APC311 Completed

7/27/2019 APC311 Completed

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Introduction

The account information need to be communicate effectively in order to make appropriate

recordings on the financial statements which reflect the financial position of the organisation. In this

report different financial reporting is is provided on the base of the data provided. The part of the

report consist of different theoretical concepts such as gearing ratios and how they can be use by

accountants to show the decrease gearing and increase earnings per share to save the tax pay by the

firm. In the same part the two other theoretical concepts are covered such as the impairment of

tangible and intangible assets and the importance of diluted earnings per share. The IFRS

accounting standards follow in those concepts are discuss and critically evaluate. In the part two of

the report the commentary on the four different transactions is provide. It is advise to the assistant

as to how the information provide in those transactions need to be interpret to make the clear

recording of those transactions in the financial statements. In the final section 3 the comparison isprovided between the financial ratios of two different companies A and B. The advise if provide to

the investors to show which company is provide more feasible and attractive invest investment

option in the light of the financial performance of the two companies base on the data provide.

PART-A

(a) The reduction of apparent gearing ratios can help show the liquidity of the firm and overall

financial position in the long term. The increase gearing can seriously effect the worth of the firm in

negative ways because higher gearing ratios show that company has rely on borrowing. On the

other hand lower gearing ratios show that the investment has come in the company from the direct

investment of its shareholders. Too much gearing percentage can put the company at serious

financial risk (The Studen Room, Online). There are different ways in which the gearing ratios or

percentages can be reduce in the financial statements by accountants to make the company to look

better so that more investors and shareholders can be attract into the business. The gearing ratios are

often manipulate in different ways by creative accountants. For instance by showing in the financial

statements the sell of different shares which are expect to lose value in the current market

conditions. Such sell of shares can improve the liquidity of the business and therefore decrease the

gearing ratios. Also converting the loans into shares after negotiating with the lenders. Such debts

can decrease the liability and increase the assets own by the business and therefore influence the

gearing mainly because of the reduced liabilities. The gearing ratios can also be improve in the

favour of company by showing increased profit in different ways such as including equities

purchase in the profit statements. The gearing ratios are often constrain by governments of different

countries because gearing is effect the tax which need to be pay to the government. According to


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Rauh (2006)the gearing ratios which are use in U.S and constrain by government regulations. The

government impose different regulations for make sure that tax evasion is avoid and companies are

pay the due tax to the government. The reducing of apparent gearing ratios is one of the ways it can

be achieve. For instance by showing the more dividend payments by increasing the gearing ratios

(Accounting Tools, Online).

(b)

I) In this section the discussion and critical evaluation will be carry out about the impairment of

tangible and intangible assets in the light of IAS36. The IFRS regulation is apply on the impairment

of tangible as well as intangible assets. The regulations apply because the nature of assets such as

goodwill which is not generate any cash-flow and is require the impairment tests for being carry outin order to find the cost of damages. Normally there are three factors which take in consideration for

recovering the costs such as Carrying amount, Fair value minus costs for selling and Value in use.

The problem is arise in case of intangible assets such as goodwill which is difficult for quantify and

the units of assets which produce the actual cash-flow for the business because it is also difficult for

quantify. The solution for over coming these problems is to apply testing methods. The impairment

test is carry out in two stages. First the value is calculate individually by testing for impairment and

then comparing its carrying amount by excluding its goodwill. The cost of damages the overall

value of the assets to which the goodwill is attach is calculated, if that amount is greater than the

amount which can be recover then the loss is recognise and must be compensate. Then the group of

units is test as whole for impairment. This time the goodwill is include and is compare with the

carrying amount. If the amount is higher then goodwill is consider as impaired. After the value has

been calculate then first the goodwill is exhausted, then the impairment loss is allocate to other

assets according to the proportion of its values (IFRS, Online).

II) Earnings per share (EPS) are critical measure of the performance of individual share which is

own by the firm. The earnings per share is also reflect the investment potential of a firm. Earnings

per share also provide information on the historical background of the share. Earnings per share also

indicate the profitability of the firm and therefore it is use widely for the financial performance of

the firm. The comparative earnings power of two firms is also measure often by comparing their

EPS (Little, Online). The growth of the firm can also be determine by accounting the earnings per

share over the period of years which give the potential investors useful information whether to

invest in the firm or not depending on the fact whether the earnings per share are increasing for the

firm. Similarly the management performance can also be demonstrate by increasing earnings per


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share since it shows the extent of returns towards its shareholders, however it is different from

profits since earnings per share shows that the effects of issuance of new shares is also account

which is reflect more clear performance of the business (Ready Ratios, Online).

PART-B

Transaction A

The transaction A states that the company Epsilon has incur an expense for constructing the

site which will be use for extraction of minerals. Such expense need to be account in the financial

statement. As we can see that there are different expenses which are incur in this transaction. First it

need to be calculate how much expense is incur by the company. There is expense incur in three

areas such as construction of the site which is 25 million. The second expense include the

estimated administrative costs such as 2.5 million whereas the third expense is the environmental

costs which will be incur to repair the damage made to the environment from the result of this

construction project is 6 million. Although the environmental cost is not legal requirement but it

still need to be account in the financial statements since it is require by the policies of the company.

However since this is a 10 year project therefore all the expense calculations need to be divide by

ten in order to obtain the annual value. However the discount rate of 8% need to be treated

differently since it is not expense rather it is discount received on expense which should be treat as

opposite of the expense. The main thing which need to be careful is the period of 10 years in this

transaction. While making calculations for the different expenses the 10 year period need to be

remember since all the expenses incur are spread over for the period of 10 years.

Transaction B

This transaction is regarding the costs incur in a development project which need to be

account in the financial statement. This project is aim at improving the efficiency of the mineextraction. The success of this project will be effect in positive way such as less expense and more

revenue generate for the company which need to be reflect on the statement. The cost of 5.4

million has been incur by the Epsilon which need to be account. However the cost savings of 1

million per year for the period of 3 months from the project also need to be take in consideration.

The cost saving period start from the 1st October 2012 and cost savings need to be apply in that

quarterly period. The cost of 4 millions which were incur in the year end 31 December 2011 has

no baring on the financial statements of year ending 31 December 2012 since it is from the previous

year. It is important to be consider that the incur costs per month on this project are different during

for first six months as compare to last six months and the cost savings which are calculate for the


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last three months need to take in account the costs of second six months which is 400,000. Also the

ten year period is also very crucial part which need to be consider while calculating the cost savings

of the project which is 1 million.

Transaction C

In this transaction the annual rental of 500,000 which need to be pay at the end of the

financial year is to be account as the expense. Any other lease payments such as 5 million also

need to be account in the financial statements. Both types of payments need to be account as rental

expense. However since IAS 17 classify that a lease is to be consider as ownership of the asset

therefore the balance sheet is also effect by the signing of lease because a new asset will be own by

the business. Also the signing of the lease is bring financial risks in the business because of the

fluctuating fair value of the asset. Such fluctuations also need to be account in the business in theform of increase gearing or whatever is appropriate form for accounting such risks. Another

important calculation is the 8% interest rate which is incur on the annual lease which is need to be

account as interest expense in the financial statement. However since the Epsilon is not interest in

buying the property therefore the value of the property is not relevance in the financial statements.

Transaction D

As given in the transaction information that Epsilon purchase the 1 million shares. The main

figure in this transaction is the sale of 600,000 shares at the price of 3.60 per share. Because of the

increase of the share value over the period of about 4 years since year 2008 when the company buy

the shares the company is expect to earn considerable amount of profit. Therefore the profit need to

be account appropriately in the financial statements. However the profit need to be calculate from

this sale by deducting the initial price of the share which is 2 on which the shares were buy in year

2008. The remaining 400000 shares need to be account at the current price which is stand at 3.50

per share which is assets own by the company at the financial year end 31 December 2012. The

selling of shares also effect the assets own by the company since by selling the 600,000 shares the

assets are decrease from the business and therefore need to be reflect of the financial statement such

as balance sheet. It is also important to be consider that Epsilon does not have the full control of the

shares therefore any profit earn from those share may be attach with some profit sharing with other

parties which need to be calculate accordingly in the financial statements.


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PART-C:

In this section of the assignment the report is presented for analysing the financial ration

data of two companies. There are different performance value provided for company A and

company B which need to be account for comparative analysis of two companies. First the Current

Ratio of two companies. As we know that current ratio is calculate by dividing current assets with

current liabilities; the company A has higher current ratio than company B which shows that

company A is in better position is more likely to pay off its liabilities. The higher ratio also shows

that the company A has more assets and less liabilities whereas the company B has comparatively

less assets and more liabilities. Similarly the Acid test ratio for company A is also higher which also

shows that the company A has higher liquidity and it can use more cash when it is require. The

company B has less cash therefore is in less liquid position than company A. The liquidity is

important for a business when it comes to making purchases regarding the inventory or paying offits debts. According to Rutherford (2003) the acid test ratios are also examine as proxies for risks.

In other words the acid test ratio provides an alternative to the financial risk the company is facing.

The account receivable days are also show better performance for company A since it has less

average days from receiving its accounts which are due on the parties who need to pay for the

company A. In other words the company A is able to be receive its accounts receivable more

quickly than company B on average. The fourth data provide is about inventory turn over times

which is the times the inventory has been sold by the businesses and shows the better performance

for that business. In this case the company A is also better place since inventory turn over time is

higher than company B which is better and shows that company A is being able to sell its inventory

faster than company B. This may also reflect that there may be less storage related costs incur on

company A although such data is not provided. However it is important to note that inventory

turnover varies widely in across retailers and over the periods of time which undermine the

usefulness of such information (Gaur, et al. 2005). Therefore such ratios need to be consider

carefully in decision making. The accounts payable section also show the similar story which is

favour of company A. It shows the average 60 days which are taken for company A to pay its

accounts which are payable to different parties which is positive sign for company A. In other

words the company A is less likely to be default when it comes to paying off its debts and shows the

better reputation and credit history. This may also help company A to more easily borrow more loan

if it is require in future. The total percentage of debt on assets is also lower for company A by 10

percentage points. Similarly the percentage of debt on total assets is also lower for company A at

28% for company A and 35% for company B which also in favour of company A. The debt

percentage is also amendable to the estimation of market value (Browman, 1980).

The gross profit percentage represents the percentage of its profit use by company for the


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production. Company B is better place in this regard although by a very small margin. According to

Hotch et al. (1994) the gross profit results can be provide from the retailer's perspective and are

computed using the retailer's marginal costs based on an average cost account. The increase of 10%

in profits can result from around 40% increase in the sales which shows the extent of this

percentage value for company B.

The operating profits show marginally higher percentage for company A at 10% which is

positive sign for company A where as the return on capital employed also show higher percentage

for company A which shows that company A is able for getting higher percentage on its capital

employed as compare to company B. The return on equity also show higher percentage for

company A although by very little margin which may not be mean as much. The gearing percentage

is higher for company B which shows higher financial risk for the company, where is company A is

again better place than company B with lower gearing percentage. The interest cover times is higherfor company A which better because it shows that the company is able to cover its interest payments

without defaulting. The number shows 8 times which is not say much however adds to the score for

company A. The earnings per share shows higher ratio for company B which is very important data

in favour of it. The earnings per share is important measure of the profitability of the company.

Finally the operating cash flow per share which shows higher ratio for company A which is positive

sign for company A. Overall the company A has shown better performance and is better place as

shown by most of the financial ratios provided. The company A is therefore a far more suitable

option for investment as compare to company B.

Conclusion

In this report the financial reporting has been perform on different account data. First some

financial concepts are critically evaluate. The financial information provided to the managers can be

confusing some times require careful analysis otherwise the information may be record incorrectly

in the financial statements and therefore does not reflect the actual financial position of the

company. The part two of the report consist the information about different transactions carry out by

the mining company Epsilon which provides the chance for carry out such analysis. The four

transactions has been carefully analyse and appropriate advise has been provide to the assistant for

recording that information in the financial statements. Similarly the comparison between the

financial ratios of two companies also provide the chance for such analysis which is carefully carry

out to provide the right advise to the investor regarding the financial performance of the two

companies.


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References

Accounting Tools, Gearing Ratio, [online] Available at:

http://www.accountingtools.com/gearing-ratio [Accessed 15/05/2013]

Bowman, R. G. (1980). The importance of a market-value measurement of debt in assessing

leverage.Journal of Accounting Research, 18(1), pp.242-254.

IFRS, IAS 36 Impairment of Assets, [online] Available at:

http://www.ifrs.org/IFRSs/Documents/English%20IAS%20and%20IFRS%20PDFs

%202012/IAS%2036.pdf[Accessed 14/05/2013]

Gaur, V., Fisher, M. L., & Raman, A. (2005). An econometric analysis of inventory turnover

performance in retail services.Management Science, 51(2), 181-194.

Hoch, S. J., Dreze, X., & Purk, M. E. (1994). EDLP, Hi-Lo, and margin arithmetic. TheJournal of Marketing, 16-27.

Little, K. Understanding earnings per share, [online] Available at:

http://stocks.about.com/od/evaluatingstocks/a/eps1.htm [Accessed 14/05/2013]

Ready Ratios, Earnings per Share, [online] Available at:

http://www.readyratios.com/reference/accounting/earnings_per_share_eps.html [Accessed

14/05/2013]

Rauh, J. D. (2006). Investment and financing constraints: evidence from the funding of

corporate pension plans, Journal of Finance, Vol. 61, pp.33-71.

Rutherford, B. A. (2003). Obfuscation, textual complexity and the role of regulated narrative

accounting disclosure in corporate governance.Journal of management and governance,

7(2), 187-210.

The Student Room, Gearing: Formula and uses, [online] Available at:

http://www.thestudentroom.co.uk/wiki/Revision:Gearing_-_Formula_and_uses [Accessed

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