Accounting for Business Decisions - ANZ Limited - Assignment Example

Accounting for Business Decisions Name Course Tutor Unit Code Date SECTION A: Use your kills to Analyze, compare, criticize, evaluate and justify the answers in a process to solve the assignment. ANZ Limited Balance Sheet as at 30th June $ $ Current Assets 2012 2011 Cash 40,000 60,000 Account Receivables 650,000 300,000 Allowance for doubtful debts (50,000) (50,000) Inventory 700,000 290,000 1,340,000 600,000 Non-Current Assets Equipment 1,800,000 1,100,000 Accumulated depreciation (550,000) (100,000) Capitalized borrowing cost 200,000 --------- 1,450,000 1,000,000 Total Assets 2,790,000 1,600,000 Current Liabilities Account payable 670,000 556,000 Tax payable 60,000 44,000 730,000 600,000 Non- Current Liabilities Loan 580,000 600,000 Total Liabilities 1,310,000 1,200,000 Net Assets 1,480,000 400,000 Shareholder’s Equity Share Capital 1,150,000 250,000 Retained Profit 330,000 150,000 1,480,000 400,000 Sales (all on credit) 1000,000 640,000 Net profit after tax 200,000 128,000 EBIT 290,000 197,000 Tax expenses 41,000 32,000 Required: 1. a. What is the interest expense for 2012? The interest expense for 2012 = EBIT – Tax expense – Net profit after tax = 290,000 – 41,000 – 200,000 = $49,000. b. How much equipment was purchased during the year? Equipment purchased during the year = Equipment as at 2012 – Equipment as at 2011 = 1,800,000 - 1,100,000 = $700,000. c. What was the depreciation expense for 2012? Depreciation expense for 2012 = Accumulated depreciation 2012 - Accumulated depreciation 2011 = 550,000 – 100,000 = 450,000. d. Were any share issues? If any, calculate the value. Yes there was a share issue in 2012 seeing as share capital increased from $250,000 in 2011 to $1,150,000 in 2012. Therefore, the value of the share issue is = 1,150,000 - 250,000 = $900,000. e. How much in dividend was paid during the year 2012? No dividend was paid during the year 2012. f. How much cash was received from customers during the year? Cash received during the year was $350,000. g. How much was paid in tax? In 2012, $32,000 was paid in tax. 2. Referring to the information in the question, provide four examples of accounting policy choices that ANZ may have made in determining profit that may have increased this year’s profit. Accounting policies are the principles, rules as well as practices applied by the company to guide the manner in which transactions are accounted for in the financial statements (Anthony & Breitner, 2010). Below are examples of accounting policies that ANZ could have adopted so as to reflect a higher profit: I. Capitalising finance costs in the creating a fixed asset instead of charging the finance costs (interest) to the income statement. II. Changing the basis of valuing stock, for example if it is using weighted average, it can change to first-in first-out (FIFO). III. Changing basis of financial reporting from historical to fair value reporting. IV. Adjusting the time when assets, liabilities, expenses and income are recognised, for instance, it can use a cash basis instead of using the accrual basis. SECTION B: (Scenario based) The general manager of Qantas had two concerns: the company’s worsening cash position ($3000 cash and No bank loan at the end of 2011, No cash and a $7,000 bank loan at the end of 2012) and an inadequate level of net profit (According to General Manager). 1. The general manager was confused because the company had a $9,000 profit, yet seemed, as noted above, $10,000 worse off in its cash position. Explain briefly how, in general, this difference between profit and cash change can happen. The difference in profit and cash flow can happen given that the two are arrived at differently. Profit is the amount a company is left with after taking away all the expenses from the revenues generated. Cash flow on the other hand, refers to the actual receipt (inflow) and payment (outflow) of cash (Bazley & Hancock, 2010). The difference arises from two key accounting concepts: (1) accrual-based accounting, and (2) matching principle. This requires that revenues and expenses be recognised when earned and incurred, respectively. Therefore the company may earn revenue through credit sales now, but customers may take a long time to pay the actual amount. Therefore, in preparing the financial statements, there will be a difference between the profit and the cash flow (Jackling et al., 2010). 2. The general manager proposed changes in the company’s accounting policies in a few areas in an attempt to show a higher profit. He met the company’s auditors to discuss these ideas. What do you think the auditors should have said? I think the auditors could not have commented on this issue. It is the duty of the management to choose the accounting policies used by a company in preparing its financial statements. Auditors are not involved in the preparation of financial statements nor are they involved in making decisions on the manner in which they ought to be prepared. The main responsibility of the auditors is to monitor and watch over the financial reporting process. They assess the process to see whether it presents a true and fair view (Deegan, 2009). 3. For each of the proposed changes below, considered separately and independently, calculate the effect on 2012 net profit and total assets as at 31st December 2012. Assume a company tax rate (Australia) as income tax rate. a) The general manager suggested recognizing revenue at an earlier point. If this were done, net account receivables would be increased by $12,000 at 31st December 2011 and by $23,000 at 31st December 2012. This would increase the total assets by the respective amounts. The total assets at 31st December 2011 would increase by $12,000 and by $23,000 at 31st December 2012. b) The general manager suggested changing the inventory cost policy to FIFO (which would still produce costs less than net receivable value). Doing this would increase 31st December 2011 inventories by $4,000 and 31st December 2012 inventories by $1,000. This would increase the total assets by the respective amounts. The total assets at 31st December 2011 would increase by $4,000 and by $1,000 at 31st December 2012. c) The general manager suggested that the company not account for deferred income taxes, but rather treat income taxes payable in each year as the income tax expenses. The deferred income tax liability was $2,800 at 31st December 2011 and, without these changes, $2,600 at 31st December 2012. The tax payable = cumulative deferred tax liability x the current rate. For 2011 the tax payable would be = 2,800 x 0.3 = 840, and in 2012, the tax payable would be = 2,600 x 0.3 = 780. This would reduce the net profits by the respective amounts. The net profits for the year ended 31st December 2011 would increase by $840 and by $780 for the year ended 31st December 2012. d) The general manager suggested capitalizing more of the company’s product development costs and amortizing additional capitalized amounts over five years, using the straight line method. If this were done, $4,000 of 2011 expenses would be capitalized at 31st December 2011 and $6,000 of 2012 expenses would be capitalized at 31st December 2012. This would increase the net profit because the expenses will go down by the capitalised amount less the amortisation. For the year ended 2011, the net profit would go up by 4000 – 4000/5 = 4000 – 800 = $3,200. For the year ended 2011, the net profit would go up by 6000 – 6000/5 = 6000 – 1200 = $4800. References Anthony, R.N. and Breitner, L.K. 2010, Essentials of Accounting: International, 10th edn, Pearson. Atrill, P. McLaney, E. Harvey, D. and Jenner, M. 2010, Accounting: An Introduction, 4th edn, Pearson. Bazley, M. and Hancock, P. 2010, Contemporary Accounting, 7thedn, Cengage Learning. Beranek, W. 1963, Analysis for financial decisions, Homewood, Ill, R. D. Irwin. Blecke, C. J. Gotthilf, D. L, 1980, Financial analysis for decision making, 2nd edn, Englewood Cliffs, N.J, Prentice-Hall. Chiappetta, B. Shaw, K. Wild, J. 2009, Principles of Financial Accounting, 19th edn, McGraw-Hill/Irwin. Deegan, C. 2009, Financial accounting theory, 3rd edn, McGraw-Hill, North Ryde. Drury, C. 2004, Management and Cost Accounting, London, Thompsons Learning. Edmonds, C. Edmonds, T. Olds, P. and Schneider, N. 2006, Fundamental Managerial Accounting Concepts, New York, McGraw-Hill Irwin. Hoggett, J.L. Edwards, C. Medlin, and Tilling, M. 2012, Financial Accounting, 8th edn, John Wiley & Sons. Horngren, C. Harrison, W. Bamber, L. Best, P. Fraser, D. and Willett, R. 2010, Accounting, 6th edn, Pearson. Jackling, B. Raar, J. and McDowall, T. 2010, Accounting: A Framework for Decision Making, 3rd edn, McGraw-Hill. Jacqueline Birt, Chalmers, K. Beal, D. Brooks, A. Byrne, S. and Oliver, J. 2010, Accounting: Business Reporting for Decision Making, 3rd edn, John Wiley & Sons. Marshall, D.H. McCartney, J.P. vanRhyn, D. McManus, W.W. and Viele,D.F. 2009, Accounting: What the numbers mean, 2nd edn(revised), McGraw-Hill. Martin, S.F and Fernando, A. 2002, Financial Statement Analysis: A Practitioner's Guide, 3rd edn, John Wiley & Sons. Ryan, R. 2006, Corporate Finance and Valuation, Thomson Learning, London. Steven, M.B. 2006, Financial Analysis: A Controller's Guide, 2nd edn, Wiley. Read More