Cash Flow, Profit and Ethical Issues

This assignment explores the relationship between cash flow, profits, and ethical practices in business. It examines how unethical behavior by ABC Learning, an Australian childcare organization, ultimately contributed to its downfall. The analysis delves into specific ethical issues such as employee mistreatment, financial misrepresentation, and cost-cutting measures that negatively impacted the company's long-term sustainability. Additionally, it highlights the importance of maintaining ethical standards for financial stability and organizational success.

Contents
Question 1...................................................................................................................................................1
Question 2...................................................................................................................................................5
Question 3...................................................................................................................................................8
Question 4...................................................................................................................................................9
Question 5.................................................................................................................................................12
Bibliography..............................................................................................................................................14

Question 1
Part i
Part ii

Part iii

Question 2
Part i
Part ii

Part iii
Memo
To: Directors of Groovie Ltd
From: Accountant
Date: December 8, 2017
Subject: Rational behind the decision of not applying LIFO system
The LIFO system of inventory recording is a system where every sale is recorded for the last
purchased stock. In this way, in deflationary price situations, cost of goods sold include lower
priced inventory hence showing the lower cost of goods sold and higher profits.
Moreover, LIFO method of inventory shows higher profits in the deflationary market conditions
but as per AASB 102 LIFO method is prohibited (Australian Accounting Standards Board,
2015). This method reduces the tax burden of the organization and shows the higher value of
inventory hence most of the accounting standards do not support to use this system of inventory
valuation. Hence it is advisable not to use this system for inventory valuation.
Accountant
XYZ

Question 3
Part i
Part ii
 Business operations are not improved because profitability ratios are not improved
 No, gross profit rate does not improve even decline from 65% in 2015 to 64.13% in 2016
and 61.61% in 2017
 No, the rate of return on equity showing declining trend which does not show
improvement in the ratio. Hence it is not improved.
 Rate of return on equity increased in 2017 and decreased in 2016
 Yes, reduction in average collection period for accounts receivables shows more effective
collection efforts
 No, the highest dividend payout ratio in last three years in 20% it represents that
dividends are not liberal and in turn not generous.
 No, even this risk is increased because debt to equity ratio is showing increasing trend.
 No, the market price of shares becoming costlier relative to earnings because price
earnings ratio showing increasing trend.
 No, increase in dividend yield ratio shows that cash return for the market value of a share
is increasing yearly. Hence there is not decline in cash return on share’s market value.

Question 4
Part i
Part ii

Part iii

Part iv
Sam should opt for order side of 400 units because with this order size company will have the
lowest cost.
Part v
Cash is the fuel for any business it helps in better operation of the business. Cash management is
the crucial part of every business. In the present case, Sam the business owner having two
options for cash management one is to keep higher cash in a bank account and bear cost of cash
financing and other is to manage the timing of payments and receipts and did not bear any cost.
Moreover, if Sam will keep more cash with the bank account then he will bear the cost of
financing that can be the opportunity cost of keeping cash in a bank account or external interest
cost in case of cash borrowings. However, if Sam focuses on maintaining proper timing of cash
payments and cash receipts then he did not bear any cost and will receive cash from accounts
receivable as and when that became due.
Hence, the second option will reduce his cost of financing and will not trouble him when
accounts payable become due. Therefore, it can be concluded that Sam should use the second
option i.e. to manage the timing of cash payments and cash receipts.

Question 5
1. Major financial statements include the income statement, balance sheet, statement of
equity and cash flow statement (Brigham & Ehrhardt, 2013). Every financial statement
has its own different purpose. Purpose of major financial statements are,
a. Income statement: The income statement presents all revenues and all incomes of
the organization. This statement is prepared for presenting accurate results of
organization’s performance during the year. This result is the difference between
the total revenues and total incomes of the organization and concludes profits
earned by the organization during the year.
b. Balance sheet: Balance sheet is the satmenet of financial position of the
organozation. This statement presents all assets whether short term or long term,
all liabilities whether short term or long term and equity hold by the organization
at the last date of the financial year. In this way, it is prepared by the organization
to represent the financial position of the organization on the date of the end of
financial year.
c. Statement of shareholder’s equity: This statement is also called a statement of
retained earnings. This statement is prepared by the organization for showing how
all equity accounts like shareholder’s capital, retained earnings and other
accumulated profits changes during the financial period. This statement is
prepared by the organizations for presenting a change in equity during the year.
d. Cash flow statement: Cash flow statement is prepared by the organizations for
showing means of cash inflows and cash outflows during the year and net cash
inflow or outflow made by the company in the year. Cash flow statement is a
statement classified into three parts i.e. operating cash flows, investing cash flow
and financing cash flows.
2. In operating a business profit and cash both are equally important. Cash is the fuel for
business operations and profits are results from the business operation. Cash is need by
the organization for making payment to various expenses and dues on the other hand
profits required by the organization for growth. Cash inflow shows cash receipts and cash
outflows shows cash payments, on the other hand, net income shows excess of revenue
over expenses and net loss presents excess of expenses over revenue. Revenue does not
means the cash inflow and expenses does not shows cash outflows. If profits of the
organization decline then eventually cash in the organization will also decline.
Moreover, Cash and profits are two different but important part of the organization and
cannot be a substitute for each other. Hence it can be concluded that both cash and profits
are important for business operation and nobody can choose any one out of these two.
3. ABC leaning was a private sector organization which works for child day care. The
organization was Australia’s largest child daycare organization. This organization
collapsed due to some unethical practices. In the case of ABC learning three ethical
issues which emerged as reason for collapsing of the organization are,

a. Company humilaiates employees of the organization. The company wants to take
competitive advantages by humiliating employees. The companies paid wages
lower than the wage standards defined in Australia to company’s employees. In
this way, the company becomes successful in the plan of lowering expenses
(Koch, The ABC of a Corporate Collapse - Chapter 1 Foundations and Growth,
2010).
b. The company forced employees to their employees to do some works which were
not part of their employment contract like, cleaning of toilets, and buying their
uniforms from their own funds (Koch, The ABC of a Corporate Collapse -
Chapter 5 Lessons Learnt, 2010). This was done by the company for lowering
their expenses and earning profits higher than the industry averages.
c. In addition to this company made financial misstatements for presenting profits
higher than the actual profits.

Bibliography
Australian Accounting Standards Board. (2015, July). AASB 102. Retrieved December 8, 2017, from
http://www.aasb.gov.au: http://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf
Brigham, E., & Ehrhardt, M. (2013). Financial management: Theory & practice. Cengage Learning.
Koch, D. (Director). (2010). The ABC of a Corporate Collapse - Chapter 1 Foundations and Growth
[Motion Picture]. https://www.youtube.com/watch?v=YYF6JW9vJKo
Koch, D. (Director). (2010). The ABC of a Corporate Collapse - Chapter 5 Lessons Learnt [Motion Picture].
https://www.youtube.com/watch?v=a4rcGpRXD9I