ACCT11081 Assessment Step 7-11Author: Jennifer Laing (s0019641)Step 7Note 10 for all years (2016-2019) covers the current asset known as inventory. Precious little information is divulged in this note, and it is summarised here.

2019 2018 2017 2016$,000 $,000 $,000 $,000

Stock at Cost 6,346 6,327 8,916 12,561Obsolescence Provision (1,309) (1,022) (1,906) (2,221)Stock at Net Realisable Value

5,037 5,305 7,010 10,340

KCQ: It is quite clear to notice after summarising this information that Funtastic has halved their stock on hand between 2016 and 2018.

I also found this information in Note 1 – Significant Accounting Policies for all years.

Inventories are stated at the lower of cost and net realisable value. Costs are assigned to individual items of stock on the basis of weighted average costs. Net realisable value represents the estimated selling price less the carrying value of inventory and costs necessary to make the sale.

Stock write downs occur where the estimated selling price of stock, in the ordinary course of business, is less than the estimated costs of completion and costs necessary to make the sale. Excess stock levels are reviewed on a regular basis, where discussions with the sales teams are undertaken.

KCQ: The definition of net realisable value intrigues me because the way it is written sounds like sales – cost = net realisable value, which would have the inventory account being equal to gross profit. Are they are selling inventory for less than cost and it is valued at market value? That seems bizarre. How is that profitable? They have sales of $29,959,000 and COGS of $25,054,000, so they are making a small profit. Why do they value stock so low?

KCQ: The other piece of information that needs to be pointed out is that costs are assigned based on weighted average costs, which means that the costs of all the stock on hand are averaged and assigned both to the stock on hand and the stock which was sold. Further investigation of outside sources has revealed that to calculate average cost, you take the total cost of the goods available for sale

(opening inventory plus purchases), and you divide that amount by the total number of goods available for sale (also opening inventory plus purchases).

There are no notes attached to the cost of goods sold account.

KCQ: Given that there are no accounts fleshing out the cost of goods sold account, I think it is fair to assume that the perpetual method of accounting for inventory is being used.

Issues: Further to noticing that the inventory levels have halved, I wonder if this has been done in attempts to improve profitability levels and turn inventory into cash to be used better within the company.

Improvements: I do not think I have been given enough information to suggest any improvements, nor do I have enough expertise to do so.

Have I had any past experiences with inventory: Yes. I was a checkout operator for Big W Gladstone in my teen years. It has been my most favourite employment in the history of my life, except for the dreaded stocktake nights which occurred over three nights every six months. We would stay back from 9pm when the store closed until sometimes 2am, with no breaks (teenagers don’t know enough about union rules to say something, do they?) counting in teams, whinging a lot to the store manager, and getting told that we were free to leave and never come back at least every stocktake. It was a gruelling and stressful experience. There were counters, checkers, and recorders. The counters would count the stock (and I was always a counter), putting a sticker on the barcode with the details and our initials. The checker would check the stock count and initial. Then the recorder would come along with their TELXON and enter the number into the system, sometimes with a second person to read out the information to them. I think a fourth person would then come along with the lists to check yet again the figures. No wonder it took so long! I wonder that it did not take longer.

Step 8Screenshot 1 => Post tutorial video 1: Starting out with AccountRight

Screenshot 2 => Post tutorial video 2: Using AccountRight

Screenshot 3 => MYOB Online Training Skills Test

Step 9Transactions that I have created in MYOB in behalf of Funtastic Ltd1. Purchase manufacturing supplies from We Make Chill Factor Supplies for $800

on 17/8/2019. ✔2. Build 1,000 Slushy makers from the manufacturing supplies on 1/9/2019. ✔3. Sell 1,000 Chill Factor Slushy Makers to Creative Wholesale Distributors for $5

each on 1/9/2019. ✔4. Receive telecommunications invoice for $200 from Aussie Broadband on

1/09/2019.✔5. Paid Mega Phone Marketing $500 on 15/10/2019 for a marketing video which

was invoiced 7/09/2019. ✔6. Recorded $200 payment of Aussie Broadband bill on 17/09/2019. ✔7. Pay We Make Chill Factor Supplies $500 on 30/09/2019. ✔8. Record bank fees of $20 on 30/09/2019. ✔9. Received payment from Creative Wholesale Distributors of $5,000 on

1/10/2019. ✔10.Issue a credit to Creative Wholesale Distributors for 20 defective Chill Factor

Slushy Makers @ $5 on 5/10/2019. ✔

All Journals Report

ID No. Account No. Account Name Debit Credit Job No.PJ 17/08/2019 Purchase; We Make Chill Factor Supplies

1 2-1510 Trade Creditors $800.001 1-1320 Inventory Raw Materials $727.271 2-1220 GST Paid $72.73

SJ 1/09/2019 Sale; Creative Wholesale Distributors1 1-1310 Trade Debtors $5,000.001 4-1000 Sales Income #1 $4,545.451 2-1210 GST Collected $454.551 1-1330 Inventory Finished Goods $727.271 5-1000 Cost Of Sales $727.27

PJ 1/09/2019 Purchase; Aussie Broadband2 2-1510 Trade Creditors $200.002 6-2400 Internet $181.822 2-1220 GST Paid $18.18

IJ 1/09/2019 Build Slushy MakersIJ000001 1-1320 Inventory Raw Materials $727.27IJ000001 1-1330 Inventory Finished Goods $727.27

PJ 7/09/2019 Purchase; Mega Phone Marketing3 2-1510 Trade Creditors $500.003 6-1200 Advertising & Marketing $454.553 2-1220 GST Paid $45.45

CD 7/09/2019 Aussie Broadband2 1-1110 Business Bank Account #1 $200.002 2-1510 Trade Creditors $200.00

CD 30/09/2019 We Make Chill Factor Supplies3 1-1110 Business Bank Account #1 $500.003 2-1510 Trade Creditors $500.00

CD 30/09/2019 Bank FeesSC300919 1-1110 Business Bank Account #1 $20.00SC300919 6-1300 Bank Fees $20.00

CR 1/10/2019 Payment; Creative Wholesale DistributorsCR000001 1-1110 Business Bank Account #1 $5,000.00CR000001 1-1310 Trade Debtors $5,000.00

SJ 5/10/2019 Sale; Creative Wholesale Distributors2 1-1310 Trade Debtors $100.002 4-2000 Sales Income #2 $90.912 2-1210 GST Collected $9.09

CD 15/10/2019 Mega Phone Marketing1 1-1110 Business Bank Account #1 $500.001 2-1510 Trade Creditors $500.00

Grand Total: $14,274.54 $14,274.54

1/08/2019 To 2/09/2020

Funtastic LimitedSuite 2.01,

315 Ferntree Gully Road,Mount Waverley, VIC

Australia, 3149

All Journals

Income Statement

IncomeSales Chill Factor Slushy Maker $4,545.45Defective Stock ($90.91)Total Income $4,454.54Cost Of SalesCost Of Sales $727.27Total Cost Of Sales $727.27Gross Profit $3,727.27ExpensesGeneral ExpensesAdvertising & Marketing $454.55Bank Fees $20.00Internet $181.82Total General Expenses $656.37Total Expenses $656.37Operating Profit $3,070.90Total Other Income $0.00Total Other Expenses $0.00Net Profit/(Loss) $3,070.90

August 2019 To July 2020

Funtastic LimitedSuite 2.01,

315 Ferntree Gully Road,Mount Waverley, VIC

Australia, 3149

Profit & Loss Statement

Balance Sheet

AssetsCurrent AssetsBank AccountsBusiness Bank Account #1 $3,780.00Total Bank Accounts $3,780.00Other Current AssetsTrade Debtors ($100.00)Total Other Current Assets ($100.00)Total Current Assets $3,680.00Total Assets $3,680.00LiabilitiesCurrent LiabilitiesGST LiabilitiesGST Collected $445.46GST Paid ($136.36)Total GST Liabilities $309.10Other Current LiabilitiesTrade Creditors $300.00Total Other Current Liabilities $300.00Total Current Liabilities $609.10Total Liabilities $609.10Net Assets $3,070.90EquityCurrent Year Earnings $3,070.90Total Equity $3,070.90

As of July 2020

Funtastic LimitedSuite 2.01,

315 Ferntree Gully Road,Mount Waverley, VIC

Australia, 3149

Balance Sheet

Statement of Cash Flows

Account NameCash Flow from Operating ActivitiesNet Income $3,070.90

Trade Debtors $100.00GST Collected $445.46GST Paid ($136.36)Trade Creditors $300.00

Net Cash Flow from Operating Activities $3,780.00Cash 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 $3,780.00Cash at the Beginning of the period $0.00Cash at the End of the period $3,780.00

August 2019 To July 2020

Funtastic LimitedSuite 2.01,

315 Ferntree Gully Road,Mount Waverley, VIC

Australia, 3149

Statement of Cash Flow

What do my financial statements tell me about my company?1. Honestly, ten transactions do not do my company justice. There are so many

moving parts, that I struggled to choose only ten. I could have expanded so much on purchasing supplies and manufacturing inventory, which was then sold.

2. Based on my transactions, my company is able to increase their bank account. They are in a better position financially at the end of the period than at the beginning.

3. This company is missing equity and shareholders. 4. This process has served to reinforce everything I have learned about

inventory and COGS under the perpetual method.

Step 10Quantitative depreciation facts for my companyAccount Name 2019

$,0002018

$,0002017

$,0002016

$,000Income StatementDepreciation Expenses

88 215 973 1,383

- Plant & Equipment

83 213 825 772

- Leasehold improvements

5 2 148 611

Amortisation Expenses

311 1,356 672 2,114

- Amortisation of other intangible assets

311 1,356 672 1,966

- Amortisation of product development costs

- - - 148

Balance SheetPlant & Equipment – at cost

1,185 1,252 4,332 4,673

Accumulated depreciation

1,145 1,110 3,875 3,345

Leasehold improvements – at cost

- 16 1,141 1,485

Accumulated amortisation

- 2 1,141 1,358

KCQsFrom the company notes in all years: “Plant and equipment are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the item.” What does this mean? This means that (1) the cost includes the purchase price of the asset, including shipping, installation, and any other costs that relate to the purchase, (2) accumulated depreciation is the total depreciation that has been calculated to date over the life of the asset, and (3) impairment means the reduction or increase in the value of the asset as a result of other factors, independent of depreciation.

From the company notes in all years: “Depreciation is calculated on a straight-line basis to write off the net cost of each item of plant and equipment over the shorter of its expected useful life and the lease term. Estimates of remaining useful lives are made on a regular basis for all assets, with annual reassessments for major items. The cost of improvements to or on leasehold properties is amortised over the estimated useful life of the improvement to the Group. The expected useful lives are as follows: Plant and equipment: 2.5 - 10 years Leasehold improvements: 3 - 5 Years” What does this mean? (1) Straight line depreciation means that the yearly depreciation expense is unchanging over the useful life of the asset. When plotted on the chart, the line is straight (hence, straight-line depreciation). The ATO also calls this prime cost depreciation. The useful life of plant and equipment is likely to be somewhere between 2.5 and 10 years. (2) The effective

life used is either the useful life of the asset, or the lease term of the asset if that is shorter than the useful life of the asset, which is likely if the asset is leased. (3) Useful life evaluations of assets are made on a yearly basis for major assets and as needed for others. I wonder what a major asset is. (4) Amortisation on leasehold properties is no longer relevant because the legislation changed in 1 January 2019 when AASB 16 came into force.

Asset account reconciliations: Notes 12 and 13 in the 2019 financial statements, and notes 13, 14 and 15 in the 2017 financial statements show details about the movement of depreciation and amortisation in the accounts. This is like how the statement of changes in equity shows the movement of profit from the temporary income statement accounts to the balance sheet through the process of closing off the temporary accounts at the end of the period.

From the company notes in 2017: “AASB 16 introduces a single comprehensive on-balance sheet accounting model for lease arrangements that apply to lessors and lessees. This effectively removes the distinction between operating leases (off-balance sheet) and finance leases (on-balance sheet) with the exception for short term leases and leases of low value assets. Lessees will now have to bring operating leases on to the balance sheet and recognise a right-of-use asset (ROU) being the asset that is leased and a corresponding lease liability for the amount used to finance the ROU. Committed payments that are now recognised as rental expense will be replaced by the depreciation of the ROU and the interest expense from the lease liability. The Group is currently assessing the potential impact on the consolidated financial statements when What does this mean? If I am understanding this correctly, this means that leased assets which used to be held to account on the balance sheet and amortised yearly are now to be depreciated instead. I think that this means that all the leased assets were incorporated into the plant & equipment category between 2018 and 2019, although it is apparent that a lot of assets were disposed of in the same time period, judging by the rapid decrease in the plant & equipment balance sheet at cost account. This is confirmed by note 12 in the 2019 financial statements, where twice as many assets were disposed of as were acquired, compared to other years where the disposals matched the acquisitions.

Account Name 2019 $,000

2018$,000

2017$,000

2016$,000

Plant & EquipmentAdditions 5 129 823 866Disposals 24 231 47 34Difference -19 -102 776 832

Product development costs: Note 7 in the 2017 notes mentions amortisation of product development costs (expense), and the asset this relates to is mentioned in note 11. However, unfortunately this is not mentioned anywhere else in the financials. A quick Google of the subject reveals that these are likely the costs relating to developing a new product, which I guess makes this

intellectual property. I wonder if this is transferred to inventory once the product has been developed.

Variances: I did notice these inaccuracies in the 2017 financial statements. I am assuming that they come under the heading of immaterial, particularly the issue with note 27 (overall variance of $9,000), but the issue with note 26 has me stumped.

Note 26Account Name 2017

$,0002016

$,000Depreciation Expenses 973 1,383Amortisation Expenses 672 2,114Total 1,645 3,497Note 26 1,450 3,254Variance (under)/over -195 -243

Note 27Account Name 2016

$,000Depreciation Expenses 1,383Note 27 2,341Variance 958

Amortisation Expenses 2,114Note 27 1,165Variance (under)/over -949

Has your firm changed its depreciation methods over the years that you are reviewing? If so, why? No, they have not changed their depreciation methods over the four years that I am reviewing.

What type of depreciation method does it use (for example, straight-line, reducing balance, units of production)? My firm uses straight line depreciation to write off their assets.

Is depreciation a significant expense for your firm? Why or why not?Account Name 2019

$,0002018

$,0002017

$,0002016

$,000Sales 29,959 41,748 55,707 88,888Depreciation 88 215Amortisation 311 1,356Depreciation & Amortisation

399 1,571 1,645 3,497

Percentage 1.33% 3.76% 2.95% 3.93%

No, depreciation is not a significant expense for my firm. A significant expense to me would be at least 5% of sales, if not more.

Identify at least three journal entries that may have been processed by your firm’s accountants when recording your firm’s depreciation.Date Account Debit Credit31/07/2019 Depreciation of

property, plant & equipment expense

83,000

Accumulated depreciation of property, plant & equipment

83,000

(Being depreciation of property, plant & equipment for 2019)

31/07/2019 Depreciation of leasehold improvements expense

5,000

Accumulated depreciation of leasehold improvements

5,000

(Being depreciation of leasehold improvement for 2019)

31/07/2019 Amortisation of other intangible assets

311,000

Accumulated amortisation of intangible assets

311,000

(Being amortisation of intangible assets for 2019)

What effect do these journal entries have on your firm’s financial statements? These journals increase the expenses in the income statements and reduce the assets in the balance sheet, transferring some of the asset cost to the income statement, matching the asset cost to the income generated.

Are there any areas where it might be possible to manipulate these entries?Once could increase or decrease the rate of write off by manipulating the effective years, asset impairment, or by changing the basis of depreciation.