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BAC6021 Financial Reporting Assignment Sample

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Words Words: 6208

BAC6021 Financial Reporting Assignment

PART A

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As per requirement, we have formulated a trial balance of an assumption based company which is named as J Ltd which is engaged in production of minerals to serve people with resources to the world.

J ltd is engaged in many types of minerals, oils natural gases. It is being also considered as world's largest companies in year 2018-19 and its main course of operation lies in Australia, Brisbane, North America and many more and even its stats shows how good the company is in its overall functioning and business.

The trial balance is as follows:

Particulars

Original TB

Final TB

TRIAL BALANCE AT 31 MARCH 2019

$'000

$'000

$'000

$'000

Sales

 

124900

 

124900

Cost of goods manufactured d in the year to 31 March 2019

94000

   

94000

Distribution cost

9060

   

9060

Administration Expenses

16020

   

16020

Restructuring costs

121

   

121

Interest received

 

1200

 

1200

Debenture interest paid

639

   

639

Plant and equipment COST (20%) straight line)

30315

   

30315

Vehicles COST (25% reducing balance)

3720

   

3720

Plant and equipment

 

6060

 

6060

Vehicles

 

1670

 

1670

Investment properties (at Market value)

24000

   

24000

Inventories at 31 March 2019

4852

   

4852

Trade receivables

9330

   

9330

Bank and cash

1190

   

1190

Ordinary shares of $1 each, fully paid

 

20000

 

20000

6% redeemable preference shares of $1 each

 

1000

 

1000

Share premium

 

430

 

430

Revaluation surplus

 

3125

 

3125

Retained earnings at 31 March 2019

 

9552

 

9552

Ordinary dividends paid

1000

   

1000

Preference dividends paid

60

   

60

7% debentures 2019

 

18250

 

18250

Trade payables

 

8120

 

8120

         

194307

194307

 

388614

The additional information are as follows :

The property, plant & equipment are being depreciated as follows

Plant & equipment 20% per annum straight line

Vehicles 25% per annum reducing balance

Depreciation of plant & equipment is consideration to be part of cost of sales while vehicle depreciation should be included under distribution costs.

Income tax for the year to 31st March 2019 is estimation at $161000

The closing inventories at 31st March 2019 were $5180000. An Inspection of finished goods that a production had been set up incorrectly and that several production batches, which had cost $50000 to manufacturer, had the wrong packing. The goods cannot be sold in this at an additional cost $20000. They could then be sold for $55000. The wrongly packaged goods were included in closing inventories at their cost

The preference shares will be redeemed at their par value ($100000) in 2019. Preference dividends are paid on 31st March each year.

The 7% debentures are 10 years loans due for repayment by 31st March 2019. Interest on these debentures needs to be accrued for this six months.

The restricting costs in the trial balance represent the cost of a major restricting of the company to improve competitiveness and future profitability

No fair value adjustments were necessary to the investment properties during the period(How To Prepare An Income Statement: A Simple 10-Step Business Guide, 2021).

After consideration of above information and compiling them in new trail balance as follows:

 

Original TB

Adjustments

Final TB

 Final TB

TRIAL BALANCE AT 31 MARCH 2019

$'000

$'000

$'000

$'000

$'000

$'000

Sales

 

124900

     

124900

Cost of goods manufactured in the year to 31 March 2019

94000

 

6063

 

100063

 

Distribution cost

9060

 

513

 

9573

 

Administration Expenses

16020

     

16020

 

Restructuring costs

121

     

121

 

Interest received

 

1200

     

1200

Debenture interest paid

639

 

639

 

1278

 

Plant and equipment COST (20%) straight line)

30315

     

30315

 

Vehicles COST (25% reducing balance)

3720

     

3720

 

Accumulated depreciation a/ 31 March 2000

           

Plant and equipment

 

6060

 

6063

 

12123

Vehicles

 

1670

 

513

 

2183

Investment properties (at Market value)

24000

     

24000

 

Inventories at 31 March 2019

4852

     

4852

 

Trade receivables

9330

     

9330

 

Bank and cash

1190

     

1190

 

Ordinary shares of $1 each, fully paid

 

20000

     

20000

6% redeemable preference shares of $1 each

 

1000

     

1000

Share premium

 

430

     

430

Revaluation surplus

 

3125

     

3125

Retained earnings at 31 March 2019

 

9552

     

9552

Ordinary dividends paid

1000

     

1000

 

Preference dividends paid

60

     

60

 

7% debentures 2019

 

18250

     

18250

Trade payables

 

8120

     

8120

 Tax expenses

   

161

 

161

 

Tax liability

     

161

 

161

Closing Inventories-Asset SOFP

   

5165

 

5165

 

Closing Inventories-COGS

     

5165

 

5165

Debenture interest accrued - liability

     

639

 

639

194307

194307

12541

12541

206848

206848

  1. Using Adjusted Trial Balance to form an Income Statement as follows :

in $000s

Particular

Amount

Revenue

124900

COGS

100063

Gross Profit

24837

Other Income

1200

Distribution Cost

-9573

Administration Expenses

-16020

Other Expenses

-121

Operating Profit

323

Finance Costs

0

Profit Before Tax

323

Income Tax Expenses

-161

Profit for the year

162

  1. b) To know the financial position of the company we will formulate Company's Balance Sheet by using Trial Balance created above as follows:

ASSETS

AMOUNT

AMOUNT

Non-current assets

   

Property, plant and equipment

30315

 

Vehicle

3720

 

Investments 

24000

 
     
     

Current assets

   

Inventories 

15182

 

Trade receivables 

9330

 

Cash and cash equivalents 

1190

 

Total assets 

 

83737

     

EQUITY AND LIABILITIES

   

Accumulated Depreciation

16489

 

Share capital 

20000

 

Retained earnings 

9552

 

Debenture Interest Paid

1278

 

Long-term borrowings 

18250

 

 6% Redeemable Preference share

1000

 

Share premium

430

 

Revaluation Surplus

3125

 

Ordinary Dividend Paid

1000

 

Preference Dividend Paid

60

 

Trade and other payables 

8120

 

Tax Liability

161

 

Debenture Interest Accrued -liability

639

 

Suspense Account

3633

 

Total equity and liabilities 

 

83737

     

PART B

About BHP Billiton Ltd

BHP Billiton Ltd is a UK based company dealing in Diversified Metals & Mining and it's being stated as the most renowned company in all over UK and even BHP Billiton Ltd is a dual listed company structure comprising BHP group Limited and BHP group Plc and the two entities continue to exist as an separate companies but operate as combined group on known as BHP.

Even BHP LTD is considered to be a company which has generated larger amount of revenues in past and current years and has established a great image in corporate world with its good future plan and focus towards their goals and objectives.(A leading global resources company (BHP, 2021)

The company working sector is in Heavy Equipment & Engineering is categorized as one of the most top known and best companies dealing in this sector not only in Australia but also in whole UK.

The present market in which they are working are: Minerals like; Copper, Iron Ore, Coal and Nickel, zinc etc., Petroleum and their current trading markets are in Canada, Peru, US, Colombia, Brazil, New South Wales and other areas in Australia, a part of these they also function their activities in Trinidad & Tobago and thus it also indicates that company is having worldwide presence.

To add on company has one of the world's most significant deposits of copper, gold, silver and uranium known as Copper Asset i.e. Olympic Dam in Australia - made up of underground and surface operations and operates a fully integrated processing facility from ore to metal and there are some more alike assets in various areas of Australia and other countries of world.(Owler,2021)

If we critically overlook to the financial statements of BHP Billiton LTD, some below points plays important role in identifying company's scalability and sector as there is no such specific terminology or something which can give an exact idea about the company sector, so to have a normalized view the following points will help to do so.

= Settlement of Debt related instrument-

As per financial statement (cash flow statement) under financing activities it can be clearly seen that company is self-sufficient enough to settle its own debts on timely basis and thus it denotes that the company's working scale is very large and which directly indicates that company is generating good amount of revenue in its course of operations; as we know only firms working on large scale are that much capable to settle bigger amount of debts properly.

As settlement of debts also affects the credit score of any company, and thus we can see that company is paying it debts on time, which directly also indicates that the scale of business is large.

= Buy-back of shares -

This is another factor which indicates about the financial condition or health of any company not as directly but indirectly it does as buying back of company's shares is not that easy as for this company needs to make /generate adequate amount of revenue and thus as per financial statement the state of revenue plus buy-back of shares directly states that company is generating enough amount of profit and revenue during their course of operation and thus it signifies that company is operating on a larger basis.

Buying back of shares also gives benefits to the company as if a company re-acquires it shares from open market it basically boost up the shareholder value as it offers a way of using the surplus funds of companies with unattractive alternative capital options. A reduction in the capital base resulting from buying back will typically produce higher earnings per share (EPS).

= Cash and Cash equivalent -

It is to be considered as the most important part in any kind of business; as in any kind of business the requirement of cash acts as working capital as there are various variable types of working expenditure which needs to be compensated on daily basis for effective working of the business and as per the company's financial statement data - it can be seen that there is higher amount of cash and cash equivalent available and the higher amount of cash and cash equivalent is only required when the flow or requirement is too high and generally big scale company have higher requirement of cash and cash equivalent and thus this directly states that company is larger in scale.

= Non-Current Assets -

There are not only one type of non-current assets in whole balance sheet i.e. there are more types of assets like - Intangible assets which includes patent, trademark & copyright and in this we are taking Plant, Property & Equipment is the base criteria for evaluation and we found that the amount of plant, Property & Equipment is more than any of the other assets and these also denotes that the overall value of the assets is more and would generate higher economic life.

To sum-up it can be said that the scalability of the firm is too large as small firms can't have this much non-current assets in their businesses (Bragg and Bragg, 2021).

= Acquisition of Assets -

Acquiring new assets is only done by company's when they upgrade or update their old assets with new and advance technologies to work effectively and efficiently in their course of business and there is no such company who can acquire assets every year, as a medium or small scale companies can't even purchase assets in shorter course of period as they lack funds and reserves for this expenses and thus it also indicate that the scale of the business is too large and the requirement of new machinery and other assets arises every year.

To add on : evaluation of company's sector is very difficult plus based these points , we could just have general overview that how we could identify it's sector based or taking in consideration the financial statements of a company and in this major use was of Cash flow statements and company's balance sheet.

The limitations are associated to above points are as follows :

Settlement of Debts - There are some debts in business which needs to be repaid on time to time basis and that cannot be denied by any kind of business, thus only using a criteria of settlement of debts can't justify whether a business is larger in scale or what kind of sector they are working.

Cash & Cash Equivalent - In any kind of business, the requirement of cash as a working capital is very common and variability and requirement might vary from business-to-business and thus a higher amount of cash and cash equivalent in any company's cash flow statement can't justify the scalability of working sector of any business.

Non - Current Assets & Acquisition of assets - This two factor can't justify the scalability of any business because only taking assets as an factor can't give an exact idea of the company sector, as there are various firms and businesses/ companies which have higher amount of non-current assets as compared to other assets of the firm and there are firms who upgrade their technologies faster.

 Buy-back of shares - This factor can't be taken as a whole to evaluate a company's scalability or sector because there are times when firms plan some strategies for future and because of which company purchased its own shares again or there are also times when company wants it ownership to stay in hands of company (Three Financial Statements - The Ultimate Summary (and Infographic), 2021)

These are just some of the main limitations which comes to eyes after evolution of discussed above points.

Ratio Comparison of J Ltd & BHP Billiton Ltd

Net Profit Percentage (Formula = Revenue- Cost/Revenue)

J Ltd = 0.198

BHP Billiton Ltd = 0.3728

Interpretation:

As Net Profit is calculate to know the current status of firm profitability i.e. where is stands and relies in terms sustainability and growth, as per calculation it can be seen that the profit is in positive numbers of both the companies which indicates that firm is able to earn sufficient amount of revenue in their course of operations but as a base of comparison , BHP Billiton Ltd would be selected as the percentage is more than J Ltd.(Businessnewdaily,2021)

Return on Capital Employed (Formula =EBIT/Capital Employed)

J Ltd = 0.006049

BHP Billiton Ltd = 1.3638

Interpretation

As Return on Capital Employed is a ratio which is calculated for interpreting company's amount of profit it generates from the use of capital employed. As per calculation it can be seen that the rate of return capital employed of both the companies are in positive numbers, thus indicates that companies are using their assets in an appropriate manner and thus for base of comparison BHP Billiton Ltd would be selected as the percentage is more than J Ltd. (Three Financial Statements - The Ultimate Summary (and Infographic), 2021)

Return on equity (ROE) Formula =Net Income/Shareholders equity

J ltd = 0.003033

BHP Billiton Ltd = 0.1772

Interpretation

As Return on equity (ROE) is a ratio which is calculated for interpreting company's profitability, it is said that a rising ROE is sign that company's profit is increasing without needing much capital. As per calculation it can be seen that ROE of both the companies are in positive numbers, thus indicates that companies is working effectively and using resources in appropriate manner and for the base of comparison BHP Billiton Ltd would be selected as the percentage is more than J Ltd.

Asset Turnover (Formula = Net sales /Average Total Assets )

J Ltd = 2.98315

BHP Billiton Ltd = 0.88599

Interpretation

It indicates the value of company's sales or revenue and the value of its assets. It is an indicator of the effeciency how a company uses its assets to generate revenue, basically higher ratio indicates , a company is performing better in its course of operations and in this case J Ltd is utilizing its assets in an effective way as compared to BHP Billiton Ltd.

Gross Profit Margin (Formula =Gross Profit/ Net Sales X 100)

J Ltd = 19.88551

BHP Billiton Ltd = 35.917

Interpretation

It indicates how company employees and it's management team works to generate good amount of revenue by considering the cost involved in production or manufacturing of goods and services during the course of operations and thus higher GP indicates company's employees and team is working effectively and effectively and in this case BHP Billiton Ltd is having higher margin than J Ltd and thus indicates it manages its cost in a better manner as compared to J Ltd.

Operating Expenses percentage (Formula =Operating Expense /Net Sales X 100)

J Ltd = 20.587

BHP Billiton Ltd = 62.46

Interpretation

A lower percentage of operating expenses indicates that the company is very good in controlling it's expenses and in this case J Ltd is much better than BHP Billiton Ltd as J Ltd is around 20% whereas BHP Billiton Ltd is around 62% , and 62% is categories as normal percentage but below 40-50, its categorized as very good.

Debt Ratio (Formula =Total Liabilities / Total Assets)

J Ltd =2.76177

BHP Billiton Ltd = 0.4861

Interpretation

Debt ratio indicates the amount of ratio of debt in any company and a having its ratio less than 1 is said that it has lower debt in its business than assets and more than 1 visa-versa and thus in J Ltd its more than 1 and BHP is lower than 1 which indicates that J Ltd is having more debts in its business over assets -which is not good for its business whereas BHP Billiton Ltd is performing better in its course of operations !

Working Capital Ratio (Formula = Current Assets/ Current Liabilities)

J Ltd =0.8476

BHP Billiton Ltd =1.89423

Interpretation

It states whether a company is sufficient to pay its short term debts for its short term assets and it also indicates the financial position of the firm for paying short term requirements and if talk about J Ltd and BHP Billiton Ltd - J LTD ratio lesser than BHP Billiton Ltd which indicates the capability of paying short term debts is lesser as compared to BHP Billiton Ltd (Owler,2021).

PART C

  1. Depreciation is a expenses for company and which every company has to incur during course of operations and even there has a great impact on business as it affects the value of businesses and entities as the calculated or accumulated depreciation reduces the book value or in account value of assets in balance sheet !l

Thus, if we talk about the impact of depreciation on BHP Billiton Ltd it will of course impact its balance sheet and there would be an increase in value of depreciation expenses that a firm has to incur doing course of business/operations !

As the firm currently is using Straight line method in terms to calculate the depreciation for its current and non-current assets and the depreciation method and rates applied to specific assets reflect the pattern in which the asset's benefits are expected to be used by the Group.(What Is Depreciation - Types, Formula & Calculation Methods For Small Businesses Accounting, 2021)

Thus changing the mode of calculation will impact the firm's expenditure in a wider manner and as the amount of depreciation expenses will be more as the size of the business is large to add on after changing the impact will be also seen on overall firm's net income too as if the amount of expense will increase it will lower down the income in hand with the company and thus on other hand it can also impact its future decisions too like if company is planning to invest or buy something for company's benefit ; they could not do that , due to lesser income in hand .

If we see the positive aspect of changing the method of depreciation it can be also said that in course of business there are some types of assets that do not exactly the same year, as assets age then they get less efficient not at the beginning of purchase and there are points like repairing cost also increase over period of time which is not being taken in consideration while using straight line method and the life span of asset is unpredictable but as per straight line method in some years the value of asset can result to zero.

Reference:

Accounting Simplified. 2021. What Are Financial Statements | 4 Types Of Financial Statements | Explanation | Examples. [online] Available at: https://accounting-simplified.com/financial/statements/types/.

BHP. 2021. A leading global resources company | BHP. [online] Available at: https://www.bhp.com/.

Bragg, S. and Bragg, S., 2021. Types of financial statements — AccountingTools. [online] AccountingTools. Available at: https://www.accountingtools.com/articles/types-of-financial-statements.html.

Businessnewsdaily.com. 2021. [online] Available at: https://www.businessnewsdaily.com/2665-accounting-formulas.html.

Corporate Finance Institute. 2021. Three Financial Statements - The Ultimate Summary (and Infographic). [online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/accounting/three-financial-statements/.

FreshBooks. 2021. How To Prepare An Income Statement: A Simple 10-Step Business Guide. [online] Available at: https://www.freshbooks.com/hub/accounting/prepare-an-income-statement.

owler.com, 2021. [online] Available at: http://www.owler.com/company/bhpbillitonplc.

ProfitBooks.net. 2021. What Is Depreciation - Types, Formula & Calculation Methods For Small Businesses Accounting. [online] Available at: https://www.profitbooks.net/what-is-depreciation/.

Appendix:

Notes

 

Capital Employed

Noncurrent assets + Working Cap

53397

77488

Working Cap

Current Assets - Current Liabilities

-4618

11034

Shareholder equity

Total Assets - Total Liabilities

53417

51824

Average Total Assets

Total Assets / 2

41868.5

50430.5

       

It is assumed that Total Liabilities and Current Liabilities value are same! (in J Ltd)

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