Using Accounting for Decision Making

#ACCT 11059#

ASSIGNMENT #2

2016 T3

He Wang

S0249389

Step 1

Chapter 4 Key Concepts and Questions

Through reading this chapter, I learnt a lot of concepts. I will discuss each of the concepts in the following pages.

I started to write when I read “to predict the future we need to start with the past (Machiavelli)”. It is my first time think about accounting is not only a subject of business area, but also the subject in my life. It is helpful for the future to make a summary from past event. When I decided to do something, I always think about the past which is like a beacon to illuminate the road ahead. as I think of now, how to make life better and more meaningful in the near future. Ok, let’s move on to the main points of restated of financial statements. The financial statement is the best way to illustrate how the firm operated during current financial year, that is used to compare with previously years, so that the financial report in 2015 contains the data of year 2014. Through read last three years’ financial reports of Brisbane Broncos Limited, I can see the company’s operation is good (made big amount profit) or bad (small amount profit or even loss) from each year. Data of past can be an indicate to future’s development of the company. Just like Brisbane Broncos made big profits in 2015 than previously. That could illustrate that Brisbane Broncos had a better operation of business as a result to gain more profits/ money. This year’s business strategy or business operation might be as a prediction which later years can be followed. All companies’ managers want to have a better understanding to review of their development history, therefore, there is an analysis of restating of financial statements to help companies meet a better future.

4.1 How do firms add values? And calculate of Economic Profit

I never think like this way; dividends are the firm to its equity investors that is only transfer of value. Cash flows which transfer of value within a firm. That made me think deeply. Gosh! Is that means increase of cash flow is more important for a company to add value? I didn’t make sentence. Through looked at cash flows statement of my company’s annual report, cash flow statement shows cash flows from/used in operating activities, investing activities, and financing activities. To calculate cash and cash equivalents at the end of the year is equal to operating activities + investing activities + financing activities + cash and cash equivalents at beginning of the period (it is from the last year’s closing balance). Free cash flow (FCF) = operating cash flow (C) –operating assets (I).

Another way to measure of add value is from economic profit, it is based on the company’s accounting profit for a period compared to its cost of capital, the formula is:

Economic profit = (RNOA – cost of capital) × NOA

The formula to calculate return on net operating assets (RNOA) is:

RNOA = OI/NOA

Economic profit is most useful when comparing multiple outcomes and making a decision between these outcomes. This is especially true for decisions with multiple variables that affect and do not affect accounting profit. For instance, one decision may result in a higher accounting profit, but after other variables are considered, the economic profit of another decision may be higher.

Let me take an assumption as an example of Brisbane Broncos, calculate as following (using 2015 data):

RNOA = OI/NOA = $2,220,631/$8,188,385 = 27%

cost of capital = 7% (assume), then:

Economic profit = (RNOA – cost of capital) × NOA

= (27% - 7%) × 8,188,385

= $1,637,677

So that, there is a positive number tells us that Brisbane Broncos more than covered its cost of capital. If there is a negative number indicates that the project did not make enough profit to cover the cost of doing business. I just made an assumption to make sure I’m in the right way, maybe incorrect.

4.2 Operating and financial activities, and Statement of Changes in Equity

Kinder surprise! It is my favorite part. I will think like this way to restate of my financial statements. To separate the firm’s financial statements by operating activities and financing activities. Operating activities are the functions of a business related to the provision of its offerings. These are the company's core business activities, such as manufacturing, distributing, marketing and selling a product or service. Operating activities should generally provide the majority of a company’s cash flow and largely determine whether a company is profitable. Financing activities are transactions or business events that affect long-term liabilities and equity. In other words, financing activities are transactions with creditors or investors used to fund either company operations or expansions. For example, I worked in a coffee shop, when customer come in to buy a cup of coffee, I provided coffee and service to him/her and they pay money to me, it is operating activities, also my manager buys coffee beans from our suppliers is operating activities. Any loan and interest payment

etc. are financing activities. Therefore, like table 4-1 shows view of the firm include net operating assets (NOA = OA – OL, or NOA = EQUITY + NFO) and net financial assets (NFA), or more commonly net financial obligations (NFO). There are several ways to calculate FCF, FCF = C – I; or FCF = d (paid dividends to Equity investors) – F (net transaction to Debt investors); or FCF = OI – ΔNOA. I have a question here, is that means NOA = OR (or OI) – OE, so that ΔNOA = OE??? I am not clearly understanding this part. So sad!

According to Seifert & Lindberg (2010) stated that the statement of changes in equity presents an entity’s profit or loss for a reporting period, items of income and expense recognized in other comprehensive income for the period, the effects of changes in accounting policies and corrections of errors recognized in the period, and the amounts of investments by, and dividends and other distributions to, equity investors during the period. The statement of changes in equity reflects all changes in equity between the beginning and the end of the reporting period arising from transactions with owners in their capacity as owners (such as owner changes in equity) reflecting the increase or decrease in net assets in the period. This statement provides a linkage between the entity’s statement of financial position and its statement of comprehensive income.

From Brisbane Broncos’ statement of changes in equity, there only includes opening balance, total comprehensive income for the year, dividends paid, and closing balance are listed. It does not have the other comprehensive income statements. It makes me confusing about why the firm did not record it?

4.3 Restate two key financial statements

Balance sheet shows all the assets and liabilities that the company made. To clearly identify each component, I discussed in class with lecturer and classmates. We give each other lots of ideas about restate of balance sheet. As I did in assessment 1 spreadsheet, I printed it out and use the sign F (financing activities) and O (operating activities) to category each component.

To restate of balance sheet, I separate my company’s financial statement as operating assets & operating liabilities to work out net operating assets (NOA); financing obligations & financing assets to work out net financing obligations (NFO); total equity; and total NFO + EQUITY (this amount is equal to NOA). After this process, I can easy to see how my company operate. The BBL does not have any exposure to foreign exchange movements. BBL does not have any financial receivable or investment, does not have any exposure to foreign exchange movements, also it does not have financial obligations, so that only cash and cash equivalents is recorded under financial assets section. Through looked at some exemplars from previous students' work, they almost got NFO>NFA; but after my calculation NFA is great than NFO. Brisbane Broncos Limited is exposed to minimal risk from its

financial instruments as a result of its debt free status (BBL Annual Report, Note 3, 2015). The results for each financial year is calculated by TOTAL EQUITY + NFO, it is equal to Net Operating Assets (NOA). The most difficult part for me is to allocate cash and cash equivalents for operating and financing. I will use the note 1 from my company’s spreadsheet to show you.

From my company’s spreadsheet:2015 2014 2013 2012

Cash and cash equivalents

21,206,671

15,747,226 16,489,265 16,115,721

Sale of goods 1,878,360 1,454,276 1,316,125 995,027*Percentage of cash out of total sales

1129% 1083% 1253% 1620%

Allocation to operating

18,784 14,543 13,161 9,950

Allocation to financing

21,187,887

15,732,683 16,476,104 16,105,771

When I calculated my company’s Operating cash and cash equivalents is $18,784 (1% of total sales of $1,878,360), financial cash and cash equivalents is therefore $21,187,887 (cash and cash equivalents of $21,206,671- $18,784). I have a query why we need to calculate the percentage of cash out of total sales. After I calculated the amount is more than 1000%. I hope when you leave a feedback please help me to explain about this part. Thanks.

Income statement shows if the net amount of revenues and gains minus expenses and losses is positive, the bottom line of the profit and loss statement is labeled as net income. If the net amount (or bottom line) is negative, there is a net loss.

To restate of income statement: I separate my company’s operating revenue & expanse, and financial revenue & expenses to figure out comprehensive operating income after tax (OI); as BBL did not record other comprehensive income, therefore no this part on restate spreadsheet. I used Australian company tax rate at 30% out of profits in 2015-2012. I calculated tax benefit use the formula: Tax benefit = net interest expense × tax rate of the firm (using the negative amount of net financial expenses before tax). For tax expense amount is add the tax benefit back (record as positive amount). Then figure out comprehensive net profit after tax (CI), CI = OI + NFE.

Through those calculations, I can figure out economic profit as I have already done under section 4.1.

4.4 Profitability and efficiency

This part of breaking things into bits is also my curious. As I calculated before the economic profit is $1,637,677 in 2015 (the assumption is cost of capital = 7%). I use the same assumption of cost of capital = 7% to figure out economic profit in 2014, 2013, and 2012:

From my company’s spreadsheet:2015 2014 2013 2012

OI $2,220,631 $413,978 $1,532,564 $1,602,527NOA $8,188,385 $11,571,868 $10,486,950 $10,540,995RNOA=OI/NOA 27% 3.6% 14.6% 15.2%Cost of capital (assume)

7% 7% 7% 7%

Economic profit=(RNOA – cost of capital) × NOA

$1,637,677 ($393,443) $797,008 $864,361

From this table, there is a negative amount in 2014, and a big difference in 2015; 2013 and 2012 were not too much difference. In 2015, BBL gain almost five times of profit more than in 2014, and reduce by one third of operating assets. So I might use the average amount between 2015 and 2014.

Average NOA = ($8,188,385 + $11,571,868)/2 = $9,880,126.5

RNOA = $2,220,631/$9,880,126.5 = 22.5%

Then economic profit at the year end of 2015

Economic profit = (22.5% - 7%) × $9,880,126.5 = $1,531,420

It is still at high amount than 2013 and 2012.

Profitability: Profit margins (PM) = Net Income / Net Sales (revenue)

Net income is comprehensive operating income after tax (OI)

From my company’s spreadsheet:2015 2014 2013 2012

OI $2,220,631 $413,978 $1,532,564 $1,602,527SALES $40,438,365 $37,836,348 $34,990,195 $32,884,775PM = OI/SALES 5.5% 1.1% 4.4% 4.9%

It can be clear to see, profit margins of 5.5% is highest amount of 4 years. PM is shows every dollar of sales that BBL made, such as every dollar of sales in 2015 BBL

made 5.5 cents profit.

Efficiency: ATO (Asset turnover) = Sales / NOA; OR 1/ATO = NOA/Sales

RNOA = PM × ATO

From my company’s spreadsheet:2015

SALES $40,438,365NOA $8,188,385 $11,571,868Average NOA $9,880,126.5ATO=Sales/NOA

4.1 times

BBL is high at 4.1 times, it means BBL generate $4.1 of sales each year for each dollar of net operating assets (NOA) put in place in the business.

Conclusion

According to read chapter 4 and restated financial statements of BBL, now I understand to operate a business not only think about the future’s development also the past is a very good reference. The past can be a good guide to indicate companies operate strategy. To restate of financial statements, to be more clearly identify operating activities and financing activities separately. All in all, companies are hoping to make more money and have a good development prospect.

Step 2

Company Spreadsheet with notes to be uploaded to Moodle independently. Also post on my blog, please

Discussions are under ASS#2 Forum.

Discussion of my query click here;

Discussion of others’ query 1, 2, 3, 4, 5, 6.

Step 3

NRLSHOP.COM Here is the website that BRISBANE BRONCOS sales of their products.

To identify the three products of BBL, I list them below.

Product 1: BRONCOS 2017 MEN'S HOME JERSEY @ $179.99

click here to buy it

Why I choose this product? Ha-ha … It is the first product into my sight on the website, also it is the most expensive one.

For this product, it is the new season’s home jersey. Lots of fans of Broncos will buy and wear it to watch the competition, these fans’ dressing may influence players’ psychology in-depth to influence the result. As normally, I do not think it is worth the price, but it is with special meaning for fans of Broncos. It might be high demand in the season date. So I am estimating around 30% of the variable cost, that is $54.

Selling price (SP) Variable Cost (VC)Contribution Margin $ (SP - VC)

Contribution Margin % (CM/SP)

$179.99 $54 $125.99 70%

Product 2: BRONCOS HAIR CAP @ $34.99

click here to buy it

Oh, handsome! This cap with red hair.

Now has 7 caps on the website, but this one is the only one looks with difficult design, so I guess it is around 70% of the variable cost, that is $24.5.

Selling price (SP) Variable Cost (VC)Contribution Margin $ (SP - VC)

Contribution Margin % (CM/SP)

$34.99 $24.5 $10.49 30%

Product 3: BRONCOS 18CM PLUSH FOOTBALL @ $14.99

click here to buy it

This is my kitten loves, he loves all kinds of football, especially it with plush.

It is soft and light, the size is: 13 cm H x 18cm W x 10cm D; the plush football can as a gift to kids. I think it is a very representative product for Broncos and do not have too much profit on selling it. So I am estimating variable cost may higher about 85%, that is $12.75.

Selling price (SP) Variable Cost (VC)Contribution Margin $ (SP - VC)

Contribution Margin % (CM/SP)

$14.99 $12.75 $2.24 15%

I have an assumption of using Maria’s formula from week 6 slides (MKY), Break-even sales in units = Fixed expenses / Unit contribution marginIf Broncos produce 5,000 men’s home jerseys, and selling them during this season in 2017.

The fixed cost can be calculated by 5,000 × $54 = $270,000; The unit contribution margin is $125.99; Then break-even sales in units = $270,000 / $125.99 = 2,143 units. It is means when Broncos selling of 2,143 units of men’s home jerseys can make profit. If below this amount, loss will be happened.

To calculate break-even of plush footballs, also produce 5,000, then:The fixed cost = 5,000 × $12.75 =$63,750The unit contribution margin = $2.24So, break-even sales in units = $63,750 / $2.24 = 28,460 units.Therefore, after sold of 28,460 units of plush footballs, Broncos can make profit. If only 5,000 units of plush footballs are produced, there is a loss.

Variable costs are costs that vary depending on a company's production volume. They rise as production increases and fall as production decreases.(assumption see table below:)

Variable cost per unit Units Total variable costsProduct 1 $54 12,000 $648,000Product 2 $24.5 1,000 $24,500

Product 3 $12.75 5,000 $63,750

The different contribution margin reflects the amount of revenue collected to cover fixed costs and be retained as net profit. Contribution margin is calculating the break-even point of sales or a target level of sales, it is an integral part. If the contribution margin ratio is high, the profit absolutely high. If the contribution margin ratio is low, it cannot be continuing to sell those products unless the company just for charity or not for profit.

There are some resource constraints that Broncos might facing. Firstly, financial constraints under a strict salary cap regime. Secondly, players leaving and change clubs. This problem that happened not only in Broncos also other 15 clubs. Loyalty is the over-riding influence in players staying. After players leaving some changes for the club were inevitable (Tony Durkin, news website of Broncos). Thirdly, Broncos might get bad result caused by players’ injury. One of the player, Pearce, failing to return for the second half. He had not played since round 24 due to a hamstring complaint. He spent the second half on the sidelines with his leg on ice. All those constraints that Broncos might facing. For sales of products such as men’s home jersey, each season the products are different but similar. If remain of any products, Broncos might reduce the price to sale them to minimize the loss, even lower than the costs.

More information see this news: The Changing Face Of Player Movement

Step 4

Feedback from me:

Feedback to me:

Reference list

Seifert, Deborah L., & Lindberg, Deborah L. (2010). Key provisions of IFRS for small and medium-sized entities. (international accounting). The CPA Journal,80(5), 34.

Wagstaffe, J. (2010). GUIDE TO ANALYSING COMPANIES Fifth Edition. Manager: British Journal Of Administrative Management, (70), 29.