ACCT11081: INTRODUCTORY FINANCIAL ACCOUNTING · Web viewAuthor Roceline De Vera Created Date...

ACCT11081: INTRODUCTORY FINANCIAL ACCOUNTING

Step 7: Inventories

Whenever I hear the word “inventory” or “inventories”, I would always think of the goods stocked in the warehouse. Once again, I am exploring the annual report of the London Security PLC, but this time, particularly looking at their inventories. I started this journey by finding the word “inventories” in each of the annual reports for the three years. Thank goodness for the search tool, it made my life easier to explore. To compare the three reports, I opened all of them together and started to compare them as I go so it will be easier for me.

The first thing that came up when I searched “inventories” was the company’s consolidated statement of financial position. Well, this is interesting, but I want to know more about the company and its inventories and not just the numbers. Next thing was the notes to the financial statements section. While reading the inventories notes in 2017, I have discovered that the company also stated that “inventories are stated at the lower of cost and net realisable value”, which is similar to the study guide chapter 4. Furthermore, London Security PLC utilises the cost method of First-in, First-out (FIFO), which is one of the two favourable methods in calculating cost(s). I also discovered that the company allocated a provision for any obsolete, slow-moving or defective items, which is found on the company’s balance sheet under liability. Not only that but I also further discovered that all the notes about inventories for 2017 to 2019 annual reports are all the same and have the same text. Thus, I am assuming that over the three years, the firm did not change its inventories practices and its policy remained the same such as the FIFO method, the lower of cost and net realisable value and the provision.

Additionally, the other notes about inventories discussed raw materials and consumables, work in progress and finished goods. In here, the report displays the figures regarding these accounts. In 2016, the raw materials and consumables were worth £4,787 and increased to £5,189 in 2017, however, it fell to £4,803 in 2018 and once again increased in 2019 to £5,998. The changes in raw materials cost over the years could be due to the exchange rate of the country where the raw materials came from or it could be due to the changes of suppliers of the raw materials. With the work in progress figures, it started with £744 in 2016, then decreased to £488 in 2017. In 2018, it increased to £668 and then decreased to £500 in 2019. The factors that affect the work in progress account could be the number of inventories working in progress and the employees who are portraying this role in the company. Lastly, the cost of finished goods. In 2016, it accumulated £5,564, it then decreased to £6,072 in 2017 and increased to £7,822 n 2018, but then decreased to £6,946 in 2019. Again, the labour and material costs have possibly affected this account. Underneath these figures are a description of the cost of inventories, it is all the same for the three years, however, in the 2017 report, there is only an additional comment regarding the impairment of inventories. These three factors: raw materials and consumables, work in progress and finished goods, for me, are an important aspect in the firm’s inventories because changes in these will influence the number of inventories and its quality.

As stated above, London Security PLC discloses some information about their inventories. This involves the method of inventories they are using, which is FIFO; the provision in their liability account to cater any theft, wastage, slow-moving or obsolete and the different costs of inventories. However, it does not disclose the type of inventories system it uses, whether it is perpetual or periodic. As also mentioned above, the firm did not change its inventories practices over the years, which means that it did not affect the firm’s financial statement, particularly the balance sheet and income statement because the inventories policy of the firm remained the same.

In the statement of financial position, the inventories account would be found. My company is not an Australian company, from the company name “London Security PLC”, it is obvious that is based in London. However, it amazed me how Maria could discover where the company is from, not by its not but through the inventories’ position in the balance sheet. She said that it is an Australian business if the current assets are on top of the balance sheet followed by the non-current assets. I looked at my firm’s financial statement, which is not an Australian business and the current assets are on the bottom, below the non-current assets and not on top. To ensure this is valid, I then tried to find my previous firm’s annual report, Macquarie Telecom Group, an Australian company. To my surprise, the current assets are on top and below it is the non-current assets meaning it is an Australian company, so what Maria said is really true, wow!

In 2016, the inventories are worth £11,095. It is a small number in relation to the total current assets of £56,835, which means 5.12% of total current assets are inventories. This figure means that the firm might be selling its inventories at a slow pace. However, the company has a provision for liabilities and charges under current liabilities, an amount of £35(£35,000). This provision allowance is for the company’s inventories that are obsolete, slow-moving, theft, wastage or distorted.

In 2017, the inventories increased to £11,749. Although it is still small as compared to the total current assets of £62,464 and total assets of £140, 763, wherein the inventories is only 5.31% of the current assets. There is still an improvement on the inventories’ value and percentage as compared to 2016. These figures could mean that the company sells its goods in a much faster pace than usual and companies are buying more inventories as stock are being sold faster than last year.

In 2018, the inventories once again increased to £13,293. This is still small in relation to the total current assets of £68,135, however, the figure of inventories increased by £1,544 in 2018 as compared to 2017. This rise in value is really big for inventories, which could mean they are selling inventories and buying inventories is a much better and faster pace.

Recently, in 2019, the inventories also increased to £13,434. It is once again smaller than the total current assets of £68,399 and total assets of £156,069; however, it is a larger number in relation to the previous years. This figure represents improving inventory management and cost of the firm, which also influenced the inventories’ figures over the years. Moreover, the cost of sales of London Security PLC has increased from £23,638 in 2016 to £36,293 in 2019. These figures represent that there are many inventories sold as it increased by £12,655 over the four years.

Some of the associated issues and costs that my firm is facing with its inventories management as highlighted on their annual report are the raw materials, direct labour, other direct costs and related production overheads that are involved in producing London PLC’s finished goods and products. While for me, some issues and costs the firm might be facing with its inventories management are slow-pace inventories, theft, wastage and inventory storage cost. This might be the case because I noticed that in the first year of four years (the year 2016), the inventories are so low as compared to the inventories now, which I assumed that the firm slow pace. While the theft and wastage are due to the normality that firm’s inventories discrepancy is due to these factors. Lastly, the cost of inventory storage is another issue the firm might be facing in its inventories management because of the expensive cost of renting or buying storage space. Therefore, the firm could improve its inventories management by regularly checking its inventories, keeping track of it and its pace, as well as only buying inventories according to the capacity of the firm’s storage space.

Step 8: MYOB

As I was trying to access the link for the tutorials, it would always show an error and will not allow me to open the link as soon as I click the “Start Learning” button. Then I remembered Maria’s email regarding this and it says that it requires us to download “Adobe Flash Player”, so I did, but it is still the same and it was telling me that the adobe flash player reached its end-of-life. After how many hours and frustration, I just did what she said as an alternative, which is through the MYOB academy and enrol on the two courses, the “Setting up MYOB AccountRight” and “Day to Day with MYOB AccountRight”, which is equivalent to the same tutorial links.

Setting-up MYOB

Last screen/transaction in my own MYOB account after the set-up course.

Evidence of finished course from the MYOB Academy

MYOB Training

Last transaction on my own MYOB file before reconciliation.

After reconciliation

Last screen on my MYOB file regarding how to get most out of AccountRight through its reports, data, graphs, etc.

Evidence of finished course from the MYOB Academy

MYOB Quiz

Since I cannot access the link on the assessment document, I tried searching on my google search “EzyLearn MYOB Quiz” and I found this link https://ezylearnonline.com.au/how-it-works/knowledge-reviews/online-myob-training-and-skills-test/ . Once opened, it said that it is a 30-minute quiz with 13 questions, which is the same as the description on the assessment, so I just did this MYOB quiz assuming they are the same. The quiz result is shown below.

Step 9: MYOB TransactionsHypothetical Transactions

London Security PLC is located in London, where the tax is known as the value-added tax (VAT) and in most cases, the goods and services include tax. In my assumption, all of the transactions include VAT of 20%. So, to work-out the tax included on the price of each item, the price of the item would be divided by 1.2, the result will then be the tax. I also assume that to maintain the integrity and quality of the company’s product, it sourced its supplies from Europe, which also have the same taxation rules. However, due to MYOB’s setting, the GST is set to Australia and it has a rate of 10% instead of 20% (London tax rate), so therefore, for study purposes, the tax to be use it GST 10% and to figure out the tax, the price of the item would only be divided by 1.1.

London Security PLC is in the fire security industry. Therefore, it is assumed that they offer services such as checking fire extinguisher and provide products such as different fire extinguisher. In producing their fire extinguisher, it must buy raw materials, pressure vessel, necking and spinning (the top of the fire extinguisher) and fire extinguisher cylinder and the ingredients containing it. It also offers products such as fire mats, fire exit signs and fire blankets. Moreover, the company checks companies’ fire supplies, if it is updated or it is still working, which is part of the service they offered. There are also suppliers and personnel who will check on the firm’s industry supplies, which the firm must pay. Below are the 10 hypothetical business transaction of London Security PLC.

Date

Transaction Description

01/01/2020

Cash injection of £100,000 by the owner to the company’s bank account.

02/01/2020

Bought 100 fire extinguisher (includes all raw materials and other products in producing the extinguisher) from Fire Hydrant Pty Ltd on credit, which costs £145/each. Include VAT.

02/01/2020

Bought 50 fire mats, 10 exit signs and 50 fire blankets from Fire House. Fire mats are sold at £20/ea, £5/ea for signs and £23/ea for fire blankets, all includes VAT and paid the bill on the same day.

05/01/2020

Partial payment paid to Fire Hydrant Pty Ltd £10,000.

09/01/2020

Kingston Building ordered 50 fire extinguishers at £150/ea, 50 fire mats at £23/ea and 25 fire blankets at £25/ea. All are inclusive of VAT.

Received £5,000 as partial payment from Kingston Building through VISA.

10/01/2020

Bella Tents quoted 5 exit signs at £7/ea and 15 fire extinguishers at £150/ea. Inclusive of VAT

Placed an order on the 11th and received cash payment on the same day.

15/01/2020

Paid £2,500 to Ergun Electricity for the company’s electricity

17/01/2020

Received the outstanding balance of Kingston building.

20/01/2020

Paid the outstanding balance bill to Fire Hydrant Pty Ltd

29/01/2020

Bill from Fire Inspection from their service of checking all the company’s fire supplies and goods, as well as the company’s own fire emergency kits. £4,745 VAT included.

London Security PLCAll Journals Report

London Security PLC

Premier House

2 Jubilee Way

Elland, West Yorks HX5 9DY

All Journals

1/01/2020 To 31/01/2020

ID No.

Account No.

Account Name

Debit

Credit

Job No.

CR

1/01/2020

Owner's cash injection to the company

CR000001

1-1110

London Security PLC Bank

£100,000.00

CR000001

3-1000

Owner's/Shareholder's Capital

£100,000.00

PJ

2/01/2020

Purchase; Fire Hydrant Pty Ltd

00000001

2-1510

Trade Creditors

£14,500.00

00000001

1-1110


£13,181.82

00000001

2-1220

GST Paid

£1,318.18

PJ

2/01/2020

Purchase; Fire House

00000002

2-1510

Trade Creditors

£2,200.00

00000002

1-1110


£2,000.00

00000002

2-1220

GST Paid

£200.00

CD

2/01/2020

Fire House 456 Hetdog England

1

1-1110


£2,200.00

1

2-1510

Trade Creditors

£2,200.00

CD

5/01/2020

Fire Hydrant Pty Ltd 123 Hens Street England

1

1-1220

Electronic Clearing Account

£10,000.00

1

2-1510

Trade Creditors

£10,000.00

SJ

9/01/2020

Sale; Kingston Building

00000001

1-1310

Trade Debtors

£9,275.00

00000001

4-5000

Item income

£8,431.82

00000001

2-1210

GST Collected

£843.18

00000001

1-1110


£8,022.73

00000001

6-3400

Cost of Sales

£8,022.73

CR

9/01/2020

Payment; Kingston Building

CR000002

1-1210

Undeposited Funds Account

£5,000.00

CR000002

2-1520

Customer Deposits

£5,000.00

SJ

9/01/2020

Transfer from deposits.

SJ000002

2-1520

Customer Deposits

£9,275.00

SJ000002

1-1310

Trade Debtors

£9,275.00

SJ

11/01/2020

Sale; Bella Tents

00000003

1-1310

Trade Debtors

£2,285.00

00000003

4-5000

Item income

£2,077.27

00000003

2-1210

GST Collected

£207.73

00000003

1-1110


£2,000.00

00000003

6-3400

Cost of Sales

£2,000.00

CR

11/01/2020

Payment; Bella Tents

CR000003

1-1110


£2,285.00

CR000003

2-1520

Customer Deposits

£2,285.00

SJ

11/01/2020

Transfer from deposits.

SJ000001

2-1520

Customer Deposits

£2,285.00

SJ000001

1-1310

Trade Debtors

£2,285.00

CD

15/01/2020

Ergun Electricity 215 Len Street London

2

1-1110


£2,500.00

2

6-1700

Electricity Expenses

£2,272.73

2

2-1220

GST Paid

£227.27

CR

17/01/2020

Payment; Kingston Building

CR000004

1-1210


£4,275.00

CR000004

2-1520

Customer Deposits

£4,275.00

CD

20/01/2020

Fire Hydrant Pty Ltd 123 Hens Street England

2

1-1220


£4,500.00

2

2-1510

Trade Creditors

£4,500.00

PJ

29/01/2020

Purchase; Fire Inspection

00000003

2-1510

Trade Creditors

£4,745.00

00000003

6-5600

Inspection Expenses

£4,313.64

00000003

2-1220

GST Paid

£431.36

CD

29/01/2020

Fire Inspection 200 Gondeen Street London

3

1-1220


£4,745.00

3

2-1510

Trade Creditors

£4,745.00

Grand Total:

£190,092.73

£190,092.73

Income Statement

London Security PLC

London Security PLC

Premier House

2 Jubilee Way


Profit & Loss Statement

January 2020

Income

Item income

£10,509.09

Total Income

£10,509.09

Gross Profit

£10,509.09

Expenses

General Expenses

Electricity Expenses

£2,272.73

Cost of Sales

£10,022.73

Total General Expenses

£12,295.46

Depreciation Expenses

Inspection Expenses

£4,313.64

Total Depreciation Expenses

£4,313.64

Total Expenses

£16,609.10

Operating Profit

-£6,100.01

Total Other Income

£0.00

Total Other Expenses

£0.00

Net Profit/(Loss)

-£6,100.01

Balance Sheet

London Security PLC

London Security PLC

Premier House

2 Jubilee Way


Balance Sheet

As of January 2020

Assets

Current Assets

Bank Accounts


£102,744.09

Total Bank Accounts

£102,744.09

Clearing Accounts


£9,275.00


-£19,245.00

Total Clearing Accounts

-£9,970.00

Total Current Assets

£92,774.09

Total Assets

£92,774.09

Liabilities

Current Liabilities

GST Liabilities

GST Collected

£1,050.91

GST Paid

-£2,176.81

Total GST Liabilities

-£1,125.90

Total Current Liabilities

-£1,125.90

Total Liabilities

-£1,125.90

Net Assets

£93,899.99

Equity


£100,000.00

Current Year Earnings

-£6,100.01

Total Equity

£93,899.99

Statement of Cash Flows

London Security PLC

London Security PLC

Premier House

2 Jubilee Way


Statement of Cash Flow

January 2020

Account Name

Cash Flow from Operating Activities

Net Income

-£6,100.01

GST Collected

£1,050.91

GST Paid

-£2,176.81

Net Cash Flow from Operating Activities

-£7,225.91

Cash Flow from Investing Activities

Net Cash Flow from Investing Activities

£0.00

Cash Flow from Financing Activities


£100,000.00

Net Cash Flow from Financing Activities

£100,000.00

Net Increase/Decrease for the period

£92,774.09

Cash at the Beginning of the period

£0.00

Cash at the End of the period

£92,774.09

Insights – Discussion

When I was creating a new file for my company, I tried to change the currency, so it really reflects my firm which uses pounds (£). I was successful in changing the currency, however, when I went back to the MYOB app, it will not let me change my accounts nor enter purchases or sales. There would always be an error as seen on the screenshot below. I spent all day trying to figure out things, I checked all the solutions, restarted the app, uninstalled the app, restarted my laptop, went to the help centre, emailed them and I also found a community forum on MYOB website about the same problem as mine. The person also could not change, edit, add or delete an account on the account list and similar error notification is shown to their MYOB app. After trying everything, I decided to leave it for tomorrow and today, Sunday, I tried to edit my account list again. The error came up. Tried entering sales. The error came up. Tried entering purchases. The error came up. From here, I decided to just change my account lists by explaining it here in my word document or just create a new file to avoid wasting time. However, before doing, I once again tried to fix it. I went to the setting where I went to change the currency, put it back to the dollar then to Pounds again then clicked apply. Afterwards, I opened my London Security PLC file and tried to edit the account lists and it allowed me to. I then checked everything and now everything worked perfectly. I was still frustrated from all the time wasted from yesterday, but I am relieved now and this learning is really memorable!

In entering transactions, exporting the journals and copy-pasting to my word document, I did not encounter any problems. The only problem I experienced was when finding the “All Journals Report”, I checked from MYOB website and discovered that somebody already asked this question and there was an MYOB expert who answered them. I tried doing this and I got what I needed, the ‘All Journals Report’. Upon seeing this report, I have noticed that the grand total for debit and credit are £190,092.73; it is balance. That is accounting, it is all about balancing. The all journals report includes CR, PJ, CD and SJ. For me, CR means cash receive; PJ is purchase journal; CD is cash disburse; and SJ is sales journal. I came to this conclusion because the first entry which is owner’s cash injection to the company is considered as CR (cash receive); this transaction incurred cash from the owner wherein this money was received by the company. The second transaction was known as PJ, it was a purchase of inventories (items) from Fire Hydrant Pty Ltd, so it is safe to assume that it is known as purchase journal. The fourth transaction on the report is about the payment of London PLC TO Fire House company regarding the item they purchase. The transaction is CD (cash disburse), it was a payment, money going out of the business. Lastly, the sixth transaction, SJ is known as sales journal because as evidenced to the transaction it was the sales made by the company to Kingston building, wherein they have paid this amount, either partially or fully.

With the profit and loss statement, it displayed that the company incurred a loss for that period, 01/01/2020 to 31/01/2020. The net loss was -£6,100.01, this is due to the high total expenses of £16,609.10 and a low total income of £10,509.09 which resulted in a high-value negative figure. The high total expense is due to the high cost of sales which is £10,022.73. The cost of sales value is due to the many items purchased by the company. These items did not only increase the inventories, but also the cost of sales (COGS) especially when the products were sold to the customers. Therefore, to have a high income and a positive profit, the company must only buy the right inventories for the company. The firm could apply the just-in-time inventory to reduce high expenses and to avoid net loss in the income statement.

Even though the company incurred a loss, its balance sheet is still positive with its equity accumulating to £93,899.99. It is okay for the company to experience loss in the first month of the financial year as the company is still building its inventories and the sales of the item might slow. Hence, the expenses (of buying items) are higher than revenue (income from items). Although this might be the case, the company’s balance sheet is in a positive position as the owner injected cash of £100,000 at the start of the month and now it increased to £102,744.09 as evidence on the balance sheet on the account ‘London Security PLC Bank’. This is a manifestation that even though the firm had a loss, the company is still striving because its total assets are higher than its total liabilities, which resulted in the net asset of £93,899.99 (£92,774.09-(-£1125.90)). The capital injection of the owner has a strong impact on the balance sheet’s positive figure.

Lastly, the statement of cash flow. The cash at the beginning of the period is £0 because I did not set-up my balances at the start and just injected cash to the company’s bank. On the other hand, the net cash flow from operating activities is negative due to the negative net income (net loss as discussed above) and GST paid (the GST included from buying items, which can also be refunded) and a small amount of positive value from GST collected (taxes from customers to be transferred to the government). Although the net cash flow worth £7,225.91 is negative, the company still had a positive cash flow at the end of the period because of the net cash flow from financing activities valued at £100,000 (cash injected by owner). Consequently, the company had cash of £92,774.09 at the end of the period.

Step 10: Depreciation

I always thought that depreciation involves the decreasing changes in the value of an asset over the years. However, there is more than that. As I finished reading Chapter 5 of the study guide, I have learnt that depreciation is the process of gauging the expenses incurred of an asset for the period, which helps the firm to know the reality of their financial situation. As I looked at London Security PLC’s financial statements, I have noticed that in their balance sheet, the largest non-current asset is their intangible assets. London PLC’s intangible assets are £67,504, £66,077, £63,578 and £62,749 2019 to 2017, respectively. These figures show that the company have increased their intangible assets over the years. However, with this increment, there will also be changes in their depreciation account.

As I have searched for the word “depreciation” in my firm’s three years annual account, I suddenly discovered that there are 16 “depreciation” words found in the 2019 annual report, while only 12 words were found in 2018 and 2017 reports. Could this be due to the rise of intangible assets and total non-current assets that affect the depreciation notes in the annual report? I then discovered that the operating lease charge was replaced to depreciation charge, due to the respect of the right of use assets. I wonder how this affected the company. Did it improve the assets both the current and non-current?

The second-largest non-current asset is the property, plant and equipment. The account has £12,164 in 2019, £12,077 in 2018, £11,589 in 2017 and £10,937 in 2016. This account had also increased over the years. The property, plant and equipment of London Security PLC is carried at deemed cost at the date of transition. These costs include purchase cost such as directly attributable costs, less accumulated depreciation. Additionally, the company uses the straight-line method (depreciable amount / useful life) to calculate the depreciation on all assets. However, London PLC does not depreciate the freehold land, but all the other assets’ depreciation are as followed as extracted from the firm’s 2017 annual report.

· Freehold buildings 2%–6%

· Plant, machinery and extinguisher rental units 10%–33%

· Motor vehicles and share in aircraft 5%–33%

· Fixtures, fittings and equipment 10%

These percentages did not change over the three years as it is the same percentage written on the 2019 annual report. Although, the firm declares that “the assets’ residual values and useful lives are reviewed annually and adjusted if appropriate at each Statement of Financial Position date”. Would these unchanged percentage still deliver an accurate value? What will the effect of these percentage?

London PLC’s depreciation of property, plant and equipment are £2,409, £2,814, £2,996 and £3,305. This increasing depreciation of property, plant and equipment reflects the increasing value of PPE as well as the increasing value of depreciation in the Income statement over the four years. Moreover, the depreciation of right use assets as mentioned above was only visible in the 2019 annual report, which is £1,716.

Over the three years, the firm did not change its depreciation methods, it continually utilises the straight-line method, which maintains the reliability and consistency of the numbers in the financial statements. The depreciation is not the largest expense in London PLC’s Income Statement; however, it is still a significant expense that contributed a role in the firm’s profit and loss. The depreciation and amortisation are £5,459, £6,195, £6,382 and £8,349, 2016 to 2019, respectively. These increasing negative figures portray the increasing depreciation of the increasing non-current assets of the firm over the years. Even though depreciation might not be the largest and most significant expense (the distribution cost is) for my firm, the depreciation and amortisation costs contributed significantly to the business and its income statement.

Three Journal Entries

DATE

ENTRIES

DEBIT (DR)

£’000

CREDIT (CR)

£’000

31/12/2017

Depreciation Expense - Plant, machinery and extinguisher rental units

Accumulated Depreciation - Plant, machinery and

extinguisher rental units

(Depreciation expense for the year 2017)

XXX

XXX

31/12/2018

Depreciation Expense - Motor vehicles and share in aircraft

Accumulated Depreciation - Motor vehicles and share in

aircraft


XXX

XXX

31/12/2019

Depreciation Expense - Fixtures, fittings and equipment

Accumulated Depreciation - Fixtures, fittings and equipment


XXX

XXX

The effect of these journal entries towards London PLC’s financial statements are a higher/lower income statement and a higher/lower balance sheet, especially in the asset as these figures affect both the expenses and contra-assets. There are possible ways on how to manipulate these entries, one of these is by changing the depreciation method the company used. For example, London Security PLC can change the straight-line method to diminishing (reducing) method, which will impact the result for depreciation expense written on the journal entries. Through changing the depreciation method, it can manipulate the journal entries as it interconnects with the value of depreciation expense and accumulated depreciation, either manipulating it to be higher or lower than the original value.

Step 11: Feedback

To be able to finish this assessment, I will be needing your help my peers! I am happy to exchange feedbacks for step 11 of assessment 1. Below is the template for the feedback.

My Comments

Step 7

Inventories

Step 8

MYOB set up

MYOB training

MYOB quiz

Step 9

Business transactions All Journals report

Financials and discussion

Step 10

Depreciation

Overall

2 | Page

Roceline De Vera ACCT11081 Step 7-11

ACCT11081: INTRODUCTORY FINANCIAL ACCOUNTING · Web viewAuthor Roceline De Vera Created Date...

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