Assignment 2 Draft

ACCT11059 USING ACCOUNTING FOR DECISION MAKING

ASSIGNMENT 2

NAME: Ian Eisenhuth            STUDENT ID: s0274317

Step 1:                                     Chapter 4 KCQ’s

Chapter 4: ‘Analysing financial statements’

‘Capital markets’… Insert chapter reading notes

Step 2:                                     Restated Financial Statements

Commentary:   I began with restating the statement of changes in equity only to realise I was a little unsure as to where to begin with it all. After going back through the chapter reading I decided to start with restating my firm Salmats statement of financial position. I initially misunderstood what was required with this task as I took all of the current assets from this financial statement and put them in the spreadsheet as operating assets, I put all the non-current assets in the spreadsheet as financial assets, all the current liabilities in the spreadsheet as operating liabilities and I put all the non-current liabilities in the spreadsheet as financial liabilities. Upon completion I realised something definitely wasn’t right. I decided to email Martin my spreadsheet and asked him for some guidance. He pointed out one error I had, which was putting ‘borrowings’ under operating obligation rather than a financial one. He also suggested I liase with students on the Facebook page and the forum on Moodle because I had quite a bit of work to do on m spreadsheet. I decide to go back through the chapter reading and it was then everything kind of clicked and I realised I had made many other errors. In fact I had pretty much done the restating wrong from start to finish.

I took a step back and spent quite some time going through each individual item on the Salmat’s statement of financial position and referred to the notes in their annual reports in order to fully understand what each item was. I also googled some of the items/categories to get a better understanding of what these were. After doing this it became clear to me that if I had of been that thorough from the beginning this task of restating their financial position would have been a hell of a lot easier and less frustrating, confusing and stressful for me.

Upon finishing restating Salmat’s financial position I realised that for the year 2013 my Total Net Financial Obligations (NFO) + Equity didn’t equal my Net Operating Assets (NOA) as it should have. After referring back to their financial statement and going over all the numbers I realised my ‘trade and other payable’ for 2013 was entered incorrectly as 58,808 rather than 59,808. After changing this value all my spreadsheet recalculated and my Total NFO + Equity = NOA. J

Because I had trouble with restating the statement of changes in equity on my first attempt I decided to go through the ASS2 student forum on Moodle and the Facebook group page to get some hints and ideas as to how other students had attacked and managed this task. It was on the Facebook group page I came across a very helpful post from Tash Muller. She added a link to one of the lecture videos whereby the lecturer Maria Tyler went through ASS2 step by step offering tips and hints along the way. After watching this video it became much clearer as to what was required of me in restating the statement of changes in equity. A task, which surprising in the end was quite easy and involved me having to make very few changes to it at all.

I found the final task of restating Salmat’s financial performance to be a lot more challenging than that of the statement of changes in equity and the statement of financial position. I spent quite a lot of time going over Martins example in the chapter reading to help me get my head around it all. After understanding his Ryman Healthcare example I made a start on my own but found it rather challenging and confusing. I decided to take a break from it all and by chance later that day I saw an ex personal training client of mine on the street. After some small talk of telling each other how we had been he asked me what I was doing with myself these days. I mentioned the study I was doing and this assignment I was currently working on. After I spoke of my troubles with the assignment and being a fund manager he offered to have a quick look at it for me and offer some guidance where he could. Even though he wasn’t 100% sure of everything he told me his thoughts on how he interpreted the task and which items he saw as ‘operating’ and ‘financing’. I found this to be of great help and the little kicker I needed to get the ball rolling and restate the financial performance of m firm Salmat. From here I proceeded fill out my spreadsheet with all the different categories I needed which seemed fairly straight forward. The only little hiccup I had was finding the interest received in order to calculate their tax benefit as this figure was no where to be seen on Salmat’s statement of comprehensive income. After looking back through their annual report and the note section (note 3) I found they had itemised their revenue and had the value of each year’s interest received only it was labeled as ‘finance income’. Once I had this I found it was just a matter of punching numbers into the spreadsheet and following the formula Martin gave in the chapter notes to calculate the tax benefit. This involved me working out Salmat’s ‘net interest expense’. I did this by adding their ‘financial expenses’ and ‘financial income’ and then multiplying the net interest expense by 0.3. I used 0.3 because being an Australian Company their tax rate is 30%.

Step 3: Identify 3 products or services of firm and estimate selling price and variable cost

Even though my firm Salmat’s Annual Reports does have segment information, this segment information does not contain details on individual product lines or services. It merely displays costs allocated for geographical and major areas so for the purpose of this assignment I have made assumptions about the pricing and various costs involved in some of the products and services they offer.

1.     SMS marketing for retailers like Mitre 10 Hardware

Selling price: $1.50 per SMS

Variable cost: IT costs-30%, cost of line rental-30%, and people costs-15%

Contribution margin*: 15% or 22.5 cents per SMS

2.     Traditional direct mail of catalogues and brochures

Selling price: $ 1 per brochure

Variable cost: cost of materials-30%, property rental-10%, printing costs-40%, people costs/wages-15%

Contribution margin*: 5% or 5 cents per brochure sold

3.     Speech recognition based call booking for clients like Auckland Taxi Services

Selling price: $1 per min/call

Variable cost: IT costs/software enhancements-20%, people costs/wages-15%, Office costs-10%, cost of line rental-30%

Contribution margin*: 15% or 15 cents/min per call.

*Contribution Margin = Sales – Variable Costs

- Discuss how contribution margins might differ or be similar

I feel like the contribution margins for the SMS marketing and the speech recognition services would be similar as they are very similar services, which have similar variable costs. The contribution margin for the brochures on the other hand could be lower because this service is more of a commodity so it is harder to set a price and extract a profit.

- Why might your firm produce a range of products/services with different contribution margins? Why not only produce the one with the highest contribution margin?

Some benefits of Salmat offering these different products/services with different contribution margins could not only be for them to potentially gain greater exposure and be open to a broader market but for them to maximize their profits and share the costs of the business over a greater area. For example the head office or CEO costs can be spread across the various departments or product/service areas. The reason behind producing services with different contribution margins and not just the one with the highest contribution margin would be in order for the to maximise profits across the company as a whole.

- Identify one or more resource constraint and any market constraints you feel may impinge firm.

I feel the brochure service they offer may be susceptible to resource constraints. This mainly being due to the fact that with aging technology people are increasingly using brochures as a form of marketing and advertising less and less. People seem to respond better to marketing and advertising through other resources such as television and social media. Social media may also act as a constraint on this area of Salmat’s business as people use it as a way of promoting and marketing their businesses. Not only is this a free service but it is a much more cost effective and efficient way to get a message across and can reach a much broader audience in much quicker time frame when compared to the distribution of brochures. 

The speech recognition based call service for Auckland Taxis Salmat offer may have some constraints in that being based in another country it may require the company to pay to send people from Australia over to monitor and gauge the performance of the business. They would also have to consider and have the constraint of dealing with a different currency and having to manage currency risk.

 

- What ways might these constraints be relevant when deciding whether or not (or how much) these 3 products should produce or sell?

These constraints would be relevant in that they would have to weigh up the cost of say producing the brochures and contribution margins they receive. Technological advances and other more effective ways of advertising and marketing (ie social media) will probably see more and more businesses move away catalogue and brochure distribution so Salmat would then have to determine if keeping this aspect/department of their company open is a profitable one. This would be the same for the speech recognition service they offer. They would have to manage the different currencies and the currency risk involved and determine is running an overseas service is a profitable and worthwhile business decision. Along with this Salmat would continually have to look at the variable costs involved and contribution margins of all the services they provide to determine how they are performing (ie how many are being sold or used) and whether or not they are making sufficient profits in keeping those aspects of the business running.

Step 4:

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