expenses incurred, recognized in the I/S, and already paid in cash.
d. Expenses incurred, not yet recognized in the I/S, but already paid in cash.

2. Costs that can be reasonably associated with specific revenues but not with specific products should be
a. Charged to expense in the period incurred.
b. Allocated to specific products based on the best estimate of the production processing time.
c. Expensed in the period in which the related revenue is recognized.
d. Capitalized and then amortized over a period not to exceed 60 months.

3. Depreciation of a plant asset is the process of

a. Asset valuation for statement of financial position purposes.
b. Allocation of the asset’s cost to the periods of use.
c. Fund accumulation for the replacement of the asset.
d. Asset valuation based on current replacement cost data.

4. Which of the following statements is the assumption on which straight-line depreciation is based?
a. The operating efficiency of the asset decreases in later years.
b. Service value declines as a function of time rather than use.
c. Service value declines as a function of obsolescence rather than time.
d. Physical wear and tear are more important than economic obsolescence.

5. On January 2, Rio Corp. bought machinery under a contract that required a down payment of $10,000, plus
24 monthly payments of $5,000 each, for total cash payments of $130,000. The cash equivalent price of the
machinery was $110,000. The machinery has an estimated useful life of 10 years and estimated salvage
value of $5,000. Rio uses straight-line depreciation. In its income statement for the year ended December
31, what amount should Rio report as depreciation for this machinery?
a. $10,500 = ($110,000-$5,000)/10 yrs
b. $11,000
c. $12,500
d. $13,000

6. Legal fees incurred by a company in defending its patent rights should be capitalized when the outcome of
litigation is
Successful Unsuccessful
a. Yes Yes
b. Yes No
c. No No
d. No Yes

7. In June Year 1, Haifa Retailers sold refundable merchandise coupons. Haifa received $10 for each coupon
redeemable from July 1 to December 31, Year 1, for merchandise with a retail price of $11. At June 30, Year
1, how should Haifa report these coupon transactions?
a. Unearned revenues at the merchandise’s retail price.
b. Unearned revenues at the cash received amount.
c. Revenues at the merchandise’s retail price.
d. Revenues at the cash received amount.

7
8. Jungfrau Company had net income of $150,000 for the year ended December 31, Year 2, and paid
$125,000 of dividends during Year 2. The following is its comparative balance sheet:

12/31/Year 2 12/31/Year 1
Cash $150,000 $180,000
Accounts receivable 200,000 220,000
Total assets $350,000 $400,000

Payables $ 80,000 $160,000

Capital stock 130,000 125,000
Retained earnings 140,000 115,000
Total $350,000 $400,000

The amount of net cash provided by operating activities during Year 2 was
a. $70,000
b. $90,000 = net income $150,000 + change A/R $20,000 – change A/P $80,000
c. $150,000
d. $210,000

9. The following balances were reported by Oland Co. at December 31, Year 2 and Year 1:
12/31/Year 2 12/31/Year 1
Inventory $260,000 $290,000
Accounts payable 75,000 50,000
Oland paid suppliers $490,000 during the year ended December 31, Year 2. What amount should Oland report
for cost of goods sold in Year 2?
a. $545,000 = payments $490,000 + change inventory $30,000 + change A/P $25,000
b. $495,000
c. $485,000
d. $435,000

10. At December 30, Agnon Co. had cash of $200,000, a current ratio of 1.5, and a quick ratio of 0.5. On
December 31, all cash was used to reduce accounts payable. How did these cash payments affect the
ratios?
Current Ratio Quick Ratio
a. Increased Decreased
b. Increased No effect
c. Decreased Increased
d. Decreased No effect

11. On July 14, Avila Co. collected a receivable due from a major customer. Which of the following ratios is
increased by this transaction?
a. Inventory turnover ratio.
b. Receivable turnover ratio.
c. Current ratio.
d. Quick ratio.

12. When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of
a specific account
a. Decreases both accounts receivable and the allowance for uncollectible accounts.
b. Decreases accounts receivable and increases the allowance for uncollectible accounts.
c. Increases the allowance for uncollectible accounts and decreases net income.
d. Decreases both accounts receivable and net income.