Step 7Inventories are the goods or materials a firm either purchases or manufactures with the intent to sell them in the usual course of their business to make profits. They can be referred to as raw materials, work-in-progress and finished goods. I believe MaxiTrans inventory would consist of parts within MaxiParts which they intend to sell to customers and parts intended for the manufacturing of trailers.

MaxiTrans Inventory

2019 2018 2017 2016Second – hand units – at NRV 1,671 1,162 3,044 5,298Finished goods – at cost 40,925 38,016 35,242 31,745WIP – at cost 4,431 4,661 6,913 4,650Raw materials – at cost 14,057 15,863 18,358 14,568Less: provision for decrease to NRV

(1,817) (2,002) (3,189) (2,920)

Total inventories 59,267 57,700 60,368 53,341% change 2.71% -4.41% 13.17%

To be honest, these terms are new to me so I decided to look into each one a little more to try gain a better understanding.

Raw materials – the materials that a business changes to produce its goods or services. These would be used in the manufacturing of trailers.

Work-in-progress – any unfinished goods that your business had made. Ie – trailers still being built.

Finished goods inventory – includes any finished goods that are ready to sell. Completed trailer.

I found in my firms annual report that Inventories are valued at the lower of cost and net realisable value. Costs are assigned on a weighted average basis and include direct materials, direct labour and an appropriate proportion of variable and fixed factory overheads, based on the normal operating capacity of the production facilities. Net realisable value is determined on the basis of each inventory line’s normal selling price. This confirms that they comply with the AASB 102.

Net realisable value is the estimated selling price less the estimated cost of sale. I noticed that only second hand units are valued this way. This makes sense as the selling price is uncertain due to it being a second hand item and the wear and tear associated with the trailer and therefore what they sell them for may be less than what is cost them to purchase. Finished goods, WIP and raw materials are all valued at cost as it is assumed that they are able to sell them for more than what we paid for them.

I also found that the calculation of the provisions for inventory involves estimation and judgement surrounding future potential losses based primarily on past experience, the likelihood of losses arising in the future as well as management knowledge and experience together with a detailed examination of financial and non-financial information trends.

I am presuming this provision is similar to the provision companies can use for bad debts. It relates to the inventory valued at cost and includes an amount for the losses on inventory that sells for less than what they purchase it for. This provision is based on management’s knowledge and past experiences as mentioned in the note above. I notice this provision is only 0.03% of the total of Inventory valued at cost, so therefore it is very minimal.

My thoughts on Maxitrans inventory?

One thing I find interesting is that WIP has a significantly lower value allocated to it compared to finished goods and raw materials. In saying that, its value remains fairly consistent over the 4 years in review, excluding the one-off increase in 2017 due to Coles contract.

I must say I always thought of Inventory being “new” stock, so I was surprised to see second-hand units listed within the Inventory. I suppose there would be a small market for second hand trailers. I wonder if this inventory is for trailers that customers have traded in when they have purchased new trailers?

I am also confused as to where the inventory is for MaxiParts side of the business is held. Would this fall under finished goods or Raw materials?

When looking at the Balance sheet, you can see that inventory makes up 50% off Maxitrans current assets. This is quite a large number, but doesn’t surprise me, as MaxiTrans is a trailer manufacturing business and would require a large amount of inventory to conduct their core business.

Overall, MaxiTrans inventory appears to be fairly consistent over the years. The 13.17% increase in inventory in 2017 was a result of the increased trailer build rate, in particular, the Coles contract. This was reduced in 2018 as the company improved their inventory levels by reducing their holding inventory that had been duplicated. This is reflected through the reduction in raw materials from 2017 to 2018.

What does your firm disclose and not disclose about its Inventories?

To be honest, I found my firm didn’t close much detail about its inventory. I really struggled to find information about what was included under each section of is Inventories. Is this because my understanding of inventory is quite small or are firms usually vague about their inventory?

Has your firm changed its Inventories practices over the years you are reviewing? How might this affect your firm’s financial statements?

No, my firm has not changed its inventory practices over the years. I was relieved to see they had the same policy each year for their inventory (2016-2019).

However, if Maxitrans were to change their inventory policy over the years, it would have an effect on their financial statements as they use the weighted average cost formula. Weighted average cost is calculated by dividing the cost of goods available for sale by the number of units available for sale. The result of this calculation can vary between the perpetual and periodic method. As Maxitrans currently use the perpetual method to record their inventory, the cost of each item will vary with every sale. However, if they used the periodic method, the cost will be the same for every item as they do not calculate their weighted average until the end of the period. This will result in a different inventory value and can vary the profit for the period.

Does your firm disclose what type of inventory system it uses?

Unfortunately my firm’s annual report didn’t blatantly tell me whether they used the perpetual or periodic method for tracking their inventory. However, I remember the Study Guide advising a key difference between the perpetual and periodic methods for recording inventory transactions is found in the way firms present their Income Statement. The perpetual method records purchases and sales of Inventories as they occur and allows firms to keep a ‘real-time’ balance of Inventories, whereas periodic only accounts for inventory movements at the end of each period. Maxitrans Income statement shows an expense item of raw materials and consumables used. This shows they use the perpetual method as the calculation for costs of goods sold is not required as they have kept track of their inventory costs during the period.

Experience with inventory?

My experience with inventory is extremely minimal. While I was at school, I worked at Crazy Clarks and remember having to do a stocktake every year. I believe they would have been using the perpetual system and doing the stocktake to write-off any discrepancies between stock on hand and what was in their system. Other than this, I have had minimal experience within Inventory and found majority of my learning within Chapter 4 on Inventories to be new. I have enjoyed gaining a deeper of understanding of Inventories, I can imagine it can get quite complex for some businesses though.

Step 8Screenshot after completing Step 1: Starting out with AccountRight

Screenshot after completing Training: Using AccountRight

Test Results

Step 9My transactions

1. Customer Invoice – Nortrans – purchase of 2000 Tyres for $260.00exc GST (Inventory). Produced through Item Invoice. 30 day terms. 50% payment received 31/08/2020 & 07/09/2020.

2. Customer Invoice – XYZ Trucking Company – 10/07/2020- $165,000 inc GST. No payment received.

3. Supplier Invoice – Tyre Co. - purchased 3000 x TH58 Tyres for $90.00ea exc GST each. Purchased through Item invoice and Inventory. 14 day terms. Paid on 15/08/2020.

4. Business insurance – 01/08/2020 - AAA Insurance - $28,520.00. (Includes stamp duty of $2900 – GST free)

5. Wages – 28/08/2020. $14,362.00. General Journal. Tax code = N-T6. Electricity payment – Ergon Energy - $4602.00inc GST7. Credit note – Nortrans – return of 150 x TH158 tyres due to over supply - $42,900.00 inc

GST. Refunded on 13/09/2020 as Invoice had already been paid in full.8. Purchase – Staff Training – New Inventory Management System - $1020.00 inc GST. Paid

15/08/2020.9. Toll Transport - Freight cost – August 2020 - $25,000 inc GST, Due 30/09/2020. (Not paid)10. Bank fees - $20.00 (GST free) – 31/08/2020.

All Journals Report

             

MaxiTrans123 Truck Way

Townsville QLD 4818  

All Journals1/07/2020 To 13/09/2020

   

    ID No.Accoun

t No. Account Name Debit Credit Job No.   

SJ 10/07/2020 Sale; XYZ Trucking Company              2 1-1310 Trade Debtors $165,000.00        2 4-2000 Sales Income #2   $150,000.00      2 2-1210 GST Collected   $15,000.00                 PJ 1/08/2020 Purchase; Tyre Co.              1 2-1510 Trade Creditors   $270,000.00      1 1-1320 Inventory $245,454.55        1 2-1220 GST Paid $24,545.45                   PJ 1/08/2020 Purchase; Toll Transport              2 2-1510 Trade Creditors   $25,000.00      2 6-3100 Freight Out $22,727.27        2 2-1220 GST Paid $2,272.73                   CD 1/08/2020 AAA Insurance              EFT 1-1110 MaxiTrans Business

Account  $28,520.00  

    EFT 6-7100 Business Insurance $23,290.91        EFT 6-7100 Business Insurance $2,900.00    

    EFT 2-1220 GST Paid $2,329.09                   SJ 8/08/2020 Sale; Nortrans              1 1-1310 Trade Debtors $572,000.00        1 4-1000 Sales Income #1   $520,000.00      1 2-1210 GST Collected   $52,000.00      1 1-1320 Inventory   $163,636.37      1 5-1000 Cost Of Sales $163,636.37                   PJ 14/08/2020 Purchase; Learn To You              3 2-1510 Trade Creditors   $1,020.00      3 6-4500 Staff Training Expenses $927.27        3 2-1220 GST Paid $92.73                   CD 15/08/2020 Tyre Co.              EFT 1-1110 MaxiTrans Business

Account  $270,000.00  

    EFT 2-1510 Trade Creditors $270,000.00                   CD 15/08/2020 Learn To You              EFT150820 1-1110 MaxiTrans Business

Account  $1,020.00  

    EFT150820 2-1510 Trade Creditors $1,020.00                   CD 22/08/2020 Ergon Energy              EFT 1-1110 MaxiTrans Business

Account  $4,602.00  

    EFT 6-1700 Electricity Expenses $4,183.64        EFT 2-1220 GST Paid $418.36                   SJ 31/08/2020 Sale; Nortrans              ADJ001 1-1310 Trade Debtors   $42,900.00      ADJ001 4-1000 Sales Income #1 $39,000.00        ADJ001 2-1210 GST Collected $3,900.00        ADJ001 1-1320 Inventory $12,272.73        ADJ001 5-1000 Cost Of Sales   $12,272.73  

               CR 31/08/2020 Payment; Nortrans              CR310820 1-1110 MaxiTrans Business

Account$286,000.00    

    CR310820 1-1310 Trade Debtors   $286,000.00                 CD 31/08/2020                DD 1-1110 MaxiTrans Business

Account  $20.00  

    DD 6-1300 Bank Fees $20.00                   CR 7/09/2020 Payment; Nortrans              CR070920 1-1110 MaxiTrans Business

Account$286,000.00    

    CR070920 1-1310 Trade Debtors   $286,000.00                 CD 13/09/2020 Nortrans 136 Enterprise Rd

Bohle QLD 4818         

    EFT130920 1-1110 MaxiTrans Business Account

  $42,900.00  

    EFT130920 1-1310 Trade Debtors $42,900.00                   GJ 13/09/2020                GJ000001 1-1110 MaxiTrans Business

Account  $14,362.00  

    GJ000001 6-4100 Wages & Salaries Expenses $14,362.00                           Grand Total: $2,185,253.10 $2,185,253.10                    

Income Statement – also known as Profit & Loss in MYOB

           

MaxiTrans123 Truck Way

Townsville QLD 4818  

Profit & Loss Statement1/07/2020 To 13/09/2020

                 

Income          Sales Income #1     $481,000.00    Sales Income #2     $150,000.00    Total Income       $631,000.00  Cost Of Sales          Cost Of Sales     $151,363.64    Total Cost Of Sales       $151,363.64  Gross Profit       $479,636.36  Expenses          General Expenses          Bank Fees   $20.00      Electricity Expenses   $4,183.64      Freight Out   $22,727.27      Total General Expenses     $26,930.91    Payroll Expenses          Wages & Salaries Expenses   $14,362.00      Staff Training Expenses   $927.27      Total Payroll Expenses     $15,289.27    Insurance Expenses          Business Insurance   $26,190.91      Total Insurance Expenses     $26,190.91    Total Expenses       $68,411.09  Operating Profit       $411,225.27  Total Other Income       $0.00  Total Other Expenses       $0.00  Net Profit/(Loss)       $411,225.27                

Balance Sheet

           

MaxiTrans123 Truck Way

Townsville QLD 4818  

Balance SheetAs of 13/09/2020

              

   Assets        Current Assets        Bank Accounts        MaxiTrans Business Account $210,576.00      Total Bank Accounts   $210,576.00    Other Current Assets        Trade Debtors $165,000.00      Inventory $94,090.91      Total Other Current Assets   $259,090.91    Total Current Assets     $469,666.91  Total Assets       $469,666.91Liabilities        Current Liabilities        GST Liabilities        GST Collected $63,100.00      GST Paid ($29,658.36)      Total GST Liabilities   $33,441.64    Other Current Liabilities        Trade Creditors $25,000.00      Total Other Current Liabilities   $25,000.00    Total Current Liabilities     $58,441.64  Total Liabilities       $58,441.64Net Assets       $411,225.27Equity        Current Year Earnings     $411,225.27  Total Equity       $411,225.27                     

Statement of Cash Flow

         

MaxiTrans123 Truck Way

Townsville QLD 4818  

Statement of Cash Flow1/07/2020 To 13/09/2020

       Account Name    

   Cash Flow from Operating Activities      Net Income   $411,225.27    Trade Debtors ($165,000.00)    Inventory ($94,090.91)    GST Collected $63,100.00    GST Paid ($29,658.36)    Trade Creditors $25,000.00         Net Cash Flow from Operating Activities     $210,576.00Cash 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     $210,576.00Cash at the Beginning of the period     $0.00Cash at the End of the period     $210,576.00          

I found the required reports fairly easily to find and produce as MYOB is the accounting software that I used for my husband’s business for the past 10 years. I tried to include as many different transactions within my firm to help me better understand and analyse how the various reports work.

The all journals account shows each transaction and what account it has affected. I always find it interesting that I only entered 10 transactions, yet MYOB has produced 15 transactions. The transaction that stands out to me the most, is the purchase invoice from Learn To You that was paid. This transaction affects 4 different accounts. The original purchase credited the Trade creditors account (Liability) while debiting Staff Training Expenses (expense) and GST paid (liability). The payment was then made on 15/08/2020 and our Bank account (Asset account) was credited (as we reduced it) and Trade Creditors. This one transaction affected Asset, Liability and Expense accounts. This transaction shows the double-entry bookkeeping side of each transaction. It also shows the grand total of all these transactions balance.

The Income statement shows my firms revenue and expenses for the period of 01/07/2020 to 13/09/2020.

Shows total income of $631,000 – I have noticed when analysing my Income statement that I have incorrectly entered my invoice to XYZ Trucking parts to an incorrect Income account. For this example, I was intending there to only be the one income account, however there are two listed on my Income statement (Sales Income #1 and Sales Incomes #2)

Cost of sales - $151,363.64. These are costs that are directly related to the sales income such as freight costs.

Gross profit of $479,636.36. This is calculated by Income minus cost of sales. Total operating expenses of $68,411.09 Overall net profit of $411,225.27 – this is calculated as gross profit minus total expenses.

You can also calculate the net profit margin for a firm by looking at the Income statement. This is calculated by dividing the net profit by the total income and multiplying it by 100. For my firm this is 65% which is considerably high.

The balance sheet shows the remaining three elements of accounting equation – assets, liabilities and equity up to 13/09/2020.

Total Assets of $469,666.91 which include current bank account balance, trade debtors and inventory. MYOB separates its assets into current and other current assets.

Total Liabilities = $58,441.64 which include GST paid and collected and trade creditors. MYOB also separates its liabilities into current and other current liabilities. The GST is also split into 2 separate accounts – paid and collected. The collected is sitting as a credit in the liability account (as we are increasing a liability) and the paid is a negative (as we are decreasing the liability).

Total Equity = Assets – Liabilities. This gives a total of $411,225.27 which shows the assets are higher than liabilities for this company. This amount also equals the profit on the Income statement and is one of the first things I noticed when I looked at the Balance Sheet.

The cash flow statement shows the cash generated and spent during a specific period. It complements the balance sheet and Income statement as it shows the net income (which is the profit from the Income statement) and includes the transactions Asset & Liability transactions (from the Balance Sheet) such as Trade debtors and creditors, inventory and GST. The cash at the end of the period ($210,576.00) matched the Bank account (asset account) on the Balance Sheet. This shows my company has enough cash to pay all current liabilities while continuing to add to its cash reserves.

Overall, my firm has made a strong profit I enjoyed looking at how the four different reports all linked together and told a different but connecting story.

Step 10Depreciation is the process of turning a firms assets (such as property, plant & equipment) into expenses each year. It is an estimate of the future economic benefit that has been used up to generate revenue for a period. It is a non-cash expenses that reduces the value of an asset over its useful life to the business due to expected wear and tear, age and expected use.

MaxiTrans uses the straight line depreciation method. This method allocates an equal amount of depreciation to each period of the assets useful life. This is calculated by dividing the depreciable amount (cost minus residual value) by the useful life of the item. This identifies the amount of

depreciation expense that will be transferred to the income statement each year. The useful life for MaxiTrans assets are as follows:

2019 (straight line)

2018(Straight-line)

2017(straight line)

2016(straight line)

Buildings 25 – 40 years 25 – 40 years 2.5 – 4.0% 2.5 – 4.0%Plant & equip 2 -20 years 2 – 20 years 5-50% 5-50%Leased plant & equip 3.33 – 10 years 3.33 – 10 years 10-30% 10-30%

The depreciation policy stated that the residual value, the useful life and the depreciation method applied to an asset are reassessed at least annually, however, I noticed that over the past 4 years my firm has not changed its depreciation method from the straight line method. However, I did notice that from 2017 to 2018 the way they presented the useful life changed from a % to a year value. I am a bit confused as to why they have done this?

A firm is able to change their depreciation method over the life of the asset to increase or decrease the depreciation expense, however the total depreciation amount will eventually total the same. If MaxiTrans had an asset they believed was more productive in the earlier years and wanted to generate more revenue in the earlier, they would use the diminishing balance method. The diminishing method allocates a decreasing depreciation amount over the useful life of the asset. This would affect their financial statements as it allows them to claim a larger depreciation deduction sooner.

MaxiTrans uses the revaluation model for Land and Buildings; and the cost method for Plant and Equipment, Office Equipment and Leased property, plant and equipment.

I found the following points relevant in my firms policies in regards to depreciation. These were consistent over the 4 years from 2016 to 2019.

Land and buildings – Property whose fair value can be measured reliably is carried at revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent impairment losses. Fair value is asses each reporting period.

- This will explain why there is no depreciation associated with this asset as land generally increases in value.

- The revaluation of land and buildings is included in my firms Comprehensive Income statement under Revaluation of land and buildings if the assets carrying amount has increased due to the revaluation. However, a loss would be shown in the Profit & Loss statement.

Plant & Equipment – stated at cost or deemed cost less accumulated depreciation and impairment costs. The cost includes materials, direct labour and appropriate proportion of

production overheads. It also states where parts of property, plant and equipment have different useful lives, they are accounted for as separate items of property

I am a very visual person so decided to put all my firms depreciation transactions into a graph to make it easier for me to analyse.

2019 2018 2017 2016Income statement

Total expenses 379,252 361,010 312,964 323,470Depreciation & amortisation expenses

(5533) (4073) (3895), (4603) (5020)

Balance SheetPP&E 41,680 93,733 88,526 78,563Intangible Assets 44,297 34,265 37,517 37,059Depreciation % to expenses 0.14% 0.01% 0.01%

After looking at these figures, it is obvious that depreciation is not a significant expense for my business as it is less than 1% across each year.

Another thing I noticed is that the property plant and equipment continued to rise gradually until 2019 when it took a steep decline. I looked further into this and found it was due to the implementation of an ERP system that MaxiTrans has been working on. Unfortunately, they have had many difficulties implementing this system and they incurred significant unforeseen costs including a large amount of time to complete its delayed implementation. Chairman, Robert Wylie, stated the replacement was necessary to remove significant risk to the business as the previous system was at the end of its life. In other words, it was no longer an economic resource that has the potential to produce economic benefits and add value to a firm in the future.

The large amount of PP&E for 2018 included 33,923 for capital work in progress which related to the ERP system. As this system was implement on 2 October 2018, an amount of 33,261 was transferred to Software/Intangibles for the capital expenditure accumulated. An impairment review was also conducted in accordance with AASB 136 and an impairment loss of $26,882 was carried across as the ERP system was revalued to $11.2 million. This was determined based on management’s estimate of the recoverable amount of an equivalent ERP system less the remaining expenditure to complete the implementation and already amortised amounts.

Three journals

General JournalDR CR

30/06/2019 Depreciation and amortisation expenses

Accumulated depreciation – Plant & Equipment

(Depreciation expense for Plant and Equipment for the year)

XXX

XXX

This journal transfers the depreciation expense for the financial year from the Balance Sheet to Income statement. Depreciation is applied to tangible assets such as plant and equipment. We debit the depreciation expense account on the income statement to increase it and credit accumulated depreciation (the contra account) to reduce the asset value in the balance sheet.

You could manipulate this entry by adjusting the estimate of the useful life of an asset. By increasing an assets useful life, the depreciation can occur over a longer period of time, however the amount expensed during each period is reduced. This would reduce the depreciation expense for the period and increase profit.

I believe the following two journals would have been completed by MaxiTrans in regards to the implementation of the ERP system.

General JournalDR CR

30/06/2019 Software at cost - Impairment loss

Accumulated Impairment Loss

(Impairment loss due to review of ERP system)

XXX

XXX

General JournalDR CR

02/10/2018 Property, plant and equipment – capital works in progress

Intangible assets – Software at cost

(Transfer of asset on implementation of ERP system)

XXX

XXX