Accounting for Management M 5011 Problem Solving Assessment
Learning Objectives addressed in this assessment:
-Apply basic accounting principles and concepts in order to understand what accounting information is, what it means and how it is used;
-Explain the significance of accounting information in the business environment;
-Read and interpret financial reports and apply knowledge to critically analyse corporate financial and non-financial information.
Assignment context:
You have recently joined Business Smart, a financial and business consultation firm. Your manager James Brown will take family leave for four weeks. He has asked you to prepare a consultation report for an important client, HIGH Energy Ltd, before he returns on 19 May.
HIGH Energy Ltd is a fast growing company utilising national and global resources to provide a variety of energy solutions to South Australian businesses. Despite rapid business expansion and integration of energy sales and services, the company's accounting and reporting quality is of concern. The Chartered Accountants Australia and New Zealand (CAANZ) Adelaide Branch has recently completed a survey of financial reporting by HIGH Energy Ltd and found that the company's accounting records were incomplete and in particular the recognition of revenues and expenses was not consistent with accrual accounting.
The Managing Director of HIGH Energy, Matthew Rice, was unhappy about these results and asked Business Wealth to reorganise the accounting records and financial statements for February and March 2016, and report any issue of concern about the business performance. In addition, the company has been under public scrutiny recently because of its high carbon emissions and the associated financial risk. As a response, Matthew is thinking about reporting on HIGH Energy's environmental protection activities including recent investment in renewable energy such as solar, wind and biomass.
You are given the following account information from the Balance Sheet of 31 January 2016.
Accounts
Cash and cash equivalents $72,300,000
Accounts Receivable1 $88,050,000 + the last 4 digits of your student ID number2
Inventories3 $191,000,000
Prepayments $86,490,000
Property, Plant and Equipment4 $975,050,000
Accounts Payable5 $66,900,000 + your date of birth (ddmm)6
Bank Loan $356,800,000
Share Capital $915,550,000
Retained Profit $ ?
Notes to the above information:
1 Trade and other receivables are all included in Accounts Receivable.
2 For example, if your student ID number is 110101234, then this figure should be $88,051,234. If the last digit of your student number is a letter, then the 4 digits before the letter should be used. For example, if your student number is 00034321N, then Accounts Receivable should be $88,054,321.
3 Inventories include all raw materials, work-in-progress and finished goods.
4 Property, Plant and Equipment (PPE) is a net amount. The original cost of PPE is $1,324,507,500 and accumulated depreciation is $349,457,500.
5 Trade and other payables such as expenses payable are all included in Accounts Payable.
6 For example, if your date of birth is June 5, then this figure should be $66,900,506; if your date of birth is November 29, then this should be $66,902,911.
During February and March, HIGH Energy has made the aggregated transactions as follows:
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1 February
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A premium of $960,000 was paid in cash for business insurance.
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3
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Raised share capital of $18,375,500 cash to the business account.
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9
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Invoiced customers for services completed and received cash payment of $260,600. The balance of $760,600 would be received in 30 days.
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12
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Received $42,510,325 payment from customers who were billed previously.
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15
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Paid salary and wages totalling $1,755,000.
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22
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Paid suppliers $789,620 for inventories purchased last month.
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25
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An environmental director was hired to commence work on 1 April.
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26
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Received a $330,000 bill from a local radio for advertising.
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1 March
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Purchased new operation equipment for $8,017,200 on credit, payment to be made in 90 days.
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4
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Sold energy products for $509,200 on credit, payment to be received in 60 days. The cost of these inventories was $460,800.
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9
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Received the outstanding balance for services provided on 9 February.
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15
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Paid salary and wages totalling $1,755,000.
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16
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Applied for an "Energy Excellence" grant of $800,000 from the South Australian Government and the result was expected to be announced at the "Award Night" on 1 May.
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19
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Invoiced customers for energy supply $9,345,600, payment to be received in 30 days.
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22
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Paid the bill received on 26 February.
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31
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Paid interest of $450,500 on bank loan. It was noted that repayment of $105,500,000 of bank loan would be due in three months and the remainder would be due in five years.
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To take CAANZ's advice into account, you have paid specific attention to income and expenses recognition. You want to make sure they are consistent with accrual accounting. In preparing the analysis and adjustments, you have collected additional information as follows:
(1) The insurance premium paid on 1 February was for 12 months.
(2) Salary was paid on the 15th of each month. So half of the monthly salary and wages were accrued on 31 March.
(3) It was estimated that the February and March depreciation of Property, Plant and Equipment (PPE) stated on the initial balance was $202,000.
(4) The new equipment purchased on 1 March was expected to have a useful life of 20 years with an estimated residual value of $817,200. Straight line method was applied for depreciation.
To better understand the business performance of HIGH Energy Ltd, you decide to benchmark its performance against another company with a similar profile in the energy industry and prepare a comparative report.
Required:
1. Work out Retained Profit on 31 January 2016;
2. Prepare a worksheet outlining the transactions of HIGH Energy Ltd in February and March 2016. Ignore tax. (Your worksheet should include the initial balances and the adjustments where necessary according to the additional information collected)
3. Prepare an income statement for the period from 1 February to 31 March 2016;
4. Prepare a classified balance sheet as at 31 March 2016;
5. Prepare a classified cash flow statement for the period from 1 February to 31 March 2016;
6. Explain what the above financial statements indicate about the financial position and performance of HIGH Energy Ltd.
7. Select a benchmarking company for further analysis. You need to choose a company from a list of Selected ASX Listed Companies provided as a separate file under Assignment on the course website. Assume the company selected represents the industry average and can be used as a benchmarking company. The name of the company selected should begin with the same letter of the alphabet as your own name, e.g. if your name is Allen Moore, you can use either ADX Energy Limited or Mission Newenergy Limited. If you cannot find an appropriate company match for your name, you may randomly select a company from the list but you need to clearly explain in your assignment why the companies that follow the same letter in your name are not used.
Then go to the company information database DatAnalysis Premium via the UniSA Library website. Under Company Reports, search the company according to its ASX Code or part of the company name. Go to Financial Data to review the company's financial statements in 2015 (if a 2015 report is not available, you can use the 2014 report). Analyse and compare the financial results of this benchmarking company and HIGH Energy Ltd. Your focus should cover the following points:
1) Which company is more profitable and generates healthier returns?
2) How well are the two companies managing their resources? Do you think they are efficient in managing their assets?
3) Can they meet their short term and long term debts?
8. Go to Annual Reports to review the most recent reports (preferably the past three years) of the selected benchmarking company. Are there any additional issues of concern related to this benchmarking company's financial position and performance? Discuss how these additional issues and evidence disclosed in the annual reports may influence your interpretation and comparative results?
9. Does the benchmarking company produce any report or information about environmental issues such as carbon emissions or renewable energy? Do you think HIGH Energy Ltd should follow what the benchmarking company is doing? Do you agree with Matthew's view about reporting on environmental activities and investment in energy solutions? Explain.
2500 words
10 references.