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Fundamentals of Accounting- Answer

Accounting Assignment Help

Fundamentals of Accounting
ACC101

 

Accounting

Question No.1

Record transactions in General journal

General journal as on the 30 November 2012

DateDetails Debit Credit
1 Nov Inventory

GST outlay (4800/11)

M Merlow A/P

Bought  inventory on credit, n/30 inclusive of GST

$4364

$436

 

 

$4800

1Insurance

GST outlay

Bank

Purchase insurance through cheque no.400 inclusive GST

$1636

$164

 

 

$1800

3Sales return

GST collection

C. Hand A/R

inventory sold is returned  inclusive GST

$100

$10

 

 

$110

3Bank

Discount Allowed (4200 × 2%)

D. Draper A/R

Received cheque and discount allowed 2/10, n/30

$4116

$84

 

 

$4200

4Lenny Ltd A/P

Bank

Discount received (2980×1%)

Pay cheque no. 401 and received discount 1/15, n/30

$2980 

$2950

$30

4 inventory

GST outlay

Laws Ltd A/P

Purchase  inventory on credit 1/10, n/30 inclusive GST

$4364

$436

 

 

$4800

5M. Merlow A/P

Bank

Issue cheque no. 402

$3300 

$3300

5M. Merlow A/P

Bill Payable

Issue a 10% 60 day bill of (5300-3300=2000)

$2000 

$2000

8Rent Expense

GST outlay

Bank

Paid November rent cheque no.403 incusive GST

$982

$98

 

 

$1080

8Law Ltd A/P

Bank

Discount received (3280×1%)

Issue cheque no.404 1/30, n/60

$3280 

$3247

$33

10Arnott A/R

GST collection

Sales

Sold  inventory on credit 2/10, n/30 inclusive GST

$9000 

$818

$8182

 

10Cash

Share capital

Issue additional share capital

$60000 

$60000

11Bank

T. Tremble A/R

Received cheque from account receivable

$2860 

$2860

11Bill receivable (5720-2860=2860)

T. Tremble A/R

Received bill  for remaining amount

$2860 

$2860

12D. Draper A/R

GST collection

Sales

Sold merchandize on account 2/10, n/30 inclusive of GST

$9600 

$873

$8727

 

13 inventory

GST outlay

Lenny Ltd A/P

Purchase goods on credit 1/15,n/30 including GST

$7200

$720

 

 

$7920

14Salaries

Bank

Paid salaries by cheque no.405

$2400 

$2400

14Cash

Sales

GST collection

Sold goods on cash including GST

$18400 

$16727

$1673

18T. Tremble A/R

GST collection

Sales

Sold goods on account 2/10, n/30 plus GST

$9300 

$846

$8453

18Lenny A/P

inventory return

Return the defective goods

$154 

$154

19GST

Bank

Issue cheque no.406 to ATO to cover previous month GST

$3000 

$3000

20Bank

A. Arnott A/R

Received cheque

$2640 

$2640

20 inventory

GST outlay

Cash

Purchase goods on cash issue cheque 407 plus GST

$9818

$982

 

 

$10800

21Bank

D. Draper A/R

Received cheque

$1320 

$1320

21Bill receivable (9600-1320=8280)

D. Draper A/R

Received promissory note for the remaining amount

$8280 

$8280

26Bank

Discount Allowed (9300×2%)

T. Tremble A/R

Received cheque fronm account receivable

$9114

$186

 

 

$9300

27Lenny A/P

Bank

Discount Received (7920×1%)

Issue cheque no. 408 for payment

$7920 

$7840

$80

28Salaries

Bank

Paid salaries with cheque no. 409 excluding GST

$2400 

$2400

30Electricity Expense

GST outlay

Bank

electricity account Paid with cheque no. 410 plus GST

$382

$38

 

 

$420

30Cash

Sales

sales on Cash

$18000 

$18000

30 Inventory

GST outlay

Lenny Ltd A/P

Purchase inventory on credit 1/15,n/30 including GST

$6600

$660

 

 

$7260

 

Record transactions in Special journals

 Purchases/ Inventory journal

DateDetails Debit Credit
1 Nov inventory

M Merlow

Bought  inventory on credit, n/30 inclusive of GST

$4800 

$4800

4 inventory

Laws Ltd

Purchase  inventory on credit 1/10, n/30 inclusive GST

$4800 

$4800

13 inventory

Lenny

Purchase goods on credit 1/15,n/30 including GST

$7920 

$7920

20 inventory

Cash

Purchase goods on cash issue cheque 407 plus GST

$10800 

$10800

30 inventory

Lenny Ltd

Purchase inventory on credit 1/15,n/30 including GST

$7260 

$7260

 

Sales Journal

DateDetails Debit Credit
10A. Arnott

Sales

Sold  inventory on credit 2/10, n/30 inclusive GST

$9000 

$9000

12D. Draper

Sales

Sold merchandize on account 2/10, n/30 inclusive of GST

$9600 

$9600

14Cash

Sales

Sold goods on cash including GST

$18400 

$18400

18T. Tremble

Sales

Sold goods on account 2/10, n/30 plus GST

$9300 

$9300

30Cash

Sales

sales on Cash

$18000 

$18000

 

Prepare the General ledger accounts

 

Cash at Bank General Ledger account

Date DetailAmount $DateDetailAmount $
Balance b/d$120000insurance1800
D.Draper4116lenny2950
T. Tremble2860M Merlow3300
A.Arnott2640Rent expense1080
D. Draper1320Law ltd3247
T. Tremble9114salaries2400
GST3000
Lenny7840
salaries2400
Electricity expense420
Balance c/d115933
  1440050  1440050

 

Accounts receivable

Date DetailAmount $DateDetailAmount $
Balance b/d14540Sales return110
sales9000bank4116
sales9600Discount allowed84
sales9300Bank2860
Bill receivable2860
Bank2640
Bank1320
Bill receivable8280
bank9114
Discount allowed186
Balance c/d10950
  42440  42440

 

Bill receivable

Date DetailAmount $DateDetailAmount $
Balance b/d1500
T. Tremble2860
D. Draper8280Balance c/d12640
  12640  12640

Inventory

Date DetailAmount $DateDetailAmount $
Balance b/d160000
M merlow4800
Laws ltd4800
Lenny Ltd7920
cash10800
Lenny ltd7260Balance c/d195580
  195580  195580

Prepaid insurance

Date DetailAmount $DateDetailAmount $
Balance b/dzero
bank1800Balance c/d1800
  1800  1800

 

Accounts payable

Date DetailAmount $DateDetailAmount $
bank2950Balance b/d11560
Discount received30inventory4800
bank3300inventory4800
Bill payable2000inventory7920
bank3247inventory7260
Discount received33
Inventory return154
bank7840
Discount received80Balance c/d16706
  36340  36340

Bill payable

Date DetailAmount $DateDetailAmount $
Balance b/d
Balance c/d2000M Merlow2000
  2000  2000

Share capital

Date DetailAmount $DateDetailAmount $
Balance b/d384000
Balance c/d444000cash60000
  444000  444000

Sales

Date DetailAmount $DateDetailAmount $
A.Arnott9000
D. Draper9600
cash18400
T. Tremble9300
Balance c/d64300cash18000
  64300  64300

Cash

Date DetailAmount $DateDetailAmount $
Share capital60000Inventory10800
sales18400
sales18000Balance c/d85600
  96400  96400

 

Subsidiary ledgers at 30 November 2012

Account Receivable

CustomerDate of saleTerms Amount
A. Arnott10 Nov 20162/10, n/309000
D. Draper A/R12 Nov 20162/10, n/309600
T. Tremble A/R18 Nov 20162/10, n/309300

 

Account Payable

CreditorsDate of purchaseTerms Amount
M Merlow01 Nov 2016n/304800
Laws Ltd04 Nov 20161/10, n/304800
Lenny Ltd13 Nov 20161/15, n/307920
Lenny Ltd30 Nov 20161/15, n/307260

 

GST collection Account

Date DetailAmount $DateDetailAmount $
C.Hand10Balance b/d7000
A.Arnott818
D. Draper873
Cash1673
Balance c/d11200T. Tremble846
  11210  11210

GST outlay account

Date DetailAmount $DateDetailAmount $
Balance b/d4000
M Merlow436
Bank164
Laws Ltd436
Bank98
Lenny Ltd720
Cash982
Bank38
Lenny Ltd660Balance c/d7534
75347534

 

GST collection (liability)$11200
GST outlay (asset)$7534
GST payable$3666

 

 

 

Question No. 2

  1. General Journal entries to record the transactions
Date Perpetual Inventory SystemAmount $Periodic inventory SystemAmount $
3Inventory (40×40)

EXW supplier

2/10,n/30

1600

1600

Purchases (40×40)

EXW supplier

1600

1600

4Freight Expense

Cash

60

60

Freight Expense

Cash

60

60

5DDP Acquirer

Fright expense

Sales (22×70)

3/10, n/30

1540

30

1570

DDP Acquirer

Fright expense

Sales revenue (22×70)

1540

30

1570

Cost of goods sold (22×40)

Inventory

880

880

9 EXW supplier (10×40)

Inventory return

400

400

 EXW supplier (10×40)

Purchases return

400

400

10Sales return (3×70)

DDP

210

210

Sales return (3×70)

DDP

210

210

Inventory (3×40)

Cost of goods return

120

120

13Inventory (20×40)

EXW supplier

800

800

purchases (20×40)

EXW supplier

800

800

14Cash (19×70)

DDP Acquirer

1330

1330

Cash (19×70)

DDP Acquirer

1330

1330

19Cash (39×60)

Sales

2340

2340

Cash (39×60)

Sales revenue

2340

2340

Cost of goods sold (39×40)

Inventory

1560

1560

20Sales return (4×60)

Cash

240

240

Sales return (4×60)

Cash

240

240

Inventory (4×40)

Cost of goods return

160

160

22EXW supplier

Cash

Discount received (800×2%)

800

784

16

EXW supplier

Cash

Discount received (800×2%)

800

784

16

 

  1. General Journal entries to record the transactions assuming the business is registered for GST
Date Perpetual Inventory SystemAmount $Periodic inventory SystemAmount $
3Purchases (40×40)

GST outlay (1600/11)

EXW supplier

1454

145

1600

Purchases (40×40)

GST outlay (1600/11)

EXW supplier

1454

145

1600

4Freight Expense

cash

60

60

Freight Expense

cash

60

60

5DDP Acquirer

Sales (22×70)

GST collection

1540

1400

140

DDP Acquirer

Sales revenue (22×70)

GST collection

1540

1400

140

Cost of goods sold (22×40)

Inventory

880

880

9 EXW supplier (10×40)

Inventory return

GST outlay

400

363

36

 EXW supplier (10×40)

Purchases return

400

363

36

10Sales return (3×70)

GST collection

DDP

191

19

210

Sales return (3×70)

GST collection

DDP

191

19

210

Inventory (3×40)

Cost of goods return

120

120

13Inventory (20×40)

GST outlay

EXW supplier

727

73

800

purchases (20×40)

GST outlay

EXW supplier

727

73

800

14Cash (19×70)

DDP Acquirer

1330

1330

Cash (19×70)

DDP Acquirer

1330

1330

19Cash (39×60)

Sales

GST collection

2340

2127

213

Cash (39×60)

Sales revenue

GST collection

2340

2127

213

Cost of goods sold (39×40)

Inventory

1560

1560

20Sales return (4×60)

GST collection

Cash

218

22

240

Sales return (4×60)

GST collection

Cash

218

22

240

Inventory (4×40)

Cost of goods return

160

160

22EXW supplier

Cash

800

800

EXW supplier

Cash

800

800

 

  1. Closing the star bright account at the end of the month of April

Periodic inventory system

Details  Number of units Total cost

(Per unit $40)

Beginning inventory24960
Purchases(40+20) =60
Less: Purchases return (10)502000
Available for sale(24+50)742960
Units sold(22+39)=61
Less: Sales return(3+4)=7
sales61-754
Closing units20

 

Perpetual inventory system

DatePurchasesSalesBalance
AprilunitscostunitspriceunitsUnit costTotal
2440960
340 @ 40160040401600
     64402560
5[email protected] 701540(22)40(880)
     42401680
9(10)40400
     32401280
10340120
     35401400
13[email protected]8002040800
     55402200
1939 @ 602340(39)401560
     1640640
20440160
     2040800

 

Question No. 3

  1. General Journal entries for balance day adjustments

 

DateDetails Debit Credit
Salaries expense (1500×7)

Outstanding salaries

10500 

10500

Depreciation on premises (800000× 2%)

Accumulated depreciation

16000 

16000

Depreciation on office equipment (152000× 10%)

Accumulated depreciation

15200 

15200

Cash

Rent revenue

Rent received in advance

12000 

6000

6000

Office supplies used expense

Supplies

6390 

6390

Prepaid advertising

Advertising Expense

2000 

2000

Earned revenue in advance

Fees earned

6000 

6000

 

  1. Income Statement for the year ended 30 June 2011
Taiwan Consultants

Income statement

For the year ended 30 June 2011

DetailsAmountAmount
Revenues
Fees Revenue

Less: revenue received in advance

880600

-6000

 

874600

Rent revenue

Add: Rent earned

 

Less: rent received in advance (16000×6/12)

  16000

+16000

32000

-8000

 

 

 

24000

Total revenues 898600
Expenses
Advertising Expense

Less: prepaid Advertising

25000

-2000

 

23000

Administrative expense30000
Salaries

Add: Outstanding salaries

390000

+10500

 

400500

Internet service provider2000
Internet Expense19000
Telephone Expense8000
Depreciation on office Equipment15200
Depreciation on premises16000
Supplies expense6390
Total Expenses520090
Net Income378510

 

  1. Balance sheet as on 30 June 2011
Taiwan Consultants

Balance sheet

As on 30 June 2011

 

AssetsAmountLiabilities and owner’s equityAmount
Bank41520Accounts Payable33000
Accounts Receivable46000GST collection5500
Prepaid Rent16000Rent received in advance8000
Prepaid Advertising2000Revenue received in advance6000
Stock office supplies

Less: Supplies expense

11890

6390

 

5500

Outstanding Salaries10500
Office Equipment

Less: accumulated depreciation

 

24400                                    15200

152000

 

 

 

 

112400

Loan200000
Premises

Less: accumulated depreciation

 

64000                                    16000

800000

 

80000

 

 

720000

Capital

Less: Drawings

 

Add: Income

345410

-40000

305410

378510

 

 

 

683920

GST outlay3500 
946920946920

 

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Research design and Methodology

Research design and Methodology

Literature Review

Organizations are directed and controlled by the system of corporate governance which provides rules, regulations, practices, and processes. Corporate governance involves protecting the interest of different stakeholders such as shareholders, customers, suppliers, financier, management, governments, community etc. Corporate governance helps the organization by providing the framework to follow to achieve the objectives and it is related practically with the internal and external managerial function of the organization. There are many contributions of auditors and accountants in corporate governance and also they are responsible in many aspects of corporate governance. Corporate governance is a system by which an organization is directed and controlled according to the Organization for Economic Corporation and Development (OECD) (Anon, 2018). One of the cores or main task of accounting is to track the financial performance of the company which determines how the company should craft its corporate governance policies or system. Accounting and corporate governance are relevant and help in developing project planning. Accounting is used as an effective element in corporate governance. If management has accurate accounting data, a corporation can make a decision on how to operate and expand a project and how much further investment is needed. Accountants and auditors also have public responsibility for the profit for an organization.  Organizations have various types of legal responsibility which also they need to explore or come forward. These corporations must need to submit transparent and clear financial statements after a period of specific time such as their income statement, balance sheet which investors use to decide and also government bodies need this information to know and determine about the company’s status. And these all are the important work of corporate governance (Francis, Khurana and Pereira, 2018). Corporation also has responsibility and contribution into shareholders. They need to invest their time and money in publishing detail information of their financial statement or situation to the shareholders. Shareholders rely on the information of the financial statement which is compiled by the accountants and these help them to decide intelligently for future steps. Each and every decision a corporation or corporate body needs to attain requires a quality and accurate information or data which is given by the accountants. And this information given by the accountants assist in managing asset and making effective decision and choice. Corporate body relies on the data provided by the accountants and it helps them to know about the income level and help to predict future income, goal or objectives. These data also help them with many types of organizational future decision such as new hire, employees’ salaries to be given, operational cost etc. In corporate governance, accounting and audit group helps in determining cash flow management and the procedure of cash flow management. And in return which helps an organization to decide on the future cash flow on projects and events. Cash flow increase rate, future rate all need to be known by the corporate body to regulate and control the organizational system and procedure and the smooth running of the company. And this work is done fairly by the accountants for the corporate governance (Anon, 2018). In planning, audit teams and accountants play a vital role in the corporate governance. They help in deciding and minimizing risk for business, they control the internal system by which an organization can see the face of success. The corporation get help from these two teams and they carry a lot weight when it comes to crafting the rules, procedures, practices, and systems for the organization and most importantly when these system and procedures are to be implemented and regulated by the organizations and when the culture of an organization needs to be changed according to the newly prescribed system procedures and rules are given by the corporation (Staff, 2018). Corporate governance is also related to the public connection such as it needs to formulate the taxpaying method or related many things. Public also decide whether to invest or not by the companies published data. And also the corporation is accountable to the shareholders who are the partly owners of the organization. The companies are required legally to deliver the financial information. And corporate body must pay attention to this according to the published information by the accountants or accounting department of the organization. To manage the profit, revenue or income of the organization audit teams and accounting team both have a contribution. To sustain with a reputation both teams have a contribution to the company. To attract new customers and retaining previous ones in organization accountants and audit team have a contribution which is monitored and related by the corporate governance team (Yourbusiness.azcentral.com, 2018). In Australian institute corporate governance helps to control externally and internally by the managerial system with a purpose of protecting the interest of stakeholders. And this work is easy because of the contribution of the audit and accountant team to the organization.   Investors and stakeholders try to reduce the cost of transaction and cost of agencies which are related to do a business with an organization and to make it possible previous information such as transparent data, clarity, concise information and true factors of the organization must be known which is possible by the audit process and corporate governance help us do it. Corporate governance is nothing but a system of doing or running the business for an organization. It helps the company to ensure a sound running in a competitive era by providing the procedure or regulation. And accounting and audit team helps to decide for the corporation by giving enough and clear information about the organizations and the future threat or opportunities for the organization. Accountants and auditors assist in developing future plan and roadmap to go, how to go and where to go. As audit team is there to control and suggest the internal body of the organization, and this internal function largely depends on the corporate governance and its assigned rules and regulations towards the company, its responsibility and contribution certainly mean a lot to the corporation. As accountants are always there to provide transparency between the managerial body and with the other department of the organization, they also play a crucial role in corporate governance and its rules and procedures (Smallbusiness.chron.com, 2018). To increase the potentiality and to ensure the success of the organization, accountants and audit teams cannot be ignored and these two parties’ roles in corporate governance must be appreciated and should not think as less important. Because the information they provide is not the task of the other department or any other parties. And outsourcing in these cases cannot be possible if an organization wants to hide its internal information and want to maintain the confidentiality. In directing and controlling the organizations’ system and implementing the prescribed procedures the role of corporate governance and the role of the accountants and auditors cannot be ignored and both three are interrelated tasks to do and to maintain the sound environment of an organization these teams are the vital according to their assigned task and by the corporation and their responsibility.

Research design and methodology

The report on the contribution of accountants and auditors in corporate governance and their responsibility is a research in descriptive form and it is written with wide descriptive information where the information and findings will be presented in a descriptive way and also the recommendation, the conclusion will be written in a descriptive and elaborate way. The research approach is the quantitative approach. And here information and findings will be presented and described elaborately and in a descriptive way which will ultimately find the desired outcome from the research plan and research questions. The data is collected through both the secondary source and primary source and the type of data is secondary and primary both. The secondary sources for collecting the data are Internet, magazine, newspaper, different published articles, online published article, the website of different organizations, books, e-books, word of mouth etc. And the primary data will be collected from the sources of direct information getting a hub. And the source which is chosen is conducting “survey” and arranging a “focus group” discussion period by which the data and information needed to start the work of this research project. Data will be collected through conducting a survey for this quantitative research. Also, there will be an arrangement for an interview or focus group discussion to collect the data for this research. The sample size would be 50. Of 50 different individuals, data will be collected through survey mainly which is till now the target and goal. The sampling method or technique would be simple random sampling. The collected data through the survey will be analyzed by statistical analysis as it is the quantitative approach. The SPSS software will be used to analyze data and to get the final decision for this research. And this methodology plan addresses all the ethical concern as per the system involved in it. Research methodology and the design would meet the requirement of the ethical concern as these all will be done through the principles and rules of the research design and methodology.

References

Anon, (2018). [online] Available at: https://www.linkedin.com/pulse/corporate-governance-role-auditor-auditing-committee-ca-sanjay-ruia [Accessed 22 Sep. 2018]. Anon, (2018). Role of Auditors in Corporate Governance. Francis, J., Khurana, I., and Pereira, R. (2018). The Role of Accounting and Auditing in Corporate Governance and the Development of Financial Markets Around the World. [online] Papers.ssrn.com. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=392482 [Accessed 22 Sep. 2018]. Smallbusiness.chron.com. (2018). The Role of Accounting in Corporate Governance. [online] Available at: https://smallbusiness.chron.com/role-accounting-corporate-governance-73557.html [Accessed 22 Sep. 2018]. Staff, I. (2018). Corporate Governance. [online] Investopedia. Available at: https://www.investopedia.com/terms/c/corporategovernance.asp [Accessed 22 Sep. 2018]. Yourbusiness.azcentral.com. (2018). The Role of Accounting in a Corporate Governance. [online] Available at: https://yourbusiness.azcentral.com/role-accounting-corporate-governance-16067.html [Accessed 22 Sep. 2018].
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Credit Data Analysis-Answer

Introduction
Recent financial crises in the United States and the European Debt crisis have created doubts in the financial systems and financial services industry has grown far more risk averse than before. The risk identification, risk mitigation and risk monitoring procedures have been modified and the whole industry has been rebuilt. The main reason for the crisis was exposure to market risk and credit risk, and operational risk to a certain extent. The financial institutions failed to identify and more importantly measure the risk they are exposed to, as a result of which most of the industries across the world have been badly affected.
Therefore, it is necessary for a financial institution to have a rigid risk management policy so as to minimize the losses from the risks that are inherent in their business. This report aims to highlight the challenges faced by the institutions in assessing the credit worthiness of the borrower and reviews the literature associated with the credit risk and credit appraisal techniques. Further statistical analysis is performed over a data set obtained in a survey based on the credit rating and loan application details for retail customers. The report then focuses on the data warehouse architecture which essential for the day to day operations of the financial institutions.
Challenges faced in determining credit worthiness of a loan applicant
The business model of most of the financial intermediaries is to borrow from those who have surplus funds and to lend to those who are in deficit of funds. Such business model is exposed to different kinds of risks like, credit risk, maturity mismatch, market risk etc. However, our focus for this report is the inherent credit risk and in order to minimize the risk the financial institutions need to have a rigid process of scanning the applications and analyzing the credit risks associated with the applicant. One with a lower credit risk is preferred as there would be less amount of loss for the lending institutions in case of default (Limsombunchai V, Gan C, and Lee M). Credit worthiness of a borrower is determined by the credit appraisal process through which all the risks associated with the borrower are identified. Through this process every borrower is assigned a credit rating which also helps the institution in pricing the loan. In the industry there are different credit rating agencies that provide ratings to all kind of borrowers, mainly institutional. However, for retail borrowers the financial institutions have to provide a rating through internal rating methods.
Credit appraisal helps us in quantifying the risk associated with the borrower. The credit appraisal process for a retail borrower is different from that of an institutional borrower. It must be noted that in case of retail borrower the information available with the lending institution is basically the sources of income and ability/willingness of the borrower to repay the loan. On the other hand in case of an institution a step wise process is followed in order to provide a rating which then is used in pricing the loan. The Basel Committee of Bank of International Settlements has provided guidelines for risk management which focuses mainly on the capital adequacy of the banks. It came into existence in 1974 by the central-bank governors of ten countries (Bank of International Settlements). Its main focus has been to develop standards which form the base of evaluation of a bank’s performance. Its standards have been regularly modified in order to address the new risks and concerns arising in the market. The capital adequacy framework designed by the committee aims at reducing the loss for a bank in case of default and ensures that there is adequate capital to return the money aken from the depositors.
The Basel II accord is a modified set of standards which consists of three main pillars that govern the framework, namely, capital requirements, centralized supervision and market discipline (Decamps Jp, Rochet Jc, Roger B, 2002). Our focus is towards the first pillar which deals with the capital adequacy requirements. Capital Adequacy ratio (CAR) is given as (maxi-pedia):
CAR=(Tier 1 Capital+Tier 2 Capital)/(Risk Weighted Assets×8%)
Where, Tier 1 capital comprises of the bank’s core capital, Tier 2 capital comprises of supplementary capital like, revaluation reserves, hybrid debt instruments etc. and The Risk Weighted Assets represents the total assets that the bank owns weighted according to the risk they are exposed to. In order to calculate the risk weighted assets the committee has classified assets into 12 different classes like claims on retail, coprorate, SME, sovereign etc. Each class has different risk weights which are assigned to them with respect to the risk they are exposed to.
For any financial asset, the credit risk is determined by the three main variables (Altman EI):
Probability of Default (PD
Loss Given Default (LGD) : calculated as (1- Recovery Rate (RR) )
Exposure at Default
Figure 1: One Year Transition Probability matrix of Moody’s(94) and S&P’s (95) (Elton EJ)
The above figure shows the transition matrix of two rating agencies Moody’s and Standard and Poor’s, which indicates the probability of transition of a borrower from one rating to other. Thus, it shows whether the credit quality of a borrower has improved or declined. The last column shows the percentage of borrowers of a particular rating have defaulted that year. This is a very useful matrix as the value of PD from the table can be used to calculate the expected loss (EL) for the bank.
EL=PD*LGD*EAD
This Expected loss helps the bank to identify how much additional capital it needs in order to cover the loss.
As stated earlier the credit ratings are normally awarded by external agencies like Standard & Poor’s. However, an effective internal rating model is needed for financial institutions to process loan applications. Most of the corporate avail loan for financing their projects, and in such cases it is not only important to assess the financial performance of the company but also to analyze the project and check whether the revenue generated from the project will be able to service the debt. Credit risk in such cases can be minimized by negotiating with the borrower in terms of payment period or the rate of interest.
After assessing the credit worthiness of the borrower and once the loan is sanctioned it is necessary for the institution to recover the amount. The total amount of defaults is reflected by the Non-Performing Assets of the lending institutions, in order to prevent losses the institutions make some provisions (i.e. keep some reserve capital as a backup). However, the risk weight associated with the asset increase subsequently as a result of which higher capital is required to cover the losses.
Hence, the process of assessing the credit quality of a borrower is one of the main factors in the process of accepting a loan approval. It is important for the institution to identify, mitigate and monitor the credit risk that the business is exposed to.
Exploratory analysis:
In order to determine the main variables those are required to evaluate the credit quality of a borrower the Rattle tool was used in order to perform an exploratory analysis using the given dataset. Principal component analysis was done in order to find the major variables that determine the nature of the credit risk. Out of the 22 variables only 12 variables were used in the analysis, out of which only 5 were chosen, they are variable 4-history, variable 5- purpose, variable 6-amount, variable 13-property, variable 18- job. These variables were chosen as they contributed to the explanation of the first few principal components as shown in the table below:
PC1 PC2 PC3 PC4 PC5 PC6 PC7 PC8 PC9 PC10 PC11 PC12
history 3% -55% 39% -8% 9% 12% -5% 15% -11% -13% -21% 64%
purpose 4% 1% -25% -72% 3% -36% 14% 29% 34% -19% 8% 13%
amount 46% 16% 5% -5% 31% 9% -36% 9% 36% 53% -33% 4%
employed 13% -38% -7% 9% 15% -38% 49% -53% 14% 34% 2% 2%
instalp -1% -24% -29% 34% 7% -62% -42% 33% -24% 7% 8% 1%
coapp -18% 0% -32% 16% 75% 31% 26% 26% -3% -1% 21% 9%
property 58% 9% 0% 6% -19% 11% 6% 6% -11% 8% 70% 29%
other -15% 2% 54% 34% -2% -19% 19% 37% 54% -1% 22% -14%
Housing 41% -20% -18% 14% -23% 12% 45% 45% -12% -7% -40% -28%
excred 5% -57% 14% -30% 11% 22% -25% 2% -3% 8% 31% -58%
job 45% 12% 21% 8% 40% -21% -8% -24% -4% -66% -8% -17%
depends 3% -28% -45% 28% -21% 25% -23% -17% 58% -32% 1% 10%
The importance of each principal component extracted is shown in the figure below:
Variable 4- History:
One of the main procedures in the screening process of loan applications is to check the past credit information of the borrower which will show a clear picture regarding the instances where the borrower has defaulted. A borrower with numerous defaults in his past is considered as highly risky borrower, on the other hand one with less or no defaults is considered to be a low credit risk exposure for a lending institution. In cases where the borrower delays the payments, for example, a payment is due in April but the borrower pays a month after the due date., he/she will not be termed as a defaulter as he has paid the installment, however, it will be indicated as a late payment which has an adverse effect on one’s credit rating. The data set provided consists of participants, most of them who have duly paid their existing credits. The histogram below shows the distribution of the variable among the participants:
However, where there is no credit history, payments of bills are used as an alternative parameter (valoans).
Variable 5- Purpose
Loans are sanctioned to a borrower only for specific purposes, as can be seen in the creditdata-dictionary document, there are only few purposes listed for this study. Therefore, it is clear that financial institutions do not lend for any random purpose even though the borrower has a high credit rating. For instance, loans are not given for gambling or for speculation or investing in stock markets, as such investments are highly risky and do not guarantee any kind return for the borrower, but in case of home loans, the borrower can build a house and generate income from it. Most of the loans for retail customers are classified as Personal Loans, Housing loans or Educational Loans for students. However, in case of corporate bodies, loans are provided mainly for projects mostly related to manufacturing sector. The importance of the purpose of the loan for credit quality of a borrower is that, it helps the lender the nature of the loan, as in is it a working capital loan or a long term loan. Depending on this the pricing of the loan and the repayment structure is designed. Moreover, the credit risk involved with a short term loan is lesser than that involved with a long term loan.
Variable 6- Amount
Another major factor that affects the credit quality is the amount of the loan sanctioned. It is not always possible for bank or any other lending institution to sanction the whole amount one applies for. Every loan amount has some part of margin money contributed by the borrower and the rest is sanctioned in phases as and when needed by the borrower. The amount sanctioned to a borrower is decided depending on various factors which also determine the credit rating of the borrower. The amount and the term of the loan decide the repayment schedules for the borrower. For a bank every loan sanctioned consists part of the bank’s capital and the depositor’s money. It is important for the bank to sanction an amount which the borrower has the ability to repay and has collateral to provide as a backup in case of default. The amount also signifies the amount of exposure that the bank will have and proportionately the expected loss will increase result in higher capital required.
Variable 13- Property
Every loan needs to be supported with some kind of collateral as it serves as a backup for the bank in case of default. The property that the borrower owns also helps in determining the amount that can be sanctioned. The collateral value is calculated and used to assign Risk Weight to the asset and indirectly affects the capital that is required from the bank to pump in. Credit quality of a borrower is determined by the value of property one owns. In order to recover the sanction amount in case of a default the bank has to calculate the value of the collateral which would be covering only a part of the total amount. The credit risk exposure and the collateral are inversely related to each other as more is the value of the collateral; less is the exposure for the bank.
Variable 18- Job:
Out of all the variables, Job is the main parameter that affects the credit quality as it is the main source of income for most of the households. Source of income for an individual is similar to the revenues generated by an organization, as it is from this income that the individual will meet all his expenditure. A constant source of income is preferred as it indicates that there is a very probability of default for that individual. In cases of small case businessmen, where the source of income is not of robust nature, it becomes difficult for the bank to sanction large amount of loans as it will lead to a higher credit exposure. Credit exposure can be limited by properly assessing the income and expenditures of the borrower and the income left will be the indicator of the debt servicing ability.
Data Warehouse Architecture
It is necessary to have a sound infrastructure in a financial institution as lot of data is exchanged across the branches of the banks as well as other institutions. The effects of financial markets need to be reflected in the systems of the institutions, any decision like interest rate cuts should be incorporated immediately and the systems should be able to reflect the change. Financial Institutions deal with a large chunk of data, and in order to ensure proper storage and retrieval, it is necessary to have a data management system installed in the system. One such solution to the data management is to create a Data Warehouse whose work would mainly revolve around collecting and storing data and to distribute it as and when the request arises (Oracle).
On a daily basis large amount of data is pumped in and out of the system in a financial institution and most of the times analytical process are run in the system. As discussed in the previous sections, the credit appraisal process requires lot of calculations and projections. Mostly, it deals with lots of data transmission in both the direction with various parties. Oracle has done a similar study in order to provide a better data warehouse system for financial institutions. In order to incorporate the improved data capturing of the critical information the architecture must include the following points:
A well developed Data model is necessary to accumulate different types of data for different requirements of the organization. This can be enabled designing efficient data sourcing models such that the ETL process can be conducted smoothly. Moreover, the data model should also be able to incorporate proper reporting models such that the results of the analytical processes in the institutions are standardized.
The design of the data warehouse architecture should be such that the analytical processes are fully supported by the active data warehouse. Active data warehouse ensures the access of data in real time and also ensures effective control of data management systems in the organization. The focus here is to provide end-to-end support to the analytical procedures in the system.
One of the most important designing parameters of the data warehouse architecture is designing the capability of large storage volumes and ensuring higher scalability. Such architecture would help in increasing the efficiency of the data management system and would also decrease cost. Another benefit of such architecture is integration of various system functions with the data management system.
Therefore, the process of credit appraisal does not end with collecting important data, rather the most important work of analyzing the data and providing the borrower a particular rating is done with the help of the IT infrastructure in the organization, and it becomes important to have flexible, updated, active data warehouse installed in the system so as to ensure large amount of data processing and storage in the system.
Pivot Table Exercise
A)
Sum of 2008 Column Labels
Row Labels Glue Guns Transponders Light Sabres Grand Total
South 120532 122228 112626 355386
East 129934 104517 87462 321913
North 99037 81302 84242 264581
West 87507 100204 60953 248664
Grand Total 437010 408251 345283 1190544
The above table and figure show the region wise sales for the three products. It is clearly visible from the graph that except for the west region, the product Glue guns has very hgh demand relative to other products. Out of all the regions, South contributed maximum to the sales (29.85% of the total sales). The demand for the products in the southern and eastern regions is very high as they collectively account for more than 55% of the total sales. The highest selling product Glue Guns contributes to almost 37% percent of the total sales. It is necessary to promote the products in the regions with low demand as it would benefit the bottom line of the company.
B)
Sum of 2009.00 Column Labels
Row Labels Luke Skywalker Chewbacca James Kirk Hansolo Grand Total
South 174628 160543 166312 134701 636184
East 161051 126177 143460 152246 582934
North 80042 128453 125849 136157 470501
West 168125 106402 84776 86036 445339
Grand Total 583846 521575 520397 509140 2134958
Similar to the previous answer, the table and the graph in the picture represent the product sales by every employee for every region. The employees are arranged in a descending order, from left to right in the table. The graph clearly shows that in the north, the salesperson Luke was not able to sell the products at the same level as that of other regions contributing only about 14% of the total sales. It can be seen that there has been a close competition with almost everyone contributing to more than 24% of the total sales. As explained in the previous question there is comparatively less demand in the West
C)
Column Labels
Sum of 2008 Sum of 2009.00
Row Labels Glue Guns Light Sabres Transponders Glue Guns Light Sabres Transponders
Enterprise 163133 146602 136756 284918 262634 245167
Galaxy 144049 107038 145061 266026 192202 262439
Planet 129828 91643 126434 227633 168577 225362
Grand Total 437010 345283 408251 778577 623413 732968
The above table and graph represent the sales of products by region with respect to the customer type. The sales of all the products combined have increased by 80% (approx.) from year 2008 to 2009. Product Glue Guns has been the top most selling product for both the years, however, the sales of Light sabres have increased at a slightly faster rate than others. Out of the three customer types, Enterprise customers have bought more than one-third of the total products sold and in all cases the purchase of the goods Glue Guns is the highest, and transponders being the least demand for the customers as a whole.
D)
Region (All)
Sum of Total Sum Column Labels
Row Labels Glue Guns Transponders Light Sabres Grand Total
Luke Skywalker 367628 297185 242329 907142
Chewbacca 278153 354123 182445 814721
James Kirk 282138 261104 268902 812144
Hansolo 287668 228807 275020 791495
Grand Total 1215587 1141219 968696 3325502
The above table and graph represent the list of the highest selling products by region and by salesperson. It is difficult to show the graphs for all the combinations of regions and salesperson, therefore, only the graph with all the regions combined has been shown. The graph clearly shows that Glue guns is the highest selling product across the all the regions as well as for all the salesperson except Chewbacca who sold more of Transponders. As seen earlier Luke is the topmost salesperson.
Conclusion
The report has addressed many issues related to the credit risk of a financial institution. It is important to design a proper risk management policy such that the losses due to a crisis can be minimized. It is understood that banking and financial services is a such a type of industry which is exposed to all kinds of risks and, therefore, it becomes difficult to manage these risks. However, organizations across the world have started taking stringent measure in order to avoid yet another meltdown in the industry.
The statistical analysis performed on the data set helped us in identifying five main variables out of twenty-two used in the survey which affect the credit quality of a retail borrower. The variables are history, purpose, amount, property, and job, these five variables play a vital role in the credit appraisal process of a borrower. It must be noted that the list of variables affecting the credit rating is not an exhaustive list as there are many qualitative parameters which are difficult to quantify and cannot be incorporated in the model.
The data warehouse architecture designed specifically for financial institutions’ credit appraisal process should concentrate on providing faster and better models. The analytical procedures of the financial institutions require an active data warehouse which has the ability to increase scale as well as store large volume of data.
References
Bank of International Settlements, ‘ History of the Basel Committee and its Membership’, viewed 17 April 2012 <http://www.bis.org/bcbs/history.htm>
Decamps Jp, Rochet Jc, Roger B, 2002, ‘ The Three Pillars of Basel II: Optimizing the Mix in a Continuous-time Model’, viewed 17 April 2012, <http://www.bis.org/bcbs/events/b2earoc.pdf>
Limsombunchai V, Gan C, and Lee M, ‘ Lending Decision Model for Agricultural Sector in Thailand’, viewed 17 April 2012 <http://www.mssanz.org.au/modsim05/papers/limsombunchai.pdf>
Oracle Financial Services, 2011, ‘ Evolving the Data Warehouse: The Next Generation for Financial Services Institutions’, viewed 17 April, 2012 <http://www.oracle.com/us/industries/financial-services/evolving-datawarehouse-wp-400257.pdf>
Valoans, ‘VA Loan Guidelines’, viewed 17 April, 2012, <http://www.valoans.com/va_facts_credit.cfm>
Elton EJ, Figure 1: One Year Transition Probability matrix of Moody’s(94) and S&P’s (95), viewed 17 April 2012, <http://pages.stern.nyu.edu/~eelton/working_papers/corp%20bonds/all%20tables%20and%20figures%201.pdf>
Maxi-pedia, ‘Capital Adequacy Ratio (CAR)’ , viewed 17 April 2012 < http://www.maxi-pedia.com/capital+adequacy+ratio+CAR>

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Foundations in Accounting-ANSWER

Course: ACCT20071 – Foundations in Accounting

 

 

Topic: Critical Analysis

 

Date: May 04, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Introduction

This paper revolves around Brazil mini disaster which occurred in the Fiscal year 2015 and how sit has impacted the environment as well as the organization. It explains as for how the corporate for social responsibility in their published report of sustainability have published. On the more, this paper defines the count on the aspect of being legitimacy theory and its impact on the status and goodwill of the organization.

Fact of the Case

Incident: – A dam in the town of Bento Rodrigues has fallen down which led to 600 persons homeless and eleven persons are killed and fifteen are not found and are still missing. On the more on statistical grounds, the dam is spread across four hundred and forty kilometres leaving a large public without water supply and damaging the health of general people and agricultural loss.

Cause: – As per the research the blamed is stated on the mining organizations BHP Billiton’s and Vale. It was floated that the failure on each and every count to fulfil their duties on account of due diligence as according to the OCED guidelines laid for multinationals enterprises. Moreover, it is clearly stated in reports that it, not an accident and the same was expressly declared by the prosecutor of Minas Gerais state environmental as in the report for the year 2013 expressed clearly that the tailings dam’s integrity was followed as per law and hence, it should disapprove the license or renewal of BHP Billiton (Ong, 2016). The suggestion was ignored leading to turn the situation into such a big disaster

Blame: – BHP Billiton was clearly blamed on account of throwing complete ignorance with respect to storage of the mining materials in the dam. No reason on account of increased production expenses, a reduction in commodity prices and pressure to attain approvals license.

As per the agreements BHP has to take all the obligations on account with environmental losses and any impact on human and their rights especially on account with supplies and any business relationships.

 

OECD guidelines for multinational enterprises

 

OECD guidelines are applicable across nations and Australian and Brazilian governments are a part of such guidelines as they have signed on following such rules. Primarily these guidelines state that if any Australian organization dealing in mining have their projects established across world border then it is the duty of such company to ensure the sight operations with utmost due diligence so that no loss and harm is suffered by anyone. Principles of OECD clearly states that corporate prime responsibilities are to perform activities for the good and betterment of universe and later the rest must follow.

Features include that corporate social responsibility is a crucial element which must not be ignored by the corporate and corporate officials. There should be the level of transparency occurring with the nature of transactions formulated in current as well as future scenarios. The Disclosure on each and every activity of the mining industry in the books of account in very crucial whether being related to the financial statement or non-financial analysis (Golob, & Bartlett, 2007). None the less, such guidelines which help in acting and reacting in a lawful manner with respect to any mis happening caused by such industry. Thus, acting as a preamble for the private organization to actively respond and behave in benefit and profit of social, the economic benefit of the environmental and it better good rather than aiming at their profits only.

CSR Theory

Corporate Social Responsibility deals with various elements which deal with attaining sustainable growth of delivering best to the environment surrounding. It is a self-evaluation approach which the corporates maintain to understand their compliance in relation to monitoring lawful and ethical environment managed. Corporate social reporting deals with reporting on three elements which are the people, profit, and planet generally known as the 3Ps of the company. On the more, the report is based on the four pillars which being the legal front which deals with the understanding the legal aspect and ensuring that the working of the organization is done under lawful compliances (Golob, & Bartlett, 2007). The economic front explains that the company working does not hamper the economic growth of the industry and ensures that it takes necessary steps to improve the economy. Looking at the ethical front it maintains the parameters that the organization has wholly and solely running on an ethical ground and doing business with no intention of malice and unlawful stands, the feeling must not be based on the forgery. The philanthropic front is the final pillar which deals with the voluntary services provided to the society which is basically not even asked by the society. It acts as an additional help or an extra privileged provided by the organization to the society.

 

Corporate Legitimacy

This concern is an ever-growing topic for the multinational organization and as the era is moving towards globalization and multinational platform the company must attain the level of legal functioning. In fact, the Australian government is ensuring that the company deals with the phenomenon of a progressive approach which primarily indulgences into the massive research and employing methodology as per current trends and ideas which ensure that the multinationals are working for the betterment of the economy. In fact, the government and the compliances team have sincerely worked towards the advancement of ensuring a desirable format in which the organization aims to report in their annual report the various social disclosures (Pellegrino, & Lodhia, 2010).

Especially, with respect to the mining industry and its manufacturing segments, Australian government maintains a strict pattern of reporting the same in the annual reports. Many Australian researchers have made a detailed study provided legitimate theory and framework to ensure that the strategies, as well as symbolic activities, are tested and hence disclosed appropriately in the reports.

 

Legitimacy Theory and Test: –  It is a social unsaid agreement which defines the parameters of the society and the organization. It defines the magnitude level which the operations of the business must sustain in level with the social ideology of acceptance. It defines the methods, values and the desirable outcomes degrees which the environment can overlook on behalf of the company working (Pellegrino, & Lodhia, 2010). Mining industry requires a social license to operate, on the more such industry on a regular basis understand and monitor the ever-changing political and environmental. This industry must aim at providing more than desired information along with keeping transparency in actions as their prime level of importance. The aptitude towards reporting has also taken a step advancement as now the company aims to provide not only a report in a traditional format called the annual reports.

As per new laws and compliances, the Australian listed companies and especially the mining industry has to provide an annual sustainability and environmental information. This segment specially defines in detail about the occurrences of the transactions in a detail format hence providing an extra dimension to the scenario as a whole, basically because the companies especially the BHP Billiton and the Trio are scrutinised and annual basis on account of their effort to disclose the various schemes with reflection to the pollutants counts with respect to the environment (Pellegrino, & Lodhia, 2010). Along with necessary reporting done with respect to necessary changes and surrounding impacts.

 

BHP Billiton Reports

The sustainability reports published by the organisation keeping in mind for corporate social responsibility and the mini-disaster of the dam in Brazil for the fiscal year 2016 and fiscal year 2017 point the following elements the company has made a sincere effort to disclose all the events with respect to dam failures in detail format, the organisation as especially reported a six-page report on Samarco and its failures along with all the possible details related to the same. CEO of the company in its reports provides that the immediately take various initiatives to put life back in action. The advancement of the geotechnical and disaster team for relief. On the more, they have established a permanent presence with a team of 35 experts which are on recorded monitoring the situation to provide better relief to the general public (BHP, 2016).

The organization has ensured to maintain parameters on social economic actions like infrastructural building, building the education system and health care system of the groups by providing necessary aids and requirements on financial as well as the non-financial background. The company has taken serious actions on the environmental front as to rebuild the water quality, living standards, ensuring better on stronger standards of preservation and environmental safety. Samarco operations as on date are suspended for the fiscal year 2016 (BHP, 2016). The company is studying and seeking help by understanding Canadian dam association standards and rules and embodying them as the best in their standards, rules as well as regulations. Efforts are made to centralize all the mineral dam management by the minerals operating group.

Report for the year 2017 does not provide such strong backing on the Samarco as the details are provided on page twelve of the report on the more just providing a short insight and describing the efforts taken in the fiscal year 2016. It only focuses on the lesson learned for near future on account of risk management process in terms of framework and structural improvements as well as accountability in terms such disaster management (BHP, 2017).

BHP Billiton has ensured to pay off the government of Brazil a lump sum amount of $ 2.3 billion for the damages caused along in addition to the recovery program of US$ 500 million for the fiscal year 2016 and US$300 million each for fiscal year 2017 and 2018 (Ong, 2016). The same are not going to stop here as the budgeted expense on contribution for the fiscal year 2019 to 2021 aims to be US $ 200 to 400 million (Ong, 2016). The company in detail analysis has mentioned in detail the performance analysis which deals in providing as how the company treats its employee its health concerns, illness causes and various action taken for the betterment of the organization as a whole.

 

Findings and Conclusion

Comparing the sustainability reports for the fiscal year 2016 and 2017 and the legal terms maintained on the corporate legitimacy and the standards expressed on the corporate social reporting. On account of transparency and disclosures of activities, a company has failed or actually excluded to mention the real cause or the main reason for such failures. Moreover, in both the reports company have summarized such segments by simply stating that they have started the investigation. Agree to support such investigations and all on humanitarian grounds agree to help on compensation and contributions. The company has agreed and is making sincere efforts on paying off debts on account of financial losses as well as non-financial losses. But still does not takes the blame on the shoulder as nowhere the company in its reports mention the real cause of such big disaster of the falling off the tailing dam. Non the company mentions in detail the role of action taken as well as steps. Along with various process involved in storing the minerals in the dam. In fact, the company in his report has completely ignored the finding mentioned in the financial year 2013 in relation to the integrity of dam and renewal of license.

Henceforth, the above paper clearly expresses that the company has incidents may have eroded the legitimacy on account of the corporate theory and CSR reporting in the sustainability report.

References

BHP. (2016). Sustainability Report. BHP Billiton. Retrieved From

https://www.bhp.com/media/bhp/documents/investors/annualreports/2016/bhpbillitonsustainabilityreport2016.pdf

BHP. (2017). Sustainability Report. BHP Billiton. Retrieved From

https://www.bhp.com/media/documents/investors/annualreports/2017/bhpsustainabilityreport2017.pdf

Golob, U., & Bartlett, J. L. (2007). Communicating about corporate social responsibility: A comparative study of CSR reporting in Australia and Slovenia. Public Relations Review33(1), 1-9.

Pellegrino, C., & Lodhia, S. (2010). Disclosures by key bodies in the Australian mining industry on climate change: a test of legitimacy theory.

 

Ong, T. (2016, March 03). BHP Billiton-owned mining company agrees to pay $3.2bn to Brazil Government over 2015 dam collapse. ABC News Online. Retrieved From

http://www.abc.net.au/news/2016-03-03/samarco-agrees-to-pay-brazil-government-for-dam-collapse/7216164

 

 

 

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Analysis of investment projects with respect to various parameters-ANSWER

 

Subject :  Analysis of investment projects with respect to various parameters

 

After analyzing all the project with the below said parameters and calculations, we would like to suggest that following project should be selected keeping in mind the payback period of under 3.5 year.

  • Project 2
  • Project 3

 

Although,  if the owner remove the requirement of payback period then all the projects are good for the company. We would like to provide a summary with respect to all the parameters, so that investment decision could be done.

 

ProjectInvestmentNPVIRRPayback period B/Cratio
1$8300004,250,14835.61%3.83030.120
2$20000039,97423.38%21.50
3$850000345,00932.49%21.824
4$50000001,729,80915.77%6.2504.640
5$3000000631,84318.64%9.573.267

 

From the above table it could easily be concluded that the project 1 which is having highest NPV, IRR and B/Cratio. This project should also be selected. Moreover, other project should also be considered as all of them are giving return more than the cost of capital.

Conclusions:

  1. Project 2 & 3 are within the parameters of the owner and should be selected immediately. And the project 2 which fulfill the social legitimacy needs of the company cannot be dropped in any circumstance.
  2. Rest of the projects, especially, Project 1, should also be considered by the company for its excellent performance potentials.

 

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Accounting Report-Answer

Summary

Woodside petroleum is an Australian listed public company which deals in the oil & gas sector. It is the largest oil & gas company in Australia. The company performs as an explorer, developer, producer and supplier. The exploration portfolio of the company includes emerging and frontier provinces in Australasia, the Atlantic margins and Sub-Saharan Africa. The North West Shelf, the landmark project of Australia for premier LNG facilities have been operated by this company. Company has the largest owner operated fleet in Australia. The company has offices worldwide like in Canada, Singapore.  The company also operates the Enfield and Vincent oil fields   in Western Australia and the Laminaria- Coralline oil field offshore northern Australia.

Woodside was incorporated on 26 July 1954. It was originally named Woodside (Lakes Entrance) Oil Co NL and it was named after the small town of Woodside, Victoria. Now, Mr. Peter Coleman is the CEO and Managing director of the company.

Woodside’s production target range for 2015 is 84 to 91 MMboe, comprising a product split of approximately 38% Pluto LNG, 26% NWS LNG, 15% NWS domestic gas and 21% condensate, oil and LPG. This range does not include production from the Apache asset purchase which is expected to be 3 to 4 MMboe2 based on a targeted transaction close date of 31 March 2015. The additional range reflects the inclusion of Balnaves oil production and Kitimat pipeline natural gas production, split approximately 55% Balnaves oil and 45% Kitimat pipeline natural gas. An updated production target range will be issued after the transaction has closed.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Part A2                                                                                                           (amount in US $ m)

Sr no.` Particulars20142013% change
     
aTotal current assets4042289539.62%
bTotal non-current assets2004020875-4.00%
cTotal current liabilities19412364-17.89%
dTotal non-current liabilities548254480.62%
eTotal stockholder’s equity16659159584.39%

 

Overall it could be seen that the company is in good position and year 2014 is better year than 2013 as there is increase in current assets, further the current liabilities have reduced to a great extent. This indicates that the company is getting self sufficient in handling it short term liabilities. Here non- current assets have reduced which indicates that the company is investing more in its short term items rather than the long term commitments. Here increase in the shareholders equity indicates the growth in the company’s profit.

For the analysis of the above data we have to further decompose these broad categories into various other groups.

Sr no.` Particulars20142013% change
     
ATotal current assets4042289539.62%
Cash and cash equivalents3268222347.01%
Receivables4784535.52%
Inventories24719228.65%
Other assets492781.48%

 

Here we can see that all the component of current assets have increased significantly, it indicates that company is growing at a good pace and they are holding high amount of current assets to met the future demand of the market.

 20142013 
BTotal non-current assets2004020875-4.00%
Receivables630              –
Inventories12850.00%
Other financial assets32320.00%
Other assets232-93.75%
Exploration and evaluation assets1268106319.29%
Oil and gas properties1753418490-5.17%
Other plant and equipment7980-1.25%
Deferred tax assets10521170-10.09%

 

In this group we can see that there is slight decrease but the increase in non current receivable could be a point of worry as it indicates that these receivable may be doubtful as these are outstanding for more than the normal credit period. Although , despite of the decrease in the exploration assets the company has increased is revenue and this shows the optimum utilization of the resources by the company.

CTotal current liabilities19412364-17.89%
Payables6055755.22%
Interest-bearing liabilities6291177-46.56%
Tax payable44031738.80%
Other financial liabilities210-80.00%
Other liabilities7630153.33%
Provisions189255-25.88%
   

 

The decrease in the interest bearing liabilities indicates the company’s ability to repay is debt and shows that company is generating enough cash flows to repay there loan due to which interest liability comes down. Other short term liabilities do not affect the group that much and there movement looks to be in ordinary course of business

DTotal non-current liabilities548254480.62%
Interest-bearing liabilities19572587-24.35%
Deferred tax liabilities163715336.78%
Other financial liabilities10100.00%
Other liabilities1231147.89%
Provisions1755120445.76%

 

The % change in this category is much effected by the same reason as indicated above relating to interest bearing securities. But the increase provision is the reason due to which the category is much effected . There provision have increased due to restoration activities and it indicates that company is planning to spend amount on the maintenance of its oil fields.

ETotal stockholder’s equity16659159584.39%
Issued and fully paid shares654765470.00%
Shares reserved for employee share plans-38-42-9.52%
Other reserves920923-0.33%
Retained earnings839577977.67%
Non-controlling interest83573313.92%

 

The detailed analysis of the stockholder’s equity is done in part A5.

 

Part A3                                                                                               (amount in US $ m)

Sr no.`Particulars20142013% change
   
1Operating revenue7435592625.46%
2Cost of sales(2,883)(2,594)11.14%
3Total expenses (before income taxes)(1,102)(1,024)7.62%
4Any non-operating (or extraordinary) gains and losses44417.32%
5Earnings per common share29321337.56%
   

           

Using the comparative analysis technique, the data indicate indicates that the company’s revenue has grown by 25%, which is a significant rate of growth. The major increase in the sale is due to sale of LNG from the Pluto unit of the company, there is almost 70% increase in the sale as compared to last year and there is also an increase in sale of oil from Vincent which is almost 200 % increase. Moreover, the company has also earned from trading of the goods which was not there last year. Overall the revenue shows that the company is expanding their business.

With respect to the cost of sale and expense, the increase is expected but the rate of increase is lesser than the rate of increase in revenue, this may be due to increase in the selling price of the goods or due to operational efficiency of the company in exploring the oil and gas more efficiently in a cost effective manner. The cost of production have actually reduced as compared to last year which is slightly surprising factor. There is not much change in other expenses; the main reason for the increase is due to the impairment of the oil & gas properties.

Here, stagnation of expense and cost of production shows that company is optimally utilizing their resources and there is potential to earn enormous profits. Now, they could even capture market by reducing their selling price and even they could attain cost leadership.

Non operating expense and incomes are very less for the company to affect any business decisions.

Earnings per share has increased considerably due to the fact the profit of the company improved due to the operational effectiveness.

 

 

 

 

Part A4                                                                                                                       US$m

Sr noParticulars20142013Increase/(decrease)

 

1net cash inflow (outflow) from operating activities478533301455
2net cash inflow (outflow) from financing activities(3,119)(2,470)(649)
3net cash inflow (outflow) from investing activities

 

(617)(1,059)442
4net increase (decrease) in cash during the year

 

1,049(199)1248

 

Net cash inflow (outflow) from operating activities:

It indicates how much money a company can make out of its regular business operations. Here for our company it could be easily seen that there is an increase of US$m 1455 during the year, it shows that company is good enough to make money out of its business operations.  This helps the investor to know that whether the business operations of the company are capable enough to generate appropriate return for them.

Net cash inflow (outflow) from financing activities

It indicates the pattern of the company to borrow and repay its long term debts; it shows how a company deals with the capital market and investors. Whether company has high dividend payout or whether their fund would be utilized in paying off their debts. For our company, we can see that company has utilized its fund for the year to repay its long term debts; due to this the dividend payout ratio has remained same for the company.

Net cash inflow (outflow) from investing activities

It indicates the amount spent or generated by the company on investment in capital assets such as plant & machinery, equipment, bonds or investing in subsidiaries. Here, the negative cash flow indicates that company is investing its funds for long term purpose and for the future health of the company and on the other hand positive cash flow shows that company is selling off its assets in order to meet its requirements. Here, in our company it could be seen that the cash flow is negative  this shows that company is investing in new equipment for increase in its operations.

Net  increase (decrease) in cash during the year

Here the positive cash flow indicates the increase in the cash inflows for the company. Our company has a positive cash flow which indicates that the cash generated by the operating activity is sufficient enough to meet the requirement of investing and financing activities. The net increase shows the good heath of the company.

Part A5                                                                                                                       US$m

Sr noParticulars20142013%change
1Issued and fully paid shares(amt)654765470
2Shares reserved for employee share plans            (38)             (42)-9.524%
3Other reserves920923-0.325%
4Retained earnings839577977.670%
Equity attributable to equity holders of the parent15824152253.934%
5Non-controlling interest83573313.915%
Total equity  16659159584.393%

 

We can see that the reason for the change on the total equity is the increase in the retained earnings , as already said the company has made good profit during the year and it has retained some of its profit for the future business operations. Further we can see that there is an decrease in the shares reserved for the employee share plan. This indicates that some of the plans may have vested due to which the reserved amount has reduced.

(Amount in US$m)

Sr noParticulars20142013change
1Equity account balance(Amt)16659159584.393%
2Issued and fully paid number of shares823,910,657823,910,6570

 

 

 

 

 

 

 

 

 

 

 

Part B Financial Ratios

Particulars NumeratorDenominatorNumeratorDenominatorRatio
 
Profitability ratios
Return on equityOperating profit after taxShareholders’ equity2516158240.1590
Return on assetsOperating profit after taxTotal assets2516240820.1045
Profit marginOperating profit after taxSales/Revenue251674350.3384
Cash flow to total assetsCash provided by operationsTotal assets4785240820.1987
Price-to-earnings ratioMarket price per share Earnings per share38.012930.1297
Activity (turnover) ratios
a) Total assets turnover SalesTotal assets7435240820.3087
b) Debtors turnoverCredit salesAverage trade debtors743549714.9598
c) Days in debtors365Debtors turnover ratio36514.959824.3988
Liquidity ratios
a) Current (working capital) ratioCurrent assetsCurrent liabilities404219402.0835
b) Quick ratio Cash + Accounts receivable +  Short-term investmentsCurrent liabilities379519401.9562
c) Interest coverage ratioEarnings before interest & taxNet interest expense367216322.5276
Financing ratios
a) Debt-to-equity ratioTotal liabilities Total shareholders’ equity7423158240.4691
b) Debt-to-assets ratio Total liabilities Total assets7423240820.3082
c) Leverage ratioTotal assetsTotal shareholders’ equity24082158241.5219

 

 

 

 

Analysis for the Ratios                   

  1. Profitability ratios :

This is a group of ratios which determines the ability of the business to generate earning as compared to its expenses and other relevant costs. These shows how efficiently the profitability of the company is maintained. There are various ratios which helps in determining the profitability of the company. These ratios give meaningful information only when they are analyzed in comparison to competitors or compared to the ratios in previous periods. In most of the ratios, higher the ratios better the performance of the company .These ratios are:

  • Return on equity

 

Return on Equity is a measure of profitability of shareholder’s investment. Higher values are generally favourable meaning that the company is efficient in generating income on new investment. The value for the previous year comes to 0.115, it could be seen that ratio has increase and we can easily conclude that company is generating funds efficiently on the funds invested by stockholders.

 

  • Return on assets

 

Return on Assets gives the number of cents earned for each Dollar of asset. Thus higher value of the ratio indicates that company is in profitability position. The value for the previous year comes to 0.075, it could be seen that ratio has increase and we can easily conclude that the company’s assets are efficiently utilized and funds are generated adequately from it.

 

  • Profit margin

 

Profit Margin gives that how much of the profit is made at certain level of sales. It shows how much company is able to control its expenses. In our case the company have kept a check on the total expense due to which it has god profit margin for the year.

 

  • Cash flow to total assets

 

This ratio shows the cash return on the total assets of the company. A higher ratio indicates the high potential for the company to infuse cash into the business. Here, the ratio is good enough to show that it is a good company.

 

  • Price-to-earnings ratio

 

The price to earnings ratio indicates the expected price of a share based on its earnings. Higher the value betters the company. But our case the earning per share is quite high but the market price per share is quite low.

 

 

 

  1. Activity (turnover) ratios

 

These ratios indicate how efficiently business uses its assets to maximize the revenue generation of the company.     Here the sales remains as a numerator to various assets like receivables, inventory, total assets etc. It measures the efficiency, of each asset, for the contribution towards to total revenue generated. Some of these ratios are:

 

  • Total assets turnover

This ratios take all the asset as of the company whether current or non-current assets. It measure how many time of total asset the revenue is generated. A low ratio means that excessive assets are employed to generate sales and some of the excessive assets could be liquidated. The ratios stand at 0.3087 which is quite low for this industry . company should look to improve its revenue more.

  • Debtors turnover

 

It measures the efficiency of a business to collect its credit sales. how quickly a company collects what is owed to it and indicates the liquidity of the receivables. Here, ratio has improved as the ratio for last year was around 12 and this year it is 14.95 which indicates that there is an increase in efficiency for collection from Debtors. This may be due to the reason that company had sold their product on lesser credit period or more of cash sales are there.

 

  • Days in debtors

 

It shows the average number of days in which the amount is recovered from the customers i.e. how much days it takes for the company to get paid for what it sells. The lower the number of debtor days, the better the company. An abnormally high figure suggests inefficiency or window-dressing of the sales figures. So , the collection period should not be far from industry average.

 

 

 

 

 

 

 

 

 

 

 

 

  1. Liquidity ratios

 

Liquidity ratios are the ratios that measure the ability of a company to meet its short term debt obligations. These ratios measure the ability of a company to pay off its short-term liabilities when they fall due. These ratios are derived by dividing the current assets by the short term borrowing or current liabilities. They show the number of times the short term obligations are covered by the cash and other liquid assets.

Some of these ratios are:

 

  • Current (working capital) ratio

Current Ratio shows the ability of the company to payback its Short term Liabilities with its short term assets, Higher the current ratios, the more company is able to repay the debt easily. Here company is in good position for repaying its short term liabilities as their current ratio is over 2 which indicates that for every dollar of debt they have 2 dollars for repayment in hand.

  • Quick ratio

Quick Ratio Suggest how much company is able to repay instantaneously against the short term liabilities. Quick ratio has quick assets like cash, short term market securities and account receivable as the numerator while current liabilities as the denominator  Here, it could be seen that for every $1 company is able to pay $1.95. Inventory is excluded from Quick assets as it takes little longer to sell the goods and recover the money.

  • Interest coverage ratio

This ratio indicates the company’s ability to meet its interest payment obligations. It  is derived by dividing EBIT for a specific year by the interest expense for the same year. It is a measure of the number of times the profit is generated by the company to repay their interest on loan taken by them. Lower ratio shows that the profit are not sufficient to repay the interest on the borrowed funds.

 

 

 

 

 

 

 

  1. Financing ratios

It indicates the overall level; of financial risk a company and it shareholders face. More  the  ratios higher the risk . our company deals in a sector which is said to be a high risk industry as the prices are very much out of control of any organization. Some of these ratios are:

  • Debt-to-equity ratio

This ratio indicate how much a company is dependent on external lenders in comparison to Equity Shareholders fund, A lower ratio indicate lower risk and vice versa. Here the ratio is very low which indicates that the company is very less dependent on the external borrower which recovers the fixed amount of interest. It shows that the company has the ability to generate more funds without the help of the external borrowers.

  • Debt-to-assets ratio

Total debt to asset ratio indicates the total amount of liabilities with respect to total assets. It means how much debt is covered by the assets of the company. Higher the ratios higher the risk. In case of our company the ratio is very low which indicates that the company has enough assets to repay all of its liabilities easily. However this ratio doesn’t provide a bifurcation between the good and doubtful assets.

  • Leverage ratio

It indicates the relation between total assets and the amount owned by shareholders. It gives an idea about the company’s leverage that is used to finance the business. This ratio cannot show any thing in isolation, so it should be used as per the industry average. In our case the ratio is 1.5 which show that company has used  its borrowed capital in a best possible manner, it shows that the return on funds is higher than the cost of capital.

Posted by AssignmentHero on

Project case – Professional and Scientific Staff Management-ANSWER

Overview

Professional and Scientific Staff Management (PSSM) is a unique type of temporary staffing agency. Many organisations today hire highly skilled technical employees on a short-term, temporary basis to assist with special projects or to provide a needed technical skill. PSSM negotiates contracts with its client companies in which it agrees to provide temporary staff in specific job categories for a specified cost.

For example, PSSM has a contact with an oil and gas exploration company in which it agrees to supply geologists with at least a masters degree for $5,000 a week. PSSM has contracts with a wide range of companies and can place almost any type of professional or scientific staff members, from computer programmers to geologists to astrophysicists.

Current System

When a PSSM client company determines that it will need a temporary professional or scientific employee, it issues a staffing request against the contract it has previously negotiated with PSSM. When PSSM’s contract manager receives a staffing request, the contract number referenced on the staffing request is entered into the contract database file. Using information from the database, the contract manager reviews the terms and conditions of the contract and determines whether the staffing request is valid. The staffing request is valid if the contract has not expired, the type of professional or scientific employee requested is listed on the original contract, and the requested fee falls within the negotiated fee range. If the staffing request is not valid, the contract manager sends the staffing request back to the client with a letter stating why the staffing request cannot be filled, and a copy of the letter is filed. If the staffing request is valid, the contract manager enters the staffing request into the staffing request database as an outstanding staffing request. The staffing request is then sent to the PSSM placement department.

In the placement department, the type of staff member, experience, and qualifications requested on the staffing request are checked against the database of available professional and scientific staff. If a qualified individual is found, he or she is marked “reserved” in the staff database. If a qualified individual cannot be found in the database or is not immediately available, the placement department creates a memo that explains the inability to meet the staffing request and attaches it to the staffing request. All staffing requests are then sent to the arrangements department.

In the arrangements department the prospective temporary employee is contacted and asked to agree to the placement. After the placements details have been worked out and agreed to, the staff member is marked “placed” in the staff database. A copy of the staffing request and a bill for the placement fee is sent to the client. Finally, the staffing request, the “unable-to-fill” memo (if any), and a copy of the placement fee bill is sent to the contract manager. If the staffing request was filled, the contract manager closes the open staff request in the staffing request database. If the staffing request could not be filled, the client is notified. The staffing request, placement fee bill, and unable-to-fill memo are then filed in the contract office.

Source: Dennis, A,  Wixom, D, Tegarden, D (2012), Systems analysis design, UML version 2.0: an object oriented approach, John Wiley & Sons, New Jersey.

 

 

Accounting

When a placement is made full payment is required no later than 30 days after the placement is finalised, by credit card or cheque or customer account. In all cases a tax invoice is provided to the client but kept confidential from the employee.

Problems associated with the current system

  • Due to the nature of the database, only one staff member can access the records at a time which causes bottlenecks and possible loss of revenue;
  • There is some duplication with paper and electronic records. Staff report that they find this cumbersome and difficult to manage;
  • Records are held in computer applications plus in paper form; and
  • The system does not provide an effective means for keeping track of placement success rates and correlating client and placement data.

 

Due to these problems, some placements have not been handled well and customer complaints are increasing.

The desired new system

The CEO of PSSM has identified his major priority is to create a system that ties together all the key elements of placement and removes redundancies from the system related to electronic and paper copies. He has hired your company, ABC Information Services as consultants to carry out analysis and develop the specifications for a new automated information system.