ACCT11081 Assignment Steps 7-11

Step 7 Exploring Nufarm’s Inventory Practices Inventory in 2017In 2017 the inventory for Nufarm was $763,039,000

Inventory in 2016In 2016 the inventory for Nufarm was $685,833,000

Inventory in 2015In 2015 the inventory for Nufarm was $753,690,000

Inventory 2014In 2014 the inventory for Nufarm was $632,901,000

Key concepts At first glance, the inventory goes through an up-down cycle every other year with consistency. It will drop $100,000,000 then the next year be back up $100,000,000 almost exactly.

For 2017, the inventory note lead me to 17. They had raw materials of $203,698 which would be the chemicals they are with to make the herbicides and germination stimulation products. The work in progress, $15,996 would be the inventory tied up in being turned into product. Finished goods $552,662 would be the actual products, in packets ready to sell. I can also see that they had an excess of inventory that was meant to be sold, in fact, $9,317 of it. Comparing 2017 to 2016, it can be seen that 2016 are all slightly less than 2017.

In 2016 and 2015 the provision for obsolescence of finished goods was less for 2015 than 2016. This is interesting as because with more product being finished in 2015 than 2016, there was less left over goods in 2015 than 2016.

2015 and 2014 show how after 2014, total inventories increased, and provision for obsolescence decreased. Something that happened in 2015 caused there to be far less wastage in product not sold.

What is disclosed or not disclosed about Inventories?The company just uses a judgement to decide if inventories are obsolete. It is not disclosed as to where the inventories are being wasted. There are many different countries with Nufarm outlets, it would be interesting to see what portion of wastage is lost for each county. This would be helpful to advise Nufarm on which markets to draw back on.

Has your firm changed its inventory practices over the years?No, my company has maintained the same practices for the past 4 years.

What is the Inventory made up of?The inventory is made up of raw materials, work in progress, finished goods and deduction for provision for obsolescence of finished goods. This is a logical format for a manufacturing company. I believe Nufarm does not retail their products, rather sell to retailers.

Does your firm use perpetual or period, how could I tell?I would say that Nufarm uses perpetual inventory tracking as it was stated that the company “makes a judgement” on what inventory is lost over a period. They would probably then go and complete a stock take, but the primary figures are just good estimates. Being a manufacturing company, it would be difficult to have staff to do stock take, unlike retailers who have millions working on any given day.

What method of inventories does it use? Nufarm uses first in-first out method for all 4 years. This is logical as chemicals should be sold before expiry dates. Therefore warehouse staff would be very concerned with selling oldest stock first.

What issues or costs are they facing with inventory management?Obviously there is some issue happening as the amount of unsold inventory has increased by $3,681 (from roughly $5,000 to $9,000) while at the same time, total inventory is only increasing or decreasing by $100,000 each year. It seems that inventory wastage is on the increase.

Are there any areas I think could be improved with inventory management?Due to soft commodity prices, inventory left overs have been increasing. This is an area that should be managed to reduce expenses. Nufarm is expecting to improve this in 2018, by merging with

another company, Crop Care. This will essentially increase marketing and customer satisfaction, and hopefully improve sales. However, if extra raw materials are purchased, manufactured into finished product and sales only increase marginally, there will still be the same amount of wasted inventory by the end of the 2018 period. For the past 2 years raw materials has stayed at $200,000, I would recommend that with this new scheme for 2018, raw materials only be increased slightly, with hopes to increase sales and reduce obsolescence of finished product.

All that said though, in actual fact only 1.22% of product is being unsold and wasted, which is really a great percentage. My suggestion is just over cautionary, as these things can escalate quickly over a few periods.

How did I identify these areas?To find this information stated above, I did some extensive analysis of the annual reports for 2017, 2016 and 2015. Although it is very meaty, using the search function helped narrow down the information I was after. Surprisingly from each year, the annual reports use the format, almost word for word when speaking of inventories, processes and goals. Each year, the financial manager seeks to carefully manage inventories, increase sales or marketing and boost profits.

Step 8 Set-up company file

Modules

QuizQuestion 1

Question 2

Question 3

Question 4

Question 5

Question 6

Question 7

Question 8

Question 9

Question 10

Question 11

Question 12

Question 13

My journey though MYOB was long and more stressful than it should have been. At first I thought I had done step 8, and left it at that till week 9 when I was informed that the MYOB quizzes were not the only thing that needed doing. I had already written down my 10 transactions for step 9, so when I did step 8, I based my set-up on the transactions I thought my company would likely make. These were a mixture of buying from suppliers (to manufacture chemical products for farming), selling to farmers and paying employees. I entered a few “past” transactions for before 1/1/2018 for these categories so my company had some history to go on. I definitely downscaled the size of Nufarm to enter things into MYOB as to not confuse myself. They would obviously have hundreds of employers and customers, but I wanted to keep it simple while I learned.

Step 9 – Business Transactions Background on transactions and business

Nufarm is a company that manufactures and retails herbicides and seed germination products. The transactions they would encounter daily would include purchasing raw materials, paying staff, receiving money from customers, banking cash, paying bills and much more.

The transaction range over 1 month, from 01/April/2018 to 31/April/2018.

1. Transaction One

Nufarm purchases $25,400 of raw chemicals (including GST) to make into products. This was purchased from SunChem on credit on the 2nd of April. There is a discount (2%) for paying within 1 month of being invoiced. We are invoiced on the spot. Freight was $800.

2. Transaction two

Nufarm employs thousands of workers across Australia. They are all paid from one office, as each employer has timecards with tells us how many hours was worked. For this example we will pay two employees, Jane and John. Pays are done on Monday, the 2ndth.

Jane is actually away on holiday, is fulltime permanent paid hourly. (Annual leave pay = $31.50 x 38 hours = $1,197)

John is casual worker, paid hourly as well. (Causal pay = $28.96/ hour x 38 hours = $1,100.48)

3. Transaction Three

On the 9th of April we pay our invoice for SunChem to make sure we do not miss the discount. We pay from the business banking account 1.

4. Transition Four

One of the retail stores made a large sale to a customer, Fruit Growers, on the 10 th of April. It was for $5,000. Fruit Growers paid $1,000 on the day Visa card, and have been invoiced for the remaining $4,000. I.E. they paid on credit for $4,000.

5. Transaction Five

The 23rd of April Fruit Growers pay the remaining invoice they had on credit. They pay by direct debit.

6. Transaction Six

Monday 09st of April, wages are paid again (done weekly) to Jane and John. Jane is back from holidays (came back 16th of April), and John worked regular 38 hours as normal. Jane’s full time normal rate is $27.22/hour x 38 = $1034.36

7. Transaction Seven

While doing the pays, it was noticed that office supplies were low. We went to the nearest Office Works and paid with MasterCard for 2 boxes of paper (20 packets of paper @ $5.99/packet = $119.8 including GST. A water cooler for $50 GST free, and fancy new highlighters ($20 including GST) were also purchased. Our credit card is paid monthly to avoid interest fees.

8. Transaction Eight

Managing director recently reviewed local factories. The company car on average used 20 l of fuel a day for the 5 working days from 23st of April to the 27th of April. From recites that’s

20 x $1.45/l x 5 days = $145

Paid for with Mastercard

9. Transaction Nine

The customer, Fruit Growers, found $500 worth of product they paid for to be out of date (it was out of date when sold). We refund them this $500 as a direct debit. (26th April)

10. Transaction Ten

It is the end of the month (30st April) and the MasterCard is paid.

These above transactions were entered into my MYOB company file “Nufarm”. Then I went to export files. To export all journals, I sent cash receipts journal, cash disbursements journal, purchases and payables journal and sales and receivables journal to excel. I had to research what a cash disbursements journal was, and it is just a cash payables journal. This also includes payments made by electronic funds transfer.

Whenever I was unsure about which report to export, I would do a quick search on the MYOB website, as there are instructional videos and step-by-step instructions to help. This was the most useful information. I also used the Facebook group, Introduction to Financial Accounting and found a post from last semester, where someone else had been stuck on the same step as me. This was about the exporting the statement of changes in equity (which is under a different tab in MYOB), which another student had given the perfect answer.

Journals

ID No. Account No. Account Name Debit Credit Job No.SJ 10/04/2018 Sale; Fruitgrowers

00000003 1-1310 Accounts Receivable $5,000.0000000003 4-1000 Services Income $4,545.4500000003 2-1210 GST Collected $454.55

SJ 5/05/2018 Sale; Fruitgrowers00000004 1-1310 Accounts Receivable $500.0000000004 4-1000 Services Income $454.5500000004 2-1210 GST Collected $45.45

Grand Total: $5,500.00 $5,500.00

1/04/2018 To 5/05/2018

Nufarm

Sales & Receivables Journal

ID No. Account No. Account Name Debit Credit Job No.CR 23/04/2018 Payment; Fruitgrowers

CR000004 1-1110 Business Bank Account #1 $4,000.00CR000004 1-1310 Accounts Receivable $4,000.00

CR 5/05/2018 Fruitgrowers for 00000003CR000001 1-1110 Business Bank Account #1 $1,000.00CR000001 1-1310 Accounts Receivable $1,000.00

Grand Total: $5,000.00 $5,000.00

1/04/2018 To 5/05/2018

Nufarm

Cash Receipts Journal

ID No. Account No. Account Name Debit Credit Job No.PJ 2/04/2018 Purchase; SunChem

00000001 2-1510 Trade Creditors $26,200.0000000001 6-8000 Product $49,803.0000000001 6-3100 Freight Out $727.2700000001 2-1320 ABN Withholdings Payable $24,403.0000000001 2-1220 GST Paid $72.73

PJ 10/04/2018 Purchase; OfficeWorks00000002 2-1510 Trade Creditors $189.8000000002 6-4700 Food $98.0000000002 6-2700 Stationery $273.8000000002 2-1320 ABN Withholdings Payable $182.00

Grand Total: $50,974.80 $50,974.80

1/04/2018 To 5/05/2018

Nufarm

Purchases & Payables Journal

ID No. Account No. Account Name Debit Credit Job No.CD 9/04/2018 SunChem 25 Gordon Street Melbourne VIC 2012 Australia

3 1-1220 Electronic Clearing Account $26,200.003 2-1510 Trade Creditors $26,200.00

CD 9/04/2018 OfficeWorks7 1-1220 Electronic Clearing Account $189.807 2-1510 Trade Creditors $189.80

CD 5/05/2018 Fruitgrowers 123 Lone Drive Eidsvold QLD 4605 Australia1 1-1110 Business Bank Account #1 $500.001 1-1310 Accounts Receivable $500.00

CD 5/05/2018 Doe, Jane4 1-1220 Electronic Clearing Account $840.364 6-4100 Wages & Salaries Expenses $1,034.364 2-1410 PAYG Withholding Payable $194.00

CD 5/05/2018 Smith, John5 1-1220 Electronic Clearing Account $883.485 6-4100 Wages & Salaries Expenses $1,100.48 25 2-1410 PAYG Withholding Payable $217.00

CD 5/05/2018 BP Service Station6 1-1220 Electronic Clearing Account $145.006 6-6300 Motor Vehicle Fuel/Oil $131.826 2-1220 GST Paid $13.18

Grand Total: $29,169.64 $29,169.64

1/04/2018 To 5/05/2018

Nufarm

Cash Disbursements Journal

Income Statement

IncomeServices Income $4,090.90Total Income $4,090.90Total Cost Of Sales $0.00Gross Profit $4,090.90ExpensesGeneral ExpensesStationery $273.80Freight Out $727.27Total General Expenses $1,001.07Payroll ExpensesWages & Salaries Expenses $2,134.84Food $98.00Total Payroll Expenses $2,232.84Motor Vehicle ExpensesMotor Vehicle Fuel/Oil $131.82Total Motor Vehicle Expenses $131.82Product $49,803.00Total Expenses $53,168.73Operating Profit ($49,077.83)Total Other Income $0.00Total Other Expenses $0.00Net Profit/(Loss) ($49,077.83)

1/04/2018 To 5/05/2018

Nufarm

Profit & Loss Statement

Balance Sheet

AssetsCurrent AssetsBank AccountsBusiness Bank Account #1 $77,250.00Petty Cash/Cash On Hand $1,500.00Total Bank Accounts $78,750.00Clearing AccountsUndeposited Funds Account $24,500.00Electronic Clearing Account $6,000.00Payroll Clearing Account $16,000.00Total Clearing Accounts $46,500.00Other Current AssetsAccounts Receivable ($4,250.00)Inventory $2,500.00Deposits To Suppliers $2,500.00Total Other Current Assets $750.00Total Current Assets $126,000.00Non-Current AssetsFurnitureAccum. Depr. Furniture $150.00Total Furniture $150.00Office EquipmentOffice Equipment At Cost $150.00Accum. Depr. Office Equipment $150.00Total Office Equipment $300.00ComputersComputers At Cost $150.00Accum. Depr. Computers $150.00Total Computers $300.00Total Non-Current Assets $750.00Total Assets $126,750.00LiabilitiesNon-Current LiabilitiesBusiness Loan #1 $100,000.00Business Loan #2 $26,750.00Total Non-Current Liabilities $126,750.00Total Liabilities $126,750.00Net Assets $0.00Equity

As of 5/05/2018

Nufarm

Balance Sheet

Statement of changes in equity

Account NameCash Flow from Operating ActivitiesNet Income ($49,077.83)

GST Collected $409.10GST Paid ($85.91)ABN Withholdings Payable $24,585.00PAYG Withholding Payable $411.00

Net Cash Flow from Operating Activities -$23,758.64Cash Flow from Investing Activities

Net Cash Flow from Investing Activities $0.00Cash Flow from Financing Activities

Net Cash Flow from Financing Activities $0.00Net Increase/Decrease for the period -$23,758.64Cash at the Beginning of the period $125,250.00Cash at the End of the period $101,491.36

1/04/2018 To 5/05/2018

Nufarm

Statement of Cash Flow

Now the company transactions for the past month are in report format, analysis on business operations can be done. The first statement, profit and loss (income statement) shows the company ran in a loss for the month of April. This was mainly due to the large amount of product purchased, and the limited sales made.

The next statement, the balance sheet, displays more alarming data. Liabilities currently trump assets by a large margin! In fact Nufarm had no equity at all. If this were a real company, I assume it would be liquidated by this point.

The last statement, changes of cash flow i.e. statement of changes in equity, shows the only way Nufarm has operated in April. Cash at bank, is relatively high, having only spend $23,758.64 out of the $125,250 at the start of the period. Cash is the main life flow keeping a company running, which is why bills, employees and other current liabilities could be paid.

Ratios analysisThe quick ratio – seeing the liquidity of a company. If at any time a company has more liabilities than assets and equity, then there is trouble.

For Nufarm, the quick ratio was 0.95. This is a bad sign as it means there are less assets than incoming liabilities.

Working capital ratio – how quickly can current assets pay off current liabilities?

The working capital ratio is 0.994. This indicates that Nufarm is at a risk, as there are less current assets than current liabilities. This would mean we have limited cash or liquid assets sitting around, and that we have taken out too many current liabilities.

Debt to equity ratio – how financially stable is the business? A large proportion of debt to a small proportion of equity indicates an unstable business.

The debt to equity ratio is the most concerning indicator of Nufarm’s operations. Liabilities are so much greater than equity, that in this case, there is no equity at all. As it is impossible to divide by “0” a numerical value cannot be given, however we can assume that the proportion of debt is 100% more than equity.

Step 10 Depreciation and amortisation This step will explore how Nufarm accounts for depreciation, and then three general journal entries that would have been made for the deprecation.

Starting in 2014 annual report, I noticed that by income statement does not list depreciation as an expense. I searched through the notes and nowhere on the income statement does it list depreciation and amortisation. I know my company, Nufarm, has depreciation though, it is listed on the balance sheet as Property, Plant and Equipment. As can be seen from table 1, the property plant and equipment has been decreasing over the last 4 years by $20,535. Next I will explore the footnote (22) to discover the reason for this decline, and the depreciation.

Table 1 Property Plant and Equipment Nufarm

Property Plant and Equipment ($000)2014 2015 2016 2017371,055 369,883 352,853 350,520

Nufarm separates property plant and equipment into the categories, land and buildings, plant and machinery, leased plant and machinery and capital work in progress. This can be seen in table 2 below, form Nufarm’s 2015 annual report. In 2014, the total depreciation expense was $45,740, out of $903,759 of all depreciation ever accumulated. The largest factor of deprecation comes from plant and machinery, which is logical as this is a manufacturing company, making farming chemicals. There were a few disposals and write-offs. This have a positive value, due to some profit being made when the assets were sold.

Table 2: Details of Property, Plant and Equipment 2014

In 2015, is appears that $4,972 worth of land was lost. It is doubtful that is was lost via depreciation, as land doesn’t normally depreciate, however it could be the result of the buildings depreciation.

Table 3: Property, plant and equipment 2015

For 2016 the largest drop in property, plant and equipment was again land and buildings. A trend I have noticed so far is that the depreciation expense for land and buildings has remained approximately $6,000 for the past 3 years. This is leading me to believe that Nufarm uses straight-

line depreciation method. The reason for the small differences could be due to changing the useful life or depreciation cost each year. I will further research the notes to confirm this assumption.

Also to be duly noted, is capital work in progress is not depreciated each year. There are write offs, other transfers and exchange adjustments, however this is probably more closely linked to inventory and wastage than the using up of the asset. Being a work in progress, Nufarm doesn’t actually use this non-current asset, therefore there would be no reason to depreciate it.

Lastly, in table 5, we see the 2017 property, plant and equipment. The depreciation seems to still follow the same patter as it has for the past 4 years. The major difference is the total cost of property, plant and equipment is approximately $200,000 less than all other years.

Table 4: Property, plant and equipment 2016

Table 5: Property, plant and equipment 2017

Table 6: Analysis of % of PPE

Percentage of property, plant and equipment of total non-current asset2014 2015 2016 201724.03% 22.32% 22.04% 21.996%

Nufarm appears to have a reasonably large proportion of non-current assets as property, plant and equipment (see table 6). This percentage has been slightly diminishing since 2014.

Nufarm’s depreciation method is straight line. It is stated that since 2014, in the annual report until now that the straight line depreciation method has been used. The useful life is different depending on which category of property, plant and equipment is being calculated. It also states that land is NOT depreciated, which means for land and buildings, the depreciation expense is only attached to the buildings. Depreciation method, residual value and useful life are all revaluated each year when the annual reports are done.

Nufarm’s recommended useful life for the categories of property, plant and equipment are as follows in table 7.

How would Nufarm’s annual reports change if another depreciation method was used? One method that Nufarm could use quite practically is the units of production method. As most of Nufarm’s assets are for manufacturing products, it would be quite logical for method for plant and machinery, and leased plant and machinery. To use the units of production method, Nufarm would need to estimate the number of operating hours, then multiple the depreciation amount / operating hour by this amount. This would affect reports in a few ways. As production increased, so would depreciation expense. Which would reduce the non-current asset, property plant and equipment, faster. The overall non-current assets would be lower than using the straight-line method, however one would assume that increased production would indicate increased sales, which would probably level out total assets.

Table 7: Useful life as estimated at the end of financial year 2017

Three depreciation journal entries. I decided that Nufarm would most likely have done journal entries for each category of property, plant and equipment separately. This is what I recreated in my own journal entries. The date, 30 th of July 2017 is one day before the annual reports were released, which is when depreciation is revaluated. It would make sense that deprecation would also be calculated at the end of their financial year. As can be seen, there is the depreciation expense account. This account is increasing, therefore it is a debit. The accumulated depreciation is an asset account. The reason it is credited though, is it is a contra asset account.

Date Account Name Debits Credits30-Jul-

17 Depreciation Expense - land and buildings 6371Accumulated depreciation - land and buildings 6371

Date Account Name Debits Credits42946 Depreciation Expense - Plant and Machinery 30695

Accumulated depreciation - Plant and Machinery 30695

Date Account Name Debits Credits

42946Depreciation Expense - Leased Plant and Machinery 1572Accumulated depreciation - leased plant and machienry 1572

Step 11 FeedbackPEER FEEDBACK SHEET: Assignment Steps 7-10

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My Comments

Step 7

Inventories

Step 8

MYOB set up

MYOB training

MYOB quiz

Step 9

Business transactions

All journals report

Financial and discussion

Step 10

Depreciation

Overall

PEER FEEDBACK SHEET: Assignment Steps 7-10

Feedback From:Yvette

Feedback To:

My Comments

Step 7

Inventories

Step 8

MYOB set up

MYOB training

MYOB quiz

Step 9

Business transactions

All journals report

Financial and discussion

Step 10

Depreciation

Overall

PEER FEEDBACK SHEET: Assignment Steps 7-10

Feedback From:Yvette

Feedback To:

My Comments

Step 7

Inventories

Step 8

MYOB set up

MYOB training

MYOB quiz

Step 9

Business transactions

All journals report

Financial and discussion

Step 10

Depreciation

Overall

PEER FEEDBACK SHEET: Assignment Steps 7-10

Feedback From:

Feedback To: Yvette

My Comments

Step 7

Inventories

Step 8

MYOB set up

MYOB training

MYOB quiz

Step 9

Business transactions

All journals report

Financial and discussion

Step 10

Depreciation

Overall

PEER FEEDBACK SHEET: Assignment Steps 7-10

Feedback From:

Feedback To: Yvette

My Comments

Step 7

Inventories

Step 8

MYOB set up

MYOB training

MYOB quiz

Step 9

Business transactions

All journals report

Financial and discussion

Step 10

Depreciation

Overall

PEER FEEDBACK SHEET: Assignment Steps 7-10

Feedback From:

Feedback To: Yvette

My Comments

Step 7

Inventories

Step 8

MYOB set up

MYOB training

MYOB quiz

Step 9

Business transactions

All journals report

Financial and discussion

Step 10

Depreciation

Overall