Analysis of Creative Tech

1. Creative's external auditors are from the accounting firm PricewaterhouseCoopers. From the annual report, Creative received an unqualified opinion on its management's assessment of their financial reporting (Creative Annual Report 2006, pg 19). This shows external users that Creative has followed all accounting rules appropriately and that the financial reports are an accurate representation of the company's financial position. To external users, they can safely use the information provided by Creative to make sound financial decisions regarding investments in Creative.

4. In the fiscal year 2006, percentage of net accounts receivable over the reported total assets = 133,002,000 / 830,613,000 * 100% = 16.01251%. In the fiscal year 2005, percentage of net accounts receivable over the reported total assets = 163,184,000 / 1,077,474,000 * 100% = 15.14505% (Creative Annual Report 2006, pg 20). We can see that the net accounts receivable from 2005 to 2006 has increased by 16.01251% - 15.14505% = 0.86746%. This could be due to the fact that there is an increase in the number of customers paying on credit (by credit cards etc). Creative uses the allowance method because we can see from the consolidated balanced sheets under current assets that they set up allowance accounts "Accounts receivable, less allowances of $18,806 and $21,288 (in US$'000)" (Creative Annual Report 2006, pg 20).

10. (a) An increase in a current asset other than cash indicates a decrease in cash. The reason is because it takes cash to acquire assets. For example, customers can pay a deposit for a product and pay the remaining by installments. Then, the accounts receivable increases but the company does not yet collect cash. This may turn up as net profit for the company but cash may not move in the same direction and magnitude due to accounts receivable. This applies to other current assets as well.

A decrease in current asset other than cash indicates an increase in cash.

A decrease in current liability indicates a decrease in cash. The payment of current liability causes both cash and liability to decrease, so our profit may increase while cash may decrease.

An increase in current liability indicates an increase in cash. If Creative's accounts payable increased during the year, this increase can occur only if cash is not spent to pay this liability. As a result, Creative has more cash on hand. Thus our net profits decreases due to increases in current liabilities but our cash increases with a different magnitude. Due to the above explanations, profit/loss and cash do not move in the same direction and magnitude. (Harrison, Horngren, Ismail, Chng, Samad, Mak, 2005)

Investors are more concerned with the net profit/loss of Creative rather than the amount of cash and cash equivalents. For investors, they are more concerned with the long-term prospects of Creative that is reflected in the net profit/loss of the company. Such information reflects the overall performance of Creative and helps investors make sound decisions about whether they want to continue investing in Creative or to increase their investments in Creative. Creditors, debtors on the other hand will be more concerned with the amount of cash and cash equivalents. In addition, the net profit or loss will also