Answer To: Step 1 involves you writing down some of your ideas, reflections and reactions to reading Chapter 1...
David answered on Dec 24 2019
Assignment Steps 7 – 11
Ros Jonsson ACCT11081 Introductory Financial Accounting
Step 7 Inventory – Exploring the inventory practices of Adcorp
Step 7 which involved the exploration of inventory in relation to our individual companies was by far the most time consuming and difficult step thus far. My limited knowledge of inventory included the stock companies purchase to on-sell to the consumer. Truth be told that is as far as I ever thought about inventory – the stock on the shelves that we as consumers purchase, what more is there to know? So, when I read through step 7, initially thinking this would be a
eeze, I was hugely disappointed to see that my company Adcorp had only begun to list inventories in their 2016 financial reports and their information relating to this inventory was to say the least very limited and very unhelpful.
I have wondered throughout this entire process whether Adcorp’s obvious lack of information was due to their reluctance to allow any of their competitors to gain an unfair advantage over their work product and processes but surely this cannot account for all of the stumbling blocks I have encountered. Their financial reports seem to be more geared to new clients and are therefore set out as a sales
ochure which highlights in detail their past and cu
ent work and
iefly touches on the financial details. They do seem to be able to gloss over the reasons for the losses they sustain. Therefore, I am leaning towards this being the very reason they have only just started reporting inventories in their financial statements. So, for whatever the reason Adcorp has been reluctant to disclose information regarding their inventory, I discovered there were other avenues open to discovering more about Adcorp’s inventory than just their financial statements. Let me explain.
..\..\ADCORP Annual Report 2016.pdf
..\..\ADCORP Annual Report 2015.PDF
..\..\ADCORP Annual Report 2014.pdf
I began by researching what inventory is in relation to individual companies. Inventory is ‘the collection of unsold products awaiting sale’. Inventory is shown in the Balance Sheet and is listed as a cu
ent asset. Cu
ent assets are assets which the company expects to be able to convert into cash within twelve months. Cu
ent assets include cash, accounts receivable and inventory. This is all obvious as it would be expected that all stock on shelves would be sold relatively quickly and well before twelve months but initially trying to find out exactly what Adcorp called inventory was proving difficult. After all, Adcorp is an advertising agency so one must wonder, what can they be holding as inventory?
When inventory is mentioned it usually
ings to mind the thought of inventory being the finished product which a company has acquired to on-sell. Through my research I discovered this is not always the case but that there are different types of inventory, the three common types being:
· Raw materials and consumables (these are the materials or items used to produce the end product which is then sold to consumers);
· Work in Progress (these are the materials or items used in the production of the end product which have begun the process of manufacture);
· Finished goods (these are the end product which has been manufactured and is now ready for sale to the consumer).
Consequently, when most people think of inventory they think of industries which produce a tangible item to sell to consumers, but Adcorp deals with the service industry so how can they possibly have hard tangible items to sell? Looking at my choices above I began to search through Adcorp’s financial reports. The only thing they made mention of was Work in Progress but they did not go on to explain in any great detail.
So far, my search had discovered Adcorp had inventory which was being labelled as ‘Work in Progress’ but they do not manufacture goods, so the search went on. Then as I read through their 2016 financial reports in more depth I found one paragraph which mentioned these words ‘Work in Progress’. On page 9 of their 2016 financial reports, Adcorp mentioned a new project which they had undertaken. The new project saw them producing two television programs which had apparently not yet been completed but would eventually provide them with a substantial revenue from the completed work.
Page 9 Showrunner productions
Showrunner Productions completed and delivered two new television series; “72 Dangerous Places to Live” and “72 Cutest Animals” with strong sales interest being generated. It is expected that revenue from sales with Animals Australia” continues to generate global sales and has been purchased by Netflix and a number of inflight video providers. The team have also just completed a screener episode for ‘Status Vacant’ that sees our team investigating abandoned places around the world. This screener is now being shown to a large number of international
oadcasters with a high-level of interest expressed in the series. Our development slate is also expanding with several other programming concepts in discussion with distributors and
oadcasters around the world to be delivered in the next financial year once the cost of productions being held as work in progress are recovered.
What I have gathered from the paragraph above is that once their new program begins
oadcasting there will be significant benefits and revenue which will belong to the 2015 – 2016 financial year but as yet have not been recouped. Therefore, Adcorp have chosen to label this outlay of production costs as inventory and not expenses due to the fact that this outlay will in the very near future begin to see a financial return. This is the very definition of inventory, goods or property (in this case services) purchased/provided and held for sale in the operating cycle of a business.
In the past they have chosen not to classify their unfinished or unpaid work as inventory but over the last few years Adcorp have seen huge losses and perhaps due to these losses have decided that it would be better to be able to include their accurate and full revenue figures in the year in which they were accrued.
Adcorp go on the make a
ief mention of inventories and work in progress through their notes as follows:
Page 62 - Inventories
ed in relation to the production of television programs are accumulated and treated as work in progress until they are completed or written off when no future value can be attributed to the project.
Page 74 Notes to the financial statements note 10 cu
ent assets – inventories work in progress at cost $617,000
There is also mention of work in progress made under the non-cu
ent liabilities defe
ed tax portion of note 23 on page 78. Interestingly this is where they seem to have begun to mention work in progress for the last three years. During my investigations, I stumbled across this realizing at first that work in progress could be shown as a non-cu
ent liability so I delved further and found that Adcorp had previously been showing work in progress here for the past three years but as expected I found nothing before 2014.
I decided at this point it was time to investigate the inventory situation of other students. Most, it would appear, were lucky enough to have a company which actually produced a tangible item none the less it was still very informative to read other student’s interpretation of inventory and work in progress. It was comforting to discover that Paige Benson whom was researching Adacel, had the same issue with their inventory being
iefly described as work in progress, forcing her to make some insightful assumptions.
Given that inventory is a key indicator in the calculation of cost of goods sold which in turn will determine profit and total assets it would appear that inventory (in its unfinished state) also aides in the determination of the company’s tax liability. Therefore, it is apparent just how important a role inventory plays in the health and growth of a company. That being said, I was baffled again when it came to my attempt to determine how Adcorp could possibly account for their work in progress using any of the common inventory accounting methods.
The four methods of inventory cost assignment used are:
· (FIFO) first in first out (this method is based on the assumption that the first units acquired are the first units sold);
· (LIFO) last in first out (this method is based on the assumption that the last units acquired are the first units sold) this method is rarely used in business. In fact, the main reason this method would be used would be during times of high inflation in a bit to reduce the profit figure thereby reducing the income tax payable;
· specific identification (this method requires that a detailed account of all units sold and still held are reported in the closing inventory balance) The use of this method means that the cost of the inventory at the closing entry can be stated as the actual cost of the specific units sold and still on hand; and
· weighted average method (calculates an average cost by dividing the cost of goods available for sale by the number of units available for sale, this is the figure used as the average cost per unit.)
As far as determining what type of inventory system would be used when accounting for work in progress in a service industry, regarding this again I was able to find very little information. Work in Progress uses a costing system which must consider all costs and the time incu
ed to date during the process as all costs and these must be accounted for at the end of each financial year but only in its totality.
After copious amounts of coffee and peer discussions the possibility was raised that in a service industry where work in progress relates to intangible items that perhaps the costing method used may in fact be the Total Absorption Costing Method. I began, with renewed energy, to research TAC and unearthed some very important and relevant facts. By definition TAC is described as ‘a method of accounting cost which entails the full cost of manufacturing or providing a service’. The explanation goes on to mention that the costs of materials and labour including any overheads whether fixed or variable must be included in this calculation. Therefore, even though Adcorp have not stated in the financial statements that this method is used in the calculation of the final costs of their Work in Progress it was with great satisfaction that I was able to uncover a fifth inventory method used specifically for the calculation of such inventory as described in Adcorp’s financial statements.
Financial Reports describing inventory system
As I had begun the mission of scouring through the financial statements for Adcorp I went back to 2008 to ensure they had never before mentioned inventory and I can confirm that they only began listing inventory in their 2016 Balance Sheet. So, the question was why now? Why had they only just decided to start listing inventory. What has changed for Adcorp? As I mentioned previously, after reading through the 2016 financial statement I was only really able to find a small degree of information relating to the cu
ent report’s inventory listing. Adcorp were describing their inventory as work in progress. This intrigued me so I began to look into past financial statements. I discovered that prior to 2014 there was no mention of inventory or work in progress but in 2014, 2015 and 2016 Adcorp began to mention their Work in Progress. But what is really interesting is the fact that they first mention work in progress in the Balance Sheet listed under non-cu
ent liabilities incorporated in their defe
ed tax calculation. So due to this interesting fact a thought was now formulating in my mind as to why they began to list Inventory.
The past few years have seen Adcorp suffer huge losses due to unstable property markets and a reduced volume in their billings as a consequence of this instability. Due to the losses sustained Adcorp have made some purchases throughout the last two years. Firstly, they acquired a 15% stake in a small video start up business which assists clients in making their own video production, at the completion of which Adcorp takes these videos and completes them to the editing stage. This means they are required to do less work as the client is doing most of it but they are still being paid for their editing portion.
The second change involved the ‘Showrunner Productions’ which has completed two television series. The financial report states that Adcorp expects revenue from sales to be delivered in the next financial year once the cost of productions being held as ‘work in progress’ are recovered.
During the 2016 financial year Adcorp describe their principal continuing activities of the Consolidated Entity as consisting of the following:
· Advertising agency services specialising in human resources, real estate, government, motor vehicle, education and retail;
· Website design, development and database support services;
· Digital marketing services and consulting, including supply of web-based products, and strategic employment solutions; and
· Video production and marketing solutions.
All of these have something in common. They are all service based activities so they require no tangible materials in order to complete the activity but they are also time consuming which means that Adcorp could be waiting for months before they receive full and final payment for their work.
The fact that inventory often forms a significant part of a company’s financial outlay means that this outlay could in fact look like an unpaid debt on the balance sheet and income statement by the time the financial reports are prepared at the end of the financial year.
While researching my company’s inventory I was only able to find the information displayed in the table above. This clearly shows during 2014 and 2015 Adcorp were documenting work in progress as a non-cu
ent liability but in 2016 they also began to list the vast bulk of this as inventories in their cu
ent assets. The same figure is displayed in the Income Statement under change in operating assets and liabilities but it is represented as a credit which signifies receivables owing. Therefore, this would explain why they are now reporting inventories as a work in progress in their assets. This will improve the outlook of the balance sheet, by reducing their liabilities and increasing their assets. This will also in turn reduce their final figure which is cu
ently being displayed as a loss in the income statement.
Given that the 2016 total for cu
ent assets is $13,563,000 and that the bulk of this is made up of cash and cash equivalents of $4,639,000 and trade and other receivables of $7,470,000 the figures attributed to Inventory which is a mere $617,000 does not make up a majority of Adcorp’s Assets.
Given that Adcorp have chosen not to disclose a great deal in relation to the details su
ounding their inventory I was forced to conduct a large portion of my investigation outside the company financial reports including the help of other students, researching textbooks and online information.
It is therefore my considered opinion that Adcorp have decided to state their work in progress as inventory in an attempt to reduce their sizable losses which are being incu
ed every year. By renaming these unpaid works as work in progress it means they are able to claim these expenses as assets while waiting for full payment to be recouped. This will put the firm’s financial statements is a much better light while giving Adcorp much needed time to endeavour to recover the outstanding debts and ensure they are reported in the financial year in which they were incu
Step 8 MYOB – Exploring MYOB AccountRight
MYOB setup screen shot
MYOB training screen shot
MYOB training skills test screen Question 1
Score obtained was 13/13 below are the screenshots for each question.
Step 9 MYOB – Creating business transactions and reports
Background story to Adcorp
Adcorp is an advertising agency cu
ently with offices in Brisbane, Canbe
a, Darwin, Melbourne,...