1.1.

Quick Analysis on Earnings Quality Indicators

To assess the earnings quality Multibintang, we use several indicators which relates to the

quality of firms earnings. Such indicators includes the existence of non recurring items, earning
persistence, and benchmark (CFA Institute 2014). While our assessment will mainly revolves
around these indicators, we acknowledges that there are of course; other indicators that can be
used for the assessment. These other indicators may include things such as relevant financial
ratio or firms choice in deciding which accounting policy to be used. But again, our choice to
use recurring items, earning persistence, and benchmark as main indicators; are simply because
it is recommended by the CFA Institute as a relevant organization.
So first thing to do, is to identify the existence of non recurring items in Multibintang
financial statement, if any. By its definition, non recurring items is a gain or loss found on a
company's income statement that is not expected to occur regularly. Such common examples
may include asset impairment, gain or loss on sale of assets, dispotition of subsidiary, early
retirement on debt, lawsuit and litigation,

some type of

tax consequences, governmental

sanction, and other outside events.

Spesifically in multibintangs financial report, we only manages to found two non
recurring items, which is a gain or loss on defined benefit plans and an excise penalty; which the
later is accounted for roughly two hundred and twenty millions rupiah. The only account relevant
to earnings, which doesnt have a balance in previous year is the excise penalty; making this
account as non recurring items in Multibintang financial report. As for defined benefit plan gain
or loss, although it did have a balance in previous year, it is still considered as non recurring
because it is not part of firms normal operation. Besides this two particular item, we havent
found any other non reccuring. All remaining accounts other than the afromentioned item already
existed in previous years; highly indicating all of them are recurring items.This excise penalty
makes multibintangs financial statement do not have the adequate relevance on representing
firms performance. In otherwords, excise penalty as non recurring expense causes firm earnings
fails to illustrate current year operating performance. To mitigate this problem though,
Multibintang has made another net income with excise penalty expense excluded, to fairly
represent firms operating performance.

Next up is making assessment in firms earnings persistence. Earnings are composed by

cash and accruals component. Sloan (1996) states that the cash component in earnings is more
persistent relative to the accruals component. Therefore, it can be said that cash component is
relatively important to keep earnings persistent. Based on this premise, we should be able to
assess one firms earnings persistence by comparing its earning growth and its accruals growth.
To make it simple, we will use sales as a proxy for earnings, and receivables for accruals.
Consequently, we propose that the firm will be likely to have more earning persistence if
its sales growth is higher than its receivables growth. This is; when sales growth/receivables
growth>1. If the result is less than one, than it should indicate that the firm is likely to be
identified as having low earnings persistence. Last indicator that we will evaluate is the
benchmark. Although Multibintang does not explicitly stated how much it tagets for sales; it does
state in its management discussion that it manages to close the year 2015 with above benchmark
sales. The firms also states that the above benchmark sales was managed to achieve amidst
unfavourable economic condition and ministerial regulation. Summing up, we conclude that
Multibintang has a high earnings quality despite some minor flaws in exsistence of non recurring
item; which has been mitigated by the management by doing separate account for earnings with
excludement of this non recurring items.

1.2. Earnings Quality Assesment For Each Financial Statement Component

1.2.1. Statement of Profit or Loss and Other Comprehensive Income

PT Multi Bintang Indonesia Tbk

NET SALES
COST OF GOODS SOLD
GROSS PROFIT
Other income
Selling expenses
General
&
administrative
expenses
Other expenses
Finance income
Finance costs
Other losses net
PROFIT BEFORE TAX
TAX EXPENSE NET
NET INCOME FOR THE YEAR

INCOME STATEMENT
2013
3,561,989
(1,278,385)
2,283,604
378
(614,293)

2014
2,988,501
(1,182,579)
1,805,922
(518,580)

2015
2,696,318
(1,134,905)
1,561,413
(476,866)

(116,205)

(137,354)

(144,247)

(28,560)
58,667
(6,646)
1,576,945
(405,716)
1,171,229

(67,990)
(3,620)
1,078,378
(283,495)
794,883

(43,976)
(220,752)
675,572
(178,663)
496,909

Based on the statement of comprehensive income above, we could see that

Multibintangs gross profit trend is gradually decreased from year to year. Declining from 2013
to 2015, the major causes of the decreasing are due to the unfavorable economic situations and
ministerial regulation restricting the sales of beer in minimarkets.
Those two factors affected to a rise cost pressures due to weakening rupiah, which has led to an
increase in the cost of raw material and packaging purchases from foreign vendors. Moreover,
the new regulation impacted to a decrease in net sales to approximately 10% in 2015. Similar to
its gross profit, Multibintangs profit before tax shared same trend by decreasing respectively
from 2013 to 2015. The decreases were 32% and 37% for 2014 and 2015 relative to prior years.
Following to its profit before tax, Multibintangs tax expense looked decreasing as its
other components of income also declining. Lastly, Multibintangs net income experienced
significant declines from 2013 to 2014 and then more than half in 2015.

By looking to evidences from Multibintangs income statement component trends in

current and previous report, there is no indications that the company did earnings manipulation
tactic to posses high earnings quality. This reason strengthened by its financial reporting trends
that suits with current issues faced by the company. Multibintang has disclosed properly its low
financial performing as well as the factors which responsible to weaken their performance.
On the other hand, Multibintang seems to understand how to separate its non-recurring
item as it is put on other income component of statement of comprehensive income. We are
assured all items on atatement of comprehensive income have been reported correctly and free
from bias. Thus, we could ensure that Multibintangs earnings quality obtained high quality
earnings by describing its actual economic performance to prevent misrepresentation of financial
reality. Finally, the information that Multibintang present and disclose is a good reflection of its
economic reality and could be useful for decision making. Summing up, in a statement of
comprehensive income perspective, Multibintang has a high earnings quality.

1.2.2. Statement of Cash Flow

From the above statement of cash flow, we could see the change in cash flow from
operation; which is highly associated with earnings, is relatively unchanged from Rp 914.558 to
Rp. 919.232. This fact alone is more than surprising because in 2015, the firm has just hit by
tremendous loss accounted for more than 200 million rupiahs in the form of excise sanction. The
firm operating cash flow is supposed to decreases when there exist such material sanction
expense; but in reality it is not. After we observe it, we found that the relatively stable operating
cash flow is caused by a substansial decrease in income tax expense (more than Rp.
150.000.000.000 Million) which even manages to offset the substansial increase in non recurring
expense; the excise sanction. This decrease in tax is mainly caused with the difference between
2015 income before tax with its prior year of 2014; 2014 income before income tax is higher
because there is no excise sanction.

From this, we could see how the sanction as a non recurring expense, may highly
contributes to the changes in earnings. In addition, this kind of non recurring expense is
decreasing earnings quality by making accounting information in the financial statement, more
less representative to illustrate firms financial condition.
Still using statement of cash flow, we can also find that the firm is likely to be healthy.
Because, the firm has more cash from operating then operating profit. This means Multibintang
may has low receivables; and can focuses on cash sales. Lastly, we can also say that the firm is
healty because its cash inflow from operation is high enough to finance its other activities;
financing and investing. Infomration on the statements above shows that the firms cash inflow
from operation is higher than the sum of firms cash outflow for investing and financing;
accounted for more Rp 900 Million rupiahs. Summing up, from a statement of cash flow
perspective, we conclude Multibintang also has high earnings quality.