BAO2203 Corporate Accounting : Proposal or Negotiation

The fact that the entity’s earnings will be materially different from market expectations.

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:
Wang Xia and Wu Min. (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.
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.
Alzarouni, A., Aljifri, K., Ng, C and 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.

And answer the following research question:

Annual reports are an outdated mode of informing users regarding the activities of a company. 

Do you agree? Why or why not?

Part I:

Requirement 1:

The gross profit of Bellamy’s Australia Ltd. has risen by 171.14% in 2016 from 2015 as per the following table:

Requirement 2:

The company has been able to increase its net profit after tax in 2016 by 322.44% from the last year. The calculations are shown below:

Requirement 3:

The return on investment, provided by the company in 2016 and 2015, are shown below:

Requirement 4:

Strength of Consolidated Statement of Profit or Loss and Other Comprehensive Income:-

1. a) Horizontal Analysis:-

The table, shown in the appendices 1, depicts that the company has maintained 45.68% gross profit margin in 2016. It indicates that the company has sold its products at a profit margin almost 100% over the product cost. The other operating expenses are almost 23% of the total income. Due to the high gross profit margin and low operating expenses, it has been able to convert 15.67% of the total sales into the net profit for the year 2016.

1. b) Trend Analysis:

The trend analysis, exhibited in the appendices 1, describes that the company has enjoyed almost 95% sales growth in the year 2016. It has also earned revenues from other income sources almost 31% more than the last year. In addition, the depreciation and amortization costs have decreased by 31% and IPO transaction costs by 100%. The high rise in sales and other incomes and fall of some expenses in 2016 have helped the company to generate 322% more profit in comparison to last year (Simons 2013).

Requirement 5:

Consolidated Statement of Financial Position:

1. a) Horizontal Analysis:

The table in the appendices 2 depicts that almost 97% of the assets of Bellamy’s are current in nature. It has strengthened its liquidity position. The company has maintained 22.51% of the total assets in form of cash and cash equivalent items, which would help the company to operate its business activities more smoothly in the following year. The major liabilities of the company are trade payables and current tax liabilities. The long-term debts cover only 0.27% of the total liabilities. Within the total equity, 48% is being contributed by retained earnings, which would help the company to fund more internal sources.

1. b) Trend Analysis:

The trend analysis in appendices 2 shows that though the cash balance has not increased highly, all other assets have increased very significantly. The liabilities have increased also, but as the increase in volume of total assets are higher than the total liabilities, the net worth of the company have risen higher by 70%. The table also shows that the company has contributed higher amount in reserve and retained earnings, for which, the amount of reserves and retained earnings have increased very significantly.

Requirement 6:

Strength of Consolidated Statement of Cash Flow:

1. a) Horizontal Analysis:

It can be stated from the table in appendices 3 that almost 51% of the ending cash balance of the company is contributed by collection from customer and 27.54% by overall operating activities. Though, the company have suffered from the lower amount of cash increased due to significantly high cash outflows from nvesting and financing activities, it has not faced any shortage issues. It has been possible as almost 99% of the closing cash balance are covered by the opening cash balance.

1. b) Trend Analysis:

The trend analysis suggests that though the cash outflow from investing activities has increased drastically in the current year, the cash inflow from operating activities have also increased significantly. It has helped the company to maintain its closing balance more or less same as previous year (DRURY 2013).

Requirement 7:-

From the financial statement of Bellamy’s Australia Ltd., it can be stated that the company has experienced drastic growth in the current year. If it would maintain the same growth in the following years, then the share prices of the company would become very higher. Hence, if any investor wishes to invest in this company, then he should purchase its shares now, before it becomes very high. On the other hand, the investors, who have already invested in Bellamy’s shares, should hold it for next few years for further growth in the share prices and earning the high dividends, as well. (Bodie 2013).

Part 2:

Evaluation on “an Annual report is an outdated mode of informing users regarding the activities of a company”

Wang Xia and Wu Min. (2011) indicated that there are several researches that explain that an annual report serves as an outdated made of informing the users considering the activities of an organization. From the review of the article “The quality of financial reporting in China: An examination from an accounting restatement perspective” it has been gathered that the research employs statements in order to indicate the poor quality of previous accounting information from annual reports that is reported within the capital market of China. Researches namely Ghazali (2010) have indicated that several listed companies within China admitted that there is poor quality of financial information mentioned within the annual reports from the years 1999 to 2005. Several companies managed their earnings majorly through below line items for avoiding losses and promoting their survival instead of supporting the refinancing objectives (Wang Xia and Wu Min. 2011).

Alzarouni et al. (2011) revealed that poor quilt of the financial reporting is observed among the companies that have poorer profitability long with shareholder base that is controlled by state along with decreased leadership along with relatively decreased share proportion considered by institutional investors. It was also gathered that Grosbois (2016) considers that the market is highly insensitive to these admissions. The reactions of investors gather only the earnings information from the recent year’s annual report that reflects the basically revealed correlation of previous financial reporting. From the article Star et al. (2016) also explained that equity market does not totally ignore the information regarding earnings. Reliance on earning by investors is generally decreased aligned with matured US market. Findings of the article indicated that accounting credibility within China has decreased value that offers weak quality financial information bears less cost due to several market mechanisms fails to deal with such behaviour. Moreover, the regulators continuous efforts to improve the financial information quality along with making sure that disclosure among the listed companies are highly fruitful. The researchers namely, Ebel et al. (2016) indicated that chances of re-statements decreased over a sample time-period that reinforces the recent regulatory strategies along with prospects for enhancing capital markets of China (Wang Xia and Wu Min. 2011).

From the analysis of the article “The importance and usefulness of corporate annual reports in Malaysia” it was revealed that perceived importance and corporate annual reports usefulness within Malaysia along with determining whether that there is a difference among the users of corporate annual reports and of annual report preparers. Findings of Rahman (2016) revealed that companies rank the annual report to be the most vital corporate information source. On the other hand, the users position the annual report to be the second most vital factor after the company visits. Singh, Peters and Schacht (2015) indicated that an implication for such finding is whether the annual report can be considered as an analyst’s information needs for the purpose of decision making. Preparers are spoken to by CFOs while clients by speculation investigators. The mean scores for preparers and clients are looked at utilizing the autonomous specimen’s t test and the non-parametric Mann-Whitney test to decide whether there are any measurably critical contrasts in their sentiments. The discoveries uncover that preparers rank the yearly report as the most critical wellspring of corporate data (Wang Xia and Wu Min. 2011). Clients, then again, rank the yearly report as the second most vital after the visits to organizations. Be that as it may, the distinction in the mean scores of preparers and those of clients on the significance of yearly reports is not huge at 5 percent level. The distinction in the mean scores for the visits to organizations is, then again, factually huge at 5 percent level. A suggestion for this finding is whether the yearly report serves the data needs of examiners for basic leadership purposes. An open door therefore emerges for future research to inspect data needs of examiners and if there is a crevice between data given in yearly reports and that required by investigators (Wang Xia and Wu Min. 2011).

From the article “The usefulness of corporate financial reports: Evidence from the United Arab Emirates” it was gathered that it is a great attempt to realise whether  the recent practices satisfies users requirement of information along with the extent to which such needs have been satisfied by the recent UAE companies disclosure practices. Researchers namely Burton and Jermakowicz (2015) indicated that the usefulness of the corporate financial reports along with perception of several user groups regarding the previous studies. These researchers also indicated that suitable disclosure of financial disclosure is vital in order to maintain an adequate financial market system. Moreover, this needs transparent and complete information availability (Wang Xia and Wu Min. 2011). If the financial disclosure remains inadequate, it has been invented by Sinkovics, Penz and Molina-Castillo (2014) that needs and perceptions of the vital users of corporate financial reports are vital for realising the financial reporting environment of UAE. The importance of corporate disclosures exists thin the assumption that there is a positive relationship among increased disclosure along with effect of national financial markets (Wang Xia and Wu Min. 2011). Such efficiency is attained at the time information regarding the securities traded within the market. This is assessable to meet participant at a low cost along with securities prices being traded incorporate important information that can be attained. Amran et al. (2015) rrevealed that the corporate annual reports has as positive role through offering their users with the needed information along with facilitating them to anticipate the cash flows for such investments. Moreover, corporate anneal reports shape and communicate the reality of an organization within the mind of annual report users.

According to Cokins (2016) the given importance of corporate annual reports to be a primary information source for the external users, the correctness of disclosure within the annual reports needs to be taken into consideration. The needs of the annual report users along with the corporate disclosure role within the decision making process serve as controversial concerns as they are not understood within any certainty degree. Amran et al. (2015) indicated that efficient capital markets offer superior quality financial reporting that facilitates the effective increase and corporate capital allocation and this generates inventor benefits. Research of China centres on the earnings management provides a superior background for certain restatement concern.

Cokins (2016) indicated that information regarding an organization’s financial performance facilitates the annul report users to understand the return that a company has gathered enough economic resources. Information regarding an organizational return indicates the ways in which management has fulfilled its responsibility to make effective and sufficient use of reporting an organization’s resources. Researchers namely Amran et al. (2015), indicated that an annual report is an outdated mode of informing users regarding the activities of a company. Information regarding cash flows of a reporting organization over a period also facilitates annual report users to evaluate an organizations capability to develop future net cash inflows (Wang Xia and Wu Min. 2011).

References & Bibliography:

Alzarouni, A., Aljifri, K., Ng, C and 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.

Amran, A., Ooi, S.K., Mydin, R.T. and Devi, S.S., 2015. The impact of business strategies on online sustainability disclosures. Business Strategy and the Environment, 24(6), pp.551-564.

Bodie, Z., 2013. Investments. McGraw-Hill

Burton, G.F. and Jermakowicz, E.K., 2015. International Financial Reporting Standards: A Framework-Based Perspective. Routledge.

Cokins, G., 2016. Strategic business management: From planning to performance. John Wiley & Sons.

de Grosbois, D., 2016. Corporate social responsibility reporting in the cruise tourism industry: A performance evaluation using a new institutional theory based model. Journal of Sustainable Tourism, 24(2), pp.245-269.

DRURY, C.M., 2013. Management and cost accounting. Springer

Ebel, P., Bretschneider, U. and Leimeister, J.M., 2016. Leveraging virtual business model innovation: a framework for designing business model development tools. Information Systems Journal.

Ghazali, N.A.M. (2010). The importance and usefulness of corporate annual reports in Malaysia. GadjahMada International Journal of Business, Vol. 12 No. 1, pp. 31-54.

Rahman, A., 2016. Improving the transparency of government requests for user data from ICT companies (Doctoral dissertation, Massachusetts Institute of Technology).

Simons, R., 2013. Performance Measurement and Control Systems for Implementing Strategy Text and Cases: Pearson New International Edition. Pearson Higher Ed.

Singh, M., Peters, S. and Schacht, K.N., 2015. Addressing Financial Reporting Complexity: Investor Perspectives: Separate Private Company Accounting and Beyond.

Sinkovics, R.R., Penz, E. and Molina-Castillo, F.J., 2014. Qualitative analysis of online communities to support international business decisions. In Handbook of Strategic e-Business Management (pp. 841-862). Springer Berlin Heidelberg.

Star, S., Russ-Eft, D., Braverman, M.T. and Levine, R., 2016. Performance Measurement and Performance Indicators: A Literature Review and a Proposed Model for Practical Adoption. Human Resource Development Review, 15(2), pp.151-181.

Wang Xia and Wu Min. (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.