Accounting for Management M 5011
SP2 2017
Problem Solving Assessment
This assignment can be completed individually or in a group of no more than 2 students. Learning Objectives addressed in this assessment:
CO1: Apply basic accounting principles and concepts in order to understand what accounting information is, what it means and how it is used;
CO2: Explain the significance of accounting information in the business environment;
CO3: Read and interpret financial reports and apply knowledge to critically analyse corporate financial and non-financial information. Graduate Qualities developed by this assessment:
GQ1: You need to operate effectively upon fundamental accounting practical knowledge;
GQ2: You are prepared for lifelong learning and professional practice;
GQ3: You are working to be an effective business related problem solver;
GQ4 (partial): You can work autonomously and independently;
GQ5 (partial): You are committed to ethical action & social responsibility for business activities.
GQ6 (partial): 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. He has asked you to prepare a consultation report for an important client, HIGH Energy Ltd, before he returns on April 21, 2017.
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 review of financial reporting by HIGH Energy Ltd and found that the company’s accounting records were incomplete and the recognition of revenues and expenses was sometimes not consistent with accrual accounting principles.
The Managing Director of HIGH Energy, Mr. Matthew Rice, was unhappy about these results and asked Business Smart to review the accounting records for the 2016 financial year. Based on this review, financial records 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 carbon emissions and energy consumption. As a response, Matthew is thinking about reporting on HIGH Energy’s environmental challenges and corporate strategy on environmental protection. However, several board members are concerned about the risk associated with such reporting. They cannot reach an agreement.
You are given the following information from the balance sheet as at June 30, 2016:
Cash and cash equivalents $4,755,600 + Your DOB
Accounts receivable 29,045,270
Inventory 9,434,050
Prepaid insurance 15,277,060
Property Plant and Equipment (net) 755,910,580
Accounts payable 47,846,810 + Your student ID
Unearned income 40,000
Bank loan (due January 2017) 26,350,000 Bank loan (5 years) 251,749,000 Share capital ?
Retained profit 17,560,750
Other account information for the year ended June 30, 2016:
Total operating revenue (90% on credit) $196,522,150
Gross profit 150,526,000
Other operating expenses 129,916,890
Interest expense 1,060,060
Tax expense 3,509,300
Net profit6 16,079,750
Operating cash flows 11,666,940
Additional information from the previous year ended June 30, 2015:
Accounts receivable $30,555,650
Inventory 9,200,800
Total Assets 763,500,400 Total Equity 469,559,000
Notes to the above information:
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 identified the following issues:
(1) An annual insurance premium of $922,410 was paid and expensed on March 1, 2016. It was noted that the insurance policy term was 12 months.
(2) The electricity use of June 2016 was not recorded because the bill of $ $23,490 was received and paid in July 2016.
(3) One of the company’s commercial properties in the Adelaide CBD was rented out on July 1, 2015. The lease agreement was signed for 3 years and included annual payments of $120,000, plus a signing-on fee of $60,000 covering the 3-year term. $180,000 received on July 1 was recorded as rental income.
(4) Salaries and wages of $735,500 for the month of June 2016 were not recorded because they were paid on July 5, 2016.
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 Share Capital in the initial balances provided to you on the balance sheet of June 30, 2016;
2. Explain why each issue you identified was not in compliance with the accrual accounting principle and how these issues impact on accounting equation, balance sheet and income statement (ignore the impact on tax).
3. Make adjustments to relevant accounts and prepare a classified balance sheet as at June 30, 2016 and an income statement for the fiscal year of 2016.
4. Select a benchmarking company for analysis. You need to choose a company from a list of Selected ASX Listed Energy 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 ADX Energy Limited or Marmota Energy 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 HIGH Energy Ltd and the benchmarking company selected (if no average data is available for some accounts, you may use year-end data to work out ratios). Your analysis 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?
5. 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?
6. Does the benchmarking company produce any report or information about environmental issues such as environmental pollution and energy consumption? Do you think HIGH Energy should follow what the benchmarking company is doing? Do you agree with Matthew’s view about reporting on environmental strategies and challenges, or with board members that the company should focus on business growth and regaining profit instead? Explain why.
Submission Notes:
• Your assignment must be presented in a clear report format, including introduction and conclusion, and with correct grammar, expression and in-text referencing. Read Writing Reports Guide on the course Learnonline website before submission.
• All assignments must be submitted online. Hard copies of assignment are NOT accepted. If the assignment is completed by two students, only one student needs to make the submission. However, the cover page must clearly indicate the names and ID numbers of both students.
• Please submit one single Word Document only. Please do not attach the assignment cover sheet. Instead, clearly indicate your name and student ID (if applicable, your fellow student’s name and ID) on the first page of the submission. This is to avoid high similarity of the assignment cover sheets reported in Turnitin.
• The length of this assignment should not exceed 2,400 words (excluding title page, table of contents, executive summary/abstract, endnote/footnote, and appendix and reference list). Please note detailed calculations for financial ratios must be shown but included in appendix. The main text should only present the summary of ratio results.
• You are required to use the Harvard Referencing style. The minimum number of references for this assignment is five (including textbook). If you are not sure about the referencing style, please read the Referencing guide on the course Learnonline website.
• Marks are allocated for correct answers, but ‘consequential’ errors are not penalised (for example, if you make an error in an adjustment, which flows through to the financial statements, you do not lose marks twice).
• Marks are also allocated for correct presentation and formatting of financial statements.
Marks are deducted for poor presentation of the assignment as a whole.
• You may ask your lecturer/tutor for help when studying this assignment, but they will only answer general questions and will not ‘check’ student answers to the assignment. You may only discuss the assignment with other students at a general or conceptual level, that is, you may talk about the issues, not the details.
• You should not prepare your assignment together with other students or groups, nor should you compare your final answers with other students or groups. It is NOT acceptable to share files, templates, or electronic versions of assignment questions with other students or groups. To ensure Academic Integrity, all submissions will be checked through Turnitin databases which include online publications, internet resources and past student submissions.
• Remember, your assignment must be all your own work. If you present material that is not all your own work you have engaged in academic dishonesty which is taken very seriously and dealt with very severely. Refer to the Academic Integrity section of the Learnonline course website.
• Due date: Friday, April 21, 2017 by 11am