assignment 2€¦ · web viewchapter four for me had a lot more valuable information than the...

Assignment 2CHLOE WEBSTER

Accounting & Online Communication. Student Id: 12047588

Step 1: Chapter 4 KCQ’s ……………………………………………………………………….... 1Step 2: Chapter 6 KCQ’s ………………………………………………………………………… 5Step 3: Restating Financial Statements ………………………………………………………... 6Step 4: Feedback Sheet …………………………………………………………………………. 7Step 5: Chapter 7 KCQ’s………………………………………………………………………… 12Step 6: Chapter 8 KCQ’s………………………………………………………………………… 14

Step 1: Chapter 4 KCQ’sChapter four for me had a lot more valuable information than the previous chapters. It was

quite overwhelming and took me quite a while to read through. I found myself, as I did previously, comparing what I was reading to my financial reports, as well as restating them as I went along. I did, however, have what felt like a million questions throughout the chapter.

“Whoever wishes to foresee the future must consult the past ...”-Niccolo Machiavelli

This statement and following paragraphs made a lot of sense to me. I feel like this is something that should always be considered. In my life, this has helped me in various situations. For example, I used to work at a coffee shop in Gladstone and to prepare for the future weeks we would look over the previous weeks’ statistics to find which days and times were at peak times so that we could prepare. Through doing so, we were then able to accurately predict which times would become most busy and make sure we have sufficient stock and staff for the times or days. We would also make predictions about what to offer for these days, and ensure that we have confident staff who can complete these requests.

How do firms add value to equity investors?

I have wondered this since a young age as my dad has always invested money into companies and is always talking about ‘wins’ and ‘losses’ with shares he has bought. I never understood how it worked, but I always wondered. Reading through this part of the chapter I was very confused about a few things. Firstly, when a firm pays a dividend, it is a transfer in value. In the previous chapters, I have understood transfer in value. However, I was very confused here. Does this mean that when a company pays dividends to an investor, it is simply giving back what it had received from the investor previously? Was the investment more of a short-term loan?

The more a firm invests into its operating assets, the less will be a firm’s free cash flow.

This statement had confused me at first, but after reading the following paragraphs, I found it made a lot of sense to me. For any business to be successful, it first must invest in its operations to receive profit from the operations. Without sufficient funds to continue operations a firm is not going to receive any profit. It seems like common knowledge to me, to create value you must spend cash in doing so. For example, you could buy a car that isn’t worth much, invest $5000 into fixing the car and making sure it is running at its best, and you might get more than you paid and spent on it. Initially, you will be out of pocket, but once the car has been sold, you will have more money than you started with.

One thing that did confuse me about the free cash flow, however, is the company example towards the end of the topic. I understand that one company is investing more into operations and both end up with the same free cash flow. What confuses me is which company would be better to invest in. Would it be better to invest in a company that spends more money on operations but has the same free cash flow? My thoughts on this are that it is very circumstantial. For example, one of the companies could be spending more of their money on expanding their firm to a new location. Though this might cost more money to begin with, the firm would most likely find that they will

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become very profitable in the future once the operation has been set up and completed. Therefore, one company might be currently spending less money on operating costs and having the same amount of profit as another, but in the future, the company that invests more money into its operations may quite easily become much more profitable. I believe this is all circumstantial.

Economic profit had confused me beyond belief. This is something I could not wrap my head around and could not make any sense out of. I did understand what return on net assets (RNOA) means, the same with operating income (OI) and the net operating assets (NOA.) It had taken me an hour to understand exactly what this paragraph was meaning and what it was trying to figure out. Finally, after what felt like eternity, I made sense of this equation. I still have some questions that I haven’t been able to answer however. What is a capital? Is this another word for the investment? Or the operations that the firm is running?

How does a firm create value and give this to their equity investors? In the chapter, it says that a dividend payment is not a creation of value but rather the transfer of value. So how does a company create this profit to give to their investors? Does a company continue or commence operations with the money from the investors and the profit that is gained back from these operations is paid to the investors? Obviously not the whole amount, but a percentage of this amount. I am unsure of whether I understand this correctly.

Restating financial statements. Oh, how this was such a treacherous activity for me. I found this beyond confusing and was constantly referring to the chapter than back to my financial statements and vice versa. I did, however, understand the importance of doing so. It seems straightforward to me that a company can easily lose money from its operations. For example, if the coffee shop that I used to work at suddenly stopped serving coffee, it will lose almost all its profits from their operations. By restating the financial reports in this manner, it has become quite evident where my company is earning and losing money when it comes to their operations.

A conceptual view of a firm This had me confused for quite a while until I had compared it to what I was doing with

restating my financial statements. To begin with, I was asking myself ‘why am I doing accounting? It takes me so long to understand any of this. I just don’t get it.” I then realised that it was talking about what financial and operational views of a firm are. From what I believe after reading this part of the chapter, it seemed straightforward. Operational activities are literally that. Operational activities. Consistent with financial activities. I think the wording of the paragraph explaining what was included in operational and financial had me so confused. The sentences and words were too close together, and I found myself having to “dumb it down” to quite understand what it meant.

The net of assets and net financial assets seem to make a lot more sense to me. I found that this was explaining exactly what we are doing with our financial statements. Taking one side into an operational view and the other into a financial view. I found the diagram that was included showing the operating expenses and operating revenue, along with equity investors and debt investors has helped a lot with understanding exactly what Martin is talking about. It had then occurred to me that equity investors receive their profit from investing in the firm through the firm’s revenue and increase’s its asset value. Though I am unsure of whether this is correct or not, this is what I understand of this.

Reading through the changes of equity paragraphs I noticed Martin had said something about firm’s not including all its earnings in their financial statements. This had me reflecting the previous chapters where financial statements are supposed to follow the principles of accounting. E.g. GAAP. In these principles of accounting, wouldn’t the firm have to disclose all earnings in the one balance sheet? Rather than putting these earnings into the statement of changes in equity? Is

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this normal for firms to do this? And what is the purpose in doing so? The only answer I could think of was that the firm is using this as a marketing technique, as Martin had said earlier this could be the case. The firm might be placing its earnings straight into the changes in equity so that investors look at this and believe the firm is paying (or transferring value) straight back to their current equity investors. I find this would be appealing for an investor.

The balance sheet. This one still confuses me. Why do companies separate their liabilities along with their assets into current and non-current? I’m unsure of whether this means a company is selling an asset or liability and that is why it is not current? Or if the firm is considering buying an asset or liability? Furthermore, the company could have shares or investments into an asset or liability. Could that be why it is non-current?

Reading the paragraph about separating cash into operating and financial views I quickly became very confused. I understand that a company may have cash set aside for an asset and that it will have cash to continue or conduct operations. This seems straightforward. Similar to my life, I have cash for food, rent, food bill, etc. and then I have money put into savings. But I am unsure of how to figure out how much is an asset and how much is for operations. Considering my companies balance sheet, my company has included "cash and cash equivalents" in their assets. They also have a very large amount in this. Since they have worded it as “cash and cash assets” would this mean that this is only an asset and they have already got a sufficient amount of cash elsewhere for operations?

Seeing that tax depends on the profit of a firm and that if a firm pays a higher amount of borrowings it will pay a lower amount in tax, I have begun to think. Is this the way the world works for average people? If people were to borrow a large sum from the bank as for a mortgage or a car, would they pay less tax so that they can pay the bank more money for their mortgage? Or does this only work when within a firm? Or does this mean that paying interest and the firm's debt is more important than paying tax? Or is this because a firm pays the interest and borrowings to a bank before it pays its tax, and therefore the profit for the company is less thus the tax expense is less?

I found it quite interesting to read how much money Martins company had saved from having borrowings and interest so that they did not have to pay tax. I’m astounded that they were, as you say, ‘shielded’ from paying that much tax because of their borrowings. This has opened what feels like a whole new world to me. Does every company do this to protect themselves from what feels like an infinite amount of tax? Can this work in smaller companies as well or only companies who are in the larger tax bracket with large amounts of money owing? Is this something that normal adults like you and me would be able to use to kind-of rip off the tax department?

Return on net assets or RNOA if you prefer. I have seen this term being used throughout the chapter everywhere. Like all the other abbreviations I have found that I have memorised this quite easily. I have been like this most of my life, having a strong ability to remember abbreviations and numbers. Anyway, to begin with, I had assumed that you were already given the numbers in the financial reports to find this out, and had quite some troubles in doing so. I had only realised that towards the end of the chapter that you must do quite a bit of work to find this out. However, it is worthwhile. Looking at the profitability I have quickly realised just how powerful and useful financial statements are. I’m not sure if it had occurred to me earlier, or if this was a 3 am realisation (yes, it is 3 am for me right now, I really should have started this earlier.) It has just occurred to me that you can use these financial statements in many ways and that by doing the profitability equation you are easily able to make a judgement about whether the company is worth investing in. I also understand that efficiency is just as, or maybe even more, important than profitability.

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I’m not sure if this is correct, however from my understanding, I would rather invest in a company that has 13c per dollar profitability, however, their efficiency would be a lot higher. This is in comparison to a company that has 50c per dollar profitability, but their efficiency is quite low. I am interested to see how my company does in this way and will be trying this out shortly to see whether my company is presenting itself as very profitable or the company is doing as well as it seems.

In conclusion, chapter four had done two things for me. Firstly, it had gone beyond confusing me. Some things, I have figured out on my own, and others I feel as though I have a million questions for. Secondly, I feel as though this chapter has opened a whole new world for me. There are so many things about accounting that I had never known existed, and there are so many things a company can do, such as ‘shield’ themselves from tax. This chapter was probably the most intriguing and factual so far.

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Part 2: Chapter 6 KCQ’s I found this chapter quite intriguing and has a fair amount of valuable information that I spent a lot

of time trying to process and use in my life and company. I had so many questions through the beginning of the chapter which were then answered as I read further on into the chapter. I have included these initial questions, along with the answers I have found throughout the latter stages of the chapter. I was pleasantly surprised to see that the chapter had such close ties to management and statistics – the two other subjects I am studying this term. This has made me realise how important each of these topics are, and just how these intervene with each other to create what seems like the perfect business.

Attaching costs to cost objects

The chapter started with attaching costs to cost objects. Attaching costs to cost objects seems straight forward, and something people in everyday life would find helpful. For example, it would be useful to know where exactly all our hard-earned money is going and whether this is helpful to us. In my company, it appears this is something that has been taken very seriously. I believe this because the company has consistently included "costs from not continuing operations" as well as "costs from continuing operations." This says to me that the firm is continuously looking at where their money is going and whether it is producing enough profit for the services.

I was initially wondering how one or two managers would look through the cost objects of a firm

and how long this would take. I had thought in an exceptionally large business that they would have a lot of trouble going through all the small and large costs. I then read that they are divided into sections and that had answered a few of my questions. However, one thing that has occurred to me through all of this is how would a firm know what costs are vital to the business, even if it is not bringing in any profit to the business? For example, a coffee shop may not make a large amount of profitability from selling hot chocolates, (working in a coffee shop I can tell you that they do not sell many hot chocolates and more times than not the product goes to waste,) but if they didn't have hot chocolate to sell then they would have a reputation of a business that does not offer a broad number of services. Furthermore, the shop would be a store primarily marketed towards adults as hot chocolate is the equivalent of coffee for children. This would take away a significant percentage of customers and limit their customer base to adults. This would, therefore, bring down their profitability even more than if they had the hot chocolate that has gone to waste. My question through all of this, is that how does a make sure that they are not taking away a valuable asset even though it may not be making them much or any profit?

Expanding on the previous paragraph, there are circumstances in which a company should think deeply about. For example, I worked in a bakery when I was younger that was minuscule and cramped. The owners had just purchased the bakery and were in a time where the economy was going downhill fast. The bakery had started with a warehouse for all their stock - and trust me there was a lot of stock. After a while of operating, with the economy still going downhill, the bakery's profits were plummeting, and they had started to brainstorm ways to cut their costs. They came up with an idea to sell the warehouse and move all their stock into the small bakery and the owner's house. When they did this, the already cramped bakery became extremely difficult to get around, and the stock was extremely hard to find as there were boxes on almost every corner and additional space. The workers could not make the food as efficiently as they had previously because they did not have sufficient room to make the food. The owners had never been inside the bakery or understood how their choice had negatively effected their business and they started blaming the workers for not working as efficiently as they had previously. My question here is, how does a company know that the decision they are making about their costs is going to benefit them rather than cause havoc? In a larger business is the decision split between people who are seeing the financials with the people who work in the actual company?

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"Some people think numbers merely reflect reality… but we believe that numbers create reality.” This quote was initially nothing but a paradox to me. Originally I was thinking, numbers cannot make a reality, it all depends on the business and what the business is doing that creates the numbers in accounting. But then I had thought, how did the business begin? With numbers. The company was founded by people who have the money, or borrowed, to start the business. And how did these people start the business? With numbers. Finding what they can and can’t afford, predicting what is going to earn them money and what isn't. Even in firms that have been existent for longer than I have - their numbers are their reality. Their numbers are telling them what is working, and what isn’t. Their numbers are telling them what they can afford and what they can't. Their numbers are telling them exactly what they need to do, and when they need to do it, they just need to invest a little time into looking at this reality.

Cost objects have a lag between being made and getting sold, as Martin has said. My question here is, are there ways of predicting or knowing how long this will last? Can companies look at how long it takes them to manufacture and sell a product and decide on whether the wait is worth the profit? For example, the coffee shop I worked for makes its beans. The beans have been created and then are waiting to be sold, but the company may not sell as many coffees as initially predicted. Some of these beans will no longer be any good to sell as they have been sitting around for too long and have spoiled. Furthermore, if the company is spending say $100,000 a month on making these beans, but their profits have plummeted, and they are only making say $80,000 from selling coffee, they will have a lot of coffee sitting around and losing profit. Similarly, the company could go on a very high-profit month and require more coffee beans than originally thought, but it takes time to 'manufacture' the coffee beans. Are there ways a company looks at this through the financial statements to decide on what their average waiting period is for the stock? For example, they could have a manufacturing date and batch number and record this, and then when the same batch is sold they also record this. Over time, this process would give them an average time for their products to sell. This also reflects Chapter 4, where it states that to predict the future we must first analyse the past.

One thing that is known by everyone is companies are regularly spending and receiving money. One thing that has occurred to me plenty of times through all the chapters is that a company can 'hide’ their costs by not including them on the financial reports due date. In relation to this chapter, a company may not include their manufacturing costs until the day after their financial reports are due. They may 'delay' manufacturing, if possible, to the day after their financial reports have been completed. This in turn, makes the company look as if they are bringing in more profit than expenses. Though this may not be the case for most companies, I believe that it is something worth exploring. Obviously, the cost would appear in the next year’s financial reports, but now the company may become more profitable, and therefore hiding the fact that they are 'cheating' the system. Or it could go the other way, the company may lose all their profits and what they have done comes to light.

Expanding on the previous paragraph is a company allowed to 'hide' the financial expenses on products they still have in their inventory, as to highlight the fact that these products will produce profits but haven't yet. Does this mean that a company can kind-of hide their expenses through doing this? Or will this become easily apparent in their next financial report? I had then continued reading and found that a company will leave its expenses on the date it cost them money, but will include the revenue on the date it occurred. Though this is logical, it can mislead their financial reports. Is there a way accountants or managers can look through these financial reports to find out that they have not spent as much money in comparison to profit as the financial reports are initially showing? Do companies list this expense under a separate name so that customers, investors, and anyone reading their financial reports understand that the company has these items for sale now and that the will bring profit soon?

After doing some further reading into the chapter, I had found that I was correct with my last question. The products are put into a separate statement in the financial report under inventory. It had then made sense to me that companies balance out their costs and profits through doing this, without hiding any costs from people reading the financial reports.

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Understandably, managers need to have a thorough understanding of what products are bringing in the most amount of profits within their business. But how does a company know which products to market and distribute? I have seen and understood that companies pay close attention to what is making them the most profit as to expand their marketing and distribution this way. However, one thing that has occurred to me through reading this is that by basing this solely on the financial reports the company is cutting the potential that certain products may have, given the right marketing and distribution. For example, a coffee shop markets their coffee primarily because that is what generally brings them the highest amount of profit. The shop notices that hot chocolates are bringing them less than no profit. However, the company could change this by marketing their hot chocolate more frequently and therefore raise their profits for their hot chocolate. By basing this decision solely on the financial reports, I feel as though a company is not looking at the bigger picture. They are not looking at what could bring them a profit if they had spent a little more time looking at the potential of these particular items. Furthermore, certain customers may not be purchasing these goods only because they do not know they exist, and if the company had marketed this product a little more, customers would begin to purchase this product. Firms that make things

After reading the paragraph about different types of companies, companies who make things and companies who sell things, I started thinking about the companies in my town. They are all both types of businesses. For example, Woolworths buys products from farmers or other companies, and in some cases, uses these things to make their own products. For example, the company buys fruit and veg from farmers and then makes their own pre-made salads to sell. Another example is a bakery, buying stock from companies and turning this stock into pies and sausage rolls. Then I thought about my company, Avingtans plc. It is a company that manufactures engineering components to sell to companies who need it. Therefore, a company that both manufactures, sells but also buys these things from other manufacturing companies. Jobs and Process Costing

When the chapter talks about how it can be difficult or even impossible to find the exact cost of each process of manufacturing their products, I wondered if this could be circumstantial. For example, my company might make 200 products a day to sell to customers, and because this number is low in comparison to the amount of chocolates a chocolate company may make, a manufacturing cost could be attached for each process. For example, a company can calculate each stage. Firstly, calculate how much it will cost to buy the supplies needed. Secondly, the company can calculate the labour for each stage and estimate how long each process will take. The company could then calculate further costs to be spent on this product. In the end, the company could calculate how much it will cost to market these items. That could be used in the situation when a company does not make many products to sell. However, if the company is making a large number of products why could they not calculate how much they spend on each process? For example, the company could average how much money it takes to make the product, and then calculate how much money is made on making one item out of the lot, basing their selling price on this. They can also estimate how much money they are spending on things like labour and production costs, and this can highlight if any processes could save money by being done differently.

Looking at the indirect costs of these processes I have noticed things such as rent and electricity is an indirect cost. My initial thought was, why doesn't the company divide this amount by the number of products they are producing. For example, the company might pay $6,000 in electricity every quarter, and then they could split this amount up into the number of products that they have produced. Let’s say the company had produced a million chocolate bars in this period. This would mean that the company is paying 0.006c per chocolate bar produced. Could this make the cost a direct cost? I had then continued reading to find that companies apportion their indirect costs amongst the different departments, and this has now made a lot more sense to me than it initially had.

Product and Period Costs

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Martin has said in the chapter that the cost of manufacturing items before they are sold are presented in the inventory section of the financial report. He has then said that these are not described as expenses until the products are sold. What I am wondering is what happens if a company does not sell this product and it has gone to waste? Do they go into a separate classification, stay in the inventory or are ignored in the financial report? If they are not included in the financial report at all once they have 'expired' then could this be said to be a marketing technique? As the people reading the reports are not aware that they have hidden or not included some of their expenses, which over time could add to be a lot of money.

Absorption and Variable Costing

Reading through the absorption and variable costing paragraph, it all seemed very straight forward and something that would generally be used throughout your everyday life. One thing that has occurred to me, however, is what about the indirect costs of making additional products? For example, a company needing to work outside of its normal hours to produce additional products would use more electricity. Does this get recorded to be put on the department costs? Or do these costs get equally split up between departments even though other departments have not played an equal part in the usage of electricity. I feel this could easily relate to my company as they have gained a lot more contracts this year producing engineering and aero parts to companies throughout the world. The business would have to take extra hours to make these parts and thus, using more electricity.

Another thing that has occurred to me throughout these paragraphs is that companies do not include selling costs. I wondered why this would be, as selling costs could easily be allocated as a direct cost to items or services, and therefore should be incurred to the cost of this product. Using the same example I have throughout this assignment, a coffee shop may spend $200 promoting their hot chocolate and making sure that every customer is aware that hot chocolate is available within their business. This may raise their sales to $500 a week. Therefore, making a profit of $200 a week minus the costs of making the hot chocolate. This is a direct cost to the business that should not be ignored as it could make a huge change to the business if a manager is aware of this.

Within my company, this could be a major cost and they may have to spend a fair amount of money insuring that companies they have contracted know of all their products to build sales and reputation. My company could do this easily by sending emails promoting their products, listing the available products on their website or online for their customers or enquiring customers. If the company spends a budget amount on doing so, they will find that their customer base would expand and their profits would heighten. But this, like everything in life, does not come for free. You cannot ignore the costs of promoting these services and items and they can easily be attached to their products, and a manager would clearly be able to understand and make decisions on which items should be advertised and to see if the money they are spending on their marketing is worthwhile.

Fixed and Variable Costs

Fixed and variable costs seem very easy to understand for me, and are something that a firm should spend resourced on analysing and predicting. I found the information about Martin's son's gig to be very helpful in understanding exactly what the difference is between variable and fixed costs. I was also pleasantly surprised to see how much statistics and mathematics is used with predicting this. Mathematics is something that I have always loved and always strived in.

Conclusion

To conclude, chapter 6 had gotten me thinking about all the different scenarios that these concepts could be applied to. It also had me thinking about how companies can use these concepts to their advantage and use such information to build their business to become more and more successful. The chapter did have a strong relation to management to statistics, which I loved. It was intriguing to see

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just how much accounting is used within other sides of the business, and just how strictly these things intervene.

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Step 3: Restating Financial Statements Going to be quite honest here, I had a lot of trouble restating my financial statements. I think it

was a mixture of lack of sleep and too much caffeine. I have written a brief overview of all the issues that I had along the way.

Firstly, I did not initially link the cells, I simply copied and pasted them. After finishing my draft of my restated financial statements did I realise that this was a huge mistake. I then had to go through and restate all the financial statements all over again. Dumb move.

Secondly, I had a lot of trouble figuring out which totals I had to sum to find the total for the changed in equity. I spent what felt like years before realising which totals to add to find the same total as what was on the financial reports from the company.

Thirdly, I had some trouble with formatting the restated financial reports, and couldn’t figure out how to word ‘operational’ and ‘financial’ to make it sound proper. I had then read Carmine Avolio’s financial spreadsheet and found ways to do this and ways to add the totals together to get the right balance at the end. Carmine’s assignment was a huge help for me in figuring out my financial reports.

Fourthly, I must admit I did not pay enough attention during lectures and did not realise that you needed to make NOA = NFA - Equity. This had me stumped for hours until I had figured out where I had gone wrong, which was ‘doubling’ up on some assets in the financial statements. This would have been a major issue in my restated financial reports had I not been given feedback advising me of this.

Lastly, I had a lot of trouble dividing how much of my cash and cash equivalents to put into operational and financial. This is where the Facebook group ‘Accounting, Learning & OC” really helped out, especially Tash Hodgson. She is a genius in my books!

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Step 4: Feedback SheetsPEER FEEDBACK SHEET: ASS#2Feedback From: Chloe WebsterFeedback To: Melissa De-Rosi

My Comments

Step 3

Restated Statement of Changes in Equity Balance SheetIncome StatementCommentary and discussion with others

(Note: You may wish to give some comments on their Excel spreadsheet)

Looking through your assignment, I struggled to find anything that didn’t add up or wasn’t linked from your initial reports – so good job with this! Everything seems to make sense and is clearly understandable. If I were to change anything here, it would be to add an extra cell between operational and financial and their totals, just so that it is easier to see which is which, as the numbers are very close together.

On a side note, Martin had told me in the initial assignment that in a year where there have been no profit or loss it is best to put a 0 instead of ‘-‘

Just a heads up

Otherwise your assignment is perfect to me!

Step 4Your feedback, particularly through Facebook, did a lot to help get me on the right track. If it wasn’t for you I’m not sure I would have passed this assignment. Thanks heaps for all your help.

PEER FEEDBACK SHEET: ASS#2Feedback From: Chloe WebsterFeedback To: Carmine Avolio

My Comments

Step 3


I could not find any issues with your restated financial statements, in fact I searched long and hard thinking there had to be something. But no, I found it perfect. I love how it has been set out, it is very easy to understand and the totals are clearly outlined. Looking through your financial reports highlighted various issues I had within mine. Though this feedback may not be constructively helpful for you, your assignment helped me out a lot.

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Step 4

Your feedback helped me a lot with restating my financial statements and did wonders for what I was supposed to be doing. Along with that your feedback and answers to all my questions on Facebook was awesome and helped me out more than anything. I was having quite a lot of difficulty with my financial statements and I don’t think I would have gotten it done if it wasn’t for your help.

PEER FEEDBACK SHEET: ASS#2Feedback From: Chloe WebsterFeedback To: Nicole Madsen

My Comments

Step 3



I could not find a single issue with your financial statement that you gave me. I clicked on random boxes and pleasantly found that you have linked every single cell from your former financial statements. You have correctly (as I could tell anyway) organised the into operational and financial, applied the tax rate to find the OI and have set your spreadsheet out clearly.

If I was to change anything in your assignment, I would put some space between operational and financial in the statements, and delete the extra cells you have under your financial statements. Other than that this is an amazing job and you have done an awesome job! Keep it up!

Step 4 N/A

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Step 5: Chapter 7 KCQ’s I found that chapter 7 related very closely to management more than anything. I found that I

could relate nearly everything that I was reading to things that I have learned in management and how closely these two subjects are now intervening. As I was reading the chapter I have jotted down ideas, and key concepts along the way and I have written them here below. After reading further into the chapter some of my questions were answered, and I have included the steps of my ‘thought process’ if that’s what you want to call it.

One thing that has occurred to me early in the chapter (before I continued reading) is how could accounting have anything to do with planning? I understood that you needed a budget for what your plan was, as that is straightforward and easy to understand. I didn't think that managers would need to spend money on things like 'motivating staff' and 'delegating tasks.' One thought that had then occurred to me is that how would a company really motivate staff and use money by doing so? Towards the end of the chapter I had found that managers particularly, reward staff who meet their responsibility. Considering everything that Martin had mentioned before this, I can easily see how this can be misguiding and employees can often find ways to ‘cheat the system.’

The baggage collection story stood out to me a lot in the chapter. It had me thinking about how this has occurred in my own life. For example, when I was working in a small coffee shop our target was to make our coffee as quickly as possible. But if you know anything about making coffee you would know how particular coffee can be. When our manager had told us we needed to have coffee served to the customers in less than a minute we all freaked out. Our normal time was 2minutes 10, not too bad if you ask me. However, when we had that pressure put onto us, the quality of the coffee paid the price. We started 'pre-making' coffee, and started preparing the group head with already ground coffee ready for the next customer that walks in. Through doing this, the group head (still being hot) had burnt the coffee grounds from being held for too long, and the coffee came out burnt and a low quality in comparison to what is used to be. Through putting the pressure on us as baristas to make coffee in less than a minute, we 'threw away' the quality of the coffee to impress our manager with our readiness. He then changed his mind on how long it should take us to make a coffee.

As you may have guessed earlier, the manager that I had at the coffee shop was all about efficiency and profit. Through being more focused on how much revenue he can make with the least amount in costs, my manager would often put only one of us on a shift at once. Though this would seem optimal for making the most amount of money and spending less money on wages, the coffee shop struggled. I had worked a Sunday once by myself, and where the coffee shop was situated was directly next to a church - so you can imagine how busy that is. Because I was by myself I was stressed and trying to make coffee as quickly as possible to get to the awaiting customers. As I said earlier, on average it took us about 2 minutes to make a coffee. However, on this day I was making a coffee every 40 seconds. I feel although that’s a record in some way, however, as noted previously, the coffee would not be anywhere near as high quality as it would be if I had taken ample amount of time. This proves that though you think you may be saving money by budgeting wages, it can often hinder your business and in this case, build a bad reputation for the business.

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I was intrigued by the story that was included about Dixon Street, and how the budgeting manager had never seen the site and therefore was unaware of things like this happening. As I have mentioned in my previous assignment, the bakery I was working in was very similar in this respect. I started wondering how often things like this happen, and how the people who are working in the site, or business, work around things like this, and how the company hinders from it. Being only eighteen and having not worked in too many different workplaces, I have still noticed that in almost all of them that something similar has happened. I'm curious as to whether this happens in larger businesses as often as it does in small business and what impacts it has on the company.

I then continued reading to find that production managers along with sales managers discuss these issues among themselves to compromise to fit within the set budget. This is logical, and makes a lot of sense and keeps the company within the budget for their products. One thing that did occur to me, though, is how does a company know that by setting a particularly low budget is going to get them the best possible revenue for their products. If the two managers discover that both sides of the business will need excess amounts in their budgets, where would they go from there? If the company finds that it will benefit greatly from going over the budget, will the company do so? Or will they gamble their chances by keeping the budget in place and not allowing excess amounts to be used?

One thing that I do have to point out, is how helpful it is that Martin has included budgeted balance sheets and income sheets. I was having a lot of trouble understanding exactly what he was going on about when he explained them, until I had looked through the example budgets he included further below. When Martin had pointed out that in the income statement and the bash budget were so opposite, I was very confused on which would be more accurate and which I should believe. To be quite honest I still am. I know that this has many different reasons, and that it really does depend on which has a higher probability of happening. I find that this is where my other subject statistics will become quite helpful. Being able to predict what Is going to happen is one thing, but to do that you will need figures from the past. Probability, however, will give you what is the most likely outcome in a situation like this, rather than predicting something that has no prior experience.

Reading through the budgeted balance sheets and how they are set out, I had started wondering whether a firm would benefit from creating a few different budgeted financial sheets to predict their future profits and losses. If a company was to create a range of budgets, with a different range of possible outcomes, they would be much more prepared if their budgets didn't go to plan and they were left out of pocket. Same thing goes for if the company is much more successful than originally predicted, the company would have some idea of where to spend their money on production and where to tighten their budgets within certain product ranges.

To conclude, this chapter has captivated me from the very beginning, and has only gained my interest by relating what is being said to things that have happened in real life. Though I am currently unable to relate these things to my company, I am looking forward to having a go at doing so, and then looking in the future to see just how accurate I was. I feel although this chapter is very relatable to almost any kind of workplace and can somehow relate to one’s prior experiences in the workforce.

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Step 6: Chapter 8 KCQ’s

To be completely honest, I found chapter 8 difficult to read through as I have no real interested in the profit margin. This might sound silly, because so far, I have loved everything else we have covered in accounting, but I would like for this chapter to be more ‘hands on.’ Though we get to use the contribution margin in our companies, I feel although I would have been much more captivated by the chapter if it was more ‘hands on’ and we have equations of some sort to try out straight away. Though the chapter does have an example here and there, I would like to try using the contribution margin in more circumstances.

Everything is limited.

Reading through these few paragraphs, a few things have occurred to me. In a previous chapter, Martin had said "We can only be in one place at a time, and nowhere else. This is the true cost of our decisions in life." This quote stood out to me a lot at the time, and I feel although it relates a lot to these paragraphs. My question here is, how does a manager know that the decision they are making is the best for the firm? In my mind, they would create something similar to a budget, calculating exactly what the decision would do to the company, and decide on which is the best for the firm. I'm unsure of whether firms do this or not, but I feel although this would be the most logical way of making financial decisions in the firm.

Contribution Margin

The chapter talks about the contribution margin in depth and explains that managers will quite often use the contribution margin to make decisions. Though I do agree that this is a very logical way of making decisions in the firm, I feel although the contribution margin could easily be very misleading. To me, it seems although there is no possible way that a firm will only offer products with a positive contribution margin, though this would be ideal it would not benefit the firm. Sometimes, through having a negative contribution margin will positively affect the sales of the firm. Using the example I always have, in a coffee shop you need your customers to pay close attention to the fact that you do have a large range of products to offer which in return draws in customers and profit. Though they may not be purchasing the item that generally has a negative contribution margin, it will boost sales in general for the business. By not including items because they have a negative contribution margin may largely effect the sales of the business in general.

This may seem straight forward, but looking through the ways to calculate the contribution margin something had occurred to me that I had not though of before. Firms need to constantly 'upgrade' or improve their products to keep up with competition and customer demand. Does this mean, that for every product the company decides to sell, they use the contribution margin in a 'backwards' formula, to decide on how much they should sell their products for? Particularly for products that they are introducing to the firm? This seems to me like it would be a very logical and easy way to decide on the exact selling price for the product to ensure that the product has a positive contribution margin.

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Elaborating on the previous paragraph, what does a company exactly do when there is a

shortage of products needed for their products, as seen in the example of robin hood. Though using the available product to produce their most profitable contribution margin would seem the most logical, could the company decide on differing items to sell using different resources? This could easily keep their profit margins positive while consistently offering the same products using different materials. Though this is very circumstantial, I feel although this would be the best possible way to keep customers satisfied.

Using an example from current politics, it is commonly known that the media and politicians focus on what seems to be a huge issue to 'distract' the citizens from realising what the government, or media, is trying to hide from them. I feel although this can be used in a firm. The company could introduce a 'new and improved' version of the product they do not have the resources to make, or they could make a whole new product completely. This will take the attention away from the fact that the original product could not satisfy customer demand, while stabilising both profit and customer satisfaction. By using the resources to make the product with the highest customer demand, will 'trick' customers into thinking that the company is simply making improvements to their products rather than the fact the firm could not product these items.

Payback period

Despite the previous information which I wasn't as interested in, the payback period quickly caught my attention. I think this is because it is math, and I can apply this to not only my company, but my own life. Maybe not currently, but in the future when I decide on taking shares or making investments in houses or something similar, this is something that I do want to use and remember for a long time. This also stood out to me because I believe it is a good way of looking at the current and future reality of a firm. It highlights the fact that the company may currently be 'losing' money in an investment, however after the payback period the company will prove the investment was well worth it. The financial reports of my firm do not highlight this enough or make it easily understandable what is happening within their firm and their future expected profits.

The chapter goes into a lot of depth about how a dollar will not be worth as much to use in the future. The discounted cash flow describes how firms 'discount' their future cash flow from the investment to get an estimate of the amount of money they will get in return from their investments. This is very logical and would be the best way to do this, and I feel this stems off the quote that Martin had given us in a previous chapter. "To predict the future, we first have to analyse the past." Is this how firms estimate how much a dollar today would be worth in the future? And if so, do they encompass any chances of this rate being very different to what could happen in the future? By doing this I feel although a firm would be prepared for almost anything that the future throws its way.

The chapter then goes on to talk about different ways that firms will calculate their future profits. The idea that I have surrounding this is similar to the one I had just mentioned. If the firms spend just a little more time using all the methods, they will find which investment opportunity has a higher probability of becoming profitable for the future. This again, is preparing the firm for many different possibilities of the profit or loss. In my own opinion, if the firm is prepared for almost anything, they will almost always 'win.'

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To finish off, I found the chapter started very slowly and I could not gain interest until the payback period came into play. I find that by being given equations, I will attempt to put these in place in my company and try them out for myself. Math makes a lot more sense to me than trying to understand the effects of decision making, unless of course we can put that into numbers as well. The chapter is a strong finish, however, for all the previous chapters and the ending of this unit. The chapter easily connects all the chapter and makes almost everything covered in this unit make complete sense to me.

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Step 7

Product 1: Copper Cutting Machine

Selling Price: £1,214.27Variable Cost £849.989Contribution Margin: £1214.27 - £849.989 = £391.281

Product 2: Pipe Threading Machine

Selling price: £3829.14Variable Cost: £2,680.398 Contribution Margin: £3829.14 - £2680.398 = £1,148.742

Product 3: Pipe Welding Vises

Selling price: £126.53 Variable Cost: £101.224 Contribution Margin: £126.53 - £101.224 = £25.306

For all the three above products, I have researched into Avingtrans Plc and found that they have a contract with Rolls-Royce. This contract is to supply Rolls-Royce with many different Ridged Pipe Assemblies. Though the contract does not state exactly which products they are supplying, I have made an educated guess as finding what is the most common assembly products for ridged pipes. I then found 3 different companies who have these products for sale, and found the average price that these products are sold for. For the first two products, seeming although they would be sold less often than the third, I have calculated the variable cost by multiplying the seeling price by 0.7 (70%.) For the last product, I have multiplied the selling price by 0.8 (80%) as it is a product that would be in much higher demand for customers.

The constraints that my company will face with selling these products is that the company may easily be in competition for the third product with many other firms. The company will need to ensure that the pipe welding vises are of the highest quality for the buyers. This can easily constraint the period in which the product is made as it will take time to ensure that these products are of the best quality. Another constraint that the company faces is that in making all these products, a lot of plastic and metal is going to be used. If the company finds that it is unable to purchase enough plastic or metal, the company will be unable to sell as many of the products as what the customers will be demanding.

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Step 8: Ratios

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Step 9: Decision in Capital Investment Avingtrans Plc is considering expanding their businesses by merging with an oil company. The two companies that Avingtrans are considering merging with is Sinopec and Saudi Armaco. These are two very successful and profitable businesses.

The merge with Sinopec will involve buying an old manufacturing building in Irvine. This manufacturing building is still currently being used and has satisfied council regulations to be functional and available at an early date. The cost of buying this building, and making a small amount of modifications is estimated at (pound) 20 million. The facility will be open almost immediately, and running for 6 years. There is a fair chance that the building will be demolished at the end of the 6 years.

The merge with Saudi Armaco will similarly involve buying a large building in Manchester. This building will need to be demolished as it has not been used in over 15 years. A new building will need to be constructed in its place. The building, as is, will only cost around $100,000. However, demolishing the building along with constructing the new building has an estimated cost of $35 million. This facility will not be readily available till the end of the year. The project is estimated to be functional for 6 years, and will sell for a large amount at the end of the period.

Both companies will be focused selling components for aero engines along with designing and manufacturing vacuum vessels and process plant equipment for the oil markets. However, Saudi Armaco has a higher customer base with higher quality oil. Thus, their profits are much higher than Sinopec.

The investment would be purchased on the 1st of January 2018, with their expected cash flows received on the 31st December each year.

Both investment opportunities, with their residual value along with their expected cash flows are included below. All values are should be considered in millions.

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From the table included above, it is already clear to see what investment opportunity will produce the highest rate of profit for the company. However, the NPV and IRR need to be considered before making this decision final.

The above table shows both the NPV and IRR with the first investment; Sinopec. It is clear to see that the NPV is a negative number, and the investment is not paid back over the six years. It is also important that the residual value is to be considered in the decision, where the deal with Sinopec also has a negative residual value.

This table shows the NPV and the IRR for the second investment opportunity; Saudi Armaco. The NPV and the IRR are quite large positive numbers, and the payback period is just under 4 years. The residual value is also quite large if the companies decide to sell the business at the end of the 6 years.

Final Decision.

The final decision is to merge with Saudi Armaco, as the NPV is quite a large number as well as the IRR. Furthermore, the payback period is just under 4 years with 2 years of large amounts of cash flow and profit for both businesses. Additionally, if the company decides to sell after the 6 years, the business is estimated to sell at 17 million. This is a very positive business opportunity that will prove to be very beneficial for both businesses involved.

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