Assignment 2 - Step 1



ACCT11059 Using Accounting for Decision MakingAssignment 2: Nicole MaguireS0252984Maria TylerDue: Assignment 2 - Step 14.1 How firms add valueI often wondered how dividends were paid and on what basis. If a company paid its equity investors all of its profits, how then could they reinvest to make more money? As it turns out, the company decides how much to reinvest, then pays the rest of its FCF to its investors. KCQAs a shareholder, would you become excited that the transfer of value has been paid to you via dividend or would you be disappointed if your company isn’t reinvesting its cash to increase its own value to make more money for you in the future? As an investor, is it better to invest in a company that reinvests more of its cash flow into the company by purchasing more assets rather than receive the benefits of higher dividends? I guess it depends on your investment strategy, being either long or short term, and perhaps today is the pasts future, and it’s finally pay day!Referring to the examples in the chapter, I would prefer to invest in Marks Inc. as they reinvest more of their profits for future benefits. To me, this indicates the company currently has investment momentum with a plan for future growth; however, this does not indicate the success of future performance.Share prices go up and down and I often wonder what causes them to fluctuate throughout the day to arrive at a closing share price. Reading about a company’s reinvestment of cash flow, I imagine when an entity purchases assets, in time this increases equity which then increases the share price. Perhaps this is only one component that affects share price as this does not explain the daily fluctuations. I really hope to learn the nitty gritty of shares in future courses.Economic Profit – I must admit I have read this section several times. At this stage I am only trying to memorise the formula. I am yet to understand the formula. I find that this equation is calculating formulas within formulas to create more formulas. I also realise that in order to generate the RNOA, you need to work with the ‘operating’ figures which explains the reasoning for restating the financial statements. I found a 90 second video which gives a quick summary of RNOA Operating & Financing ActivitiesMy understanding of splitting activities into operating and financing is to determine if the company is actually making money, from its primary function. KCQIf a company’s main function was selling shoes and sports apparel, and salaries & expenses were absorbent and almost to the break-even point, could income from financing activities help improve profit to give the illusion that the company was more operationally successful than they appear? What would those financing activities be?4.3 Restate two key financial statementsThere are several accounts on my balance sheet and income statement which, currently, are descriptive words on a page that have little meaning to me. I have posted some comments in moodle but have not had a response, and being a distance learning student I don’t have the benefit of attending class and discussing the terms with other students. Most people have not updated their blog so there’s no opportunity for discussion there. I guess my ‘discussions’ will have to be a little one sided with google and textbooks.The chapter makes it sounds easy, put an O here and an F here. Ryman Healthcare has a small number of entries on its balance sheet compared to my company, Pou sheng. The instructions look fairly straight forward and separating the cash into operating and financing shouldn’t be too difficult. I have checked my Income statement for ‘other comprehensive income’, I will not need to add any extra lines as the only item listed here is ‘exchange difference arising from translation’. Easy! I enjoy spreadsheet work so I look forward to the splitting of tax.4.4 Profitability and EfficiencyI never thought to analyse profits in this way. I’m currently in the middle of a private investment project and I’m excited to see how many cents I make for each dollar I have invested. I am importing some items which I plan to resell before purchasing more. I will make it my strategy to ensure I increase those valuable cents for my next shipment.Flashback – Breaking things into bits – My pop (an engineer) was notorious for pulling apart every electrical item he could find to create some other item from the parts. He would joke that he dismantled a helicopter and used the propeller to build his ceiling fan.I must admit it was daunting upon first viewing my financial statements. They were many items I did not understand. My previous roles as bookkeeper had basic accounts and were unlisted companies, so there were no references to shareholders or items such as ‘Recognition of equity-settled share-based payments, net of amount forfeited relating to share options not yet vested’ (admittedly I still don’t understand what this means). But as Martin suggests: ‘Analysis involves breaking things into bits’, and slowly, I am deciphering these items, one at a time, and translating these individual accounts into the meaningful events that created the reason for those figures to appear on the statement. Reading this section, and prior to grabbing my calculator, I see that a formula equals a formula divided by a formula. How will I ever remember the individual formulas needed to calculate the answer? The answer is: Repetitiveness and practice. Which I anticipate is the focus of assignment three. Information is not knowledge: I can certainly relate to that statement after reading this section. Whilst reading all the information regarding which year of NOA to apply to the RNOA formula I am still confused whether to use the current, previous or average figure. Between 2013 and 2014 Pou Sheng’s NOA differs by 75 billion dollars. Is that a small or large difference when NOA was 1103 billion in 2013?KCQWhich figure do I use for NOA? At this point I feel I could use one or the other. I really need to analyse the statements, determine the level of activity, do the calculations, compare the differences, and decide which figure makes more sense. I perceive the theory is that the change in net operating assets needs to reflect the operating activities associated with the change in those assets. This may or may not be recorded in the same period, as business processes take time, but those periods may be related to one another. This makes me wonder, within management accounting, could employees select figures to create a perception that profits are higher than they are realistically? I guess anyone can create as many mythical reports as they like. Financial statements will tell the reality of a business. Unless the financial statements belong to Enron (this is a fascinating video for anyone who hasn’t seen it) Profit margin and asset turnover are a little more straight forward, plucking figures out from the restated financial statements. I look forward to completing some ratios in assignment three and hopefully find some clarity in calculating economic profit.Step 2 – Restating Financial StatementsWell, I must say my head is spinning. I have completed the equity statement and found this to be relatively simple (hoping I’ve completed it correctly). When I progressed to the balance sheet I discovered that some elements in this section aren’t so easy to classify as operating or financing. So here I must re-evaluate (where oh where) to place the entries related to ‘interests in joint ventures’ and ‘acquisitions of subsidiaries’ (which Pou Sheng repeatedly indulges in, much to my confusion). A small moment of clarity: Maria mentioned in her lecture that Wesfarmers goodwill figure is rather high due to them purchasing many companies. Maria has placed goodwill under operating so I can only assume acquisitions to also be an operating asset. However, in contradiction, the AASB website recognises these accounts to be ‘investing’ activities, which I learned in ACCT19084 – Financial Accounting. So after consulting my old accounting textbook (which basically confirmed these are investing activities), one clear bold line of text shined out from the pages: Operating activities are related to the transactions that make up profit.So after checking the notes to my income statement, clear as day, share of results of an associate & share of results of joint ventures are listed in the income statement.Reading further into my notes and using the ‘find’ feature (I don’t know whether to laugh or cry), but I discovered all these accounts are already listed on my consolidated cash flow statement, already divided into operating, investing and financing activities. Joint ventures are listed in the operating, however acquisition of subsidiaries are listed in ‘investing’ activities. I think I will leave the acquisition in operating as it does impact the profit. Ironically, I am super happy I didn’t read the cash flow statement earlier because I probably would have listed these items thoughtlessly into my restated balance sheet, but now I feel I have grasped a better understanding of what these accounts represent by spending the time researching the notes, textbooks and the AASB website. I’m really looking forward to receiving the results and feedback, so please, steer me in the right direction if you see any errors on my statements.Step 3Pou Sheng are a retailer of sportswear, purchasing products directly from the wholesaler. The variable costs associated with all three products will be similar as the costs include the cost of the goods themselves plus shipping costs to the outlets. Labour could be fixed or variable or a mixture of both, depending how busy the outlets are and how many staff are required to work on any given day in any given season. Staff may be employed as salary (fixed) or casual (variable). I do not have experience in the clothing retailer industry so I simply guessed a variable cost of 65% for the following three items.Product 1: Adidas ZX FLUX Running Shoe Y639Product 2: Adidas men's 2016 new men's casual short-sleeved T-shirt shamrock AJ8828 Y199Product 3: Adidas Training Socks AY4600 Y79Looking at Pou Shengs online shop , I found selling prices listed in Chinese Yen, so I have converted the price to Australian dollars for relevance. I found the selling prices to be rather similar to the prices you would pay here in Australia.ProductsSelling price YSelling Price AU$65% Variable CostCMShoes639$127.25$82.71$44.54Shirt199$39.63$25.75$13.88Socks79$15.73$10.22$5.51The product with the highest contribution margin, and also the highest selling price, are the shoes. The CM is $44.54 which is the amount leftover to pay for fixed costs and profit. Ideally, the retailer would prefer to sell more shoes than the other two items to receive a higher CM, but not everyone is shopping for shoes today. If the retailer only stocked shoes, the customer seeking to buy a shirt would shop at the outlet next door, to the loss of Pou Sheng. The CM for socks is minimal, however when a customer buys a new pair of shoes, staff can upsell the socks and essentially earn extra CM for very little effort. I recently bought the most fabulously comfortable shoes my feet have ever indulged in from Skechers (anyone who owns Sketchers knows what I am talking about), and matching sized sockets are a must, so the sales lady sold me three pairs for $17, which basically increased my spend by 17%.ConstraintsOne constraint which appears to have been a problem for Pou Sheng previously is the lack of being a market leader and supplying to customers the latest and most innovative sports apparel. They found previous seasons apparel, not in line with the current trend, would remain on shelves and hangers and take up valuable shop space where other desirable products could be selling more frequently. Conversely, if they do not supply enough of the current products demanded, sales will be lost. This comes down to the basic economic principles of supply and demand. Timeliness with regard to stock ordering is also a factor. Winter stock such as jackets would need to be discounted at the beginning of the warmer seasons to allow room for the summer collection, resulting in lower CM and less profit. This explains why you begin to see winter clothing stocked in retail outlets at the end of summer. If winter stock is ordered half way through winter, you could expect to have excess stock leftover at the end of the petitors are also a major factor. Many of Pou Shengs retail outlets are situated in large shopping malls assumedly with several other clothing stores nearby. If a competitor is having a sale, it may impact the day’s trade for Pou Sheng. Sports clothing isn’t a necessity like food and shelter, so issues with the economy and affordability will impact the level of sales. Natural disasters may destroy cotton crops causing an increase in the cost of materials and currency fluctuations will affect, either negatively or positively, export costs.Discussion ................
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