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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Liyaxin Kang Acct 11059-Ass 2
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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Liyaxin Kang Acct 11059-Ass 2
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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Liyaxin Kang Acct 11059-Ass 2
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).
Estimated Selling price = $90
Estimated Variable Cost = $ 45
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
Estimated Selling price = $5
Estimated Variable Cost = $ 2
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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Liyaxin Kang Acct 11059-Ass 2
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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Liyaxin Kang Acct 11059-Ass 2
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 From: Liyaxin
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
Restated Statement of Changes in
Equity
Balance Sheet
Income Statement
Discussion with others
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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Liyaxin Kang Acct 11059-Ass 2
Identify three products/services
Estimate selling price, variable cost
and CMs
Commentary – CMs
Constraints – identify and
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 From: Liyaxin
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
Restated Statement of Changes in
Equity
Balance Sheet
Income Statement
Discussion with others
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
Identify three products/services
Estimate selling price, variable cost
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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Liyaxin Kang Acct 11059-Ass 2
and CMs
Commentary – CMs
Constraints – identify and
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
Restated Statement of Changes in
Equity
Balance Sheet
Income Statement
Discussion with others
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
Identify three products/services
Estimate selling price, variable cost
and CMs
Commentary – CMs
Constraints – identify and
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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Liyaxin Kang Acct 11059-Ass 2
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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