The Beinish model is a statistical model that uses financial ratios calculated with

accounting data of a specific company in order to check if it is likely (high

probability) that the reported earnings of the company have been manipulated.
How do you calculate the M-score?

The M-score is based on eight variables, of which some are designed to capture
the effects of manipulation while others show preconditions that may prompt
firms to engage in such activity. While Beinish takes data from the fiscal years, we
use the last trailing twelve-month (TTM) numbers as the current year (year t). For
year t-1, we take the TTM results for the 12 months before year t.

1. Days Sales in Receivables Index (DSRI): The ratio of days sales in

receivables during the last year (t) compared to the year before (t-1). A
disproportionate increase in receivables relative to sales may suggest
revenue inflation.

2. Gross Margin Index (GMI): A value greater than 1 indicates that margins
have deteriorated. This signals poor prospects and might lead to earnings
manipulation.

3. Asset Quality Index (AQI): Asset Quality is the ratio of non-current assets
other than plan, property, and equipment as a proportion of total assets. An
AQI greater than 1 indicates that a firm has potentially increased its
involvement in cost deferral.
4. Sales Growth Index (SGI): Growth does not imply manipulation, but
growth firms are more likely to commit fraud because their financial
position and capital needs put pressure on managers to achieve earnings
targets. In addition, controls and reporting tend to lag behind operations in
periods of high growth. Any perception of decelerating growth can
significantly impact the value of the stock and be very costly to manage. A
value greater than one increases the probability of earnings manipulation.

5. Depreciation Index (DEPI): The rate of depreciation in year t-1 / year t.

The depreciation rate equals depreciation / (depreciation + net property,
plant & equipment). If this value exceeds 1, the rate at which assets are
depreciated has slowed. Either management revised the estimates of assets
useful lives upwards or adopted a new income method.

6. Sales General and Administrative Expenses Index (SGAI): The ratio of

SGA to sales in year t / year t-1. Analysts would interpret a disproportionate
increase in sales as a negative signal about the firm's prospects. Beneish
expects a positive relation between SGAI and the probability of
manipulation.

7. Leverage Index (LVGI): The ratio of total debt to total assets in year t
relative to year t-1. A value greater than 1 indicates an increase in leverage.
 8. Total Accruals to Total Assets (TATA): Total accruals is calculated as the
change in working capital accounts other than cash less depreciation. This
ratio proxies the extent to which cash underlies reported earnings. Higher
positive accruals (less cash) indicate a higher likelihood of earnings
manipulation.

A score greater than -1.78 indicates a substantial likelihood of earnings

manipulation.
 Nestlé Lanka PLC - As at 31 December (Rs'000)
Statement of Financial Position 2022 2021
ASSETS
Non-Current Assets
Property, Plant and Equipment 7,755,061 7,850,323
Capital Work-In-Progress 2,243,392 716,060
Other Non-Current Assets 276,015 321,761
Deferred Tax Assets 269,392 0
10,543,860 8,888,144
Current Assets
Inventories 12,711,455 6,154,678
Trade and Other Receivables 4,806,806 2,187,972
Amounts due from Related Parties 1,034,828 873,080
Cash and Cash Equivalents 17,797,568 7,011,873
Total Assets 46,894,517 25,115,747
EQUITY AND LIABILITIES
Equity
Stated Capital 537,255 537,255
Retained Earnings and Reserves 10,205,280 7,897,398
10,742,535 8,434,653
Non-Current Liabilities
Retirement Benefit Obligations 17,160 194,530
Deferred Tax Liabilities 0 724,596
Non-Current Provisions 895,750 1,023,596
Non-Current Financial Liabilities 14,192,312 5,417,887
15,105,222 7,360,609
Current Liabilities
Trade and Other Payables 9,379,848 6,417,646
Amounts due to Related Parties 6,177,210 1,988,465
Current Tax Payable 2,633,326 728,365
Dividend Payable 2,799,537 84,753
Current Financial Liabilities 56,839 101,256
21,046,760 9,320,485
Total Liabilities 36,151,982 16,681,094
Total Equity and Liabilities 46,894,517 25,115,747
 Nestlé
Statement of Profit Lanka
or Loss PLC - For
Statement the YearPosition
of Financial Ended 31 December (Rs'000)
Statement of Profit or Loss and Other Comprehensive Income 2022 2021
Revenue 73,707,077 45,420,119
Cost of Sales (47,991,175) (30,751,323)
Gross Profit 25,715,902 14,668,796
Other Operating Expenses (831,237) (35,777)
Marketing, Selling and Distribution Expenses (8,066,605) (5,815,722)
Administrative Expenses (4,631,239) (2,554,050)
Profit from Operating Activities 12,186,821 6,263,247
Finance Income 726,011 72,747
Finance Expense (5,043,282) (189,347)
Net Finance Expense (4,317,271) (116,600)
Profit Before Taxation 7,869,550 6,146,647
Income Tax Expense (1,793,773) (817,497)
Profit for the Year 6,075,777 5,329,150
Other Comprehensive Income - Net of Tax
Items that will not be reclassified to Profit or Loss
Actuarial Gain/(Loss) on Retirement Benefit Obligations 160,804 108,513
Items that may be subsequently Reclassified to Profit or Loss
Gain/(Loss) on Cash Flow Hedges 0 1,054
6,236,581 5,438,717
Total Comprehensive Income - Net of Tax

Days Sales in Receivables Index (DSRI)

2022 2021
NET RECEIVABLES 4,806,806 2,187,972
REVENUE 73,707,077 45,420,119

= 0.065214986
0.048171869

= 1.353798142
Gross Margin Index (GMI)

= 14,668,796
25,715,902

= 0.57

Asset Quality Index (AQI)

2022 2021
CURRENT ASSETS 36,350,657.00 16,227,603.00
PPE 7,755,061 7,850,323
TOTAL ASSETS 46,894,517 25,115,747

1- 0.940530382 1- 0.958678
= 0.059469618 = 0.041322

= 1.439192186

Sales Growth Index (SGI)

2022 2021
REVENUE 73,707,077.00 45,420,119.00

= 1.622784762
Depreciation Index (DEPI)

2022 2021
DEPRICIAT ION 216,371.00 154,655.00
PPE 7,755,061 7,850,323

0.0271433 0.019319853

= 0.711772355

Sales General and Administrative Expenses Index (SGAI)

2022 2021
SGA EXPENSES 12,697,844.00 8,369,772.00
NET REVENUE 73,707,077.00 45,420,119.00

0.172274421 0.18427455

= 0.934879074
Leverage Index (LVGI):

2022 2021
LONG TERM DEBT 15,105,222 7,360,609
CURRENT LIABILITIES 21,046,760 9,320,485
TOTAL ASSETS 46,894,517 25,115,747

0.7709213 0.664168738

= 1.160731084

Total Accruals to Total Assets (TATA)

NET INCOME 6,075,777

CASH FLOW FROM OP AC 8,402,309
CASH FLOW FROM IN AC (1,961,779)
TOTAL ASSETS 46,894,517

= -0.007778159

TOTAL CALCULATION FOR THE BEINISH MODEL

M-SCORE '= (1.76)