ASS#Step4

Step 4

practising the recording process

Sharon Field - Q89038205 | ACCT110811 - Introductory to Financial

The chart of accounts organizes transactions into manageable sub-categories relevant to the activities useful for monitoring purposes. For example, I sell Nutrimetics cosmetics as a supplement to my income (but also because it’s a bit of fun and free stuff!!!), so I like to keep track of sales and orders. The sales being the revenue side and orders the expense. It’s not a big business and some months I may have no sales or orders, so I just use my personal bank account to collect monies and pay for orders. I also thought it’s good to keep entertainment expenses separate from living expenses as it’s a luxury and as such, I can forgo that expense to suit my income budget. Other suitable purposes for separate categories are donations for tax purposes, child care fees for checking rebates and insurance to make sure premiums have not sneakily changed. It’s also good to follow the ever changing use of mobile phones and internet charges. Better deals are constantly presented and I find as my knowledge grows with the use of technology, I need to be updating regularly. So, in some ways my chart of accounts is similar, yet so very different according to what I need. I’m sure as life changes, so will my personal chart of accounts.

In the example chart of accounts, I might change the way vehicle expenses is represented. My car is my biggest asset, I don’t own my own home or have huge investments, and it might be useful to keep all vehicle related expenses in the same category. Last year I bought a new car. The old car was more expensive to register, maintain repairs and used more fuel. I know this because I collected the data and made an informed decision to improve my vehicle expense. Of course, I factored in trading the car for public transport but with children and my busy lifestyle, it just wasn’t practical.

I am curious to understand what the percentages mean. I am happy with 19% income with my side business and coupled with part time working earns slightly more than government assistance. I hope to improve on that percentage when I gain more meaningful employment. Does the 80% mean that is how much of my income is spent on expenses? It makes me feel as though I’m living at a break-even point, something a profitable business might strive for. If I am more conscious of frivolous expenses can this percentage be improved? What does improving this percentage mean for my standard of living? This has definitely been an eye-opening experience. I find myself questioning how I spend my money and am I getting my money’s worth afterwards. I think it has been a useful exercise and I gained valuable experience using excel!!! I found little tips here and there!

This is the link to excel files:

https://onedrive.live.com/edit.aspx?cid=e4788879e22a3fd5&page=view&resid=E4788879E22A3FD5!273&parId=E4788879E22A3FD5!113&app=Excel

ASS#Step3

Step 3

identify your own company, post on your blog some background information on your company and its industry, and comment on other people’s blogs.

Sharon Field - Q89038205 | ACCT110811 - Introductory to Financial

http://www.pacificturbine.com.au/

The first thing I note is that my allocated company is located in Brisbane Queensland and I kind of feel a sense of patriotic loyalty. I knew turbines are some kind of engine but upon investigation discovered they were specifically air craft engine manufacturers; however, this is not their only source of revenue. The company is actually a group of four businesses PTB business, Pacific Turbine USA, IAP Business and Emerald Assets business. The $3.6 million revenue earning activities for the period ending June 30, 2016 involves:

·         Long-term engine maintenance contracts

·         Increased aircraft lease revenue

·         Improved sales margins

·         Reduced staff and overhead costs

·         Insurance payout from prior year incident

Although the Emerald Asset business contributed a small profit, it is expected to reduce significantly due to depreciation. This got me thinking about the estimated life of an aircraft and due to safety issues involving human life, the types of expense involved in maintenance. In fact, Warren Buffet once said,

"The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money. Think airlines." (https://www.fool.com/investing/2017/04/08/which-airline-stocks-does-warren-buffett-own.aspx)

Pacific Turbine USA is a new venture and mentions establishing its “customer base” and focuses on the North American market, but has a similar model to PTB business. It will be interesting to study the business model that has been successful in Australia.

The PTB Brisbane business is highlighted as its main driver of success. Its Engine Management Program in Pinkenba near Brisbane Airport, involves consistent monthly payments for comprehensive engine management service which provides consistent cash flows to the engine and parts sales and workshop jobs. I know how important cash is ensuring the continuity of business and it looks like this model works well for PTB. It seems the business model uses other programs to back the expected decline in profitability of most its activities, such as ongoing maintenance management of engines manufactured or after sales service and parts. This coupled with the expansion of the business to capture US markets seems to be key strategies to ensure continued profits.

The Chairman and Managing Director’s review mentions “corporate overheads”, something I’m not familiar, relating to “relocation of administration and finance costs.” I have no idea how this cost them $1.285 million and why it is a separate expense from all the groups??? I find shares confusing. The report says the group places $0.700 million of shares to pay the cash portion of the dividend? How does that work? And what is the share placement stated in the cash flows of the same amount? I understand the allocation of capital spent as a reflection of how some assets were paid for but I don’t understand dividends. What is a “work in progress” asset? Partly completed engines? This will be interesting to discover. I recall some inventory knowledge from high school but have never seen it in action.

I must admit the Director’s report seemed to drag on and was quite boring. I may not have paid as much attention as I should but I skimmed enough to get the gist. A brief examination of the remuneration amounts were quite impressive and thought “wouldn’t it be nice to have that kind of salary” and maybe one day, I will!

I noticed the auditor’s declaration of independence and recognized it to one the vital internal controls and external too. It gives a sense of credence and reliability to the information contained in their financial reports. I also noted the Corporate Governance statement, which relays the ethics involved not only in the compilation of reports but the business as a whole. These should assist in answering the questions of how, when, where and why in classifying transactions and economic substance.

The Consolidated Statement of Profit and Loss and Other Comprehensive Income

Seems almost straight forward, total revenue listed first and then expenses are subtracted (most amounts are in brackets I assume to represent a debit amount?) to show a profit or loss which is then transferred to owner’s equity, R – E = profit. Most of the expense items are logical, however the changes in inventories, which I will need to investigate further, is significantly more than the previous year. Bad and doubtful debts have changed to a positive figure from the previous year and I wonder if indeed that is positive? Was an adjustment necessary because someone paid them back after being written off or did something else happen?

Statement of Financial Position

Also seems straight forward, assets are identified into current and non-current which are subtracted from current and non-current liabilities give equity as per the formula, A – L = E.

Consolidated Statement of Changes in Equity

I can see further how the bits and pieces fit together. The equity is divided into issued capital from shares and other equity securities plus the dividend appropriation reserve and retained earnings to give total equity, which is the same amount shown in the statement of financial position. But I can also see that equity is the balance from the previous year plus profit from this year plus contributions of equity net of transaction cost (not completely sure what this is, hoping for some feedback on review) less dividends paid.

So piecing it altogether,

Assets  +  Expenses  =  Liabilities  +  Revenue  +  Equity

63632   +  43170         =   25946        +   43170       +  37686

         106802               =                        106802

Hence the formula works!!!!

The Statement of Cashflows

I can understand that most of their cash comes from receipts from customers but by the same token, most of their cash is used to pay suppliers. It is interesting to see the separate activities such as operating, investing and financing. I recall from ACCT11059 how we restated the statements into operating and financial activities. Since cash is a very important aspect of the business, I can understand that tracking the cashflow is especially important. I can see that the balance is the same amount shown in the Statement of Financial Position. It’s like additional information and further explanation of cash movement.

Notes to the Financial Statements

The preparation of these statements are in accordance with the Corporations act 2001, Australian Accounting Standards and Interpretations of the Australian Accounting Standards Board and International Financial Reporting Standards as issued by the International Accounting Standards Board. It also mentions using the historical cost method of valuation and fair value. I’m not entirely sure how these methods are applied but it will be interesting to discover more. There are various guidelines for estimating and making fair assumptions too. They have a long list of notes concerning lease assets which make up a large portion of revenue. They also mention goodwill and other intangible assets have infinite life are not subject to amortization. I recall Anna Towan question what is goodwill and thinking I didn’t really have an answer. So I did a little research. My understanding is that goodwill is value created by the business through reputation, branding and established customer relations. It can be recognized as a measurable value when the business is sold above the business’s book value. I have come across the term in marketing also. There is controversy over how its[U1]  measured. It was interesting to see the estimated useful life of assets as most of them were represented in years, however engines were in hours! I suppose this is another judgement made using their experience from years in business. Derivative and hedging activities??? A mystery. I wonder if anyone can shed some light. It seems to be related to investments and cash, but it also mentions that some “derivatives do not qualify for hedge accounting”, is there secret hedging going on???? I can see further explanations of what is included revenue and some assets accounts. This may come in handy for future steps involving spreadsheets.

Links to Annual Reports 2014, 2015 & 2016

http://www.pacificturbine.com.au/wp-content/uploads/2016/07/2014PTBGroupAnnualReport-1.pdf

http://www.pacificturbine.com.au/wp-content/uploads/2016/07/2015PTBGroupAnnualReportFINAL-1.pdf

http://www.pacificturbine.com.au/wp-content/uploads/2016/07/PacificTurbineAnnualReport2016FinalFormatted.pdf

News Articles:

https://simplywall.st/news/2017/07/10/will-ptb-group-limited-asxptb-continue-to-underperform-its-industry/

https://earlebusinessunion.com/investors-are-watching-technical-levels-on-shares-of-ptb-group-ltd-ptb-ax/67826/

https://simplywall.st/news/2017/04/13/what-makes-ptb-group-limited-asxptb-a-financially-strong-company-is-it-really/

http://www.smh.com.au/news/Business/PTB-takes-flights-with-strong-ASX-debut/2006/12/18/1166290453632.html

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 [U1]

Making some great head way with Peerwise. I have also been researching and compiling a draft for step 3, hopefully I should have something posted by the weekend!

Step 2

Study Guide Chapter 1.4 & cHAPTER 2

 Sharon Field - Q89038205 | ACCT110811 - Introductory to Financial

 Personal Reflections

Even as I read though these sections, I struggle to search the part of my brain where the previous accounting knowledge is safely packed away. These concepts are familiar yet strange. It’s clear at some point I just memorized ‘some stuff’ then without fully comprehending its meaning, promptly forgot. Much like a caterpillar munching its way through life, I will transform with this learning, into something meaningful and beautiful. I can apply these concepts to the running of my household, my business, my personal little business. I have some income, some capital investments, assets to maintain and liabilities, regular expenses, extraordinary expenses and on occasion some revenue. All the while, juggling between cold hard cash decisions and keeping people happy, especially myself. There are many reasons I want to make some significant transformable changes, the main ones are to make my mother proud, to be a good role model and mostly for the self-appreciation feeling one can only achieve by succeeding in spite of the odds stacked against you. I want to know, I want to apply and I want to engage.

Key concept number one: 

An increase in an asset is a debit 

Assets + expenses = equity + liabilities + revenue 

An increase on the left hand side is a debit, an increase on the right hand side is a credit

My minute mantra making the most of memorization.

Key concept number two: The heart of business is adding value to others and equity is the trust that the business will create value.

I had always assumed the only reason to be in business is to make lots of money or at least profit maximization. But there’s more to it than that, it’s the willingness to sacrifice to create something that someone else considers more valuable than money. What is the secret to this value creation?

Key concept number three: The General ledger contains all the businesses transaction records.

So what are these transactions to be recorded? How do we decide what needs to be recorded and when? What information do mangers want to capture and why? The Chart of Accounts can tell us which accounts are most prominent. Maybe this could help highlight the more significant activities of the firm. I think we need to understand the economic substance of business activities and then record relevant information as a reminder. This must be a huge job in large corporations. I wonder how it is possible to track everything. All I can think of is, thanks to technology, it sure makes it easier. Everything is linked, somehow, like a book telling a story, I imagine that’s what the general ledger is like. A window into the original ideas for being in business and possibly a glimpse into the future of where it’s going.

Key concept number four: Subsidiary ledgers are for those accounts the firm wants to record further details.

It makes sense that individual accounts would be kept for ease of use in the day to day running of the business. The general ledger would be quite bulky, if books were still used, with names, addresses and contact details of everyone the firm was dealing with, even with digitization, information would be difficult to navigate. I don’t like how casual ‘getting ripped off’ sounds. What kinds of assurances can accounting put in place? Does keeping separate records provide a cross reference of sorts, to help accountability? I guess Coffee Supreme has enjoyed success enough to indulge in nice dinners, skiing holidays and the company of cats and geese. I absolutely agree, that some of the best stories are told over coffee. How do businesses decide on limits and terms of credit? How long is too long and how much is too much?

Light bulb moment – The subsidiary ledgers are control accounts! Time and observation developing trust relationships, taking educated risks and managing those decisions by setting limits and terms. Making comparisons with ledgers to individual accounts maintained by separate people. How often should they be checked? Daily, monthly, when the account is transacted? Perhaps a hierarchy, owner, manager, employee, where access to records are restricted? It might all be a matter of trust, but also a matter of opportunity, regardless of the assumed ‘perks of the trade’ or ‘fringe benefits’. There are subtle protections put in place which help build the trust, reduce error and fraud and make business possible. Johnny Depp always makes me think of pirates. I guess even pirates needed accounting but probably not a lot of trust. So the journals tell the business’s story in chapters, once we know how to read them.

Key concept number 5: GST – Goods and services tax is 10% in Australia, paid, collected and payment or refund. The tax on production contributions collected by the government and paid by the consumer.

This is a complicated concept that may take me some time to understand. In my research I found there are GST free items, such as fruits and vegetables. I need to be aware of GST inclusive and exclusive items. I understand it is a liability from the firms’ perspective. This is a concept I will need to take care with as values will be affected and I’m sure the government will be monitoring closely too. How do we know if an item has GST included? Do we make assumptions or is it clearly shown somewhere? How can we check that it is recorded and not paid twice? I can understand that keeping it separate helps tracking but I predict this is one concept I find confusing.

Key concept number 6: Specialised journals, the separation of chapters in the firms’ story, the sorting alike business activities transactions almost into stories of their own.

I am somewhat familiar with sales, purchases, cash receipts and cash payment journal from my days as a tax consultant. I suppose the look has somewhat changed over the years. Digital dockets, automated electronic receipts, bank transfer numbers instead of cheques, the click of a button, the touch of the screen and it’s all safely stored in a cloud. I wonder how it all works today. I am excited to find out. But I still find GST more confusing.

Key concept number 7: The general journal records transactions that don’t match the specialised journals such a bad debts and credit returns.

Bad debts, these things happen and must be recorded. Goods sold or bought can be faulty. Nothing is perfect and yet the world still turns and business goes on. If these things do happen, this journal will tell the story.

Key concept number 8: Cash is the blood of the business. When the blood runs out, the business dies. Huge concept, this is the only way a business will end.

Key concept number 9: The bank reconciliation. The ominous task of keeping an eye on your cash.

I really liked the Xero video. I don’t have much experience with accounting software but it made it look so easy. It was easy to see the matching principle in effect and so much detail to understand the intricacies of business activity. I find it kind of exciting. I’m looking forward to learning more about software and other information technology advancements.

Key concept number 10: Current and non-current assets and depreciation.

It’s my understanding that non-current assets can be thought of as operating assets, which will deteriorate over time. The deterioration, is the depreciated value recorded as its usefulness is used up over time. I’m not sure how to value an asset and how that is recorded. The original cost less the depreciated value? But the asset is still useful for an undetermined amount of time, the true value not realised until the asset is completely useless and sold or thrown away. So how are assets true value reflected accurately? I understand the tax office sets some rules, which really only provide guidelines. Does accounting have to be perfectly accurate to be useful? I noticed that there was no clear explanation of current assets. I did some research to confirm cash is an example. Goodwill is also a confusing point of contention. Why is it considered a non-current asset? What is it really and how can goodwill be turned into cash?

Conclusion

I am developing pictures to go with the story but some are still out of focus. I can understand the logic of separating information and having checks and balances in place for security. It will be an interesting journey to discover new things and revive old ideas. I really like the logic of accounting and the reassurance behind the mathematics. 

Step 1 Study Guide Chapter 1.1 – 1.3 Sharon Field - Q89038205 | ACCT110811 - Introductory to Financial

Personal Reflections

What are the economic and business realities and who decides what gets recorded? Since each business experiences these differently, I can understand their records being quite independent. It makes sense that a firms accounts should help us to connect and engage with their individual economic and business realities, using bookkeeping to structure a relevant and faithful interpretation. A structure which shows the various parts and functions all working together, systematically throughout the whole firm. So what kinds of bookkeeping is common to all entities? And just how can a firms accounts be a hindrance to interested parties?

I read lots of things. It keeps me informed, entertained and my mind focused. I read things in all sorts of forms, fiction, facts, hard copy (I like the feel and smell of paper still), soft copy and imaginary copy? Yes, imaginary. Can you really believe everything you read online? Or in the newspaper? It can be difficult to sort through the fact from fiction, which is why I think it’s important to cross reference and engage with others for a better clarification, verification and understanding. It is fantastic to be able to communication using various forms of contact quickly and easily too. I have reconnected with peers, met new ones and invited new connections all with the common goal of learning. I am finding my way and it is paved with relationships the likes I have never experienced before and I like it!

I have a vague recollection of Luca Pacoli from ACCT11059, the 500 year old Italian monk referred to as ‘the father of accounting’. I’m sure the more I read the more I’ll remember. There are those foundations instilled such as the proprietorship concept and the accounting equation that still hold fast but I realise there is much accounting knowledge that needs reigniting to have a solid grasp. In my working days as a tax consultant, the matching principle was firmly implanted as a form of evidence of accountability and the importance of the dual entry accounting. So I am building on the past and infusing fresh perceptions.

I invariably notice how the world is geared toward right-handed inclinations. The simple task of washing dishes was taught to me by my mother to wash the dirty dishes on the left and place clean dishes of the right. As a consequence I have a tendency to address tasks working from left to right. One of the other accounting foundations I recall is debits on the left and credits on the right. I have always wondered why and I have a feeling I will understand during this course.

The digital age is absolutely fascinating. I am a little ‘old school’ which is commonly referred to nowadays as ‘the long way’ but I am still convinced doing the long yards ends up being shorter. You can’t skip steps and not leave something behind. If you don’t build a solid foundation the structure will crumble. I do understand how much faster and easier the digital age makes information available but you still need to know the how and the why for it to be useful. That’s what I hope to get out of doing this course. How is this information useful and why? What transactions best reflect the economic and business realities of a firm? How are these interpreted as data? How does double entry accounting ensure the relationship between the different elements of the business model that underpins accounting stay intact???? I want to deepen my understanding and transform the way I see business. Not just as a profit maximizing machine but as a wholistic entity encompassing all stakeholders.

The digital disruption for me means learning new software. I am in constant awe of things we can do via the World Wide Web, it’s important to keep up with it and it’s moving very fast. Where is it all going indeed!!! The revolutionary AI is rapidly advancing and I actually welcome its arrival. I’ve been dreaming of personal robots since the 80’s when we asked what we expected by the year 2000! I doubt reading will ever not be needed, so whether paper or screen we will still need to understand how to interpret the data, even though our robot buddy might be able to Google for us in the very near future.

I recall using journals every day to enter sales receipts, invoices and payments and other things. How much easier it is today with computer technology. Some of the books clients would bring were very heavy and other simply shoeboxes full of bits of paper. I kind of enjoyed organizing these unassuming messes into logical columns of data, but even more handing the bulky bits of paper back and hand over a tiny flash drive with all the information stored. I’m not sure what that data meant to them or what they used it for but it had to be better than bulky books and bits of paper! Most of the time it was the bottom line, they were most interested or the profit and loss statement but sometimes sales and costs. I still wonder what they could do with those numbers and how they helped them.

I always knew the owner was considered separate from the business for legal purposes and also for dual accounting purposes, two sides to a coin. The simple idea that transactions affect not only the firm but the owner as well. It is kind of crazy that computers can’t handle the notion of left and right but instead interpret as positive and negative. I never thought of the purchase of an asset as the obligation a firm owes the owners but that it what it does! Why would you pay for something that you wouldn’t expect to add value? By the same token the firms liabilities also need to prove their investment value. Trust is huge in the business world and I’m starting to understand the role confidence plays as a vital part of business success.

The accounting equation assets = equity + liabilities and its extension assets + expenses = equity + liabilities + revenue is cemented in my knowledge. All the power elements working together to give us a balanced view the business. I am thinking more than ever what each of these qualities represent from various points of views. I am thinking these components reflect the objectives and values of the business but what does that mean to the community? How do we read the data?

“The Conceptual Framework for Financial Reporting, as set by the International Accounting Standards Board (IASB) which is the independent standard-setting body of the International Financial Reporting Standards (IFRS)” it is good know there are rules and regulations guiding and governing the information a firm records and must report. This provides a confidence and assurance of accuracy, that what is being recorded is a faithful representation of the truth.

It makes sense that an asset owes you an obligation and a liability takes away value and equity as the part ‘left over’. You spend money to make money and spend more to maintain making more money! Accounting is the technique of showing the value of a firm in precise dollars. Money is the language and accounting is its interpreter. This is how we can keep track of business as it evolves. I think income is a better term for revenue. It creates an understanding of the obligation. If I invest money, I expect money to be incoming. I understand how revenue relates more to the transfer of value between equity investors and the firm as well as expenses. There’s no such thing as a free lunch!

I’d completely forgotten the concept of accrual accounting. Of course it seems ludicrous to complete the value of a firm only upon its demise. The simple concept of accounting for actions that arises as they occur rather than when cash is exchanged, especially with all the different forms of payments available. So we make some judgements and assumptions to account for the expectation of cash exchange, which is also assessed subjectively. I guess there’s a certain level of risk taking that may or may not pay off when going into business.

Well there are lots of lessons to be learned in business and accounting gives a solid foundation from which economic consequences can work out positively by assessing good judgements and better assumptions. Rather than focusing just on the bottom line, all lines can be tracked and matched against to avoid costly mistakes.  

Fabulous first lecture. Met some new faces and caught with some old faces with new hair! Learnt some new concepts and refreshed old ones. And here's my progress on Peerwise!

Peerwise 2017

My enrollment for ACCT11081 is finally complete and I have started on Peerwise! It's been a rocky start but I'm determined and I never give up!!! I have also joined the Facebook group and the UCROO group, but enough of that BRING ON THE PEERWISE 😄

Still a long way to go but I am gaining momentum!

ACCT11081 Introduction to Financial Accounting

It has been 2 years since I have studied accounting and the beginning of my return to tertiary education. I earned a Diploma of Business in 2015😤 and decided to continue studying to achieve a Bachelor of Business majoring in Marketing and Accounting😊.

A Few Hiccups

As a keen supporter of embracing innovation I welcomed the introduction of MyCentre. Unfortunately my study plan included studying ACCT11057 as a core unit and things have changed. This meant I am unable to complete enrollment into the new core unit, ACCT11081 until certification day. The frustrating outcome means a delayed start to Peerwise, which was an awesome learning technique but even more frustrating I am unable to access the etext I have purchased!😠Not one to give up so easy, I have been preparing questions for Peerwise and adding a little humour to keep things amusing. Who said you can't study and have fun! I am glad to be blogging again, it really helps to form perspective and engage in mutual learning.

How's the Fam Bam!

I'm happy to report everyone is doing great! My gorgeous daughter Daisy is settling well to grade 1 life and Ryan is the most improved student for this semester, receiving awards academically and personally, so proud of them both. We have also welcomed a new family member, Slinky a sausage dog, dachshund cross coolie, a rescue dog from CAA. He is very much adored by all of us and keeps us all safe and loved.

Chapter 4 KCQ's

Step 1

Chapter 4 – Analysing Financial Statements

Key Concepts and Questions

I had not considered the idea of capital markets as trading in future expectations but that explains them so well.  Factories could only hope to make a product as flawless as an ocean makes fish.  It is much more challenging to foresee the exact outcome of an equity investment. I can see the importance of consulting with financial statements as a way of evaluating the future through looking at the past.  A way of being aware of contingencies that are involved in the return of an investment, using an educated estimate.

Another concept I established is the framework or structure of a firm using Discounted Cash Flow, DCF and the economic profit.  I was so unfamiliar with these terms, yet it makes sense to be able to view how cash invested has been used and generated. I understand that the DCF is a comparison of the cost of an investment with value of cash expected to be generated in the future.  The economic profit (opportunity cost) is still somewhat difficult to grasp. My understanding is that economic profit attempts to measure the creation of wealth that exceeds the cost of the amount of capital invested.  I’m still not sure how it does this.

I realise that separating the operational and financial activities of a firm gives a better indication of the performance of the main operation of the business.  Another key aspect, the return on net operating assets, RNOA, is the amount of capital employed and breaking it into profitability (how much value is created) and efficiency (how much effort is needed to create that value).  I believe it is somehow related to the payment of dividends. I found this link helpful in clarifying.

“Weighted average cost of capital (WACC) is the average rate of return a company expects to compensate all its different investors. The weights are the fraction of each financing source in the company's target capital structure.”  http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/weighted-average-cost-capital-wacc-2905

Free Cash Flow,   FCF = C – I.  I view this as a relationship between the cash generated from sales and the investment back into the firm’s operating assets or those assets which create the firm’s income.  This is important for the firm’s future capacity to generate cash and in turn, create more profit.  What is the difference between the cost of capital and the amount of capital?

Calculating RNOA = OI/NOA, operating income (earnings) divided by net operating assets, a direct measure of “value add.”  I see this as highlighting the amount of income generated by the operating assets.  I find ΔNOA (change in net operating assets) = C (capital outlays), somewhat confusing.  I think it means the amount of capital invested in purchasing more operating assets.  I revised chapter 3.4 and I can see now that the value of an investment is more than dividends, it’s about future earnings too.

I understand that the operating income (OI) is cash generated from the operating activities, those activities that involve the product, customers and suppliers and not financing activities which are related to the debt and equity markets.  For my comapany that would be the revenue from generating electricity rather than interest earned.  The difference between the ΔNOA (change in net operating assets) and the operating assets would show how much money the business has spent on new operating assets! I think I’m starting to get it!  Now I can see what its meant by capital outlays.  It’s not all about the cash in the bank!

The concept of economic profit is still confusing.  I comprehend how the return on net assets and the amount of operating assets is calculated, but how is the opportunity cost of capital measured?  Why does accounting leave out the cost of capital?  I do understand that once capital is invested, it can’t be invested anywhere else.  But how do we measure the opportunity cost, the cost of if we invested in something else?  I can assume that cash flow and dividends have something in common with economic profit, as they seem to be some sort of measure of money earnt.  My perception of a business now is that it can have cash in the bank, create dividends and capital can be reinvested to create future profits.  Is there more to it than that?

It seems obvious that operating activities, employees, customers, suppliers agreements are the main contributors to a firm’s value.  This is a powerful way of viewing the business as it signifies how much assets are working.  This is the reason the firm is in business!  I suppose it is like a Kinder surprise, where the finances are soon eaten away only to be left with a small toy.  Separating these from the financial activities, which relate to decisions about financial structure, equity investors and debt investors would give a better picture of how much earnings should be retained and how much to allocate to dividends.

This is the whoa bit.  I had to slow down and re-read this quite a few times. So here goes, the net operating assets show operating revenue, the net financial obligations show operating expenses and the difference is the operating income.  Net financial assets are where finances are saved and are not spent on the operation of the business.  It is usual for a business to have a net financial obligation (NFO), the debt related with the ‘equity markets, (d) (dividend payments, share issues and share buybacks) and net cash flow with debt investors (F) (net interest payments and the repayment and issue of debt).’  The connection with NFO and the NFA are the movements shown in the (C) cash flow from operations and (I) the net cash invested.  Which is FCF = C – I or represented as (OI) operating income less (ΔNOA) the change in net operating assets!  The Ryman example really helped to make sense by using numbers and how to apply these formulas.  I can see the debt incurred to pay dividends and finance obligations, a clear transfer of values between operating and financial activities.  Although the operating activities are primary, I realise that the financial activities are important too, as they are primarily used to support the business in an uncertain market.

The restated statement of equity, our first glimpse at the comprehensive income.  The ‘dirty surplus’ amounts of revenue and expenses that are not shown in the income statement.  My initial reaction was ‘where are they then?” and “what are they?” I still don’t know if I could recognise a “dirty surplus” in a dark alley!  It looks like they show up in the statement of comprehensive income and are hidden in the balance sheet in the equity amount, which makes some sort of sense. I think it is the amount of other comprehensive income, which is in a separate statement, although I’m not completely sure. 

I realise that learning is a social activity and I’m very thankful for all the interactions I’ve had to complete this assignment.  The restated balance sheet or in for my company the statement of financial position purpose is to find the operating assets (NOA) and identify the financial assets (NFA) or (NFO) financial obligation, which is more common. The cash aspect is significant as some of it can be operating, money used to pay wages and suppliers for example or financial, money saved for a rainy day.  I see this as being a way to show how the operating assets are operating and also how much debt has the firm.  The difference between the NOA from concurrent years, represents the change in NOA or how many more assets have been acquired. This is the beginning of understanding how the firm intends to generate future profits.

The restated income statement makes the operating income more evident.  The tax attribute is very important to a business.  There can be serious legal consequences if this is not properly represented.  I see how this can help influence a firms decisions to reduce its tax expense and take advantage of the tax benefit, as the comprehensive operating income is clearly separated from the comprehensive net profit. 

I can understand that profit per dollar of sales is considered the main accounting driver. Profitability is how much profit a firm makes from each dollar of sales.  I can kind of see similarities in the contribution margin with the profit margin. The RNOA is how the operating income relates to the operating assets and matching it to sales, how well the invested assets are doing, and a measure of performance.  How much profit you make for each dollar invested is important too. After all, the reason for investing is to get more out than what you put in, the economic profit.  While this makes sense to me, my company’s calculations don’t seem to add up. What am I missing?  I find this part the most confusing.

Contact Energy

NOA = (4980 + 4891)/2

          = 4936

RNOA = PM (OI/sales) x ATO (sales/NOA)     RNOA = 259(OI) / 4963(NOA)

            = (259/2537) x (2537/4936)                              = 5.21%

            = 5.24% (this does not seem right)

Economic profit = (5.24% - 8.9%) x 4936

                              = confusion!

I have a lot more to learn on this and it seems very important.

Efficiency, another key accounting driver, ATO = Sales/NOA, is the amount of sales made from each dollar of net operating assets.  I like how the inverse is useful to consider the amount to allocate to operating assets, 1/ATO = NOA/Sales.  Another key concept is the interactions between the profit margin and asset turnover.  It’s like a monitoring system of the assets in relation to the creation of profit.  It indicates the value added to the investment of assets.  This is important for the growth of the business, not only to support the increase of product but to also maintain sustainability.

Contact Energy

ATO = 2537/4936

         = 0.51times

Conclusion

This has been by far the most interesting and challenging chapter so far.  I believe there is so much more to understand.  It is important to separate the operating and financial activities to gain a better knowledge of the performance and profitability of a firm.  It is also necessary to be able to analyse how these concepts are interacting with each other.  I can see some of the concepts of investing capital and investing in assets in a firm and their interactions between sales and profits.  I have a better understanding of the cash flow and the economic profit (value add) and have been introduced to ratios.  I have an insight into the operating and financial activities of a firm and how these can be broken up to interpret the profit margin and the asset turnover. 

Restating Financial Statements - ASS#2

The Trials and Tribulations 

Step 2

Commentary and discussions with others

Restating the Changes in Equity Statement:

Our first daunting task after reading chapter 4 and applying the inferred knowledge.  I found it difficult to know where to start.  The first thing I noticed from my company’s, Contact Energy, statement was that it was somewhat different to the Ryman’s example.  There were no headings for other comprehensive income, just a total amount.  There were other comprehensive income listed in another statement called the statement of comprehensive income and separate from the income statement was a heading called non-statutory measure: underlying earnings in tax. I had no idea what was a ‘cash flow hedge fund.’ It sounded like some sort of investment you find in superannuation!  This confused me and I posed the following question on Facebook and the Moodle forum and mentioned my concerns in the tutorial:

Hi all, my statement of changes in equity for Contact Energy doesn't show separate headings for "Other comprehensive income after tax", this is shown in the Statement of Comprehensive Income as "change in cash flow hedge reserve." There is also a statement for "Non-statutory measure:underlying earnings after tax." My question is this, what is a hedge reserve, there are no notes & should I include the hedge reserve in the equity or income statement? I am inclined to include it in income, leaving my restated equity unchanged. Any advise?

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The only response was from Facebook and I followed a suggested link from Rebecca, which kind of made sense but I was still undecided how to approach the restated equity statement.  I didn’t get any responses from the Moodle forum, which was somewhat disappointing. I sort further clarity in the tutorial and did some revision of the chapter.  I decided to include the change in cash flow hedge reserve in my restated statement of equity, to show it as operating income. My understanding of a hedge reserve is a sort of like a term deposit to cover things like the purchase of electricity or the change in currency of overseas trading. I believe risk management would be a part of the operating activities. I figured it should be shown in the restated equity as well as income, to emphasise all the capital.  After I had already made some decisions, I realised that the wording of the question must have been just as confusing and that timing matters too.  After discussing this in a study session with Elaine, I felt more comfortable about my approach. I also discussed this with Jess Evans via Facebook which caused me to change it from financial to operating.

Restating the Statement of Financial Position:

Classifying Operational and Financial Activities

The first issue I looked at was the cash account.  I noticed that there was significantly more cash in 2013 than 2012.  So after using the advice given in the chapter, I allocated $25mill (1% $2504 revenues) to the operating activities and the balance $55mill to the financial activities and left the 2012 amount of $5.892mill as all operating activities. In 2011, I also allocated $22mill (1% $2209 revenues) to operating activities and $25 mill to the financial activities. The 2010 figure was all allocated to operating activities.  I also questioned the amount of goodwill, which was consistent over the 4 years.  I found it difficult to decide whether or not it was operating or financial.  I posed the following question on Facebook and Moodle forum and invoked a series of different responses!

So, goodwill guys, I'm unable to decide, operational or financial? It is related to the operating assets, or it is at Contact Energy, where it relates to the purchase of a power station, so I'm inclined to think financial, an intangible cash asset, but could it be operational as it relates to the main operation of making power?

Melody put forward quite a convincing argument that it was financial and I was inclined to agree. After tossing and turning over the idea, I decided that even though goodwill leans towards a financial activity, it seems more likely to be an operating activity as it relates to the value of an operating asset upon purchase.  Goodwill adds value to the company purchased that is used in the operating activities of the firm. Before finally deciding to allocate goodwill to the operating activities of the company, I referred to the footnotes in the annual report. In Contacts case, the amalgamation of Empower Ltd, which generates cash through retail electricity and LPG and the goodwill is allocated to each of these activities. I also referred to the following links for further clarification:

Research links:

 http://smallbusiness.chron.com/increase-goodwill-affect-cashflow-statement-accounting-37224.html

http://www.slideshare.net/ateeqkhan09/cash-flow-statement-n-problems

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I can’t believe I put the deferred tax amount in brackets, making it a negative number and putting out my entire calculation!  I found that using formulas in excel, was another way to double check the figures.  Although, I am constantly aware that even if the figures add up and match, they may not necessarily be the correct figures.  I am even more aware that cut, paste and copy make affect formulas too, which I discovered the hard way! Derivatives of financial instruments, even though I had no idea what they were it sounded financial and I referred to this definition.  Deferred tax I decided was related to the operating activities as tax is paid according to the income made from producing and selling.  Apart from the discrepancies of my own input, this seemed fairly straight forward to complete.

Restating the Income Statement:

Figuring out financial income and expenses was not easy.  Other significant items, net interest expense, asset impairments, provision release, all were not familiar and I did a lot of research to discover there meanings and classifications. I found Facebook and Moodle forum discussions by others most informative.  I felt that I didn’t need to ask as many questions just by reading them.  I soon found that associated earnings was an item I had in common with someone on the Moodle form and answering that question, helped me get an insight to its meaning. This was my response:

I had equity accounted earnings of associates in Contact Energy. The footnotes refer to various dealings with other associated companies. I initially classified this as operating revenue, mainly because it relates to the shared expenses & revenues of purchased similar businesses, ie, other power companies, however one of the companies trades in energy futures. I tossed and turned on the idea that I could apportion that interest held between FI & FE and also to operating expenses.  It was doing my head in! So I decided to go with operating revenue as it mainly adds value due to similar operating activities. Even as I write this I'm thinking maybe it is financial as it is an investment that generates profits, not power. Whatever you decide, write how you justify it in the running commentry.

I also brought up the issue in the tutorial and decided that these were indeed an operating activity as my company uses these associated firms as a backup, so to speak, to supply extra energy should demand require.  After discussions with Jess Evans, I made adjustments to the classification of the cash flow hedge fund, which are also shown in the restated equity.  Overall I learnt a great deal during the restating process.  I had to really look into the footnotes for all items and research answers further to get a better understanding.  Reading the forums and Facebook posts helped enormously, but face to face is by far my favourite.  Elaine showed me a few tricks in linking the numbers from the previous worksheet.  I decided it would be too time consuming to fix all the numbers but I managed to incorporate a few key figures and had a little fun in the working space provided. I also became a little more familiar with some of the terms used.

Identifying 5 products

1.  Contact Energy’s home check up

2.  The installation of “smart meters”

3.  Maintenance

4.  Installation of gas bottles

5.  Installation of “gas meters”

Direct costs:  The cost of salaries, electrical devices, equipment and safety gear.

Indirect costs:  The costs involved with the receipt and allocation of each call out, such as receptionist wages, telephone, online or other communication with the customer and the provision of company vehicles.

Fixed costs:  Electrical monitoring device and other equipment used for testing electrical items.

Variable costs:  The cost of labour per hour, the safety certificate issued, the smart meter and instruction booklet, gas meter, electrical wiring and gas bottles.

Contribution Margin:  The charge of the service provided less variable costs involved for that service.

Example:

The service charge of installing a “smart meter” -    $130

Less

Variable costs:  Labour costs-                  30

                            Smart meter -                 12

                            Instruction booklet -        3

                            Electrical wire-                  2                    $37

Contribution Margin-                                                         $93

Discussion:

I was definitely thrown trying to identify a particular product or service, so I had to ask for advice. I raised the issue at the tutorial and after I listened to Martin’s advice, I was prompted to think outside the box. Still unsure of all the particulars, I also interacted with Facebook and Moodle. There has been much support from others and for this I am truly grateful.  In the end I made up a few figures, I estimated that it would take about ½ hr ($30 @ $60/hr) for a technician to install a ‘smart meter’, a device that measures and transmits electricity consumption remotely back to Contact, which cost about $12, using $2 of electrical wire and giving the customer a $3 instruction booklet and charging the customer $130.  This means that there is $93 to cover direct costs and contribute to profit.  This margin may be different to the installation of gas bottles or meters.  They may require more labour time, different equipment, the gas bottles may cost more and there might be safety issues.  Gas may cost more to produce than electricity.  Gas may require different qualified staff or on-going training of staff for workplace, health and safety reasons.  This might mean the margin may need to higher, to cover costs. 

Identify a resource constraint and a market restraint

There are weather constraints on the hydro and geothermal production of electricity. The carbon emission program is one of the environmental constraints, which is carefully monitored and regulated.  Solar power is becoming popular, influencing supply and demand.  The competition between rival power companies is also an important consideration.

How does this impact the decision of producing and selling the product?

Periods of high and low rainfall, including drought impacts the effectiveness of producing power.  This has led to the purchase of extra power and the management of storage of excess power produced.  Electricity prices have increased to cover production costs due to lack of production and also that production being subjected to the carbon tax. A $2 billion investment plan initialised 5 years prior to 2013, has helped maintain the strength of Contacts market position.  The competition between rival companies has prompted Contact to introduce the “What’s my number” campaign in an attempt to regain customer loyalty. In addition, Contact has offered new customers a fixed price for a fixed term. The annual report emphasises that Contact is committed to the focus of the retainment and attraction of new and existing customers.  I am wondering if the cost of promotion and their community initiatives are factored into costs too.