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Step 9

Background about my business transactions

My business manufactures and sells Accsya wood (fake wood). Within the month of July there were 10 transactions which involved receiving materials for manufacturing, taking orders for Accoya wood and returns of inferior product. Also receiving and paying bills.

Transaction 1

Sales – GST incl Bob building and co $160 000

Transaction 2

Payment Received Bobs building and co $160 000

Transaction 3

Sale- GST incl Inviro builders $320 000

10 % Deposit Inviro builders $ 32 000

Transaction 4

Return of product Bobs building and co $ 34 000

Transaction 5

Purchase of materials NQ Suppliers $52 690

Transaction 6

Bill paid NQ Suppliers $52 690

Email remittance

Transaction 7

Electricty bill GST incl $46 321

Transaction 8

Sale cash GST incl Cash $ 3200

Transaction 9

Payment received Inviro builders $ 288 000

Transaction 10

Work BBQ $250

BUSSINESS TRANSACTION REPORTS

All Journal

Income Statement/Profit and Loss Statement

In an income statement (profit & loss statement)it tells you how much revenue a company has earned between certain periods. In this case it is between July 2017 and June 2018 which is the usual accounting year. GST is excluded in an income statement as it is a liability and an income statement does not include liabilities. It also shows me the total amount of sales for this period and the costs for these sales. It then shows me the gross profit after cost of sale has been deducted from total income (sales) which is $374 545.45. The income statement is also telling me the expenses for this period which was $52 309.09. Then it goes on to tell me the net profit and loss for the period. This is calculated by gross profit – expenses = net profit/loss or net income.

In total the income statement tells me how much this business earned or lost during this period. Luckily this business is running at a profit.

Balance Sheet

This balance sheet is providing me with details about the assets (on the top of the balance sheet) and liabilities (on the middle of the balance sheet) of this business. Plus the total equity (on the bottom of the balance sheet). In this case the total asset is $354 460. Which by looking at this balance sheet consists of cash in the bank. The liabilities are what a business owes to others. In this case it is GST collected minus GST paid. This particular statement then shows the asset - liability =

the equity which is $322 236.36. This belongs to the shareholders and owners of this business. From what I can see they are doing pretty good.

Cash Flow Statement

A cash flow statement tells you the inflow and outflows of its cash. It is the actual physical cash a business has. You need to know this as ideally a business needs enough cash to pay expenses and make purchases (even though recently I’ve discovered this is not always the case). Normally the cash flow statement is divided into three parts as is in this statement. Which consists of operating activities, investing activities and financial activities. Within this statement it shows only operating activities as there are no investing activities or financing activities report.

Investing activities is the cash flow from purchases or sales from assets such as property, plant and equipment and investments. For example if a business was to buy a piece of equipment or machine this would show as an cash going out ( if it payed cash) and if they were to sell equipment, machinery or some investment then this would show as an incoming of cash. There is zero investment activities within this company.

Financial activities show the cash flow from selling stocks and bonds or loans. It also includes the paying back of loans as cash is used for this. Again there is zero financial activities in this statement.

Operating activities is the cash brought in and out from regular business activities such as selling goods and providing a service, paying wages, paying suppliers, paying insurances ect…. A company with a negative cash flow in its operating activities is most likely to become financially unstable. Within this company the operating activities is the only activity being utilised and has a positive cash flow. It generates all its cash from sales with next to no costs.

In saying all this it is important to realise that these statements are all related to each other. Any changes in assets and liabilities on a balance sheet is mirrored in the expenses and revenue on an income statement. The cash flow shows information of cash assets on a balance sheet and net income that is shown on the income statement. In other words, each statement on their own only tells a little of a business’s story whereas combined they tell the complete story of a company’s true financial performance.

STEP 10DEPRECIATION

Depreciation represents the process where property, plant and equipment have less value as an asset through usage, wear and tear, and lack of effective use within an entity.

NOTES FOR FINANICAL STATEMENTS 2016 (which are the same for each year)

Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any impairment charged. Cost includes the original purchase price of the asset as well as costs of bringing the asset to the working condition and location of its intended use. Depreciation is provided at rates calculated to write off the cost less estimated residual value of each asset, except freehold land, over its expected useful life on a straight line basis, as follows:

Plant and machinery- These assets comprise pilot plants and production facilities. These facilities are depreciated from the date they become available for use at rates applicable to the asset lives expected for each class of asset, with rates between 5% and 20%.

Office equipment- Between 20% and 50%.

Leased land and buildings Land held under a finance lease is depreciated over the life of the lease.

Freehold land - Freehold land is not depreciated.

Accsys says above that they use the straight line method of depreciation annually Depreciable amount = Annual Depreciation Useful LifeDepreciation and amortisation is not listed as a large expense in the Income statement. It actually isn’t listed at all, well so I thought until I researched total revenues note 3, as shown below in figure A.

Figure A- shows note 3 in total revenue.

I have copied note 3 (figure B) below and depreciation and amortisation is listed under loss from operations. At the bottom of each heading it has a total of EBITDA (Earnings before interest, taxes, depreciation and amortisation). This kind of reporting below is called segmental reporting. I googles it and apparently publicly-held entities are require to do this to give its shareholders an accurate picture of the company’s performance. To me it looks as though Accsys is depreciation absolutely everything possible. I thought depreciation was just on physical things such as machinery, cars ect. I’m not sure how you can depreciate research and development?? I tried to find more information about this within the financial statements and notes but was unsuccessful.

Figure B-shows how note 3 is set out and where depreciation is used.

The total of the depreciation is the figure B is included in other operating costs as an expense as shown below in figure B2.Figure B2

Consolidated statement of financial position is the Balance sheet (figure C). Property, plant and equipment (PPE) with note 17 is the depreciation portion in the non-current assets. The depreciation of PPE is classed as a long term asset as these items are used to make money for the company over years. But seen in figures 1, 2, 3, and 4, these figures actually show how property, plant and equipment is broken down to show how depreciation is an expense. This is because as PPE utilised over years causing wear and tear that devalues the items by making them worth less than the original cost thus being a depreciation expense.

Figure C- This show where property, plant and equipment is located on the balance sheet.

Figure D - shows the notes in years 2013, 2014, 2015 and 2016 and how the book value is determined.

(Figure D continued)

Within note 3 it shows original costs then it adds any additional costs. The accumulated depreciation is then take off this amount giving you the net value.

DEPRECIATION JOURNAL ENTRIES

30/06/2016 Depreciation Expense- Machinery Accumulated Depreciation-Machinery(Depreciation expense for the year)

12 30012 300

30/06/2016 Depreciation Expense- Office equipment Accumulate Depreciation- Office Equipment(Depreciation expense for the year)

8 7008 700

30/06/2016 Depreciation Expense- Delivery Truck Accumulate Depreciation- Delivery Truck(Depreciation expense for the year)

15 90015 900

The estimated useful life of these items is 6 years. The depreciation would be deducted every year until the total deduction reached the original cost of the item or the book value leaving a NIL residual value.

These journal entries would affect the balance sheet by being classed as part of a non-current asset and the total of these journal entries would increase the non-current asset by $36 900 for the year.

It would also affect the consolidated statement of comprehensive income (balance sheet) as the total depreciation of these journal entries would be classed as part of the total of other operating costs and be deducted from revenue adding to the loss for the year.

COULD ENTRIES BE MANIPULATED?

The only way that I can see to manipulate these entries to improve the financial statements is to not include them in the expenses. This would them make it look as they are only non- current assets. You could probably increase or decrease the useful life expectancy to suit what outcome for the year you might wish to have. This would only work for the short run but it could make the books look good if you were requiring more capital via investors.