How Strong is Australias Economy - Assignment Example

Cloud 9 Case Study Student’s Name Institution Affiliation Question 1 The Australian economy reflects a lop-sided growth pattern, which has been exhibited for some time. The economic conditions reflect the combined impact of the strong dollar, mining investment boom, a period of weak productivity growth for the last ten years, continuing risks in the worldwide economy associated with the global financial crisis fallout as the global activity center shifts from the west to the East. Also, the structural changes in the spending patterns of Australian households, weak spot in the local commercial and residential construction cycles and a reduction in investment and operational spending by the Australian state and federal governments. By international standards, the Australian economy is doing relatively well. The rate of unemployment is also lower compared to other AAA countries (Carmignani, 2013). On the other hand, inflation is higher compared to other countries like the United States and the United Kingdom; however, it is less than 3%. The country current account balance has deteriorated owing to increasing mining-related imports, increasing investments in the resource sector, progressive normalization of interests rates and terms of trade on external borrowing. The Australian Prime Minister, Kevin Rudd noted that Australia has “among the lowest of budget deficits and debt to GDP of any other major economies in the developed world” (Carmignani, 2013, par. 1). The value of goods and services that Australia produces was 2.6% higher than the second quarter in 2012. The consumer-spending rate increased by 0.4% in 2013 whereas the personal saving rate was at a high of 10.8% (Cole, 2013). The persisting high exchange rate as well as still weak assurance is preventing materialization of new growth factors. The labour market has eased with the rate of unemployment hovering at about 5.5per cent until April 2013, while inflation remained low at 2.2 per cent in early 2013 (OECD, 2013). The business is affected by development in other countries, foreign currency fluctuations, and other global forces. IBisWorld (2013) report showed that the revenues from the industry are expected to reduce by 3.3% per annum; this has resulted from increased competition from international footwear manufacturers. The industry has been facing increased competition both externally and internally. In spite of the high competitions, the industry also faces low barriers to entry. Various indirect factors discourage and promote entry to the industry, for example, high-end imported men shoes discourage local shoe wholesalers and retailers. Globalization has led companies to outsource production overseas. Currently, it is hard to find low-cost footwear producers in Australia (IBISWorld, 2013). The continued negative impact of the global recession has had a major impact on the Australian economy and this has in turn reduced the consumer spending power. According to Marks (2013), trade liberalization has played a major role in globalizing the footwear industry through re-orienting production to international market from domestic market. As a result, output has reduced in the domestic market while expanding in the later market. Such global forces have led to a decline in footwear employment in Australia. The footwear industry is labor intensive and there are unique labor relation issues. It is a large source of direct employment as well as an important customer source for a wide variety of Australia raw material and is an important consumer for providers, and middle suppliers of technical, trade and professional services. The industry had promoted a very vibrant retain sector through facilitating just-in-time retailing transactions and making sure that there exists a flexible supply of high demand footwear for customers where there is askew retail forecasts of timing, preferences and consumer demand. Various initiatives encourage respect for labor rights in the footwear industry and bring together different groups that consist of trade unions, companies, NGOs, and universities to implements codes of conducts that endeavor to protect the rights of the workers. The legal rights of waged employees and employment conditions are essential to fulfilling fundamental human rights and key issues for gender equality and development and global poverty reduction. The footwear industry has experienced an escalating use of footwear components to significantly gain from low labour cost countries whilst exercising control over the assembly and control of the end products. The company growth and overall financial performance is similar to that of the industry in that it is affected by other developments in other countries, foreign currency fluctuations and other global forces such as globalization. For instance, the recession has led to reduced sales for the company as the consumer purchasing power has reduced owing to factors such as low rates of employment. The performance of the business is dependent on both local and international economic factors, for instance, imports from other countries increase competition and lead to reduced demand for local products. Global forces have also re-oriented production to international market from the local market. Like the industry, the business also highly depends on economic conditions as well as customer confidence that have been largely affected by the 2008 financial crisis. The business has also been facing increased competition from international wholesalers and retailers however, unlike the industry the company sales and profitability is still high owing to differentiation in order to beat competition. There are also low barriers to entry in the industry and this affects the business. The supply of high imported footwear affects the business as it has entrenched a culture of heavy price discounting, leading to devaluing of the brand internationally. The demand for Australian footwear, both abroad and at home, has also reduced because of volatile economic conditions in the key export markets, rising imports, heavy discounting by retailers, emergence of low-cost wholesalers and retailers and unfavorable exchange rate movements. The business engages in wholesale transactions and sells good for resale to other businesses in Australia and abroad. They act as intermediaries and buy the footwear in bulk from the manufacturers. They act as intermediaries in the distribution of the footwear. The client operations are decentralized to move closer to the local and abroad clients. The client’s business is cyclical in nature-there are high seasons and low seasons which greatly influence the demand of the footwear. Nevertheless, the business plans ahead to take advantage of economic periods when the customers are more interested in spending disposable income. The footwear susceptibility to fraud or theft is limited. In addition the business has put in place measures for ensuring that their merchandise is well protected whether at the warehouse or when in transit. Competitive Environment The client sells footwear and there has been significant changes with respect to major brands and products, selling strategies, and sales and gross margin by product. The business specializes in the preferred footwear by men, women and children of all ages. Diversification plays a major role in ensuring that the business remains competitive. In addition, the prices of the products are kept lower than those of the competitors. The client major competitors are three wholesalers who specialize with only footwear. The rest of the competitors sell both clothes and footwear. The three hold about 55% of the market share whereas the client holds 45%. There is no significant differentiation between the client and the competitor merchandise as they source their merchandise from the same producers, as a result, they have to depend on other approaches such as price in order to remain competitive. The threat of potential new entrants is high however the business has put in place measures to ensure that competition does not affect sales, for instance by selling to wholesalers and retailers locally and abroad. There are no significant barriers to entering the market and this translates to increased competition for the business. The footwear usually go through a four stage lifecycle. The introduction stage is usually the most important stage when the product is introduced in the market. In the growth stage, a large amount of money is spent on promoting the product. In the maturity stage, the business makes the product stand out by using price and other differentiation strategies. There is decline in the cycle when the demand and sales of particular footwear begin to fall after new and better products are introduced in the market. The product is dependent on trends and styles. Customer preference for trend shoes is quite high and setting high prices does not reduce demand. Currently most people seek to wear the shoes that trendy or those, which are considered stylish by their peers and friends. The client is highly dependent on women and youth (both men and women) footwear as they are fast moving. This causes the client to stock more of women shoes instead of men as they increase the company sales. The client customers are men, women, children, and the youth; women and the youth products are fast moving compared to those of the children and men. There have not been any significant fluctuations in the client customer base as the client greatly markets the footwear locally and abroad in addition to putting in place measures for remaining competitive. The key suppliers are major shoe manufacturers in Australia are Patino shoes, Global Footwear Manufacturers Limited, R& A Trading Ltd, Huggys Ugg Boots, mp & sons’ pty ltd, and Holster Fashion. External market forces as well as significant price movements influence the materials as well as the price of the final products. An increase in imported materials used to manufacture the footwear usually translates to higher prices for the products. The footwear industry uses technology in machinery used for shoe production. Computerized digitising enable the shoe model to be scanned in order for it to be accurately reproduced on the screen. Modern technology also allows various sizes to be formed at the same time. These are the technological trends affecting the industry. The ability to invest in these technological trends influences the production capacity of the manufacturers. The client operations are affected significantly by local and foreign legislations as the client products are subject to trade and export legislations. There are no new laws or regulations recently enacted or pending which may have significant effects on the company. Question 2 RATIO DEFINITION 2009 2008 Profit Margin Profit Net sales 1,051,740 =3.0% 34,300,042 1,013,014 =3.2% 32,114,278 Current Ratio Current Assets Current Liabilities 23,459,329 =1.4 17,050,818 27,046,502 =1.2 22,427,761 Quick Ratio Current Assets-Inventories Current Liabilities 23,459,329-6,263,242 =1.0 17,050,818 27,046502-6,796990 =0.9 22,427,671 Debt to Equity Ratio Liabilities Equity 18,800,667 =3.2 5,789,186 22,611,355 =4.47 5,063,032 The Cloud 9’s profit margin between the two years under preview show insignificant variability. The profit margin is steady and relatively consistent in the two years. Concerning the current ratio, Cloud 9’s current assets can adequately cover the current liabilities. The company has no problem in meeting its short-term commitments as they fall due. As indicated by the acid test ratio, the company had problems in 2008 in covering its current liabilities from the liquid cash (or near cash). The year 2009, however, the company was able to solve the problem and it had no liquidity problems. This seems to have come at a cost as the financial assets shows a significant decrease from 2008 to 2009 by a difference of $4,412,905. This difference can also be attributed to acquisition of property, plant and equipment as the company reported an increase of $551,298. To come up with a surmountable account of the difference further investigation into the significant difference should be conducted. The debt to equity ratio also raises concerns. Although the company was able to bridge the liabilities from 2008 to 2009, the debt to equity ratio is still very high. This could raise concerns that the company might have problems in meeting the interest payments as they fall due. Further review into the high liabilities would be necessary. Question 2(b) The specific areas that should receive special emphasis during the audit are total liabilities and shareholder equity because of the high debt to equity ratio. The company has significantly financed growth with debt and this has led to volatile earnings. The auditor should focus on documentary evidence such as invoices, suppliers’ statements, bank statements, minutes of meetings, and correspondence, legal agreements and should verify information in client’s records by reading documents to confirm existence, rights and obligations (“vouching”), or trace from documents to clients records to confirm classification, accuracy, completeness (“tracing”). The potential problem areas are current liabilities and debt to equity ratio as the debt to equity ratio remained high although the company was able to bridge the liabilities from 2008 to 2009, the debt to equity ratio is still very high. The accounts and related assertions that require particular attention to solve this issue are current assets inventories, current liabilities, and equity. The client-financing source should be reviewed-an evaluation should be made of the debt sources, debt structure, reliability of future financing sources, and the reliance on debt instead of equity financing. Question 3 a) The first step will require Suzie to identify the type, nature of work that experts will deal with as well as the scope. The scope of the work will be linked with the objectives. Secondly, she will have to ensure that the experts are competent and experienced in auditing of shipments. She can get this information from other clients who have dealt with the expert in question. Thirdly, Suzie will have to ensure that the expert does not have any conflicts of interest with the client or the auditing team. Conflict of interest can arise where the experts have other clients who compete with the entity that is being audited. It would important for Suzie to check the likelihood of potential conflicts of interest arising. The next step will involve determining whether the expert will be able to complete the tasks within the set period as well as evaluating the scope of the work. She will also have to spell out a plan for fees and expenses payment. To this point, the client is not aware that the experts have been engaged. Suzie will have to avail this information and urge the client to be cooperative with the experts and provide them with all the information they may require. Finally she will lay out the criteria for determining the work that will be done by the experts and document it not forgetting the approval or understanding of the experts in this regard. b) Suzie must clearly let the experts understand the objectives and scope of the work as well as the items that must be contained in the report. The expert must be informed of the intended use of the report, disclosure of the expert’s involvement and it extent. The experts must also be informed about the confidentiality of the client’s information, access of the information to be used by the expert and the assumptions and methods that the expert will be required employ. Suzie will use these assumptions and methods data in determining the extent that the experts work will be used as audit evidence and assessing the quality of the work. They experts, on the other hand, must be qualified auditors and registered with the professional bodies, and experienced and must have a good reputation in the auditing field. The experts must also prove that they are objective and independent. A statement declaring their independence and lack of conflicting interests with the client would also be required. No matter the level of reputation or the qualification that the expert bears, Suzie will have to assess the suitability of the methods that the expert will use when forming his or her opinions. She must ensure that they are appropriate to the circumstances of the case and determine the extent that the information can be relied on. In essence, Suzie must understand the methods and assumptions that experts will use so that she can be able to determine whether they are reasonable. c) The amount for engagement in derivative transaction of the firm shall not be over 50% of the firm net value. The limit of loss for every and individual contract shall not be over 10% of the amount of the contract. Every contract content shall be assessed and chosen by the high level managers whom the Board of Directors authorizes. The firm department transaction personnel, accountable for derivative transactions, shall follow the dealing approach in line with the accepted deal terms and conditions of the transactions and implement deals directly with counterparts. When the deals are coFor the firm derivative transactions, the department that is accountable for establishing management regulations shall set up a wide-ranging information system towards the balance positions of For the firm derivative transactions, the department that is accountable for establishing management regulations shall set up a wide-ranging information system towards the balance positions of the firm, profit/loss analysis to facilitate proper monitoring, risk control and respond to abnormal situations in a timely manner. On a monthly basis, the firm shall report and make a public announcement of the derivative transactions (including purposes of trading and purpose of hedging) that it has engaged in, up to the end of the past month in line with the needed form on the website selected by the proficient security authorities before the tenth day of every month. In case derivative matters of which maximum loss for every or individual contract is more than 10% of the contract amount respectively or any cancellation, termination or amendment of the original contract takes place, the company shall report and make announcements in line with the set provisions within 2 days from the occurrence of the event. References Carmignani, F. (2013). Comment: How strong is Australia’s economy. Retrieved from http://www.sbs.com.au/news/article/2013/08/13/comment-how-strong-australias-economy Chance, D., & Brooks, R. (2009). Introduction to Derivatives and Risk management. 8ed. Mason, OH: South-Western Cengage Learning Cole, W. (2013). Australian economy marks 22years of growth in Q2. Reuters. Retrieved from http://www.reuters.com/article/2013/09/04/us-australia-economy-idUSBRE98304M20130904 IBISWorld (2013). Footwear Manufacturing in Australia: Market Research Report. ANZSIC C1352. Marks, A. (2013). The globalization of the Australian textile, clothing, footwear and motor vehicle industries: results in line with other western market economies. Global Economy Journal, 13(1), 129-150 OECD (2013). OECD economic outlook. Vol. 2013/1. OECD Publishing. Read More