You are on page 1of 3

Q10 11

Analysts should be careful in comparing financial ratios across companies in different countries
because of the following reasons- Differences in business environments which in turn might
affect ratios. For ex, countries in which accounting income is the basis for tax, the companies
there will report as low accounting income as possible. Thus, it can in turn be misleading to
assume that these companies are not as much profitable as companies in other countries where
accounting income is not used for tax purposes.
E10 2
China Petroleum & Chemical Corporation (Sinopec)
Accounting Rules
Profit 2006
Total Equity
12/31/2006
Total Equity
12/31/2005
Avergae Total Equity
2006

PRC
50,664
254,875

IFRS
55,408
262,297

US GAAP
54,862
262,297

215,623

222,803

222,803

235,249

242,550

242,550

% difference in profit
% Difference in average equity

IFRS/PRC
9.4%
3.1%

Return on average total equity

21.54%

US GAAP/PRC
8.3%
3.1%

US GAAP/IFRS
-1.0%
0%

22.84%

22.62%

c
% difference in ROE
6.1%
5.0%
-1.0%
There is a large difference PRC profit and both IFRS and US GAAP profit than between IFRS
and US GAAP profit.
d) There is no difference in stockholders equity between IFRS and US GAAP in either 2005 or
2006 and only a relatively small difference in profit. As a result whether the company used IFRS
or US GAAP made almost no difference on ROE 2006. These relationship may or may not be
generalizable to other years.

E10 9
a) Because the change in finished products (FP) and work in progress (WIP) is subtracted
in calculating total operating income, the balance in FP and WIP inventory must have

decreased during the year. This can be demonstrated by considering the following
example of the calculation of cost of goods sold.
Beginning inventory
Plus: purchases
Goods available for sale
Less: ending inventory
Equals: cost of goods sold

3,000
5,000
8,000
2,000
6,000

Cost of goods sold (6,000) is equal to the cost of purchases (5,000) plus the decrease in
inventory (1,000). = 3000 beginning inventory -2000 ending inventory
In Gamma Holdings income statement, the amount spent on purchases is reflected in
the line items cost of raw materials and consumables, personnel costs, and so on.
The change in FP and WIP is also subtracted to accurately reflect the cost of the goods
sold for the year.
b. To calculate cost of goods sold for the year, an analyst would need to know the amount of
each operating expense related to manufacturing activities. For example, the amount of
depreciation of tangible fixed assets related to factory assets would be needed.
c.

Operating expenses
Raw materials and consumables
Contracted work and other external costs
Personnel costs
Amortisation of intangible fixed assets
Depreciation of tangible fixed assets
Other operating costs
Impairment of intangible assets
Impairment of property plant

Total
Change in FP and WIP
Estimated cost of goods sold

Sales (net turnover)


Estimated cost of goods sold
Estimated gross profit

Total

Manufacturing

212.9

90%

42.7

100%

236.9

50%

118.5

4.2

80%

3.4

29.4

75%

22.1

100.2

10%

10

18.5

80%

14.8

7.4

75%

5.6

652.2

191.6
42.7

408.7
14.3
423

658.5
423
235.5

d.

Gross profit margin (Estimated gross profit/Sales)

(235.5/ 658.5) =
35.8%