Paper on Accounting Systems
Added on 2020-03-23
19 Pages2400 Words46 Views
FinanceHealthcare and Research
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IntroductionCochlear Limited is a company that manufactures medical devices and supplies the Nucleus cochlear implants. The Hybrid electro-acoustic implant and the Baha bone conduction implants are also manufactured by the company. The company is based in Sidney and it was started in the year 1981 with finance from the government of Australia. The government intended to commercialize implants and it was started by Dr Graeme Clark. The company holds about two thirds of the world’s hearing aid/implants business. Cochlear was named byForbes as the world’s most innovative company in the year 2002 and 2003 (Funnell& Cooper, 2012). The company was also need by the same magazine as the most innovative firm in the year 2011. This paper analyzes the accounting systems of the company and how the company performs financially by accessing and evaluating its financial reports over the years.Knowledge of Cochlear and its entities The company’s manufacturing facilities are based in Sweden and Australia. The main facility is located at the Macquarie University in Sydney. Cochlear distributes its products in more than 110 countries globally. Approximately 43% of the company’s revenue is derived from the Americas. 40 % of the revenue is from Europe while Middle East and Africa represents 17% of the company’s annual revenue. The remaining 17% which is approximately $161.3 million is from the Asia-Pacific. In the year 2015 Cochlear spent about 15% of its revenue on research and development and this amounts to $128 million (Caanz, 2017). Cochlear revenue for the year 2015 was AU$ 925.6 million. The net income for the company during the same period was AU$ 145.8 million. The company is headed by the president. The chief executive officer and then the Executive Director are in charge in that order. The current share price for Cochlear Limited is 158.71. The dividend yield declared in the previous year was 1.40/1.70. The total issued shares of the company are 57.43million shares. The
regulations in this industry are very strict since it’s involves health care. The company needs to maintain high quality standards for its gadgets (Arens, 2012). The company is also required to adhere to the International accounting standards and to conform to all the rules put in place by the ASX.Identification of business riskThe identification of business risk process helps to identify inherent risk in the internal control systems or in the accounting policies and procedures of the company. The business risk for Cochlear is identified by reviewing regulations and legislation in this industry. The firm’s financial statements are also analyzed to help identify the risks. The biggest business risk is that of the business seizing to be a going concern. Cochlear is exposed to financial market risks. This includes the currency risk and the interest rate risk. The company trades in Australian dollars and the fluctuating currency market may affect the company’s returns. Since the company operates in more than 100 countries acrossthe world, most of the payments are made in form of US $ and therefore change in interest rates represents a significant business risk for the business.The interest rate on loans may rise in future given the current economic environment in Australia. The demand for loans in the country has been on the rise in the country in the last three years. This therefore means that there is a high probability that the interest rates will hike in future. This therefore exposes Cochlear to additional expenses in interest rate. The 2015 financial reports indicate that the company’s loans and other interest bearing liabilitiesamounted to AU$168,159,000. An increase in interest rates would therefore have a significant negative effect on the company’s revenue.
The other risk that can be identified from the analysis of the financial statements is the liquidity risk. Liquidity is the ability of a company to meet its financial obligations when they fall due. The total current assets in 2015 financial year amounted to AU$ 420,879,000. Whenyou less inventory ($127,613,000) the current assets are at $293,176,000.The current assets for this period are A290, 253,000. This therefore means that the liquidity is at a significant risk level since in case the current assets reduce by a little margin, the firm may find itself in liquidity problems.Cochlear is also exposed to credit risk. This is the risk resulting from a situation where a customer who owes the company fails to meet their financial obligations as agreed. It mostlyresults from trade receivables and notes receivables. The current credit terms for Cochlear are 30 days (Fund, 2012). The risk that the company is exposed to in relation to credit is not above normal. The total maximum exposure to credit risk by the company for the year 2015 totaled $236,728,000. Based on historical data of the company, this is a fair value.Q3.Specific account balanceAccountsreceivableLoan accountInventoryaccount(a) Explain why the account balance is at significant risk of material misstatement.a)The accounts receivables balance are likely to be affected by material The loans account balance also has a high risk of being misstated. Thisis because, Inventory account balance is also at a high risk of being materially
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