Advanced Financial Accounting

This report analyses the financial performance and position of a2 Milk Company Limited for the year ended 30th June 2018. It includes sales, cash flows, equity, debts, auditor's report, and financial ratios.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced financial accounting
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Executive summary
The main objective of the report is to focus on financial performance and financial position of
a2 Milk Company Limited for the year ended 30th June 2018. The report will consider the
major accounts like sales, cash flows, equity and debts of the company. The report will
further focus on the auditor’s section highlighting the name of the auditors, type of
expression issued by them and summary of the auditor’s report. It will further analyse the
financial performance of the company through various ratios like profitability ratio, liquidity
ratio, leverage ratio and asset turnover ratio. Further, the report will provide conclusion based
on the financial performance of the company.

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Table of Contents
Introduction................................................................................................................................3
Answer 1....................................................................................................................................3
Answer 2....................................................................................................................................3
Answer 3....................................................................................................................................4
Answer 4....................................................................................................................................5
Answer 5....................................................................................................................................6
Answer 6....................................................................................................................................7
Answer 7....................................................................................................................................7
Answer 8....................................................................................................................................7
Conclusion..................................................................................................................................9
Reference..................................................................................................................................10

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Introduction
The report will analyse the financial statement of a2 Milk Company Limited for the
year ended 30th June 2018. It will find out the dominating sector of the annual report contents
and focus on various items like sales, cash flow, retained profit and borrowings. The report
will further focus on the auditor’s section highlighting the name of the auditors, type of
expression issued by them and summary of the auditor’s report. It will further analyse the
financial performance of the company through various ratios like profitability ratio, liquidity
ratio, leverage ratio and asset turnover ratio. (Thea2milkcompany.com 2018).
Answer 1
Brief discussion about the company-
a2 Milk Company Limited established in the year 2000 by Corran McLachlan and it
carries on its business in New Zealand, Australia, United Kingdom, United states and other
Asian countries. It offers the fresh milk under the brand name of the company and infant
formula under brand name a2 Platinum. It further offers skim milk powder, premium milk
powder with Manuka honey and premium platinum milk formula for pregnancy
(Thea2milkcompany.com 2018).
Answer 2
Dominated section of the report
Looking into the annual report of the company for the year ended 30th June 2018 it is
found from the contents page that financial part is the dominating section. It includes from
the page number 64 to page number 106. Under this section company provided details
regarding the director’s approval on financial statements, independent report from the

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auditors, consolidated statement for the comprehensive income, changes in the equity, cash
flows and financial position and the notes associated with these statements
(Thea2milkcompany.com 2018).
Answer 3
Director’s report
Name of the directors –
 David Hearn – Chair and the Executive Director
 Julla Hoare – Deputy chair and independent, non-executive Director
 Jayne Hrdlicka – CEO and Managing Director
 Peter Hinton – Independent and non-executive Director
Summary of director’s report are as follows –
The board of a2 Milk Company is comprised of 6 directors, out of which 4 directors
are non-executive independent directors and 2 directors are executive directors. Corporate
governance framework of the company is established for assuring that the employees,
officers and directors satisfy their duties in responsible way to protect and enhance the
shareholder’s interest. Corporate governance framework of the company has been established
in accordance with the corporate governance recommendations and principles of the ASX
Corporate Governance Council (McCahery, Sautner and Starks 2016). Various corporate
governance policies adopted by the company are code of ethics, continuous disclosure
policies, communication policies for the shareholders, trading policies for securities and
diversity policies. The company will pride itself regarding continuous disclosure policies and
it has adopted the procedures as well as guidelines set for assuring that it complies with the
disclosure obligation (Khan, Muttakin and Siddiqui 2013). The entity adopted the policy for

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shareholder’s communication that will outline the commitments and approaches for effective
communication with the shareholders. Various key risks recognized by the company are
regarding the supply chain, product quality, key personnel, IT cyber security and workplace
safety and health. Regarding remuneration policy the direcoror’s report highlighted that the
policy of the board regarding remuneration of CEO and other senior executives is providing
them market based remuneration that will include variable as well as fixed incentive on the
basis of remuneration. The remuneration will be linked with company performance as well as
individual performance (Thea2milkcompany.com 2018).
Answer 4
Auditors of the company
Auditor of the company for the year ended 30th June 2018 was Ernst & Young and
they expressed unqualified opinion for the financial statement of the company.
As per the auditor’s opinion the financial statement of the company are presented
fairly in all the material aspects. Further, the financial statements of the company are
complied with the requirements of IFRS (International Financial Reporting Standards).
In auditor’s report the auditors stated that the key audit matters are the matters those
as their professional judgement were most significant with regard to the audit of company’s
current year financial statement (Armstrong et al. 2015). Various key audit matters identified
by the auditors are –
 Revenue related to product sale is recognized after all the rewards and risks associated
with good’s ownership are passed to the purchaser. The value is recognized after
adjusting the volume rebates and trade discounts given to the purchaser (IASB 2015).

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 Considering the complexity and variety of of the contractual arrangement of the
company has with its customers that led to considerable revenue growth also
considered as key audit matter.
For the above mentioned key audit matter, the auditor conducted the following
procedures –
 The auditors considered the revenue recognition appropriateness with regard to its
accounting policies as the policies are related to the rebates and trade discounts
offered to the customers (Huff and Delcoure 2014)
 Evaluated the controls and processes with regard to the recording of the rebates and
trade discounts offered to the customers
 Selected the sample for rebates and trade discounts offered to the customers for
assessing that whether the value and timing of the amount recognized were in
compliance with accounting standards (Jin, Shan and Taylor 2015).
 Considered the customer discounts and ageing profile at the closing of the year and
made enquiry regarding the likelihood of settling the ageing balances.
Answer 5
Sales of the company have been increased from $ 549,247 thousands in 2017 to $
922,354 thousands in 2018. Reasons behind increase of sales were receipt of external revenue
from exporting the milk, infant formula and various other dairy products along in addition to
income from license fees and royalties. Further, China and various other segments from Asia
received external revenue through exporting milk, infant formula and other products related
to dairy to various parts of Asia and China (Thea2milkcompany.com 2018).

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Answer 6
Cash flow
Net cash inflow from operating activities of the company for the year ended 30th June
2018 was $ 231,108 thousands. Net cash inflow of the company over the year from 2017 to
2018 has been increased from $ 121,020 thousand to $ 340,455 thousand. In terms of money
the amount increased by $ 219,435 thousands and in percentage terms the amount increased
by 281.32% (Larkin 2013).
Answer 7
Retained profit and borrowings
Company’s retained earnings for the year ended 30th June 2018 amounted to $
290,701 thousands. For the period the company did not have any borrowings in form of loans
or debentures. However, the company had standby debt finance facility available amounting
to AUD $ 10 million that was undrawn as on 30th June 2018.
Answer 8
Ratio computation

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Profitability ratio determines the profit earning capability of the company from the
revenues. It further computes the ratios taking into consideration the profit available with the
company after paying off all the operational expenses of the company. From the above ratio
computation table it can be identified that all the profitability ratios of the company are
indicating that the company is efficient in creating return on shareholder’s investment and
deploying its assets for generating return. Further the net profit margin as well as the gross
profit margin is indicating that the company is efficient is generating return from sales
revenue (Delen, Kuzey and Uyar 2013). Asset turnover ratio is the efficiency ratio that is
used for measuring the entity’s ability to create sales from the assets through comparing the
sales with the total assets. The asset turnover ratio of the company is indicating that the
company is generating sufficient revenues as compared to its assets. Liquidity ratios are
considered as the financial metrics used for computing the debtor’s ability with regard to
payment of short term obligation without raising any external capital (Babalola and Abiola
2013). The liquidity ratio that is the current ratio as well as the quick ratio of the company is
determining that the company’s current assets are sufficient to pay off the short-term
obligations when they become due for payment. Leverage ratio of the company that is the

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debt to asset ratio that indicates the percentage of assets financed through borrowing is
indicating that lower proportion of the assets are financed through debts (Gharaibeh 2014).
Further, the debt to equity ratio that states the proportion of debt and equity in the capital
structure of the company is indicating that only 30% is consisted of debt. It indicates that the
company is lower leveraged as it is majorly dependent on equity finance for its fund
requirement (Bhandari and Iyer 2013).
Conclusion
From the above analysis it is concluded that it has been identified from the annual
report of the company for the year closed on 30th June 2018 that the director’s report
highlighted the corporate governance followed by it and the key risk found by it regarding the
company’s operation. Looking into the auditor’s report section of the annual report it is found
that the audit for the year under consideration was carried out by Ernst & Young who
expressed unmodified opinion with regard to the financial statements of the company.
Company’s financial performances for the year ended 30th June 2018 is stating that it is
capable to earn sufficient income from sales revenue after paying for various operating
expenses. Profitability ratios of the company are indicating that the company is efficient in
creating return on shareholder’s investment and deploying its assets for generating return.
Further, the company’s liquidity position and leverage position is good enough for long term
sustainability.

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Reference
Armstrong, C.S., Blouin, J.L., Jagolinzer, A.D. and Larcker, D.F., 2015. Corporate
governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1),
pp.1-17.
Babalola, Y.A. and Abiola, F.R., 2013. Financial ratio analysis of firms: A tool for decision
making. International journal of management sciences, 1(4), pp.132-137.
Bhandari, S.B. and Iyer, R., 2013. Predicting business failure using cash flow statement based
measures. Managerial Finance, 39(7), pp.667-676.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios:
A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Gharaibeh, A., 2014. Capital structure, liquidity, and stock returns. European Scientific
Journal, ESJ, 10(25).
Huff, K. and Delcoure, N.N., 2014. The Method of Choice for Reporting Comprehensive
Income. Journal of Eastern European and Central Asian Research, 1, pp.1-5.
IASB, F., 2015. Revenue from Contracts with Customers. Exposure Draft.
Jin, K., Shan, Y. and Taylor, S., 2015. Matching between revenues and expenses and the
adoption of International Financial Reporting Standards. Pacific-Basin Finance Journal, 35,
pp.90-107.
Khan, A., Muttakin, M.B. and Siddiqui, J., 2013. Corporate governance and corporate social
responsibility disclosures: Evidence from an emerging economy. Journal of business
ethics, 114(2), pp.207-223.

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Larkin, Y., 2013. Brand perception, cash flow stability, and financial policy. Journal of
Financial Economics, 110(1), pp.232-253.
McCahery, J.A., Sautner, Z. and Starks, L.T., 2016. Behind the scenes: The corporate
governance preferences of institutional investors. The Journal of Finance, 71(6), pp.2905-
2932.
Thea2milkcompany.com. (2018). [online] Available at: https://thea2milkcompany.com/wp-
content/uploads/A2M-Annual-Report-FY18.pdf [Accessed 7 Sep. 2018].