katrina brown s0030976 assessment step 7-10€¦ · web viewauthor: trina brown created date:...

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ACCT11081 CQUniversityTERM 2 2017ASSESSMENT

Step Seven to Ten

Katrina Brown s0030976

KATRINA BROWN s0030976 Assessment STEP 7-10

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Step 7: Inventory Practices

As I contemplate Chapter 6 and Chapter 19, I find I have discovered not only that I am refreshing my memory from previous learnings many years ago, but also learning new concepts about inventory. I hope to gain from this experience that I can relate my new findings with my company Punch Taverns, and create a better understanding of the concept.

When I continue to browse the Punch Taverns financial statements for 2014, 2015 and 2016 I am find I am looking at familiar material. I have found the Income Statement, Consolidated Statement of Comprehensive Income, Balance Sheet, Statement of Changes in Equity and Cash Flow Statement. I am feeling reasonably comfortable, as I have started to understand how to navigate this labyrinth of data. Note I mention ‘started’, I sure am no expert. However, as I peruse the 2014 Balance Sheet I have noticed that Inventory is not listed. This is when a slight panic sets in. Had Punch Taverns not yet ventured into selling tied beer and cider yet? Why is Inventory not listed? Is this an illegal financial statement? Has Punch Taverns not recorded according to legislation? Trust me to immediately think the worst.

Then as I continue further to peruse the 2015 Balance Sheet, I find a small Inventory figure of £100,000. Whew! Nothing unlawful happening within this company. A transition of no Inventory in 2014, and then on to a small amount in 2015 suggests to me that Punch Taverns have only started to include Inventory as part of their business structure. If I remember correctly, Punch states on their informative website of a new business venture called the Punch Buying Club where publicans can purchase beverages from Punch Taverns. To be able to achieve this trade, Punch Taverns will have Stock on Hand for the leased taverns to purchase. The 2016 financial statements move on to listing Inventory at a value of £700,000. This tells me that with growing Inventory, so is the confidence of the Punch Buying Club sector. Tavern tenants must be gaining from buying stock from Punch Taverns, and therefore are purchasing more. There is now a need and confidence for Punch to increase Inventory, resulting in a much larger Inventory value. I ask myself, will this figure continue to grow into the future? Does it create more ‘work’ for Punch Taverns, and is it worth it?

It is important to note, that the primary source of Punch Taverns is leasing company owned tavern buildings out to tenants to be run as pub businesses under the Punch brand name. I cannot help but wonder how this type of business has before the Buying Club was created, avoided listing any Inventory. As I scroll through the financial statements, I notice that the leased buildings are listed as Assets. A smart move on Punch Tavern’s behalf, as it saves time of physically counting Stock on Hand when it comes to audit time. Although I assume that the leased buildings would need to have a valuation performed as to not be over or under-valued, just like Inventory.

Reading through the footnotes of Punch Taverns recent endeavour, I find there is limited information available regarding Inventory. It seems as if they have included just enough to keep interested parties satisfied. There is of course no information for nil Inventory in 2014, but I am informed that in 2015 and 2016 all Inventory are Finished Goods. This tells me that Punch Taverns is not a factory, because there are no partly finished Inventory involved. All stock is a complete product available for purchase.

Interestingly, the only further material in the statement notes was in 2016. Note 16 states that the ‘Group recognised £6.1m of Inventory as an expense during the period’. I decipher this information that Punch outlaid £6.1m to purchase beer and cider stock to sell to pub tenants. This figure should decrease in following years, because the company will not have the initial start-up costs anymore. Another important note disclosed by the firm in the 2016 financials, is the ‘Inventories are stated at


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the lower of cost and net realisable value’. This tells me Punch Taverns Inventory is reported at an amount lower than its cost, or the net realisable value where the selling cost less associated expenses. There is no mention of whether lower of cost or net realisable value is the lowest figure, as that would tell investors or interested parties how the company came to its Inventory figures.

Another piece of information that is not mentioned in Punch Taverns is the type of inventory system or method of inventory used. This concerns me, as I would prefer to see what system they have chosen, and whether it is most suitable to this company. I would assume having stock such as beer that has an expiry date, Punch Taverns will use the FIFO method. The oldest stock will need to be sold first before it expires, otherwise it cannot be sold and becomes an expense. Using the FIFO method, assumes the cost of the first units purchased is the cost of the first units sold. Therefore, the last beer and ciders purchased, will have the cost of the most recent purchase cost. This method is easy to apply and can be widely used by all employees. If Punch Taverns had more history of Inventory, I could see if the FIFO method results in an overstatement of profit.

This leads on to finding that Punch Taverns has also not mentioned whether they use a perpetual or periodic inventory system. This is another piece of vital Inventory information I would like to know as an interested party, to presume if this company is using an effective system. Punch is a large company that would depend on computerised accounting systems, requiring up-to-date, timely information at the ready for making important business decisions. Using the assumption, I would believe that the firm would use a perpetual inventory system. Unlike the periodic system where the cost of sales is determined at the end of the period, the perpetual system governs cost of sales at the time of every sale. This method also requires an inventory card or record for each item of stock. As it is not mentioned how many different items are stocked by Punch Taverns, I find it unclear as to whether the perpetual system would be beneficial. If there is a large variety of inventory on hand, then perhaps this system could become complicated and too many errors could occur. It could also cause physical stocktake to become costly. The benefit of the inventory card to Punch Taverns, would be a help of what Stock needs to be increased, or what is not profitable. So, for now I will assume the perpetual inventory system.

Looking at my discoveries of really well, not much information and a whole lot of assumptions, it is safe to say this company has very little history of Inventory. Therefore, I cannot say if its inventory practices have changed or stayed the same. It also means that there is not yet much effect on the financial statements, as Inventory is a new concept to this company. I do however believe the FIFO method would be most appropriate. As for perpetual or periodic the verdict is still out. I consider the perpetual system to beneficial to Punch Taverns, because it presents current information. If for instance, Punch Taverns is using the FIFO costing method in the perpetual inventory system it would incur some issues and costs. The cost of a physical stocktake would be the first foremost cost. This costs time and wages to complete. Once the stocktake is complete the company will discover any inventory errors. If stock in transit is not considered, or a cut-off date is not implied then it would cost the company to fix the error. A result would be an over or understatement of inventory in the financial year, which would be carried over in to the next financial year to correct the error. Another issue is a sales return. Stock returned under the FIFO method will have to be costed back to its earlier cost and not the latest cost. This could eventually show an overstatement of profit, if it is cheaper stock. Another issue whilst using the FIFO method is during a period when unit cost is rising, lower costs are actually recorded because they are the first units purchased. This can demonstrate a higher profit, when actually the most recent costs are actually higher.


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When considering if Punch Taverns can improve in any areas, I feel slightly perplexed. I feel as though this firm can express more information in the financial statements. As an interested party of this company I am not given much information. I do not know what costing methods are used, or the inventory system. I can only make assumptions. Subsequently, I feel as though I cannot suggest where any more improvements can be made.

I have had limited experience with inventory. I once worked in a saddlery retail store as a sales assistant. This particular business used a periodic inventory system that did not have a computerised inventory recording system. After the end of the financial year, that was always set at the 30 th of June, a physical stocktake was always held. Extra staff was employed for about three days so that the owner managers could stocktake, and business could occur as usual. Sometimes, stocktake would occur over the weekend while the store was shut and customers buying retail could not change the stocktake count. Extra staff was not required if this occurred. Whilst working on the floor, I was required to treat the stock in a FIFO basis. I had to try my best to sell the oldest stock on the shelf first, by looking at the price tag that had a date code written on it. The price tag also always had its purchase cost attached. This saddlery store had a vast variety of items in stock. I always assumed FIFO costing method was used, however this would have been timely with so much different types of stock.

*******Include Cost of Sales information******

Step 8: Learning and Exploring MYOB AccountRight

Set-up online training put into practice:


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Final transaction after completing the AccountRight online training:

MYOB online skills training test

Scored obtained was 13/13. Each question has been recorded below:

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Step 9: Punch Taverns PLC business transactions and financial statements

Punch Taverns PLC is a company that purchases taverns and then rents or leases them out to tenants, commonly known as pub leasing. These tenants run these taverns as a pub business under the Punch Taverns prefix. Up until recently this has been the nature of this company. Punch Taverns has branched out recently to supplying their tenants with their own branded craft beer and cider. Tenants are now given an option of either (a) full priced rent with discounted beverage prices, or (b) discounted rental terms with full priced purchase prices of the branded beverages.

For the purpose of this exercise in MYOB, I will convert from Stirling pounds to dollars, and replace the UK company tax rate with our Australian GST rate of 10%. I wanted to start the transactions in September, as the financial year for this firm is at the end of August. However, for some reason unbeknownst to me, I have made the starting month in October. Within the hypothetical business transactions, I have tried to include both the rental transactions and item transactions. At first, I felt apprehensive, as Punch Taverns is not a straight forward company that only sells items or inventory. However, once I got started the operations seemed to flow. I have included in the transactions those companies that have chosen their rental options and beverage pricing option. I have also tried to include different methods of payments, to gain a better understanding of the MYOB accounting program, and how the temporary accounts are affected.

Hypothetical Business Transactions for Punch Taverns PLC:

Transaction Date Details1 October 1 Punch Taverns purchased 400 units of craft beer cartons,

and 150 units of cider cartons from Sunshine Beverages Pty Ltd, plus freight. This purchase was paid via cash on delivery with a Visa Card.Craft Beer = $20 per unit = $8000Cider = $25 per unit = $3750Freight = $250Total = $12000 inc. GST

2 October 3 The Railway Ramsbottom paid Punch Taverns its fortnightly rent of $5000, including GST. This was paid into the Punch Taverns Business Account via direct deposit.Rent = $5000 inc. GST

3 October 4 The Crown and Glove purchased 20 units of craft beer and 5 units of cider from Punch Taverns on account with a 14-day credit term. No discounts.Craft Beer = $30 per unit = $600Cider = $35 per unit = $175Delivery = $100Total = $875 inc. GST

4 October 7 Punch Taverns returned 25 damaged units of craft beer to Sunshine Beverages Pty Ltd, with a credit made to the Punch Taverns account.Craft Beer Return = $20 per unit = $500 inc. GST

5 October 8 The Crown and Glove paid fortnightly rent to Punch Taverns with cheque number 6623. The Crown and Glove receives a 10% rental discount.Rent = $5000Discount = $500


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Total = $4500 inc. GST6 October 9 Punch Taverns purchased 100 units of cider from Stormy

Ciders Pty Ltd, for $20 per unit with 30-day credit term. Freight is an additional.Cider = $20 per unit = $2000Total = $2000 inc. GST

7 October 12 The Railway Ramsbottom purchased 100 units of craft beers from Punch Taverns, with a 10% discount on a 14-day credit term. Freight is additional.Craft beer = $30 per unit = $3000Discount = $3 per unit = $300Freight = $100Total = $2800 inc. GST

8 October 15 Punch Taverns pay for electricity costs from the Business AccountElectricity = $4500 inc. GST

9 October 16 The Railway Ramsbottom returns 10 units of craft beer to Punch Taverns, on a credit term.Craft beer = $30 per unit = $300Discount = $3 per unit = $30

10 October 17 The Railway Ramsbottom paid their account in full with Punch Taverns vis direct deposit to the Punch Taverns Business Account.


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ID No. Account No. Account Name Debit Credit Job No.PJ 1/10/2017 Purchase; Sunshine Beverages Pty Ltd

00000001 2-1510 Trade Creditors $12,000.0000000001 6-3100 Freight Out $227.2700000001 1-1320 Inventory $10,681.8200000001 2-1220 GST Paid $1,090.91

CD 1/10/2017 Sunshine Beverages Pty Ltd 12 SunshineRoad London United Kingdom1 2-1110 Visa #1 $12,000.001 2-1510 Trade Creditors $12,000.00

SJ 3/10/2017 Sale; The Railway Ramsbottom00000001 1-1310 Trade Debtors $5,000.0000000001 4-1000 Services Income $4,545.4500000001 2-1210 GST Collected $454.55

CR 3/10/2017 Payment; The Railway RamsbottomCR000001 1-1110 Business Account $5,000.00CR000001 1-1310 Trade Debtors $5,000.00

SJ 4/10/2017 Sale; The Crown and Glove00000003 1-1310 Trade Debtors $5,000.0000000003 4-1000 Services Income $4,545.4500000003 2-1210 GST Collected $454.55

SJ 4/10/2017 The Crown and Glove: Discounts on 0000000300000004 1-1310 Trade Debtors $500.0000000004 6-3300 Discounts Given $454.5500000004 2-1210 GST Collected $45.45

CR 4/10/2017 Payment; The Crown and GloveCR000002 1-1110 Business Account $4,500.00CR000002 2-1520 Customer Deposits $4,500.00

SJ 4/10/2017 The Crown and Glove: Credit from 00000004SJ000001 1-1310 Trade Debtors $500.00SJ000001 1-1310 Trade Debtors $500.00

SJ 4/10/2017 Transfer from deposit.SJ000003 2-1520 Customer Deposits $5,000.00SJ000003 1-1310 Trade Debtors $5,000.00

PJ 7/10/2017 Purchase; Sunshine Beverages Pty Ltd00000002 2-1510 Trade Creditors $500.0000000002 1-1320 Inventory $454.5500000002 2-1220 GST Paid $45.45

SJ 12/10/2017 Sale; The Railway Ramsbottom00000005 1-1310 Trade Debtors $2,800.0000000005 4-2000 Stock Income $2,454.5500000005 4-5000 Freight Income $90.9000000005 2-1210 GST Collected $254.5500000005 1-1320 Inventory $1,818.1800000005 5-1000 Cost of Sales $1,818.18

1/10/2017 To 20/10/2017

Punch Taverns PLC OFFICIALJubilee HouseSecond Avenue

StaffordshireDE14 2WF

All Journals


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PJ 15/10/2017 Purchase; Super Dooper Electricity00000004 2-1510 Trade Creditors $4,500.0000000004 6-1700 Electricity Expenses $4,090.9100000004 2-1220 GST Paid $409.09

CD 15/10/2017 Super Dooper Electricity Lectric Lane London United Kingdom1 1-1110 Business Account $4,500.001 2-1510 Trade Creditors $4,500.00

SJ 16/10/2017 Sale; The Railway Ramsbottom00000006 1-1310 Trade Debtors $270.0000000006 4-2000 Stock Income $245.4500000006 2-1210 GST Collected $24.5500000006 1-1320 Inventory $181.8200000006 5-1000 Cost of Sales $181.82

SJ 16/10/2017 The Railway Ramsbottom: Credit from 00000006SJ000002 1-1310 Trade Debtors $270.00SJ000002 1-1310 Trade Debtors $270.00

CR 17/10/2017 Payment; The Railway RamsbottomCR000003 1-1110 Business Account $2,530.00CR000003 1-1310 Trade Debtors $2,530.00

Grand Total: $66,870.00 $66,870.00

Punch Taverns Financial Statements for Hypothetical Transactions


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Punch Taverns PLC OFFICIALJubilee House

Second AvenueStaffordshireDE14 2WF

Balance SheetAs of 20/10/2017

Assets Current Assets Bank Accounts Business Account $7,530.00 Total Bank Accounts $7,530.00 Other Current Assets Trade Debtors ($500.00) Inventory $8,590.91 Total Other Current Assets $8,090.91 Total Current Assets $15,620.91 Total Assets $15,620.91Liabilities Current Liabilities Credit Cards Visa #1 $12,000.00 Total Credit Cards $12,000.00 GST Liabilities GST Collected $1,093.65 GST Paid ($1,454.55) Total GST Liabilities ($360.90) Other Current Liabilities Trade Creditors ($500.00) Customer Deposits ($500.00) Total Other Current Liabilities

($1,000.00)

Total Current Liabilities $10,639.10 Total Liabilities $10,639.10Net Assets $4,981.81Equity Current Year Earnings $4,981.81 Total Equity $4,981.81



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Second AvenueStaffordshireDE14 2WF

Profit & Loss Statement1/10/2017 To 20/10/2017

Income Services Income $9,090.90 Stock Income $2,209.10 Freight Income $90.90 Total Income $11,390.90 Cost Of Sales Cost of Sales $1,636.36 Total Cost Of Sales $1,636.36 Gross Profit $9,754.54 Expenses General Expenses Electricity Expenses $4,090.91 Freight Out $227.27 Discounts Given $454.55 Total General Expenses

$4,772.73

Total Expenses $4,772.73 Operating Profit $4,981.81 Total Other Income $0.00 Total Other Expenses $0.00 Net Profit/(Loss) $4,981.81


Second AvenueStaffordshire


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DE14 2WF

Statement of Cash Flow1/10/2017 To 20/10/2017

Account Name

Cash Flow from Operating Activities

Net Income $4,981.81 Trade Debtors $500.00 Inventory ($8,590.91

)

Visa #1 $12,000.00 GST Collected $1,093.65 GST Paid ($1,454.55

)

Trade Creditors ($500.00) Customer Deposits ($500.00) Net Cash Flow from Operating Activities

$7,530.00

Cash Flow from Investing Activities

Net Cash Flow from Investing Activities

$0.00

Cash Flow from Financing Activities

Net Cash Flow from Financing Activities

$0.00

Net Increase/Decrease for the period

$7,530.00

Cash at the Beginning of the period

$0.00

Cash at the End of the period $7,530.00

Financial Statement Interpretation

I have never thought of financial statements as ‘telling a story’. But I suppose as information divulges from one sector, it will then intertwine unsuspectingly with more information. So that is how I will dissect my hypothetical financial statements. Start by analysing in one area, and then continue to see where I conclude as the data corresponds. Tools that I will use along the way are the financial ratios used to examine business performance. The key indicators I will explore will be gross profit ratio, profit margin, expenses to sales ratio and inventory turnover. The reason of why these are tools are useful will be provided as I illustrate the results.

I am first drawn to inspect the Statement of Cash Flows to study the day-to-day flows of Punch Taverns. After all, daily transactions are where it all starts. It is interesting to realise that the transactions included for Punch Taverns are all related to operating activities. These are the transactions related to buying and selling inventory or services, and running expenses. If Punch Taverns had cash flow relating to finance activities then they would also be included. Examples of these may be interest paid or repayment of borrowings. As there are no transactions relating to these, they are not included at this time. The cash flow from operating activities tell me that the income received will


katrina brown s0030976 assessment step 7-10€¦ · web viewauthor: trina brown created date:...

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