ASSIGNMENT 2 – Critical Use of Accounting Information ACC/ACF5903 SEMESTER 2, 2018
This task accounts for 25% of the final mark for ACC/ACF5903 (provided the final exam is passed). The objective of this task is to gain experience critically using and presenting accounting information in order to make judgements in a professional way.
This assignment aims to allow you to demonstrate that you can (i) how to use accounting information when making a judgement related to company performance, (ii) identify limitations of accounting information, (iii) understand accounting quality from tone at the top, and (iv) organize your thoughts in coherent and presentable way.
You will be assigned a pair of Australian listed companies to use as the case for this assignment. Your pair of companies, who operate within the same sector, will be notified to you via email no later than Week 6. As this is an individual assignment, each student will receive a different pair of companies.
Due day: 5pm Monday 1st Oct
If you are a student registered with Disability Support Services and require approved forms of support to complete this assignment, you must notify the Chief Examiner prior to two weeks before the due day.
Submission Requirements:
• Print the finalised individual assignment as a pdf and submit it via the link in Moodle.
The following images demonstrate the steps involved in the submission:
Press ‘Save changes” (see image above) and then, when your submission is finalised, press “Submit assignment” (see following image):
Word limit:
• 1,500 words (not including data presented in tables or tables of content).
• However, a good assignment is one that makes a well-informed evaluation and communicates it succinctly. For example, a 500-word evaluation will score a better mark than a 1,500-word evaluation that does not provide additional substance and clarity.
• Penalty might be applied if the actual number of words in assignment 2 exceeds the max limits.
Preparation:
a) Access the Morningstar database at http://datanalysis.morningstar.com.au.ezproxy.lib.monash.edu.au/af/dathome?xtmlicensee=datpremium
b) Download the Financial Data for the two companies assigned to you for the years ending 2015, 2016 and 2017;
c) Download Annual Reports for 2015, 2016 and 2017 for the two companies.
Requirements
You must answer each of the following four requirements in sequence:
1. Compare and contrast how the two companies use resources to generate wealth.
2. Using data from the Morningstar reports, evaluate and compare the two companies’ Return on Asset performances;
3. Analyse ROA performance from angle of accounting policies that companies adopted and from angle of relevant real-world events.
4. Please have further analysis of overall firm performance in addition to ROA: from perspective of corporate governance or the quality of management team. Note: the performance indicators in the marking guide below provide more detail in relation to these Requirements.
MARKING GUIDE
(Out of 25. Assignment scored out of 100 then divided by 4)
Q’n Pts Requirements Performance indicators
(a) 5 Formatting of assignment 2 1. Front page shall be included.
2. Please include tables of content.
3. Please include the number of words in your assignment
4. Please choose “Times New Roman” as your text font, with font size 11 and 1.5 line spacing in your content.
(b) 5 Readability 1. The English writing shall have a clear progression to cover bullet points related to assignment requirement, and the content shall be readable.
(c) 15 Compare and contrast how the two companies use resources to generate wealth. 1.
2. Identify main similarities and main differences in companies’ operations.
To which extent, the selected pair assigned to you could reflect the trend of industry development?
Please briefly explain why or why not.
(d) 40 Using data from the Morningstar reports, evaluate and compare the companies’ ROA performances. 1. Please give comments on the ROA formula using by Morningstar, and justify which formula you are using in your assignment 2.
2. Decompose ROA into efficiency and profitability for each year & each company (no explanation is required). State a critical opinion about how the performances of the two companies compare (you may apply the DES method for ratio analysis which is introduced in lecture PPT)
(e) 20 Further analysis of ROA performance from angle of accounting policies that companies adopted and from angle of relevant real-world events. 1.
2. Please find out accounting policies that affect the measurement of profit and assets in the pair of companies you are analysing.
Please find out the related real-world events (e.g., macro-economic factors/ shocks/ industrial-wide events) which might help you explain the ROA performance of two companies, and indicate
/highlight the source of your real-world events.
(f) 15 In addition to ROA, please have overall analysis of firm performance: from perspective of corporate governance or the quality of management team. 1.
2. Please find out relevant perspective of two companies’ corporate governance or the quality of management team that contributes to explanation of overall financial/firm performance.
Briefly explain why the perspective you choose in above is relevant and indicate & highlight your source (i.e., where do you find out the reference).
FEEDBACK
The main forms of feedback are
• Guidance in completing the assignment provided during lectures,
• Guidance from tutors during selected tutorials, • Completion of a marking rubric.
APPENDIX
Why using accounting information in a critical manner is important
The simple answer is, that accounting numbers can never be taken at face value; i.e. accounting numbers must not be taken as objective truths. Instead, it is essential the limitations of accounting information are taken into account when using information to inform decisions.
What are some of the limitations of accounting information?
Firstly, in presenting information that describes the real-life outcomes of a business, accounting has its own ‘concepts’ and ways of measuring them. ‘Profit’ and ‘Assets’ are two examples of ‘concepts’. In measuring profit, accounting intends to measure an increase in ‘wealth’ but accounting may exclude aspects of a business’s outcomes that you might think should impact the measurement of the wealth produced by a business. It might also include aspects you might think are not relevant (e.g. an expense that occurs in only one year and which you think is extraordinary for some reason, such as restructuring costs). Similarly, accounting may include and/or exclude particular resources in its measurement of ‘assets’.
Secondly, accounting measures concepts in monetary terms, e.g. dollars. Quantifying business outcomes in money terms is a limitation in itself.
Moreover, accounting may allow different ways of measuring the same thing. Different accounting policies result in different dollar measurements.
Thirdly, the use of many accounting policies require estimates by managers and accountants.
For example, the ‘measured’ value of a depre
ciation expense for particular equipment depends on estimates of the equipment’s useful life, and its value when it will no longer be required. Estimates can be conservative or optimistic.
Fourthly, it’s essential to incorporate the quality and/or style of management team into consideration when we evaluate firm’s financial performance. Executive team is “tone at the top”, thus to which extend, they adopt the corporate governance would definitely influence the output of accounting performance.
What do these limitations mean for decision-making?
People using accounting information to make decisions need to be aware of how the information has been impacted by these limitations and to then consider them when making a decision or forming an opinion. They must not accept information at face value!
Thus, when using annual information to consider how business outcomes have changed over a number of years, the user must be aware of the ways in which accounting was done differently over the years. When performance of a group of companies is being compared, the users must be aware of the ways in which the companies do their accounting differently. This assignment requires you to demonstrate this awareness.
In regard to this assignment, the ratio “Return on Assets” (ROA) is an accounting indicator of how well assets are used to generate profit in any year. Thus whilst ROA has many limitations as an indicator of how well wealth has been generated by resources, it is a useful input to decisions about the wealth generated from resources.
A little more about Return on Assets (ROA)
ROA is calculated by dividing the value of profit by the value of assets. Profit is the difference between total income and total expenses. The value of assets is the total of a variety of different kinds of assets.
In other words, total income, total expenses, and total assets are made up of a combination of different items. This assignment requires you to select particular items that affect the values of profit and assets, and hence ROA, and investigate the accounting of them.
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