ÇAĞ UNIVERSITY

Faculty of Economics and Administrative Sciences

Department of International Finance and Banking

FINANCIAL STATEMENT ANALYSIS

TOPIC: ABC LEARNING COMPANY

PREPARED BY
Aysegul SUBAŞI - 16226031

SUBMITTED TO
Dr. Öğr. Üyesi Canol KANDEMİR

Accounting Lessons which have been learned from ABC Learning

One of the reasons ABC Company collapsed is that it is rapidly developing both in Australia
and other countries, and it also borrows high amounts for it. I think it wouldn't have caused it
to collapse if ABC had enough assets to cover its debts or had it not taken out debts that it
wouldn't cover.

Although ABC Company was organized many times and resulted in a major overhaul, this
was a temporary solution. Editors may not always benefit. Costs arise as a result of these
regulations.

The only ABC executive without a managerial position is Sallyanne Arkinson, who has little
knowledge of ABC's operations, but instead of Sallyanne Arkinson, he should have been a
manager with sufficient knowledge of the company's operations, because that information is
necessary to benefit the development of strategies.

The Audit Committee's effectiveness declined with the appointment of David Ryan, who
chaired the Audit Committee. Because he was a CEO who made the wrong strategy decisions
before. If a successful person had been appointed in place of David Ryan, he could have
guided strategies better.

When the company was in bad condition, ABC Learning co-founder Le Neve Groves claimed
that Eddy Groves put pressure on him and forbade him from discussing ABC's finances
without an oversight. He also claimed that Eddie Groves signed Le Neve's company
documents and opened his mail. Claims like these are not well received by the other
executives of the company and they feel they create pressure.

Groves prevented Le Neve Groves from attending board meetings, by issuing a domestic
violence order against him in mid-2008. If Groves could, instead, take a professional
approach and not involve family relationships in the work, they would have followed a better
strategy. I think one reason for the company's collapse is poor corporate governance.

ABC Learning posted a profit of over $ 50 million, as a result of which share prices rose
300% over the past five years. In an item that causes this situation, it is intangible assets. I
think this situation can be misleading for potential investors. Because the company's profit is
artificial.

In 2005-2006, ABC Learning received approximately $ 206 million in an indirect subsidy

from the Australian Federal Government through Child Care Benefit payments to parents with
children enrolled in ABC Learning Centers. In this case, ABC earned most of his income
from government subsidies. Without these revenues, they might not have gotten into this
much debt if they were trying to win new customers, because as they got income, ABC
Company continued to borrow.

75% of the company's assets are intangible assets. These had to be reduced because these
assets would not benefit in case of company bankruptcy.

The high value of assets relative to a low debt level provided ABC with an attractive leverage
ratio for investment. Equity increased from $ 20 million in 2002 to $ 1.7 billion in 2007,
except that debt approached $ 1.8 billion. These intangible assets included $ 3 billion in
childcare licenses and only $ 1 billion in tangible assets. The situation got more difficult as
equity and debt for expansion increased. In this case, it is not possible to pay $ 1.8 billion in
intangible assets, the company actually went bankrupt by providing a high leverage ratio
because potential investors increased as a result of the good leverage ratio. The leverage ratio
should be reduced by reducing intangible assets. As the investors increase, it becomes
difficult to pay the shares, so it was necessary to reduce the leverage ratio. Another cost of
expansion is equity.

When banks demanded repayment in 2008 , ABC Learning Centers defaulted on debt repayments.
This, in turn, caused its liquidity to collapse.

Cash flow in 2007 is almost nonexistent. In order to grow further, this situation was not considered
and intangible assets were shown high and this situation was tried to be covered. I think instead of
doing that, the ABC could borrow by looking at its asset status, or it could go down the downsizing
path and recover.