Accounting Systems and Processes

This document provides study material and solved assignments on Accounting Systems and Processes. It covers topics such as spreadsheet functions, inventory management, bank reconciliation, and bad debt management. The document includes examples and explanations for each topic.

Running head: ACCOUNTING SYSTEMS AND PROCESSES
Subject Code:
Subject Name: Accounting Systems and Processes
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ACCOUNTING SYSTEMS AND PROCESSES
Acknowledgement:
The work in this assignment is my own work, and has not been plagiarised.
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Table of Contents
Part A: Spreadsheet..........................................................................................................................3
Answer to Question 1:.................................................................................................................3
Answer to Question 2:.................................................................................................................5
Part B: Inventory management........................................................................................................6
Answer to Question 1:.................................................................................................................6
Answer to Question 2:.................................................................................................................7
Answer to Question 3:...............................................................................................................14
Part C: Bank reconciliation............................................................................................................14
Answer to Question 1:...............................................................................................................14
Answer to Question 2:...............................................................................................................14
Part D: Bad debt management and financial decision...................................................................16
Introduction:..............................................................................................................................16
Bad debt method used by the A2 Milk Company:....................................................................16
Methods of estimating bad debt:................................................................................................16
Analysis of the financial information of the organisation:........................................................17
Analysis of the company report on sustainability:....................................................................19
Conclusion:................................................................................................................................19
References:....................................................................................................................................20
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Part A: Spreadsheet
Answer to Question 1:
The three spreadsheet functions learnt include the following and their detailed
explanations are provided as follows:
Future value (FV):
The future value of any investment is determined with the help of the following
spreadsheet formula:
Formula = FV (Rate, Nper, [Pmt], PV, [type])
In the above formula, rate denotes interest rate per annum; NPER stands for number of
periods, [Pmt] equals to payment per period, PV means present value and [type] indicates the
payment at the end of the year, if there is no provided information (Winston, 2016).
For instance, an investor has invested $100 in 2018 with interest rate of 10% per annum
and the payment is made on annual basis. The question here is to determine the future value of
the investment in 2021. By using the spreadsheet function, the future value of the investment is
determined as follows:
Normal view:
Formula view:
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This function is useful, as it assists in finding the future value of a specific investment
having periodic payment and constant rate of interest.
Net present value (NPV):
This function provides the estimated earnings of a project or investment. NPV is
computed with the help of the following formula:
Net Present Value = NPV (rate, value 1, [value 2],…)
The rate denotes the discount rate for a particular period and the values indicate positive
or negative cash flows. The negative values are considered as payments, while positive values
are considered as cash inflows. For instance, an organisation is planning to undertake a project
having an economic life of 5 years with required rate of return of 10%. The cash inflows and
NPV are calculated as follows:
Normal view:
Formula view:
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This method is useful, as it is possible to determine the projected earnings of an
investment made in future (Mayes, 2014).
Effect:
In order to calculate the effective annual rate of interest, effect function is used. This
function is used in Excel containing the following formula:
Effective annual interest rate = Effect (Nominal_Rate, NPERY)
In the above formula, nominal_rate denotes the nominal rate of interest and NPER
indicates the number of compounding per annum. For example, a payment needs to be settled
with a nominal rate of interest of 12% and the number of compounding per annum is 12. The
effective annual rate is computed with the help of the following formula in spreadsheet:
Normal view:
Formula view:
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Thus, this function provides slightly higher interest rate in contrast to the rate quoted by
the lender.
Answer to Question 2:
VLOOKUP function, also known as vertical lookup, is an in-built spreadsheet function,
which is designed to work with data organised into columns. For a particular value, this function
finds the value in one data column and it returns the corresponding value from another column
(McFedries, 2016).
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Part B: Inventory management
Answer to Question 1:
The major points of differences between periodic and perpetual inventory systems are
discussed as follows:
Basis of comparison Perpetual Inventory System Periodic Inventory System
Recording Regular update of inventory
records
Periodical updates of inventory
records
Ascertainment of
closing inventory
It is ascertained based on
inventory records
It is determined based on physical
inventory count
Inventory count Conducted to assure if units held
are in accordance with records
Conducted for ascertaining the cost
of sales
Inventory control Increased level of control, since
the management has knowledge
of the quantity at all times
No control, since the management
has no knowledge of the quantity
until the period end
Temporary accounts No maintenance of temporary
accounts, as there is direct
recording in inventory count
(Chołodowicz & Orłowski, 2015)
There is maintenance of temporary
accounts such as returns, sales and
purchased, which are closed at the
period end
Cost Expensive in terms of
maintenance owing to need of
competent professionals
Less costly to maintain due to
requirement of lower cost and
workforce (Miller-Nobles,
Mattison & Matsumura, 2016)
For instance, in case of Bike World, it could be observed that the organisation has
purchased 20 units of merchandise inventory on 5th June at $217 per unit. The journal entry in
case of perpetual inventory system is represented as follows:
Date Particulars Debit Amount Credit amount
05-Jun Merchandise Inventory Account................................Dr $4,340
To Accounts Payable Account $4,340
By considering the above example, the journal entry in case of periodic inventory system
is depicted as follows:
Date Particulars Debit Amount Credit amount
05-Jun Purchase Account................................Dr $4,340
To Accounts Payable Account $4,340
After considering all the above aspects, it could be said that although it is easy to
implement a periodic inventory system in place, it lacks the additional benefits of a perpetual
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inventory system like real time insight on profitability and margins. Thus, perpetual inventory
system would be beneficial for Bike World.
Answer to Question 2:
Perpetual inventory system:
Average cost method (Normal view):
Average cost method (Formula view):
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LIFO method (Normal view):
LIFO method (Formula view):
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FIFO method (Normal view):
FIFO method (Formula view):
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Periodic inventory system:
Average cost method (Normal view):
Average cost method (Formula view):
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LIFO method (Normal view):
LIFO method (Formula view):
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FIFO method (Normal view):
FIFO method (Formula view):
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Reconciliation of inventory (Normal view):
Reconciliation of inventory (Formula view):
Answer to Question 3:
As the business of Bike World is not going well, the owner of the organisation is
suggested to adopt the perpetual inventory system. This is because the cost of goods sold is
lower in average cost, FIFO and LIFO methods in perpetual inventory system compared to
periodic inventory system. As a result, the organisation would be able to show higher gross profit
to its investors under perpetual inventory system.
Part C: Bank reconciliation
Answer to Question 1:
One item that could increase the bank balance is notes receivable and another item that
could increase the cash balance is cheque paid into the bank but not collected (Chhabra &
Pattanayak, 2014). Both the items are assumed to have an identical amount of $1,000.
Answer to Question 2:
Bank reconciliation statement (Normal view):
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Bank reconciliation statement (Formula view):
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Journal entries (Normal view):
Journal entries (Formula view):
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Part D: Bad debt management and financial decision
Introduction:
The report covers different aspects related to bad debt management and financial
management decision related to the A2 Milk Company Limited. The organisation has been
established in 2000 in New Zealand and its main products include A2 milk, infant formula and
other dairy products supplied in both domestic and global markets including New Zealand,
Australia, USA, UK and China (The a2 Milk Company, 2019). The section would provide a brief
overview of the bad debt method used by the organisation and comparison would be made with
other method of estimating bad debt. After this, the financial performance of the organisation
would be analysed with the help of financial ratios. Finally, the report would shed light on
evaluating the sustainability performance of the organisation. Based on all these aspects,
recommendation would be provided regarding investment decision.
Bad debt method used by the A2 Milk Company:
After evaluating the annual report of the A2 Milk Company, it is identified that the credit
sales made are outstanding and they are expected to be settled in cash. It has not recognised any
expense for bad debts in relation to the amounts owed by the associated parties.
This implies that the organisation is using the direct write-off method of bad debt, as this
method involves delayed recognition of bad debt. As per its annual report in 2016, the total bad
debt expense of the organisation has been $69,000, which was nil in 2015
(Thea2milkcompany.com, 2019).
Methods of estimating bad debt:
Besides allowance method, direct write-off method is another method that could be used
for measuring bad debt. The primary differences between these two methods are enumerated
briefly as follows:
Basis of comparison Direct write-off method Allowance method
Timing There is delay in recognition
of bad debt and this leads to
increased initial profit.
There is immediate recognition
of bad debt and the initial profit,
thus, tends to be lower.
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Accuracy It is possible to know the exact
figure of bad debt expense due
to write-off of a particular
invoice.
In this method, only an estimate
of a specific invoice is charged.
Receivable line item This item in the statement of
financial position tends to be
higher due to absence of any
reserve (Ruch & Taylor,
2015).
The item is lower due to netting
of a reserve in the receivable
amount.
Analysis of the financial information of the organisation:
In order to analyse the financial position of the A2 Milk Company, the following three
financial ratios are used:
Particulars Details 2015 2016
Net profit A $ -2,091,000 $ 30,436,000
Revenue B $ 154,803,000 $ 352,502,000
Current assets C $ 60,533,000 $ 182,423,000
Inventories D $ 4,846,000 $ 52,566,000
Prepayments E $ 9,651,000 $ 15,099,000
Current liabilities F $ 28,952,000 $ 76,808,000
Total liabilities G $ 30,238,000 $ 77,074,000
Total equity H $ 58,629,000 $ 133,078,000
Net margin A/B -1.35% 8.63%
Quick ratio
(C-D-
E)/F 1.59 1.49
Debt-to-equity
ratio G/H 0.52 0.58
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Property, plant and equipment
Goodwill
Other intangible assets
Deferred tax assets
$- $5,000,000 $10,000,000 $15,000,000
Non-Current Assets of the A2 Milk
Company
2016
2015
Accounts payable Deferred tax
liabilities Total non-current
assets
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
Non-Current Liabilities of the A2 Milk
Company
2015
2016
The above table mainly helps in depicting the outcomes of the financial ratios used for
analysing the financial performance of the A2 Milk Company in 2016 compared to 2015. Net
margin is a profitability ratio used for ascertaining the profit generated by the organisation after
deduction of all its expenses to evaluate the efficiency of the company management (Brigham et
al., 2016). This ratio is extremely important from the viewpoint of the investors, as future
dividend distribution of an organisation is dependent on its profit generation capacity. In case of
the A2 Milk Company, net margin is observed to increase considerably from -1.35% in 2015 to
8.63% in 2016, which is a favourable sign for both the organisation and the investors. The reason
has been the massive increase in demand of the dairy products over the year resulting in
considerable rise in sales revenue.
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Another ratio used is quick ratio, which helps in ascertaining the ability of an
organisation to settle its short-term obligations with the available short-term asset base. A higher
ratio is deemed to be favourable, as it indicates the availability of adequate working capital. In
this case, the ratio is observed to fall from 1.59 in 2015 to 1.49 in 2016 owing to significant
increase in short-term payables from the customers. Finally, debt-to-equity ratio is used for
determining the capital structure or solvency position and this ratio carries much value to the
investors, as they could identify the leverage risk associated with the organisation (Islam, 2014).
The ratio has increased slightly from 0.52 in 2015 to 0.58 in 2016; however, it is within the ideal
standard of 1. This implies that the organisation has emphasised on raising more funds through
equity rather than using bank loans.
From the above charts, it is evident that there has been decline in PPE of the A2 Milk
Company, as it has sold a portion of the same for increasing its cash base. However, this has
been offset by considerable decline in deferred tax liabilities.
Analysis of the company report on sustainability:
The sustainability report of the A2 Milk Company reflects a social responsibility of the
management to go beyond maximising profit margin and wealth of the shareholders. The
management has shown commitment towards protecting and enhancing the welfare of the
society, which is deemed to be a favourable practice for any business organisation (Junior, Best
& Cotter, 2014). In order to reflect its social responsiveness, the organisation has supported the
following non-profit organisations in Australia:
 Partnership with The Song Room
 Landcare Grants Program where applications are submitted by the farmers for grants and
four farmers are eligible for funds so that they could respond to challenges along with
improving the sustainability of their operations effectively
 Partnership with the Children’s Book Council of Australia
 Donation of A2 platinum infant formula to the Salvation Army
It clearly implies that the organisation has wide understanding of social responsibility,
which has assisted in boosting its reputation in the market by development of a loyal customer
base. Moreover, it has effective code of ethics, which has been approved by its board of directors
for ensuring sound company culture so that the employees work to their fullest potential (Hahn
& Lülfs, 2014). Hence, it could be said that the A2 Milk Company has adopted favourable
sustainability practices to ensure smooth flow of its business operations in the long-run.
Conclusion:
After consideration of all the above-analysed aspects, it is apparent that the A2 Milk
Company has managed to improve its profitability position significantly in 2016 due to huge
increase in sales revenue. Moreover, the solvency position of the organisation is found to be
stable and it has sound sustainability practices to support the overall community besides
maximising the wealth of its shareholders. Therefore, it is recommended to invest in the shares
of the organisation, as such investments would lead to generation of better returns in future.
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References:
Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment:
Theory And Practice, Canadian Edition. Nelson Education.
Chhabra, K. S., & Pattanayak, J. K. (2014). Financial accounting practices among small
enterprises: Issues and challenges. IUP Journal of Accounting Research & Audit
Practices, 13(3), 37.
Chołodowicz, E., & Orłowski, P. (2015). A periodic inventory control system with adaptive
reference stock level for long supply delay. Measurement Automation Monitoring, 61.
Hahn, R., & Lülfs, R. (2014). Legitimizing negative aspects in GRI-oriented sustainability
reporting: A qualitative analysis of corporate disclosure strategies. Journal of business
ethics, 123(3), 401-420.
Islam, M. A. (2014). An analysis of the financial performance of national bank limited using
financial ratio. Journal of Behavioural Economics, Finance, Entrepreneurship,
Accounting and Transport, 2(5), 121-129.
Junior, R. M., Best, P. J., & Cotter, J. (2014). Sustainability reporting and assurance: A historical
analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), 1-11.
Mayes, T. R. (2014). Financial Analysis with Microsoft Excel. Nelson Education.
McFedries, P. (2016). Excel 2016 formulas and functions. Que.
Miller-Nobles, T. L., Mattison, B., & Matsumura, E. M. (2016). Horngren's Financial &
Managerial Accounting: The Managerial Chapters. Pearson.
Ruch, G. W., & Taylor, G. (2015). Accounting conservatism: A review of the literature. Journal
of Accounting Literature, 34, 17-38.
The a2 Milk Company. (2019). About us - The a2 Milk Company. Retrieved 17 January 2019,
from https://thea2milkcompany.com/about-us/
Thea2milkcompany.com. (2019). Retrieved 17 January 2019, from
https://thea2milkcompany.com/wp-content/uploads/A2ML0029-a2-2016-
AR_Spreads.pdf
Winston, W. (2016). Microsoft Excel data analysis and business modeling. Microsoft press.
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