Posted: June 20th, 2022

BAO2203 Corporate Accounting

Question:

The Corporations Act (2001), Accounting Standards, and ASX requirements regulate disclosure entities.

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ASX LR3.1 requires that financial information and significant events which could have an impact on the price of securities be reported to the ASX in a timely manner.

ASX LR3.1 has an overriding requirement that information be disclosed that would reasonably cause a material change in price. However, the rule also includes the following exceptions.

Part I

Calculate the difference between 2015 and 2016 using the consolidated financial statements from Bellamy’s Australia Ltd

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The Gross profit has increased by a percentage.

The percentage increase in net profits after taxes.

For 2015 and 2016, the return on investment (assets), was 16.

(Always use EBIT).

Comment (two paragraphs) as a financial analyst on the strength of Consolidated Statement of Profit/Loss and Other Comprehensive Income 2016

Comment (two paragraphs) as a financial analyst on the strength of Consolidated Statement of Financial Position 2016.

Comment (two paragraphs) as a financial analyst on the strength of Consolidated Statement of Cash Flows 2016

Based on your analysis and before you knew about the recent decline in share prices and stop to trading, would you recommend to your clients that they buy, hold, or sell Bellamy shares?

Part II

Analyse the attached articles:

A review from an accounting restatement perspective on China’s financial reporting quality.

Malaysian corporate annual reports: their importance and utility

Evidence from the United Arab Emirates on the usefulness of corporate financial statements

Answer:

Part I

Gross profit increases by a percentage

Bellamy’s Australia Ltd had a strong gross margin in 2016, compared to 2015.

A 12.79% increase in gross profit margin was observed. This indicates a strong level and control over the price of goods sold.

This is a good indicator of company performance. It can be concluded that the company’s operations are well managed.

Gross profit ratio

Gross Income

Percentage increase in net profit after tax

The net profit margin is used to determine the return on sales.

The 8.4% increase in net profit reflects the efficiency of the company as well as a strong control over expenses (Needles & Powers 2013, 2013).

This shows that Bellamy’s Australia Ltd operates in a profitable way.

Increase in net profit after taxes by a percentage

Net Income

Return on Assets

The return on assets reflects the way the management uses the company’s assets (Spiceland et.

The computation shows that the 2016 return on assets increased by 33% compared to 2015.

It was 17.98% in 2015. It increased to 50.9% by 2016. The increment is (50.9-17.98), which equals 33%.

This indicates that the assets were efficiently used, which helped the company post higher numbers.

EBIT

Avg Assets

Return on Assets

The Strength of the Consolidated Statement of Profit and Loss Account

Bellamys Australia Ltd’s 2016 year was a great one. The company’s revenues increased substantially, indicating its strong control over operations.

This resulted in a higher gross profit ratio than 2015.

Because the costs are directly related to sales, the costs rose to a significant degree.

Profit before tax was therefore higher.

Due to the strength of the business, income tax expenses were higher.

Overall, the profit for the year was higher which indicates that the company performed well.

The company’s EPS was higher than usual, which indicates the company’s profitability in relation to shareholders.

The company’s EPS is 39.8. This means that if Bellamys Australia gives every dollar to every shareholder, then each share will get $39 (Bellamys, 2016).

The balance sheet shows the EPS number.

Comment on the Consolidated Financial Statement

The consolidated financial statements show the assets and liabilities position.

According to the balance sheet, Bellamys Australia Ltd’s current assets have grown almost at twice the rate of its current liabilities.

This shows that the company has sufficient liquidity to meet its obligations.

In the future, there will be plenty of cash.

As it is close to the 2:3 standard ratio, the current ratio is the best for the company.

The company has excess cash because it exceeds the standard ratio. This cash can be used elsewhere to generate returns.

Current Ratio

Current Assets

Current Liabilities

In 2016, the total assets were higher, indicating that fixed assets have been purchased.

This is a sign of long-term stability.

This indicates that the company has a solid foundation for expansion.

In 2016, the total equity was higher.

Consolidated Statement of Cash Flows

The cash flow position is the cash flow from operating activities. It is shown that receipts from operating activities are higher in 2016.

It ultimately gives a higher net income and positive cash flow from operating activities.

Cash is also used for investing because the company bought plant and property.

This scenario shows an outflow of funds.

The company paid dividends and repaid the borrowed money when it came to financing activities. Therefore, outflow is greater than inflow.

Cash is therefore used for financing activities.

The cash and cash equivalent appear in a positive number, meaning that the opening of next fiscal year will be positive.

Analysis of Bellamys Australia Ltd. (Buy, Hold or Sell)

Bellamys Australia Ltd was a strong company with strong fundamentals before the decline in share prices and the halt in price.

The year 2016 has been exceptional, with higher profits and significantly increased revenues.

The company was able to operate in a professional manner.

The company’s liquidity is also high, which means that the balance sheet is impressive.

The cash flow also shows a positive scenario.

The fundamental analysis of Bellamys Australia Ltd shows that it is a high quality stock that will yield higher returns over the coming period.

It is important to keep it in your radar and maintain a buy position.

Part II

Annual reports are an outdated method of informing users about the activities of a company.

Since many years, the importance of annual reports and their use have been a topic of much debate.

Many people have questioned the usefulness of annual reports in decision-making.

It begs the question of what annual reports are meant to accomplish and who they should serve.

Other than press releases and individual meetings, there are many other ways to get information about the company’s activities. However, this reliance varies between people (Mark & Michael 2016, 2016).

This can be explained by the lack of disclosure from companies.

However, although annual reports are often deemed outdated by many studies it still provides a wealth of information that cannot be matched by any other method.

Information about the activities of a company can improve the efficiency of financial markets. This information is available to market participants at very low costs.

The quality of information is a key factor in financial markets’ ability to reveal the company’s true value (Wang & Wu 2011, 2011).

While there are many ways companies can communicate information about its activities to users, annual reports are the preferred method for most users.

Annual reports are the key to this success.

Annual reports not only provide useful information but also help users forecast future cash flows based upon their investments (Alzarouni and.

Companies have shown a reluctance to disclose material information due to the high costs of providing it.

The question of whether annual reports are obsolete varies depending on who you ask.

In Malaysia, for example, analysts see company visits as the most important way to obtain company information. However, other users consider annual reports to be the most important (Tooley and.

This is due to users demanding more information, and preparers being reluctant to provide every detail due cost concerns.

According to studies, the statistically significant difference between users and preparers at five percent clearly shows unfulfillment user’s needs (Ghazali 2010, 2010).

Even though interim reports, prospectuses, and financial press releases can be used to obtain company information, most users consider annual reports the best way to get financial information.

Prospectuses and interim reports are sent directly to shareholders. They are also made available to potential security buyers.

Parties establish personal contact with companies by way of direct correspondence, listening and discussing company speeches, etc. (Yeo 2010, 2010).

Although any of these media may be used as a basis for corporate reporting, an annual report is the most important and effective source of information.

This is because it is directed at the community or society in general; it can be offered to anyone (Lev et.

Accessibility to other modes is not possible for all users, as in the case with an annual report.

Although it may need some modifications, its importance is immense not only for shareholder-company relations but also for company-society relationships (Ghazali 2010).

Users also rely heavily on annual reports because they are more accessible than other information.

The public has a greater trust in audited information than any other type of information.

An annual report also provides detailed information about financial statements and historical summaries, as well as information on other plans and policies. This information is not available in any other information sources.

There is one problem with annual reports’ effectiveness: they are often more informative than other sources. (Vinten 2004).

The reason for the widespread criticism of annual reports’ effectiveness and relevance is that companies fail to meet the information needs of users.

The extent users rely upon annual reports greatly depends on their decision-making process.

Individual investors in UAE used annual reports the least because they considered them outdated.

These investors rely on technical evaluations instead of fundamental assessments.

They feel that they lack the accounting and financial background to make use of the reports and then relate it to their market investments.

Similar to the UAE, others consider annual reports more valuable than other formats (Alzarouni, et.

According to studies, the majority of UAE users were able to access information about publications, advisory services, and communication with company management with the help an annual report.

Many people now consider annual reports outdated because many companies fail to provide sufficient information to meet their needs.

The reason is that 56% of respondents in UAE believe the current level in annual reporting disclosure is inadequate. Bank credit officers and fund managers are the main users who rely on these reports to make economic decisions.

It is therefore imperative to improve the level of disclosure in many countries, such as UAE, so that the annual report’s purpose can be fully achieved (Alzarouni and.

Surveys have also shown that annual reports help investors and other users to compare the company’s performance, which in turn helps in assessing its performance (Northington 2011, 2011).

These users claim that although company visits are more informative, they cannot be used to compare performance in the past.

As mentioned, the utility of an annual report is dependent on its ability to meet the needs of the users.

Governments can ask for information directly from companies, but annual reports may not be an updated model to procure information.

Users place a lot of importance on annual reports’ effectiveness. This is because they need current and accurate information that will help them make decisions.

Private meetings with companies in Malaysia are becoming an increasingly important form of corporate information.

Investors from several countries reported that annual reports were inadequate. This is why they are turning to other forms of corporate information.

It is important to stress the importance of annual reports’ efficiency. However, it should be noted that timely and current information is vital.

Companies aren’t bothering to offer such services to users and they have to shift to other forms of information. This leads to annual reports being seen as outdated, even though it is not the case in reality (Ghazali 2010, 2010).

Each user must have accurate information about the company’s affairs in order to make informed decisions.

There is one problem between the importance of annual reports and the possibility of them being outdated. This is because it is difficult to modify the disclosure level. (Samaha & Dahaway (2010)

The current components of the annual reports are not sufficient to meet the needs of all users, so they are turning to other sources.

Surveys in UAE found that disclosures of owners’ equity, cash flows and statements of income were significantly higher than those on balance sheet and other information.

Studies also show that many companies fail to disclose information on their long-term performance and future expectations, such as the rate of return required by the company for its forecasts and projections of financial performance in the next three to five year (Melville 2013, 2013).

Users’ differences in opinion on annual reporting clearly shows that they have not become obsolete and that users need more information than what companies offer.

The question of whether annual reports are outdated is dependent on many factors.

This question has been the subject of many debates over many years.

Annual reports are a valuable source of information about a company’s affairs that is more detailed than any other source. However, companies’ reluctance to share all information can hinder its effectiveness (Wang & Wu 2011, 2011).

There is no definitive answer to the question of whether annual reports are outdated. Different countries and users have different views and rules.

The reality is that an annual report provides the highest level of information and cannot be matched by other modes. Addressing the issues in the current disclosure level can help to resolve this debate, as users may not choose other sources of information.

Refer to

Alzarouni A, Aljifri K, Ng C & Tahir M, I 2011, The utility of corporate financial reports. Evidence from the United Arab Emirates’ Accounting & Taxation vol.

Ghazali N.A.M 2010. ‘The importance of corporate annual reports Malaysia’, Gadjah Mada International Journal of Business. vol.

Kaplan, R.S 2011. “Accounting scholarship that advances profession knowledge and practice”, The Accounting Review, vol.

“Rewriting earnings history”, The Review of Accounting Studies vol.

Mark A.

C & Michael J. P 2016. ‘The timeliness UK private company financial reporting : Regulatory and economic factors’, The British Accounting Review. vol.

Melville, International Financial Reporting: A Practical Guide, 4th Edition, Pearson Education Limited, UK

Powers, B.E.

Northington, S 2011, Finance. New York, NY, Ferguson’s.

Samaha, K. & Dahaway K 2010. “Factory influencing corporate transparency in active share trading firms. An Explanatory Study’, Research in Emerging Economies.

Tooley, S. Hooks, J & Basnan N 2010, ‘Performance Reporting by Malaysian Local Authorities: Identifying Stakeholder Needs’, Financial Accountability and Management.

Vinten, G 2004. ‘Voluntary Annual Report Disclosures: What Users Want’, Managerial Auditing Journal.

Wang, X & Wu.

M 2011, “The quality of Chinese financial reporting: An examination from an accounting restatement standpoint”, China Journal of Accounting Research. vol.

Yeo, P 2010. “Narrative reporting: The UK experience”, International Journal of Law and Management vol.

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