ACCT11081ASSIGNMENT 1

Rebecca Ramsay

Step 7 – Rakon Ltd Inventory

Key concepts & Questions - 2015 Inventory practices

As inventory represents one of the most important assets of any business, I am interested to explore Rakon’s annual reports and learn about the organisations inventory practices. The relevant report for the 2015 Financial year, can be found at:

file:///C:/Users/User/Downloads/Rakon%202015%20Full%20Financials%20Book%20Web%20(1).pdf

Firstly, after reviewing the notes to the financial statements, one of the things that stood out most to me, was how little information regarding inventories was provided! Whilst it clarified that Rakon’s inventories are stated at the lower of cost (weighted average cost) or net realisable value, there seemed to be little else offered. One of the key questions I encountered, was what does the company’s inventory consist of? After conducting some research, I found that Rakon are manufacturers of quality quartz crystal and high performance TCXO's, VCTCXO's and crystal oscillators. The businesses inventory consists of a variety of crystal resonators, voltage controlled crystal oscillators, voltage controlled clock oscillators, temperature compensated crystal oscillators as well as crystal filters and frequency multipliers.

Reading further through the 2015 Annual Report and I’ve located another section regarding inventories. This proves to be much more informative! As Rakon is a manufacturing entity of the previously mentioned items, there are three different inventory accounts that are maintained. These consist of raw materials (materials and parts purchased to make the various crystal oscillators, filters and multipliers)

which have a value of $10,867,000, work in progress (Rakon products that are partly completed but require further processing) of $12,570,000 and finished goods (total cost assigned to all crystal oscillators, filters and multipliers that are fully manufactured and ready for sale) worth $5,279,000. In addition to the inventory accounts breakdown, there are notes regarding an inventory obsolescence provision of $4,862,000 that has been included in the raw materials, work in progress and finished goods figures. This is a new accounting term that I haven’t previously encountered and my question is, what actually is inventory obsolescence? After conducting some research, I discovered that the term refers to inventory that is at the end of its product life cycle and has not seen any sales or usage for a set period of time. This type of inventory has to be written down and can apparently cause large losses for a company. Rakon calculates this provision on specific identification of items of inventories, for which net relisable value is deemed to be lower than cost. So, my next question regarding inventory obsolescence, is whether the provision calculation via specific identification method, is the same specific identification method utilized for inventory cost assignment?

Moving onto the Balance Sheet and perusing current assets where inventories are accounted for, and I note that they are $28,716,000 for the 2015 financial year. As the total current assets value is $68,364,000, inventories accounts for approximately 42% of this figure. I’m not sure if there is an ‘ideal percentage’ as such, and therefore my question is, what percentage of an organisations current assets should be allocated to inventories? Does the percentage of inventory to total assets impact on an organisations performance or profitability?

Key concepts & Questions - 2016 Inventory practices

The next report perused in order to further review Rakon’s inventory practices, is the organisations 2016 Annual Report, which can be found at:

file:///C:/Users/User/Documents/CQU%20Business%20Course/Accounting%20ACT11081/Rakon%20Annual%20Report%20FY2016.pdf

I’ll be very interested to see if there have been any changes to Rakon’s inventory practices, for the 2016 financial year. As noted under the non-financial assets and liabilities section of the report, Rakon’s accounting policy hasn’t changed. The organisations inventories are again stated at net relisable value, whereby, the value is the estimated selling price in the ordinary cost of business, less the estimated costs of completion and selling expenses. The three different inventory accounts maintained, consist of raw materials with a value of $10,523,000, work in progress of $15,049,000 and finished goods of $4,258,000, with a total inventories value for the 2016 financial year of $29,830,000. When comparing these figures with those of 2015, whilst there isn’t a significant change in the value of raw materials held, there is a noticeable increase of $2,479,000 in the value of work in progress and a decrease of $1,021,000 in the value of finished goods held. So, my first question regarding inventory practices for 2016, is what do changes in the inventories of work in progress and finished goods imply? Does this relate to manufacturing productivity or decreases in inventory efficiency?

Again, as found in the 2015 Annual Report, an inventory obsolescence provision is noted. This time however, it has increased to $6,154,000, which is a change of $1,292,000 from the previous financial year. What I found particularly interesting is for the 2016 year, only $799,000 of inventory was scrapped in comparison to $1,675,000 from 2015, which is a significant decrease. After conducting some research, I found the reason for this change may relate to the following:

improved inventory management systems increased accuracy in the assessment of product life cycles warehouse management taking steps to clear our stock, therefore reducing

obsolete stock

Moving onto the balance sheet, and total inventories of $29,830,000 makes up 47.41% of the total current assets figure, which is $62,910,000. This percentage has increased by approximately 5%, from 42% the previous year. It will be interesting to see if this increasing trend of inventory-to-total assets continues in the 2017 financial year? Keeping in mind that too much inventory has the potential to use up valuable cash resources, which then can’t be used for other purposes.

After noting the varying changes in Rakon’s inventory accounts and inventory-to-total assets increase, it is time to peruse the organisations principal subsidiaries. Under the subsidiaries section, the organisation notes that subsidiaries are all entities over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Rakon’s principal subsidiaries at balance date are as follows:

It appears the majority of Rakon’s subsidiaries relate to the direct research, development, marketing and financing of Rakon’s crystal oscillators and associated products. In addition, there has been no changes in the percentage interest held by each group from 2015 – 2016.

Key concepts & Questions KCQ’s - 2017 Inventory practices

Now moving onto the final Annual Report, which is for 2017 and can be found at:

file:///C:/Users/User/Documents/CQU%20Business%20Course/Accounting%20ACT11081/Rakon%20Annual%20Report%20FY2017%20.pdf Again, as stated in the previous 2 Annual Reports, inventories are noted at the weighted average cost. There are however further changes regarding the breakdown of inventories. This time, the raw materials figures have decreased to $7,167,000 which correlates to a significant change of -31.89%. Interestingly, inventories for works in progress have also decreased from 2015, with a change of -16.54% down to $12,551,000. Finished goods figures were similar to those of the previous year, with a value of $4,568,000. So, my question is, why would there be such a pronounced decrease in both the raw materials and works in progress inventory accounts? After conducting some research, it appears that the manufacturing sector as a whole is facing challenges in light of changing market dynamics, and various articles viewed concerning Rakon Ltd, would support the view that it isn’t immune. Perhaps Rakon is trying to increase their cashflow by reducing material inventories and work in progress? This could be achieved by reducing stock levels or utilising alternative cheaper raw materials, thereby minimising the amount of money tied up in components and assemblies.

An addition to the inventory notes for 2017, relates to the inventory obsolescence provision. Unlike 2015 and 2016 where there was no explanation provided, this time there is a listing of the significant judgements made in determining the provision. These include:

Ageing of inventory Forecast revenue and likely consumption of inventory Historical revenue and actual consumption of inventory Specific identification of items of inventories for which the net relisable value

is deemed to be lower than cost

My question regarding the obsolescence provision is, what happens if the estimates and assumptions (forecasting revenue and likely consumption of inventory) that involve a higher degree of judgement or complexity, turn out to be inaccurate?

Moving onto the balance sheet for 2017, and total inventories of $24,286,000 accounts for 41.81% of the total current assets figure, which is $58,086,000. This percentage has decreased by approximately 5.6%, from 47.41% the previous year. After reviewing the decrease in raw materials and work in progress inventory accounts, the reduction in inventory-to-total assets figures, makes some sense. Research shows that one of the largest drains on a manufacturing company’s cash is inventory. Perhaps Rakon has reduced its inventory, in order to increase the amount of cash available to run the company?

What type of inventory system does it use (perpetual or periodic)?

After reading through all of the Annual Review summaries of Rakon’s significant accounting policies and completing a thorough examination of the organisations inventory notes, the type of inventory system the business uses has not be disclosed out right. However, whether a periodic or perpetual inventory system is being utilised, in order to measure the cost of sales expense, the allocation of total inventory cost between inventory and cost of sales must be based on some cash flow assumption. Varying methods based on different cost assumptions include:

specific identification first-in, first-out last -in, last-out average cost

The terminology for the average cost method varies, depending which inventory system is in use. When the method utilised is called the weighted average, then the inventory system is periodic and when the moving average method is being used, then it is the perpetual system that is being utilised. I assume the organisation is employing the periodic inventory system, based on Rakon’s accounting policy notes below:

What method of inventory does it use (weighted average, FIFO, LIFO etc?

Rakon utilises the weighted average method for its inventory, as per the above accounting policy note. This same method is employed throughout the 2015, 2016 and 2017 Annual Reports. This is no great surprise, as according to Maria’s tutorial video, Accounting standards dictate that only the first-in, first out (FIFO) and weighted average cost methods are allowed as a means of valuing inventory. According to research I conducted, the weighted average cost method is most commonly used in manufacturing businesses (such as Rakon), whereby inventories are piled or mixed together, making it difficult to differentiate between them. This method is calculated by dividing the total cost of goods available for sale, including the cost of the beginning inventory and all net purchases, by the total number of units available for sale. This weighted average is then multiplied by the number of units available for sale to determine the cost of the ending inventory.

What are some of the associated issues and costs that your firm might be facing with its inventory management and why might this be the case?

After re-reading through Rakon’s Annual Reports for 2015, 2016 and 2017, I was unable to locate any information that detailed issues and costs that the organisation may be facing, in relation to its inventory management. However, after conducting some research, a possible issue that Rakon may encounter by utilising the weighted average cost method, is that inventory prices can vary greatly and pricing may not

recover the costs of the more expensive items. Thereby, selling some of their more expensive inventory items for the same price as the lower – cost items. In addition, apparently the average cost method works by looking back over a purchase period to see what has been paid per inventory item, which means that it wouldn’t be until the end of the accounting period that Rakon may realise it has been under - pricing some of its products, such as crystal resonators, crystal oscillators, clock oscillators, crystal filters or frequency multipliers.

Are there any areas where you think your firm could improve its inventory management and how did you identify these areas?

One of the key area’s Rakon may be able to improve its inventory management system, is in relation to the sheer amount of inventory that is being scrapped. In 2017 alone, the value of scrapped inventory was $2,077,000, whilst in 2016 it was $1,618,000. As Rakon is a manufacturing business and production processes often generate a considerable amount of scrap, a scrap inventory control system could be implemented. Such controls could include tracking supplier quality levels and using computer tracking for items with a short shelf life. The raw materials figures for 2017 decreased by -31.89%, as well as the value of inventory for works in progress by -16.54%. These changes reflect an improvement in working capital through a significant focus on reductions in inventory. Rakon could continue to improve its inventory management system by implementing a just-in-time inventory order system through better supplier relationships, thereby, maintaining an optimal level of inventory.

Step 8 – MYOB Training

Screenshot for MYOB setup of my created company - Yasmar Pty Ltd

Screenshot for completed and applied MYOB training – Yasmar Pty Ltd

Screenshot for completed MYOB Online Training Skills Test

Step 9 – Business transactions and financial statements

Business transactions in July by Rakon Ltd

July 3rd - Transaction 1: Interest income received on a term deposit Rakon Ltd has, for $16,450.00.

July 5th - Transaction 2: Invoice # 42891 received from Spark warehouses, for rent to be paid on a manufacturing warehouse Rakon Ltd rents in Auckland, used to manufacture crystal oscillators and crystal resonators. This is for an amount of $25,000.00 for the month of August 2017, and has terms of 7 days.

July 6th – Transaction 3: Rakon ordered (Purchase Order # 5) the following raw materials to manufacture crystal oscillators, from Rockn Crystals on credit for a total of $750,000.00 –

Item 1 – 75,000 x Quartz Crystals @ $10.00

July 10th – Transaction 4: Rakon generated Invoice # 5 for Telstraclear, for items sold on credit. This was a 14 day account for a total of $620,000.00 –

Item 1 – 400 x Crystal resonators @ $1000.00Item 2 – 200 x Voltage controlled oscillators @ $100.00Item 3 – 100 x High stability TXCO @ $2000.00

July 11th – Transaction 5: Rakon paid an electricity bill via EFT, to New Zealand Energy Corporation for $1400.00.

July 12th – Transaction 6: Rakon paid Inv # 42891 via EFT, to Spark warehouses for rent.

July 13th – Transaction 7: Rakon generated Invoice # 8 for BAE Systems Australia, for items sold on credit. This was a 14 day account for a total of $320,000.00 –

Item 1 – 200 x Voltage controlled oscillators @ $100.00Item 2 – 200 x Crystal resonators @ $1000.00Item 3 – 50 x High stability TXCO @ $2000.00

July 20th – Transaction 8: Rakon paid Inv # 68510 via EFT, to Rockn crystals for raw materials purchased as per Purchase Order #5.

July 24th – Transaction 9: Rakon received payment by EFT for Inv # 5, from Telstraclear, for items purchased on credit.

July 27th – Transaction 10: Rakon received payment by EFT for Inv # 8, from BAE Systems, for items purchased on credit.

Financial statements for Rakon Ltd

    

Rakon Ltd - All Journals1/07/2017 To 31/07/2017   

      ID No. Account No.

Account Name Debit Credit Job No.

   CR 3/07/2017 Interest paid on Term

Deposit         

    CR000003 1-1110 Business Bank Account #1

$16,450.00    

    CR000003 8-1000 Interest Income   $16,450.00                 PJ 5/07/2017 Purchase; Spark

Warehouses         

    00000004 2-1510 Trade Creditors   $25,000.00      00000004 5-1000 Cost Of Sales $22,727.27    

    00000004 2-1220 GST Paid $2,272.73                   PJ 6/07/2017 Rockn Crystals - Purchase

raw materials         

    00000005 2-1510 Trade Creditors   $750,000.00      00000005 5-1000 Cost Of Sales $681,818.18        00000005 2-1220 GST Paid $68,181.82                   SJ 10/07/201

7Sale; Telstraclear          

    00000005 1-1310 Trade Debtors $620,000.00        00000005 4-3100 Crystal resonators   $363,636.36      00000005 4-3200 Voltage controlled

oscillators  $18,181.82  

    00000005 4-3300 High stability TXCO   $181,818.18      00000005 2-1210 GST Collected   $56,363.64                 CD 11/07/201

7New Zealand Energy Corporation PO Box 8440 New Plymouth, NZ Tel: +64-6-757-4470 Corporate Office L2, 86-96 Victoria St L2, 86-96 Victoria St Wellington New Zealand

    EFT 1-1110 Business Bank Account #1

  $1,400.00  

    EFT 6-1700 Electricity Expenses

$1,272.73    

    EFT 2-1220 GST Paid $127.27                   CD 12/07/201

7Spark Warehouses Auckland New Zealand

         

    EFT 1-1110 Business Bank Account #1

  $25,000.00  

    EFT 2-1510 Trade Creditors $25,000.00                   SJ 13/07/201

7Sale:BAE Systems Australia          

    00000008 1-1310 Trade Debtors $320,000.00        00000008 4-3200 Voltage controlled

oscillators  $18,181.82  

    00000008 4-3100 Crystal resonators   $181,818.18      00000008 4-3300 High stability TXCO   $90,909.09      00000008 2-1210 GST Collected   $29,090.91                 CD 20/07/201

7Rockn Crystals 404 Oxford Street Paddington Australia  

    EFT 1-1110 Business Bank Account #1

  $750,000.00  

    EFT 2-1510 Trade Creditors $750,000.00                   CR 24/07/201

7Payment; Telstraclear          

    CR000007 1-1110 Business Bank Account #1

$620,000.00    

    CR000007 1-1310 Trade Debtors   $620,000.00                 CR 27/07/201

7Payment; BAE Systems Australia

         

    CR000008 1-1110 Business Bank Account #1

$320,000.00    

    CR000008 1-1310 Trade Debtors   $320,000.00                         Grand Total: $3,447,850.0

0$3,447,850.00

 

 

 

 

Rakon Ltd

Balance SheetAs of July 2017

Assets         Current Assets         Bank Accounts         Business Bank Account #1 $180,050.00       Total Bank Accounts   $180,050.00     Total Current Assets     $180,050.00  Total Assets       $180,050.00Liabilities         Current Liabilities         GST Liabilities         GST Collected $85,454.55       GST Paid ($70,581.82)       Total GST Liabilities   $14,872.73     Total Current Liabilities     $14,872.73  Total Liabilities       $14,872.73Net Assets       $165,177.27Equity         Current Year Earnings     $165,177.27  Total Equity       $165,177.27

Rakon Ltd

Statement of Cash FlowJuly 2017

Cash Flow from Operating Activities      Net Income   $165,177.27           GST Collected $85,454.55    GST Paid ($70,581.82)  Net Cash Flow from Operating Activities     $180,050.00              Cash Flow from Investing Activities      Net Cash Flow from Investing Activities     $0.00              Cash Flow from Financing Activities      Net Cash Flow from Financing Activities     $0.00       Net Increase/Decrease for the period     $180,050.00Cash at the Beginning of the period     $0.00Cash at the End of the period     $180,050.00

Rakon Ltd

Profit & Loss StatementJuly 2017

Income           Crystal resonators     $545,454.54     Voltage controlled oscillators     $36,363.64     High stability TXCO     $272,727.27    Total Income       $854,545.45  Cost Of Sales           Cost Of Sales     $704,545.45    Total Cost Of Sales       $704,545.45  Gross Profit       $150,000.00  Expenses           General Expenses           Electricity Expenses   $1,272.73       Total General Expenses     $1,272.73    Total Expenses       $1,272.73  Operating Profit       $148,727.27  Other Income           Interest Income     $16,450.00    Total Other Income       $16,450.00  Total Other Expenses       $0.00  Net Profit/(Loss)       $165,177.27  

Financial statements evaluation

All Journals Report

The All Journals report for Rakon Ltd shows all of the hypothetical transactions that I created for my firm, in order by date. As it is an All Journals report, a variety of journals such as the sales journal (invoices created for Telstraclear and BAE Systems), purchases journal (purchase order created for Rockn crystals), cash receipts journal (payments received from Telstraclear and BAE Sytems) and cash disbursements journal (paid invoices for purchases from Rockn crystals) are listed. Even though we have been learning about double entry bookkeeping throughout subject ACCT11081, I now have a greater understanding of how entries are recorded by debiting one account and crediting another account, with the same total amount. As can be seen from the All Journals report, whereby the total amount debited and credited for each one of the hypothetical transactions that I created for my firm, are of equal value.

Balance sheet

One of the first things that I initially notice about the Balance Sheet for my company, is how few assets and liabilities are listed! Apparently Rakon has no property and land, vehicles, inventory, petty cash, equipment or vehicles. Oops! On the high side, Rakon is also extremely light on liabilities with no interest payable, accounts payable or credit cards payable. Clearly when I created my hypothetical transactions, I could

have included a lot more variety and detail, if only to make my poor balance sheet look more interesting! Regardless, I’m still able to determine how much Rakons business bank account balance is at the end of July 2017, as well as see that GST collected was for $85, 454.55 and GST paid was -$70,581.82. As of July 2017, current year earnings are valued at $165,177.27 and Rakons total equity is $165,177.27. As the Balance sheet lists all my firm’s assets and liabilities and works out its net assets, I’m clearly able to determine Rakons working capital ($180,050.00) and Rakon’s business liquidity ($165,177.27).

Profit and loss statement

According to Rakon’s Profit and Loss statement for July 2017, the organisation is making a sizeable profit (hypothetically). Whilst Rakon had realised sales of $854,454.45, the cost of sales value was quite large at $704,545.45. This was due to the cost of purchasing the necessary raw materials of quartz crystal, in order to manufacture the company’s crystal oscillators. As the cost of sales is quite high, Rakon could source alternative suppliers for required raw materials. Included in the cost of sales figure, is rent paid to Spark warehouses for the month of August. I wasn’t sure whether to include this as a cost of sales transaction, or record it as an expense. The research I conducted stated that when a product is sold, the manufacturing rent that is included in the product cost will be part of the cost of goods sold figure. However, after looking at Rakon’s hypothetical Profit and Loss statement, I’m wondering if this cost should have been treated as an expense?

Cash flow statement

Rakon’s cash flow statement shows the organisations inflow of revenue verse its outflow of expenses for the month of July 2017. The statement shows that Rakon has net income of $165,177.27, generated from cash flow from operating activities. I am curious why the interest income received from the company’s term deposit, isn’t noted under the net cash flow from investing activities?

Tools to analyse financial statements

Financial ratios are one traditional financial tool that can be used to analyse financial statements. Rakon Ltd could utilise the profitability ratios to evaluate the firm’s financial performance. For instance, Rakons hypothetical profit and loss statement for July 2017, can be used to calculate the company’s profit margin:

Profit margin = Profit/Revenue

For Rakon Ltd the rates are:

Profit = $165,177.27 x 100 = 19.32% $854,545.45

Therefore, this reflects the portion of each dollar of revenue that represents profit. Another ratio that can be utilised to assess the profitability of Rakons hypothetical financial performance, is the expense ratio. This can be used to calculate the portion of each dollar of revenue that goes toward an expense, such as electricity:

Expense ratio = Expense/Revenue

For Rakon Ltd, for the month of July, the expense ratio for electricity is:

Expense ratio = $1,272.73 x 100 = 0.14% $854,545.45

Clearly when I created my 10 business transactions I should have probably allowed for a greater electricity expense figure. However, according to the above profitability ratio, for July 2017, 0.14 cents of each dollar of Rakon Ltd sales revenue, went towards paying for electricity.

Moving onto the financial stability ratios, which can be used to determine Rakon Ltds financial stability by assessing the company’s financial statements. One of the ratios that can be used to determine long term stability is the equity ratio, which is calculated as follows:

Equity ratio = Total equity/Total assets

For Rakon Ltd, for the month of July, the equity ratio is:

Equity ratio = $165,177.27 x 100 =91.73% $180,050.00

Therefore, by analysing the above ratios for Rakon Ltd for the month of July, based on my hypothetically created business transactions, 19.32% of each dollar earned is profit, only 0.14 cents of each dollar earned goes towards paying the company’s electricity bill, and the company has an extremely healthy equity ratio of 91.73%!! If only my own financial situation looked as healthy as the one I created for this assignment!

Step 10 – DepreciatonKey concepts & Questions KCQ’s – 2015 depreciation policies

Depreciation is the method in which the cost of a capital asset is allocated over the estimated useful life of the asset. Within Rakons 2015 Annual report, there are multiple references and sections designated to defining the company’s depreciation costs and the relevant assets estimated useful life. Firstly, after reviewing the notes to the financial statements it is stated that there are no new accounting standards, amendments or IRFIC interpretations adopted by the group as of 1 April 2014. Therefore, moving onto the Profit and Loss statements and Balance Sheets, to see what Rakons financial statements reveal about the organisations deprecation methods. The first thing I notice, is that Rakon has not disclosed the company’s depreciation costs in the Profit and Loss statement. So, my first question is, where have they divulged this depreciation expense? Further investigation of the financial statements shows that the depreciation expense of $6,103,000 for 2015, is noted under the statement of Cash flows with reference to section 6, for more information

regarding this expense. It is here that my first question is answered. The company has included its depreciation expense in the profit and loss statement, under the heading of operating expenses for a total of $46,246,000.

After noting the company’s depreciation expense for 2015, it is time to peruse details regarding Rakon’s property, plant and equipment and associated accumulated depreciation and impairment. Items of property, plant and equipment are stated at cost, less accumulated depreciation and impairment losses. Details are as follows:

My initial query regarding the above table, is why have land and buildings been calculated together and not separately? Land doesn’t have a limited useful life, and its economic benefit won’t be consumed over time to a point where it is used up. During Maria’s lecture, it is mentioned that land generally appreciates and does not depreciate, therefore, I wonder why land has been included with buildings to have an allocated accumulated depreciation and impairment cost? Also mentioned in the property, plant and equipment section of the 2015 Annual report, is that due to the closure of Rakon’s manufacturing facility in Lincoln and the re-organisation of the company’s New Zealand operations, the useful lives and future requirements of property, plant and equipment held by the New Zealand and UK operations were reviewed in 2014. The reassessment resulted in impairment of $3,077,000. The review of useful lives resulted in additional depreciation of $7,398,000.

Further review of these notes, illustrate that where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant or equipment. The assets’ residual values and useful lives are reviewed and adjusted if appropriate, at each balance date. The depreciable assets useful lives are estimated as follows:

Key concepts & Questions KCQ’s – 2016 depreciation policies

In the 2016 Annual report accounting policy and disclosures section, it states that Rakon Ltd has adopted new standards, amendments and interpretations as of 1 April 2015. The group has early adopted the amendments to NZ IAS 1 presentation of Financial Statements, which clarifies the existing requirements relating to materiality, order of the sections, subtotals, accounting policies and disaggregation. These amendments support the new structure of the company’s financial statements. I’m not sure how exactly these changes will impact the presentation of Rakon’s balance sheet, profit and loss and statement of cash flows, but am interested to find out!

As with the 2015 financial statements, the depreciation expense for 2016 has not been recorded under the profit and loss statement, but is located within the statement of cash flows. There has however, been a significant decrease in the depreciation expense by 35.35%, from $6,103,000 to $3,945,000. Whilst the amortisation expense has increased by 31.41% from $1,835,000 in 2015, to $2,675,000 in 2016. As amortization of intangibles is the process of expensing the cost of an intangible asset over the projected life of the asset, I’m interested to see what details have been provided. The breakdown of intangible assets is as follows:

Goodwill Patents Software Product Assets under Total Development construction

$000s $000s $000s $000s $000s $000s

Of the net book value of intangible assets for Rakon Ltd for 2016, only $2,335,000 of the total $14,850,000 of intangible assets, has been disclosed for goodwill. This equates to a percentage of 15.72. So, my question is, what percentage of total intangible assets, is appropriate to be allocated to goodwill? The current figure of 15.72% seems reasonable to me. After conducting further research regarding goodwill, Rakon has stated in its notes, that due to an increase in data traffic, investment into new network infrastructure is expected from telecommunication operators. With Rakon maintaining a leading technology position, the group is expected to benefit from this investment, with the future cash flow projections continuing to support the carrying of goodwill balances for the France and India CGUs, where network infrastructure is a prime or significant market. My next question regarding goodwill, is does an organisation simply allocate an amount they determine appropriate, in order to balance the books?

Key concepts & Questions KCQ’s – 2017 depreciation policies

Moving onto the Annual Review for 2017 and as with the previous review for 2015 and 2016, the depreciation expense is noted under the Statement of cash flows. There hasn’t been a great deal of change throughout the year, with the depreciation expense reducing by $454,000 from $3,945,000 in 2016, down to $3,491,000 for 2017. After reviewing the associated notes (provided for in the Balance sheet) for property, plant and equipment, the table below provides detail regarding the companies non – financial assets and how figures were determined.

Land & Leasehold Plant & Computer Assets underbuildings improvements equipment hardware Other construction Total$000s $000s $000s $000s $000s $000s $000s

Of particular note, is the depreciation reversal on assets disposal. Whilst this was something I hadn’t previously considered, clearly, fixed assets may be sold anytime during their useful life. So, my question regarding the depreciation reversal, is how would this be processed? For example, using the above figures, would the $1,055,000 depreciation reversal for plant and equipment be recorded by crediting or debiting the accumulated depreciation ledger? Debiting? In addition, as the total depreciation charge of $3,491,000 for 2017, is shown on the balance sheet, my next question is, has this already included the total depreciation reversal on disposals of $1,264,000? So many questions!

Depreciation and amortization methods

Rakon Ltd hasn’t changed either its depreciation or amortization methods from 2015 through until 2017. Depreciation of property, plant and equipment, other than freehold land, was calculated on a straight- line basis, so as to expense the cost of the assets to their expected residual values over their useful lives. Whilst amortisation of intangible assets were charged to the statement of comprehensive income, also on a straight- line basis, over the assets estimated useful lives.Is depreciation a significant expense?

The depreciation expense for Rakon Ltd for 2017 isn’t very large, as can be seen from the below table:

In 2017 depreciation was $3,491,000, which represented only 8.33% of $41,888,000 that comprises Rakon’s total operating expenses. Whilst in 2016, depreciation was $3,945,000, which was 8.25% of the $47,766,000, that comprised of the total operating expenses for the year.

Depreciation- Journal entries

31/03/2017 Depreciation expense- Plant and MachineryAccumulated Depreciation- Plant and Machinery (Depreciation expense for the year)

xxxxxx

31/03/2017 Depreciation expense- Computer hardwareAccumulated Depreciation- Computer hardware (Depreciation expense for the year)

xxxxxx

31/03/2017 Depreciation expense- Leasehold improvements Accumulated Depreciation- Leasehold improvements(Depreciation expense for the year)

xxxxxx

What effect do these journal entries have on your firm’s financial statements?

The above journal entries for depreciation will result in a debit to the company’s comprehensive income statement (account for depreciation expense), and will have a corresponding credit in the company’s balance sheet (account for accumulated depreciation). As the accumulated depreciation is a balance sheet account, its balance will carry over to the next accounting period, however, as the depreciation expense is a temporary account in the comprehensive income statement, at the end of each year its balance is transferred out and will start the new year with zero depreciation expense balance.

Are there any areas where it might be possible to manipulate these entries?

Whilst I’m not certain of areas where it would be possible to manipulate the entries, perhaps the only way is by changing the type of depreciation method (straight -line,

reducing balance or units of production) that was utilised, or perhaps amending the useful life that was used in the calculations?

Step 11 – Individual feedback with othersPeers that I have provided feedback for steps 7-10 of the assignment, are shown below. This process provided an opportunity to discuss any issues and concerns relating to the individual steps, as well as a chance to engage with peers that as a distant student you may not otherwise. This was a step I found extremely helpful, although at times it was a challenge managing the time required to provide thoughtful and hopefully quality feedback.

Feedback provided to Kelly Tranberg

My CommentsStep 7 Inventory What a concise and well written Step 7! I thought it was

great how you provided an overview of your previous encounter with studying the concept of Inventories, as well as providing tables with the inventory figures for 2015, 2016 and 2017. When you discussed this information throughout Step 7, it was easy to refer back to the tables you had provided. My firm is a manufacturing company, so it was interesting to see how different our firms were in relation to a service industry having no raw materials or work in progress! I was unable to see in this step where you had discussed any associated issues and costs your firm may be facing, so perhaps this could be an area to add some more detail?

Step 8 MYOB You’ve provided the two necessary screenshots for both the setup and training phases of the MYOB software. Well done in getting 13/13 for the MYOB online training skills test. Great work!

Step 9 Business Transactions

I enjoyed reading your financial statement discussion. I also found the process of inputting 10 transactions for my firm daunting! You completed a comprehensive analysis of your firms financial statements, and I liked how you included an income and expenses graph. You provided a comprehensive overview of the various tools that can be used to analyse an organisations financial statements.

Overall Overall your assignment is excellent! It’s very concise, easy to read and clearly conveys your understanding of inventory, MYOB and analysing financial statements. Well done!

Feedback provided to Ryan Hunnius

My Comments

Steps 7Inventory

It is evident that you’ve read through the comments and notes of the Annual Reports, regarding inventory for the Oroton group. You’ve also noted the inventory figures for Oroton for each of the relevant years. Perhaps, you could provide some more detail regarding the type of inventory system Oroton uses, as well its method of inventory, some issues and costs the organization maybe facing with inventory management and anyway it could improve the company’s inventory management.

Step 8MYOB Set up

MYOB training

MYOB quiz

I can see the screen shot attached for the MYOB software setup phase. Just wondering though, if this is for the correct MYOB software? I believe we needed to utilize the AccountRight software rather than MYOB essentials.

Step 9Business Transactions

All Journals report

Financials and discussion

Not available

Step 10Depreciation

Not available

Overall A solid start to Step 7 for Inventory and Step 8 for MYOB software training and setup, with some more work required to answer the assignment questions fully.

Feedback provided to Christiana Bull

My Comments

Steps 7Inventory

Straight away I like the way you have included an inventory table for the last 4 years, detailing a breakdown of Avon Rubbers inventory figures. It made it so easy to refer back to, while reading your notes. Well done!

You answered all of the questions we were required to in such an informative and thorough way. Seriously, well done!

I particularly enjoyed reading your response to Avon Rubbers inventory management issues. You can see you have conducted a substantial amount of research and this made for a great read.

Step 8MYOB Set up

MYOB training

MYOB quiz

I can see you’ve included the necessary screen shots, for both the setup and training phases of the MYOB software.

Step 9Business Transactions

All Journals report

Financials and discussion

I like how you introduced Avon Rubber at the beginning of section 9, by providing some background information about the company. I also thought it was a really good idea how you stated your decisions and assumptions regarding the hypothetical transactions and then provided a collective analysis when analyzing the hypothetical reports. Again, for this section, all of the required questions are answered and you have added an in-depth analysis of all the content.

Step 10Depreciation

Wow! What a good idea to provide tables for amortization, depreciation and the useful life of the organisation’s depreciable assets from 2013 through to 2016. I particularly liked how you conducted research regarding goodwill and how it isn’t amortised like other intangible assets and why. I hadn’t realized it was because companies were not correctly amortising their goodwill and were allocating unrealistic figures in order to make their balance sheets look as though they had a larger quantity of assets! Again, you have clearly conducted a lot of research.

Overall Overall, I think your assignment is amazing! I genuinely looked for any areas were something extra could be added, but you just have everything covered! It’s well written, lots of analysis and research and is also visually pleasing with the tables you’ve added. Well done!!

Feedback provided to Sharon Field

STEPS My Comments

Step 7

Inventory

What a great step 7 for Inventory. I liked how straight away Sharon defined that PTB’s inventory consisted of aircraft, engines, and spare parts as finished goods for sale and then this was followed up with the method of inventory (specific identification) the company actually used. I also thought it was really good how Sharon wasn’t sure what “impairment” meant, and therefore conducted some research and then included her findings in her step 7, for others to learn from. Perhaps there could be some areas mentioned whereby PTB could improve its inventory management? Change its accounting records, conduct a physical count of its inventory

or determine an optimal inventory level. Also, maybe include some graphs or tables, simply to provide some visual interest? A screen shot of the financial notes, where the company details the breakdown of it inventory?

Step 8

MYOB set up

MYOB training

MYOB quiz

Not available

Step 9

Business transactions All Journals report Financials and discussion

Not available

Step 10

Depreciation

Not available

Overall Overall, I think it was a great step 7. Easy to read and informative about PTB’s inventory practices. As yet, I was unable to see details for Step 8, Step 9 or Step 10.