BUS114 Assignment 03 S121 - Student Guide PDF

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BUS 114 Assignment 03 Student Guide Detailed answers are presented in this suggested solution. Students are not expected to have answered as comprehensively. Students are expected to display understanding when answering questions.

1. Financial Accounting – Balance Sheet: 28 marks (a) •

Synlait’s Chairman’s report (page 9) indicates that A2 Milk is its only customer.

•

Synlait’s financial statements (Note 10, page 162) shows that A2 Milk is one of its top 20 shareholders and owns over 35.6 million shares (19.8%).

•

According to A2 Milk’s CEO report (page 15), Synlait is one of A2 Milk’s three key strategic partners and supplies milk to A2 Milk.

•

Under Other financial assets (Note C6, page 84), classified as a Non-current Asset on the Balance Sheet in A2 Milk’s financial statements, A2 Milk purchased shares in Synlait previously and then in March 2020 purchased a further 4.4 million shares thereby increasing its investment to 19.84%

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BUS 114 Assignment 03 Student Guide (b) Items on the Balance Sheet Description of the item

Measurement

Value of the item for 2020 in the Financial Statements (per company)

Location in the Financial statements and related notes

Reasons for the classification

Discuss one difference between the two companies found in the notes

Milk and products for resale.

Stated at lower of cost and net realisable value.

$269,384,000

Current Assets, Note 5 Current Assets, Note C2

Held for resale within in one year.

Synlait’s inventory includes Work in progress while A2 Milk does not. A2 Milk has goods in transit which is not the case for Synlait.

$268,544,000

Equity, Note 12

Money owed by

No answer required.

Equity, Note D5

the business to the owner.

Inventory Synlait A2 Milk

milk held

$147,332,000

Share capital Synlait

Money raised in

It is the

A2 Milk

exchange for ordinary shares.

contributed value of share capital in dollars and the number of shares that have been issued.

$146,933,000

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BUS 114 Assignment 03 Student Guide Loans & Borrowings Synlait

Interest bearing liabilities such as loans and bonds.

No answer required.

A2 Milk

Current and Non-current Liabilities, Note 11 N/A

Held for repayment within one year and longer.

Synlait makes use of working capital and revolving credit facilities while A2 Milk does not have any debt facilities. No debt facility used by A2 Milk.

$4,230,000 $42,503,000

Current and Non-current assets, Note 8

$13,640,000

Non-current Assets, Note C5

A portion of the intangible assets will be used up with one year and the rest over a longer period. The intangible assets have longer useful lives than one year.

Synlait’s intangible assets include brands and intangibles in progress which are not included in A2 milk. A2 Milk also has project development in the intangible assets.

N/A

A2 Milk

Intangible Assets Synlait

$102,837,000 $426,754,000

Assets that are not tangible such as patents, trademarks and goodwill.

No answer required.

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BUS 114 Assignment 03 Student Guide (c)

The Balance Sheet provides an overview of the assets owned (or controlled) and the liabilities owed by the company. As can be seen from the table above, Synlait owes $527.6 million ($102,837,000 + $424,754,000) in debt while A2 Milk does not have that type of debt. This makes Synlait a much riskier company as it will be required to pay back the interest and the loans from sales. Although further analysis would be needed, it would seem that A2 Milk would be a better prospect to invest in than Synlait.

2. Financial Accounting – Income Statement: 15 marks (a) Accounts receivable is to be recorded at the recoverable amount. Accounts receivable amount is $1,500,000. Default rate is 10% so will only receive 90%. Recoverable amount is $1,500,000 - $150,000 = $1,350,000.

(b) i. When the cash paid on 1 August 2020:

Balance Sheet: Cash (an asset) is decreased in the balance sheet. Prepaid insurance (an asset) is recognised in the balance sheet as Lokalalo now has the benefit of cover for 12 months. Income Statement: There is no effect in the income statement as the expense is not recognised until after the month of cover has passed. Statement of Cash Flows: Operating cash outflow is recognised in the statement of cash flows. ii. At 31 August 2020 or for the month of August 2020: Balance Sheet: In the balance sheet prepaid insurance is reduced by the portion of benefit received ($15,000÷12 = $1,250) and equity goes down due to the income statement impact (expense recognition). The balance of prepaid insurance in the balance sheet will be $13,750. Income Statement: An expense of $1,250 is recognised in the income statement.

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BUS 114 Assignment 03 Student Guide Statement of Cash Flows: Option-1: No effects on cash flow statement from the adjusting transaction; though if students shows 15,000 cash outflow on cash flow statement from the 1 Aug 2020 transaction, it is also acceptable. The answer needs to be clear on which transaction it refers to.

(c) i.

The cash flow statement shows the entity’s cash inflows, outflows and net cash flow for the reporting period. The cash flow statement splits these cash flows between operating, investing and financing activities.

ii.

It is important as a business needs cash to operate and meet its obligations. Without cash flows a business will wither and die.

iii.

The main differences between profit after tax and cash flows from operating activities are: •

Accrual vs cash accounting (we record revenue when it is earned and not when the cash is received which is why we have accounts receivable OR we record the expense when it is incurred and not when the cash is paid which is why we have prepaid insurance).

•

Non-cash items that need to be included in profit after tax (depreciation) but not operating cash flows.

3. Financial Accounting – Financial Statement Analysis 7 marks A2 Milk’s Gross profit margin (GPM) and Profit Margin (PM) increase slightly from 2019 to 2020. In 2020, GPM indicates that for every $100 of sales revenue, the business was able to generate $55.96 of gross profit to cover other operating expenses (such as marketing and administrative expenses). This ratio is slightly higher than Year 2019, which is good. PM indicates that in 2020, for every $100 of sales revenue, the business was able to generate $22.29 of profit after tax. This is again slightly higher than the previous year. In both cases, it shows that the Covid-19 pandemic did not negatively impact the company profitability in the Income Statement in 2020. In contrast, A2 Milk’s Return on Assets (ROA) and Return on Equity (ROE) ratios decrease from 2019 to 2020. In 2020, ROA indicates that for every $100 of assets, the business was able to generate $44.52 of EBIT. This is lower than 2019, which is not good. In 2020, ROE indicates that for every $100 of equity, the business was able to generate $40.15 of profit after tax. This is again lower than the previous year, which is not good. In both cases, it shows that profitability to investment ratios have worsened in 2020 compared to 2019. (NOTE for students ONLY: based on A2 milk’s 2020 annual report, the decrease in ROA is driven by the increase in the average total assets is bigger than the increase in operating profit (i.e., Earnings before interest and tax). The decrease in ROE is driven by the increase in the average total equity is bigger than the increase in profit after tax.) A comparison of the profitability ratios between A2 Milk and Synlait across the two years shows that A2 Milk’s GPM, PM, ROA and ROE ratios are better (higher) than Synlait. Overall, A2 Milk maintains the gross profit and profit margin, but the return on assets and return on equity ratio have decreased. A2 Milk’s profitability ratios are better than Synlait’s, which means that A2 Milk has better profitability.

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