Analyzing an Income Statement - Assignment Example

Question 1 While designing an accounting system which will look into the requirements of the organisation and to provide external report to the person who manages it, the following needs to be considered Scalability: It is important that the accounting system which is designed “changes as per the changes the business encounter so that the report which we get matches the requirements of the companies and the agencies that need it”. (Siebler, 2010) Relevance: The accounting system should be relevant to the industry and match with the requirement of the agencies so that reports provided are correct Reliability: The accounting system should be reliable and the decision taken on the basis of it should be reliable and sound Comparability: The system should be such that the results of the companies are being comparable to other firms in the same industry. Understandability: The reports generate on the basis of the accounting system used should be easy to understand and results based on it should match the requirements Cost: The accounting system should be such that the cost involved are manageable and the results generated on the basis helps the management to benefit from it The company needs to provide “the reports like profit and loss statement, balance sheet and cash flow statement” to auditor, government agencies, shareholders, taxation department and people associated with the company. Question 2 1. A. Groups other than shareholders who have interest in the activities are suppliers, creditors, government agencies, environment agencies, customers, directors, employees, super markets, and any other person associated with the company. This is so because the changes in the policy and profits will have a bearing on people associated with the company. B. The reason which is leading Woolworths to act in a socially and environmentally responsible manner is as follows Woolworths uses napkins made in China from APP which is harming the environment as it uses trees for the production of napkins The timber production unit and the environmentalist in Australia have acted against the company by giving advertisements that Woolworths is looking for profit and not towards the environment and society Using napkins made in China is causing unhealthy competition as the labour are not well paid there thereby giving rise to unhealthy competition “APP who source the napkins to Woolworths are not certified to do so and have been banned in US”. APP who source material to Woolworths uses dubious financial data which has hampered the goodwill and made Woolworths susceptible to be using things which are harmful to the environment. 2. The account done by accountant will change when they include environment accounting as “accountants will be faced with a problem of how to respond to the changes, how to account for carbon trading which is used in environment accounting, the way in which the environment issues will be handled and so on”. (Medley, 2007) Accountant will also face the problem of how do they account the environment accounting and what changes need to be brought to include it. 3. Two social and environment issues addressed is APP which supplies napkins to Woolworths is harming the environment by destroying trees for it and has not been certified as a sustainable trader in fibre and is harming the trees and destroying natural habitat. Deforestation has lead to forest to dwindle which has affected the wild life and caused many species to vanish thereby harming wild life species. 4. APP has never been certified as a sustainable supplier means that APP hasn’t got the permission from the legal bodies to use timber and produce napkins and paper but is doing so and in the process is harming the environment by causing deforestation and harming the natural species. APP account has been audited means that the accounts of the company are been audited but the environmental factors are not considered as it should be. The account has been audited as per the countries norms and also doesn’t consider the difference which accounts in the labour laws. Question 3 a. Profitability: The profitability ratios indicate improvement for Smart Fashions Pty Ltd. The gross profit indicates a rise from 40% in 2007 to 43% in 2008. Gross profit indicates “the profit a business makes on the cost of goods sold after considering the direct expenses”. (Kennon, 2010) The gross profit shows a moderate increase showing efficiency in production. The net profit on the other hand shows a decrease to 2.1% in 2008 as compared to 2.6% in 2007. It indicates “the profit attributable to the equity shareholders after all the expenses for the business has been met”. (Kennon, 2010) It is a worrying factor for Smart Fashions Pty Ltd because the net profit has decreased. This is attributed upon the fact that gross profit has risen but so has the indirect expenses. Smart Fashions Pty Ltd needs to reduce it. The return on assets for Smart Fashions Pty Ltd has decreased to 2.5% in 2008 as compared to 2.8% in 2007. It is identified as “the profit earned per dollar of assets and shows whether the asset is underutilized or not”. (Joseph, 2010) The return has decreased due to decrease in net profits which can be attributed to the rise in indirect cost. When we compare it to the industry average which is 3.9% it shows poor performance. Smart Fashions Pty Ltd needs to improve their return on assets so that they can be compared with the industry standards. The overall result for profitability shows that the profit has decreased and this is due to indirect cost. The company needs to reduce it and improve the management. b. Efficiency: The efficiency ratios help to judge “the efficiency of the management and also indicates the company’s efficiency to manage its capital”. (Joseph, 2010) This ratio is based on turnover and thereby is an important indicator. The inventory turnover ratio for Smart Fashions Pty Ltd has improved in 2008 as compared to 2007. The ratio has improved to 58 days in 2008 as compared to 71 days in 2007. It shows efficiency on the part of Smart Fashions Pty Ltd as they revolve their inventory in 58 days. This also suggests that it is done around 7 times in a year. This shows that they have not blocked a lot of funds as they are near to the industry standard of 55 days. “This demonstrates good inventory management and the orders are placed at proper time thereby ensuring that inventory is as required”. (Joseph, 2010) Smart Fashions Pty Ltd need to continue this way and this will ensure that funds are not blocked thereby ensuring proper working capital. The average debtors’ receivable period has shown improvement in 2008 as it is 76 days compared to 81 days in 2007. This states that Smart Fashions Pty Ltd is able to revolve it debtors in 76 days. It also means that debtors’ are revolved 5 times a year. The company needs to improve it as far below industry standards which is 48 days. This is a concern as “the chances of debtors’ not paying the funds have risen and there is a fear that bad debts might rise”. (Kennon, 2010) Smart Fashions Pty Ltd needs to improve it drastically and ensure that recovery is faster as it will also help to reduce current assets and ensure that working capital is managed properly. Question 4 1. CSL uses historical cost accounting except for “available for sale” and “at fair value through profit and loss” where fair value measure has been used. 2. Total assets is $ 7,366,815,000 3. Accounting Equation is “Assets = Liabilities + Owners Equity” For beginning of 2008 Assets = liabilities + Owners Equity 4,694,964,000 = 1,888,839,000 + 2,806,125,000 For ending of 2008 Assets = liabilities + Owners Equity 7,366,815,000 = 1,903,920,000 + 5,462,895,000s 4. The non-current liabilities have decreased by $333,262,000. This has been contributed by decrease in trade payables by $940,000, interest bearing liabilities and borrowings by $370,406,000, deferred tax liabilities by $2,707,000, provision by $114,000, increase in government grants by $5,133,000 and increase in retirement benefit liabilities by $2,772,000. 5. The change in total assets is $1,855,915,000. “The change in total liabilities is a decrease” in it by $93,432,000. The change in total equity is $1,949,347,000. Here we see that Change in Assets = Change in Liabilities + Changes in Equity 1,855,915,000 = (93,432,000) + 1,949,347,000 Thus, it demonstrates the equation that assets = liabilities + equity so the changes will be also equal as assets are contributed by either liabilities or through equity funds. 6. CSL had 100% interest in all its subsidiaries except for Cervax Pty Ltd where it has 74% stake and CSL Behring Sales Force Inc it has 0% stake. 7. Total Revenue is $4,622,387,000. Gross Profit is $2,222,667,000. Net profit attributable to members of CSL is $1,145,932,000. EBIT is $1,369,747,000. 8. Net Profit for consolidated group is $1,145,932,000. Net Profit from operating activity is $1,024,824,000. Net Profit is greater than profit from operating activities. The company needs to see that net income from operating activities is greater as it reflects earnings to be of high quality and since income statement is prepared on accrual basis so profit from operating activity should be high. 9. The changes occurred in the financing activities are as more shares have been issued and it amounts to $1,848,804,000. Dividends paid have increased by $92,061,000. Borrowings have been paid and stands as $360,482,000 compared to previous year. Shares have been bought back amounting to $54,941,000 and receipts from settlement of hedge have increased by $60,084,000. This has led to an increase in financing activities by $1,279,236,000. 10. The company has invested in property, plant and equipment, in onerous contracts for business projects. There was a net investment in investing activities which demonstrates that the company has future projects. References Joseph K, 2010, “Analyzing an income statement: Return on Assets”, about.com guide, The New York Times Company Joseph K, 2010, “Analyzing an income statement: Inventory Turnover”, about.com guide, The New York Times Company Kennon J, 2010, “Analyzing an income statement: Gross Profit”, about.com guide, The New York Times Company Kennon J, 2010, “Analyzing an income statement: Net Profit Margin”, about.com guide, The New York Times Company Kennon J, 2010, “Analyzing an income statement: Receivable Turnover”, about.com guide, The New York Times Company Medley P, 2007, “Environment Accounting: What does it mean to professional accountant”, Accounting, Auditing & Accountability Journal, Volume 10, Issue 4, Page 594-600 Siebler W, 2010, “Things to consider before buying accounting software”, ezine articles, retrieved on April 4, 2010 from http://EzineArticles.com/?expert=William_Siebler Read More