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ACC201 Financial Accounting and Reporting

Depreciation of Machinery

“In early July 2015, Masterton Ltd is considering the acquisition of some machinery for \$1.200.000 plus GST to be used in the manufacture of a new product. The machinery has a useful life of 10 years, during which management plans to produce 500.000 units of the new product. The residual value of the machinery is \$100.000.

When calculating the profit before depreciation, all expenses have been deducted, including the repairs and maintenance expense.

Part 1. As the accountant for Masterton Ltd prepares separate depreciation schedules for the machinery for the 5-year period, using the following depreciation methods; Straight line method, diminishing balance and units of production. “

Depreciation of Machinery

Accumulated depreciation

The depreciation schedule for the machinery of Masterton Ltd using the straight-line method is \$122,000 per year.

Machinery plus GST is 1,200,000 + 120,000 = 1,320,000

Cost minus residual is 1,320,000 – 100,000 = 1,220,000

Divide the total by the machines useful life is 1,220,000 / 10 = 122,000

 Year ending 30 June Carrying amount at beginning of year Depreciation expense Accumulated depreciation Carrying amount at end of year 2016 1,320,000 122,000 122,000 1,198,000 2017 1,198,000 122,000 244,000 1,076,000 2018 1,076,000 122,000 366,000 954,000 2019 945,000 122,000 488,000 832,000 2020 832,000 122,000 610,000 710,000

Annual depreciation expense

The depreciation schedule for the machinery of Masterton Ltd using the diminishing balance method of 40% is as followed:

 Year ending 30 June Carrying amount at beginning of year Depreciation expense Accumulated depreciation Carrying amount at end of year 2016 1,320,000 528,000 528,000 792,000 2017 792,000 316,800 844,800 475,200 2018 475,200 190,080 1,034,880 285,120 2019 285,120 114,048 1,148,928 171,072 2020 171,072 71,072 1,220,000 100,000

Year ending 30 June

The depreciation schedule for the machinery of Masterton Ltd using the units of production method is \$2.44 per unit.

Machinery plus GST is 1,200,000 + 120,000 = 1,320,000

Cost minus residual is 1,320,000 – 100,000 = 1,220,000

Divide the total by the machines capacity is 1,220,000 / 500,000 = 2.44 units

 Year ending 30 June Carrying amount at beginning of year Depreciation expense Accumulated depreciation Carrying amount at end of year 2016 1,320,000 122,000 122,000 1,198,000 2017 1,198,000 109,800 231,800 1,088,200 2018 1,088,200 134,000 365,800 954,200 2019 954,200 141,520 507,320 812,680 2020 812,680 146,400 653,720 666,280

“Part 2. Prepare a report for management, stating the advantages and disadvantages of each depreciation method. Include in your report your recommendations on the choice of a method consistent with the requirements of IAS 16/AASB 116. Support your recommendations with the schedule showing the total annual cost for operating the machinery, and the profit after depreciation. “

Depreciation of Machinery

Straight line method; this method calculates the useful life of the machinery in years and is very simple to calculate and control. This method is suitable for assets which are going to be used equally over each period of its useful life. The disadvantage of this method is that it doesn’t take any fixture of usage in the count. Which means that if the machinery is too be used more during some periods, that it will not be taken into count in the depreciation calculation.

Diminishing balance; this method is an accelerated method, meaning that a bigger amount is expensed in the early years of the assets life, and the depreciation expense decreases over the life of the asset. In this example with the machinery of Masterton Ltd, the depreciation is calculated as 40% of the machinery value per each period. the disadvantages with this method are that it is more complicated to calculate and that it does not take in the count if the usage of the machinery changes and are to be higher used in the end if the period instead of in the beginning. This method is, therefore, most appropriate for an asset that is guaranteed to be used more when it's new/ in the early years of its life, and that are expected to wear out quickly.

Units of production method; this method is based on usage and not on time as the other two versions. This gives the most accurate view on the depreciation as it calculates the expense based on the actual units consumed in each period. This is best suitable where assets usage varies significantly over the life if the asset (and not just in the early years) since it allocated more depreciation expense to periods of heavier use and less to periods of lighter use. However, to be able to use this method in an accurate way, a very well planned budget for usage per period is needed.

According to IAS 16/ AASB 116 the depreciation method chosen for each specific asset “shall reflect the pattern in which the assets future economic benefits are expected to be consumed by the entity”. It is also stated that the method chosen should be applied consistently from period to period unless there is a major change in the expected pattern of consumption of those future economic benefits.

Based on the calculations done, and the information received regarding usage and units to be produced, I recommend Masterton Ltd. to use the units of production method. The main reasons to recommend units of production method are;

• Masterton Ltd has a clear and efficient budget showing the number of units to be produced for the period (this recommendation assumes that a budget for production over the last 5 year will be available as well.)
• The number of budgeted units have a variance over each period.
• The highest amount of units (for the five first year) are to be produced the last year, and the lowest amount is to be produced the first year.
• Units of production method give a steady, reliable profit after depreciation.

Straight Line method would give a similar result, but since it's not as accurate as units of production it would not be my prefered method. Whereas diminishing balance method would leave the machinery fully depreciated after five years, meaning five years ahead of its useful life. The result of that would be that the depreciation expense from the first two years would be way higher than the profit for Masterton Ltd. Furthermore, it would not take into account that the production volume is increasing over the years, not decreasing.

Annual cost of operating the machinery

 Year ending 30 June Operating cost of machinery (depreciation excluded) Operating cost of machinery (depreciation included) 2016 70.000 192.000 2017 60.000 169.800 2018 90.000 224.000 2019 95.000 236.520 2020 100.000 246.400

Profit after depreciation using the units of production method:

 Year ending 30 June Profit before depreciation (op. cost are deducted) Profit after depreciation 2016 350.000 228.000 2017 340.000 230.200 2018 355.000 221.000 2019 360.000 218.480 2020 380.000 233.600

Cash Flow Statement Of JB HI-Fi

Aim of a cash flow statement

It helps us to know the aptitude of the business to produce positive cash flows.
 it helps to measure the capability of the company to pay its loans and dividends.
 it helps to inform the consequence of major transactions made in the year.

Explanations

1. Operating activities: cash produce through the basic activities of business such

receipt from the customers, payments made to debtors and creditors.

1. Items including cash inflows:

Items including outflows of cash included:

1. i) interest paid
ii) dividends paid
iii) interest element of finance lease payments.

Cash receipts include:

1. i) receipts from sales of fixed assets
2. ii) receipts from sales of investments

iii) receipts from repayment or sales of loans made to other entities.

Cash payments include;

1. i) payments made to have fixed assets
2. ii) payments for investments in the subsidiary net of balances of cash and cash equivalents

iii) payments made for investments in other entities

1. iv) loans made and payments to acquire debt of other entities.

Financing: the alterations made in the scope and configuration of the equity investment and borrowings of the business.

Items included in the inflow activities of the financing activities:

1. i) receipts from issuing shares or other equity instruments
ii) receipts from issuing debentures, loans, notes and bonds and so on.

Items included in the outflow of financing activities:

1. i) repayments of the borrowed amount
ii) lease rental payments
iii) payments made for re-acquire or redeem the entity's shares. (Fao.org, 2018)
1. The most of sources for JB HiFi to source cash flow from different activities are listed below:

(a) cash flow from operating activities

The main sources of cash for jb hi-fi is receipt from the customers amounting to \$6,205.5m and their payments are made to suppliers and employees which is amounted \$5,908.8m moving to interest and bill discounted they have received \$1.7 million and interest and another financial cost paid has been amounted to \$9.3m and last income tax paid for the business activities has been \$98.5m. The net amount of the cash inflow from the operating activities for the year was\$190.6m.

(b)cash flow from investing activities

The payment made during the year were \$836.6m for a business combination and \$49.1m for plant and equipment whereas they had proceeds from the sale of plant and equipment \$0.2m and in total, for the year they have an outflow of cash for\$885.5m.

(c) cash flow from financing activities

During the year they had issue shares of worth \$395.9m. They also made repayments for the borrowings \$450.0m. and payments for debt issue cost \$1.7m and dividends paid to the owners of the company were worth \$119.1m. the total of the cash outflow for the company was for\$715.9m. (Jbhifi.com.au, 2018)

1. Cash Flow Statement Of JB Hi-Fi

The Cash Flows Statement is one of the principal financial reports s used in the financial positions which includes Income statement, balance sheet and Statement of Changes in Owners’ Equity; and where the beginning and ending balance sheets are important to be recorded if any cash change occurs in the reconciliation; any other supplementary data such as Income taxes or interest amount paid or any non- cash financing and investing exercises, e.g. is announcing basic stock return of land).

The Cash Flows Statements are categorised into three specific components:

• Operating transactions where cash is affected.
• Investing transactions where cash is affected.
• Financing transactions where cash is affected.

The table below shows the cash flow Statement of JB HI-FI with the following transactions:

“JB HI-FI Cash Flow Statement”

AnnualQuarterly

Period Ending:

2017

30/06

2016

31/12

2016

30/06

2015

31/12

Period Length:

12 Months

6 Months

12 Months

6 Months

Net Income/Starting Line

-

-

-

-

Cash From Operating Activities

190.6

276.1

185.14

259.64

 Depreciation/Depletion - - - - Amortization - - - - Deferred Taxes - - - - Non-Cash Items - - - - Cash Receipts 6205.5 2885.7 4355.75 2324.76 Cash Payments -5908.8 -2575.3 -4101.23 -2029.84 Cash Taxes Paid -98.5 -34.2 -66.25 -33.57 Cash Interest Paid -9.3 -1.5 -3.66 -1.94 Changes in Working Capital 1.7 1.4 0.52 0.23

Cash From Investing Activities

-885.5

-866.5

-52

-28.62

 Capital Expenditures -49.1 -20.1 -52.34 -28.82 Other Investing Cash Flow Items, Total -836.4 -846.4 0.34 0.2

Cash From Financing Activities

715.9

663

-130.56

-179

 Financing Cash Flow Items -10.9 -10.5 -0.13 0.06 Total Cash Dividends Paid -119.1 -36.7 -93.2 -30.87 Issuance (Retirement) of Stock, Net 395.9 395.2 -7.23 -8.19 Issuance (Retirement) of Debt, Net 450 315 -30 -140

Foreign Exchange Effects

-0.1

-

0.18

0.28

Net Change in Cash

20.9

72.6

2.75

52.28

Normally Depreciation, Depletion, Amortization and non-cash items are not recorded in the Cash Flow Statement as they are not implied in any cash receipt or cash payment, however, they may be used to calculate the profit.

1. At the end of the Financial year, the position of JB Hi-Fi Limited is worse because the net income of the organization and operating activities are contrasted, therefore showing the difference which is less comparing the previous year. In that case, the transaction is very sensitive and warns that the net income should be transforming into cash amounts.

As a result, JB Hi-Fi should reliably produce more Cash inflows than Cash outflows, where JB Hi-Fi will benefit from the profit earned, its dividend will be expanded, part of its stocks will be purchased back, decrease bad debts expenses, or buy some other company.

1. JB Hi-Fi has recorded payment or receipt of interest in Operating activities whereas dividends in Financing activities. Dividends and the receipt and payment of interests have been increased negatively compared to the previous year showing that JB Hi-Fi has increased in Cash Outflows.

References Lists:

Fao.org. (2018). Chapter 3 - Cash flow accounting. [online] Available at: http://www.fao.org/docrep/w4343e/w4343e04.htm [Accessed 23 Jan. 2018].

Jbhifi.com.au. (2018). Cite a Website - Cite This For Me. [online] Available at: https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf [Accessed 24 Jan. 2018].

Averkamp, H. (2018). What Can The Statement of Cash Flows Tell Us? [online] Accounting Coach. Available at: https://www.accountingcoach.com/blog/what-is-the-statement-of-cash-flows [Accessed 24 Jan. 2018].

au.investing.com, (2018). JBH Cash Flow Statement. [online] Fusion Media Limited. Available at: https://au.investing.com/equities/jb-hi-fi-cash-flow [Accessed 24 Jan. 2018].

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