Acc5215 : Corporate Accounting : Assessment Answers

Part A. BOARD COMPOSITION

(1) How many independent directors are there?

(2) What is the number of directors of each gender? Qualifications of three directors Experience of these three directors.

(3) Are they on other boards and if so, what kind?

(4) Number of subsidiaries and associates, foreign subsidiaries and associates.

(5) Calculate borrowing costs and interest rates.

(6) Give one reason that you selected this company to use in your answer.

Part B. REPORT:

(You have to work on the same company as you have selected in Part 1.)

Required: As an in-house accountant of your selected company, you have asked to prepare a report to be used in its annual general meeting. The report needs to discuss the following matters using the information found in the company’s annual report for 2017 and the past 2-3 years if necessary.

(1) The current profitability level of the company, and stability of that profitability level for the past 2- 3 years.

(2) The frequency and quality of the dividend payments and any growth in the company’s equity in the recent years.

(3) Opportunities for future growth (e.g., new business segments and/or new services) and the company’s recognition of and plans for growth.

(4) Challenges in the current business activities (e.g., rise of the competitors) and the company’s preparation to deal with them.

(5) The company’s contribution to corporate social responsibility and environmental sustainability.

(6) The company discloses about assumptions concerning the future and other key sources of uncertainty in estimation made in the report.

(7) Give some possible reasons for the different methods of classification of expenses used.

(8) Provide a brief summary report on “the quality of sales and the quality of net income”, and highlight any “financial distress” issue of your selected

company by using the Cash Flow Statement Analysis approach developed by Carslaw and Mills in 1991. (See attached Carslaw, C & Mills, J. 1991, “Developing Ratios for Effective Cash Flow Statement Analysis”).

As mentioned above, all the arguments have to be made based on the information provided in the annual report. You may also find it useful to read some financial articles from newspapers or journals or from case studies in your text book on issues relevant to your company. This may enhance your assignment. You have to appropriately cite/reference all the supporting articles. 5 Question 2 (Part A and B)

Part A.

Required: Prepare the statement of profit or loss and other comprehensive income of Orion Ltd for the year ended 30 June 2017 in accordance with AASB 101/IAS 1, showing the analysis of expenses by function in the statement. Additional information:

(1) Orion Ltd uses the single statement format for the statement of profit or loss and other comprehensive income.

(2) Land was revalued by $50,000 during the year ended 30 June 2017. The related tax was $15,000.

Part B.

Leanne is the accountant for Neal Ltd. This entity has a 70% holding in the entity Henry Ltd. A trainee working with Leanne is concerned that the consolidated financial statements prepared under AASB 10 may be misleading and asks Leanne why they are not allowed to prepare the consolidated financial statements showing the non-controlling interest in Neal Ltd in a category other than equity in the statement of financial performance, and for the statement of changes in equity to show the profit numbers relating to the parent shareholders only. Write an appropriate answer for Leanne to give, covering the following issues:

1) How are prime users considered in the preparation of Consolidated Financial Statements?

2) The differences that would arise in the consolidated financial statements of Neal Ltd if the noncontrolling interests were classified as debt rather than equity (Debt vs Equity) The reasons the standard setters have chosen the equity classification in AASB 10

Answer:

Part-A 1

There are several independent directors who are working in Woolworth Plc.

Jillian Broadbent, AO BA (Maths & Economics)
Independent NonExecutive Director

Holly Kramer BA (HONS), MBA
Independent NonExecutive Director

Siobhan Mckenna B.EC (HONS), MPHIL
INDEPENDENT NONEXECUTIVE DIRECTOR

Scott Perkins Bcom, Llb (Hons)
Independent NonExecutive Director

Kathryn (Kathee) Tesija Bsrmm
Independent NonExecutive Director

Michael Ullmer BSC (Maths) (Hons), FCA, SF Fin
Independent NonExecutive Director

Number of directors of each gender

Male- 10 directors
Female-5 Directors

(Woolworths Group Limited (2018).

5). Calculate borrowing costs and interest rates

The borrowing cost of Woolworth Company is AUD $ 162 million. It shows that the interest rate of the company would be

162/13040*100=

=1.24%

6). The main reason to select this company is based on the strategic financial planning, capital structure, and governance program and board composition of company (Woolworths Limited 2015).

Part-B

Particular	Formula	2015	2016	2017
Net profit ratio	Net profit/ Sales	2.62	2.34	2.75
Gross profit Ratio	Gross profit/ Sales	26.14	27.14	28.61

The profitability of the company has increased by .15% since last three years. It shows that company has increased the value of its investment. The gross profit has also increased by 2% since last one year. It shows good stability throughout the time.

2). The quality of the dividend payment has gone down which shows the negative outcomes to shareholders. It is observed that company has decreased its dividend payment to AUD $ 562 million which is 225% lower as compared to last three year data.

3). Company has strong opportunity due to the effective growth rate of the industry. In addition to this, company has also been trying to tap other markets by tapping the new markets (Deloitte00202018).

4). The main challenge which Woolworths has been facing is increased complexity of the business and other rivals such as Tesco, Morrison and Wesfarmers by using the advance cyber computing system for the secure online gateway for clients (Khorwatt, 2015).

5). Woolworth has been contributing at least by 5 % of the average net profit of the last five years. It shows high profitability and increased business outputs (Auditing and Assurance Standards Board (2015).

6). The main key assumption is related to its investment in the online business sectors to sell its goods and services. It has assumption that it will help company to grow speedily if it taps the online E-business (Hay, Stewart, and Redmayne, 2017).

7). The possible reason for the different methods of the classification of the expenses is related to identify which amount to be charged from the profit and loss account and which amount to be placed in the balance sheet. It helps company to save its busienss from the direct loss.

8). The liquidity ratio analysis of the cash flow statement of Woolworth has shown that net cash outflow from the investing activities has increased by 22% since last five year in 2017. It has cash outflow of AUD $ 1431 million which is way higher and may result to destruction of business if not managed effectively (Auditing and Assurance Standards Board (2015).

Question- 2

Part-A

Preparation of the income statement

Profit & Loss for [Orion Ltd ] as at [30 June 2017]
PROFIT & LOSS	30-Jun-17
Sales	6,50,000
Interest income	1,000
Gain on sale of plant	13,000
Rental income	1,000
Royalty income	5,000
Other revenue	500
Total Revenue	$6,70,500
Cost of goods Sold	$4,10,000
Gross profit/net sales	$2,60,500
Expenses
Interest on borrowings	$16,500
Sundry borrowing costs	$500
Research expense	$25,500
Advertisement Expenses	$12,500
Sales Staff salary	$48,500
Amortisation of patent	$3,500
Freight out	$16,000
Shipping supplies	$8,000
Depreciation on sales equipment	$2,500
Administrative salaries	$36,000
Legal and professional fees	$6,500
Office rent expense	$15,000
Insurance expense	7,000
Depreciation of office equipment	$8,000
Stationary and supplies	$2,500
Miscellaneous expenses	$1,000
More…
Total expenses	$2,09,500
NET PROFIT (Net Income)	$51,000
Income tax expense	15,500
Net Profit After Tax	35,500
Assumptions:
All figures are GST inclusive.

Part-B

1). Prime users of the consolidated financial statements are creditors, shareholders and employees of the company. Company needs to identify that prime users are not indulged in the preparation of the financial statement of company. As per the AASB 101, consolidated financial statement should not be influenced by the people who have direct and indirect relation with the company (Kristensen, 2015). This standard focuses on increasing the true and fair view of financial statements with a view to increase the overall outcomes of the business. These prime users are the real users of the financial statements who have big amount of stake in the company. Therefore, they considered by the accountants whether they will understand the prepared financial statement of company. The reporting period of the consolidated statement also varies due to the transactions risk on the international level (Vîls?noiua, and Buzenche (Matei, 2014).

2). It is observed that if the non-controlling interest is booked as debt in the books of accountant of the company rather than the equity then it will increase the financial leverage of the organization. The main changes would be increased cost of capital and increased charges on the profitability of the business. If these problems are not taken in the proper manner then it will result to destruction of the business in long run. It is observed that debt to equity of Company should be below 30:70 i.e. 30% debt and 70% equity portion. If company undertakes the non-controlling interest as debt then it will increase the debt funding by 20% which will eventually impact the financial leverage and solvency risk (Grant Thornton, 2017). It will also be undertaken as related party transactions which needs should be assessed by evaluating the arm length price rules and regulation (The Institute of Chartered Accountants in England and Wales 2013).

Conclusion:

There are several factors which have been analyzed such as board composition, borrowing cost, interest expenses and financial statement of the company. Now in the end, it could be inferred that there are several rules and regulations which needs to be complied by the stakeholders if they wants to maintain stable business in long run.

Introduction:

In this report analysis of the business functioning of the Woolworth and its board composition have been taken into consideration. In the first part, Woolworth Company has been taken into consideration. After that in second part, financial performance of company has been analyzed. In Question-2, financial performance of company have been analyzed.

References:

Auditing and Assurance Standards Board 2015. Auditing Standard ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report [ONLINE] Available from https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf [Accessed 8^th January, 2018].

Auditing and Assurance Standards Board 2015. Auditing Standard ASA 570 Going Concern [ONLINE] Available from https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf [Accessed 8^th January, 2018].

Deloitte 2018. Deloitte Touche Tohmatsu LLC [ONLINE] Available from https://www2.deloitte.com/jp/en/pages/about-deloitte/articles/audit/audit.html [Accessed 8^th January, 2018].

Financial Times 2017. Equities [ONLINE] Available from https://markets.ft.com/data/equities/tearsheet/forecasts?s=WOW:ASX [Accessed 18^th January, 2018].

Grant Thornton 2017. IFRS Viewpoint. [ONLINE] Available from https://www.grantthornton.global/globalassets/1.-member-firms/global/insights/article-pdfs/2017/IFRS-Viewpoint-7-going-concern.pdf [Accessed 8^th January, 2018].

Hay, D. Stewart, J. and Redmayne, N, B. 2017. The Role of Auditing in Corporate Governance in Australia and New Zealand: A Research Synthesis. Australian Accounting Review. 27(4).

Khorwatt, E., 2015 .Assessment of Business Risk and Control Risk in the Libyan Context. Open Journal of Accounting.4.

Kristensen, R. H. 2015. Judgment in an auditor’s materiality assessments. Danish Journal of Management & Business. 2.

The Institute of Chartered Accountants in England and Wales 2013. Audit and Assurance Advanced Stage Technical Integration Level. [ONLINE] Available from https://www.icaew.com/~/media/corporate/files/qualifications%20and%20programmes/learning%20partners/learning%20materials/ti%20audit%20assurance%2020142015%20inspection%20copy.ashx [Accessed 8^th January, 2018].

Vîls?noiua, and Buzenche (Matei),S. 2014. Determining Audit Materiality in the banking industry- a knowledge based approach. Procedia Economics and Finance.15.

Woolworths Group 2016. Financial Report 2016. [ONLINE] Available from https://wow2016ar.qreports.com.au/xresources/pdf/wow16ar-financial-report.pdf / [Accessed 18 ^th January, 2018].

Woolworths Group Limited 2018 Portfolio Businesses [ONLINE] Available from https://www.woolworthsgroup.com.au/page/about-us/our-brands/portfolio-businesses/ [Accessed 8^th January, 2018].

Woolworths Limited 2015. Annual Report 2015. [ONLINE] Available from https://www.woolworthsgroup.com.au/icms_docs/182381_Annual_Report_2015.pdf [Accessed 18^th January, 2018].

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