STEP 1: - liyaxinkang.files.wordpress.com€¦ · Web viewChapter 4 . Whoever wishes to foresee the future must consult the past -Machiavelli. This quote at the beginning of the chapter

Using Accounting for Decision Making

Assignment 2

Liyaxin

Supervisor: Martin Turner

Contents

STEP 1:......................................................................................................................................1

Step 2....................................................................................................................................... 3

Step 3....................................................................................................................................... 5

Step 4....................................................................................................................................... 8

Liyaxin Kang Acct 11059-Ass 2

STEP 1:

CHAPTER 4

Whoever wishes to foresee the future must consult the past

-Machiavelli

This quote at the beginning of the chapter was striking one to me as I could understand it

easily. The financial statements of the companies tell us about the future expected

performance. If I am looking to invest in a company, the first thing I will look for is profits

which are mentioned in the profit and loss account. I remember my parents used to invest

in stock market. They use to research about the financial news and also about the financial

statements of the companies to decide if they have to invest or not.

How firms add value

KCQ:

The free cash flow to firms, as understood by the name, is the amount of free cash which is

available to the firm. Therefore, it not only considers the profits but also the non-cash

expenses. From investors point of view of FCF is also an important factor which should be

analyzed from the financial statements. So, if a company has incurred too many non-cash

expenses and invested in operating assets the profits will be low but the FCF will be high. In

this case solely relying on the profits would not wise and thus it should be ensured that

there is also focus on FCF.

Economic profit is a concept which I learnt in economics. If I remember correctly, economic

profit was the accounting profit less opportunity cost. The same concept is also applicable

here. The economic profit formulae mentioned is Economic profit = (RNOA – cost of capital)

× NOA. Therefore, this method also considers the opportunity cost when deriving the

profits which make sense since the capital is not free.

This suggests that all the profits which are shown in the financial statements of the

companies are reflecting misleading profit. The opportunity cost of capital is not considered

in accounting profit which is a significant limitation. In simple terms if I have invested in a

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firm where the return I get is 15%. This is not the actual profit as I could have earned 5% by

investing in deposits in bank. So, this reduces my actual profit to 10% by investing in the

company.

Comments about the true cost of our choices in life definitely got me thinking. I can only be

in one place at a time, and there certainly is a lot to see and do. How scary!! Thanks for that

Martin ha-ha. Now I feel like I am somehow missing out on too much every minute I am

writing this. But hey, that’s life right. I made a choice to study accounting so I can have a

career in something I love doing. So, it makes sense – we can only invest in one thing at a

time. The time I spend studying can’t be then reused to do other things. It’s gone and used,

but hopefully one day I get a greater return from it, like money, intelligence, happiness or all

of the above!

Operating and financial activities

KCQ: Is this classification as simple as mentioned in the diagram? I doubt it. There must be

items which must be affecting both the operating and financing activity. So what should be

done about those items?

This segregation of financing, operating and investing activities in a firm is appropriate as

firms can identify what activities are leading to positive or negative cash flows. For instance,

of the operating activity of the firm is producing negative cash flows, then it is a cause of

concern as the firm is not able to generate enough revenues from the operating activities.

I have worked in a nail salon once, and the operating activity that I can think is generating

revenues from the main activities of nail painting services to the consumers. The financing

activity I cannot think of any as there are no dividends or any debt in the salon. It was a sole

proprietorship. And I wonder if such statements are only done in large enterprises or they

are also done in small firms and businesses such as one where I worked? I guess they do not

have the knowledge or the resources to carry out such analysis.

Restate Statement of comprehensive income and two key financial statements

KCQ: Are reinstated balance sheets are required by the shareholders or these are just for

the analysis of the financial statements?

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I looked in the annual report of the company assigned to me and found that there is no

reinstatement of financial statements. This means this is done for the analysis purposes to

divide the various activities and examine the performance of companies. One important

thing I observed in the case of Ryman Healthcare is that the total between the original and

reinstated financial statements should match. So there is just altering of the figures and

dividing them into various categories.

4.4 Profitability and efficiency

I have always considered the profitability to be of prime importance in analyzing the

financial performance of the companies. But the profit margin of Ryman Healthcare

mentioned was 55.30%. Such a huge margin profit is really high and I wonder if businesses

exist with such a high profit margin. My obsession with profitability ended as the ATO

Ryman Healthcare was very low. This means that the companies with high profitability

cannot be efficient.

Conclusion

I have learnt a good deal about the financial statements and reinstatements of financial

statements. The practical example shown helped in understanding the concept. However, I

still have doubt if I can divide the activities among operating, investing and financial

activities. I need to work on some problems so that I can get a firm grasp on this topic.

Step 2

Restatement of Financial statements

When I was doing Step 1, I wrongly chose the financial statements of Lafarge Africa. When I

realised I made a big blunder, I thought I will do it again as I wanted to make sure I do not

lose marks in this assignment. So, I made sure I did step 1 again for Lafarge. However, there

was an obstacle I faced when I was looking for the annual reports of Lafarge.

The latest financial statements of Lafarge in the website is for the year ending 31 December

2014. This financial statements can be found by opening the website link ('Lafarge-Financial

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results' 2017). Now the main question is why is the financial statements for 2015 not

available. The reason is that Lafarge merged with Holcim in October 2015 and the new

company was named as LafargeHolcim. Therefore, the annual report of LafargeHolcim for

2015 showed the financial statements of both the companies ('LafargeHolcim Annual Report

2015' 2017). The financial statements had the year 2015 and 2014 results. So, I could not

use these as if I had used 2012 and 2013 statements of Lafarge and 2014 and 2015

statements for LafargeHolcim, there would have been a mismatch in the opening and

closing balances of equity and profit. Therefore, I opted to use the financial statements of

Lafarge for the year 2014, 2013, 2012 and 2011. This was of tremendous learning to me as I

read about one of the biggest merger of the two cement giants of the world.

Therefore, my reinstatement sheet would have the statements of the above-mentioned

years. Initially, I was finding it tough to put numbers and deciding which numbers should be

in operating and which should be in financing. However, I did some research on Google and

put the numbers appropriately so that there were no errors. I believe there were two main

calculations involved in this step

Allocation of cash and cash equivalents –This was one of the major steps where I made

sure to put right figures as any mistake would have led to the wrong answer. Therefore,

the examples helped me in going about this part. I made sure I calculated the allocation

for the examples and then proceeded with my question. This part I allocated more time

and was careful.

Tax expense- Here the tax benefit had to be allocated as financial income. I have read

that with the use of debts there is a tax advantage and this knowledge was put to use

here. The tax benefit of financing was deducted from the operating part and thus added

to the financing income in order to derive the genuine operating and financing profits

and losses

One trouble I had was segregating the headings such as Total operating assets and Total

operating liabilities. This took quite a bit of time. I wanted to make it easy for the reader. So,

I coloured some of the major headings different.

The assignment says it needs 12-13 hours to do this part. I believe I took some 10 hours for

this part. I spent 1 more hour in checking everything. I hope I did a right thing in choosing

the years 2011 to 2014.

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Step 3

I was aware of the fact that Lafarge is one of the biggest cement manufacturing company in

the world. So finding the three different products of this company was a challenging task. I

did some research and came up with these three distinct products.

1) Cement

I did some research and concluded that a kg cement of Lafarge would approximately cost

$0.50 (‘cement' 2017). Therefore the price of 50 Kg cement bad would be $25. The variable

cost for this product will be the material used and the labour costs associated with the

production. The fixed costs will be the power consumption, electricity required to run plant

and machinery in its product.

Estimated Selling price = $25

Estimated Variable Cost = $ 15

Contribution = 25-15 = $10 = 40%

2) Concrete

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The products mentioned in the company website mentions that concrete is sold. So I looked

for the price of concrete. The price is mentioned per cubic meter, and I assume the selling

price to be $90 per cubic meter (Concrete prices 2017).



Contribution = 90-45 = $45 = 50%

3) Manufactured sand

This is one of the other products mentioned for sale on the website. This sand is used for

natural resource preservation and is made to improve the strength of concrete. Again I did

some research and price came in per cubic feet. The price of manufactured sand could be

assumed to $5 per cubic feet



Contribution = 5-2 = $3 = 60%

The contribution margin of the three products can be compared as under

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Cement Concrete Manufacturing Sand0%

10%

20%

30%

40%

50%

60%

70%

40%

50%

60%

Contribution percentage

Contribution percentage

It can be seen from the graph that the contribution offered by the different products varies

for Lafarge. There is a large difference in all three products which is due to the usage and

the necessity. The cement is the product which is required more as compared to the other

two products. Since cement is a basic product and there are many local companies

worldwide that manufacture cement, there is fierce competition for Lafarge for this

product. That could be one of the reasons that the contribution margin is low for cement as

compared to other two products. A good option for the company would be to focus on

products other than cement as there is tough competition in cement industry and Lafarge

could leverage its brand to diversify. A merger with Holcim in 2015 offers good prospects for

the company as it would mean more expansion with new products offered for sale to the

construction industry.

Resource constraint

There could be many resource constraints for Lafarge. The company is present in more than

55 countries. That means many factors and risks come with the projects. For instance, the

labor laws in the countries are different and thus pose a constraint to the company to

expand. There is also a foreign exchange risk with the presence in so many countries. The

production of cement and other products require huge machinery and thus it is significant

constraint that may impinge the firm.

Market constraint

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There is a bigger market constraint for Lafarge as compared to resource constraint. That is

the demand for its products which is cement and which is dependent on the global

economy. The company is dependent on the construction. If there is a boom in the

economy, it means more construction which could lead to more cement sales. However, in

the case of recession, the company could face difficulties. If there is weak demand in

countries such as the United States and China, Lafarge could face serious market problems.

Step 4

Feedback to Students

Feedback From: Liyaxin

Feedback To: Wanqi

My Comments:

STEP 1

KCQ’s

You did well in this step as you associated the

personal experiences that you have faced in the

restaurant with this Chapter. It was not really the

summary but more of a personal reflection in this

step. I believe you did a great job in this part.

STEP 2

Restated Statement of Changes in

Equity

Balance Sheet

Income Statement

Discussion with others

All your figures match. For example, the ending

and closing equity balances in the reinstated

statements match with the original statements

which were done in Assignment 1. Therefore, it

seems your figures are correct. However, I have

noticed that somewhere you have formulas and

elsewhere you have just mentioned the numbers.

So, you could follow a consistent approach. Also,

the major part of this step is the calculation of

cash and cash equivalents to assign to operating

and financing activity. I personally think that you

have done correctly.

STEP 3

Identify three products/services

You have chosen three very different products,

which are jeans, sunglasses and necklace.

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Estimate selling price, variable cost

and CMs

Commentary – CMs

Constraints – identify and

commentary

Excellent analysis and applied the formulas very

well. However, you could have elaborated on

how you arrived at estimated costs. I believe it is

due to lack of information on the internet. If yes,

you could have mentioned the assumptions as a

separate section.

Overall Comments Overall I believe you have done well. The

presentation is also good as I found it easy to

read. I guess you will get good marks. However,

you could lose on the part where you have to

reflect on step 2. This part was very concise and

could be elaborated. All the best!


Feedback To: Jemma Ahmann

My Comments:

STEP 1

KCQ’s

You have mentioned a lot of KCQ which is good

thing I guess. However you could have also used

some of the personal experiences. You have not

just mentioned the summary and seems like you

are personally engaged and learning from this

chapter. So well done in this step.

STEP 2


Equity

Balance Sheet

Income Statement


You seem to be an expert in Excel. You have

presented the restatements brilliantly.

You have mentioned IPO expense as operating

expense in income statement. Probably this is

related to financial activity. I could find only this

mistake. A brief commentary was required for

this part. But it seems you have made it pretty

long. No word limit is mentioned but this could

have been shorter.

STEP 3 The company allocated to you is oil and gas

company. The three products you have chosen

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and CMs

Commentary – CMs


commentary

are related to placement services and supervision

services. You could have included one product

which is like the core product for better analysis.

You could have made assumptions. The resource

constraint and market constraint are fine.

Availability of qualified labour is a good point you

have mentioned.

Overall Comments Good job. Step 3 was really tough for you as it

was the case of oil and gas industry. Despite this

you have done well. Step 2 was great !


Feedback To: Jayde Roberts

My Comments:

STEP 1

KCQ’s

You did not mention any KCQs. Though this step

you did fine as it there were no summaries and

more of personal engagement. There were some

personal examples too which added value to this

step. Perhaps some examples related to

accounting would have added more depth to this

step.

STEP 2


Equity

Balance Sheet

Income Statement


NFO + Equity should be equal to net operating

assets. This condition was not fulfilled for 2 out of

4 years for you. You need to check again. You did

not allocate cash and cash equivalents between

operating and financial items in the reinstated

balance sheet. You have just mentioned cash in

financial assets. This should be allocated to

operating assets also. Please refer to guide again

STEP 3



Your knowledge about the property management

helped you with this step. This can be observed in

the identification of three services. I believe you

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and CMs

Commentary – CMs


commentary

have done a good job in this section. The

constraints are also mentioned adequately.

Overall Comments Good job. Though plenty of scope of

improvement in Step 2. Step 3 is done very well.

Feedback received

Feedback From: Wanqi

Feedback To: Liyaxin

My Comments:

STEP 1

KCQ’s

You have done well as you have linked your

experience of working in a nail saloon to the

accounting concepts. You have not just presented

a summary but have mentioned your thoughts

and idea which is good.

STEP 2


Equity

Balance Sheet

Income Statement


Your Reinstated financial statements are from

2011-2014. Then I read your reflection which

mentioned the reason. The calculations and excel

sheet seems fine. You need to work on your

presentation as I found the excel a bit confusing

and difficult to read.

STEP 3



and CMs

Commentary – CMs


commentary

Identification of products in cement company is

difficult but you did well. There are no

assumptions mentioned as to how you arrived at

the costs and selling price. You have made

reference with regards to sale price but not to

variable costs.

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Overall Comments Well done. Some scope of improvement in

presentation in excels. Referencing is also done

by you, which is good as it adds value to your

assignment.

Reflection on feedback

The feedback process is really helpful as we can get the perspective before submitting the

assignment. So even if it helps slightly, it will be good for the assignments. The feedback I

received was helpful as it mentioned some good points which I need to improve. Also,

positive comments in the feedback help in increase in confidence. This feedback is helpful,

but I believe the interactions and discussions on the forum are really helpful. The interaction

during the process of assignment is of immense help as changes can be done immediately.

Whereas when feedback is received after the completion of the assignment, making

changes becomes difficult. I believe this feedback process can be further improved by

making it mandatory for students to give feedback to other students. This will ensure that

the benefits of feedback process are gained by all the students. For instance, the students

who complete their assignment earlier have an advantage as they can get more feedback.

The feedback I gave to other was also helpful as it showed me the presentation styles and

the writing style which I could also incorporate. For instance, one of the student did very

well in the excel sheet so I learnt a lot from it.

References

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'Cement' 2017, accessed January 7, 2017, from <https://www.bunnings.com.au/our-

range/building-hardware/cement-concreting/cement-products/cement>.

'Concrete Prices - How much does concrete cost? - The Concrete Network' 2017,

accessed January 7, 2017, from <https://www.concretenetwork.com/concrete-

prices.html>.

'Lafarge-Financial results' 2017, accessed January 7, 2017, from

<http://www.lafarge.com/en/financial-results>.

'LafargeHolcim Annual Report 2015' 2017, accessed January 7, 2017, from

<http://reports.lafargeholcim.com/2015/annual-report/>.

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Documents

STEP 1: - liyaxinkang.files.wordpress.com€¦ · Web viewChapter 4 . Whoever wishes to foresee the future must consult the past -Machiavelli. This quote at the beginning of the chapter