ACCT11081Steps 7-11Brad Cox
STEP 7. INVENTORIES
Reading through the study guide I found it interesting that
almost half of all listed companies have inventories, or more
interestingly, that half of them don’t. The first thing that came
into my mind was that half of the listed companies must provide a
service and have no inventories, whilst the other half must provide
goods and these firms must have inventories. But then I got to
thinking about the firm I have been given for this unit, AirFrance
KLM which mainly provide a service and they have inventories so it
must just depend on each individual company and not how they
operate or what they sell. I also found it interesting that Dell
have no inventories, or a zero balance, as they only purchase parts
once an order is received. Why would such a large company do this?
Surely they can look at their track record of sales and estimate
approximately what sales they will have going forward, order enough
to cover that estimate plus a little extra contingency, and then
order in bulk as to achieve most likely a better supply rate and
more importantly so that there is no downtime should the supplier
run out of stock.
When I was working for my father’s company, an aluminium
fabrication company specialising in fencing, gates, pergolas and
privacy screens etc, we would order approximately 80% of our
aluminium in bulk as to achieve the cheapest price available for
purchase. Usually a minimum of 1 tonne was required to be ordered
to for each extruded section before we were offered the cheapest
kilogram rate. By doing this it meant our cost of goods sold was
much less than if we just purchased the aluminium as it was
required, as the rate of aluminium can be 50% more or worse
depending on quantities ordered. From memory, before I left the
company we would pay $4.90/KG for orders over a tonne and for
orders under 200KG it was around $8.00/KG. Sometimes this way of
ordering meant we would have an overload of inventory on hand &
it may take a while to offload, leaving money tied up in inventory,
some of which we were never able to get rid of except by scrapping
the aluminium for $2.00/KG. For my Father’s company for example,
lets say he spent $25K on materials and fabricated all of that into
$60K of sellable goods, the cost of goods sols would show $25K if
it were all sold. This would turn the goods from an asset listed as
inventory, into an expense (cost of goods sold) and leaving $35K
gross profit.
My Dads company still uses the periodic method of accounting for
inventory. At the end of each month a stocktake is completed to
determine how much stock is on hand, which can then determine the
cost of products sold based on the kilogram amount of stock
remaining versus sales. It would actually be a lot harder to use
the perpetual method for my Dad’s company in my opinion, as none of
the finished goods can have barcodes attached on them and every job
we had was custom made and custom priced which makes it hard to
keep track of exact amounts that leave the warehouse.
I currently work in a pub which would most definitely almost
always have less inventory than what it says according to their
accounts. The reason mainly being wastage, we may pour a beer which
is recorded through the till as 425ml but if the flow of the tap is
too fast you may end up needing 500ml of beer to fill the 425ml
schooner glass. Also, sometimes it is hard to accurately pour a
30ml nip of spirits which goes through the till as 30ml. at the end
of each night the duty manager does a stocktake of all beer kegs
and every morning our accounts officer matches it up with sales to
determine wastage. By doing this they can adjust their accounts
accordingly to record the amount of inventories they hold and can
more accurately determine the cost of keg beer sold per period. The
pub I work for is owned by ALH Group, which in turn is owned by
Woolworths. Of all the ALH pubs in Australia ours is in the highest
5% for wastage amounts, meaning our cost of goods sold would be
higher for us than the other pubs in our business. The reason our
wastage is so high is that there was a big mistake during
construction and this caused the planned restaurant and planned
sports bar areas to have to swap places. The Cold room however
remained where it was originally supposed to be and that is where
the kegs are stored and the beer is required to travel approx. 40
metres through the lines before it hits our taps and the longer the
lines, the higher the chance of problems in the lines which cause
new kegs to come out frothy for the first litre or two and these
amounts are why we are in the highest 5% for wastage.
Reading through the section on why specific identification isn’t
generally allowed had me scratching my head. I couldn’t understand
why this practice wouldn’t be allowed, but then as I continued to
read Martins explanation, it finally clicked. For the pub where I
work now, if we were to use specific identification and we had in
our stock room Jack Daniels Stubbies, one carton we bought for $80
and the other carton we bought for $115, we could choose to sell
the $80 carton first and with the specific identification practice
this could skew the profit and loss figures.
When reading about the LIFO method of accounting for inventory I
kept asking myself how could this be a commonly accepted practice
& why would we want to use this method if it is going to show a
smaller figure in our overall profit. I understand that lower
profit means lower tax payable, but I would have thought that a
higher profit would be a greater incentive for a company that will
be presenting statements and reports for potential investors.
I had to stop and think why we would debit inventories when
purchasing them, but then I looked up and on my wall is the 3 most
important things to remember for this unit, one of them being that
an increase in asset is a debit which made me realis that inventory
is an asset and we are increasing it, therefore meaning we need to
debit that account. Reading further through this section and it is
taking me back to step 5 & I am thinking about where each
transaction would be placed on the trial balance.
After reading through this chapter completely I have decided to
print out chapter 1 section 1.4 and also stick it to my wall so
that I can look up and memorise all of it until I have no dramas
recalling what needs to be debited & credited when there is an
increase or decrease in that account.
For my firm, AIrFrance KLM, the word inventories appears 13
times throughout the financial statements in all 3 annual reports.
As expected it appears as a current asset on the balance sheet and
over the 4 years the inventory has increased from €538 million in
2014 to €532 million in 2015, €566 million in 2016 and €557 million
in 2017. It next appears on the consolidated statement of cash
flows, included as part of the change in working capital
requirement. I am a little unsure what that actually means but have
noted it down as something I need to come back to later. It next
appears where it tells us how inventory is measured and what method
inventories are valued on. In AirFrance KLM’s case, inventories are
measured at the lower of their cost and net realisable value, and
are valued on a weighted average basis. Inventory is then broken
down in note 24 (as shown below) to show aeronautical space parts,
other supplies and production work in progress and their combined
value, they then go onto deduct opening valuation allowance, change
to allowance, use of allowance, currency translation adjustment,
and re-classification to give them the overall Net Value of
Inventory. A couple of these items above I don’t fully understand
as yet but again, I have noted this as something that I will need
to come back to later. Before I even saw note 24 on the statements,
my initial thoughts were that spare parts were going to take up the
majority of the inventory account, as they service over 2000
aircraft for over 200 clients, and I don’t assume spare parts for
aircraft would come very cheap. The figure for 2017 in aeronautical
space parts was €517 million, and whilst this seems like a huge
figure, when you account for how many aircraft they service, I
would consider this figure to be quite low and especially when
compared to the €25.8 billion in revenue they received. My firm has
kept the same inventories practices for all 4 years of the
financial statements and I cant find anywhere in the annual
report/statements where it says what type of inventories system it
uses.
As at December 31
In € Millions
2017
2016
2015
2014
Aeronautical Space Parts
587
591
544
520
Other Supplies
122
117
135
171
Production Works in Progress
7
11
16
12
GROSS VALUE
716
719
695
703
Opening Valuation Allowance
(153)
(162)
(165)
(164)
Change to allowance
(14)
(9)
(18)
(15)
Use of allowance
5
18
22
13
Currency Translation Adjustment
1
0
(1)
0
Reclassification
2
0
(1)
0
Closing Valuation Allowance
(159)
(153)
(163)
(165)
Net Value of Inventory
557
566
532
538
Step 8. MYOB
Below are the two screenshots I took, one from the last window
in both the setup phase and one from the training phase. I have
also attached a screenshot of the 13 question quiz results page. I
found the setup and training videos quite explanatory and very easy
to follow. I feel relatively confident that I understand the basics
of MYOB now and look forward to learning about the more complicated
things that can be involved in helping us view a firms reality.
Step 9. Transactions and analysis
Below are the ten transactions I created for my company
AirFrance KLM.
1. January 1, AirFrance KLM Purchased 1000 EasyPro Super Tablets
from EasyTech @ $399 each= $399,000.00 total purchase inclusive of
GST
2. January 4, Supermodels of Paris Purchase 20 First Class
return tickets from Paris to New York @ $1200= $24,000.00, plus an
additional 20kg of checked baggage each way @ $80 each= $1600.00,
for a total sale of $25,600.00 inclusive of GST
3. January 8, order and pay 50% deposit for x200 new pilots
uniforms @ $195.00 from Uniforms R Us. X200 @ $195.00= $39,500.00
total purchase inclusive of GST. 50% Deposit = $19,500.00 inclusive
of GST. Remaining balance paid on January 25th.
4. January 8, order and pay for wine from Deluxe Wines. X5000
bottles of 250ml champagne @ $2.80 each = $14,000.00 inclusive of
GST. X2500 bottle of 250ml Shiraz @ $2.52= $6,300.00 inclusive of
GST. Total Purchase = $20,300.00 inclusive of GST. Goods ordered on
the 8th of January with a $15,000.00 payment, received and paid for
in full on the 16th of Jan
5. January 11th. Paris Sky Tours pays for maintenance carried
out on their Aircraft $33,500.00 inclusive of GST
6. January 12th. Eiffel Removals orders and pays for freight of
4 tonne of Cargo from Paris to France. $32,000.00 inclusive of
GST
7. January 24th AirFrance KLM order x2 aircraft from Boeing. X1
Boeing 737 @ $21,500,00.00 inclusive of GST and x1 Airbus A400 @
$26,000,000.00 inclusive of GST. Total Purchase price of
$47,500,00.00 inclusive of GST with a deposit of $25,000,000.00
being paid on the 24th and the remaining $22,500,000.00 paid on the
25th
8. January 25th. AirFrance KLM receive an invoice for their
public liability insurance for $150,000.00 inclusive of GST.
$80,000.00 is paid on the 24th and the remaining $70,000.00 is paid
on the 25th
9. January 25th. AirFrance KLM Pays for Jet Fuel from British
Petroleum. 100,000 litres @ $0.55c per litre = $55,000.00 inclusive
of GST.
10. January 26th. AirFrance KLM orders and pays for 20,000
inflight magazines from Main Media Paris. 20,000 @ $2.80 each =
$56,000.00 inclusive of GST
Whilst entering all of the above transactions into MYOB I came
across many issues. The first issue was with my first transaction,
I wasn’t sure if I should use the receive items command or the Bill
command. When creating each transaction there always seemed to be
something simple that I would miss, like the correct date for
example, or to change the invoice number or layout for that
particular transaction. It was also very frustrating when I would
fill out an entire transaction, get to the area where we enter the
item, create the item and then create the supplier, click ok and
then it would go back to the command centre and the entire
transaction had disappeared and I would need to start all over.
Below is the all journals report that I generated for these
transactions, I tried to copy and paste it to make it easier to
read but couldn’t configure it right so screenshots are the best I
could come up with. It took me a good hour or so to figure out how
to generate the all journals report, I was getting so frustrated
because I knew it was going to be something simple and of course it
was. After exporting the all journals report I found the other 3
reports much easier to find which was a big relief. I have also
attached the Income Statement, Balance Sheet and Cash Flow
Statement below.
If you were to just base the analysis of AirFrance KLM’s
performance in January on the statement of cash flow and the profit
& loss statement you may come to the conclusion that they had
an awful month, but once you have a read of the balance sheet it
doesn’t seem so dire. You can see the total equity at the start of
the period was $100,000,000.00 and at the end of the period is
$99,701,636.00. (note that I have done my transactions in
Australian dollars, not Euro as per the real statements of
AirFrance KLM) looking through the balance sheet I think I should
have the ‘Aircraft @ cost’ listed in the current assets as opposed
to Non-current assets where I have placed it originally. Another
way we could analyse these figures is by applying the Debt to
Equity Ratio which in this case would be;
($4,348,019.19) / $99,701,636.37 = 0.4%, which is a terrific
result but not really very realistic as I think for this ratio to
be significant we need allot more than 10 hypothetical transactions
and a whole lot more that include sales and revenue etc. Another
way we could analyse would be to use the Equity Ratio where you
take the equity and divide it by the total assets, in this case it
would be;
$99,701,636.37 / $95,353,618.18 = 1.04, which would show great
investment potential for investors as it shows confidence in the
company from other investors that whilst most of the assets are
financed by investors, there is a huge confidence in the company’s
ability to turn these assets into profit otherwise previous
investors would have sold out.
Based on the ten transactions I created for this company it is
really hard to get any scope on how the company is travelling. The
reason being that as we were only allowed 10 transactions it just
so happened that only 3 of them generated income whilst the other 7
were expenses. If I could have included another transaction of
Ticket Sales for Economy Class for the month of January this could
have completely tilted the figures and analysis in another
direction.
STEP 10. DEPRECIATION
The first place depreciation is mentioned in AirFrance KLM’s
statement is in the Consolidated Income Statement, and the fact
that it is on here would to me suggest that there was a downward
revaluation of their PPE. The figures for Depreciation,
amortization & provisions for 2017-2014 are as per below.
2017- (€1,776,000,000)
2016- (€1,665,000,000)
2015- (€1,631,000,000)
2014- (€1,718,000,000)
It next appears on the consolidated statement of Cash Flows
where it also directs us to look at footnote #9. The lowest figure
on the Income Statement came in 2015 and was €1,631,000,000.00 and
the largest came in 2017 and was €1,776,000,000.00, showing a
relatively consistent balance throughout the 4 years.
One interesting thing I noted in the 2016 statement was the
figure €1,632,000,000.00 for 2015 but in the 2015 statement the
same figure for that year was €1,631,000,000.00, showing a
difference of €1 million which I am assuming has allowed for the
statements to be restated & after some of the debts have had to
be written off.
It next appears in section 4.9 of the notes explaining the
aggregates used within the framework of financial communication.
Note 4.14 explains how PPE is recorded, which is at their
acquisition or manufacturing cost, less accumulated depreciation
and any accumulated impairment issues. This method is the same
method used for all 4 years of the statements being used. Note 4.15
explains the ‘Impairment Test’ where tangible fixed assets,
intangible assets, and goodwill are tested for depreciation if
there is an indication of impairment, and those with a indefinite
useful life are tested at least once a year on September 30th. It
also tells us here that each asset is tested individually where
possible, except for assets where we cant attach independent cash
flows. These assets are put into various groups , the business
segments; Passenger travel, cargo, maintenance & it is these
groups that are tested.
The info by business segment statement shows us where
depreciation and amortization are broken down into their specific
segments. In this case, the passenger network segment has by far
the most depreciation for each period and this is to be expected as
the sales in this area are relatively higher than all other
segments as well.
Next we get to Note #9 ‘Amortization, Depreciation &
Provisions’ statement where the overall figures are broken down
into intangible assets, flight equipment, other PPE in
amortization. Inventories, Trade receivables, and risk &
contingencies appear in the Depreciation and provisions section of
the statement.
On the intangible assets statement for the year 2016 and 2015
there is a charge to depreciation of (€1,000,000.00) in the
customer relations column which makes me even more certain that
they have had to write off €1,000,000.00 in bad debts from
customers not paying.
In the 2016 annual report there is a note that states that the
recoverable value of the cargo CGU (Cash Generating Units) being
determined by their market value, based on appraiser valuations,
for both the aeronautical and other intangible assets. All the
depreciation historically booked on the tangible assets of this CGU
have been progressively reversed with the relating fleet disposal.
I am not 100% sure what all of the above paragraph means but I
think it has to do with how the depreciation is handled when they
have sold off part of their aircraft portfolio.
The 2015 Annual Report has a section which tells us that due to
a significant reduction in activity at Paris CDG in recent years,
they decided to decrease its full freighter fleet at Schipol
(Netherlands) in Financial Year 2014. An impairment mounted to €13
million has been recognised in non-current expenses to decrease the
Cargo CGU’s carrying value into line with its market value, based
on appraiser valuations, in respect of both the aeronautical assets
and the other tangible assets. So my understanding of what has
happened above is that they have had a downturn in sales through
their cargo segment, so they decided to sell off part of the assets
and in turn have had the remaining business valued with an
impairment of 13 million added to expenses due to a valuing of 13
million less than the previous value.
Next is the tangible assets statement where it breaks down;
charge to depreciation, releases on disposal, change in scope
reclassification, and currency translation into flight equipment
and other tangible assets, with each of these being broken down
further into owned aircraft, leased aircraft, assets in progress
and other for flight equipment and land & Buildings, Equipment
& Machinery, Assets in progress, & other for Other Tangible
Assets. Figures are relatively the same for all 4 years an all
categories. The figures are as per below.
Total Depreciation on Tangible Assets;
2017- (€13,043,000,000)
2016- (€12,906,000,000)
2015- (€13,403,000,000)
2014- (€12,809,000,000)
Intangible assets with a definite useful life are amotized on a
straight line basis over the following periods;
Software- 1-5 years
Customer Relationships- 5-12 years
It was interesting to note that the airline has been subject to
the Emissions trading scheme and that the group is required to
purchase CO2 quotas to offset its emissions. These quotas are
classed as intangible assets that are not depreciable.
PPE are recorded at their acquisition or manufacturing cost,
less accumulated depreciation and any accumulated impairment
issues. The interest charged on assets under construction is
capitalised and added to the cost of the asset concerned. Aircraft
are depreciated using the straight line method over their estimated
useful life of 20 years, assuming no residual value for most
aircraft in the fleet. Some aircraft’s useful life can be extended
to 25 years. Other PPE are depreciated over their useful life using
the straight line method as follows:
Buildings- 20-50 years
Fixtures and Fittings- 8-20 years
Flight Simulators- 10-20 years
Equipment & tooling- 3-15 years
The amortization and depreciation methods used have been the
same for all 4 years of annual reports studied.
Whilst depreciation is one of the biggest expenses for AirFrance
KLM @ €1,776,000,000 in 2017, I don’t really think of it as being a
significant issue for them as these assets turned expenses have
significantly helped to generate the €25,784,000,000 in
revenue.
X3 Journal Entries that may have been processed by AirFrance
KLM’s Accountants;
Debit
Credit
December 31 2015
Depreciation Aircraft @ 5%
xxx
Accumulative Depreciation
xxx
December 31 2015
Depreciation Buildings @ 3.5%
xxx
Accumulative Depreciation
xxx
December 31 2015
Depreciation Flight Simulator @ 7.5%
Xxx
Accumulative Depreciation
xxx
The 3 journal entries above would be used to help us come up
with the overall figures in the income statement and balance
sheets. The figures could be manipulated by choosing to use a
different depreciation method for different groups of assets. We
could also try to adjust what we call the useful life on various
assets to try and give a longer life, meaning less depreciation for
the period, resulting in higher profit for the period.
Assets
Current Assets
Bank Accounts
Bank Account #1.$74,425,200.00
Total Bank Accounts$74,425,200.00
Clearing Accounts
Undeposited Funds Account$32,000.00
Electronic Clearing Account($22,644,500.00)
Total Clearing Accounts($22,612,500.00)
Other Current Assets
Trade Debtors$59,100.00
Deposits To Suppliers$300,000.00
Total Other Current Assets$359,100.00
Total Current Assets$52,171,800.00
Non-Current Assets
Office Equipment
Aircraft at cost$43,181,818.18
Total Office Equipment$43,181,818.18
Total Non-Current Assets$43,181,818.18
Total Assets$95,353,618.18
Liabilities
Current Liabilities
GST Liabilities
GST Collected$8,281.81
GST Paid($4,356,300.00)
Total GST Liabilities($4,348,018.19)
Total Current Liabilities($4,348,018.19)
Total Liabilities($4,348,018.19)
Net Assets$99,701,636.37
Equity
Current Year Earnings($298,363.63)
Historical Balancing$100,000,000.00
Total Equity$99,701,636.37
As of January 2018
AirFrance-KLM
1/25 Airport Way, Paris, France
Balance Sheet
Account Name
Cash Flow from Operating Activities
Net Income($298,363.63)
Trade Debtors($59,100.00)
Deposits To Suppliers($300,000.00)
Aircraft at cost($43,181,818.18)
GST Collected$8,281.81
GST Paid($4,356,300.00)
Net Cash Flow from Operating Activities($48,187,300.00)
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($48,187,300.00)
Cash at the Beginning of the period$100,000,000.00
Cash at the End of the period$51,812,700.00
January 2018
AirFrance-KLM
1/25 Airport Way, Paris, France
Statement of Cash Flow
