Using Accounting for Decision-Making - Assignment Example

Name: Institution: Course: Date: Using accounting for decision making Step 1: Analyzing financial statements I agree with Marc Bloch that one must consult the past in order to foresee the future in analyzing the financial statements of any company. It is from the financial statements of a company that analysts are able to understand the past of the firm. I agree to the fact that firms do not add value by paying dividends to its equity investors rather it does add value by transferring the value between a firm and its equity investors. I bear a similar understanding of free cash flow with the writer. In this case, I fully agree that cash flow is a measure of value though it is not in itself a measure of value. I also believe that the amount of free cash flow which a firm generates will be affected by the decision of the firm about how much to invest into operating assets. It is also very true that, the more a firm invests in its operating assets the less it will have its free cash flow. Therefore cash flow can be sued by firms to add value as the firm will earn returns. Economic profit is also another way in which a firm can add value. This method is used by firms as a measure of the extent to which a firm has been bale to add value over and above its cost of capital during a period. In my understanding, firms can use both economic profit and cash flow to add value to its equity investors therefore a good way in which firms can analyze their financial statements. In the issue of operating and financial activities, I agree with Anita Roddick that business is about creating a products or service so good that people will pay for it. I also agree to the fact that the most efficient way of identifying accounting drivers of economic profit and cash flow is to restate the firm’s financial statements in order to ensure all earnings are included. I also think in line with the article that in restating the financial statements of firm, the operating activities should be separated from the financial activities in order to see how the firm is financed and have a clear view of the firms operating activities from inside. I do not think that dirty surplus which makes firms not to include its earnings in income statement and put it directly in the balance sheet should be allowed as this might not be a sign of being genuine. On the issue of restating two key financial statements, I agree that balance sheets of any firm should be restated in order to separate the operating and financial assets and liabilities. In my understanding, it very true that restating the balance sheet will facilitate short term and long term liquidity of a firm. I fully agree that it also very important to restate income statement if a firm wishes to separate its operating and financial revenue and expenses. In the issue of profitability and efficiency, I fully agree that understanding the relationship and maximizing the interaction between profitability and efficiency is one of the keys to success in any business. In my understanding therefore, it is important to break things or the financial components into units in order to determine profitability and efficiency of the firm. There are very many ways in which a firm can determine its profitability but I think that firms should measure their profitability in terms of their ability to add value to equity investors. In my understanding of efficiency, it is measured as the relationship between assets and turnover and is therefore a good way of analyzing financial statements. Step 2: Restating your firm’s financial statements Adelaide Brighton Ltd Restated Statements of Movements in Equity Years ended 31 December     2004 2005 2006 2007 2008 2009     $m $m $m $m $m $m                 Equity               Contributed equity     513.3 513.3 514.0     Reserves     14.0 13.3 14.5     Retained profits (losses)     98.4 139.8 136.4     Minority interests     8.3 8.6 3.0     Parent entity interest     625.7 666.4 664.9     Total Equity     634.0 675.0 667.9         1,894 2,016 2,001     Adelaide Brighton Ltd Restated Statements of Financial Position Years ended 31 December     2004 2005 2006 2007 2008 2009     $m $m $m $m $m $m                 Operating Assets               Cash and cash equivalents     24.6 24.2 19.3     Receivables     134.3 147.2 158.3     Inventories     75.4 80.8 84.3     Property, plant and equipment     665.6 694.2 742.5     Investments accounted for using the equity method   38.1 40.8 66.9     Intangible assets     165.0 164.6 164.4     Total Operating Assets   1,103 1,152 1,236     Operating liabilities               Payables     73.1 85.4 84.8     Provisions     49 50 58     Borrowings     251 251 343     Current tax liabilities     20.3 15.4 9.2   Deferred tax liabilities     79.3 84.3 63.0   Total Operating Liabilities     473 486 558   Net operating Assets     630 666 678     Equity               Contributed equity     513.3 513.3 514.0     Reserves     14.0 13.3 14.5     Retained profits (losses)     98.4 139.8 136.4     Minority interests     8.3 8.6 3.0     Parent entity interest     625.7 666.4 664.9     Total Equity     634.0 675.0 667.9     Adelaide Brighton Ltd Restated Statements of Financial Performance Years ended 31 December     2004 2005 2006 2007 2008 2009     $m $m $m $m $m $m                 Total operating revenue   717.3 791.2 888.4   Cost of sales     -464.3 -509.0 -573.2   Freight and distribution costs     -94.9 -108.8 -121.3   Total operating income     232.0 270.6 193.9     Marketing costs     -11.0 -11.0 -11.6     Administration costs     -38.6 -40.7 -41.1     Profit before income tax     182 219 141     Income tax expense   -29.2 -31.0 -35.7     Net Profit     153.2 187.9 113.9     Finance costs     -15.9 -17.9 -24.8     Net profit after tax     137 170 89     I have had issue in separating operating assets and liabilities from financial assets and liabilities. I found it difficult to identify whether each asset and liability in the financial statements is an operating or financial item. Step 3: We have got to make some decisions a. How much of each of these five products should The Quite Amazing Buggy Company produce and sell to maximize its profits Terrain-Buggy Suburbs Terrain-Buggy Suburbs Elite City Runner Sweep Axi F11 v5 Twin Sales 60,000,000 6,250,000 75,000,000 3,000,000 10,000,000 Less variable cost 30,000,000 3,750,000 37,500,000 2,000,000 12,500,000 Profit 30,000,000 2,500,000 37,500,000 1,000,000 (2,500,000) To maximize profit, the company should produce and sell those units which are required or demanded. The strength of this analysis is that the analyst is bale to determine the profitability of the respective firm. This analysis also helps the management in decision making. The weakness of using this analysis is that it may not actually determine or show the profitability of a firm. There is the need to make a decision from the choice of the above alternatives. The management accounts will support me in decision making as it will enable us to determine the product with less contribution and make a decision on whether to continue producing or to drop it. Work Cited Jerry J. Weygandt, Managerial accounting: Tools for business decision making. John Wiley & Sons, 5th Edition, 2009, pg 200 Read More