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:

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.

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

A. Part A

1. Question 1: The Principal Operating Activities of Blackmore’s Limited

Blackmore’s Limited is a listed pharmaceutical company with its main operations as a distributor of branded vitamins in the market. The company extends its operations mainly in Australia and South East Asia, in the distribution of the branded vitamins. Blackmore’s is a leading developer of innovative products produced organically with expertise in the vitamins, minerals, herbs and other nutrients. The main operations of the company are carried through the distribution through retail stores as well as super markets (www. blackmores.com.au and www.investsmart.com.au- accessed on 16/05/2012).

2. Question 2

Marcus Blackmore was appointed the chairman of the company in 2009, Mr M Blackmore has fully paid up share capital of 4,479,278 in 2011, according to the company’s 2011 Annual report (Annual Report 2011, accessed on 16/05/2012)

3. Question 3

The 2011 annual report contains significant notes to the financial statements which are a clear reflection of the accounting policies followed by the firm, and being the line with the accounting standards of the firm. The notes to the significant financial statements are as follows; the firm has confirmed the amendment in the particular accounting standards and have applied them in the preparation of the consolidate accounts. The following amendments have been undertaken by the corporation firstly the Amendment to the AASB 7, Amendment to the AASB 101 related to the financial statements presentation and well as Amendments to AASB 107 related to the presentation of cash flows. The certain accounting standards have yet not been adopted but the firm confirms the adoption of the standards in years 2013 and 2014.

4. Question 4

The 2011 annual report contains significant notes to the financial statements which are a clear reflection of the accounting policies followed by the firm, and being the line with the accounting standards of the firm. The notes to the significant financial statements are as follows; the firm has confirmed the amendment in the particular accounting standards and have applied them in the preparation of the consolidate accounts. The following amendments have been undertaken by the corporation firstly the Amendment to the AASB 7, Amendment to the AASB 101 related to the financial statements presentation and well as Amendments to AASB 107 related to the presentation of cash flows. The certain accounting standards have yet not been adopted but the firm confirms the adoption of the standards in years 2013 and 2014.

The depreciation is accounted on the basis of the straight line method for assets like property, plant and equipment the life of the machinery is estimated and the appropriate measure of the residual balance has been undertaken as well.  The freehold land is not depreciated while the life time of buildings is estimated at 20-40 years, the leasehold properties at 3 – 13 years and the Plant and equipment 3 – 20 years. The balance of the depreciation is calculated on the following basis (Annual Report Blackmore’s, 2011 Pages 60-64 accessed on 16/05/2012)

5. Question 5

Corporate Governance: Blackmore’s adheres to very high standards of corporate governance and has high principles to determine corporate behaviour and responsibility. The corporate governance principles adopted by Blackmore’s are the following the First Principle followed by the company is to adopt a solid outlay for the management and the oversight for the management. Second Principle followed is related to the structure of the board and the valuation of the firm under the consideration of the firm. The Third Principle aims at adoption of a clear adoption of ethical and responsible behaviour throughout the corporation. The company also intends to safeguard the interests of the firm while undertaking the financial reporting process. The fifth principle adopted by the corporation is to make the appropriate and timely disclosures of key information of the corporation from time to time. The sixth principle followed is the keep in mind the interests of the shareholders and the maximization of the shareholders’ interests in the process. The seventh principle adopted by the corporation is the risk management of the projects undertaken as well as minimization and profit maximization has to ensure. The eighth principle followed to have an appropriate and fair remuneration process, the compensation process should be based on the performance of the employees and management. The management should also undertake innovative compensation measures to ensure employee motivation (CORPORATE GOVERNANCE PRINCIPLES, Annual Report 2011 accessed on 16/05/2012).

6. Question 6

The similarities of the internal and external audit process stop with planning. Beyond that both the internal and external have completely different implications on the organizations control mechanisms and legal compliance. The basic difference arises in the risk assessment of the organization. Firstly the standard utilized in the assessment of risk is different for both internal and external audit. The internal auditors use the  Statement on Internal Auditing Standards (SIAS) 9 and   Risk Assessment(The IIA, 1991), whereas the external auditors use the standard  Statement on Auditing Standards (SAS) 47, “Audit Risk and Materiality in Conducting an Audit” (AICPA, 1983) and SAS 53 in the assessment of risk. Not only the internal and external auditors use different standards in the assessment of risk but also utilize the risk differently as well.

This is because the objective of risk management is different for internal and external audit teams. The internal audit is concerned with communication of the roles and responsibilities within the organization. The internal auditing department has to adopt a broader role to ensure operational efficiency, compliance, and financial work. This has to ensure efficiency and effectiveness in all the departments.

On the other hand the external auditors are not present within the organization, and may also use the information of the internal audit. The external audit risk assessment is based upon ensuring correct financial statement reporting and evaluation of the presence of any fraudulent practices in the financial reporting. The external audit has to ensure the effective presentation of financial reports to all the stakeholders of the business. The external audit is more about legal compliance and is a compulsory activity on the other hand the internal audit is not a compulsory activity.

Taking into account even the monitoring function on the controlling operations the internal audit has to monitor the activities of all the operational departments within the business and maintain efficiency. On the other hand the external audit is only concerned with the financial statement monitoring and their presentation to stakeholders. Thus, the external audit is more about legal compliance and is a compulsory activity on the other hand the internal audit is not a compulsory activity.

(Findarticles.com- accessed on 16/5/2012, and Pickett, 2012, Annual Report 2012, accessed on 16/05/2012)

7. Question 7

The revenues of the corporation in the years 2011 were reported as $234,423 and the income from the other sources was reported as $1,325. The revenue of the corporation has been received from the sale of goods as well as the interest from the bank deposits, the income from Royalties have also been accounted as part of the revenues. The other income resources have been identified as the gain from the gain(loss) from the sale of Assets was reported as $5 million , the company has received grants from the government to develop the market were reported as $21 million and Net foreign gains have been reported as Net foreign exchange gains $1,299. (Annual Report Blackmore’s 2011, accessed on 16/5/2012 Page 64)

8. Question 8

The Total cash receipts from the customers have been reported as $247,828 , There is a difference between the actual customer receipts and the actual revenue reported as some the sales that have been reported as credit sales , but however the actual payments has not been realised as yet. The payments would eventually be realised in the course of the year in progression (Annual Report Blackmore’s 2011, accessed on 16/5/2012 Page 65,66)

B. Part B

1. Question 1

a. Current Ratio = Current Assets/Current Liabilities

Current Ratio in 2010 Current Ratio = 80485/34457 = 2.33

Current Ratio in 2011 Current Ratio = 78521/33221=2.36

b. Acid Test Ratio = Current Assets- Inventory/ Current Liabilities

Acid Test Ratio in 2010 = 80485-22555/34457 = 1.68

Acid Test Ratio 2011 = 78521 – 23749/33221 = 1.64

c. Gearing Ratio = long term liabilities/ capital employed x 100

Gearing Ratio 2010 = 48102/ 71,790 x 100 = 67%

Gearing Ratio 2011 = 40,797/79112 x 100= 51.5 %

d. Interest Cover Ratio = (Earnings before Interest and Taxes) / (Interest Expense)

Interest Cover Ratio 2010 = 36,746/ 2,442 = 15.04

Interest Cover Ratio 2011 = 41,533/2372= 17.5

(Thukaram , 2003 and Annual Report Blackmore’s 2011 , accessed on 16/5/2012)

2. Question 2

Company X

Black Mores

Comparing Both Company X and Blackmore’s we have the liquidity position Blackmore’s is slightly better than the position of company X. This can be analysed because Blackmore’s has a better current ratio as well as a better acid test ratio in both the years of operations as evident from the table. A higher liquidity ratio is a indicator of greater liquidity available to the company, Therefore a better cash flow and smooth running of business operations. On the other hand comparing the gearing ratio Company X continues to be highly geared in both the years under study, implying a higher degree of risk associated with the investment in the company. A higher gearing ratio implies an existence of a debt burden on the corporation, therefore making investment in the corporation a risky investment (Thukaram,2003)

3. Question 3

Comparing the Interest coverage Ratios of both the corporations Company X and Blackmore’s it is advice to the investor to provide to Blackmore’s , Because in the both the years of study i.e. 2011 and 2010 the ratio has been 17.5 and  15.4 respectively. While on the other hand company X has an interest cover ratio of 10.9 and 13.1 in 2011 and 2010 respectively. Therefore providing credit to Blackmore’s is better has the firm has higher earnings to cover the cost of interest and would be effectively be able to pay the costs easily without affecting the profitability of the firm. A higher interest cover indicates a higher margin of safety clearly evident in Blackmore’s ltd. (www.investinganswers.com – accessed on 16/5/2012).

4. Question 4

The Performance of Blackmore’s has experienced a steady improvement in the year 2011 in comparison to 2011, The firm has experienced an increase in the revenue contributing to the increase in the profit margins for the firm. The corporation has experienced a sales growth of 9% over the period a clear indicator of high performance by the company. The profit margin of the firm has increased by 12% over the past year a clear indicator of the steady progress being made by the firm. The expenses of the firm have experienced a minor increase in the period this has been largely due to the expansion in revenues and the operations of the firm, Most of expenses incurred would tend to increase the profitability of the company (Annual Report Blackmores 2011, Page 6 accssed on 16/5/2012).

References

• “BLACKMORES LIMITED (BKL) – Company Profile.” Managed Funds – Superannuation Funds – Managed Investments. N.p., n.d. Web. 16 May 2012. http://www.investsmart.com.au/shares/asx/BLACKMORES-LIMITED-BKL.asp
• Annual Reports – About Blackmores – Blackmores.” Vitamins and Dietary Supplements – Health Information – Australia – Blackmores. N.p., n.d. Web. 16 May 2012. <http://www.blackmores.com.au/about-blackmores/investors-centre/annual-reports>.
• Vitamins and Dietary Supplements – Health Information – Australia – Blackmores.” Vitamins and Dietary Supplements – Health Information – Australia – Blackmores. N.p., n.d. Web. 16 May 2012. <http://www.blackmores.com.au>.
• Rao, Thukaram. Accounting and financial management for BCA & MCA. New Delhi: New Age International, 2003. Print

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