Airline Liquidity and Internal Controls: Delta Airlines - Research Paper Example

June 20, Delta Airlines Introduction Reliable financial ments are based on liquidity and internal control procedures. The investors rely on liquidity ratios for their investment decisions. The effective internal control procedures reduce errors and frauds. Liquidity and internal controls affect the decision making process. Task 1 Auditor’s Statement and Purpose The external auditor’s statement affirms the Delta Airlines’ accounts presented in the financial statements are fairly presented. Fairly presented means the auditors did not spot any significant errors or fraudulent amounts in the financial reports. The auditors will present an adverse opinion if the audit shows certain financial statement amounts are fraudulent and there are significant errors (Elder, 2012). The auditor’s report’s purpose is to give a hint to the users of the financial reports. The auditors’ report will indicate whether the company presented material fraudulent financial reports. The investors will shy away from companies where the auditor’s report indicates there are several material errors included in the financial reports. When the auditors’ report shows the financial reports are fairly presented, investors, customers, suppliers, community, employees, government and other users of Delta Airlines’ financial reports will prefer to transact with the company (Elder, 2012). Delta Airlines’ Internal Control System Delta Airlines implements the company-wide internal control system. The Chief Executive Officer sets the design and implementation of Delta Airline Company’s effective internal control system. The board of directors oversees and ensures the successful implementation of internal control system procedures. The management officers, heads, and employees strictly implement the internal control system policies. Both the internal auditors and external auditors recommend improvements in the internal control system and report whether the current internal control system is effective. The audit committee coordinates with the external and external auditors to ensure internal control system procedures are effective (Elder, 2012). Delta Airline Company’s internal control system includes several important aspects. The Control Environment aspect includes the line and staff and management individuals’ prioritizing the implementation of the internal control procedures. All individuals must exercise ethical values, competence, philosophy, and morale needed for Delta Airline Company’s effective internal control system. The Risk assessment and management aspect includes identifying, estimating, evaluating, and managing risks that may the financial reports (Elder, 2012). Further, the internal control procedures aspect includes procedures that prevent, reduce, or eliminate Delta Airline Company’s operational risks. This includes ensuring achievement of organizational goals and objectives. The procedures include documentation, verification, safeguarding of assets, duty separation, and approval and documentation processes. The System of Information Maintenance Aspect includes timely, valid, relevant, sufficient, clear, and open exchange of information among the line, staff, and management individuals. The Evaluation of Delta Airline’s internal control system’s reliability and effectiveness includes monitoring whether all line, staff, and management employees know and implement all internal control procedures (Elder, 2012). The internal control procedures are regular implemented. Cash counts are implemented to determine cash shortages. The company’s official receipt copies are compared with the cash deposits to ensure all customer payments are accounted for. Inventories of assets are regularly implemented to affirm all assets shown in the balance sheet are valid (Elder, 2012). Furthermore, the audit report indicates the Delta Airlines Company’s internal control system is effectively implemented. The audit report affirms the existence or validity of each recorded business transaction reported in the financial reports. The same report affirms all valid and relevant business transactions are completely recorded. The same report affirms Delta Airlines has rights to the assets and properly recorded all obligations. The same report affirms proves the business transaction amounts are accurately recorded. Lastly, the same report affirms all transaction accounts and related disclosures are included in the financial reports (Elder, 2012). Cash Balance and Changes    Thousands               2013 2012 Increase Percent     Cash And Cash Equivalents 2,966,000 2,791,000 175,000 0.06                 Delta Airline Company’s cash balance shows a favourable financial performance during 2013 (Delta, 2013). The 2013 cash and cash equivalents balance is $2,966,000,000. The amount is definitely higher than the 2012 cash and cash equivalents balance, $2,791,000,000. The 2013 year showed a six percent account increase. The increase amounts to $175,000,000. The main source of the cash and cash equivalents is the company’s revenues from regular operating activities. The above table clearly indicates that there is a favorably increasing cash and cash equivalents trend. This trend clearly shows that the 2014 will generate a higher cash and cash equivalents ratio (Debarshi, 2011). Evaluation of Working Capital and Current Ratio Working Capital   Thousands               2013 2012 Increase Percent     Current Assets 9,651,000 8,272,000         Current Liabilities 14,152,000 13,270,000         Working Capital -4,501,000 -4,998,000 497,000 (0.10)                 The above working capital table shows the company’s capacity to use available current assets to pay its maturing current liabilities (Delta, 2013). The above table clearly shows that the 2013 working capital, -$4,501,000,000 is favorably higher than the 2012 working capital, $-4,998,000,000. However, the table also shows that the company does not have enough currently liabilities available to pay for the current liabilities. The 2013 working capital figure is $497,000 higher than the prior year’s working capital figure. The 2013 working capital increase is 10 percent over the prior year figure (Debarshi, 2011). Current Ratio     Thousands                 2013 2012 Increase Percent     a Current Assets 9,651,000 8,272,000         b Current Liabilities 14,152,000 13,270,000           Working Capital -4,501,000 -4,998,000 497,000 (0.10)       Current Ratio (a/b) 0.68 0.62 0.06 0.09                   The above table shows the company’s current ratio computation (Delta, 2013). The table shows the 2013 current ratio is 0.68, indicating that the current assets is unfavorably 68 percent of the company’s 2013 current liabilities. The 2013 amount is favorably higher than the 2012 current ratio result, 0.62. The 2013 figure is $ 0.06 higher than the 2012 amount. The 2013 figure is nine percent higher than the 2012 figure. This trend clearly shows that the 2014 will generate a higher current ratio (Debarshi, 2011). This trend clearly shows that the 2014 will generate a working capital ratio. There are several reasons for the above working capital trend and current ratio trend. First, the company is slow in collecting customer’s accounts. Next, the company generates unnecessary current liabilities. Third, the company is tight on cash and is forced to increase its current liabilities to fund the current business operations (Debarshi, 2011). Task 2 Airlines accounts receivables   Thousands               2013 2012 Increase Percent     Net Credit Sales 37,773,000 36,670,000 1,103,000 0.03     Receivables 3,345,000.00 2,156,000.00 1,189,000 0.55                 The above table clearly shows that the company’s 2013 net receivable amount is $3,345,000,000. This is favorably higher than the 2012 net receivables amount, $2,2156,000,000 (Delta, 2013). The 2013 amount is $1,189,000,000 higher than the prior year amount. The 2013 figure is 55 percent higher than the 2012 figure. This is understandable, the increase in revenues contributed to the increase in the receivables amount. The 2013 net credit sales amount, $37,773,000,000 is $1,103,000 higher than the 2012 amount, $36,670,000. The 2013 amount is 3 percent higher than the 2012 figure. To arrive at the net credit sales (revenue) amount, the gross credit revenue amount is reduced by the sales discounts and sales returns. Likewise, the net credit sales amount includes the sales allowance deductions. This trend clearly shows that the 2014 will generate a higher receivables figure (Debarshi, 2011). Receivables Turnover Ratio                           2013 2012 Decrease Percent     Receivables Turnover = 13.73 17.55 -3.81232 (0.22)                     The receivables turnover shows how long the company is able to collect the receivables amount (Delta, 2013). The 2013 receivables turnover ratio is 13.73 times. The ratio is unfavorably lower than the prior year’s receivables turnover ratio, 17.55 times. The 2012 figure is 3.81 times higher than the prior year’s ratio. The 2013 ratio is 22 percent lower than the 2012 ratio. The ratio shows an unfavorably declining receivables turnover trend. The slow collection can be traced to slow collection activities or selling to customers who were unable to pay their obligations on time. Revising the credit polity by weeding out companies who have cash payment problems will shorten the customers’ payment schedule. This trend clearly shows that the 2014 will generate a lower receivables turnover ratio (Debarshi, 2011). Task 3 Noncurrent Assets    Thousands               2013 2012 Increase Percent     Property Plant and Equipment (Tangible) 21,854,000 20,713,000 1,141,000 0.06     Goodwill (Intangible) 9,794,000 9,794,000 0 -     Intangible Assets (intangible) 4,658,000 4,679,000 -21,000 (0.00)                 The above table clearly shows that the company’s tangible assets picture. The 2013 property, plant, and equipment account is classified as a tangible noncurrent account (Delta, 2013). The 2013 amount, $21,854,000,000, is significantly higher than the prior year’s amount, $20,713,000,000. Specifically, the 2013 amount is $1,141,000,000 higher than the 2012 amount. The 2013 figure is six percent higher than the 2012 figure. This trend clearly shows that the 2014 will generate a higher tangible noncurrent asset figure (Debarshi, 2011). Further, the company’s intangible noncurrent asset is composed of two accounts (Delta, 2013). The first account is the goodwill account. The company’s 2012 account is $9,794,000,000. The 2013 figure replicates the prior year’s operating performance, $9,794,000,000. An intangible account is one that cannot be physically seen. Goodwill is classified as an intangible account. This trend clearly shows that the 2014 will generate similar goodwill figure (Debarshi, 2011). Furthermore, the Delta Airline Company’s intangible assets for 2013, excluding Goodwill, are unfavourable (Delta, 2013). The 2013 amount, $4,658,000,000 is lower than the 2012 amount, $4,679,000,000 (Debarshi, 2011). Asset Turnover Ratio   Thousands                   Increase         2013 2012 (Increase) Percent     Revenue 37,773,000 36,670,000 1,103,000 0.03     Total Assets 52,252,000 44,550,000 7,702,000 0.17     Asset Turnover Ratio 0.72 0.82 (0.10) (0.12)                 The above table clearly shows Delta Airlines’ asset turnover ratio. The ratio shows how the company maximised its total assets to generate the current accounting period’s revenues (Delta, 2013). The 2013 receivables turnover ratio is 72 percent. The figure is unfavorably lower than the prior 2012 accounting period’s 82 percent receivables turnover ratio. The 2013 ratio generated an unfavourable 0.10 decrease, representing an unfavourable twelve percent decrease. This trend clearly shows that the 2014 will generate a lower asset turnover ratio (Debarshi, 2011). Purpose of Depreciation and Impact on Financial Statements    Thousands               2013 2012 Increase Percent     Accumulated Depreciation 7,790.00 6,660.00 1,130.00 0.17                 Depreciation is the act of allocating the tangible noncurrent assets’ value over the assets’ useful life (Delta, 2013). Delta Airlines uses the straight line method of depreciation. The annual depreciation amount is arrived at by dividing the noncurrent asset amounts by the related noncurrent assets’ total number of useful life years. The above table shows that the company’s 2013 accumulated depreciation figure is $ 7,790,000. The amount shows an increase of $1,130,000 depreciation expense over the prior accounting year, 2012. The 2013 accumulated depreciation is 17 percent higher than the 2012 accumulated depreciation figure, $6,660,000 (Debarshi, 2011). Further, the depreciation lessens book value of the balance sheet’s noncurrent assets value. The accumulated depreciation results to the annual decline in the book value of the noncurrent assets. Consequently, the annual depreciation expense amounts reduce the company’s net profit outcomes. The annual depreciation expense does not include a credit to the cash account during the year (Fraser, 2011). Different Depreciation Methods There are different methods to compute Delta Airline’s annual depreciation. Currently, the company uses the more popular straight line method (Delta, 2013). Another method is the flying hours method where each airplane’s value is divided by the estimated number of flying hours during the life of the airplane. The result is multiplied by the actual hours flown during each accounting year (Fraser, 2011). Further, a third depreciation method is the sum of the years digits method. The method generates decreasing annual depreciation expense amount. For example, the first year depreciation expense of a 5 year noncurrent asset is arrived at by multiplying 5/15 and the asset amount. The third year depreciation is arrived at by multiplying 3/15 and the asset amount (Fraser, 2011). Lastly, the declining balance method can be used. The method shows that the current book value of the noncurrent asset is multiplied by a fixed annual percentage. The current year’s book value is arrived at by subtracting the current year’s depreciation amount from the current year’s book value amount (Fraser, 2011). Comparing the above depreciation methods, the best method is the straight line method. The method is simpler to compute. The method is the more popular method. The method shows a fixed annual depreciation expense amount, reducing the need for a lengthy mathematical computation (Fraser, 2011). Task 4 There are several recommendations to improve the company’s internal control, enhance liquidity and implement sound decisions for noncurrent asset investments. First, the company should increase the number of inventory counts. The increase will reduce the possibilities of erroneous asset amounts displayed in the balance sheet. Next, the company should increase the number of cash counts. The cash counts will spot cash shortages and cash overages. The cash counts will ensure the cash and cash equivalent amounts presented in the balance sheet are correct. Next, the company should reduce the current liability amounts. The reduction will improve the working capital figure. The company should install more CCTV cameras to spot, prevent, and reduce theft of company assets. The company should increase the advertising budget. The additional advertising budget will increase revenues, increasing the asset turnover ratio and current ratio (Fraser, 2011). Conclusion The reliable financial reports are grounded on liquidity and internal control procedures. The investors prefer liquid companies. The effective internal control procedures significantly lower the possibilities of unintentional errors and intentional frauds. Evidently, the liquidity issues and the effective Delta Airline’s internal control system influences the financial statement users’ decision making activities. References: Debarshi, B., 2011, Management Accounting. London: Pearson Press. Delta Airlines, 2013, Retrieved June 20, 2014 from Delta Airlines, 2013, Retrieved June 20, 2014 from Delta Airlines, 2013, Retrieved June 20, 2014 from Elder, R., 2012, Auditing and Assurance Services. London: Prentice Hall Press. Fraser, L., 2011, Understanding Financial Statements. London: Prentice Hall Press. Read More