Solving in Accounting Principal - Math Problem Example

Problem Solving in Accounting Principal Prepared by ] Section Submitted to Date 1. Briefly provide an overview of Qantas Group. Include a description of the main operating activities, location of operations and an indication of the size of the group (e.g., number of employees, sales revenue, number of stores, total assets, market capitalisation, etc A. Qantas is an Australian Airliner company. The company is one of the long distance airlines in the world. They operate subsidiary businesses including other airlines and businesses in specialist markets. To ensure the maintenance of the reputation of the leading airlines in the world, the company invested on Airbus 380, Boeing 787, Air bus 330-200, Boeing 737-800, Bombardier Q400, Boeing 717-200. The aircrafts will be operated by national jet systems. The operations of the Qantas take safety as prime factor and the expertise of the staff ensured that internationally. The company develops and examines the proficiency of over 10,000 crew every year. The company operates from Australia and the operations of the company reach worldwide. One can book for the services of the company from every major destination in the world. In 2006 the company accrued a net profit of $479.5 billion from revenue of $13.6 billion. This indicates the profitability of the company. The earnings per share in 2006 is 24.9 cents according to the financial report of the company. The fuel cost remains a main challenge for the Qantas group. It is $2.8 billion in 2005-06, which is 45.1 percent higher than the previous year. The company is the world’s 2nd oldest and 12 largest airline. Its market capitalization is $7billion. The objective of the procurement in Qantas is to maximize the shareholder value. The systematic ongoing process and ethical supply of externally purchased goods will achieve this. The group will procure items ranging from stationery to aircraft. The sustainable future program target doubled from $1.5 billion to $3 billion in august 2005. This is to address the impact the rising fuel costs. In june 2006 the first target of $1.5 billion was achieved. The group employs around 38,000 people and 90 percent of them are employed in Australia. Qantas increased services for US, UK, China, Canada, Japan and Indonesia in 2006. These services range from non stop flights to weekly twice or thrice flight services. The total assets of the company was $19,183.3 million and the liabilities were at $13,102.2 million. The net assets or the total equity is at $6081.1 million. From 35 years the Qantas holidays has established reputation for quality products. 1.6 million Customers purchased world class Qantas holiday packages and products in 2006. The demand is due to the maintenance in the quality due to the technological investments. This allows customers to book and pay for their holiday needs online. The payment includes the charges of flights, hotels and cars also. More than 150 locations are covered under Qantas holiday packages. The airlines will work in coordination with other airlines to implement its holiday packages thus by increasing the co branding effect. Qantas is successful in making Airport terminals increasingly becoming the part of the customer experience. This is due to self service options like quick check kiosks. These reduce the time spent in checking in and will offer a wider selection of products and services. Qantas owns eight domestic terminals in Australia. Regarding the infrastructure, Adelaide airport’s multi user terminal has been opened in December 2005. Both international and domestic services of Qantas will be available in this facility. Before the end of 2007 Qantas is planning to land A 380 into that terminal. This needs upgrade of Qantas club lounge facilities and that is going on. 2. From the financial statements of Qantas Group locate the following items for 2006. List the value of the items and indicate whether that value includes or excludes GST (Goods and Services Tax). a. Fuel expense b. Trade creditors c. Cash paid in course of operations d. Advances and prepayments e. Bad debts expense A. From the financial statements of the company the fuel expenses for the company are $2802.3 million. This is $870.6 million more than the previous year expenses. This may be due to the increase of services to US, UK, Canada, China, Japan and Indonesia. These services include non stop services and weekly twice and thrice services. The fuel expenditure mentioned in the financial statements did not include the Goods and Service tax. This is due to the fact that the tax paid is mentioned after calculating the expenses in the financial reports. This results in payment of goods and service tax for above mentioned amount from the profit after tax as the tax mentioned is sales and income tax only. The total liabilities stand at $13,102 million for the year 2006. In the financial statements of the company the goods and service tax is not included in this list. So. The trade creditors mentioned in the financial statements include the Goods and service tax and it is calculated by including the deferred taxes in the statement. The cash paid during the operations is regarding man power and staff related, selling and marketing, aircraft operating variable, fuel, property, computer and communication, tours and travel, capacity hire and others. This amounts to $45435.6 million. This did not include the goods and service tax as it was not mentioned in the statements while calculating the cash paid during the operations. The revenue received in advance is $ 2282.8 million. The provisions stand at $477 million. Both of these do not include the goods and service tax aspect as it was not mentioned while calculating these expenses or liabilities. The bad debts expense can be put at $54.6 million. The cost of finance is this much more than the finance income. This much of amount can be attributed to the bad finance costs accrued by the company. 3. Prepare a table similar to the table below. Complete the table by inserting information from the financial reports. Calculate each item as a percentage % of revenue from sale of goods. Financial Item $ 2006 $ 2005 Change % Change Sales and other income Expenditure Net finance costs Income tax expense Profit for the year A. Financial Item $ 2006 $ 2005 Change % Change Sales and other income 129 percent 131 percent Negative change of 2 percent 1.52 Expenditure 123 percent 91.9 percent Increased by 31.1 percent 25 Net finance costs 0.4 percent 0.79percent Decreased by 0.39 percent 49.3 Income tax expense 1.4 percent 1.79 percent Decreased by 0.39 percent 21.7 Profit for the year 3.5 percent 5.4 percent Decreased by 1.9 percent 35.1 Finance income 1.19 percent 0.931 percent Increased by 0.26 27.92 Tours and travel revenue 5.27 percent 5.62 percent Decreased by 0.35 percent 6.2 Net Assets 44.5 percent 44.01 percent Increased by 0.49 percent 1.11 Liabilities 96.0 102.0 Decreased by 6 percent 5.8 4. Calculate inventories as a percentage of total assets and comment on their importance to the operations of Qantas Group. Would you expect the proportion of inventory to total assets to be different for a retailer? Explain why? A. The inventory is about 5.5 percent of the total net assets. The company as it is a services sector is maintaining a lesser inventory when compared to the net assets. About 95 percent of net assets are free of maintaining the burden of inventory. In case of a retailer relatively high inventory is needed to be maintained. This is because, the retailer has the responsibility of supplying the goods on demand. In case of service sector, the goods required in the process of services can be procured on timely basis so that the low inventory can be maintained. This maintenance of low inventory is not possible with the retailer. However there is a difference in maintaining assets. The assets in case of service industry like airlines will be useful for the operations of the company. This may not be up to the same extent in the case of any retailer. The assets of the retailer may be in another form and a small amount of his assets will be useful in the operations. So that difference can be used by the retailer to maintain a high inventory than the service sector. The rendering of services is different from supplying the goods on demand. This basic difference in the operations of a retailer and the airlines will enable the airlines to maintain a lower inventory. However it is a compulsion for the airlines to maintain a low inventory, if not the assets of the company may not be useful for the operations regarding offering of services. 5. What is the amount of cash receipts in the course of operations for 2006? Explain why this amount is not equal to Sales and Other Income. The explanation must focus on the different concepts involved in reporting cash received and revenue under accrual accounting rules. You should also consider GST in your explanation. The amount of cash receipts in the operations in the year 2006 is $14,396.1 million. This is not equal to sales and other income as it is only $13646.7 million. This means that the cash receivables are more than the sales and other income. The difference is the receivables in the form of advances. This implies that the operations or the newly installed services by the company demanded cash more than that of generated by the sales and other income. This may be due to the payments regarding non current liabilities of the last year also. This indicates that in the year 2006 the company has to take advances to render services and to meet the payment demands. The net cash from operating activities after subtracting the cash payables from the receivables is $2086.1 million. This indicates that the company has received surplus of cash from the operational activities that is need for cash payables. This indicates that the company is able to accrue the cash that is blocked in the past operations in the present and is capable of taking less advances any if needed. The need of taking advances also will be less if the cash from operational activities is more than the cash needed for the payments. This should not incur financial costs for the company as it will result in the decrease of profit or loss for the company in the coming years. 6. What are prepayments? What amount has Qantas reported for prepayments? Give an example. Explain why adjusting entries are required for prepayments. Prepare T ledger accounts to demonstrate the affect of the adjustment on prepayments and a related expense account. A. The prepayments reported by Qantas are depreciation and amortization. The amount paid for that is 1,241.3 million in 2005 and $1249.8 million in 2006. the non cancellable operating lease rentals is $266.6 million in 2005 and $355.7 million in 2006. 7. What is the amount reported for Revenue Received in Advance? Explain what you think this item represents. In journal format provide an example of an adjustment that would affect this account and discuss why the adjustment is necessary. A. the amount reported for revenue received in advance is regarding the finance income and it is $117 million in 2005 and $163.3 million in 2006. this can be termed as the revenue received in advance as it is not the cash from operations and not due to the sales activities. This term represents the excess of cash that is flowing due to the operations of the company. If this is mixed with sales and other income, this amount need to be included in profit and the tax must be paid. In this manner it affected the account. 8. What is the amount of depreciation expense for 2006? What method is used to calculate depreciation expense? What is the underlying assumption of this method in relation to the usefulness of plant, property and equipment A. The amount of depreciation expense for 2006 is $1249.8 million for Qantas group and the $1111.0 for Qantas company. The method followed here to calculate the depreciation is the amount invested to upgrade the services and the instruments. 9. Use Microsoft Excel to prepare a vertical analysis of the Income Statement for 2006 and 2005. Use Net passenger revenue as the base A. The company return of assets when compared to the earnings of the year is at 7 percent. The company’s capability of using its assets in generating earnings has decreased by the previous year. In 2005 this ratio was 12.4 percent. The capability of the company to use its assets to generate the earnings is more than 5 percent more in 2005 than in 2006. This might be due to the investments incurred for the company due to the introduction of the extra services to US, UK, Canada, China, Japan, and Indonesia. This results in initial investment and the increase of total assets and current liabilities. This may result in retaining the less income. 10. Calculate the following ratios for Qantas Group for 2006 and 2005: f. Return on total assets g. Return on shareholders’ equity h. Current ratio i. Quick ratio j. Debt ratio k. Times interest earned A. PERFORMANCE RATIOS Return on total assets assets /earnigns rningsx100 7 percent 12.4 Net debt to net debt plus equity (ratio) 27:73 38:62 n/a Net debt to net debt plus equity including off balance sheet debt and hedge reserve (ratio) 44:56 n/a n/a Net debt to net debt plus equity including off balance sheet debt and excluding hedge reserve (ratio) 46:54 n/a n/a Net debt to net debt plus equity including off balance sheet debt and revenue hedge receivables (ratio) n/a 46:54 n/a Earnings per share (cents) 24.9 36.8 (11.9) cents Return on equity (percentage) 7.9 12.5 (4.6) points Return on equity including the notional capitalisation of non-cancellable operating leases on a hedged basis (percentage) 7.4 13.8 (6.4) points Profit before related income tax expense and net finance costs as a percentage of sales and other income (percentage) 5.3 8.1 (2.8) points Profit before related income tax expense as a percentage of sales and other income (percentage) 4.9 7.3 (2.4) points 11. Write a report as a financial analyst evaluating profitability, liquidity and long-term debt paying ability of Qantas Group. Refer specifically to ratios calculated in Q10 and other analysis undertaken in Q3, Q9 and discussion in Q1. A. The return on equity is 24 percent in 2005 and it is 23 percent in 2006. The investment regarding extra terminals in various international airports and the introduction of aircrafts to new destinations resulted in extra investment and the retained earnings will be more in the coming year as the present investment will be absent and the earnings from that can be termed as profit and the present decrease in profitability of the company will increase the profitability in the next year as the equity was used to render new services or the extension of the services. The quick ration of the company is less than 1 in 2005 and 2006. This indicates that the for every one dollar of current liabilities, there only less than one dollar of current assets that can be convertible to cash. This is generally not accepted by creditors. This is due to the fact that the company may have the liquidity problem for the cash required for the operations. Qantas is over coming the problem by getting enough cash required for the operations and even more than that in 2006. As the quick ratio less than one exhibits the company’s inability of generating enough cash from the current assets. Qantas is in a better position regarding that ratio than 2005 as it is improve from 0.6 to 0.8. The company is slowly improving the capability of generating cash from the current assets. 12. Find or calculate the following information that would be relevant to a shareholder of Qantas Group: a. Earnings per share b. Current share price (www.asx.com.au) Price earnings ratio (based on current share price A. The earnings per share is 24.9 cents including the dividend offered by the company. As the present share price of the company is $5.19 in ASX, the earnings per share offered by the company at 24.9 cents can be termed as reasonable income from the value of the share. This can be termed that the share is not over or under valued and has been valued according to the earnings till now. Regarding the profitability of the Qantas group it can be termed as performing above average. This is due to the fact that though the company invested in new terminals and services, it has retained the reasonable profit after the payment of tax. As the goods and service tax is not mentioned in the balance sheet, the profit may be less after deducting it. This may decrease profitability but keeps the company’s profit earning capacity at par with the industry average. Regarding the liquidity, the company is not performing well. This is evident from the value of quick ratio which is 0.8 in 2006. One thing the company can be regarded as having better liquidity or improving its liquidity is that the company is increasing its capability of generating cash from the current assets year by year. This is evident form the fact that the company is having quick ratio of 0.6 only in 2005. If company is able to increase the quick ration at the same extent in the coming years without disturbing the profitability and increasing the cost of finance, its liquidity can be termed as good. For the present situation it can be termed as average. 13. Explain why Qantas Group has reported receivables as both current and non-current assets. What is the amount of trade debtors that management actually expects to receive? A. The company is reporting the receivables as current and non current assets as it is not using that cash for the operations or for the payments of the advances or the interests. This result in the increase of assets of the company by the cash received. This may be the reason for the company for reporting the cash receivables in the current and non current assets. The company wants to invest that cash in generating assets of for the future investments without using it for the payments of interest on advances or for the debts. 14. What is the accounting treatment of maintenance and overhaul costs? Under what circumstances are those costs “capitalised”? A. The accounting treatment of maintenance and overhaul costs are man power and staff related and aircraft operating costs. These are reported as $3163.5 million in 2005 and $3321.7 million in 2006 for man power and staff related and $2,370.6 million in 2005 and $2525.3 million in 2006 regarding aircraft operating costs. The capacity hire reported as $341.0 million and $369.6 million in 2005 and 2006 respectively can also be considered as maintenance and overhaul costs. 15. How much did the amount of Cash (and cash equivalents) increase or decrease during the year? What were the total net cash flows from operating activities, investing activities and financing activities A. The cash receivables increased by more than $1100 million in 2006 when compared to 2005. This did not result in increase in net cash flow than the previous year and it was less than that. This is due to the investments of the company for the new terminals and long term and short term services. 16. Refer Note 1. (C) “In the preparation of the financial statements managers must make judgements, estimates and assumptions that affect reported assets, liabilities, income and expenses”. Give examples of two estimates that would have been made by the management of Qantas Group and discuss their affect on the financial statements A. The two facts that the managers of the Qantas company can use to judge the financial statements are the increase in profit and cash receivables with out much increase in expenditure for operations or cost of finances. Though the expenditure on operations and cost of finance have been increased, the hike can be justified with the performance of the company and the capability it achieved to invest for new terminals despite having quick ratio less than 1. This is due to the generating of cash from the operations and the judicious use of it. Read More