Contemporary Issues in Accounting Assignment

This report provides a financial analysis of ADX Energy Ltd. including measurement requirements of conceptual framework, fundamental and enhancing qualitative characteristics, and requirements of general purpose financial reporting. The report also includes an income statement and financial position analysis, as well as ratio analysis. The report concludes with recommendations for the company.

CONTEMPORARY
ISSUES IN
ACCOUNTING
ASSIGNMENT

1
By student name
Professor
University
Date: 25 April 2018.
1 | P a g e

2
Executive Summary
In the given case, a report has been prepared on one of listed companies, ADX energy Ltd. The financial
analysis has been done on the same with the help of the profit and loss account and the balance sheet
analysis over the past 2 years. The latest annual report of the company has been used for the analysis.
Furthermore, the ratio analysis has been done to get the idea of the performance indicators and how
the company had fared in the last 2 years. Besides this, the report also highlights the measurement
requirements of conceptual framework, fundamental and enhancing qualitative characteristics that the
company has met. It also mentions if the annual report has met the requirements of GAAP and are the
users of report able to make decision on the basis of the same. Finally, conclusion and recommendation
has been given as to further course of action by the company.
2 | P a g e

3
Contents
Introduction.................................................................................................................................................4
Discussion and Analysis...............................................................................................................................4
Measurement requirement of conceptual framework............................................................................4
Fundamental Qualitative characteristics.................................................................................................4
Enhancing Qualitative characteristics......................................................................................................5
If users are able to make use of the reports for decision making............................................................5
Users need only basic knowledge of accounting – Yes or No..................................................................6
Requirements of General Purpose Financial Reporting...........................................................................6
Income Statement and Financial Position Analysis................................................................................10
Ratio Analysis.........................................................................................................................................12
Conclusion & Recommendation................................................................................................................14
References.................................................................................................................................................15
3 | P a g e

4
Introduction
The company which has been selected for the purpose of the financial analysis is ADX energy Ltd. It is
listed on Australian Stock Exchange and is a part of the energy sector. It also deals in gas and oil
exploration. It operates four oil and gas permits in the country of North Africa and Europe together with
gold and base metals interest in several parts of Australia (Delone & Mclean, 2004). It was established in
the year 1987. With respect to the vision of the company, it aims to have greater shareholder returns
through prospective investments by applying state of art technology. The financial analysis has been
done below.
Discussion and Analysis
Measurement requirement of conceptual framework
The conceptual framework laid down by the accounting bodies all over the world considers
requirements with respect to measurement, presentation and disclosure in the financial statements.
There are 3 basic fundamental principles of measurement which are:
1. The objective of measurement is to show how carefully the resources of the entity have been
used, what are the claims against the entity and if the management and governing board of
company has discharged its responsibilities well with regard to use of resources.
2. Generally, measurement starts with the balance sheet item, but the relevance of information is
also impacted by how it affects the income statements, cash flow statement, statement of
changes in equity and notes on accounts (Mock, Ragothaman, & Srivastava, 2018).
3. The cost of measurement must be commensurate with the benefits that accrues to the existing
as well as potential stakeholders of information.
All the given requirements have been met through the detailed annual report which meets the matching
concept and costs have been highlighted against revenue line items. It also highlights detailed
information for use by different stakeholders.
Fundamental Qualitative characteristics
Financial reporting information should be meeting 2 fundamental qualitative characteristics and should
report information that is true and fair and is not misleading.
1. Relevance: Accounting information is said to be relevant if it has the ability to change the
decision of the user of information. It can happen if the information presented if of confirmatory
value or predictive value or both of them. The relevance of information depends on the nature
and materiality of the item. Suppose in the given case, ADX energy would have shown only gross
block of the asset then the same would not have been useful of user but now with the entire
schedule of fixed assets showing addition, deletion, depreciation, etc, it becomes relevant
(Heminway, 2017).
2. Faithful Representation: It means that the financial information should represent only the things
which it purports to represent. Three major characteristics needs to be met some of which are
4 | P a g e

5
completeness in recording of all the transactions, neutrality approach while preparation of
financial statements and the accounts and reports being free from error, omissions and
inaccuracies. The same has been ensured by ADX limited as the auditor has stated in the
Auditors report and Directors have declared in the Directors’s Report (Jefferson, 2017).
Enhancing Qualitative characteristics
The financial statements must possess the quality of enhancing qualitative characteristics which help in
bifurcating the more critical information from the less ones. These characteristics has been mentioned
below alongwith the extent to which it has been met by ADX limited.
1. Comparability: the financial values has been given for the last 2 years in all the major financial
statements be it profit and loss account or balance sheet or cash flow statement and the notes
on accounts. This helps the user to compare the performance of the company as compared to
the last year.
2. Verifiability: Verifiability means the data should present a faithful representation of the affairs
and the auditors or any other accountant should be able to reach the same result as the
accountant of the company using the same inputs. The company in hand ADX energy has
followed it as is mentioned in the Auditors Report to the users.
3. Timeliness: The information is useful only when the same is presented to users in a timely
fashion and ADX energy has also prepared and published the annual report within the due time.
4. Understandability: The information presented should be clear and concise and should not be
ambiguous. The same has been represented in the annual report of company.
If users are able to make use of the reports for decision making
In the given case the company has presented the information in the most detailed way for the
understanding of the user. The stakeholders may be different, it may be internal or external. The
information needs have been fulfilled for each one of them like for creditors and the bankers and
financial institutions, the debt equity split and the liquidity and solvency picture of the company has
been given. For the potential and existing investors of the company, the share price, the dividend and
EPS information has been given and for employees and other internal stakeholders, the business
information and critical excerpts on the business policies has been given.
5 | P a g e

6
Users need only basic knowledge of accounting – Yes or No
As per the conceptual framework, users need only the basic knowledge of accounting to analyse the
company. The statement is however, partially correct as the basic knowledge of accounting helps the
company in knowing what the debits and credits and the financial statements and its line items but for
the critical analysis and review, in depth knowledge of ratio and what they purport to represent should
also be clear (Kew & Stredwick, 2017). Furthermore, there are many internal and external factors on
which the growth and sustainability of the company depends upon and hence to take a rational decision
the user must have the knowledge of the same. Decision making purely on the basis of basic accounting
knowledge can prove to be detrimental to the interests of the investors.
Requirements of General Purpose Financial Reporting
The four major general purpose financial reporting reports consists of balance sheet, income statement,
cash flow statement and the statement of changes in equity. The same has been included in the annual
report and the relevant notes with respect to the same has also been included. All such requirements
have been met such that the users are informed and they can take investment and other decisions
accordingly. It is called the general purpose financial statements because these are the basic documents
6 | P a g e

7
which help the users in making the better investment and economic decisions. The screenshots of the
same has been shown below.
7 | P a g e

8
8 | P a g e

9
9 | P a g e

10
Income Statement and Financial Position Analysis
The income statement analysis and the balance sheet analysis of the company for the last 2 years has
been shown below:
ADX Energy Limited
Consolidated statement of profit or loss
Particulars 2017 2016
A$ A$
Revenue and Income
Interest revenue 4,303 1,841
Other income 905,474 -
909,777 1,841
Expenses
Administration and corporate expenses, net of recoveries from exploration
projects 542,456 738,965
Share-based payments 712,774 216,490
Exploration expensed 1,857,32 949,530
10 | P a g e

11
2
Net loss/(gain) – other financial assets at fair value Total expenses -54,819 752
3,057,73
3
1,905,73
7
Profit/(loss) before income tax
-
2,147,95
6
-
1,903,89
6
Income tax expense 21,378 9,604
Profit/(loss) after income tax attributable to members of ADX Energy Ltd
-
2,169,33
4
-
1,913,50
0
Other comprehensive income/(loss)
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translation of foreign operations -95,586 -14,699
Income tax relating to items of other comprehensive income/(loss) - -
Other comprehensive income/(loss) for the year, net of tax -95,586 -14,699
Total comprehensive profit/(loss) for the year
-
2,264,92
0
-
1,928,19
9
Cents Per Cents Per
Share Share
Basic earnings/(loss) per share -0.21 -0.25
ADX Energy Limited
Consolidated statement of financial position
Particulars 2017 2016
$ $
ASSETS
Current Assets
Cash and cash equivalents 1,840,247 734,152
Trade and other receivables 164,814 152,683
Other financial assets at fair value - 266,874
Total Current Assets 2,005,061 1,153,709
Non-Current Assets
Property, plant and equipment 178 281
Total Non-Current Assets 178 281
Total Assets 2,005,239 1,153,990
LIABILITIES
Current Liabilities
Trade and other payables 675,711 422,249
11 | P a g e

12
Total Current Liabilities 675,711 422,249
Non-Current Liabilities
Provisions 256,186 -
Total Current Liabilities 256,186 -
Total Liabilities 931,897 422,249
Net Assets 1,073,342 731,741
Equity
Issued capital 68,083,114 65,859,376
Reserves 6,246,647 5,959,450
Accumulated losses (73,256,419) (71,087,085)
Total Equity 1,073,342 731,741
From the above income statement we can see that the company has hardly had any sale of the oil,
energy and petroleum products and thus the company has suffered the operating loss as well as the net
loss for both the years (Alexander, 2016). However, there was sale of few auxiliary products in the year
2017 which also had the corresponding increase in the exploration cost due to which the quantum of
the loss has further increased. IT can be seen that the administration and corporate expenses have
decreased and the share based payments have increased marginally. On an overall basis, the loss of
entity has increased in 2017 as compared to the last year and it has had a corresponding impact on the
basic earnings per share which again has declined drastically (Oberoi, 2018).
In terms of the balance sheet of the company, we can see that amongst the current assets, the balance
of the cash and the cash equivalents has increased and the trade receivables has gone done. The current
financial assets have all been sold and has become zero. The company does not hold much of non-
current assets but only a miniscule amount in the plant, property and equipment. The balance of the
total assets has increased overall (Belton, 2017). In terms of the liabilities, the trade and other payables
has increased from $ 422249 to $ 675711. Amongst the non-current liabilities, the provisions has again
increased to $ 256186, therefore there has been an overall increase in the liabilities balance and it has
almost doubled as compared to the last year. In terms of equity, the balance of issued equity shares
capital increased because of the issue of shares and similarly the balance of the reserves has increased
due to the share based payments during the year. Again the balance of the accumulated losses has
increased due to the continuous losses being suffered by the company.
Ratio Analysis
The ratio analysis of the company under the various heads has been given below:
ADX Energy Limited
1. Liquidity Ratios
Current Ratio = Total current assets/ Total current liabilities 2017 2016
12 | P a g e

13
Total current assets 2,005,061
1,153,70
9
Total current liabilities 675,711 422,249
Result 2.97 2.73
Liquid ratio /Quick Ratio = (Total current assets - Inventory - Prepaid
expenses)/ Total current liabilities 2017 2016
Total current assets - Inventory - Prepaid expenses 2,005,061
1,153,70
9
Total current liabilities 675711 422249
Result 2.97 2.73
2. Debt Management Ratios
Debt ratio = (Total Debts / Total Assets) or ((Total assets- total
owners' equity)/total assets) 2018 2017
Total Debts 931,897 422,249
Total Assets 2,005,239 1,153,990
Result 46% 37%
Debt to Equity Ratio = (Total Debt/Total owners' equity) or
((Total assets- total owners' equity)/total owners' equity) 2018 2017
Total Debts 931,897 422,249
Total owners' equity 1,073,342 731,741
Result 87% 58%
3. Efficiency Ratios
Receivables Turnover Ratio = Sales/Accounts Receivable 2017 2016
Sales 905,474 -
Accounts Receivable 164,814 152,683
Result 5.49 0.00
Days Receivable = 365/Receivable turnover 2017 2016
No. of days 365 365
Receivable turnover 5.49 0.00
Result 66.44 0.00
4. Profitability ratios
Profit Margin / Net Profit ratio = Net income / Sales 2017 2016
Net income (2,169,334) (1,913,500)
13 | P a g e

14
Sales 905,474 -
Result -239.58% 0.00%
Operating Margin ratio = Operating Profit/Sales 2017 2016
Operating Profit (1,490,001) (1,686,654)
Sales 905,474 -
Result -164.55% 0.00%
Return on Equity = Net income/total owners' equity 2017 2016
Net income (2,169,334) (1,913,500)
Total owners' equity 1,073,342 731,741
Result -202.11% -261.50%
Return on Assets = Net income/total assets 2017 2016
Net income (2,169,334) (1,913,500)
Total Assets 2,005,239 1,153,990
Result -108.18% -165.82%
The ratio analysis has been shown and as per the same, we can see that in terms of liquidity, the
company has adequate protection and the current ratio has increased from 2.73 in 2016 to 2.97 in 2017.
This is well above the industry trend of 2 times and it shows that the company is able to pay off its short
term liabilities and payables on time. Since the company does not have inventory or prepaid expenses,
in the balance sheet, the liquid ratio will be same as that of the current ratio and it’s a healthy one
(Goldmann, 2016).
In terms of the solvency or the debt management ratios, we can see that the debt to total assets ratio
has increased from 37% to 46% and it shows that the company has increased the proportion of debt in
the overall capital structure without the corresponding increase in the equity capital. The ideal debt
equity ratio is 2:1 and the company is current having at 0.87 (0.58 in 2016), which is an indicator of the
fact that the company is not having in terms of dilution of ownership (Choy, 2018). Even though the
proportion of debt has increased during the year, still the overall proportion is under the control.
In terms of the efficiency ratio, the inventory turnover and the payables turnover ratio has been ignored
since the company is not carrying any inventory in the balance sheet. However, in terms of the
receivables turnover, the same is 5.49 times currently in 2017 (0 in 2016 since no sales made) which is
below the industry trend and thereby the company needs to improve upon the sales. The receivables
days is standing at 66 days which is on the higher side and it has a serious impact on the cash flow.
In terms of the profitability ratios, the company have been in losses off late. The net loss ratio is 239% in
2017 and similarly the operating loss margin is 164.55% in 2017 (Bena, Ferraira, Matos, & Pires, 2017).
The return on equity has been negative in both the years at -201% and -261% in 2017 and 2016
respectively which shows that the shareholder’s wealth is being eroded and the return is negative.
Finally, the return on assets which shows how the company has utilised the assets in generating the
14 | P a g e

15
sales, it can be seen that the same was 165% in 2016 and 108% in 2017 respectively. This is because of
the fact that the company has been losses.
Conclusion & Recommendation
From the above discussion and analysis, we can infer that the company is in dire straits as can be seen
from the falling share prices as well. The company had no revenue whatsoever in 2016 and that is the
reason why most of the performance ratios are negative (Appelbaum, Kogan, & Vasarhelyi, 2018). Apart
from the liquidity and the solvency ratios, all the other have been on the negative end as there has been
no sales and on top of that the costs are being incurred and that’s the reason why the losses are
increasing. As a part of the recommendation the company needs to focus on gaining the market share
and increasing the sales. Besides that there is a scope of decrease in the costs and bringing efficiency in
operations like improving on the debtors and payables turnover ratio. The company also needs to
improve on the internal control measures so as to achieve efficiency and productivity. Besides this, the
company has been doing good in terms of reporting practices as it prepared its financial statements as
per IFRS rules and has also attached the corporate governance report as a part of the annual financial
statements. The company has been reporting all the disclosures and notes on accounts so as to be in
line with the relevant standards of auditing and accounting. As per the independent auditors report, the
auditors have given a clear report that the company is showing a true and fair view of the operations
and is not biased and that the financial statements have been prepared in accordance with the
Corporations Act, 2001 and the Australian GAAP.
References
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-
431.
Appelbaum, D., Kogan, A., & Vasarhelyi, M. (2018). Analytical procedures in external auditing: A
comprehensive literature survey and framework for external audit analytics. . Journal of
Accounting Literature, 40(1), 83-101.
Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance (Vol. 2). London:
Macat International ltd.
Bena, J., Ferraira, M., Matos, P., & Pires, P. (2017). Are foreign investors locusts? The long-term effects
of foreign institutional ownership. Journal of Financial Economics, 21-35.
15 | P a g e

16
Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview
Analysis. Ecological Economics, 145. Retrieved from
https://doi.org/10.1016/j.ecolecon.2017.08.005
Delone, W., & Mclean, E. (2004). Measuring e-Commerce Success: Applying the DeLone & McLean
Information Systems Success Model. International Journal of Electronic Commerce, 9(1).
Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), 103-112.
Heminway, J. (2017). Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, 1-35.
Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland .
Technological Forecasting and Social Change, 353-354.
Kew, J., & Stredwick, J. (2017). Business Environment: Managing in a Strategic Context (second ed.).
London: Chartered Institute of Personnel and Development.
Mock, T. J., Ragothaman, S. C., & Srivastava, R. P. (2018). Using Evidential Reasoning Technology to
Enhance the Audit Quality Assurance Inspection Process. Journal of Emerging Technologies in
Accounting, 15(1), 29-43.
Oberoi, J. (2018). Interest rate risk management and the mix of fixed and floating rate debt. Journal of
Banking and Finance, 86, 70-86.
16 | P a g e