What is the nature of business of the company?

The operations of the Company, Stamford Tyres, involve the distribution, retail and
provision of maintenance services and technical knowledge on different types of tyres, ranging
from that for buses and trucks to that for passenger cars. Since the financial year 2005, it has
also started to manufacture its own brands of tyres like Sumo Truck Bus Radial, Sumo Truck
Bus bias and Passenger Car Radial tyres. In short, the Company is involved in manufacturing,
wholesaling and service business.

What are the company’s main types of revenues and expenses?

The main revenue for the Company comes from wholesaling and distribution, which
constitutes 82.0% of the total revenue, follow by retailing which is 17.8% (refer to page 39 and
51 of the financial report), its main expenses are from cost of raw materials and goods sold,
and employees’salaries and benefits, which constitute 78.7% and 8.8% of the total revenue
respectively (page 39 of report).

What is meant by the term “revenue recognition”?

Revenue recognition is the record of an asset gain (debit Cash or Accounts receivable)
for the provision of goods and services to customers and increase (credit) in the respective
revenue account.

When does the Company recognize revenue?

The Company recognized revenue for sales of goods when ownership titles of the
goods are transferred to the customers, which is usually upon delivery, in addition, they record
dividend when the right to receive it is established, and interest income is recognized on time
proportion basis, that is, from the time note is received to the end of a financial period. Besides
that, the Company also recognized rebates from suppliers as revenue by crediting the relevant
expense accounts. In general, when there are economic benefits to be gained and the amount to
be recorded is reliable.

Explain concisely if methods adopted are appropriate?

The way it recognizes revenue for sales of good, dividend and interest incomes are
appropriate as they are in accordance to the Revenue principle as revenue is only recognized
when or after goods are delivered or services provided in the cases of dividend and interest
revenues. However, the recognition of rebates from suppliers as revenue is not correct, as they
are not a result of providing goods and services.

What percentage of total assets does the company hold as accounts receivable at the end of the
financial year? How does this compare to the previous year?

Accounts receivable for the end of FY2005 are valued at $68,748,000, 34.5% of total
assets ($199,470,000), which compared to end of FY2004, value of $60,067,000(33.0% of total
assets, $182,117,000), is higher by $7,135,000(1.5%).

How would you evaluate the appropriateness of the company bad debt policy?

The Company recognizes bad-debt expenses using allowance for uncollectible account
methods. In my opinion, the company follows the general accepted accounting principles
(GAAP) in Singapore by using this method for bad debts that helps to give a realizable picture
of the Company’s net profits in that year. In conclusion, the Company has recorded its bad
debts appropriately (refer to page 40 and 47 for values of assets and bad-debt policy
respectively).
What are the types of inventories carried by the company?

The inventories holds by Stamford tires are different types of vehicles’ tires and wheels
and automobiles parts and accessories.

In general, why must companies use cost flow assumptions to cost their inventories?

In general, Companies have to attract investors and the items, investors will look in the
companies are the net profit and inventory turnover, which requires the business to cost their
inventories. However, Companies have to pay income tax based on their net profit, therefore
they will need to decide on costing assumptions that they deem, will balance between painting
a good picture of the company and amount of income tax; the method has to be used
consistently for fair assessments by investors and tax authorities.

What cost flow assumption does the company use to cost its inventories? Is the assumption
appropriate?

The Company uses the weighted average cost method to value its inventories, which
assumes that inventories sold are a mixture of early and recent purchases. Since the Company’s
inventories are not unique and sales volume is high, specific identification method should not
be used, moreover, types of tires sold are based on market demand so it will be appropriate to
assume that later purchases of a certain vehicle’s tires may be sold first than earlier purchases
of a different vehicle’s tires.

Compute the total historical cost of the company’s inventories as at the latest balance date. If
you think it is not possible to compute, explain why.

The historical cost of inventories is calculated by adding the allowance for stock
obsolescence ($6,278,000) to the value of inventories stated on balance sheet ($62,338,000)
and equal to $68,616,000(refer to page 59, note on inventories).
How does the company depreciate its property, plant and equipment (fixed assets)?

Stamford tires uses the straight-line method for depreciation of fixed assets (page 44), it
records full year depreciation in the financial year of acquisition and does not record
depreciation in disposal year (page 45).

Does this policy look reasonable? In answering the latter question, explain concisely the
tradeoffs management makes in choosing a depreciation policy, and how an investor can assess
the reasonableness of the depreciation policies of a company.

The trade-offs for using this method will be that it may not accurately reflect the
economic benefits obtained from the assets in a particular financial period, and hence
depreciation expenses may not match revenue earned. Therefore, when operating revenue is
high, this method will give a good net profit, but when operating revenue is not good, the net
profit reported will be low. When assessing a Company’s depreciation policies, investors
should compare previous financial period’s operating revenue and depreciation expenses with
current period, if for instance, there is a big jump in operating revenue but depreciation
expense is the same, or vice versa, then the policy may not be reasonable.

Did the company dispose of any property, plant and equipment during the latest financial year?
Was there any gain or loss on such disposals? What would be the journal entry to record such
disposals? (Where applicable, use one of the disposals made by the company to illustrate how
the gain/loss should be recorded.)

The Company disposed of leasehold lands, plant equipment and motor vehicles in the
financial year 2005.The gain in disposal of these assets amounts to $193,000 (page 52) and the
journal entry is as followed (refer page 55):
Debit Cash $416,000
Debit Accumulated depreciation- Plant, equipment and property $662,000
Credit Gain on disposals $193,000
Credit Plant, equipment and property $885,000
Does the company have any intangible assets? What are these? What are the accounting
policies regarding amortisation or impairment of these intangible assets?

Stamford tires have the intangible assets of computer softwares, goodwills and development
costs that will provide future benefits. The Company amortizes these assets using the straight-line
method over their useful lives (page 46-47) and reported an impairment loss in profit and loss
statement when some of the carrying amount of its assets is not recoverable (page 48).

Besides the stated liabilities on the balance sheet, state and (if possible) quantify other possible
future obligations that the company has as at the latest balance date. What is the importance of
such information to investors? (Note: If the company reports more than three other possible
future obligations, pick any three to explain.)

Stamford tires reported contingent liabilities of $89,132,000 for guarantees issued for
bank facilities granted to subsidiaries in financial year 2005. This information helps to tell
investors of the possible debts that the Company may have in the future due to current
operating circumstances, which will give an accurate picture of the Company’s financial
position in the future, that investors need to make sound decisions.

What are the transactions that are reported in the company’s statement of changes in equity? In
your own words, explain as completely as possible the nature of each of these transaction(s).
(Note: If there are more than three transactions reported, pick any three to explain.)

The transactions reported in the Company’s statement of equity changes are the
issuance of ordinary shares, cash dividend payout and the transfer from capital reserves. The
issuance of shares is to finance or expand the operations and the investments of the Company
by issuing to investors shares that represent the market value of the business, which in turn
receive cash or equivalent asset from investors and transfer to its paid-up Capital. Cash
dividend payments are made from the revenue reserves account, which is the retained profits of
the business, and this transaction can be carried out even when the company incurred a loss in
the financial period only if retained profits balance is positive. The transfer from capital
reserves due to exercise of Warrant 2007(refer to page 69,note28) is a transaction where by
warrants owners are allowed to purchase ordinary shares at exercise price of $0.10 and the net
proceeds will be transferred from capital reserve to share premium reserve.