Accounting for Management Problem Solving Assignment
This assignment can be completed individually or in a group of no more than 2 students.
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.
Graduate Qualities developed by this assessment:
- You need to operate effectively upon fundamental accounting practical knowledge; GQ2: You are prepared for lifelong learning and professional practice;
- You are working to be an effective business related problem solver; GQ4 (partial): You can work autonomously and independently;
- You are committed to ethical action & social responsibility for business activities.
- You can communicate effectively in written language.
Assignment context:
You have recently joined Business Smart, a financial and business consultation firm. Your manager Mr. James Brown will take family leave for four weeks. He has asked you to prepare a consultation report for an important client, BEST Resources Ltd, before he returns on October 28, 2016.
BEST Resources Ltd is a mining and metallurgical company based in South Australia. Its main products cover zinc, lead, copper, gold and other nonferrous metals. The company experienced the fastest growth during the recent mining boom but is struggling with slumping overseas demands in these two years.
The main reason for this consultation for BEST Resources Ltd is the concern about the unsatisfactory quality of transaction recording and reporting addressed by the Chartered Accountants Australia and New Zealand (CAANZ). In early June 2016, CAANZ Adelaide Branch completed a survey of financial reporting by BEST Resources Ltd and found that the company's accounting records were incomplete and the recognition of revenues and expenses was not consistent with accrual accounting. The Managing Director of BEST Resources Ltd,
Mr. Peter Cham, was unhappy about these results and asked Business Smart to review the accounting records up to the end of May 2016 and report any inappropriate transaction recording. Based on this review, financial statements for the 2015-16 financial years can be accurately prepared and any issue regarding business performance can be identified.
In addition, the company has been under public scrutiny recently because of its high environmental pollution and energy consumption. As a response, Peter is thinking about reporting on BEST Resources' environmental challenges and corporate strategy on environmental protection. However, several board members are concerned about the risk associated with such reporting. Given that the company may anticipate a couple of lean years ahead because of the economic downturn and end of the mining boom, they argue that the company should focus on the main business areas and regaining profit. The issue is pending.
You are given the following account information from the balance sheet at May 31, 2016.
Accounts
Cash and cash equivalents $3,575,000 + your date of birth (ddmm)
Accounts Receivable2 $28,740,000
Inventories $9,977,000
Prepayments $15,388,000
Property, Plant and Equipment $754,316,000
Accounts Payable $45,875,000 + last 4 digits of your student ID number
Bank Loan $278,099,000
Share Capital ?
Retained Profit $19,646,000
Also, the following information from the income statement stated from July 1, 2015 to May 31, 2016 is provided.
Accounts
Total revenue $195,830,000
Net profit6 $18,165,000
Gross profit $150,366,000
Assume during June 2016, BEST Resources made the following aggregated transactions:
1 June - Paid salary and wages of $940,550.
1 - Purchased new operating equipment at a cost of $2,124,000. Residual value was estimated to be zero and the useful life to be 30 years. Payment would be made in 180 days.
3 - Sold inventories for $253,700, payment to be received in 45 days. The cost of these inventories was $183,700.
8 - Received an outstanding balance of $296,880 from customers for inventories sold on 25 April 2016.
11 - Paid suppliers $332,950 for inventories purchased on 12 May.
16 - Recruited a new accountant commencing work on 1 July.
19 - Sold inventories for $398,450 and received cash payment of $50,000. The balance would be received in 45 days, which is the company's normal credit term. The cost of inventories was $308,450.
23 - Issued 1 million shares at $2.5 per share and received funds on the day.
27 - Paid a television advertisement bill of $12,000. The bill was received on May 28, 2016.
30 - Paid monthly interest of $380,780 on bank loan.
To take CAANZ's advice into account, you have paid attention to transaction analysis and records, in particular, the recognition of income and expenses. You want to make sure they are consistent with accrual accounting. In preparing for the analysis, you have collected additional information for the end of year adjustments (BEST Resources uses straight line method for depreciation):
(1) Salary was paid on the 1st of each month. So the salary and wages for the month of June 2016 must be accrued.
(2) On October 1, 2015, an insurance premium of $806,400 was paid and expensed immediately. It was noted that the insurance policy term was 24 months.
(3) The new plant acquired on August 1, 2015 was not depreciated. The total acquisition cost was $11,129,200. The plant was expected to be used for 50 years with an estimated residual value of $737,200.
(4) A physical stock count revealed that inventories as at June 30, 2016 were $9,434,050. There seemed to be some inventory loss.
(5) The electricity consumption of June 2016 was estimated to be $11,200.
(6) It was noted that repayment of $26,350,000 of bank loan would be due in six months and the remainder of bank loan would be due in five years.
(7) One of the company's commercial properties in Adelaide CBD was rented out on July 1, 2015. The lease agreement was signed for 5 years and included annual payments of $80,000 plus a signing-on fee of $100,000 covering the 5-year agreement term. The $180,000 received on July 1 was recorded as rental income.
(8) By the end of June, further depreciation of total Property, Plant and Equipment (PPE) stated on the balance sheet of May 31, 2016 was estimated to be $333,000.
To better understand the business performance of BEST Resources Ltd, you decide to benchmark its performance against another company with a similar profile in the materials industry and prepare a comparative report.
Required:
1. Work out Share Capital in the initial balances provided to you on May 31, 2016;
2. Prepare a worksheet outlining the transactions of BEST Resources Ltd in June 2016. Ignore tax. (Your worksheet should include the balances at the beginning of June and the adjustments according to the additional information collected at the end of June)
3. Prepare a classified balance sheet as at June 30, 2016;
4. What is the net profit of BEST Resources Ltd for the 2015-16 financial year? Comment on its financial performance and financial position in the year.
5. Select a benchmarking company for further analysis. You need to choose a company from a list of Selected ASX Listed Mining 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 name (or your fellow student's name should you do the assignment in pair), e.g. if your name is Allen Moore, you can use either Aspire Mining Limited or Mintails Limited. If you cannot find an appropriate company to analyse, you may randomly select a company from the list but you need to clearly justify the reason.
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 2016 (if a 2016 report is not available, you can use the 2015 report). Based on available data, analyse and compare the financial results of this benchmarking company and BEST Resources Ltd (if no average data is available for some accounts, you may use year-end data to work out ratios. Ignore tax). 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?
6. 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?
7. Does the benchmarking company produce any report or information about environmental issues such as environmental pollution and energy consumption? Do you think BEST Resources Ltd should follow what the benchmarking company is doing? Do you agree with Peter's view about reporting on environmental challenges or with board members that the company should focus on business growth and regaining profit because of current financial stress and economic downturn? Explain why.