step - tashsaccountingblogforuniversity.files.wordpress.com · web viewthe first thing, i noticed...

My Blog: Tash's Accounting Blog for University

Step 7 – InventoriesI searched Boral’s annual reports 2016 to 2018 for the word ‘invent’, to see what they

disclosed about their inventories practices and to see how they account for them within their

financial reports.

The first thing, I noticed from reading all three annual reports, was that they have not

changed their accounting practices towards inventories over the past four years, as AASB

102 – Inventories was not mentioned in any footnote 1 of the financial statements under,

‘Changes in accounting policies’; nor, under ‘New accounting standards and interpretations

not yet adopted’.

The next thing, I noticed under footnote 3.2, was that inventories are valued at the lower of

cost and net realisable value (NRV)”. Meaning that the inventories will be recorded at ‘cost’

(that is, what the cost was to purchase that stock); or the NRV. Whichever one of these is

the lowest price is what that item is recorded at in inventories. Inventories on a Balance

Sheet is the value of stock on hand at the end of the reporting period, whether it be raw

materials, work in progress, finished goods etc. It has nothing to do with the value of cost of

goods sold on the Income Statement. NRV means that if the sales price is now below the

purchase price (cost) a firm may use that price less any costs involved in marketing, selling

and distributing that product at the price of that inventory. For example, Boral purchased

10,000 roof tiles at $1/tile. Boral were selling these tiles for $3/tile but these tiles are now out

of fashion and no one is purchasing them. Boral place an advertisement costing $200 in the

paper advertising that these tiles have been reduced to $0.75/tile, they have 1,000 left. The

NRV price would be $0.75 – $0.20 (cost, 200/1,000) = $0.55. Boral would then record these

1,000 tiles in inventories at $0.55, not the original cost of $1. Therefore, inventories on the

Balance Sheet would show $0.55 x 1,000 = $550. If cost was lower than NRV, inventories

on the Balance Sheet would show $1,000 ($1 x 1000). Figure 7.1 below shows their footnote

regarding how they account for inventories.

Figure 7.1

Natasha Ness WilsonStudent ID 12075698 ACCT11081– ASS#2 STEP 3-6 of 27

https://tashsaccountingblogforuniversity.wordpress.com/

Ok so, Boral have told me that they value inventories at the lower of costs or net realisable

value. However, they do not disclose if they use the perpetual or periodic inventory systems

to keep a track of inventories. The perpetual system keeps a live track of inventories from

purchase through to sale on the income statement as ‘Cost of Sale’. Based on what Martin

has told us in chapter 4 of the study guide, I do believe Boral uses the perpetual method. If

we look at figure 4-1 of the study guide in figure 7.2 below, Martin clearly shows us the key

differences in how firms present their Income Statements based on what system they use.

Figure 7.2

Firms using the perpetual method, just shows revenue (sales) less cost of sales (costs of

goods sold, COGS). If using the periodic method on the other hand, they will show the

opening balance of inventory plus purchases less the closing balance of inventories at the

end of the period. Figure 7.3 below shows Boral’s 2018 Income Statement showing that they

have reported revenue less cost of sales.

Figure 7.3

Natasha Ness WilsonStudent ID 12075698 ACCT11081– ASS#2 STEPS 7-11 of 27

So, based on the above I believe that they use the perpetual inventory system over the

periodic. The other reason why I believe they use this system, is because they are a large

manufacturing firm, who would need to keep a live record of all their inventories, they could

not operate successfully by only counting stock on a quarterly or annual basis and to do it on

monthly or weekly basis etc. would be too time consuming and expensive. The key

advantages of the perpetual method are, that it keeps track of inventories and cost of sales

in real time when goods are sold. Whereas, the periodic method does not calculated cost of

sales until the end of a period once they have physical done a stock take. The only thing that

still has me doubting my decision, is that Boral have not done any write-downs on

inventories due to wastage, theft, obsoletion etc. However, I have decided that their

inventory adjustments must be so miniscule that they do not show up in reporting on their

financial statements, as everything is rounded to the nearest 100 thousand dollars.

Therefore, it would be safe to say that their write-downs are less than $100 thousand a year

and that is why it is not recorded in their financials. Gee, I hope I am understanding this

correctly….

Now, the next thing that has me stumped, is that they have not disclosed, what cost flow

assumption they use to calculate inventory costs. Being an Australian manufacturing

company, they can only use the weighted average or the FIFO cost assumption. The

weighted average cost flow assumption takes the average cost over a period and uses that

average as the cost. For example, Boral purchased 100 bricks at $1/brick, the next month

they purchased another 100 bricks at $2/brick. To work out the weighted average we divide

the $300 (cost)/200 (no. of bricks) = $1.50. This cost than gets applied to all bricks both sold

and unsold. FIFO on the other hand, takes the price of the first lot of bricks and allocates that

cost to first bricks sold, it assumes that the first bricks in are the first ones sold. For example,

Boral purchased 100 bricks at $1/brick, the next month they purchased another 100 bricks at

$2/brick. At the end of the period they have 100 bricks still in inventory. This means they sold

100 bricks during the period. Cost of Sales would be $100, as this is how much the first lot of

bricks cost and we assume these are the ones that got sold and the value of bricks in

inventory would be $200, as these were the last ones purchased, meaning we assume they

are the ones still in stock. Based on my understanding of these two cost flow assumptions, I

believe they would be using the weighted average cost, as it would be impossible to make

sure that they are selling their oldest stock first. But in saying that, they may use FIFO as it is

not stated in their financials.

The last thing, I am going to talk about is my list of actual inventories and what they can tell

me about Boral. In figure 7.4 below is a list of Boral’s inventories for the past 4 years. I


mentioned in step 3 that Boral had ‘Land development projects’ listed as both a current and

non-current asset under inventories. From what I can understand is that when a firm has

land that they are redeveloping for resale this item gets moved into inventories once the

redevelopment works begin. All related costs of this item are recorded against inventories

during the acquisition and development stages, but once development is complete any costs

are expenses when they occur, meaning they go direct to the Income Statement. This can

be seen in figure 7.4 below.

Figure 7.4

I wonder if they use the specific identification cost flow assumption for this item as it can

clearly be identifiable. Above we can see that Boral have 500 thousand dollars of land

development products in current assets, meaning they plan to sell this inventory within the

next 12 months. The remaining land development projects of 11.4 million dollars are sitting

in non-current assets, meaning that this inventory will not be sold within the next 12 months.

The rest of their inventory items are very standard for a manufacturing firm. Raw Materials

are items they have in stock awaiting to be turned into a final product. Work in Progress are

all the items that are currently in production and Finished Goods are all their final products

sitting in a store or on a shelf in a warehouse awaiting to be sold. Over the past 4 years we

can see that Raw Materials are growing, Work in Progress on average is very consistent and

that Finished Goods are also on the rise almost in line with Raw Materials. Boral have

roughly 33 per cent of their assets on average tied up in ‘Inventories’, meaning that if they

had no inventories, they would have an extra 30 per cent of cash in the bank, but in doing

this they would have not products to sell and therefore, on business. ‘Receivables’ on the

other hand, account for 50 per cent of their current assets, this has grown over 13 per cent in

the past two years. These two items are the largest assets in Boral’s current assets on their


balance sheet. The other interesting thing is that their ‘Finished Goods’ account for over half

of their inventories, meaning that they have more products sitting on the shelf awaiting to be

sold than what they do in Raw Materials and Work in Progress.

After reading through the rest of their annual reports in 2016 they mentioned that there was

a slight reduction in Hardwood’s inventory levels, however there is no mention has to how or

why they did this. In 2017 they talk about increases in inventories in the US Cladding

businesses due to higher weighting towards the more expensive Versetta product. This is

the only indication that they may use the weighted average cost flow assumption. And finally,

in 2018 they mention that inventory levels were higher in the Australian construction

materials businesses and Boral North America due to expected higher levels of demand for

products in FY2019.

Overall, I think they could improve on how they report their inventories in the footnotes, as it

is not 100 per cent clear as to whether they use the perpetual or periodic systems or the

weighted average or FIFO cost flow assumptions. I think they could also benefit by

disclosing more about their ‘Land development projects’, such as disclosing what these

projects are and how they account for their costs. And if they are using the perpetual system

and their inventory adjustments are so small that they do not register on the Balance Sheet,

that they should be noting this in their footnotes to shows that they have a very good

inventory management system in place.

I have had very little to do with inventories in my working career, the last time I was involved

in stock takes was over 20 years ago when I worked as a hairdresser and on the 30 June

every year would we would have to do a stocktake for our employers taxation purposes.

Tubes of tint, perms, etc, were classed as ‘Raw Materials’ or ‘Work in Progress’ depending

on if they were opened or not. These were products we had not yet used to curl or colour

someone’s hair. Shampoo, conditioner, hairspray etc., that was on the shelf ready to be sold

was classed as ‘Finished Goods’. This is the only time we tracked stock; therefore, we used

the periodic system for accounting for inventories all those years ago. Throughout the year

we would only order stock of a particular item when we could see that we were low on that

product. This was done every 1 to 2 weeks, but we never, at these time, physically counted

stock. The down side, of my employer using the periodic system, was that it did not account

for theft or wastage and being a retailer in a big shopping centre, theft would have been a

big issue from both employees and customers. However, there were CCTV cameras

everywhere, but these were mainly to keeping an eye on the till, as back then most people

still paid by cash.


Step 8 – MYOB AccountEdge Basic v6 TrainingI am a Mac user so I had to download one of MYOB’s AccountEdge packages and after

discussing with Maria I decided to use download the basic package, AccountEdge Basic. I

then realised that in the PowerPoint tutorial from week 6 it suggested that we download

MYOB Plus. Oh well, let’s see how I go using the basic package. After clicking the ‘free trail’

button, I then went into my downloads, on my computer to install the software. After running

it, it come up with this screen in figure 8.1 below.

Figure 8.1

I then had to drag and drop the “AccountEdge Basic v6”, icon, into “Applications”. I must

admit I should have done this whole step 8 in the one session, but I did not. I left it here and

tried to continue the next day. Instead of going back to the “Assignment T2 2018.pdf”, I

thought I would be clever and log into my account on MYOB’s website and access my

training from there. Well, what a mistake that was! Somehow, I managed to start the MYOB

Essentials training and not the AccountRight training. I then found training that looked like

the correct training, as it had to do with setup. But, when I came to do the “Using

AccountRight” training, the website was telling me I had to pay for it. It was not until, I asked

for help in our Facebook group that I was finally put back on the right track again. So, thank

you, my peers! I needed to go back to the ‘tutorial’ link in the assignment instructions, page

10! Not go, to MYOB’s website and login into my account and not go to the tutorial link in the

‘Tutorial Week 6.pdf’ in Moodle, like a had been doing. Once I clicked on the correct link, in

the correct document, I was finally able to complete the correct training. Figure 8.2 below is

showing the courses I needed to complete.


Figure 8.2

Figure 8.3 below, is a screen shot of my actual last screen within AccountEdge Basic once I

had completed this first stage of the training. It is missing several headings to what the Pro

package has; however, I was still able to figure out all the things I needed to know and be

able to do.

Figure 8.3


My final screen in “Using AccountRight” training can be seen in figure 8.4 below.

Figure 8.4

In figure 8.5 below, are the results of the EzyLearn MYOB Online Training Skills Test.

Figure 8.5

Training is now complete; so, I should now be able to complete step 9 with confidence. I am

disappointed that I did not download the ‘pro’ package, as the ‘basic’ package does not have


a ‘Purchases’ or ‘Inventories’ command centres. I will have to pay all bills via the ‘Banking’

command centre.

Step 9 – Boral Financial Statements using MYOB AccountEdgeHypothetical Boral Business Transactions

In figure 9.1 below are 10 hypothetical business transactions for Boral Limited during the

month of April 2019. As, Boral are a building products and construction materials company, I

came up with the below hypothetical transactions. They produce plasterboard, bricks and

concrete etc; hence, these types of sales were made to their customers. In the

manufacturing of plaster boards, they need to purchase gypsum and for the manufacturing

of bricks, they require lime and alumia. On the 17 April 2019, ABC Contracting returned 5

damanged sheets of plasterboard for a credit note adjustment. Boral also had to pay their

electricy account, freight account and were charged their monthly account keeping fee from

their bank.

Figure 9.1

Figure 9.2 below shows the ‘All Journals’ report this displays all of the transactions in all

journals for Boral for the month of April 2019. This report allows me to enter in any date

rage, so I could check my transactions on a daily basis if I wished; or, I could run separate

reports on all of the separate journals. For each transaction, there is a debit to one account


and a matching credit to. For my trade debtors, the GST was automatically calculated

assinging the debit amount to trade debtors and the credit amount to GST collected.

However, when entering my payments through the ‘Banking’ comand centre, under ‘Spend

Money’, I had to remember to add the tax for every single payment. SJ, stands for Sales

Journal, this is where sales to customers are entered. CD, stands for Cash Disbursments

(AKA, Cash Payments), this is where I entered in all my bills that required to be paid as I did

not have a ‘Purchases’ comand centre in my version of MYOB; therefore, I cannot track

purchases, nor inventories. CR, stands for Cash Receipts, when payments came in I

processed them through the ‘Sales’ command centre and the system automatically created a

transaction in the CR journal. To run this report I clicked on ‘Reports’, ‘Accounts’, ‘General

Journal’, ‘Customise’. Made sure the transaction date range was form 1 April 2019 to 30

Aprial 2019. Change ‘Source Journal’ from ‘General’ to ‘All’. Clicked the ‘Display’ button and

up came my report. Clicked the ‘Send’ button and selected ‘Excel’. Journals keep a record of

all debits and credits to and from accounts, whether it be a standard transaction or a reverals

from making an error. It also gives a grand total to show that debits match credits. These

reports will not pick up errors either; for example, if a debit/credit has been applied to the

wrong account.


Figure 9.2

Figure 9.3 below is Boral’s Income Statement (P&L) for April 2019. This report shows their

financial performance for the month. I chose to show this report at a ‘level 2’. I love there that

are 4 levels to show this report; level 4 would have given me a detail of each revenue and

expense account and a level 1 would have just given me ‘Income’ less the ‘Expenses’, with

no detail. This P&L shows me what products made the revenue for the month and what

general expenses there were. Income Statements are GST exclusive. For example, Income

of $12,300 was derived from sales (trade debtors less credits) of $13,530 including GST for

the month, 13,530/11 = $1,230 (GST). 13,530-1,230 = $12,300. P&L are produced on an

accural basis, meaning that the figures shown may not have been received or paid as yet;

however, goods and/or services have changed hands. I can see my ‘Gross Profit’ of


$12,300, which is revenue less cost of sales (which are the direct costs in production of

goods/services). As MYOB basic, has no inventory command center, there is no ‘Cost of

Sales’ in my report. Next, all the other indirect costs such as Boral’s electricity and freight

expenses that relate to operations are deducted from the gross profit to give a net operating

profit of $11,012.27. After that, comes any income and expenses that do not relate to

operations, such as finance income, finance expenses, tax expenses etc. These would be

added and deducted to give Boral’s overall Profit/Loss for the month; which, in this case was

$11,012.27.

Figure 9.3

Figure 9.4 below shows Boral’s Balance Sheet as at April 2019. As at, means the balances

of each Asset, Libility and Equity account as at the 30 April 2019. This is Boral’s Financial

postion on that particular day. All of these accounts are GST exclusive execpt for trade

debtors and trade creditors. Assets show: there was $2,865 in the bank; Accounts

Receivable had $11,550 owing from customers including GST; and Inventories showed that

there was $2,454,55 worth of raw materials on hand at the end of the month. Libilites

showed that we had collected $1,230 of GST from customers, note this account has a credit

nature; and we had paid $372.72 in GST when we paid our expenses, note this account has


a debit nature. Giving us a liabilty total of $857.28 that we need to pass onto the Australian

Tax Office when we do our BAS. There were no trade creditors (Accounts Payable) in my

report, as MYOB Basic for Mac does not have a ‘Purchasing’ command centre. Therefore, I

could not enter invoices received for future payment. Invoices recevied, were paid

straightaway through ‘Spend Money’ in the ‘Banking’ command centre, reducing the bank

balance immediately. Equity shows that the capital account had $5,000 in it (this means that

the own’s gave the business $5,000 of their own personal money, to start the business) and

that the current earnings (retained earnings) for the month is $11,012.27, which matches our

profit on the Income Statement. We can see that Assets = Liabilites + Equity on the Balance

Sheet.

Figure 9.4

Figure 9.5 below shows Boral’s Statement of Cash Flow for April 2019. This statement

shows us how money flowed into and out of the firm during the year and the cash balance at

the end of the period ties back into the balance of the Bank account on the Balance Sheet.

This report shows us Boral’s net income for the period of $11,012.27. Trade Debtors is a

credit, meaning that we are yet to receive these funds from Accounts Receivables and the

reason that GST Collected is a debt, is because in has already been accounted for in the


amount owing from Trade Debtors, which is $11,550. The reason Inventory Raw Materials

and GST paid are showing a credit balance is because Boral have already paid these

accounts; therefore, funds flowed out of their bank account. If Boral had any investment or

financing actives these would have appeared next. Investment activities could include items

such as new purchases/sales of non-current assets, purchases/sales of other entities,

repayments of loans, cash relating to aquisations, etc. All purchases would appear as a

credit, as funds left the firm and all sales, payments or cash acquired etc. would appear as a

debit, as funds flowed into the firm. These account totals for the year would appear under

‘Cash Flow from Investing Activities’. Financing activies appear after the invetments totals for

the year under ‘Cash Flow from Financing Activities’. These activities could include things

such as capital injections (debit), dividends paid (credit), repayments of loans (credit) etc.

Figure 9.5

The Statement of Cash Flow, flows back to the bank balance on the Balance Sheet and

finally the Income Statement and Balance Sheet give as the extended accounting equation

Assets + Expenses = Equity + Revenue + Liabilites

16,869.55 + 1,287.73 = $18,157.28 = 16,012.27 + 12,300 + 857.28 = $29,169.55


$29,169.55 - $18,157.28 = $11,012.27 profit

I loved that when you ran these reports in MYOB that I could hover over the figures and a

magnifine glass would appear, I could click on these and it would open up a screen with the

details as to what made up that balance.

Step 10 – Boral’s Depreciation First of all, what is depreciation? Depreciation or amortisation is the declining value of an

asset over its useful life. Firms’ use this reduction to decrease the value of their non-current

assets over their useful lives. These assets include:

‘Property, plant and equipment’ (PPE), which are tangible assets, meaning they are a

physical item that can be touched such as buildings, vehicles, machinery, office

equipment etc.; and

‘Intangible assets’, which are a firm’s assets that cannot be physically touched such

as trading names, intellectual property, patents etc.

Assets such as land, goodwill and some other intangible assets cannot be depreciated or

amortised as they have an indefinite life. Only assets with an expiry date, will lose value over

time; therefore, only those assets can be depreciated or amortised during their lifetime. A

firm will decrease the value of these assets due to wear and tear, age and expected usage,

technical and commercial obsolescence, and legal or similar limitations. Firm’s will usually

use the word ‘depreciation’ when referring to a reduction in value of PPE and ‘amortisation’

when referring to a reduction in value of intangible assets.

A firm will record all their asset into their ‘assets register’ at cost (purchase price, less

deductions such as discounts and GST plus any costs incurred such as installation costs

and estimated dismantling costs). They will then establish and estimate if the asset has a

limited useful life, as well as a residual income, if any upon disposal of the asset. For

example, Boral purchase 20 new cement trucks at 1 July 2018, each truck cost $100,000

once GST was deducted and transportation costs were added. This is the value these

assets were recorded at in Boral’s asset register. Boral then estimated that these trucks

would be in operation for the next 5 years and that at the end of the 5 years they would be

able to sell them for $10,000 each. Therefore, Boral will be able to depreciate $90,000 for

each of these assets, over the next 5 years.

The next thing, a firm needs to decide on, is what depreciation method they will choose for

each class of asset they own out of the following three methods:


1. Straight-line – also known at the ‘Prime cost method’, with this method the

deprecation value will be constant over the life of that asset. So, if Boral chose this

method, it would be $90,000/5yrs = $18,000/yr/truck.

2. Diminishing value – also known as the ‘Reducing balance method’, assumes that the

asset will be more productive in the earlier years; so therefore, will incur more costs

in those years. Using this method, a percentage is assigned to the value and each

year this percentage is deducted from the carrying value of the asset. If Boral chose

this method at say 33.3 per cent (the maximum percent for depreciation of their ‘plant

and equipment’), it would be 1st yr $90,000x33.3/100 = $29,970, 2nd yr $60,030

(carrying value) x33.3/100 = $19,990. This calculation would continue until year 5 to

which the asset would be valued a $0 on the balance sheet.

3. Units of production – this method estimates the number of units an asset will produce

over its useful life and divides the value of the asset by the unit amount to get a unit

value. This value, is then multiplied by the actual number of units the asset produces

each year to get the depreciated amount. If Boral chose this method and estimated

that each truck would deliver 4600 loads of cement in its useful life, the calculation

would be $90,000/4600 = $19.57/delivery. 1st year each truck made 939 deliveries;

therefore, depreciation in 1st year would be $19.57x939 = $18,372. This asset would

become obsolete on the balance sheet once it hit the number of deliveries, it would

not consider the number of years they have owned the asset.

Once a firm has decided on what above depreciation method it will use for each class of

asset they own (yes they can chose a different method of each class of asset), they will then

expense this depreciation or amortisation at the end of their financial period to their Income

Statement to match the revenue to which those assets helped generate during the period.

One thing to note here, is that depreciation and amortisation are non-cash transactions; no

physical money is leaving the firm. On the balance sheet the assets will be recorded at cost,

less the accumulated depreciation or amortisation amount, which is the total running

deduction since acquisition of the asset. The AASB s 116 p 50 states, that firms must

review their assets residual value and the useful life at the end of each financial period “and,

if expectations differ from previous estimates, the changes shall be accounted for as a

change(s) in an accounting estimate in accordance with AASB 108 Accounting Policies,

Changes in Accounting Estimates and Errors.”

Now, that I understand how depreciation and amortisation work, I can analyse Boral’s

financial statements to see how they account for this decline in value in their reports and see

how it impacts on their profit for the year and the value of their assets overall. I decided to


look at their Income Statement and Balance Sheet first. On their Income Statement, there is

no mention of depreciation and amortisation anywhere. There is an item called ‘Other

expenses’ with reference 2.2. Upon reading footnote 2.2, there is no mention of depreciation

and amortisation. The expenses relate to ‘significant items and net foreign exchange losses.

OK, so I cannot see under which item depreciation and amortisation have been expensed to

on the Income Statement. I wonder if it gets expensed under several items. Moving onto the

Balance Sheet, I can see PPE and intangible assets with references 3.3 and 3.4

respectively. Both of these footnotes told me that in the past 4 years that Boral have used

the straight-line method to calculate depreciation and amortisation on both their PPE and

intangible assets. I then went and checked footnote 1 to make sure there have not been any

changes to the accounting standards that have resulted in any changes in the Group’s

financial statements and there have not been. However, at the 1 July 2019 they will be

adopting AASB 16 Leases, and that by adopting this standard “will result in a reclassification

of operating lease expenses into depreciation and financing expenses”, which can be seen

in figure 10.1 below.

Figure 10.1

Looking back at footnote 3.3 PPE, it told me the following additional information:

freehold land is not depreciable;

operating leases, may use an alternative depreciation method if it is more

representative of the pattern of benefits to be derived from the leased property.

Lease rental charges were $123m in 2018, $72m in 2017, $73.9m in 2016 and

$75.5m in 2015;

Quarry stripping assets use the units of production method and they are amortised,

not depreciated over their expected life. OK, so not all PPE use the terminology

‘depreciation’ when they reduce the value of these assets, they can be amortised

instead;

rates for classes are, 1-10% for building, 1-5% mineral reserves and licences and 5-

33.3% for plant and equipment; and


assets are reviewed each balance sheet date with regards to their depreciation

rates, methods used, their useful lives and residual value. If changes are made

adjustments are reflected prospectively in the current and future financial years only.

Footnote 3.4 Intangible assets, told me the following:

amortisation rates are between 5-20%;

the following useful life expectancies as shown in figure 10.2 below.

Figure 10.2;

Goodwill has an indefinite life, so has not amortisation;

Boral had intangible assets to the value of $124m in 2018, $120m in 2017 (excluding

Goodwill) that had indefinite lives. In 2016 and 2015 there is no mention of any

indefinite intangible assets. This is probably because, they did not own any before

their acquisition of Headwaters Inc in America in 2017;

Indefinite intangible assets are checked for impairment annually; and

judgements are made with identifying, valuing and estimated useful loves of

intangible assets on acquisition of new businesses.

I love that with these footnotes showed me the opening balances for each asset class, the

movements throughout the year, especially the additions, disposals and depreciation or

amortisation expenses, as well as the closing balances. In figure 10.3 below we can see

Boral’s depreciation and amortisation expenses for PPE and intangible assets for the past 4

years. These figures tell me, that they write-down more PPE, than they do intangible assets.

Boral own a lot of PPE, and as these assets are physical assets a lot of them would have

shorter useful lives compared to intangible assets as they are items that age, suffer wear

and tear and run the risk of becoming obsolete very quickly due to new technologies etc.

Whereas, intangible assets are not physical items so they do not suffer from age and wear

and tear; however, they would be susceptible to obsoletion and legal limitations. The figures

below in figure 10.3 are what has been expensed to the Income Statements over the past 4

years.


Figure 10.3

I now go searching for ‘depreciation’ in the rest of the annual reports as I could not see

where these expenses in figure 10.3 were expensed on the income statements. Boral’s

Chief Financial Officer (CFO) only starts including depreciation and amortisation in her

Financial Review in 2018, as seen in figure 10.4 below. This table shows a clear snapshot of

how much total depreciation and amortisation was expensed in 2018 and 2017 to the

Income Statement and these figures match my figures in figure 10.3 above, just rounded to

the closest hundred thousand instead of million. These figures differ slightly, due to them

being categorised into ‘Continuing operations’ and ‘Discontinued operations’; whereas, in

footnotes 3.3 and 3.4 they are categorised into PPE and intangible assets. Great, so I can

confirm that the figures in footnotes 3.3 and 3.4 under ‘depreciation and amortisation

expense’ did get expensed to the Income Statements; even though, I cannot see clearly

where this was done. Luckily, this one table was in the 2018 annual report or would I would

still be racking my brain as to what got expensed to the Income Statement.

Figure 10.4

We now need to discuss how they account for depreciation and amortisation on their

balance sheet.

In figure 10.5 below, we can see the historical cost of PPE for the past 4 years, less the

accumulated depreciation, amortisation and impairment. We can also see that since 2015

Boral’s PPE assets are steadily growing and that their accumulated depreciation,

amortisation and impairment costs average out to around $2.961 billion per year. This would

be due to them adopting the straight-line method of depreciation and amortisation across

these assets. If they had used the diminishing value method, we would see this figure

declining each year, and it is not. We can see that with PPE that Boral have depreciated and

amortised over 50% of their asset value since acquisition. The reason for this would be due

to high deprecation rates and short life expectancy of most of these assets.


Figure 10.5

In figure 10.6 below, we can see Boral’s intangible assets at cost, less their accumulated

amortisation for the past 4 years. We can see since their purchase of Headwaters Inc. in

2017, their intangible assets have grown a staggering 97% and that goodwill purchases

have increased by 90%. The interesting thing about this table below is the when Boral

owned fewer intangible assets in 2015 and 2016 they had reduced the value of these assets

by over half due to amortisation. The other thing, I can see is, that with most of these

intangible assets they acquired over the past two years is that they must have a very small

rate of amortisation, as they are only reducing at a rate of 7% annually and over $124m

worth of them cannot be amortised at all as they have an indefinite life.

Figure 10.6

Upon searching for the word ‘deprecation’ in the rest of the annual reports. In 2016 Boral

mention depreciation savings of $70m was with regards to their Building Products sector,

which can be seen in figure 10.7 below. I have to assume that they used their current

methods to write these assets down as there is no mention anywhere throughout their report

as to how or why this was done. If you refer to figure 10.5 above there is a $70m difference

between their PPE from 2015 to 2016. This was the only other interesting mention of

deprecation throughout the rest of their annual reports.


Figure 10.7

Looking at figure 10.9 below shows the depreciation and amortisation expense as a percent

of the total current value of PPE and intangible assets. Over the past 4 years this expense

has only accounted for 10% or less of the total value of PPE and intangible assets; so,

compared to the amount of assets Boral own, this expense is insignificant when you

compared it to their cost of sales, which amounts to almost 67% of Boral’s Revenue.

Figure 10.9

When processing depreciation and amortisation expenses these are entered into a firm’s

General Journal as they are non-cash entries; so therefore, cannot go into one of the

specialised journals. The depreciation asset account is an expense account; hence, an

increase in an expense is a debit. The accumulated depreciation accounts are contras

account to their asset accounts; hence, they have a credit nature as they are reducing the

value of the asset over time. Below are three types journal entries Boral’s accountants may

process when recording their depreciation or amortisation at the end of the financial year. In

figure 10.10 below, we can see my example of depreciation regarding Boral’s 20 cement

trucks using the straight-line method over 5yrs $18,000 x 20 trucks. Figure 10.11 is how their

amortisation would look with regards to their quarry stripping assets and figure 10.12 is how

their amortisation would look with regards to their patents. These journal entries will increase

the depreciation and amortisation expense accounts on the Income Statement, as they are

being debited and they will credit the corresponding contra accumulated depreciation or


amortisation asset account. These contra accounts are linked to their related asset account;

therefore, by crediting this account reduces the value of the asset, whilst keeping a record of

the accumulated depreciation or amortisation of that asset over its useful life. For example,

after the first year Boral’s ‘truck asset account’ would show a cost value of $2 million and the

‘contra accumulated depreciation – cement trucks account’ would show -$360,000;

therefore, reducing the value of the ‘’truck asset account’ to $1,164,000 on the balance

sheet for the financial period. By moving these expense to the Income Statement, matches

the expense to the revenue in which it helped generate.

Figure 10.10

Figure 10.11

Figure 10.12

Even though, Boral are expensing depreciation and amortisation, no physical cash is leaving

their bank account as these are non-cash transactions. If Boral did not depreciate or

amortise their assets, their Income Statement in 2018 would have shown a profit of

$808.6m, meaning they would have had to pay more company tax, as they made a higher

profit. However, buy adding this non-cash expense to their Income Statement reduces their

profit; so therefore, the less company tax they have to pay. Depreciation and amortisation


also affect the overall value of their assets on their Balance Sheet, we can see that on their

current Balance Sheet they hold $4 billion worth of PPE and Intangible assets as seen in

figure 10.9 above; however, these asset cost over $7 billion when they were acquired (PPE

$5.7 b + Intangible $1.3). These figures could be easily manipulated by changing the rates at

which these assets depreciate or amortise. A low percentage would have them depreciating

slower; therefore, less would be getting expensed to the Income Statement each year

increasing profit. A higher percentage would have them depreciating faster; therefore, more

would be getting expensed to the Income Statement each year decreasing profit. Managers

could manipulate these figures very easily if their bonuses were driven by higher recorded

profits.


Step 11 – Feedback PEER FEEDBACK SHEET: Assignment Steps 7-10Feedback From: Natasha Ness Wilson

Feedback To: Anastazia Sowter

My Comments

Step 7Inventories

Probably not necessary to mention depreciation in para 1 of inventories as these items cannot be depreciated, they can only be sold or written off as a loss. Leave this for step 10. Explain what Cost, NRV and weighted average are and give some examples. You haven’t mentioned if they use the periodic or perpetual systems to track inventories nor explained what these are. You also haven’t discussed if you have ever had any experience with inventories; if not, mention this. Some screen shots of figures may also help with your explanations, especially when you are discussing figures. This is a 5 mark question so requires more detail.

Step 8MYOB set up

MYOB training

MYOB quiz

Wow, you are lucky already having had experience with MYOB. I would just add headings to your screen shots as to what they are. You also mentioned that there were some aspects of the training you should implement into your everyday work. I would elaborate on this, as this too is another 5 mark question.

Step 9Business transactions

All journals report

Financial and discussion

This step is for 8 marks should be very detailed. It is great that you explained how you can create Aged Receivables and Aged Payables reports from the daily transactions. Maybe explain why fuel and staff amenities are processed via ‘Spend Money’ in the banking command centre and not under purchases. I could not open any of your PDF files of the of the reports, these might have to be entered as screen shots. You also need to explain what these reports tell you about your firm.

Step 10Depreciation

Explain what the straight-line depreciation method is and with your examples you have not consider residual value of the assets. For example, CMI’s new purchase of a car would be worth something after 6yrs. CMI would need to consider this value before they started depreciating this asset and this value would need to come off the cost of the car before they could start depreciating this asset. Also explain that these assets have to be reviewed annually and if useful life or residual value changes in must be adjusted in the current and future years. Also, you need to discuss how your examples of deprecation journals would affect the income statements and balance sheet and if it would be easy to manipulate these figures and why would someone do this. I could not see any information regarding actual deprecation figures for your firm, nor any discussion about if these figures are a significant expense for your firm. Again, this is a 5 mark question so requires more detail.


Overall Overall, this is a great start to your assignment, I just feel you need to go into more depth and explain the KCQ’s and how these decisions affect what is reported in CMI’s Income Statement and Balance Sheet. That by choosing different methods to report inventories and depreciation does affect the outcome of what is reported as the firm’s profit.

PEER FEEDBACK SHEET: Assignment Steps 7-10Feedback From: Natasha Ness Wilson

Feedback To: Carlie Christopher

My Comments

Step 7Inventories

Firstly, I would correct the screen shots so they were within the margins. I am not sure what Ambertech do, so mention what they do so the reader knows why they have so much stock on hand. Explain what finished goods and stock in transit are. Also, I would be explaining what weighted average, FIFO and NRV are and give examples of these. What the difference is between periodic and the perpetual inventory systems. Mention if you have or haven’t have any experiences with inventories; if so, describe these.

Step 8MYOB set up

MYOB training

MYOB quiz

You have addressed all the steps required for this section. Well done.


All journals report


Sorry could not comment, as this step has not been completed.

Step 10Depreciation

Sorry could not comment, as this step has not been completed.

Overall Overall, your step 7 is good; however, I think you need to discuss the KCQ’s for inventories and give some examples. Step 8, you have included all that was required. Good luck :o)

PEER FEEDBACK SHEET: Assignment Steps 7-10Feedback From: Natasha Ness Wilson

Feedback To: Evan Spurway

My Comments

Step 7 To me NRV is the sales price less costs in order to get rid of the


Inventories stock (the firm is now selling the item at a price lower than the original cost to purchase that item so they can use the NRV on inventory instead of the original cost price). It is this sales price minus any other cost incurred to get rid of this old stock, such as advertising etc. As this price is lower than original cost this new cost price (NRV) is what is used to value that item in inventory. Not the original purchase price. Items may be valued at cost or NRV within Inventory on the balance sheet, as they have new stock in and old stock becoming obsolete. Explain what FIFO is. It is great that you have added some tables regarding inventories and COGS; however, none of these are explained. Do they hold a lot of stock compared their other current assets? Is it their best asset on their balance sheet? How would this affect cash flow and profit? Have you had any experience with inventories through your work?

Step 8MYOB set up

MYOB training

MYOB quiz

I think you may have gotten carried away with all the screen shots, I counted 48… we really only need to put 3 up. Last shot within MYBO for both lots of training and the results of the quiz. I think I put about 5 in, but I was having issued with my training so felt like I need to explain it.


All journals report


Sorry I don’t like the landscape format with your journal entries as it goes over 3 pages and it doesn’t look like the ALL JOURNALS REPORT that we have been asked to generate from MYOB. I cannot see your table with the 10 transactions that your company may have, this needs to come before the reports so it flows nicely . It looks like you are still working on this step. Stick to a table of the 10 transactions and how you came up with these transactions for Cochlear, the 4 reports and explain them.

Step 10Depreciation

This step is about depreciation/amortisation, not really impairment, so discus this to the extent of what impairment is; I wouldn’t elaborate too much on this. Your 3 Journal examples of depreciation need 3 debits and 3 credits, not one debit and 3 credits. The accountants would enter these separately in the system per asset at the end of the financial year to keep a clear entry for each asset/or group. Not enter in one large single transaction. The accumulated depreciation is a historical record of depreciation of the assets; hence, when you do the journals it reduces the asset values and increases the depreciation or amortisation expense accounts. You say that you can’t think of any reason or way these figures could be manipulated. There are ways in which these figures could be manipulate. EG. to show a greater profit or less profit, depending on what the managers want to report. You are still working on this step too I can see.

Overall Firstly, you need to put your name, student details and subject in the header or footer. Sorry, I had downloaded so many other students files, so had to remember what one was yours. Luckily, I knew you had Cochlear as your firm. When defining the KCQ’s try writing these in your own words instead of copying them from the source. Overall, it’s a good start, just needs some fine tuning. Best of luck with it all :o)


step - tashsaccountingblogforuniversity.files.wordpress.com · web viewthe first thing, i noticed...

Documents