QUESTION

ACCT1046 Introductory Accounting

Assignment – Semester 1, 2012

 

This assignment is designed to get you to locate the annual report for a company and become familiar with the contents of an annual report, particularly the financial statements and the notes to the financial statements. While we have looked at very basic formats of the financial statements, the financial statements for a company contain a little more detail and information on some items you may not have been introduced to yet. Pay particular attention to the information provided in the notes to the financial statements as you will find a lot of useful information in them that may help with some of the questions.

 

 

REQUIRED:

You are required to obtain the 2011 Annual Report of Blackmores Limited and then answer the questions that follow in Part A and Part B.

 

 

Question 1

Describe the company’s principal operating activities.

 

Question 2

Directors of a company will often own shares in the company as well. Name the chairman of Blackmores’ board of directors and identify the number of shares the chairman held in the company at the end of their 2011 financial year (financial year ends June 30, 2011).

 

Question 3

The annual report contains a number of reports with only some of these being ‘financial reports’.  Name all of the financial reports in Blackmores’ 2011 annual report.

 

Question 4

Using the 2011 Annual Report, identify the number of the note that deals with Significant Accounting Policies and identify the method of depreciation the company uses to depreciate property, plant and equipment. What is the underlying assumption of this method in relation to the usefulness of property, plant and equipment?

 

Question 5

Explain what is meant by the term ‘corporate governance’ and list the eight principles of corporate governance that Blackmores adheres to.

  

Question 6

Describe the purpose of the external auditor’s report, and name the audit firm engaged by Blackmores in 2011.

 

Question 7

With reference to the consolidated entity:

• What is the total amount of revenue and other income in 2011?
• What are the two revenue items?
• What is the ‘other income’ comprised of? (You must refer to the relevant note to find the answer to this.)

 

Question 8

Again with reference to the consolidated entity:

• What is the amount of cash receipts from customers in 2011?
• Why does this amount differ from the 2011 sales figure?

 

 

Question 1     (4 marks)

Using the consolidated figures for Blackmores Ltd, calculate the following ratios for the years 2010 and 2011. Ratios are to be shown at one decimal place.  (You must show all your workings. Where no workings are shown you will receive zero for this section.)

 

1. Current ratio
2. Acid test ratio
3. Gearing ratio
4. Interest cover ratio

 

Question 2     (2 marks)

You have been provided with the following information about another company, Company X, in the same industry as Blackmores Ltd:

 

COMPANY X
Ratio	2011	2010
Current ratio	2.1	1.8
Acid test ratio	1.2	1.5
Gearing ratio	60%	80%
Interest cover ratio (times)	10.9	13.1

 

Using the information above and the calculations in Part B Question 1, you are required to analyse the liquidity and financial gearing (leverage) of Blackmores Ltd and Company X by providing:

(a)   a description of the movement in each of the ratios for Blackmores Ltd and an explanation of what this movement tells you about Blackmores Ltd;

(b)   a description of the movement in each of the ratios for Company X and an explanation of what this movement tells you about Company X.

 

Question 3     (2 marks)

Assume you are considering becoming a creditor for Blackmores Ltd or Company X (from Part B Question 2 above). That is, you will only be providing credit to one of them. Explain which company you would prefer to provide goods to on credit and why you have chosen this company. You may consider both financial and non-financial information in making this decision.

 

Question 4     (4 marks)

Prepare a table similar to the table below.  Complete the table by inserting information from Blackmores’ financial statements (consolidated figures).  Calculate each item as a percentage (%) of sales revenue.

Financial Item	2011 ($)	%	2010 ($)	%
Sales		100.0		100.0
Total expenses
Promotional and other rebates
Raw materials and consumables used
Employee benefits expense
Selling and marketing expenses
Profit for the year

Refer to the table above to explain the performance of Blackmores in 2011 compared to 2010.

 

Format and Presentation:

The assignment needs to be presented and formatted according to the guidelines shown in this semester’s Course Guide.

 

You need to ensure that the numeric answers you provide are accurate.  For example, some figures are shown in thousands while others are not; showing an answer as $102 instead of $102,000 will result in a mark of zero for such a question as there is obviously quite a difference between these two figures. Also ensure that you use the Group (Consolidated) Financial Reports not those of the Parent Entity (Company).

Referencing:

As you will be using a company’s Annual Report as the basis for answering many of the questions asked in this assignment, you need to ensure that you acknowledge this in your assignment. In fact, any sources that you use need to be acknowledged in order to avoid plagiarism.

 

Information on referencing can be found in the Guidelines for Referencing and Presentation at the RMIT website using the following address: (http://www.rmit.edu.au/bus/students).

 

From the Blackboard site there is also an online Referencing resource that you might find useful.

 

In-Text Referencing and the Reference List:

Sources of information must be cited both in the body of the text (in-text referencing) and the end of the assignment (reference list). Failure to do so will result in penalties. Remember that when referencing an Annual Report it is a corporate document that does not have a particular author but it will still require referencing any time you use information from it. Any other documents or books or other references you use will also require referencing.

 

Penalties Regarding Referencing:

No in-text referencing – deduct 1.5 marks

Some in-text referencing only – deduct 1 mark

No reference list – deduct 1.5 marks

Incomplete reference list – deduct 1 mark

 

Electronic Submission:

All assignments (with Turnitin report attached) must be submitted both electronically through Gradebook on the course Blackboard site, as well as in hard copy. (Further information can be obtained from your lecturer or tutor.)
Policy on Late Submissions:

The policy on late submissions can be found in the current semester’s course guide.

SOLUTION

PART A – The Company

 

Question 1

The company’s principal operating activities.

In the financial year 2010-11 Balckmores’s principal activities included the development and marketing of health products. These health products include vitamins, herbal and mineral nutritional supplements. The Blackmores Group has operations in Australia, New Zealand and Asia.

 

Question 2

The chairman of the company is Mr. Marcus C. Blackmore AM. He holds 4,479,278 fully paid ordinary shares

Question 3

 

The financial comprises the statement of financial position as at 30 June 2011, the income statement, the statement of comprehensive income, the statement of cash flows and the statement of changes in equity for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity, comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 50 to 101.

 

Question 4

The Significant Accounting Policies are given under Note 3 of the Notes.

Depreciation on Property, plant and machinery in Balckmores is calculated on a straight-line basis. This means the net cost of each asset is considered equally over the life time of the asset. This is used to calculate the residual value of the asset.

 

Question 5

The corporate governance defines the relationship that is there between all the stakeholders of a firm which includes, Directors, Higher Management and also the shareholders This gives the information on how the management of the company defines the responsibilities and other related matter and how these are managed.

 

The eight principles of corporate governance as given in the annual report are:

1. Lay solid foundations for management and oversight
2. Structure the Board to add value
3. Promote ethical and responsible decision-making
4. Safeguard integrity in financial reporting
5. Make timely and balanced disclosure
6. Respect the rights of shareholders
7. Recognise and manage risk
8. Remunerate fairly and responsibly

 

 

Question 6

The auditor report gives information on the audit performed by the auditing firm and provide an insight on the financial reports of the company based on the audit. The audit firm for Blackmores is Deloitte

Question 7

The total amount of revenue and other income in 2011 is $235,748,000 which is the sum of sales and other income.

The two revenue items are Revenue from sale of goods and Interest revenue from bank deposits and Royalties

The ‘other income’ comprises of Gain/(loss) on disposals of property, plant and equipment, Government grants received for market development, Net foreign exchange gains and Net exchange losses on forward exchange contracts

 

Question 8

The amount of cash receipts from customers in 2011 is 247,828

This differs from the sales figure of 2011 as there are amount receivables from the previous year.

 

 

PART B – Analysis of financial Information

 

Question 1

 

Current Ratio is the ratio of current assets to current liabilities.

 

As given in the annual report of Blackmores the current assets of the company are $ 78,521,000 in 2011 and $ 80,485,000 in 2010.

The current liabilities of the company are given as $33,221,000 in 2011 and $34,457,000 in 2010.

 

For 2011 Current ratio is $78,521,000 / $33,221,000 which is equal to 2.4

 

For 2010 Current ratio is $80,485,000 / $34,457,000 which is equal to 2.3

 

Thu the current ratio calculated for 2011 is 2.4 and for 2010 is 2.3

 

 

Quick Ratio or Acid Test Ratio is calculated as the ratio of difference of current acid and inventories to current liabilities. The inventories for the year 2011 and 2010 are 23749 and $22555 respectively. Thus the net difference is calculated and the ratio of this net difference with current liabilities is shown below.

For 2011 the quick ratio is calculated as ($78,521,000 -$23,749,000) / $33,221,000

Thus we get the quick ratio for 2011 as 1.6487

For 2010 the quick ratio is calculated as ($80,485,000 – $34,457,000) / $34,457,000

For 2010 the quick ratio is 1.68

Gearing Ratio:

Gearing ratio is calculated by the following formula (Vandyck, 2006)

 

From the annual report we get the values required for calculating the gearing ratio

The Long Term borrowings are $40,000,000 for 2011 and for 2010 is $47,356,000.

The cash available with the company is $10,168,000 in 2011 and $21,507,000 and the shareholders fun are taken as the total equity which is $79,112,000 in 2011 and $71,790,000 in 2010.

Thus the Gearing Ratio for 2011 is ($40,000,000 – $10,168,000)/ $79,112,000 which is equal to 37.7% and the Gearing Ratio for 2010 is ($47,356,000 – $21,507,000)/ $71,790,000 which is equal to 36.0%

Interest Coverage Ratio is the ratio of earnings before Interest and Tax to the interest expense of the company

The Earning before Interest and Tax (EBIT) for 2011 is given as $41,533,000 and for 2010 is $36,746,000 and the interest expenses for 2011 are $2,372,000 and $2,442,000.

The interest coverage ratio for 2011 is $41,533,000 / $2,372,000= 17.5

The interest coverage ratio for 2010 is $36,746,000 / $2,442,000= 15.0

 

For 2011 the interest coverage ratio is calculated as Thus Interest Coverage ratio is 2011 and 2010 are calculated as 17.5 and 15.0

All the financial ratios that are calculated have been tabulated below

Financial Ratio	Formula	2011	2010
Current Ratio	Current Assets/ Current Liabilities	2.4	2.3
Acid Test Ratio	(Current Assets – Liabilities) / Current Liabilities	1.6	1.7
Gearing Ratio	(Long Term Borrowings + Short term Loans) – Cash / Shareholders Funds	37.7%	36%
Interest Cover Ratio	EBIT/ Interest Expense	17.5	15.0

 Question 2

 

(a)   The ratios in case of Blackmore show that the company is growing. This can be said by the fact that the current ratio of the company is greater than the previous year. The gearing ratio is also on the comfortable side and the Interest Expense ratio is also increasing.

 

This shows that the growing strong with increasing Earnings and the capability of raising short term capital as the short term liquidity of the company is good as shown by the current ratio.

 

(b)   The strength of a company is analysed by the Acid Test Ratio which is an indicator of the short term liquidity of a company. This is because it provides insight into the ability of a company to meet the short term obligations

 

Thus the first important aspect that has been observed is that it is reducing from 2010 to 2011.

 

Current ratio which is similar to Acid Test Ratio is also the measure of company’s ability to meet short term liquidity requirements (Troy, 2012). The current ratio is different from acid test ratio is that it also considers inventory which is not considered in acid test ratio.

 

Thus the current ratio is less conservative than acid test ratio and is important in accessing the operation efficiency of a company.

 

This can be seen that current ratio is increasing.

Based on the two findings, current ratio and acid test ratio it can be said that the inventories of the companies are increasing as although for 2011 the current ratio is higher, the acid test ratio is on the lower side when compared to 2010.

 

The Gearing Ratio is reducing which means the liabilities are reducing as compared to shareholder’s funds which are a good sign but the interest coverage ratio is lower. This shows that the EBIT to Interest Expense are reducing. This can be said that the EBIT of the company is reducing as the interest expense will reduce because the gearing ratio is on the lower side.

 

 

 

 

Question 3

 

The Blackmores will be preffered over the company X as the current ratio of Blackmore is on the higher side. Secondly the Interest Coverage ratio is also higher and the Acid test ratio is also showing the stability of the company.

As the company Blackmores is showing more stability, its experience and position in the industry gives more credit to the company.

 

Question 4

The below table has been prepared and the various heads have been shown as well as there percentage of sales is also shown:.

Financial Item	2011 ($)	%	2010 ($)	%
Sales	234,423,000	100	214,934,000	100
Total expenses	195,059,000	83.2%	180,347,000	83.9%
Promotional and other rebates	22,,907,000	9.8%	19,054,000	8.9%
Raw materials and consumables used	69,920,000	29.8%	65,748,000	30.6%
Employee benefits expense	52,730,000	22.5%	48,179,000	22.4%
Selling and marketing expenses	22,102,000	9.4%	19,134,000	8.9%
Profit for the year	27,305,000	11.6%	24,297,000	11.3%

 

It can be seen from the above table that Blackmores expenses as percentage of total sales has reduced. Thus they have been able to take steps to reduce expenses and at the same time maintain the increase in sales. The main point is that they have increased the marketing expenses by 0.5% which has resulted in an increase in profit. Thus it has been fruitful for the company to increase the selling and marketing expenses.

 

Another important point is that the wastage of raw material has been reduced, this can be said as the raw material cost is reduced where as the sales have increased. Also the contribution of employees in the success of the company has not been neglected and the spending on employee benefit expenses has increased.

 

References:

Leo Troy, (2012), Almanac of Business & Industrial Financial Ratios

Charles K. Vandyck, (2006), Financial Ratio Analysis: A Handy Guidebook, Trafford Publishing

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