rochelleburney.files.wordpress.com · Web viewThe 2015 recorded Depreciation of €5,502,000 and Amortisation of €7,153,000 out of the €271,185,428 in expenses recorded making

ACCT11081 INTRODUCTORY FINANCIAL ACCOUNTING

ASSIGNMENT – STEPS 7 - 11

Rochelle Burney

STEP 7 - INVENTORIES Opening my financials to have a close look at my Firms Inventories and more precisely how my firms keeps account of the movement of its inventories and I am initially very overwhelmed. I cannot find any information on whether my firm uses the Periodic or Perpetual Method to record its inventory transactions nor any information on the inventory cost formulas they use to measure the costs of their inventories. What they have written in their financial statements regarding their inventories is very vague. However I was relieved to find they break down their financial statement item of “Costs of raw materials, cons. and goods for resale” into each individual item on page 58 (Stock and Inventories). This Item was broken down into Raw, ancillary and consumable materials, Work in progress, Finished products and goods for resale, and Advance payments, for each year of my firms financial reports.

I found this information very handy as my firm manufactures and sells high end fashion items, this section made it clear what portion of the “Costs of raw materials, cons. and goods for resale” were in the form of raw materials and what portion of this amount was actually stock ready for resale and so forth which I found interesting. In looking through my financials to try and figure out what cost formula Aeffe used to measure the cost of their inventory and the only information I found that really gave any indication was that they used a Weighted Average Cost of Capital equal to 5.63%, and I questioning if this principle was also applicable to my firms cost of inventory?

We learnt in our last accounting subject “Account, Learning and Online Communication” that a firms Weighted Average Cost of Capital is the percentage return that any stakeholders of a firm can expect to see. Although I questioned if my firm also used a Weighted Average cost formula for its inventories. Thinking about this concept further and I decided, the fact that my firm stated this “WACC” principle does not necessarily mean they have used the same ‘Weighted Average’ cost formula principle for their inventories also. Back to re-read my firm financial statements in hopes that I may have missed something in the notes section.

I found nothing more on these principles than I did the first time, so I decided to base my decision on whether my firm uses the Periodic or Perpetual Method to record its inventory transactions and the inventory cost formulas they use, would be based on other evidence I found in Aeffe’s financial statements. The two concepts of Perpetual vs Periodic are the methods a firm uses to record its

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inventory transactions. The Periodic method is where a firm records it inventory transactions periodically (usually once a year).

This is done by physically counting its inventories. The opposite is true for the perpetual method, this is where a firm records its inventory transactions as they occur. These transactions are constantly changing and updating as they take place and give the firm the benefit of having a constant ‘Cost of goods sold’ figure which in turn allows them to calculate their gross profits. Of course at the end of a period a firm that uses the perpetual method will still perform a stocktake of their inventories to account for any shortfall.

So does my firm use the Periodic or Perpetual method to record its inventory transactions? I found all 4 years (2014, 2015, 2016 and 2017) of my firm’s financial statements where consistent with each other and stated the same information on my firm’s inventories throughout. I have concluded that my firm uses the Perpetual method to record its inventories and this is based firstly on the statement “The terminal value of Equity Investments has been determined using the formula of perpetual annuity” that I read in the financial statements. This statement was the same for all 4 years, and there were a few simular statements throughout the financial statements regarding this method being used to calculate the present value predominantly in relation to equity investments. So my presumption is that this concept is consistent in the management of my firm’s inventories also.

My second reasoning behind my conclusion and what made me first think that this Perpetual method was in place was the information I came across in the financial statements regarding the raw materials my firm uses in its manufacturing process. The raw materials are first sent to a warehouse where they are then sorted and redistributed to all of its manufacturing warehouses to be processed. Once the raw materials are converted to the final product they are then redistributed to the firms numerous outlets for resale. Now what got me thinking Aeffe had to be using the Perpetual method to account for its inventories was that this input changes hands so many times before it actually gets to the customer, without a continuous recording system such as the perpetual method in place, the inputs would be impossible to keep track of.

Furthermore, it was stated numerous times throughout the 2014, 2015, 2016 and 2017 financial statements, that periodic meetings take place between all divisions on a regular basis to ensure management of inputs and outputs, as one of the focuses of my firm is to waste as little as possible and use recycled material wherever possible. These periodic meetings were a way to monitor and manage this endeavour. There would be so much preparation leading up to these meetings if my firm were using the periodic method and it would simply not be realistic to do so if say every three months all my firms staff were running around counting every tiny input that goes into the manufacture of its fashion items. These items could be as small as individual buttons, lengths of thread and so forth, so in conclusion the only method to record the inventory transactions that works for my firm is the perpetual method.

So now which Cost formula does my firm use to measure the costs of its inventories? This bit was not as easy as I had hopped, and honestly my first thought was why not just attach the actually cost of each output to it directly, also known as Specific Identification. This became clear to me after reading chapter four of the study guide. The Accounting Standards prohibits the use of Specific Identification when a firm has a large number of inventory items that are ordinarily interchangeable. Meaning, like my firm they have a large number of inventory items that are identical, however could have different costs associated with them.

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For example my firm may have purchased a large number of buttons from one supplier at an average price, however was unable to purchase all they needed from this supplier and so purchased a second lot of the same buttons from a second supplier at a higher price. If this “specific identification’ method was used to apply costs to outputs, a firm could really pick and choose which costs to attached to which outputs as they are interchangeable and thus create the “gross profit” outcome they would prefer over what is actually correct at that point of time. Therefore The Accounting Standards prohibits my firm from using this specific identification cost formula to measure the costs of its inventories.

There was also one other cost formula that was prohibited to be used by my firm and that is Last in, First out (LIFO). The International Accounting Standards prohibits the use of this cost formula, although there are some exceptions for the United States. Using this cost formula means the last items of inventory purchased are the first ones used. Usually the most recent inventory items purchased are likely to be the higher price, over time this is especially true due to inflation and so forth. Meaning older inventory items are sitting for longer periods of time and could never be sold at all. The problem with this method, apart from the old inventory items sitting in warehouses indefinitely, is that once again this cost formula does not represent the true costs associated with outputs. As the higher inventory costs will be attached to the outputs assuming these inventory items are the first to be sold. In this way the ‘gross profits’ once again will not truly represent the reality of the firms inventory costs.

This leaves only two options for the Cost formula that my firm could have used. The first one is First In, First Out (FIFO), and as the name suggests it is assumed under this cost formula that the first inventories purchased are the first to be used or resold, meaning a firms inventories are turning over and are always up to date, or this is the assumption anyway. This could not be correct, how a firm manages its inventories in reality could be very different however when attaching costs to outputs this formula is used. The last formula to consider is the weighted average cost formula. This formula assumes there is a mix of the recent inventory items and older inventory items being used and thus attaches a weighted average cost of goods sold to all the identical inventory items.

Basically a firm may not keep track of when the items were purchased or for what costs and instead spreads these costs across all its inventory items as an average cost, this method works very well for the firms using the perpetual method, as the stock are constantly being recorded and updated, this weighted average cost would be somewhat fair to the actual costs associated with each item, if however the firm was using the periodic method, this weighted average cost would only be applied at the end of the period and could mean a huge variance in costs depending on the attributing factors.

Of these two it is very hard to determine which method my firm used to calculate its costs of goods sold. The only information my firm supplied in their financial statements on how their inventories are managed was as follows;

Inventories are recorded at purchase or production cost or, if lower, at their estimated net realisable value.

Net realisable value is the estimated selling price under normal operating conditions, net of completion costs and all other selling-related expenses.

The cost of production of finished products includes the cost of raw materials, outsourced materials and processing, and all other direct and indirect manufacturing costs reasonably attributable to them, with the exclusion of financing costs.

Obsolete and slow-moving inventories are written down to reflect their likely use or realisability.

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If I had to take a guess, I would assume my firm uses the First In, First Out cost formula to account for its cost of inventories. The reason I first come to this conclusion was based on what my firm actually does and what its needs would be, my firm specialise in the manufacture and production of high end fashion items. As we all know fashion is constantly changing, my firm is so successful and from all my research up until this point, it is highly competitive in its industry. The weighted average cost formula assumes that a firm uses a mix of the old and new inventory items for its outputs which I supposed could be correct for my firm, especially for smaller item such as thread and zippers however it seems to me the First In, First Out method would be closer to the truth when it comes to my firms inventories.

I would be very shocked if my firm was using older inventory items (especially since my firm does not just manufacture its fashion items, they also purchase items already ready for resale). My assumption is my firm would want these older inventory items rotated as soon as possible to avoid being left with bulk amounts of inventory items due to a change in the fashion demand. This assumption is further backed up by one of the points noted above “Obsolete and slow-moving inventories are written down to reflect their likely use or realisability” which has been taken directly from the financial statements for the 2014, 2015, 2016 and 2017 years.

The second reason behind my conclusion is the wording my firm uses in relation to its inventory costs “inventories are recorded at purchase or production costs”, “The costs of production included the cost of raw material…..” I assume if a weighted average cost formula was used then these sentences would include wording such as “average costs” to be better described the process. However due to the lack of information my firm disclose in their financials regarding their inventory management systems I could not say for sure which cost formula would be in place.

Aeffe has a massive amount of Inventories recorded in their financial statements and seems to be consistent across all four years. In 2014 they recorded just under 84 million euro in stock and inventories, which progressively grew to just under 98 million euro recorded in 2017 year. Majority of these amounts were the ‘finished products and goods for resale’, almost 76% of this sum in 2017 was in this form which I found very interesting. While there is no way to tell what percentage of inventory items my firm buys as finished products already ready for resale and what percentage of inventory items are purchased in the form of raw materials and converted to the final output.

It occurs to me that they must be very efficient at processing these raw materials to account for that higher percentage of inventory items already ready for resale at that point in time. I expected to see a larger number for the raw materials items held in stock and work in progress items, and was surprised to see they only accounted for 24% of the total inventory items recorded in the 2017 year. Regardless it is easy to see from these figures that my firm’s world (so to speak) revolves around its inventories, with such a large amount of inventories held across all years. I also found it interesting that my firm has not changed its method of recording its inventories in their end of financial year reports over the four years I viewed. The wording was identical, even the financial statements had the same items listed across all four years, the only details that changed were the actual figures.

Now I have never had any experience with inventories, I worked in a seafood shop when I was in school and a number of times I performed a stock take of the frozen goods we held in our cold rooms, however this was mostly for the purpose of reordering stock and once I think was used in the end of year balances however my knowledge does not go past the initial recording of the stock we held. I would have no clue what steps were taken after this point, and I certainly have no knowledge of what issues with inventories a firm that operates in an industry that seems to have a very regular expiry date when it comes to inventories as is the case with my firm.

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One of the pieces of information that I found interesting in my firms financial reports was that the inventory items of raw material and work in progress recorded mainly related to the spring/summer 2018 collection (their current fashion line). The write downs they recorded for the period in 2017 was just 12,682 euro for the entire year and this was due to obsolete and slow moving material in stock. My initial assumption when viewing my firms inventories was that their write downs would be quiet large due to changes in fashion, I was amazed to see such a low figure for the 2017 year and it was lower again in the 2016 year by almost 4000 euro.

To me this suggests my firm managers its inventory very efficiently, to have less than 13,000 euro in write downs out of just over 106million in costs of inventory recorded for the same year is very surprising. From what I have read about my firm, I really have no insights into how they could better manage their inventories. To me it appears they are doing very well, first to have such a high amount of inventories and stock across all years, obviously they have a very good management system in place to keep account of the stocks especially since they change hands any number of times before they actually reach the customer. Also as my firm has a number of manufacturing warehouses and outlets, they do very well to account for all stock and inventories across all branches and further to this, having a very low amount of write downs in the period with these same challenges would suggest they are very efficient in the management of their inventories and recording their costs of goods sold.

STEP 8 – MYOB TRAINING AND SET UP I have included below a few screen shots of the various steps I completed in the process of setting up my business in MYOB. The business I have used for this step is Peak Electrical & Air Conditioning, as this is my husband’s business and I wanted my leaning in these steps to be based on our own firm.

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Second Phase – Training

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Please see below screen shot of my results for the MYOB Online Training Skills Test

STEP 9 – MYOB BUSINESS TRANSACTIONS I have listed below my 10 transactions relevant to my firm Aeffe.

1. Materials ordered from Fabric House S.R.L in the sum of €130,000 Euro. 2. Routine Service/Maintenance on Fabrication Machines MAC International SRL paid on site

€25,000 euro. 3. Transportation costs for Management Team to Milan Airport (August Seminar, West 56 th

Street New York USA) Paid in cash in the amount of €350 euro. 4. Electrical Services Maintenance and Repairs of warehouse Cappello Lorenzo & C. SNC in the

sum of €680

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5. Food and Beverages for Office party 2018 Winter Catalogue Launch Ciano Food Services in the sum of €3,650

6. Phone and Internet Expenses for August 2018 in sum of €1,7807. Fashion Items for Winter 2018 collection sold to MosChino Outlet in France in the sum of

€244,398.008. Part Payment to Fabric House S.R.L for items ordered on account in the sum of €95,0009. Flight Expenses for Management Team from Milan Airport to New York (August Seminar,

West 56th Street New York USA) paid on credit card in the amount of €1,950 euro10. Payment to Credit card for Flights expense (August Seminar, West 56 th Street New York

USA) in the amount of €1,950 euro

Aeffe Via Delle Querce, 51

47842 - San Giovanni in Marignano (RN)Italy

All Journals1/07/2018 To 30/09/2018

ID No.Account No. Account Name Debit Credit

CD

27/08/2018 MAC International SRL Viale Regina Margherita, 33, 20122 Milano MI, Italy

1 1-1110 Aeffe Business Bank Account

$25,000.00

1 6-2100 General Repairs & Maintenance

$22,727.27

1 2-1220 GST Paid $2,272.73 CD

30/08/2018 MyTaxi

1 1-1140 Petty Cash/Cash On Hand

$350.00

1 6-4600 Travel & Accom. Expenses

$318.18

1 2-1220 GST Paid $31.82 CD

30/08/2018 WEBJET ONLINE

1 2-1110 Aeffe Business Credit Card

$1,950.00

1 6-4600 Travel & Accom. Expenses

$1,772.73

1 2-1220 GST Paid $177.27 CD

30/08/2018 Cappello Lorenzo & C. Snc Viale Venezia, 35, 38050 Castelnuovo TN, Italy


$680.00

2 6-2100 General Repairs & Maintenance

$618.18

2 2-1220 GST Paid $61.82 C 30/08/2018 Ciano Foods Via dell'

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D Ecologia 5/11 Loc. Vallin Buio, Livorno, Italy


$3,650.00

3 6-4700 Food $3,318.18 3 2-1220 GST Paid $331.82 CD

30/08/2018 EXPAT


$1,780.00

4 6-2900 Telephone Expenses

$1,618.18

4 2-1220 GST Paid $161.82 PJ

1/09/2018 Purchase; Fabric House S.R.L

3 2-1510 Accounts Payable $130,000.00 3 6-3100 Freight Out $1,272.73 3 1-1320 Inventory $116,909.09 3 2-1220 GST Paid $11,818.18 CD

12/09/2018 Fabric House S.R.L Via delle Viottole, 7, 59100 Prato PO Italy Italy


$95,000.00

5 2-1510 Accounts Payable $95,000.00 CR

21/09/2018 Payment; MOSCHINO

CR000001 1-1110 Aeffe Business Bank Account

$244,398.00

CR000001 1-1310 Accounts Receivable

$244,398.00

CD

21/09/2018 Money Transfer - FLIGHTS FROM MILAN TO USA

TR000001 1-1110 Aeffe Business Bank Account

$1,950.00

TR000001 2-1110 Aeffe Business Credit Card

$1,950.00

SJ

22/09/2018 Sale; MOSCHINO

1 1-1310 Accounts Receivable

$244,398.00

1 4-1000 REVENUE $222,180.00 1 2-1210 GST Collected $22,218.00 Grand Total: $749,156.00 $749,156.00

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Profit & Loss StatementJuly 2018 To September 2018

Income REVENUE $222,180.00 Total Income $222,180.00 Gross Profit $222,180.00 Expenses General Repairs & Maintenance $23,345.45 Telephone Expenses $1,618.18 Freight Out $1,272.73 Payroll Expenses Travel & Accom. Expenses $2,090.91 Food $3,318.18 Total Payroll Expenses $5,409.09 Total Expenses $31,645.45 Operating Profit $190,534.55 Total Other Income $0.00 Total Other Expenses $0.00 Net Profit/(Loss) $190,534.55



Statement of Cash FlowJuly 2018 To September 2018

Account Name

Cash Flow from Operating Activities

Net Income $190,534.55 Inventory ($116,909.09) GST Collected $22,218.00 GST Paid ($14,855.46) Accounts Payable $35,000.00 Net Cash Flow from Operating Activities

$115,988.00

Cash Flow from Investing Activities

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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

$115,988.00

Cash at the Beginning of the period

$275,000.00

Cash at the End of the period $390,988.00



Balance SheetAs of September 2018

Assets Current Assets Bank Accounts Aeffe Business Bank Account $391,338.00 Petty Cash/Cash On Hand ($350.00) Total Bank Accounts $390,988.00 Other Current Assets Inventory $116,909.09 Total Other Current Assets $116,909.09 Total Current Assets $507,897.09 Total Assets $507,897.09Liabilities Current Liabilities GST Liabilities GST Collected $22,218.00 GST Paid ($14,855.46) Total GST Liabilities $7,362.54 Other Current Liabilities Accounts Payable $35,000.00 Total Other Current Liabilities $35,000.00 Total Current Liabilities $42,362.54 Total Liabilities $42,362.54Net Assets $465,534.55Equity Current Year Earnings $190,534.55 Historical Balancing $275,000.00 Total Equity $465,534.55

The first statement I looked at was my Statement of Cash Flow, this all looked pretty straight forward to me. It displayed my Net Income from the transactions I had entered, the cost of my purchases of

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inventory, as my firm is a fashion manufacturer it seemed to me that most of their purchases would be in materials. This all displayed on this statement as I had expected. This statement also included the GST amounts, my remaining balance of my accounts payable account (as a part payment was made as one of my transaction). I was pleased to see there was a positive figure displayed for my ‘net cash flow from operating activities’, of course this was not a surprise as this was what I was trying to achieve however working with a program that I had really only ever used to enter data, I was a bit worried when I printed my statements I might discover I had entered the sales incorrectly.

There was no cash flow from financing activities which again was no surprise as none of my transactions were finance related. When I commenced this step I initially choose to have a sum of $275,000 of cash, thinking back to what I had read in the study guide, if you do not have a positive cash account balance your business could be in real trouble with no way to pay for everyday transactions, so I chose to enter a positive figure when initially setting up my account. The Statement of Cash flow stated my opening cash balance, and of course the balance at the end of the period, which again was no surprise to see.

I did think that it would have been a good idea to include when in the process of setting up my accounts a sum for my firms liability accounts for my firm, as is more in line with the truth on their current position as seen in their financial statements and this could have reflected that, which also would have given me the opportunity to further practice this process. I decided against doing this step in the end as this was one of the initial set up and training steps I completed in Step 8. I am confident I know how to do this step, and changing these details now would mean I would need to rerun all reports. However this would have changed my Statement of Cash flow considerably.

As it stands this statement tells me my firm had a very good first quarter, after all costs and expenses it revealed a significant increase in my firms net cash flow balance. Out of curiosity, I went back to my firm’s financial statements to see if their actual Statement of Cash Flow had any similarities to the one I have created. The first thing I noticed was that they had no inventory items listed under their net cash flow from operating activity, and I find this very odd. This is making me question if I was meant to list my firms items as both ‘items I buy’ and ‘items I inventory (which I linked to my inventory expense account)’…..

The reason I selected to inventory my items was due to my initial thought of tracking inventories which we read about in the study guide. Surely this is a method my firm would use to keep track of their ever changing list of inventory items. However my first thought when seeing this difference was that maybe this was incorrect. However I then noticed the item ‘Increase/Decrease in Tangible Fixed Assets’ which as we have read in the study guide is the assets that have a physical presence such as the current asset ‘inventories’. Even so I am surprised how small this amount is, however is not a deal break as I have seen over the last 6 months of study, a firms Statement of Cash Flow certainly does not give us the whole story of a firm.

Another thing I noticed when comparing the two ‘Statement of Cash Flow’ Statements was that in comparison my transactions I entered had far more cash transactions that Aeffe has in reality. Their figures were very small in comparison. The next statement I analysed was my ‘Balance Sheet’. The first Item that grabbed my attention was that my cash transaction for the Taxi fare in the amount of $350, was showing on my statement as a negative. Having completed this step in the wee hours of the morning, I had forgotten to go into the spend money section and settle this amount. I have rectified this issue and included a reprinted version of my balance sheet below as it stands now.


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Balance SheetAs of September 2018

Assets Current Assets Bank Accounts Aeffe Business Bank Account $390,988.00 Total Bank Accounts $390,988.00 Other Current Assets Inventory $116,909.09 Total Other Current Assets $116,909.09 Total Current Assets $507,897.09 Total Assets $507,897.09Liabilities Current Liabilities GST Liabilities GST Collected $22,218.00 GST Paid ($14,855.46) Total GST Liabilities $7,362.54 Other Current Liabilities Accounts Payable $35,000.00 Total Other Current Liabilities $35,000.00 Total Current Liabilities $42,362.54 Total Liabilities $42,362.54Net Assets $465,534.55Equity Current Year Earnings $190,534.55 Historical Balancing $275,000.00 Total Equity $465,534.55

I only transferred the money necessary to clear this debt, however it occurred to me later that I could have included a little more so that cash account would still have appeared on my statement with a positive figure this time. Once again I looked back at my firm’s original Balance sheet to compare and was relieved to see far more similarities with the inventories, cash (which in my case was my business bank account amount), Tax liabilities, and Accounts Payable (or Trade Payables as Aeffe refers to them).

In comparison to Aeffe’s original ‘Balance Sheet’ statement, the ‘Balance Sheet’ I have prepared tells a much shorter story. According to my statement, my firm pays for all transactions either in cash or on account, of course this is not showing the credit card purchase that was one of my transactions and the reason for this is I settled this account as one of my other transactions. To look at this statement alone and you would have no clue this debt existed, and this is a good example of the types of information this statement fails to disclose, and thus cannot tell you the whole story of my firm or rather my firms transactions for that period. Realising this information I found very enlightening, getting to practice these processes for ourselves and seeing the affect they have on our

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firm’s statements at the end is really very interesting. Again in comparison my Balance sheet showed no financial liabilities, I would really have liked to enter these types of transactions and see the difference it had on my balance sheet. However again this would change my entire document, and would probably mean I would miss my submission date for this assignment with the extra work I would create for myself.

Moving onto the Income Statement and again it tells a very short story, and is most defiantly the least complicated version of an ‘Income Statement’ I have ever viewed. The items listed are very simple. Revenue, and all my expense items. One thing that stood out the most to me, was that my Income Statement had no ‘Cost of Goods Sold’ item listed. After seeing this, I went back into MYOB to see if I could use the ‘Build Item’ option under inventory to create the items I had sold and link them to the materials used to create them. As one of my transactions was to purchase a large sum of materials, and another transaction was to sell the finished products to Moschino. So I thought there should be some way in MYOB to transfer these materials to the finished good however I had no luck figuring this out for myself and had even less luck searching for help online. Hopefully we might get the chance to explore MYOB further in our future studies as I am left very curious if this can be done using this program.

Moving on and in viewing this statement closer it becomes apparent how many expenses I have recorded as transactions, I really was not even thinking about the different types of transactions when deciding on my list, only the sort of transactions my firm would have in reality which is one I struggled with having no knowledge of how a manufacturer would operate. Looking at this statement now and I am wishing I would have included a few different transaction types to really practice the different areas these transactions are recorded and the effects they have in the end on my financial statements.

Looking at this statement and it would appear my firm is very simple in its operations, having only sales revenue as income, with a handful of what would appear everyday expenses in the life of a firm. They have a very strong net profit figure for a three month period, which now seems unrealistic especially when viewing this statement which paints the firm as a small business with limited transactions. Now to take a further look at these figures, to do this I have put to work some of the concepts we learnt in studying ‘Accounting, Learning and Online Communication’, in particular the Ratio Analysis.

Net Profit Margin: Which is the percentage revenue made by a firm after deducting all expenses from sales, it is the measurement of profit that can be made from the total sales a firm makes for that period. (Net Profit/Sales = Net Profit Margin), therefore when analysing my firms financial statements I can see that the Net Profit Margin would be ($190,534.55/$222,180) x 100 = 85.76%. Meaning for every dollar in sales, 85.76 cents of that 1 dollar sold was profit. This seems ridiculously high to me, and made me wonder what the actual Net Profit Margin for my firm was for 2017. After doing the calculations I saw that the actual Net Profit Margin for Aeffe for the 2017 year was 3.63%, which is more what I had in mind….. Therefore the Net Profit Margin would appear to be way too high, and the conclusion that can be drawn from this figure is that the profit margin for this firm would not be sustainable into the future.

Return on Assets: This is the percentage return a firm sees on its assets (Net Profit/Total Assets = Return on Assets), therefore from my created financial statements the return on Assets is ($190,534.55 / 507,897.09) x 100 = 37.51%. Again this figure seems a bit high to me, the main thing to see is that this figure is higher than any other alternative risk free investment option or it would not be worth the risks involved. It is certainly better to see a higher figure here. Once again I am curious to see this figure in reality for my firm, I turn to the original statements and am very

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surprised to see for the 2017 year my firm saw a return on their assets of 81%. That is massive….. In conclusion my created firm is very efficient at using its assets to generate earnings for the period.

Total Asset Turnover Ratio: Is the figure that my firm has generated times its sales value (Sales / Total Assets) and if this figure is too high it can be an indicator that a firm might be overworking its Assets. In this case it can be seen that the Total Asset Turnover was 222,180/507,897.09 = 0.44, meaning for each dollar of assets my firm generates 44 cents of sales, which is quiet low really however in comparison to the 2017 financial statements for Aeffe were the Total Asset Turnover is 0.82 it is not far from the truth for my firm. From this figure I would suggest my firm is not as efficient as it could be when it comes to utilising its assets.

Current Ratio: This is the Current total assets of a firm divided by its current liabilities (Current Assets / Current Liabilities). It is important to see at least 1 for this figure as it represents the company’s ability to pay its short term and long term liabilities. So for my created financials the Current Ratio is 11.99, which is not a surprise as I have not entered any financial liabilities for my firm. Which of course has meant the Current Liability figure is very low which is not realistic for this type of firm. The 2017 Financial Statements for Aeffe actually give us a Current Ratio 1.3. While this figure looks good for my firm, it is not realistic.

Equity Ratio: This figure measures the amount of assets that are financed by the stockholders (Equity/Total Assets). So for the financials I have created this would be 91.65% which of course is no surprise as I have not entered any financial liabilities for my firm. The remainder of the 100% is the portion of the assets that are financed by debt, therefore 8.34% is the Debt ratio for my firm. I do not need to compare this figure to Aeffe’s actual financials as I know they have financial liabilities listed. Of course for any investors this figure would seem extremely favourable however I know this does not paint the reality for my firm.

In conclusion from an outsiders perspective these figures would seem a little contradictive however favourable for the future success of the business.

STEP 10 – DEPRECIATION In looking at my firms Depreciation policies I was relieved to find so much information included in their financial statements. They had both Depreciation and Amortisation amounts in their income statements across all four years I viewed. Amortisation is the process of accounting for the expenses relating to Intangible Assets (those that have no physical presence such as patents, trademarks and copyrights). I will start out by discussing the process my firm uses to depreciate its Tangible Assets.

The first bit of information I came across was in regards to their Tangible Fixed Assets which stated “Tangible fixed assets, are stated net of accumulated depreciation, are recorded at purchase or production cost except for those assets which have been revalued in accordance with specific laws. Cost includes related charges and directly-attributable expenses”. After reading Chapter 5, this sentence appeared to be quiet standard for a firm when describing their depreciation policies, however my curiosity was peaked when reading of the assets that have been revalued due to specific law. I am interested to see which assets this is referring to, but first to discuss their policies.

As we read in the Study guide, a firm can use two different depreciation models, Cost or Revaluation. A firm might only use the one method to account for its depreciation or it might use a combination. Revaluation model is where a firm revalues an item of its Property, Plant or Equipment to its fair value, where fair value can be reliably measured. At which point they can either depreciate or list any impairment losses based on the amount. Were the Revaluation model is used, a firm must use this method for the entire class of Property, Plant and Equipment to which the asset belongs.

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The alternative is for a firm to use the cost depreciation model, which as evident in my firms financial statements is the one my firm is currently practicing. As stated in the study guide, “The cost model is basically were a firm carries an item of Property, Plant or Equipment at its original cost less any accumulated depreciation and any accumulated impairment losses”. My firm provided a very clear description on how they depreciate their assets. “The Tangible Fixed Assets are depreciated systematically each year on a straight-line basis”. Tangible Assets are those that have a physical presence, such as Property, Plant and Equipment.

Now the study guide has provided us with some information on this ‘Straight-line policy’. This method is obviously a cost model of depreciation, were an asset is depreciated at a consistent amount over its useful life. My company has stated in their financial statements (for 2014, 2015, 2016 and 2017 years) that these Tangible assets that have been depreciated on a straight-line basis using economic-technical rates that reflect the residual useful lives of each asset. The only exception to this is the carrying amount of my firms Land and Buildings, which was adjusted to reflect the value determined by an independent appraisal. From that point depreciation rates are applied on a straight-line basis over the new estimated useful lives of 50 years at 2%.

I cannot say when this change took place as all four years that I viewed contained the same information, it is clear this change happened before the 2014 year. As stated about these assets were revalued due to specific laws stated in the Accounting Standards affecting these assets. My firm also included the depreciation rates for all its Tangible Assets and I was surprised to see these rates have not changed over the four years I viewed. It was noted in each year of my firms financial statements that my firms Land was not depreciated. Which is consistent with what we learnt in the study guide, as Land does not expire or get used up over the course of the business’ operations. The rates are as follows;

Industrial Buildings 2% - 2,56%Plant and Machinery 10% - 12,5%Industrial and Commercial Equipment 25%Electronic Machines 20%Motor Vehicles 20%Cars 25%

My firm uses this same cost model to determine its amortisation rates for its Intangible assets across their useful lives, which in the case of their Brands is an estimated 40 years. I was very surprised by this figure, seems like a very longer time for this type of asset, however looking at the background for my firm, it has been operating for such a long time (and using the same brands) this makes sense and makes me wonder if this firm was newly establish, what would be the estimated useful life for this type of asset. The categories and the rates used are shown below, and these rates are consistent across all 4 years of financial statements I view.

Royalties from patents and intellectual property 33%Brands 2.5%

Further to this, my firm states that it’s Intangible Assets with an infinite useful life such as Goodwill, are not Amortised as per the above and instead is subject to an impairment test performed annually at which point any impairment losses are recognised in the Income Statement. Depreciation and Amortisation does not seem to be a significant expense for my firm. This expense is actually listed as one item on my Income Statement ‘Amortisation, write-downs and provisions’, which I found interesting however they have broken these items up on page 68 of the financials to reflect each

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individual amounts. In the 2017 year Depreciation of Tangible Fixed Assets was €5,004,000 while Amortisation of Intangible Fixed Assets was €6,555,000 which at first seems like a very high figure however of the €297,523,017 in expenses recorded for the 2017 year, this amount made up just 3.9% of my firms total expenses recorded for the 2017 year.

This seemed to be quiet consistent throughout the years I view, with the 2016 recording Depreciation of €5,149,000 and Amortisation of €6,806,000 out of the €279,175,983 in expenses recorded making up just 4.3% of the total expenses for the year. The 2015 recorded Depreciation of €5,502,000 and Amortisation of €7,153,000 out of the €271,185,428 in expenses recorded making up just 4.7% of the total expenses for the year. The 2014 recorded Depreciation of €5,332,000 and Amortisation of €6,990,000 out of the €249,766,616 in expenses recorded making up just 4.9% of the total expenses for the year.

What I found interesting was that consistently across all years my firm had a higher sum of Amortisation than Depreciation, which is not at all what I would have expected. The reason for this is obviously that Property, Plant and Equipment make up such large asset value compared to brands copyrights and so forth. My firm did not include an accumulated Depreciation or Amortisation item in its balance sheet, and instead listed each item individually.

Please see below the three fictional journal entries that have been processed by my firm’s accountants when recording my firm’s depreciation.

1. Increase for investments in renovations and modernisation of shopsDR Depreciation Expense €1,064,000CR Accumulated Depreciation – €1,064,000Leasehold Improvements

2. Purchase of Plant and Equipment DR Depreciation Expense €871,000CR Accumulated Depreciation - €871,000Plant and Machinery

3. Purchase of Electronic Machines DR Depreciation Expense €1,160,000CR Accumulated Depreciation - €1,160,000Other Tangible Assets

The increase of these investment journal entries will affect the depreciation value, adding to the depreciation expense in the financial statements over the estimated life for each item, and of course decreasing the Accumulated Depreciation account over that same time. There are ways that it is possible for these entries to be manipulated, especially in the case of the Shop renovations. In this instance the costs or revaluation amounts could be overstated or understated to achieve a more favourable outcome. In the same way the estimated life of any given item could be manipulated and so forth.

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Documents

rochelleburney.files.wordpress.com · Web viewThe 2015 recorded Depreciation of €5,502,000 and Amortisation of €7,153,000 out of the €271,185,428 in expenses recorded making