ACC5502 - Assignment Question 1 - Year 2013

ACC5502 Assignment One – Semester One, 2013.

Due Date: 24 April, 2013     Total Marks: 100 marks Weighting: 20%

Question One 25 marks

On 21 January, 2011 Mike Mangan in the Eureka Report wrote:

“Most people accept that the pre-GFC “excesses” of massive financial leverage; and bonus culture contributed to the subsequent financial collapse. And for most people in the US, the GFC is now defined as lost jobs, lost houses, often lost families and, in some cases, lost lives. 

You’d think financiers would be chastened by this carnage. Nothing could be further from the truth. With a quick step and a dog whistle, they just mutter “bad trade”. And their DNA is such that bad trades are quickly forgotten. Another day, another deal. Barclays CEO Bob Diamond has even demanded the industry stop apologising and, presumably, just get on with making money. This as the US faces record home foreclosures and US unemployment near 10%. Thanks for your empathy, Bob.

For those who have experienced the unique world of investment banking, Diamond’s insensitivity is typical among global financiers. They exist in a parallel universe, collecting art, fine wine and other trophy toys and spending very little time wondering what the poor people are doing.

Mind you, bankers have learnt the GFC lesson: no more US real estate lending. So while the US Federal Reserve prints money, hoping to resuscitate US housing, financiers are busy spraying the freshly minted dollars into commodities and emerging markets in one of the more predictable displays of the law of unintended consequences.

While Australian banks were angels in comparison to their northern hemisphere cousins, even they needed government guarantees to stay alive during the GFC. Having forgotten this corporate socialism, they too are back doing what they do best: rewarding themselves with barely a mea culpa in sight. 

So we have the spectacle of CommBank CEO Ralph Norris sneaking through a rate rise on Melbourne Cup afternoon that was double the RBA’s rise. Not his finest hour. Politicians then shouted “re-regulation”. At that point as an industry leader, Norris could have said something like: “We as an industry have to accept more than our fair share of the blame for the GFC. We are in a privileged position and have a responsibility not just to shareholders but also to the wider community that a GFC never occurs again”. Instead what the pollies got was a warning: if you increase financial regulation it will only hurt the wider economy and by implication your electoral base.

What Norris was really saying is: “I’m a protected species AKA“richus bankus”. I am not subject to normal economic disciplines. While I care for the country, it’s not my responsibility if it collapses. My only duty is to look after shareholders and they in turn look after me (wink, wink). In good times I engorge myself heartily, and when I make a mistake, as I did in 2008, I just go and ask for a government handout '¦ sorry '¦ guarantee. And because I’m so large I can never go bust. And that, children, is why I was the highest-paid Australian CEO in 2010.”

Some might say I’m being too harsh. But if I wanted to be harsh I’d compare Norris’s comments to a typical Sopranos-type protection racket – an offer you can’t refuse, such as “accept my offer (pause), otherwise (another pause), I won’t be responsible for any ill fortune that may befall you, and your families”. But I’m not going to do that. 

Like Barclay’s CEO, Norris has a tin ear. Yes he’ll throw the odd bone to the community like the Queensland Premier's Disaster Relief Appeal. At $1.35 million, CommBank is the largest donor. But that represents just 0.02% of this year’s expected profit. Not 0.2%, but 0.02%. This apparent example of corporate social responsibility is the equivalent of the average Australian wage earner contributing about $10! The worst natural catastrophe to hit this nation in decades, and CommBank threw the corporate equivalent of a “tener” at it. We should be so thankful”. 

Source: http://www.eurekareport.com.au/article/2011/1/21/why-bankers-will-crash-system-again#ixzz2MAnNpjyo Accessed 28 February, 2013.

Required:

1. Compare and contrast the pros and cons of regulation with that of a free market economy. 10 marks

Ans:

1. State your opinion on the regulation versus free market economy debate. Use the backdrop of the Global Financial Crisis to illustrate your main arguments. 10 marks
2. Do you agree with Mike Mangan? Why or why not? 5 marks

Question Two 75 marks

Refer to the 30 June 2012 financial reports of onthehouse Holding Ltd. The report can be found on their website or the ASX website.  Answer the following questions using the consolidated financial reports and the notes to the consolidated financial reports. 

1. For the year ending 30 June 2012 state: (2 marks per part for a total of 20 marks)
1. The total assets at the end of the financial year.

For the year ending 30^th June 2012 total asset are 70,247,000

1. The accounting equation in dollar figures for the end and beginning of the year and the change in the accounting equation from the beginning and the end of the year.

1. State the changes in the company’s non-current liabilities during the year.

Ans: The main changes in the company is the non-current liabilities has increased $1,573,000 (72%) compared to year 2011, which for company borrowing has increased  $1,022,000 (44.8%) , Deferred tax liabilities has increased $568,000 (34%), but company provision has decreased 17,000 (– 6.8%) compare year 2011.

1. What is the main asset the company owns and what is its value? Compare this to the total equity. State your conclusion from this comparison.

Ans : The main asset that company own are intangible asset which the value are 59,618 if we compare with equity (61,287) there is changes of amount 1,669

1. State the total revenue, net profit/(loss), and EBIT.

Ans: Total revenue $20,327,000, net profit/loss is 2,141,000, EBIT is 3,057,000

1. How does the company earn its revenue?
2. Compare the net profit with the net cash flows from operating activities. Which amount is larger? Is this normal?
3. Outline how the company has financed its activities during the year.

Ans: For the year 2012, company has financed into (Operating activities which cost $6,422,000, also used $5,782,000 for investing activities, and used 679,000 on financing activities)

1. Outline the investment activity the company undertook. Was there a net investment or a divestment?

Ans: For year 2012, company have used 1.6 million on software and also used 3,240 on joint venture control entity, Conclusion Company has invested a lot in years 2012.

1. Consider the opening and closing cash balance and the total cash flow from each of the operating, investing and financing activities. What is your conclusion regarding the company’s strategy and second year of operation?

Ans: Refer to the company opening and closing cash balance and total cash flow, we found that operating has the highest increment in term of cash balance which causes company has increase net balance $1,319,000 , by referring to this amount it means company have more fund to start up business for the following year.

1. Compute the ROE, profit margin ratio, asset turnover ratio, current ratio, debt to equity ratio, interest coverage ratio, NTAB, EPS, DPS and the PER. (3 marks per ratio for a total of 30 marks)

C. Short answer questions based on 30 June 2012 financial reports of onthehouse Holding Ltd.

a) Why is amortisation such a big expense on their Income Statement? 4 marks

Ans: The reason why amortisation got big expense is because they have huge intangible asset.

b) In the provisions there is a liability being provided for called ‘make good’. What does this mean? 4 marks

Ans : The word Make-good meaning the group has certain leases that require the asset to be returned to the lessor in a lease stipulated condition. As such, a provision for make good obligations is measured and recognised at the expected cost of returning the asset to the agreed condition.

c) What was the opinion of the auditor in relation to the accounts? Why are accounts audited? 4 marks

Ans: Audit opinion, the auditor states that he or she has examined the client’s financial statements for the year then ended in accordance with generally accepted auditing standard (gaas) including test of the accounting records and other necessary auditing procedures. The auditor then indicates whether in his or her opinion the client financial statements present fairly the financial position, results of operations, and changes in financial position for the year-ended in conformity with Generally Accepted Accounting Principles (GAAP) applied on a consistent basis.

d) If onthehouse Holdings Ltd did not borrow $3 million what would their current ratio have been? What stakeholders would be interested in the current ratio? Why would they be interested? 4 marks

e) Compare the ROA, Profit margin ratios and Asset turnover ratio. What does this comparison tell you. 4 marks

f) Does the company comply with the ASX Corporate Governance Guidelines? Explain. 4marks

g) onthehouse Holdings Ltd is trying to compete with market leaders the REA group and Fairfax Media’s Domain. Would you invest in onthehouse Holdings Ltd? Why or why not? 1 mark

Ans: Referring to onthehouse holding ltd financial report, I would invest on it, because from the financial report it prof that this company have increase a lot of profit if compare with year 2011, it means that the strategy that they used to gather more potential customer is working, and I strongly believe this strategy is very suitable to use for the 

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ANSWER FOR ASSIGNMENT ONE 

TITLE PAGE

Subject        :         ACC5502 Accounting and Financial Management Assignment One  

Student Name    :        Lau XXXXXXX

Student Number     :         0010XXXX

Semester: S1-2013

Date of Submission:    24 APRIL 2013

Total Word Count: 1900 words

QUESTION ONE 

Answer for Question 1A

Regulation refers to some markets needs licensed to run the businesses or a natural monopolies, eg, tobacco, drug, water, gas and telecommunications. The regulated market also call the controlled market is the provision of good and services that is regulated by a government appointed body with terms and conditions of supplying goods and services in price or whom they are distributed.

Free market is a market has unrestricted entry into and out of the market of trade; it governed exclusively on the economy principle of supply and demand maintained through good competition. In free marketing is no restricted by licensing, unions, guides, trade association memberships in the trades. 

Pros:  Free markets helps in allocating capital and labor, in areas where there is a demand for products and services. If there is no demand, resources are free to be allocated to other goods and/or services. 

1. Market economy can be adjusted easily. 

2. Rational self-interests, freedom to produce what they want. 

3. Better variety of goods of choice.

4. Encourage competitive environment of trading. 

Cons:   It can be based on resources allocation and economic efficiency.

1. Unemployment.

2. Certain goods and services may not be provided.

3. Consumption of harmful goods maybe encouraged.

4. Ignore social cost.

5. Unprotected with copyright and other ethical issues. 

Answer for Question 1B

Under the Global Financial Crisis (GFC) in recent year I use US as an example, it is leading  United State to the financial collapse soon in current situation,  under this situations I will prefer to free market compared to regulated market, reason as per below. 

In Free Markets, refer to some local small business or small enterprise may able to sustain better in such bad economics. The disadvantage side, if uses a Chinese local restaurant in New York, they may have to try hard to cut down the spending and price to attract more customer, if unsustainable they may close down. The advantage side, people most likely will try to decrease in their disposable income due to loss job or cut down in salary, therefore create a demand for home cooking, the opportunity for supermarket or mini-market. 

In the case of America ,compare to some regulated market like oil & gas, the high consumption has large impact on personal and business user are highly depended for its locate production like transportation and machinery for crops product. Therefore regulated market are productive in helping at GFC, and its does not create more jobs for people.  In most case the regulated market has not change at any financial situation because they are necessary. Therefore I will still prefer the free market.

Answer for Question 1C

No, I do not agree with him. Firstly his statement to too extreme however does not viewed the fact in just overall comments, second,  it is not completely true throughout the report many aspect of ‘truth’ may not be covered, lastly the statement toward Mr. Harris was not proven before he write about it shows mike is  not so professional. 

QUESTION TWO – PART A

Answer for Q2A- A

The total assets for the years 2012 at ended 30Jun 2012 is 70,247,000.

Answer for Q2A- B

Answer for Q2A- C

The non-current liability at Onthehouse Holding Ltd includes borrowings, deferred tax liabilities and provisions. Comparing with the year 2011 to 2012, the borrowings has increased by 1,022,000, deferred tax liabilities has increased by 568,000 and provisions has decreased by 

17,000. The total change has increased by 1,573,000.

Answer for Q2A- D

The main asset of Onthehouse Holding Ltd is their intangible assets worth 59,618,000. Intangible asset refers to an asset that is not physical in nature example software development, property database, customer contract and relationships, brand names and non-competition agreements. The change compare with year 2012 decrease in 2,660,000 compare to year 2011.

Answer for Q2A- E

The total revenue is stated as 20,327,000, net profit/loss is stated as 2,141,000 and EBIT is stated as 3,057,000.

Answer for Q2A- F 

Revenue is generated in two categories: 1.Media (advertising) and 2.Marketplace (lead generation).  

Most of Onthehouse’s revenue business division is currently generated from display advertising, principally from banks, building, societies and mortgage brokers. In the foreseeable future, it is anticipated that greater revenue will be generated from real estate professionals and finance professionals in the Marketplace category through lead generation.

Answer for Q2A- G

Cash Inflow - Cash Outflows = Net Cash Flow

Revenues - Expenses = Net Profit

As per statement of cash flows the 'net cash flow' of Operating activities as 6,422,000 and as per statement of Comprehensive Income profit the 'net profit' as 2,141,000, the net cash flow amount shows larger, 'If net income is much larger than cash flow from operations, it's a signal that the company's earnings quality-the usefulness of earnings-is questionable. If cash flow from operations exceeds net income, on the other hand, the company may be much healthier than its net income suggests.' -Morning Star.

Answer for Q2A- H

Onthehouse Holding Ltd’s cash flow activities inclusive of operating activities, investment activities and financial activities. 

Operation activities  6,422,000

Investement activities 5,782,000

Financing activities 679,000

Answer for Q2A- I

Onthehouse Holding Ltd basically has two major investing activities are software and data intangibles, and in jointly controlled entity sector, for the year 2012 as mostly are investment includes as per below. 

Payments for software and data intangibles 1,636,000

Payments for acquisition of subsidiaries, net cash acquired 422,000

Payments for investment in jointly controlled entity 3,240,000

Payments for plant and equipment 293,000 

Transaction cost and relating to acquisitions 212,000

Divestment as below,

Proceeds from disposal of plants and equipment 21,000

Definition of net investment, Net investment refers to activity of spending wish increases the availability of fixed capital goods or means of production. This measure helps to give a sense of how much money a company spending on capital items like property, plants and equipment which uses for operations. Calculated as  

Net Investment = Capital Expenditures - Non-Cash Depreciation. 

Definition of Divestment, ‘the process of selling an asset; Also known as divestiture, it is made for either financial or social goals. Divestment is the opposite of investment'. (Madura 2007) 

Answer for Q2A- J

The total cash flow from operating, investing and financing activities equals to  the net increase in cash amount is 1,319,000, I will estimated  that company will have more funds for starting up business for the coming year. 

QUESTION TWO – PART B

QUESTION TWO – PART C

Answer for Q2C- A

Amortization refers to intangible asset's cost over time of period, in business; amortization refers to spreading payments over multiple periods. The terms used for two types of process, includes amortization of loans and amortization of intangible assets. 

First amortization of loans refers to the paying off of debt in regular instalments over a period of time; Second the intangible assets refers to the deduction of capital expenses over a specific period of time of the consumption value of intangible assets such as patents, trade names, franchise license, government license, trademarks, goodwill and other lack physical substance but provide long-term benefits to the company. At Onthehouse Holding Ltd it has a large amount show in their income statement. 

Answer for Q2C- B

Some paid rental may needs to be refund. 

Make-good: The Group has certain leases that require that asset to be returned to the lessor in a lease stipulated condition. As such a provision for make good obligations is measured and recognized at the expected cost of returning the asset to the agreed condition.

Answer for Q2C- C

Accountants and auditors both of the job scope are to ensuring that firms are run efficiently by providing them with valuable financial information and accurate record keeping. Financial auditing is to perform to ascertain validity and reliability of accounting information and internal control for assessment. It is to measures the work done, prepared for decision making used for internal and external users.

Answer for Q2C- D

Ratio Analysis: An examination of the relationship between two quantitative amounts with the objective of expressing the relationship in ratio or percentage form. 

"Current Ratio = Current Asset/ Current Liability"

 6,015,000/ 5,254,000=1.15% 

Stakeholders is interested with the current ratio because as the current ratio will be able to show ability of a firm to pay short term obligation. In result shows in normal terms means company will not be able to pay it creditor in short terms, but however the current asset maybe low due to they have high investment on non-current asset. 

Answer for Q2C- E

Return on assets measure on profitability, calculated as profit divided by average total assets. 

Asset turnover ratio measure of asset efficiency calculated as sales revenue divided by average total assets.  

ROA ratio: EBIT/Average assets x100= x % 

7,953,000/ (70,247,000 + 67,918,000/2) x100

7953000/69082500 = 0.1151

0.115x100 = 11.5

ROA = 11.5%

Profit margin ratio: EBIT/ Sales revenue = 100 =  x%

7953000/20327000 = 0.3913 x100 = 39.13 %

Profit margin ratio = 39.13%

Asset turnover ratio:  Sales revenue/ average total assets = x times

20327000/67918000=0.2993 times 

Asset turnover ratio = 0.2993times

Answer for Q2C- F

Yes, firstly it is stated in corporate governance statement and with an open statistic report with following the principle1-8 and recommendation comply with the reference and explanation, the scope of responsibility are clearly stated at their annual report. 

Answer for Q2C- G

I will prefer to invest in Onthehouse Holding because I believe it is more profitable. 

List of Reference 

1. Madura, J. 2007, Introduction to Business, 4th edn, USA: Thomson South-Western.
2. Stuart, 2004, Comparing Economic Systems in the Twenty-First Century,7th edn,p.538 George Hoffman. 
3. Altvater, E. 1993, The Future of the Market: An Essay on the Regulation of Money and Nature After the Collapse of "Actually Existing Socialism. p. 57.
4. Paul M.J. 2005, A Glossary of Political Economy Terms, Market economy, Auburn University.
5. Keryn C. 2010, Accouting Business Reporting for Decision Making, 3edn, Wiley.
6. McLaney, E. J. 2012, Accounting An Introduction, 6th edn, Pearson.
7. Erich A. 2001. "The Nature of Financial Statements: The Income Statement". Financial Analysis - Tools and Techniques - A Guide for Managers. McGraw-Hill. p. 40.
8. Jan R. 2008, Financial & Managerial Accounting. p.55 
9. Wood F. 2005, Frank Wood's business accounting, 2 10th edn, Prentice Hall
10. Suzy B. 2013, ACC5502 Accouting and Financial Management:2013 lecture notes March 2013, University of Southern Queensland, Semester 1, 2013.