ACCT11059 Victoria Gillies 25th September 2018

INTRODUCTORY TO FINANCIAL ACCOUTINGSTEPS 7 - INVENTORIESWow! How much can we do with inventories! There’s so much. After looking through my firms’ inventories for the years 2017, 2016, 2015 and 2014, it was enlightening to see the changes of inventories throughout these years. Digging through my company I found that there were no write-downs in any of the annual reports. I also found that when the inventory accounts were divided up into Raw Materials and Finished Goods, there was no explanation on the inventory procedures used. This is probably because the AASB is for Australia, and not the United Kingdom.

I found that the 2014 year was when they had used the First-In-First- Out (FIFO) inventory method. Their inventory account for this year was 19, 158,000 euro. The inventories for this year (2014) were the largest out of the non-current assets and was the second largest out of all the assets. It was followed from Property, Plant and Equipment which was worth 131, 525,000 euro. For this year I also found that there were no supplier rebates. I found that the inventories were divided up int0 two sections; raw materials and consumables and finished goods. The raw materials and consumables figure was 616 euros and the finished goods was worth 18, 542,000, giving a total of 19 158 000. The total cost of sales that were recognized as an expense amounted to 831 million euros. Another thing that I found interesting with the annual report for 2014 was that it stated “…costs of inventories include transfer from equity of any gains/losses on qualifying cash flow hedges for purchases of new materials”. I found this statement quite interesting. I found it interesting because I had no idea what a cash flow hedge is, so I decided to take it to my peers.

Thank-fully, Maria had responded to my questions and gave me some more questions to ponder about when understanding what this part of inventory means.

Firstly, I would like to start off with what the meaning of a cash flow hedge is. According to Accounting Tools (2018) a cash hedge flow is “…a hedge of the exposure to variability in the cash flows of a specific asset or liability, or of a forecasted transaction, that is attributable to a

particular risk”. So in terms of my company Applegreen, the risk is the foreign currency risk, this is due to the fact that they operate in both US dollars and Euro. In Accounting Explained (2013), changes in the hedge should be broken down into two different components.

1 – Match the change in value of the hedged instrument which should be recorded into other comprehensive income

2 – Any excess change in value should be recognizes in profit or loss.

The comprehensive income figure from 2012 was (32, 000) and the comprehensive income from 2013 was (159,000) to give a figure of (191,000) (hedge loss) for 2014. It is important that the foreign currency risk is offset by the gain or loss on hedging investment, this is because it will reduce the volatility of future cash flows. Thus, the reason why a company might include the transfer of equity from a gain or loss from cash flow hedge in purchasing new inventory. Because it will reduce the risk of a volatile foreign currency exchange, thus the inventory will cost less for the company to purchase. I think that that is what it means. I am not entirely sure though. From this small sentence I have gained so much more insight into the Hedging accounting method, to how a foreign currency risk can adversely affect a company.

Moreover, the 2015 Annual Report from Applegreen had a total figure of 24, 076 euros worth of inventory. However, this year differed from 2014 because the company had used the average-weighted costs method of measuring inventory. The figure for the inventories increased to 24 076 euro. This year again had raw materials and consumables worth 883, 000 euros with the finished goods increasing as well to 23, 191, 000 euros. The company did not disclose which type of inventory method was used to calculate these figures. As these company is based in Ireland it does not have to follow the AASB but it would have particular standards for the company. The cost of sales recognized as an expense and included in the cost of sales reached 941 million euros which was also an increase from the previous year. Two-thousand and sixteen’s Annual Report followed in similar steps from 2015, the inventory figure again increased to 30, 273, 000 euros worth of inventories and used the average-weighted cost method. The raw materials and consumables were worth 981 000 euro and the finished goods also increased again to 23 191 euros. There was also no valuation given again for this year on the type of inventory method used. This is also again similar to 2017 Annual Reports, however, the total inventories increased to 35 228 million euros and the raw materials were worth 1, 203, 000 euros and the finished goods; 34, 025 euros.

For the 2017 Annual Report I also found inventory figures in a table listed ‘Business combinations’, where inventories for a group called the Bondi group had 3 120 000 euros worth of inventories and the Carsley group had 780 000 euros worth of inventories. I thought that this was quite interesting.

From the research conducted the last three years (2015, 2016 and 2017) have all increased their inventories and also changed their inventory method with using the weighted average cost basis. In the last three years they have also expanded the number of sites and franchises they have which may have been why these figures have increased. I also found that the last three years the company have provided supplier rebates. The Annual Report states;

“Supplier rebate income is recognised in cost of goods sold concurrent with the sale of the inventories to which it relates and is calculated by reference to the expected consideration receivable from each rebate arrangement. Supplier rebate income is not recognised if there is

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significant uncertainty regarding recovery of the amount due. Supplier rebate income accrued but not yet received is included in accrued income.”

As I have found no evidence that the company has used the perpetual method of accounting. They have not included whether or not they have had any write-downs or any losses of inventory incurred. Therefore, I am assuming that the company uses the periodic method of accounting.

STEP 8 – MYOB TRAINING AND INITIAL SET-UPI have really been looking forward to this step. It’s exciting to me to create my own information relating to a business. I have just used the same name as my company that was given to me – Applegreen as well as the fake number and business email. I look forward to taking you on my created business journey; showing you my training, quiz results, and using hypothetical data to understand the world of MYOB.

Here are the two screenshots from both setting up and my training. **PLEASE NOTE: The steps on setting up and all of my training is available in Appendix One: Initial training and understanding accountright. **

STARTING OUT WITH ACCOUNTRIGHT

USING ACCOUNTRIGHT

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MYOB EZYLEARN TRAINING SKILLS TEST:

STEP 9 TRANSACTIONS FROM APPLEGREENApplegreen Transactions

1. 1st July 2018: The Applegreen company received a payment of 150 000 from Globetrotter Trucking Ireland Ltd for fuel for all of the company’s trucks with a 5% discount as they paid within 180 days.

2. 3rd July 2018: Andrew Wayne received 150 euro for a fuel and car service performed 3. 4th July 2018: Received a payment from Andrew Wayne for 100 euro for fuel 4. 6th July 2018: The Applegreen company purchased 2x food counter warmers from Harvey

Norman Ireland for 2, 156 euros. 5. 9th July 2018: Applegreen paid the utilities bill of 80 000 euro to Electric Ireland 6. 10th July 2018: Salary expense for staff for 200 0007. 15th July 2018: Paid the monthly rent of 15 000 euro to Ireland Real Estate 8. 18th July 2018: Donated 3,000 euro to charity to the Northern Ireland Children’s Hospice.9. 22nd August 2018: Purchased a refrigerator for 2000 euro from Refrigerator Co. Ireland 10.22th August 2018: Received 600 000 euro for franchises 11.30th August 2018: Payment for Petrol Gas Ltd for 100 000 euro

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All Journals:

Balance Sheet:

Income Statement:

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Statement of Cash Flows:

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Wow! It was an enlightening experience to complete and create my own transactions for the business. However, I still have some mixed emotions about it. When I first started on MYOB, I used Google Chrome and after several days of disconnecting and reconnecting the internet, going to different places trying to receive good internet, I started to panic thinking that I would not get the training and the transaction steps completed. After turning to my peers, who quickly told me that I needed to use the internet with Microsoft edge sheer relief overwhelmed me. I saw on the Facebook unit page that any person was having the same issues. However, as I look back on step 10 (creating transactions for the firm), I am really proud of the work I have completed. As Martin says, accounting tells its own story. Looking back on the firm’s statements, a chapter of this story can be seen through the analysis of various ratios. These ratios analyse and delve deeper into the firm’s profitability, efficiency, liquidity and financial structure.

So, lets start off with profitability, which measures a company’s performance when the revenues are deducted from the expenses:

The profit margin ratio: Net profit/sales: (188 812.74/688 722.73) x100 = 27.41%

The profit margin ratio is when the net profit is deducted from income or revenue. The profit margin ratio indicates how many cents in the dollar of sales a company actually keeps. In this hypothetical situation there is 27 cents in the dollar that the company uses. The Wages and Salaries is the largest expense of 400 000 euro, looking back at this now I think that it would be a little bit less, given that it is an estimation and it seems a bit out of proportion, compared to the rest of the figures.

Return of assets: Net profit/ Total Assets: (188 812.74/ 4 150 000) = 0.045

The return of assets ratio shows how much income an asset can receive. The higher the return the more investors are likely to invest. Investors will compare this to the industry’s average. Here, in this case the return of 0.045 is extremely low, so I compared this to the ‘real’ Applegreen return of assets and received a figure of 4.25. although this is higher it is still quite a low return. So, this is indicative that the assets that Applegreen do not have assets that invest much in their net income. However, it is hard to tell because it needs to be compared with another firm within its industry. It also does not consider the limits and fluctuations of the economy and foreign exchange rates.

The total asset turnover ratio: sales/ total assets: 688 722.73/ 4 150 000 = 0.17

The total asset turnover ratio measures the firm’s efficiency of a company’s assets to generate sales. As the return of assets ratio was quite low, I wasn’t expecting this figure to be too high, and in fact low. It compares the dollar value of the assets to its revenue. As a rule of thumb, it should be around .5 where it generates half of the company’s earnings. In this hypothetical case the business should look at management and production problems.

Liquidity Ratios:

The current ratio: Current assets/current liabilities: 4 150 000/ 136 636.36 = 30.37

The current ratio measures the ability of the business to meet long-term and short-term debt obligations. In this hypothetical case, the reason as to why this figure is quite high is because the only liability the firm has is GST Collected. I have not added any other loans for the business. If I could do this again I would add a bit more of everything and would include a transaction of;

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received a loan from ANZ for the purchase of land. However, in this case the business has too much working capital.

The equity ratio: equity/total assets: 4 136 363.64/ 4 150 000 = 0.99

The equity ratio measures the proportion of assets that are financed by shareholders. As the firm has limited liabilities it is no surprise as to why this ratio is so high. However, in this case the business can swiftly pay off its liabilities – GST Collected with having minimal affect.

Overall, the ratios and the analysis are an extremely useful tool to measure the profitability, efficiency, liquidity and structure of a business; to help understand the firm’s story. The profit margin ratio indicated that there were 27 cents in the dollar which contributed to the company and which the company use. However, the return of net assets and the total asset turnover ratios were extremely low. In this hypothetical case this would be critical as the business operates by providing goods. I would have expected them to have a much higher turnover, however, this was probably due to an error of my judgement. If given the chance (and more time) I would have loved to have done more with MYOB in creating and ordering inventories. This may have increased the turnover rates as it would have increased the sales. In terms of liquidity the ratios are quite high indicating that the business will be able to pay off liabilities easily. It also indicates that the business is working too much capital. However, like the inventories, if given more time I would have liked to included a loan or repayment as part of my transaction, as it would have been a more realistic transaction for my company – Applegreen.

STEP 10 – DEPRECIATION Depreciation is an estimation that uses up future economic costs. It turns assets such as property, plant and equipment into an expense. It is based on judgements and estimates. It is not a transaction, rather an estimation of value. Manager’s use one of three depreciation methods; straight line, reducing balance or units of production.

Depreciation is found in Apple green’s annual report under Property, Plant and Equipment. Throughout the years of Applegreen their Annual Report shows consistency with depreciation and its methods, I see no real significant changes to the methods used. The Applegreen company also used the same ‘life-expectancy’ for each of their asset accounts; Plant and equipment: 20 years, Fixtures and fittings: 10 years, and Motor Vehicles and Computer software: 5 years each.

2017/2016/2015/2014: Applegreen Plc

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Depreciation from Applegreen Property, Plant and Equipment: “Property, plant and equipment is stated at cost, less accumulated depreciation and accumulated impairment losses”.

The figure for depreciation for 2017 was 13,661,000 compared to 2016 with 10,890,000. In 2016 the figure was 8,484, 000 and 2014’s figure was 5, 604,000. Clearly there is an increasing trend of depreciation throughout the years. From 2014 to 2017 the depreciation has been fairly average. It is not the largest nor the smallest expense.

The straight – line method involves having the historical cost minus the residual value, divided by the estimated useful life, to calculate the annual depreciation of a non-current asset account. It was quite easy to find this information in my firm’s annual report.

“Property, plant and equipment is depreciated on a straight-line basis over its expected useful life. The typical useful lives of the Group’s property, plant and equipment are: Freehold property Over 50 years Leasehold improvements Over the term of the lease or useful life, whichever is lower Plant and equipment 20 years Fixtures & fittings 10 years Motor vehicles 5 years Computer hardware and software 5 years Freehold land is not depreciated.” (Applegreen Annual Report. (2017).

Here are my three journal entries that may have been processed when recording Applegreen’s depreciation:

1. Purchase of land for new Applegreen station DR Depreciation expense (euro) 40 000 000CR Accumulated depreciation – Land and buildings (euro)40 000

2. Purchase of new computers DR Depreciation expense (euro) 156 000CR Accumulated depreciation – Computer & Hardware (euro) 156 000

3. Purchase of land for new Applegreen station DR Depreciation expense (euro) 43 000CR Accumulated depreciation – Plant and Equipment (euro) 43 000

These transactions affect the business in such a way that it adds to the depreciation expense of the business, lowering its overall value. Management can manipulate depreciation by over-stating or under-stating it. They could charge less depreciation on the asset, increase its estimated life-span and could potentially re-value their assets.

STEP 11 – PEER FEEDBACK

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APPENDIX ONE: INITIAL TRAINING AND UNDERSTANDING ACCOUNTRIGHT

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STEP ONE – INITIAL TRAINING ON SET-UP :

STEP TWO – TRAINING FOR ACCOUNTRIGHT

Process of Sales:

Creating a Quote: Clearwater provided a quote for Footloose Dance Studio for repairing a water filter.

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Creating an invoice: The Island Way Motel ordered two large Cooler Filters and the Clearwater provided a one-hour service tow installing both of the water filters.

Displaying the quote as an invoice: The water filter for Footloose Dance Studio has been repaired, now I have changed the quote to an invoice.

Receiving Payments:

Receiving payment, deposit to account: The Footloose Dance Company received and paid for the invoice for the $800 water filter repair. It has now become a closed invoice.

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Grouped undeposited funds: The Island Way Motel paid a cheque of $2 608.87 to pay off all of its invoices.

Adjustment Notes:

Adjustment notes for customers who have fully paid: The Motor Company returned all of the boxed tea as it was damaged. I adjusted for this as it does not show in the Returns and Credits section that the Motor Company had an amount of -375 ($) still owing. These has been cleared to the closed invoices section.

Process Purchases:

Order: Ordered 12 and 10 Medium and Large Filters from Clear and Bright Filters.

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Invoice received from supplier and changing that into a bill:

Pay bills:

Electronic Payments:

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Spend Money:

Receive Money:

Bank deposits:

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Bank reconciliation:

Reconcile Smarter:

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