Corporate Accounting

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Questions:

Disclosing entities are regulated by the Corporations Act (2001), Accounting Standards and ASX requirements. The continuous disclosure requirements in ASX LR 3.1 require timely reporting to the ASX of significant events and financial information that is likely to impact the price of the entity’s securities. ASX LR 3.1 contains an overriding general requirement to disclose information that a reasonable person would expect to have a material effect on price, however the rule includes the following exceptions:

Part I

Using the consolidated financial statements of Bellamy’s Australia Ltd, calculate comparing the 2015 and 2016 figures:

  1. The percentage increase in Gross profit.
  2. The percentage increase in net profit after tax.
  3. Return on investment (assets) for 2015 & 16. (hint, use EBIT).
  4. As a financial analyst, comment (two paragraphs) on the strength of the Consolidated Statement of Profit or Loss and Other Comprehensive Income for 2016.
  5. As a financial analyst, comment (two paragraphs) on the strength of the Consolidated Statement of Financial Position for 2016.
  6. As a financial analyst, comment (two paragraphs) on the strength of the Consolidated Statement of Cash Flows for 2016.
  7. Based on your analysis, and Before knowledge of the recent share price decline and share trading halt, would you have recommended to your clients to buy, hold or sell Bellamy’s shares? Why?

Part II

Read and analyse the three attached articles by:

  • The quality of financial reporting in China: An examination from an accounting restatement perspective.
  • The importance and usefulness of corporate annual reports in Malaysia.
  • The usefulness of corporate financial reports: Evidence from the United Arab Emirates.

Answers:

Part I

  1.  Percentage Increase In The Gross Profit

Bellamy’s Australia Ltd posted a strong gross profit margin in 2016 as compared to the year 2015. An increment of 12.79% has been observed indicating a strong level of sales and strong control over the cost of goods sold.  This ratio is a strong indicator of the performance and going by the result it can be said that the operations of the company are managed in an effective manner.

Gross  Profit Ratio20162015
Gross Income11172841207
Sales Revenue244583125302
Gross Profit Ratio [(Gross Profit after tax/Sales Revenue)*100]45.6810232.88615
  1. Percentage Increase In Net Profit After Tax

The Net profit margin helps in knowing the return to sales.  The percentage increment in net profit is 8.4% indicating the efficient nature of the company and a strong command over the expenses (Needles & Powers, 2013). This indicates that Bellamy’s Australia Ltd is operating in a profitable manner.

Percentage increase in Net Profit after tax20162015
Net Income383289073
Sales Revenue244583125302
Net Profit Ratio [(Net Profit after tax/Sales Revenue)*100]15.670757.240906
  1. Return On Assets

The return on assets projects the manner in which the management utilizes the assets of the company (Spiceland et. al, 2010). From the computation, it can be observed that the return on assets has increased significantly in 2016, a sharp rise of 33% from the level of 2015. It was 17.98% in 2015 and increased to 50.9% in 2016 hence the increment is (50.9-17.98) = 33% approx.  This means the assets were utilized in an efficient manner and helped the company to post better numbers.   

ROA20162015
EBIT5489412981
Avg Assets107835.572170
Return on Assets
[(Net income/ Average assets)*100]
50.9053117.9867
  1. Strength Of The Consolidated Statement Of Profit And Loss Account

The year 2016 has been a top notch for Bellamys Australia Ltd as the revenues of the company increased significantly thereby highlighting the strong command over the operations of the company. This led to a strong gross profit ratio as compared to 2015. The costs increased to a significant extent because it is in direct tune to the sales of the company.  As a result profit before tax was higher.

The income tax expenses of the company were higher in nature because of a strong business.  Overall, the profit of the year was higher indicating that the company performed in a strong manner.  The EPS of the company enhanced to a greater extent signifying that the profitable nature of the company in relation to the shareholder.  The EPS of the company stands at 39.8eaning if Bellamys Australia distributes every dollar to the shareholder then every share will receive $39 (Bellamy’s, 2016). The EPS figure is provided in the balance sheet of the company.

  1. Comment On The Consolidated Financial Statement

The consolidated financial statements project the position of assets, as well as liabilities. As per the balance sheet, the current assets of Bellamys Australia Ltd have increased almost at a double pace and have surpassed the current liabilities. This indicates that the company has surplus liquidity and can easily meet the obligations. There will be no shortage of cash in the coming scenario.  The current ratio is placed at 2:3 the best for the company as it touches the standard ratio of 2:1. However, surplus cash is lying with the company because the ratio exceeds the standard ratio, this cash can be invested elsewhere that will generate returns.

Current Ratio  
 20162015
Current Assets13919270764
Current Liabilities6011623060
Current Ratio (Current Assets/Current Liabilities)2.315393.06869

The total assets are higher in 2016 indicating that fixed assets were purchased. This indicates long term stability. More capital was issued to raise funds which imply a strong scenario for the company in terms of expansion.  The total equity is higher when it comes to the year 2016.

  1. Consolidated Statement Of Cash Flows

The Cash flow position begins with the cash flow from operating activities whereby it is indicated that the receipts from the operating activities is higher in the year 2016. Ultimately, it gives a positive and higher net income from operating activities. On the other hand, cash is used from the investing activities because the company purchased plant and properties.  Hence,  outflow of funds are seen in this scenario.

When it comes to financing activities, the company repaid the borrowing and paid dividend thereby the outflow of funds is more as compared to inflow. Thereby, cash is used in case of financing activities.  Overall, the cash and cash equivalent appears in positive number meaning the opening of next year will have a positive balance.

  1. Analysis Of Bellamys Australia Ltd (Buy, Hold Or Sell)

Before the knowledge of the share price, decline and the halt in its price I would have recommended a buy for Bellamys Australia Ltd as it has strong fundamental. Moreover, year 2016 has been remarkable as it has fetched higher profits and revenues enhanced significantly. This means that the company operated in an effective manner. Moreover, the balance sheet is formidable where the liquidity is high for the company. Moreover, the cash flow depicts of a strong scenario. Overall, the fundamental analysis of the company states that Bellamys Australia Ltd is a quality stock that will provide higher returns in the forthcoming period. Hence, it must be kept in the radar and a buy position must be maintained.

Part- II

Annual Reports Are An Outdated Mode Of Informing Users Regarding The Activities Of A Company.

The importance and use of annual reports have been a subject of debate since many years. Although an annual report intends to offer shareholders and other interested people information regarding the company’s activities and financial performance, yet its usefulness in decision-making has been regarded limited by many people. This raises the question as to what goal of annual reports and whose interests they are supposed to serve. Besides, the prevalence of other modes like press releases and individual meetings also offer information regarding the company’s activities, but such reliance varies from people to people (Mark & Michael, 2016). The reason behind this can be attributed to the level of sufficient disclosure made by companies. Nonetheless, even though annual reports are considered outdated by many studies, yet the level of information it provides cannot be matched by any other mode.

The efficiency of financial markets can be attained when information regarding the activities of a company is accessible to the market participants at a very low cost. Furthermore, the capability of such financial markets to shed light on the company’s value depends on the quality of disclosure (Wang & Wu, 2011). Although various companies rely on other modes of communicating information regarding its activities to the users, yet annual reports have been considered the best mode for most of the users. The key reason behind this can be attributed to the role played by annual reports. They not only offer effective information to the users but also assist them in forecasting future cash flows based on their investments (Alzarouni et. al, 2011). However, taking into consideration a number of costs involved in offering every material piece of information, companies have been showing reluctance in their adequacy of disclosure. Furthermore, the question as to whether annual reports are outdated varies from one user to another. For instance, in Malaysia, analysts consider company visits the most important mode for company information, while other users regard annual reports the most significant mode (Tooley et. al, 2010). Besides, this issue has been caused because users demand for more information and preparers are reluctant in offering every detail due to cost issues. As per studies, this difference betwixt users and preparers is statistically relevant at five percent that clearly depicts unfulfillment of user’s requirements (Ghazali, 2010). Although company affairs can be procured through interim reports, prospectus, financial press releases, etc, every user consider an annual report the most effective medium of attaining financial information. Interim reports are directly sent to shareholders, prospectuses are made available to the anticipated security buyers, external

parties create personal contact with companies through direct correspondence, listening to company speeches, private meetings, etc (Yeo, 2010). Any of these media can form a basis of corporate reporting, but despite the prevalence of various sources, an annual report can be considered the most effective and important source of information. The prime reason behind this is that it is directed to the society or community at large; to whomsoever, it can have been formally offered (Lev et. al, 2008). Other modes do not grant accessibility to every group of users like in the case of an annual report. Even though it requires some modifications, yet its importance looms huge not only in shareholder-company relationships but also in company-society relations (Ghazali, 2010). Moreover, since an annual report is relatively more easily accessible than another mode of information, users highly rely on such mode. Furthermore, the prevalence of audited information also plays a role in creating confidence among the public that cannot be guaranteed by any other mode. In addition, besides financial statements, few more detailed information regarding statistical data, historical summary, relevant business outcomes, and other plans or policies of the company are given through an annual report, and that are not available in other sources of information. The only complication regarding the effectiveness of annual reports is that there is a high need to make such reports more informative so that the users are not willing to opt for other modes (Vinten, 2004).

On a whole, the mass criticism received on the effectiveness and relevance of annual reports is because companies are failing to address the information requirements of users. In other words, the extent to which users rely on annual reports highly depends upon their decision-making processes. For instance, in UAE, individual investors made the least utilization of annual reports as they considered it outdated. This is because such investors depend on technical evaluation in place of fundamental assessments. In addition, they feel the lack of accounting and financial backgrounds to make utilization of the information accommodated in the reports, and thereafter, relate it to their investments in the market. Similarly, in UAE, other users consider annual reports more useful than other modes (Alzarouni et. al, 2011). This can be proved by the fact that according to studies, most users in UAE attained information regarding publications of the stock market, advisory services, communication with company’s management, etc, with the help of an annual report. However, since companies have failed to offer sufficient information to address the needs of such users, the effectiveness of annual reports have now been regarded as outdated by many. This is because approximately 56% of the survey in UAE depicts that the current level of disclosure in the annual reports is not adequate in nature, and the major dissatisfied users were bank credit officers, fund managers, etc, who depend on such reports to make relevant economic decisions. Therefore, improvement in the current level of disclosure in many countries like UAE is compulsory so that the purpose of an annual report can be attained in full (Alzarouni et. al, 2011).

In addition, surveys have depicted that annual reports assist the investors and other users in comparing the performance of the company, thereby, in turn, assisting in assessing the performance (Northington, 2011). According to such users, although other modes like company visits can provide information that is more meaningful, these cannot assist in facilitating performance comparison in relation to past years. Besides, as mentioned earlier, the usefulness of an annual report varies betwixt users because if it can cater to the requirements of users, it is not outdated, and vice-versa (Kaplan, 2011). For instance, governments can request information directly from a company and it may not find annual reports an updated model for procuring information. Furthermore, the huge importance exerted by users on the effectiveness of annual report is due to the fact that they require timely and up to date details that can assist them in their decision-making process. This is the reason why in Malaysia, private meetings with companies are gradually becoming a more important mode of corporate information. Furthermore, investors from many countries have reported annual reports to be insufficient, and this is the main reason why they have been resorting to other modes of corporate information. Therefore, in order to emphasize upon the efficiency of annual reports, it must be noted that provision of timely and up to date details is very necessary. Since companies are not bothering to provide such services to users, they are forced to move towards other modes of information, thereby resulting in annual reports being considered outdated in nature, which is not true in reality (Ghazali, 2010). Every user is bound to attain proper information regarding the affairs of a company so that they can make proper decisions. The only complication lying betwixt the importance of the annual report and whether annual reports are outdated is that high level of modifications is required in the level of disclosure (Samaha & Dahaway, 2010). Since the present components of the annual report are not complete to cater to the requirements of every user, they have started turning towards other sources. For instance, according to surveys in UAE, the disclosure of items associated with owners’ equity statement, cash flows, and statement of income were immensely higher than the disclosures on items of balance sheet and ‘Other information’. Moreover, studies state that many companies failed to disclose matters on their long-term performances, and future expectations like the rate of return needed by the company on its forecast and projects of future financial performance for the upcoming three to five years (Melville, 2013). Hence, on such issue of disclosure in annual reports, users’ difference in an opinion clearly sheds light on the fact that annual reports, in reality, have not become outdated, and instead users require much more information than companies already offer them.

On a whole, the question as to whether annual reports have become outdated depends on a number of reasons. Besides, this question has been subject to many debates for many years. While annual reports can offer information regarding the affairs of a company in an enhanced manner that any other source of information cannot provide, the reluctance on the part of companies to disclose all material information is playing a role in hampering its effectiveness (Wang & Wu, 2011). Moreover, there is no correct answer as to whether annual reports have become outdated or not, as different countries and users have different viewpoints and rules. Nevertheless, the reality is that the level of information offered by an annual report cannot be matched by any other mode, and addressing the problems in the current level of disclosure can surely provide a solution to such debate because then users might not opt for other sources of information.

References

Alzarouni, A, Aljifri, K,  Ng, C & Tahir, M, I 2011, ‘The usefulness of corporate financial reports: Evidence from the United Arab Emirates’,  Accounting & Taxation, vol. 3 No. 2, pp. 17-37.

Bellamy’s 2016, Bellamy’s Annual report and accounts 2016, viewed 20th April, 2016 https://investors.bellamysorganic.com.au/media/ea194175/Bellamys%20annual%20report%202016.pdf

Ghazali, N.A.M 2010, ‘The importance and usefulness of corporate annual reports in Malaysia’, Gadjah Mada International Journal of Business, vol. 12 No. 1, pp. 31-54.

Kaplan, R.S 2011, ‘Accounting scholarship that advances professional knowledge and practice’, The Accounting Review, vol. 86, no.2, pp. 367–383.

Lev, B, Ryan, S, Wu, M  2008. ‘Rewriting earnings history’, The Review of Accounting Studies vol. 13, pp. 419–451.

Mark A. C & Michael J. P 2016, ‘The timeliness of UK private company financial reporting: Regulatory and economic influences’, The British Accounting Review, vol. 48, no. 3, pp. 297–315

Melville, A 2013, International Financial Reporting – A Practical Guide, 4th edition, Pearson, Education Limited, UK

Needles, B.E. &  Powers, M 2013, Principles of Financial Accounting, Financial Accounting Series: Cengage Learning.

Northington, S 2011, Finance, New York, NY: Ferguson’s.

Samaha, K. & Dahaway, K 2010, ‘Factory influencing corporate disclosure transparency, in the active share trading firms: An Explanatory study’, Research in Emerging Economies, vol.  10, pp. 87-118.

Spiceland, J., Thomas, W & Herrmann, D 2011,  Financial accounting, New York: McGraw-Hill/Irwin,University Press.

Tooley, S, Hooks, J & Basnan, N 2010,  ‘Performance reporting by Malaysian local authorities: Identifying stakeholder needs’, Financial Accountability and Management, vol. 26, pp. 103-133.

Vinten, G 2004, ‘Voluntary annual report disclosures: What users want’, Managerial Auditing Journal, vol. 19, pp. 152-153.

Wang, X & Wu. M 2011, ‘The quality of financial reporting in China: An examination from an accounting restatement perspective’, China Journal of Accounting Research, vol. 4. pp. 167-196.

Yeo, P 2010, ‘Narrative reporting: the UK experience’, International Journal of Law and Management, vol. 52, pp. 211-231.

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