hbensilum.files.wordpress.com€¦ · web viewname: helen bensilum. student number: s0241057....

Name:

Helen Bensilum

Student Number:

S0241057

Program:

Using Accounting for Decision Making

Course Code:

ACCT11059

Assignment:

Assignment Stage 2 (ASS#2): Restated financial statements

Topic:

The second of the course’s major assignments which explores the financial statement items, demonstrates the restated financial statements, demonstrates interaction with others in the course

and discusses key concepts and questions

Word Count:

6777

Lecturer:

Martin Turner

Date Due:

11.00 am Monday 11 May 2015

Step 1

My key concepts and questions on Chapter 4

Chapter 4 opens by setting the picture that firm’s trade in expectations. The statement, ‘Firms are alive and we are buying outcomes of their future business activity”, seems to refer again to trust. Set in the context of capital markets, this paints a very dynamic picture in which we constantly trust the firm to work to create value. Given firms only exist because of people and people vary in their dedication, honesty and interests the expectation of a firm creating value is a little unsettling and at the same time exciting. It could just depend on who is driving the lead camel and whether they can get everyone to join the camel train!

Once the camel train is moving in time we want to know if it is actually making progress in the right direction and at a reasonable pace. We also want to know if any of the camels in the line up are dragging their feet; (I don’t even know if camels drag their feet or just lay down in refusal to participate?) Martin explains that Discounted Cash flow (DCF) and economic profit are two common frameworks used by people to analyse firms. I like the next sentence that tells me there is some sort of process or important information to focus on in the financial statements. This concept of what is likely to be driving value in a firm is interesting. I understand this as the activities that result in the firm’s worth.

This practice of restating financial statements looks to be logical. In the past I have learnt about debits, credits and the five accounting elements. When learning the bookkeeping process and seeing all the various transactions that result in the financial statements and various reports (on accounting software) I always wondered what real value some accounts have and what impact these accounts have on the final reports produced. It seems that some accounts need to be stripped away to produce value information. Maria talked about intangibles and goodwill. She explained goodwill as a balancing transaction that just records the amount the equity owners have been willing to pay above the value of the investment. I don’t see that this sort of transaction would be reflective of the value of the firm and therefore it needs to be reorganised in the financial statements when considering what the realities are.

Sometimes this text turns on its head! We go from why we are restating financial statements in view of key accounting drivers of economic profit and cash flow to learning about restating financial statements to learn about financial statements! But, I am here to learn so I will continue seeking. It occurs to me that firms have an operational side which is what the income statement is mainly about and then a financial side which is what some of the balance sheet is mainly about. Then there are interactions between these sides that cross the floor and intermingle. Investors put money in that is in turn used to mainly purchase operating assets. These funds however may earn interest whilst waiting to be spent on the operating asset. This would be financial income. Dividends are another financial items that actually only result when the firm has created value by using operating assets.

So how are dividends actually recorded in the debits/credits process? I will think this process through. A general journal entry recording the Dividends Payable (Dr and the account is a current liability) and a balancing transaction in Retained Earnings (Cr and the account is in owners’ equity) begins the process and the journal entry is then transferred to the ledger accounts (or automatically in software packages). (A temporary account in expenses could be used instead of the liability account with the temporary dividends account closed to Helen Bensilum of 23S0241057 ACCT11059

Retained Earnings at the end of year.) Another entry occurs when the dividends are paid to the equity owners. The Dividends Payable account is debited and the Cash account (asset) is credited. This simply shows the movement of value from the control of the firm to the control of the equity investors. For example, Joe can list the value of a dividend as an asset in his own financial holdings. Like saying: This week Joe has wealth that consists of a house, a car, furniture, cash, wages owing, dividends payable etc. But next week when the firm pays the dividend Joe has wealth that consists of all the other items but the cash has increased and there are no dividends payable in the list (assuming Joe has no other dividends payable from other firms and he hasn’t spent any cash). I think I have the picture sorted now.

Dividends and FCF alike are similar to the wire that conducts the electricity along from one source to another. There is no net gain only a transfer of energy. (I am ignoring the 2nd law of thermodynamics in this analogy.) This means that we can see the movement of value but it doesn’t tell anything about what is really being created. We need to look at the return on the investment just like when a fuel is harnessed and processed or combusted in some way to transfer the energy into a process that results in more energy. A hydroelectric plant uses the kinetic energy of the water to drive turbines that create power in the same way a firm takes the capital invested and feeds into a system to hopefully add value.

So why do we bother to calculate FCF if it is nothing more than a transfer of value? And why do many analysts in capital markets focus on the cash flow of a firm? Is this just a clever ploy to attract the average person to investment that a wiser investor would ignore? That seems a bit sinister and surely regulators would do well to ensure investment offerings are of better value even for the average person wanting to have a gamble on a firm’s trading in expectations.

From the examples of King Enterprises and Mark’s Inc it would seem that FCF may hold some value in assessing the operating efficiency of a firm. The operating income (OI) may be the same but the expected investment into operating assets is less for King Enterprises and therefore there is more FCF available from the firm. Therefore as an investor hoping for a dividend payment I would be more likely to invest in King Enterprises where there is more opportunity of a higher return. It would be wise to spend time reading the footnotes and researching the web to ensure that King Enterprises has made good predictions about future investment. A dividend in the short term is nice but continued operations through smart investment are more sustainable.

So Economic profit is a measure of value added in a year. It is the accounting profit for the period (generally a year) compared to its cost of capital. It is the earnings generated over and above the opportunity cost of the capital the firm is using to generate those returns. The equation is: Economic profit = (RNOA – cost of capital) x NOA, Where, RNOA = OI/NOA.

I have yet to understand just exactly how the OI is calculated. Under the heading Free Cash Flow, Martin gives the OI figure for Ryman healthcare. I hope to be able to grasp just how he arrived at this figure soon! I am going to spend a little time working through the Economic equation by attaching some figures (which may or may not be very relevant). A firm made an accounting profit for the 2014 FY. I just assume this is $1000 for illustration purposes. The firm has NOA of $100 000. So I can then calculate the RNOA as: 1000/100 000 which is 0.01. The firm also has a cost of capital of 10% (which at this point I assume I could find in

Helen Bensilum of 23S0241057 ACCT11059

the footnotes?). With this information I can calculate Economic profit as: (0.01 - 10%) x 100 000 = 900. So the firm added $900 of value in the year over and above the opportunity cost of the capital the firm is using to generate those returns. I still cannot apply this equation to my company’s financials and I’m wondering if I need to learn more about the separation of operating and financial activities.

Looking at economic profit gains the advantage of viewing value added rather than being concerned with dividend and investment policy which is influenced by boards and opinions. There are some factors about the economic profit equation that require an understanding of the separation of operating activities and financial activities to be able to actually calculate the information. After reading (and re-reading) the Chapter 4 text I have made myself a table to clearly separate the operating and financial activities.

Table 1: Separation of operating and financial activities

Activity Operational FinancialInteractions with:

product and input markets capital markets

customers and suppliers equity and debt investorsDecisions about:

which operating assets to acquire or to sell

the financial structure of a firm (how much of a firm's operations to fund with debt or equity)

what agreements to enter into with employees, suppliers and customers

matters such as dividend policy (how much of a firm's earnings to retain within a firm and how much to pay in dividends to equity investors)

various other activities to add value to the inputs a firm acquires from suppliers

I have decided to apply Table 1 above by attempting to separate the operating and financial activities of my firm, Spark NZ. Below is Table 2 of my first attempt at separating the operating and financial activities. I can see that I have a lot of work to do to understand these better.


Table 2: First attempt at separating the operating and financial activities

Spark NZ Financial Statement entry

Operating Activities ReasoningNote

SourceIS Operating revenue and other gains Interactions with customers. Not sure about the other gains? 4IS Operating expenses Interactions with suppliers, input markets. 5IS Depreciating expenses Why operating? Perhaps asset is depreciating as a result of the operations?IS Income Tax Why operating? Is this tax that relates directly to operating income only? 7BS Cash Is all of this operating?BS Receivables and Prepayments Operating income and expenses?BS Taxation Recoverable Taxation on income and expenses? Like GST?

BS Inventories Operating assets held for inputs or resaleBS Assets classified as held for sale What sort of assets or these?BS Property, plant & Equipment Operating assets 15BS Intangible assets intellectual property used in operations or to create value 16BS Short-term payables and accruals Items owing or receivable from operations? 17

Financial Activities ReasoningNote

IS Finance Income Interactions with investors 6IS Finance Expense Interactions with debt investors 6

CIS Cash Flow hedges Hedges about financial risk? 11BS Short-term derivative A derivative is a financial product? 11BS Long-term investments Capital investment therefore financial? 14BS Long-term derivative assets A derivative is a financial product? 11BS Short-term derivative liabilities A derivative is a financial product? 11

BS Short-term provisionsCould this operating because it detracts from the operating income if the provision amount actually isn't paid? 18

BS Debt due within one year name suggests loans 19BS Liabilities classified as held for sale Is this like selling on debt? 8BS Long-term derivative liabilities A derivative is a financial product? 11

BS Long-term provisionsOr could this operating because it detracts from the operating income if the provision amount actually isn't paid? 18

BS Long-term debt name suggests loans 19

Not sure ReasoningNote

IS Amortisation Operating because it is the devaluing of operating assets?

CISRevaluation of long-term investments designated at fair value

Financial because it is in relation to long-term investments? But then these could be operating investments. 14

CISReclassified to income statement on disposal of foreign operation Look this one up!

CIS Translation of foreign operations Look this one up!

BSLong-term receivables and prepayments Are these like loans, or paid up rents? 12

BS Taxation payable Is it payable on operating income or financial income?BS Deferred tax liabilities Deferred tax on operating or financial income?

BS Long-term payables and accrualsOperating because payables and accruals are generally things like holiday or long service leave accruals which relate to wages? 17

BS Share capital Equity component, neither operating or financial 20BS Reserves Equity component, neither operating or financial 20BS Retained earnings Equity component, neither operating or financialBS Non-controlling interests Equity component, neither operating or financialCIE Other comprehensive income/(loss) See the comprehensive income statement

CIE Dividends Financial because of interaction with equity investors 10

CIE Supplementary dividends Financial because of interaction with equity investors 10CIE Tax credit on supplementary dividends Financial because it is a tax component that relates to dividends? 10CIE Dividend reinvestment plan perhaps financial as it seems to be about funding the firm

CIE Issuance of shares under share scheme Perhaps financial as it seems to be about funding the firmCIE Disposal of foreign operation Sale of a subsidiary? So maybe financial? 8

CIE Shares repurchasedMaybe financial because of funding structure of firm but maybe it just sits in equity?


After the lengthy exercise of my first separation attempt (which I realise is not actually a part of Step 1 in Ass#2 but I just wanted to apply the text to understand it better) I have spent more time looking at Figure 4-1: View of a firm: operating and financial activities. Figure 1 below shows my understanding of each item and what it represents. I have no idea why, but I had some preconceived idea that this would be a circular flow diagram. Perhaps this was based on the idea that cash circulates. Anyway it doesn’t matter, I just wonder sometimes about where my preconceived ideas are born. The figure does show the interactions between C and I as transfers of value between the two sides of the firm.

Figure 1: My view of a firms operating and financial activities (from Figure 4-1, Chapter 4, ACCT11059 study guide)

Reading through the information about restating the financial statements I can see that I have a lot of work ahead of me and this is becoming overwhelming given scare time resources. The application of allocating tax to the separate activities looks complicated but I understand the relationship between tax and interest expense; that increased interest expense reduces operating income and vice versa. I am thankful for the piece of information about calculating how much tax the firm would have paid on its operating activities if it had no financial assets or liabilities as this seems logical to me.

I have spent quite a bit of time developing questions for Peerwise on ATO, PM and cost of capital. I know what these mean now so I will not go into detail here as I need to move onto Step 2. I have found Chapter 4 to be lengthy but very informative. It has taken me a lot of time to really work through the concepts. I know that I will spend more time yet scrolling the text as I separate the operating and financial activities. When attempting my first separation set out in Table 2 above I discovered that I had


Figure 4-1: View of a firm: operating and financial activities This view of a firm clearly separates its operating and financial activities Source: This figure is based on a chart for all stocks and flows for a firm in Penman (2009, p. 244).

And I have sourced it from ACCT11059 Chapter four of the Study Guide.

2-way arrow representing funds flowing into and out of the NFA. Inflows are from equity investors purchasing shares while outflows are from dividends paid to investors.

2-way arrow representing funds flowing both in and out that relate to debt investors. Inflows are funds from borrowings and outflows are repayments.

Funds moving out of the firm to purchase inputs for operating activities. Interactions with suppliers that result in expenses.

Funds flowing into the business from interactions with customers through revenue from selling a product or service that has resulted from operating activities.

Cash flows into NOA as purchases of inventory and NFA as payments on funding.

Investment into NOA as purchases of operating assets and NFA as financial assets used to store wealth.

not included the comprehensive income statement in my spreadsheet! Anyway, I easily added it and updated the formulas. Phew!

The text about opportunity cost in relation to life was a good example in this text and something I could probably write another thousand words of reflection on but my priority must now be on the current opportunity and taking the time to write that reflection would be the opportunity cost of immediately moving onto the next step.

Step 2

Restating my firm’s financial statements required a lot of time. I really hope I can master this process more confidently. The main issue I had with restating was about understanding what each item really included. Like what sort of transaction occurred in reality to result in someone entering source data that was processed in double-entry accounting to become a financial statement entry. The restating process definitely achieved Martin’s goal of having students look at every item on the financial statements. I have included below the table that I began in my ASS#2 Step 1 (Table 1 above). I posted this table for feedback and I have included the feedback I received from this post. The table is included here as Table 2 as it is an updated attempt from Table 1.

First post for Step 2 requesting feedback

Below is a table of my second attempt at separating the operating and financial activities of my firm. To date I have not actually attempted to enter my restated financial statements into the spreadsheet.

I am really keen for feedback on the following items:

Inventories Operating because it has to do with items used for resale. But, "the cost of inventories includes the transfer from equity of any foreign exchange gains or losses on qualifying cash flow hedges related to inventories." Hedges are a financial instrument so is there a component of this that is financial? The footnote separates inventories into three groups, all operational. Maybe the 'hedges' here is still an operations issue because it directly relates to operating


assets?

Reclassified to income statement on disposal of foreign operation

After Googling this it seems this is about a financial activity?

Translation of foreign operations


Long-term payables and accruals

The notes suggests interactions of an operational nature?

Disposal of foreign operation


Any help? Please?!!!

So far this process has taken me a lot of time and I’m beginning to wonder if I’m just over thinking the situation. I also have to tackle the tax calculations. I’m cringing. My apologies for the poorly presented table.

Table 2: Second attempt at allocating items

Operating Activities Financial statement entry Reason

Notes

ISOperating revenue and other gains

All of the interactions are about operational issues. 4

IS Operating expensesAll of the interactions are about operational issues. 5

IS Depreciating expensesDepreciation on operating assets therefore a component of operations

IS Income TaxRecalculate tax

7

ISNet earnings for the year from discontinued operation

Note 8 explains this is earnings from an operation that has a significant separate business stream or geographic location and has been discontinued or sold. 8

BS Cash

$208/$936 = 0.22 This is a low amount so all operating. Same for 2013. Check 2012 & 2011 – all operating amounts

BS Receivables and Prepayments

Note 12 talks about operational interactions with suppliers and customers 12

BS Taxation RecoverableTax on trading such as goods and services

BS Inventories

Operating because it has to do with items used for resale. But, "the cost of inventories includes the transfer 13


from equity of any foreign exchange gains or losses on qualifying cash flow hedges related to inventories." Hedges are a financial instrument so is there a component of this that is financial? The footnote separates inventories into three groups, all operational. Maybe the 'hedges' here is still an operations issues because it directly relates to operating assets?

BS Assets classified as held for sale

This is in relation to the pending sale of a subsidiary and is operational because the firm is dealing with a potential customer and making a decision about which asset to sell. 8

BS Property, plant & Equipment

Note 15 talks about assets and the way they are being used in relation to useful life so this is operational. 15

BS Intangible assets

Note 16 talks about useful life and lists items that would be used to create value within the operations. 16

BS Short-term payables and accruals

Note 17 is a table showing values that relate to suppliers, input and product markets and customers 17

Financial Activities

Notes

IS Finance IncomeInteractions with capital markets, equity and debt investors 6

ISShare of associates net profits/(losses)

Included with finance income and finance expense on statement

IS Finance ExpenseInteractions with capital markets, equity and debt investors 6

CIS Cash Flow hedges Hedges are a financial instrument 11

BS Short-term derivativeNote 11 talks about derivatives being a financial instruments 11

BS Long-term investmentsInteractions in Note14 are with capital, equity and debt markets. 14

BS Long-term derivative assets A derivative is a financial instrument 11

BS Collateral fundsNote 24 lists financial assets and talks activities with equity markets 24


BS Short-term derivative liabilities A derivative is a financial instrument 11

BS Short-term provisionsInteractions with product and input markets, customers and suppliers 18

BS Debt due within one yearDebt is about the financial structure of a firm 19

BSLiabilities classified as held for sale

Note 8 include info about the pending sale of a subsidiary. These liabilities are included in the sale info. The sale has been classified as operational as it is about which assets to sell 8

BS Long-term derivative liabilities A derivative is a financial instrument 11

BS Long-term provisions

These relate to leases and requirements of properties that are used for operating activities. 18

BS Long-term debtInteractions with capital markets, equity and debt investors. 19

Not sureNotes

IS Amortisation

Operating because it is a depreciation of intangible assets such as a patent or software.

CIS

Revaluation of long-term investments designated at fair value through other comprehensive income

Financial interaction with capital markets that resulted from investing a store of value. 14

CISReclassified to income statement on disposal of foreign operation


CIS Translation of foreign operationsAfter Googling this it seems this is about a financial activity?

BSLong-term receivables and prepayments

Note talks about financial interactions 12

BS Taxation payableTax liability payable on goods and services trading

BS Deferred tax liabilites Tax not yet paid

BS Long-term payables and accrualsThe notes suggests interactions of an operational nature? 17

BS Share capital Interactions with equity investors 20

BS Reservesequity component, neither operating or financial 20

BS Retained earningsequity component, neither operating or financial

BS Non-controlling interestsequity component, neither operating or financial

CIEOther comprehensive income/(loss) Sub-total heading

CIE DividendsThese are interactions with shareholders but present under the 10


Transactions with shareholders section of the Changes in Equity

CIE Supplementary dividends

These are interactions with shareholders but present under the Transactions with shareholders section of the Changes in Equity 10

CIETax credit on supplementary dividends

Equity matter as its about transactions with shareholders 10

CIE Dividend reinvestment plan

These are interactions with shareholders but present under the Transactions with shareholders section of the Changes in Equity

CIEissuance of shares under share scheme


CIE Disposal of foreign operationAfter Googling this it seems this is about a financial activity? 8

CIE Shares repurchased


Legend Operating activities Financial activities Still uncertain Equity items Tax items to review


Feedback from this post:

After receiving the above feedback I still didn’t feel confident to approach the task but I definitely had a clearer picture of what I needed to do. Below is a question from Peerwise that assisted me to understand the tax benefit calculation better.

“Peerwise

Q. The sum of what figures are used to work out the tax benefit when multiplied by the corporate tax rate of the country

A. Financial expenses and Financial income

Explanation: The financial expense and financial income figures are used in order to calculate the tax benefit amount. The smallest figure of the 2 is taken from the largest figure and the sum is used to times the corporate tax rate. This then works out the tax benefit”


After spending some time on the restating process I still had some concerns so I looked on the forums and found the post below helpful. When I clearly understood how the financial statements had to interact with each other I was able to sort out my formulas. This helped to speed up the process.

Below is Table 3 which is my third attempt at allocating operation and financial items to the restated statements. I still don’t know how correct the allocations are but I decided that I needed to move on with the activity.

Table 3: Third attempt at allocating items

Operating Activities

Financial statement entry Reason

Notes

IS

Operating revenue and other gains All of the interactions are about operational issues. 4

ISOperating expenses All of the interactions are about operational issues. 5

ISDepreciating expenses

Depreciation on operating assets therefore a component of operations

IS Income TaxRecalculate tax

7

IS

Net earnings for the year from discontinued operation

Note 8 explains this is earnings from an operation that has a significant separate business stream or geographic location and has been discontinued or sold. 8

BS Cash$208/$936 = 0.22 This is a low amount so all operating. Same for 2013. Check 2012 & 2011 – all operating amounts


BS

Receivables and Prepayments

Note 12 talks about operational interactions with suppliers and customers

12

BSTaxation Recoverable Tax on trading such as goods and services

BS Inventories

Operating because it has to do with items used for resale. But, "the cost of inventories includes the transfer from equity of any foreign exchange gains or losses on qualifying cash flow hedges related to inventories." Hedges are a financial instrument so is there a component of this that is financial? The footnote separates inventories into three groups, all operational. Maybe the 'hedges' here is still an operations issues because it directly relates to operating assets?

13

BS

Assets classified as held for sale

This is in relation to the pending sale of a subsidiary and is operational because the firm is dealing with a potential customer and making a decision about which asset to sell. 8

BSProperty, plant & Equipment

Note 15 talks about assets and the way they are being used in relation to useful life so this is operational.

15

BSIntangible assets

Note 16 talks about useful life and lists items that would be used to create value within the operations.

16

BS

Short-term payables and accruals

Note 17 is a table showing values that relate to suppliers, input and product markets and customers

17

Financial Activities

Notes

ISFinance Income Interactions with capital markets, equity and debt investors 6

IS

Share of associates net profits/(losses)

Included with finance income and finance expense on statement

ISFinance Expense Interactions with capital markets, equity and debt investors 6

CISCash Flow hedges Hedges are a financial instrument

11

BSShort-term derivative

Note 11 talks about derivatives being a financial instruments

11

BSLong-term investments

Interactions in Note14 are with capital, equity and debt markets.

14


BS

Long-term derivative assets A derivative is a financial instrument

11

BSCollateral funds

Note 24 lists financial assets and talks activities with equity markets

24

BS

Short-term derivative liabilities A derivative is a financial instrument

11

BSShort-term provisions

Interactions with product and input markets, customers and suppliers

18

BSDebt due within one year Debt is about the financial structure of a firm

19

BS

Liabilities classified as held for sale

Note 8 include info about the pending sale of a subsidiary. These liabilities are included in the sale info. The sale has been classified as operational as it is about which assets to sell 8

BS

Long-term derivative liabilities A derivative is a financial instrument

11

BSLong-term provisions

These relate to leases and requirements of properties that are used for operating activities.

18

BS Long-term debtInteractions with capital markets, equity and debt investors.

19

Not sure

Notes

IS AmortisationOperating because it is a depreciation of intangible assets such as a patent or software.

CIS

Revaluation of long-term investments designated at fair value through other comprehensive income

Financial interaction with capital markets that resulted from investing a store of value.

14

CIS

Reclassified to income statement on disposal of foreign operation


CIS

Translation of foreign operations


BS Long-term receivables and

Note talks about financial interactions 12


prepayments

BSTaxation payable Tax liability payable on goods and services trading

BSDeferred tax liabilites Tax not yet paid

BS

Long-term payables and accruals The notes suggests interactions of an operational nature?

17

BS Share capital Interactions with equity investors20

BS Reserves equity component, neither operating or financial20

BSRetained earnings equity component, neither operating or financial

BS

Non-controlling interests equity component, neither operating or financial

CIE

Other comprehensive income/(loss) Sub-total heading

CIE Dividends


10

CIESupplementary dividends


10

CIE

Tax credit on supplementary dividends Equity matter as its about transactions with shareholders

10

CIE

Dividend reinvestment plan


CIE

issuance of shares under share scheme


CIE

Disposal of foreign operation

I had thought this was about financial activity but working through the restating I think it’s actually the transaction that transfers the disposal of foreign operation into. The income statement deals with the impact of revenue earned from such activity. 8

CIEShares repurchased


Legend

Operating activities

Financial activities

Still uncertain Equity items Tax items to Helen Bensilum of 23S0241057 ACCT11059

review

I managed to complete the restated financial statements with the interaction checkpoints agreeing. This exercise has helped me appreciate the footnotes in financial statements and just how much information is available. I look forward to feedback on this part of my assignment.

Step 3

I have identified three products or services estimated their selling price and variable cost. Using this information I have calculated the contribution margins. This is followed by a discussion on the possible constraints that Spark NZ may face in pricing and marketing products and services.

As my first product I have chosen to assess a service that is related to mobile phone plans and actually is a component of the plans. Following is a comparison between the voicemail service provided on a Galaxy A3 Pearl White mobile handset as a prepaid and post-paid service. I have chosen this approach to consider whether there are perhaps differences between pricing depending on the amount of guaranteed revenue Spark NZ can earn through contracts with customers.

The Galaxy A3 Pearl White mobile handset is on offer as a prepaid or post-paid serviced phone.

As a prepaid service the deal offers:

Total cost upfront - $549Includes the following charges when you purchase prepaid credit:

49c/min talk 20c/min text 10MB Data at $1/day

With additional costs of: Picture message – 50c each Video call – 89c/min International texts – 30c/each Casual data - $1/day for 10MB Voicemail – 20c per retrieval Video messaging - $1 each

As a post-paid service the deal offers:

Upfront cost $0 Monthly cost - $81.88 Total cost over 24 months - $1965.12

Includes:

Unlimited talk (to any NZ network)Helen Bensilum of 23S0241057 ACCT11059

Unlimited text (to any NZ network) Data – 2.5 GB/month

With additional costs of:

Additional data - $0.30/MB Voicemail - $0.20 Additional minutes -$0.69/min Calling International Top 5 - $0.91/min Calling Rest of World - $1.43/min

The same handset is available from other retailers with absolutely no extras (no sim, headphones etc) with prices ranging from $369- $399 each.

Voicemail is one service offered on both payment methods and is $0.20 per retrieval. Given this type of service would involve server storage and access the input costs would be fairly consistent and the best way to increase earnings on such a service would be to promote more people to use it. I propose that by the time all infrastructure, property, plant and equipment, human resources, compliance costs and consumables are paid there would be maybe $0.01 profit/voicemail. This doesn’t sound like much but these types of services generally rely on high volume usage.

The Contribution Margin is the defined as:

Contribution Margin = Sales – Variable costs.

The contribution margin is actually made up of fixed costs + profit. So,

Fixed costs + profit = Sales – variable costs.

The voicemail service would have variable costs of items such as wages and repairs and maintenance. As such a service would require a large structured system I assume the fixed costs would be far higher than the variable costs. Given the amount charged is the same regardless of whether Spark NZ has any guaranteed ongoing revenue from the sale of the handset (i.e. prepaid or post-paid) I assume that Spark NZ is confident that people will access the service sufficiently to cover the fixed costs. I have assumed the costs as following:

Sales $0.20 – Variable costs $0.03 = Fixed costs $0.16 + profit $0.01.

Based on the above figures the voicemail service has a contribution margin of $0.17. In this situation variable costs are very low so the ability to sell the service is important to ensure the overheads are being paid for. As the firm markets this service as part of packages the uptake would be reasonably assured if the overall marketing plan is working well. The costs associated with such a service may be allocated as part of a department rather than just this specific service because other similar services may be using some of the same infrastructure.

The next service I have chosen to look at is mobile broadband. On an open plan 500 MB can be purchased for $15/month or 1.5 GB can be purchased for $29/month. With a 12 month contract a customer can pay$69/month for 6GB. Obviously the more money a customer


commits upfront, the more their purchasing power increases; all be it with the risk of sunk cost. There would be some additional costs per contract sold as with customer set up and the time taken to service each individual customer. I have assumed the costs as follows:

Service Sales - Variable costs = Contribution margin

500MB $15 - $7 = $8

1.5 GB $29 - $10 = $19

6GB $69 - $20 = $49

The above data shows that with this type of product the more one particular customer is willing to purchase the less the variable costs. Also, the firm has reduced its risk of the overheads not be well utilized by securing either larger amounts of data purchased or an actual contract guaranteeing the service has been paid for. It would seem from the above table that only selling the higher priced, but better value, service is the best way to go. However, not all customers are going to readily engage with the outlay as from a customer’s perspective this is a sunk cost that they may not wish to keep incurring. A lower price package with less value for money is a great way to get customers hooked on a product or service and then they will increase they consumer spend on it over time, especially if the next product is only $14 more.

It can be seen that a market constraint of selling a service such as mobile broadband is the desire of people to engage with the service. So the structure of the packages to ensure customers feel valued and protected from ongoing commitments is important to work towards eventually securing larger consumer spends per customer and in turn driving efficiency.

The third item I have assessed is a packaged product that Spark NZ sells to business customers which includes unlimited broadband data, unlimited landline calling to any NZ mobile of landline, free business grade modem plus the opportunity to add a mobile from $55 to unlimited calling to any NZ and Aussie landlines and mobiles. This all in one product looks to be aimed at the time poor, resource needy business operator that wants simple, straightforward and reliable service. If variable costs are assumed to consist of items such as administration fees, equipment expenses, and staff to service the customer then the overhead costs would include items such as cabling, networks, properties and intellectual property to operate such a venture. Services such as voicemail demonstrated above are all components of these bundled packages. I will make some assumptions about variable costs but I really don’t know if the figures are realistic.

Service Sales - Variable costs = Contribution margin

Bundled $149 - $70 = $79BusinessPackage

This type of packaged service seems to work well for both business and customer as the business can secure market share, ensure fixed overheads are employed (NOA) and the Helen Bensilum of 23S0241057 ACCT11059

customer knows what they have agreed to and understands how much the services should cost them. The profit margin on these packages and many telecom services may well be quite low as it is a highly competitive market. As stated in Spark NZ’s 2014 Annual report, when the telecom was established in its previous form (as Telecom New Zealand) mobiles didn’t even exist. Technology firms move very fast and the development and pricing of products has to move equally as fast to meet market demands and avoid missing opportunities. My firm has had to rebrand themselves to achieve this. In decided what services and products to sell along with how to structure the customer engagement Spark NZ has been proactive to lower the fees on services in markets where they want to secure more market share and where they believe there will be a large future consumer base willing to spend on communications. This concept of securing market share is similar to investing in operational assets. This type of strategic thinking would be important to me as an investor now that I understand the FCF relationship.

Step 4

Feedback and interaction

On Friday 1 May I emailed the students in my feedback group. Below are the snips of the emails.

Email to Haocheng Shi

Email to Hans Batzke


Email and interaction with Haylea Lavaring

Further interaction with Haylea Lavaring


By Friday 7 May 2015 I had given feedback to three people. Below are the snips of the blog posts.

Feedback to Hylee Cho

Feedback to Yoka


Feedback to Melissa

I received some feedback from Haylea who was in my student feedback group which was motivating at the time. This assignment can seem overwhelming at times and having someone else look at my draft was very encouraging.

I found giving feedback to be helpful in this assignment as I gained a better understanding of how the items in the restated financial statements interact. I hope I didn’t overstep the help line with Melissa’s spreadsheet. She has contributed a lot on the forums and has progressed so well with her spreadsheet given she has very little experience with excel. I know how much my own husband has learnt and how well he has mastered various aspects of excel during the last two years as I’ve demonstrated how to drive excel and then left him to have a go himself. (By the way...he attends to all IT problems and maintenance along with my son while I happily use Microsoft Office! ) In relation to Melissa, I made contact with her during ASS#1 and she has a large family to juggle with work and study. I know a little about this “life choices balancing act” and I am amazed at how much help she gives others while attending to her own activities. I hope my feedback has helped her as much as giving it helped me.

I have also updated my blog with the ASS#2 information. I have not received any traffic on my blog which I believe is due mainly to the fact that I can only recall including a link to it in my feedback to Yoka.My blog link is https://hbensilum.wordpress.com/


https://hbensilum.wordpress.com/

hbensilum.files.wordpress.com€¦ · web viewname: helen bensilum. student number: s0241057....

Documents