P12-7 Using Financial Reports: Interpreting Financial Statement Information and Analyzing and Interpreting Ratios [[ (AP12-5) [012-2, 12-4, 12-7, 12-8 National Airlines Ltd. was founded by a team of entrepreneurs and has grown from serving five destinations to serving more than 100 destinations in many countries. The following financial statements are taken from one of National's annual reports along with excerpts from selected notes to its financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Statement of significant accounting policies: (d) Revenue recognition (i) Passenger revenue, including the air component of vacation packages, is recognized when air transportation is provided. Tickets sold but not yet used are reported in the consolidated statement of financial position as advance ticket sales. Page 742 Required: 1. Examine National's statements of financial position. The company's assets increased in the current year. Which asset shows the largest increase? 2. National's current liabilities include the advance ticket sales account with a balance of $620. What does this account represent, and what type of transactions would cause an increase or a decrease in the account balance? Explain. 3. Compute the return on assets, return on equity, and net profit margin ratio for both years. Comment on the profitability of National's operations in both years. National's total assets and shareholders' equity amounted to $4,144 and $1,590, respectively, at the beginning of the prior year. 4. National's operations generated significant amounts of cash during both years. The company also made significant investments in new aircraft in the current year. How did the company finance the acquisition of additional aircraft? 5. Compute and interpret the quality of earnings ratio and the capital expenditures ratio for both years. \begin{tabular}{|c|c|c|} \hline \multicolumn{3}{|l|}{\begin{tabular}{l} NATIONAL AIRLINES LTD. \\ Statement of Cash Flows \\ Years Ended December 31 \\ (in millions of Canadian dollars) \end{tabular}} \\ \hline & Current Year & Prior Year \\ \hline \multicolumn{3}{|l|}{ Operating activities } \\ \hline Net earnings & $367 & $284 \\ \hline \multicolumn{3}{|l|}{ Items not involving cash } \\ \hline Depreciation and amortization & 265 & 227 \\ \hline Change in maintenance provisions & 36 & 8 \\ \hline Change in other liabilities & (3) & (1) \\ \hline Loss on disposal of property and equipment & 1 & 48 \\ \hline Stock-based payment expense & 17 & 19 \\ \hline Deferred income tax expense (recovery) & 29 & (8) \\ \hline Unrealized foreign exchange gain & 5 & (5) \\ \hline Change in non-cash working capital & 200 & 21 \\ \hline Change in other assets & (26) & (7) \\ \hline \multirow[t]{2}{*}{ Purchase of shares pursuant to compensation plans } & (14) & (10) \\ \hline & 877 & 576 \\ \hline \multicolumn{3}{|l|}{ Investing activities } \\ \hline Aircraft additions & (841) & (694) \\ \hline Aircraft disposals & 83 & 75 \\ \hline \multirow[t]{2}{*}{ Other property and equipment and intangible additions } & (65) & (45) \\ \hline & (823) & (664) \\ \hline \multicolumn{3}{|l|}{ Financing activities } \\ \hline Increase in long-term debt & 153 & 614 \\ \hline Repayment of long-term debt & (171) & (309) \\ \hline Shares repurchased & (124) & (39) \\ \hline Dividends paid & (70) & (61) \\ \hline Cash interest paid & (47) & (40) \\ \hline \multirow[t]{2}{*}{ Change in non-cash working capital } & & 5 \\ \hline & (259) & 170 \\ \hline Cash flow from operating, investing, and financing activities & (205) & 82 \\ \hline Effect of foreign exchange on cash and cash equivalents & 31 & 20 \\ \hline Net change in cash and cash equivalents & (174) & 102 \\ \hline Cash and cash equivalents, beginning of year & 1,358 & 1,256 \\ \hline Cash and cash equivalents, end of year & $1,184 & $1,358 \\ \hline \multicolumn{3}{|l|}{ Supplemental disclosure of operating cash flows } \\ \hline Cash interest received & 16 & 17 \\ \hline Cash taxes paid, net & (115) & (204) \\ \hline \end{tabular} \begin{tabular}{|c|c|c|} \hline \multicolumn{3}{|c|}{\begin{tabular}{c} NATIONAL AIRLINES LTD. \\ Statement of Earnings \\ Years Ended December 31 \\ (in millions of Canadian dollars, except per-share amounts) \end{tabular}} \\ \hline & Current Year & Prior Year \\ \hline \multicolumn{3}{|l|}{ Revenues } \\ \hline Guest & $3,557 & $3,599 \\ \hline \multirow[t]{2}{*}{ Other } & 472 & 377 \\ \hline & 4,029 & 3,976 \\ \hline \multicolumn{3}{|l|}{ Operating expenses } \\ \hline Aircraft fuel & 814 & 1,090 \\ \hline Salaries and benefits & 802 & 725 \\ \hline Rates and fees & 563 & 520 \\ \hline Sales and marketing & 325 & 325 \\ \hline Depreciation and amortization & 265 & 227 \\ \hline Aircraft leasing & 174 & 182 \\ \hline Maintenance & 164 & 128 \\ \hline Other & 251 & 235 \\ \hline \multirow[t]{2}{*}{ Employee profit share } & 101 & 69 \\ \hline & 3,459 & 3,501 \\ \hline Earnings from operations & 570 & 475 \\ \hline \multicolumn{3}{|l|}{ Non-operating income (expense) } \\ \hline Finance income & 16 & 17 \\ \hline Finance cost & (54) & (52) \\ \hline Loss on foreign exchange & (10) & (2) \\ \hline \multirow[t]{2}{*}{ Loss on disposal of property and equipment } & (2) & (48) \\ \hline & (50) & (85) \\ \hline Earnings before income tax & 520 & 390 \\ \hline \multicolumn{3}{|l|}{ Income tax expense (recovery) } \\ \hline Current & 124 & 114 \\ \hline \multirow[t]{2}{*}{ Deferred } & 29 & (8) \\ \hline & 153 & 106 \\ \hline Net earnings & $367 & $284 \\ \hline \multicolumn{3}{|l|}{ Earnings per share } \\ \hline Basic & $2.94 & $2.22 \\ \hline Diluted & 2.92 & 2.20 \\ \hline \end{tabular}