itsaccrualworld246410288.files.wordpress.com · Web view2019. 5. 26. · Specific identification is also vital in order to correctly analyse performance of models, salespeople,

Kelly Lee S0171114

Step 7

In this unit, the times that I get most excited is when I get to learn more about something that I already have an exposure to in my career. While learning about inventories I spent almost the entire time having “ah-ha!” moments and “what!!” moments. Before getting into my allocated companies’ inventories, I had already started identifying my workplace’s inventory identification method and cost formula methods.

Being a car dealership, obviously vehicle inventory is accounted for using the perpetual method. Although Martin used an example of a car dealership in the study guide, I already knew this was the case, given the individual value of vehicles is generally a substantial figure. The same method is also used in our service and parts department. I believe that this method is the only one that could be used in a car dealership, as is it vital to know what the financial position of the dealership is at any given time.

In terms of the cost formula, it is interesting to realise that the dealership uses both. When it comes to vehicles, specific identification is used. As noted in the study guide, this is acceptable because the goods are not interchangeable. Specific identification is also vital in order to correctly analyse performance of models, salespeople, marketing impacts etc. It would be very hard to rate performance and know where improvements need to be made without using this method. However, in the parts and accessory department the FIFO formula is used. When compared to weighted average, I think FIFO is the stronger method. If an error is incurred during purchasing it would be much easier to fix the error if it is only related to one or two entries. For example, if a bonnet protector is incorrectly purchased into the accounting system at a cost of $10 instead of $100, it is much easier to detect and rectify rather than if all the bonnet protectors in stock are affected by this one mistake.

After having some fun relating terms back to my daily workplace it was time to have a look at BlueScope’s inventories, but I first wanted to make a prediction based on what I had learnt and my existing knowledge of BlueScope.

1. Transaction recording method? Definitely perpetual. Right? I’m questioning myself now, given the amount of raw materials BlueScope work with, maybe periodic might be used (if the period was a day or a week). I’m going to stick with perpetual.

2. Cost formula? I’m going to go with weighted average on this one. Given the fluctuating price of steel and materials, weighted average would be the safe option.

The first thing I am reminded of, is how standard and uniform BlueScopes annual reports are (still haunted by Ebiquity from ACCT11059). All three statements have inventories mentioned first on the Statement of Comprehensive Income as ‘Changes in inventories of finished goods and work in progress’ then next as an item under current and non-correct assets on the Statement of Financial Position. I skipped past the mention on the Statement of Comprehensive Income because there was no refence to a note (inventories all reference note 7 on all three reports) and if it’s on the CI statement its probably not relevant at this stage.

The next thing I did is probably not entirely relevant, but I want to note it for any peers that read through my assignment for feedback. Once I had all three of my annual reports opened to the Statement of Financial Position page, I used the highlight tool in adobe to highlight the lines I wanted to compare. I genuinely use this tool all the time when looking at reports on the PC, because I hate to waste paper by printing things out that I don’t need to, but I also struggle to focus on a particular line item when there is a lot of text on each page. Didn’t know about the highlighted tool in Adobe? You’re welcome.

Page | 1 Assignment 1, Step 7-11

Kelly Lee S0171114

The first thing I noticed, was the inventory under current assets is growing each year, with the exception of 2015-2016 where there was a small decrease. I think this would be expected, with any business that is growing, current inventories are always going to increase as purchases increase.

In regard to non-current inventories, although there is a change year on year the change is not particularly substantial.

To be honest, when I went on to look at the inventory note for each year, I was a little under-whelmed. Each year the note included a breakdown of the types of inventory items (as seen in the table below), a note on inventory expense and a note on recognition and measurement. I think I was expecting more?

To begin, BlueScope has noted on each report that inventories are accounted for “at lower of coast and net realisable value”. I knew from the study guide that this was mandatory as per the AASB standards, but it’s always reassuring to be able to relate phrases back to real examples. The inventory expense portion of the note gives us the figure that has been expensed in order to write back inventories to the net realisable value (also shown in a table below). The next paragraph in the note explains how cost / net realisable value is calculated, and states that “costs are assigned to inventory on the basis of weighted average costs”.


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As previously mentioned, the general trend over the four years shows an increase in current inventories year on year whereas non-current show very little change. I do think its worth noting though, that finished goods in 2018 in considerably higher than in previous years, which could be because of an increased competition with imported finished goods as mentioned in the business unit reviews. While it is important to remain competitive, it should be important for BlueScope to carefully manage its finished goods inventory, because unlike raw materials and spares, there would be no alternative use for a finished good, which means it runs the risk of becoming obsolete.

While I was unable to find anything that gave me a solid answer as to whether BlueScope use the perpetual or periodic method to account for their inventories, I think I have found more evidence to suggest periodic than otherwise. Nowhere in the annual reports can I find any line items called ‘cost of sales’ or ‘cost of goods sold’. I can however find ‘revenue’ and ‘raw materials and consumables used’. The more I think about it, the more I am inclined to believe that the periodic method may prove more useful when it comes to a manufacturing business such as BlueScope. A cost of sale is easy to calculate when it comes to a firm who buys and sells finished goods, but when it comes to manufacturing this would be a difficult calculation, as labour and consumables need to be accounted for. This is also probably the reason that BlueScope show a notable write-down each year when calculating their inventories, as the costs of variables like labour and consumables fluctuate frequently.

In conclusion, looking back on my earlier predictions, while I was correct by expecting weighted average to be the cost formula used by BlueScope, I have changed my opinion on the transaction recording method to periodic, even though I have been unable to confirm one way or another.


Kelly Lee S0171114

Step 8

Screenshot after initial set up:


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Screenshot after training modules completed (note that I switched to the existing Clearwater file, as I found it easier to explore when some information had been pre-filled):


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Screenshot of result from EzyLearn MYOB Online Training Skills Test (missed 1 x option on a multiple answer question):


Kelly Lee S0171114

Step 9

MYOB Transactions created for BlueScope Steel Pty Ltd:

1-1110 BlueScope Main Account opening balance = $1,000,000.00

2-2100 NAB Business Bank Loan opening balance = -$1,000,000.00

01/03/19

Particulars Sale of 1250 meters of Colorbond Guttering to Bunnings LimitedAmount $12,500.00 including GSTTerms 30-day account

04/03/19

Particulars Sale of 1000 meters of cold rolled BlueScope Steel to Titan Garages and Sheds Amount $5000.00 including GSTTerms 7-day account

10/03/19

Particulars Sale of 2500 meters of Lysaght steel fencing to B&D Fencing Australia Amount $125,000.00 including GSTTerms Cash Sale

15/03/19

Particulars Purchase of 500kg of Iron Ore from Atlas Iron Amount $5000.00 including GST Terms 14-day account

18/03/19

Particulars Purchase of 1tonne of coal from Centennial Coal Amount $50,000 including GSTTerms 30-day account

22/03/19

Particulars Purchase of service of 2 x blast furnace from Australian Steel Mill ServicesAmount $1,250.00 including GST Terms Cash Sale

26/03/19

Particulars Purchase of 1 x Company Vehicle from Wollongong City Motors Amount $25,000 including GSTTerms Cash Sale

02/04/19

Particulars Pay Origin Energy for electricity bill 1 Jan19 to 31 Mar19 Amount $5,678 including GSTTerms Cash Sale


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07/04/19

Particulars Sale of 2000 3 metre x 3 metre sheets of galvanised steel to ProBuild Amount $30,000 including GSTTerms 30-day account

15/04/19

Particulars Pay rent of office premises to Ray White Warrawong for May19 Amount $50,000 including GSTTerms 7-day account


Kelly Lee S0171114


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Discussion

The first thing I noticed on my financial statements was that something had gone askew with the 1-1330 ‘Inventory Finished Goods’ account. I initially thought I was being smart by doing an inventory adjustment prior to inputting any transactions, however I made a couple of errors. The first mistake was not back dating the adjustment, as you can see from the All Journals report, I did the adjustment on the 14/05/19 but should have backdated it to at least 01/03/19. The next error is apparent when looking at Balance Sheet, as you can see that Inventory Finished Goods is a credit. I thought that by making the adjustment I would be putting a debit balance into the account (beginning the period with assets in inventory), however if I wanted to make an opening adjustment (rather than a journal) I should have done it via setup – balances – account opening balances. I decided to go back and fix these errors and re-run my reports. The results are below.


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This new set of financial statements looks as I expected, namely Inventory Finished Goods now shows a debit of 59,250 which is the opening balance of 155,500 less sales of 96,250. To counter the opening balance in the Inventory Finished Goods account I reduced the opening balance in the BlueScope Main Account to 844,500.

I found the All Journals report the most challenging to run, as there was no clear heading for this in the report index. I found the easiest way to run this report was to run the General Journal report under transaction journals, then adjust the parameters once within the report.


Kelly Lee S0171114

Profit and Loss Statement

The most obvious point on this statement is the profit/loss result which shows that the company is running at a profit for the period. I thought it would be fun to calculate a net profit margin to see how it tracked. The formula is net profit after tax / sales, therefore 8806.36 / 156818.18 = 5.62%. In my opinion I believe that 5% would be a reasonable margin to expect from BlueScope, however I decided to go back to their actual financial statement for 2018 and calculate the real net profit margin. In 2018 revenue came to 11,526.3m and total comprehensive income was 1729.9m, giving a net profit margin of 15%. This was much more than I was expecting, and interesting to compare. It’s important to note also that I only input a few relatively modest expenses, and no employee wage expense at all (which is generally a business’ biggest expense). If expenses such as wages were considered, I suspect my version of BlueScope would have most likely been trading at a loss for the period.

Statement of Cash Flow

Even though the statement of cash flow is a little bare, there are a few key points to take from this report. At the end of the period, BlueScope added 65,789.27 in cash flow from operations, lost 22,727.27 from investments, resulting in a net result of 43,062. Therefore, cash has increased for the period. Much like the Profit and Loss Statement, this result is favourable, however its important to mention again that this simplified version of BlueScope is not reflective of what real operations would look like!

Balance Sheet

I found the Balance Sheet the most beneficial report, in terms of seeing actual movement throughout the period. The initial insight is a assets total of 1,062,039.27, total liabilities of 1,053,232.91 which gives equity of 8,806.36 (equity = assets – liabilities). Seeing as I now have these figures, its now possible to calculate the return on assets (net profit after tax / total assets) = 8,806.36 / 1,062,039.27 = .83%. This result is not great; however, I believe that considering this is effectively the first month and a half of trading, it’s not too bad. In comparison to the real BlueScope’s ROA (1,729.9m / 10,931m) of 15%, it’s not hard to see which version of BlueScope is using their assets in a more profitable way!

Summary

After doing this exercise and analysing the financial statements above, I found myself wanting to go back to the start and re-do everything on a larger scale. I found it really interesting how at the beginning of the exercise I thought that I was putting too much margin on the finished goods, however, as I got to the end I realised that in order to stay afloat the profit margin would need to be much higher, or a lot more sales would have to occur.

Step 10

Throughout all three financial statements for BlueScope Steel, their depreciation policies remain the same. It is noted that Property, Plant and Equipment (PPE) is depreciated “on a straight-line basis over their estimated useful lives or, in the case of leasehold improvements and finance leases, the shorter lease term, unless there is reasonable certainty that the Group will obtain ownership at the end of the lease term”. BlueScope also have a table present in all financial statements which shows an estimated useful life for each category of PPE, which also remains the same throughout.


Kelly Lee S0171114

2018 2017 2016 2015$m $m $m $m

Depreciation and Amortisation Expense

375.3 378.9 388.1 343.0

Property Plant and Equipment 4049.3 3721.7 3834.1 3732.60Depreciation and Amortisation

as a % of PPE 9.27% 10.18% 10.12% 9.18%

Unfortunately, BlueScope Steel does not provide a detailed breakdown of what their PPE balance is made up of (unlike Ryman Healthcare), however, the above tables show us some important points;

As an average, BlueScope Steel depreciate 9.68% of their PPE per year, therefore, if we were to average out of useful life of all of BlueScope’s assets it would be 9.68 years.

There was a jump in PPE from 2017 to 2018. Further investigation suggests that this jump is most likely due to the write-back of impairments which were recognised in previous years.

2018 2017 2016 2015$m $m $m $m

Depreciation and Amortisation Expense

375.3 378.9 388.1 343.0

Total Expenses 10,572.2 10,171.7 9,588.4 8,501.2Depreciation and Amortisation

as a % of Total Expenses 3.55% 3.72% 4.05% 4.03%

The above table shows that depreciation and amortisation as a percentage of total expenses is lessening. This could mean several things but the first thing that came to mind was, BlueScope are managing their PPE better year on year. Alternatively, BlueScope might be spending too much money in other areas of the business which could distort this figure to make it look like an improvement where there isn’t any. However, given that BlueScope have shown profit growth from 2016 to 2018 it is most likely that they are in fact getting more ‘bang for their buck’ from their assets. Another possibility is that BlueScope have acquired land in 2017 and 2018. As the table above shows, BlueScope do not depreciate land, therefore if the balance of PPE was made up of more land and less of the other categories this could also show depreciation and amortisation as a percentage of total expenses dropping year on year.


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Journal Entries

Date Narrative Debit ($m) Credit ($m)30/06/18 Depreciation expense

– Coating LinesXXX

Accumulated Depreciation –

Property Plant and Equipment

XXX


– Iron and steel making plant and

machinery

XXX



XXX


– BuildingsXXX



XXX

Date Narrative Debit ($m) Credit ($m)30/06/17 Impairment expense –

Building products Indonesia

XXX

Accumulated Impairment –


XXX

Date Narrative Debit ($m) Credit ($m)30/06/18 Amortisation expense

– Computer softwareXXX

Accumulated Amortisation –

Intangible assets

XXX

Journals such as these above are necessary as part of a firm’s balance-day adjustments. They are moving amounts from temporary expense accounts to balance sheet accounts in order to calculate the periods profit or loss. If these journals were not done, depending on the size of the firm and their PPE then it could have a severe impact on the financial statements, as they would be incorrectly declaring more profit than what is true. As Martin pointed out in the study guide, these Page | 18 Assignment 1, Step 7-11

Kelly Lee S0171114

transactions do not consist of any money literally changing hands but without them the firm would not be adhering to the accounting standards. While depreciation is only shown as a single line item of the Profit and Loss Statement, it also will appear on the Balance Sheet as part of what makes up the Property Plant and Equipment line.

While there are strict (and many) rules for PPE in the AASB Standards, it could easily be manipulated given that the requirement is based around a lot of estimates. PPE could be classified incorrectly from the beginning (EG machinery rather than building component) which could result in the item being depreciated using the incorrect rate. The AASB Standards state that depreciation must begin from when the asset becomes available for use, however this is something that could be manipulated too. In a large company such as BlueScope Steel, for example, an asset may be built in Brisbane and ready to be used by 01/04/18. If the management at the Brisbane site forgot to tell the accountant in Port Kembla that the asset was ready for use, then depreciation would not start in the correct period. While it might not sound like much, it could be the difference between a profit and loss for a smaller less profitable company.

Step 11


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itsaccrualworld246410288.files.wordpress.com · Web view2019. 5. 26. · Specific identification is also vital in order to correctly analyse performance of models, salespeople,