typeaaccountant.files.wordpress.com · Web viewIf you are reading this and undertaking a similar course, I would advise both saving soft copies of your firm’s reports and printing

Katherine Campbell - s0107542

Assignment – ACCT11081All of the following steps have also been recorded on my blog at -

https://typeaaccountant.wordpress.com/2019/05/16/assign-steps-7-11/

A quick note to the unfortunate reader of this rather long assignment detailing my drawn-out thoughts – I’m sorry it is so long and also… this assignment has been amazing!

If you are reading this and undertaking a similar course, I would advise both saving soft copies of your firm’s reports and printing them!!! This assignment calls for you to recall so many facts and figures, having the soft copy search function but also a hard copy on hand would have saved me a lot of time.

Just when I’d think I was getting a handle on the KC&Q’s I’d read the next week’s content and realise some assumptions I’d made were totally off base. I had to read and reread and reread my firm’s Financial Reports and each time I’d get something new out of them!I’ve learnt so much from this unit, but it has also taught me that I have sooooooooo much left to learn too! 😊

Step 7 - Allegra Orthopaedics Inventories

Financial Report 2018

Perpetual vs. Periodic Inventory Management:Allegra Orthopaedics uses the perpetual method.This is evidenced by the Income Statement simply stating the known Cost of Goods Sold. There is no formula shown to indicate periodic inventory management.

An example of an Income Statement which indicates periodic inventory management:(Sourced from: https://www.accountingformanagement.org/exercise-10-icm/)

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https://www.accountingformanagement.org/exercise-10-icm/

https://typeaaccountant.wordpress.com/2019/05/16/assign-steps-7-11/


Should the periodic method have been used by Allegra Orthopaedics, then there would be no separate mention of write offs in the Annual Report; any loss would simply be attributed to Cost of Goods Sold.

Upon first glance of the Income Statement for Allegra I would imagine that there was no significant inventory impairment for this reporting period. I believe significant impairments are to be reported on their own line and are recorded in a Contra-Inventory Account. Impairments to inventory which are minimal would simply be included in COGS.

Cost Formula:Allegra Orthopaedics uses the FIFO (first in first out method).It has also been disclosed within the Financial Report that Allegra values its inventories at the lower of cost or net realisable value (as per the Australian and International Standards).

Other significant disclosures include – Finished Goods – “Cost comprises of purchase and delivery costs, net of rebates and discounts received or receivable.”Meaning any rebate or discount Allegra was eligible for, was taken into account and applied before assigning a final cost of goods sold unit price.

Another disclosure relates to the “Provision for Impairment of Inventories”. “The provision for impairment of inventories assessment requires a degree of estimation and judgement. The level of the provision is assessed by taking into account the recent sales experience, the ageing of inventories and other factors that affect inventory obsolescence.”

Statement of Financial Position as at 30 June 2018 revealed – Current Assets 2018 – Inventories of $3,028,345, compared withCurrent Assets 2017 – Inventories of $1,776,560This is an annual increase in Inventories of $1,251,785 or 70.46%Inventories is of course listed under Current Assets due to the expectation that the asset will be used/consumed and benefit gained, within 12 months. It is listed under Cash and Cash Equivalents and Trade and Other Receivables, as they are listed in order of their liquidity.

Inventories as a percentage of Current Assets at 30 June 2018 were ($3,028,345 / 5,941,692 x 100) = 50.97%. This was by far the largest portion of Current Assets.Comparing this to 30 June 2017 and the percentage was 38.16%As Allegra Orthopaedics are a product supplier and developer, it makes sense that they would hold significant stock levels. Their new relationship with Waldemar LINK could also explain the significant increase in inventory held.

Further notes (Note 6. Expenses) reveal that there was a reversal of inventory impairment from a prior period.

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Note – this, I found very confusing! Being a report on Expenses I thought the amounts would be displayed as – ‘(000,000)’ – the brackets referring to a loss.This assumption was reinforced by this section of the Notes:

However, as you can see in the above image, the figures are not in brackets.Then as I reach the area of the notes covering impairments I see:

Finally, I see some ‘brackets’. However, to me, a listed impairment – recovery of overprovision says –

oops, in a prior period our estimate was that the inventory was impaired (the NRV was less than the cost of inventory item/s) and now we have reassessed and believe this is now not the case.

Therefore, to me this reversal of impairment should cause the value of the Inventory Asset Account to be increased (debited). And yet, the figure of $50,917 is in brackets.

Bear with me – I know, my thought process was a long process – I realise this Note is for expenses which are all normally shown in brackets on an income statement, but this is NOT in income statement. Expenses are shown here on Note 6. as the ‘norm’ and any figure shown which has an effect opposite to an expense will be shown with brackets. See below:

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Now Note 8. makes perfect sense!

“Reversal of inventory impairment from prior periods to net realisable value recognised as a recovery during the year ended 30 June 2018 amounted to $50,917 (2017: expense of $74,811). The recovery (2017: expense) has been included in cost of sales and purchase of consumables in profit or loss.”

I can only imagine that Allegra Orthopaedics chose to include this adjustment with COGS because they deemed the adjustment as not significant. The reversal constitutes only 3.61% of the declared COGS, and they have declared the details of the reversal in the report notes.

The Statement of Profit or Loss and other Comprehensive Income for year ended 30 June 2018 shows Expenses – Cost of Sales and Purchases of Consumables to be $1,409,457. This is a reduction of $158,439 in expense from the 2017 figure. This reduction is explained in the notes and is due to improved sales margins and an overall reduction in Inventory Provision Expense (Cost of Goods?).

It was interesting to read over the Auditor’s accompanying letter. I enjoyed reading on the issues they identified as needing clarification in their judgement. One such item was when to recognise revenue. This was tested by performing test audits on the controls in place for sales, invoicing, the movement of revenue line items and inventory movement, ensuring of course that this aligned with AASB requirements for recognising revenue (most likely AASB15).

I also thought it interesting that the company discloses that they do not adopt early implementation of new Australian Accounting Standards. Such standards are only adopted once they have become mandatory.

The below table shows the changes 2015-2018 in Inventory value, COGS and Write-downs:

2015 ($) +/- (%) 2016 ($) +/- (%) 2017 ($) +/- (%) 2018 ($)CA – Inventory

2,359,519

-35.94% 1,511,486

17.54% 1,776,560 70.46% 3,028,345

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Cost of Sales…

3,556,839

-42.04% 2,061,663

-23.95% 1,567,896 -10.11% 1,409,457

Write Downs

52,500 365.42% 244,348 -69.38% 74,811 -31.94% (50,917)

This table shows that whilst the value of inventory has increased, and significantly so, the COGS has decreased a great deal. This is a great indication of improved inventory practices and improved sales margins. (Or possibly, judgements in inventory impairments are wildly modest in order to manipulate the firm’s position – says the cynic in me!).

The firm will need to ensure that it does not hold excessive levels of inventory, as over time the cost of holding inventory and threat of technological obsolescence (especially in this industry) could result in huge write-downs and impairments to the asset.

A good check on inventory holdings is to apply the Efficiency Ratio (Inventory Turnover). Where we assess how well the company uses its assets to generate income.

Formula: COGS / Average Inventory = Turnover1,409,457 / 2,402,452.5 = 0.586

This means the firm sells approximately 58% of its inventory in a 12-month period – meaning all held inventory should be able to be sold and cleared within 24 months.

To truly know how this ratio stacks up, we would need to compare it to industry benchmarks and consider a trend analysis for this firm.

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2015 2016 2017 20180

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

Allegra OrthopaedicsInventory Practices 30 June 2015-2018

CA Inventory Cost of Sales Write Downs

The above graph shows that from sometime in 2017 to 2018 as Allegra’s CA Inventory increased, their actual Cost of Sales decreased. This could be explained by the outsourcing of manufacturing, working to a better economic scale and improved inventory management.


The 2017 Report differs from the 2018 Report in that when disclosing judgments on Inventories, they are not simply referring to Finished Goods. Reference is made to Work in Progress, Raw Materials and Finished Goods. This is likely due to the fact that during this reporting period the manufacturing side of Allegra’s operations was restructured and outsourced.

Other similarities however, remain the same. FIFO is still used and the inventory unit cost is calculated after applying any rebates. It has also been disclosed within the Financial Report that Allegra values its inventories at the lower of cost or net realisable value (as per the Australian and International Standards).

This report also outlines the costs involved in the restructure of manufacturing, where some equipment and staff were transferred to Signature Orthopaedics Pty Ltd. During this transition it was noted that there were $149,654 Net Loss on Inventory Write Down. This is another example, referencing the fact that Allegra must use the Perpetual Inventory System.

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The 2016 Report also makes reference to Work in Progress, Raw Materials and Finished Goods. Other similarities include - FIFO is still used and the inventory unit cost is calculated after applying any rebates. It has also been disclosed within the Financial Report that Allegra values its inventories at the lower of cost or net realisable value (as per the Australian and International Standards).

Note 10 of the 2016 Annual Report discloses a breakdown of the Current Asset – Inventories. The inventories are separated into Raw Materials (at cost), Work in Progress (at cost) and Finished Goods (at lower of cost or net realisable value).

Current Asset – Inventories

2016 2015

Raw Materials 9450 439,229Work In Progress - 87,391Finished Goods 1,502,306 1,832,899

The lack of Work In Progress for the 2016 reporting period may be due to the scaling down of production in preparation for the closing of the manufacturing department.As part of the restructuring costs, there were Write Downs for Inventory of $149,654 and Cost of Sales – Materials of $231,061.

Final Comments on Financial Reports and Inventory Reporting

Allegra Orthopaedics manages its inventory using the perpetual system of recording and reporting, though their Financial Statements do not disclose this in black and white. It is simply apparent due to the formatting of their Income Statement and mentions of write-downs.

Allegra does disclose that their chosen method for controlling inventory movements is based on the First In First Out (FIFO) System, which complies with both Australian and International Standards. This is surely the most sensible option, as Allegra is part of an innovative industry where changes are always afoot. Therefore, moving older stock items first, before they risk becoming obsolete is the most financially sound choice.

Their practice of inventory reporting doesn’t appear to have greatly changed between 2016-2018, with the exception I’m sure, of some management practices due to the outsourcing of manufacturing in the 2016/2017 reporting period.

It appears as though the company has gotten more control on its write-downs, with these figures declining each year. Action was needed after the 2016 Report showed an increase of 365.42% in write downs. This may be due to tighter inventory movement management, tighter security controls and training in handling (all examples of internal controls). One wouldn’t usually suspect theft to have played a major role in inventory write-downs for a firm such as this, due to the nature of the finished product being produced.

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My Experience with Inventory Management

My experience in this field is quite crude, but relevant nonetheless.

As a 15-year-old junior working in a newsagency, part of my daily tasks was to restock the shelves (stationery, drinks fridge, cigarette holders). All of which was quite simple, however some of my co-workers did not relish the same enthusiasm as I did for the work. Instead of following inventory handling procedures, short cuts were taken and this resulted in the need to write down inventory due to wastage and theft.

Restocking the cigarette supplies meant recording how much of each brand were needed to fill the display, source the quota from the storeroom, remove all display packs, place the fresher packs from the storeroom to the back and then replace the existing display packs. The theory behind this, (similar to the drinks fridge management), is that each carton has a use by date and we were to practice FIFO, to ensure as little wastage as possible from expiring packs.

The other internal control which was lacking at the time, resulted in significant theft from workers themselves. Each staff member was allowed to consume food and drink from within the store, and were to have a suspended transaction recording this consumption. At the end of each shift this transaction which should be ‘rung up’ by a separate staff member should be cleared and paid for. However, due to limited supervision and security, collusion soon followed and several staff members would often fail to record the actual extent of their consumption.

Another example of inventory management would be in my good friend’s jewellery making business. She sources product parts and assembles them to make earrings and necklaces etc. Her practices are not FIFO, but more a mix of weighted average and LIFO.Weighted average would be her normal practice; however, LIFO or an amended Weighted Average is utilised during special seasons where certain products are likely to be more in demand at certain times (i.e. Christmas themed jewellery around Christmas time). (She currently runs a very small business and is not required to undertake tax reporting.) She would also manage her stock levels through the periodic method – though as this is more of a hobby than anything, I’m sure she does all of these things without even realising the significance of her chosen business practices. Her lack of control systems could be due to the size of her business, lack of education and management apathy.

Of course, being a mother and running a household means that I also have experience in managing and stocktaking goods in my pantry. This should be managed primarily on a FIFO basis, however, due to a lack of tight controls and external involvement (my husband) there is the odd write-down due to wastage, and also theft by my sticky-fingered nieces who are quite partial to the odd Tim Tam.

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Step 8 – MYOB

Set Up Screenshot

Although I did not link a bank account, I did explore the appropriate area of MYOB whilst completing the training.

Final screen of the Getting Started Tutorial – Setting Preferences.

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Training Screenshot

Bank Deposit Slip

Reconciliation Report

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Banking Features

Final screen for tutorial

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MYOB Online Training Skills Test

Q1

Q2

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Q3

Q4

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Q5

Q6

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Q7

Q8

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Q9

Q10

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Q11

Q12

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Q13

Summary of Questionnaire

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Step 9 – Hypothetical Business Transactions for Allegra Orthopaedics

Notes – Allegra Orthopaedics operates in AU Dollars.Inventory is managed via the Perpetual Method and FIFO is practiced.Accounts Receivable and Payable are Control Accounts shown below. These accounts have subsidiary accounts for each Customer and Supplier (not shown).Allegra Orthopaedics follows AASB 120 – Income Approach - where government grants are recognised initially as part of profit and loss (this is opposed to the Capital Approach where grants are recognised on the Balance Sheet).In compliance with the Matching Principle - grants relating to costs are recognised over the necessary period to suitably match the cost they are granted to cover.

1. Supply 10 x Active Knee Product (Finished Good) to Royal Prince Alfred Hospital, $10,000.00 per unit + GST. Sold on credit, terms are 30 days.

DR Accounts Receivable 110,000

CR Sales 100,000

CR GST Collected 10,000

(Sold Inventory (A.K.P) on credit)

DR Cost of Goods Sold 110,000

CR Inventory 110,000

2. Supply 1 x jri Furlong Evolution Hips (Finished Good) to Mackay Mater Hospital, $15,000.00 per unit + GST. Payment terms – COD.

DR Cash at Bank 16,500

CR Sales 15,000

CR GST Collected 1,500

(Cash sale of Inventory (j.F.E.H))

DR Cost of Goods Sold 16,500

CR Inventory 16,500

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3. Purchase 1,000 x titanium screws (raw materials) for Active Knee manufacturing from A1 Supplies, $1.00 per unit + GST. Purchased on credit, terms 30 days.

DR Inventories 1,000

DR GST Paid 100

CR Accounts Payable 1,100(Purchased Inventory (screws) on credit)

4. Purchase 500 x saw blades (raw materials) for joint replacement manufacturing from C3 Supplies, $5.00 per unit + GST. Payment terms – COD.

DR Inventories 2,500

DR GST Paid 250

CR Cash at Bank 2,750

(Cash purchase of Inventory (blades))

5. Rent payable for month of April 2019 on Sydney facility.$20,000 per month + GST. Premises owner is D4 Developments Pty Ltd.Paid 30th April 2019.

DR Rent Expense 20,000

DR GST Paid 2,000


(Rent for April 2019 paid in cash)

6. Capital injection of funds by private share placement.

DR Cash at Bank 2,500,000

CR Contributed Capital 2,500,000

(Capital raised through share offer)

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7. Remaining balance of government grant received for Research & Development Division.

DR Government Grant Account 770,495

CR Other Income 770,495

(Balance of government grant received)

8. Marketing undertaken during May 2019 to attract larger customer pool of surgeons. Primarily to promote Waldemar LINK GmBH & Co products. Funds for marketing have already been budgeted for and previously journaled to a Marketing Allowance Account.

DR Marketing Expense 100,000

DR GST Paid 10,000

CR Marketing Allowance 110,000

(Marketing expenses for May 2019)

Upon review (and after completing MYOB transactions and reviewing the Financial Statements), I am wondering if this journal entry should include another DR/CR where the marketing expense is shown as being paid to the external ‘marketing provider’ and CR-Cash at Bank? Should I also have included a journal of when the funds were first allocated and posted to the Marketing Allowance Account?

9. Electricity invoiced for $10,000 + GST, to be paid by 30th April 2019 for usage in the month of April.

DR Electricity Expense 10,000

DR GST Paid 1,000


(April 2019 Cash Electricity payment)

10. Purchased a commercial grade 3D Printer (using government grant) for the Research and Development Division from E5 Printing Suppliers.

DR Equipment Purchase 60,000

DR GST Paid 6,000

CR Government Grant Acc 66,000Page 21 of 34


(Purchase Equipment with government grant)

All Journals Report from MYOB

Allegra Orthopaedics Ltd - ACCT1108118-20 Orion Road

LANE COVE WEST, NSW 2066

All Journals1/04/2019 To 16/05/2019

ID No. Account No. Account Name Debit Credit

CD

16/04/2019

Transfer Govt Grant to GG Account

1 1-1110 Business Bank Account #1 $770,495.00 1 1-1120 Government Grant R & D $770,495.00 CR

29/04/2019

Bal. Govt Grant - R & D

CR000003 1-1110 Business Bank Account #1 $770,495.00 CR000003 8-2000 Other Income $770,495.00 CD

30/04/2019

Ergon Energy

1 1-1220 Electronic Clearing Account $11,000.00 1 6-1700 Electricity Expenses $10,000.00 1 2-1220 GST Paid $1,000.00 CD

30/04/2019

D4 Developments Pty Ltd 10 Jackson Street Manly NSW 4835 Australia

EFT 1-1220 Electronic Clearing Account $22,000.00 EFT 6-9500 Rent $20,000.00 EFT 2-1220 GST Paid $2,000.00 CD

2/05/2019 Transfer Marketing Allow to Marketing Expense

1 1-1370 Marketing Allowance $110,000.00 1 6-1200 Advertising & Marketing $100,000.00 1 2-1220 GST Paid $10,000.00 PJ 3/05/2019 Purchase; C3 Supplies 2 2-1510 Trade Creditors $2,750.00 2 1-1320 Inventory Raw Materials $2,500.00 2 2-1220 GST Paid $250.00 PJ 3/05/2019 Purchase; E5 Printing

Suppliers

3 2-1510 Trade Creditors $66,000.00 3 1-2110 Plant & Equipment At Cost $60,000.00 3 2-1220 GST Paid $6,000.00

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SJ 6/05/2019 Sale; Mackay Mater Hospital 2 1-1310 Trade Debtors $16,500.00 2 4-1000 Sales Income #1 $15,000.00 2 2-1210 GST Collected $1,500.00 CR

6/05/2019 Payment; Mackay Mater Hospital

CR000001 1-1210 Undeposited Funds Account $16,500.00 CR000001 2-1520 Customer Deposits $16,500.00 SJ 6/05/2019 Transfer from deposits. SJ000001 2-1520 Customer Deposits $16,500.00 SJ000001 1-1310 Trade Debtors $16,500.00 PJ 8/05/2019 Purchase; A1 Supplies 1 2-1510 Trade Creditors $1,100.00 1 1-1320 Inventory Raw Materials $1,000.00 1 2-1220 GST Paid $100.00 CD

10/05/2019

C3 Supplies 58 Ross River Road Townsville QLD 4802 Australia

EFT 1-1110 Business Bank Account #1 $2,750.00 EFT 2-1510 Trade Creditors $2,750.00 CR

15/05/2019

ASX Share Offer Capital

CR000002 1-1110 Business Bank Account #1 $2,500,000.00 CR000002 3-1000 Owner's/Shareholder's Capital $2,500,000.0

0 CD

16/05/2019

E5 Printing Suppliers

1 1-1120 Government Grant R & D $66,000.00 1 2-1510 Trade Creditors $66,000.00 CD

16/05/2019

Electronic Payment

EP000001 1-1110 Business Bank Account #1 $33,000.00 EP000001 1-1220 Electronic Clearing Account $22,000.00 EP000001 1-1220 Electronic Clearing Account $11,000.00 CR

16/05/2019

Bank Deposit

CR000004 1-1110 Business Bank Account #1 $16,500.00 CR000004 1-1210 Undeposited Funds Account $16,500.00 Grand Total: $4,421,590.00 $4,421,590.0

0

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MYOB Income Statement

Allegra Orthopaedics Ltd - ACCT11081

18-20 Orion RoadLANE COVE WEST, NSW 2066

Profit & Loss StatementJuly 2018 To June 2019

IncomeSales Income #1 $15,000.00Total Income $15,000.00Total Cost Of Sales $0.00*Gross Profit $15,000.00ExpensesGeneral ExpensesAdvertising & Marketing $100,000.00Electricity Expenses $10,000.00Total General Expenses $110,000.00Insurance ExpensesRent $20,000.00Total Insurance Expenses $20,000.00Total Expenses $130,000.00Operating Profit ($115,000.00)Other IncomeOther Income $770,495.00Total Other Income $770,495.00Total Other Expenses $0.00Net Profit/(Loss) $655,495.00

*This is an input error on my behalf (when setting up the inventory item). The sale made was a Finished Goods Inventory item ($16,500.00 – Sale – Saw Blades – paid via cash). A COGS should have been recorded/incurred but is not displaying on the Income Statement.

A correct COGS affects the profit margin, and as such, the gross profit (and consequently the net profit) shown above is inaccurately inflated.

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I was also scratching my head as to why the sale of the Active Knee Product (Inventory – Finished Goods) was not being reflected in the Balance Sheet – Accounts Receivable or the Income Statement – Income and COGS.

My first thought was – Oh, well it is an account receivable, credit terms are 30 days and they haven’t yet paid. However, this does not fit with our accrual accounting policies, or AASB 15 para 9 – on when to recognise accounts receivable in a firm’s accounts.

Then I realised my error. I had put it through MYOB as an Order and failed to convert the order to an Invoice. ***Silly, silly me***

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MYOB Balance Sheet



Balance SheetAs of June 2019

Assets Current Assets Bank Accounts Business Bank Account #1 $2,480,750.00 Government Grant R & D $704,495.00 Total Bank Accounts $3,185,245.00 Other Current Assets Inventory Raw Materials $3,500.00 Marketing Allowance ($110,000.00) Total Other Current Assets ($106,500.00) Total Current Assets $3,078,745.00 Non-Current Assets Plant & Equipment Plant & Equipment At Cost $60,000.00 Total Plant & Equipment $60,000.00 Total Non-Current Assets $60,000.00 Total Assets $3,138,745.00Liabilities Current Liabilities GST Liabilities GST Collected $1,500.00 GST Paid ($19,350.00) Total GST Liabilities ($17,850.00) Other Current Liabilities Trade Creditors $1,100.00 Total Other Current Liabilities $1,100.00 Total Current Liabilities ($16,750.00) Total Liabilities ($16,750.00)Net Assets $3,155,495.00Equity Owner's/Shareholder's Capital $2,500,000.00 Current Year Earnings $655,495.00 Total Equity $3,155,495.00

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MYOB Statement of Cash Flows



Statement of Cash FlowJuly 2018 To June 2019

Account Name

Cash Flow from Operating Activities Net Income $655,495.00 Inventory Raw Materials ($3,500.00) GST Collected $1,500.00 GST Paid ($19,350.00) Trade Creditors $1,100.00 Net Cash Flow from Operating Activities $635,245.00Cash Flow from Investing Activities Plant & Equipment At Cost ($60,000.00) Net Cash Flow from Investing Activities -$60,000.00Cash Flow from Financing Activities Owner's/Shareholder's Capital $2,500,000.00 Net Cash Flow from Financing Activities $2,500,000.00Net Increase/Decrease for the period $3,075,245.00Cash at the Beginning of the period $0.00Cash at the End of the period $3,075,245.00

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MYOB Trial Balance

MYOB Financial Statements Discussion

First off, a couple of thoughts regarding this process and analysis…

Trying to analyse the above statements in a way that offers any true meaningful business insight is difficult. These transactions are random, are few in number, and are not really representative of the company it is loosely based upon. The transactions ‘take place’ over the course of 2 calendar months and the trading entity as far as the MYOB file is concerned, opened its accounts with zero capital.

With that said, I can still apply the key concepts and accounting principles I have learned throughout the course of this unit and my studies overall to offer some insight regarding the effects these transactions would have on this version of Allegra Orthopaedics Ltd.

1. Revenue – Income & Gains:There were no gains reported for this period.Income is limited to one Sales transaction (cash) (there should have been a second Sale recorded on credit, but this is not shown due to an input error) and one Other Income transaction (balance of government grant).

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I would not consider the credit terms to be a tight control on accounts receivable. As invoices issued were due and payable within 30 days. There was no incentive for early payments, nor were there any penalty for late payments. During this reporting period, this was not an issue, as the only invoice to be issued for a customer on credit, was not processed and is sitting in the accounting software as an Order (again – silly me!). The other customer’s terms were fulfilled and were cash on delivery.

2. Expenses:Expenses incurred for the 2-calendar month period were exceptionally large in comparison to the Sales Revenue (more than 8 times the total revenue).

Whilst this does not accurately reflect the true nature of Allegra’s financial performance, it is fitting that the Expenses outweigh the Revenue (includes Sales Income and Other Income – this is in reference to the 2018 Annual Report).

The real Allegra Orthopaedics reported an EBITDA loss for the 2017-2018 period of $681,000; this is due to their heavy investing in the Innovation Division. This is a bold/risky move, as they do not expect to see significant revenue streams from their major project for several more years.

Whilst this firm reports a much greater amount of GST Paid (Asset Account) (which is a positive for making a claim to the ATO), it is not a good indication of operating practices. It is clear that this firm is purchasing far more than it is selling.

3. Capital, Grants & Assets:The shareholder capital injection and balance of the government grant recorded in this period has had a significant impact on the firm’s apparent liquidity.

The grant enabled the firm to purchase a 3D printing machine for their Innovation Division, which also meant an addition to the firms Non-Current Assets (Property, Plant and Equipment). As it is expected that the firm will benefit from the asset over a number of years. (As per student feedback from Evan Spurway – this acquisition probably should have been recorded in MYOB > Accounts > Record Journal Entry – this would have recorded the entry into the General Journal, as payment for the asset came from the government grant).

The financial statements are also impacted by the firm’s recognition of the grant to be recorded as an Income item, as opposed to a Capital item. Another example of how judgements and estimates in accounting can have real consequences and can potentially be used to manipulate reports and a firm’s overall position.

An important note on MYOB and assets – I struggled a little with inventory expense vs asset. When processing transactions in MYOB where the firm is purchasing raw materials, I immediately consider the purchase to be an expense (as that tends to be what a purchase means to me) – however we have to apply our accounting principles

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and definitions! The purchase of raw materials is actually the purchase of an asset. These generally do not become an expense until they become a finished good, are sold and a COGS expense is applied!

4. Equity & Liabilities: The Net Profit of $655,495 is encouraging. Although this is not a sustainable way for the firm to continue its business, as this profit is entirely reliant on a private share offer and grant. This is evidenced by the Operating profit/(loss) of ($115,000).

5. The Accounting Equation:Assets = Liabilities + Equity$3,138,745 = ($16,750) + $3,155,495

At least my transaction entries have enabled me to produce a Trial Balance and Accounting Equation which balance! Though, it is not too difficult when I am only dealing with 10 transactions.

I would also note that a Trial Balance which balances is a great start, but is no measure of whether transactions have been accurately recorded in their respective accounts (eg. Asset, expenses, liabilities, income, equity).

Step 10 – Depreciation

Before analysing each yearly report for my firm, it is important to first outline what practices the firm uses and how they account for depreciable assets.

Allegra Orthopaedics uses the Cost Model (AASB 116 (30)).

Property, Plant and Equipment (PPE): this is stated at historical cost minus accumulated depreciation and impairment. PPE is derecognised upon disposal (when there is no future economic benefit to be gained – ie. No longer fulfils the requirements of an asset) – the resulting gains or losses between the disposal amount and the prior carrying amount are recognised in profit/(loss).

Historical Cost: combines cost price with ready for use costs etc. There is no disclosure as to whether this cost includes the estimated price of dismantling, removing and restoring site (as required by AASB116 para.16).

Subsequent Costs: another interesting matter to note is that there wasn’t a black and white disclosure regarding the application and consideration of Subsequent Costs.The 2018 Annual Report States:

Note 2. Critical accounting judgements, estimates and assumptions (continued)Estimation of useful lives of assets

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The consolidated entity determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down.

All that I could find was a vague reference to an ‘other event’ which could affect the useful life of PPE. Could additional expenses and capitalisation costs be considered as an ‘other event’ which would impact on the asset’s useful life?

Depreciation: calculated on a straight-line basis (where an equal amount of depreciation is given to each period of an assets useful life). My assumption is that the below table (which remains the same from 2016-2018) also refers to the asset classes. The firm also notes that not only is the residual value assessed at each reporting date (as required under the AASB), but also the useful life and depreciation method. Land is not depreciable.

Plant and equipment 2-20 yearsFixtures and fittings 2-13 years

Leasehold improvements 3-5 yearsInstrument sets 5-20 years

Leasehold Assets: these assets under lease are depreciated. Depreciation is calculated on the unexpired period of the lease term, or the estimated useful life – whichever is shorter. (I found this quite interesting as it wasn’t something that I had yet seen covered in our weekly lectures).

Allegra Orthopaedics Accumulated Depreciation:

Accum. Depreciation ($) Classes as a % of Total DepreciationPlant & Equip. Fixtures &

FittingsLeasehold Improvements

Instrument Sets*

2016 417,716 10.18%

1,089,88826.55%

434,21710.58%

2,162,95352.69%

2017 425,48310.78%

1,155,01729.24%

4,2270.11%

2,365,91059.89%

2018 441,54410.42%

1,146,84127.07%

26,0790.62%

2,621,81661.89%

The above table shows that depreciation levels remain steady over the years from 2016-2018 with the exception of a 10%+ drop from 2016 to 2017 for Leasehold Improvements.

The reduction in Leasehold Improvements could be explained by Note 26. Commitments of the 2017 Annual Report – where the net commitment recognised as a liability reduces from $106,785 to $39,467, where the firm anticipates a great reduction in associated leasehold fees in 2-5 years. During 2016 some plant and equipment was sold off and some manufacturing was outsourced. The balance recorded on the Balance Sheet 2016 for PPE was $477,219. The

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notes for the report advise that there was a net loss on disposal of $302,613 on the sale of plant and equipment. I am surprised that this reduction in NC asset has not affected the overall depreciation in a greater fashion for plant and equipment for 2016.By far the largest contributor to accumulated depreciation, consistently each year is Instrument Sets. This class is marked with an asterisk in the 2016 Annual Report; however, I could not locate the explanation for the asterisk. There also isn’t a clear definition or explanation for what makes up the Instrument Sets class.

Balance Sheet – Non-Current Assets ($)PPE % of Total NCA % Change

2018 1,147,789 77.25 8.072017 567,044 69.18 3.962016 477,219 65.22 21.28

The Balance sheet between the years appears very similar where NC assets are concerned. Generally listed are PPE, intangibles and from 2017-2018 security deposits are also listed.

Between 2015-2016 PPE as a percentage of total NCA dropped significantly, but has since developed an upward trend, one that is modest as a percentage of NCA, but as far as recognised amount, it has increased considerable.

There is provision in the reports for PPE Impairment. Prior to watching this week’s lecture and reviewing the Study Guide, I believed this impairment possibly referred to a PPE depreciation. However, after further study I now know that an impairment is where the carrying amount of an asset is greater than the recoverable amount (AASB 136 (59)). This requires an impairment of the asset by way of a reduction to the carrying amount, the reduction is recognised in profit or loss (for initial revaluations only). Subsequent revaluations resulting in impairments require the impairment to be recognised in Other Comprehensive Income (AASB 136 (61)).

Intangible assets (both identifiable and unidentifiable (i.e. Goodwill – purchased)) are also subject to a method of depreciation, although known for this type of asset as amortisation. The intangible must have a finite life of use for the firm. Impairments to this type of asset is recorded as an expense. Intangibles with an infinite life are not subject to amortisation, but only to impairments.

Allegra Orthopaedics recognises intangibles which are part of a business combination (with the exception of goodwill) at their fair value as of the date of purchase, intangibles which are acquired separately are recognised at cost.

The Prudence Principle requires us to anticipate potential future losses, but not future gains. Therefore, it is an important practice of Allegra’s to prospectively assess each period the expected consumption trend and expected useful life for such assets.

Depreciation and amortisation are greatly affected (particularly in the short term) by the method of depreciation chosen and the model for valuing (cost or revaluation). There are Page 32 of 34


many estimates and judgements involved which makes this one of the ‘greyer’ areas of financial accounting. Careful consideration should be given to the pattern in consumption of benefits from an asset and choosing the method of depreciation accordingly.

A firm may manipulate the appearance of its performance depending upon which method of depreciation it uses. Whilst over the entire life of an asset, total depreciation should generally be the same, an asset which generates revenue evenly over its life but has a Diminishing Balance Method of depreciation applied, will be capable of producing similar output/benefit year after year, yet the expense of depreciation apportioned in the earlier years will be greater and will mean a reduced net profit – meaning reduced payable taxes – this is not using sound accounting nor ethical judgment. This judgment call also fails to align with the Matching Principle where revenue earned in a period is matched with the associated expenses in the same period. A reporting entity I believe, would need to justify why this method was chosen, and disclose this in its notes to the annual reports.

Depreciation Journal Entries for Allegra Orthopaedics

Date: Journal Entry DR CR

29/06/2016 Depreciation Expense xxx,xxxAccumulated Depreciation – Plant xxx,xxx

(Depreciation expense for the year)

29/06/2017 Depreciation Expense xxx,xxxAccumulated Depreciation - xxx,xxxFixtures & Fittings


29/06/2018 Depreciation Expense xxx,xxxAccumulated Depreciation - xxx,xxxInstrument Sets


Amortisation Journal Entries for Allegra Orthopaedics

Date: Journal Entry DR CR

29/06/2016 Amortisation Expense xxx,xxxAccumulated Amortisation – website xxx,xxx

(Amortisation expense for the year)

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29/06/2017 Amortisation Expense xxx,xxxAccumulated Amortisation – patents xxx,xxx

(Amortisation expense for the year)

In order to understand how depreciation is recorded, we must appreciate that whist the accumulated depreciation account is a permanent account (being a contra asset and credit in nature – permanent until disposed and derecognised), the depreciation expense account is debit in nature and is a temporary account which needs to be closed off at the end of the reporting period.

The above journal entries reflect entries made between 2016 and 2018 and show how a firm journals an asset from being a NC asset into an expense over its useful expected life (as previously assessed and should be reflective of the asset ageing and being ‘used up’). A depreciation expense is recorded and a corresponding entry is made to the accumulated depreciation account for each class.

As previously discussed, the method of depreciation applied will have an immediate effect on the firms reported expenses and resulting net profit. This is an area open to manipulation. An approach to manipulation which may be easier to ‘hide’ by a firm’s accountant or manager could be in the allocation of Subsequent Costs to a NC asset after acquisition. A cost to capitalise the asset (improvements and modifications) may instead be recorded as an expense (normally reserved for repairs and maintenance), and will have a flow on effect to the financial statements showing an exaggerated expense account. Other simple errors could also be made in the recording process which could affect the firm’s statements, such as transposing figures or posting depreciation expenses to the incorrect class of asset etc.

Step 11 – Feedback

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typeaaccountant.files.wordpress.com · Web viewIf you are reading this and undertaking a similar course, I would advise both saving soft copies of your firm’s reports and printing