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ACCT11081 – Introductory Financial AccountingAss#1 - Step 3-6

S0049661 – Toni Daniel

Blog Link: http://www.accountbuster.wordpress.com

https://www.alsglobal.com/

Step 7 – ALS Inventory Practices

ALS Ltd is a laboratory testing services provider working within many different industries. When I was first allocated this company, I did check to see that they contained inventories and found that they did. However, when it came to observing their inventories in more detail, I started to wonder – what actually did their inventories consist of – and I was not fully satisfied with my answer.

ALS Ltd recorded inventories to the value of 75.8 Million AUD in 2018. The following recordings of inventory were recorded in the preceding years.

2018 2017 2016 2015Inventories 75.8M 67.2M 79.0M 76.1M

In the notes section this was further broken up to show the following costings for inventory:In millions of AUD 2018 2017 2016 2015Raw materials and consumables 41.6 34.6 37.4 36.8Work in Progress 34.2 32.4 28.0 24.4Finished Goods 0.0 0.2 136.6 14.9TOTALS 75.8 67.2 79.0 76.1

As ALS Ltd is a services provider, it was still unclear to me just what their inventory value actually consists of. The above information was still not making it clear. After all, if I was taking a coal sample to ALS to get tested, just what inventory would I be purchasing from them. Is inventory not just a product that is purchased or manufactured to be onsold for profit?

I went to their notes on revenue for each year, only to find that their revenue consisted of :‘Revenue from rendering of services’ in both the 2017 & 2018 financial years. The 2015 & 2016 financial years both recorded a small amount for Revenue from sale of goods, being 6.6M & 5.9M respectively. As we were taught that inventory should be turned over multiple times each year, this small amount in the sale of goods still did not account for the high amount recorded in inventories for each year.

https://www.alsglobal.com/



I then started to wonder what raw materials and consumables a laboratory testing service provider would utilise and found that chemicals, petri dishes and test tubes would be considered a consumable to provide this service. But would it be considered a raw material, would it be used to make a finished good ready for resale? I would think not.

I went further into their notes section and found the explanation below:“Costs for sample testing commenced but not yet completed in the analytical laboratories and incomplete field services works are recognised as work in progress…….”While this has not officially told me what ALS Ltd inventories actually consist of, I am now concluding that the consumables that the company uses in providing the service that they perform is recorded as inventories. While those consumables are not generally on-sold, they are consumed in the provision of the service (Lab Testing) and recorded as an expense at that time (in the expenses section – Raw Materials and consumables are recorded).

So the inventories consist of Raw Materials and Consumables, the Raw Materials and Consumables that are currently being used to provide services, that at the time of recording of reports have not yet been finished and are therefore ‘Work in Progress’, and the Raw Materials and Consumables that have been used in services that are complete but not yet invoiced at the time of recording of reports and are therefore “Finished Goods”.

The notes further state that inventories are stated at the lower of cost and net realisable value, a practice which complies with Australian Accounting Standards.

The notes also state that the cost of inventories are based on the weighted average method. While it does not state if it uses the periodic or perpetual method, I would assume that ALS, being such a big company would use the perpetual method of recording inventories. This would ensure that the cost of all the consumables are all recorded within their accounting systems with quantities and costs and are proportioned out with each service provided and recorded as an expense or COGS at that time.

ALS Ltd had no changes in the reporting methods over the 2015 – 2018 reporting years. The notes to the financials were exactly the same for each year. I found that while trying to learn more about the inventories in my firm, it did not provide enough detail to enable me to learn definitively what the inventories actually did consist of and I was required to do a lot of assumptions in order to work out what was what. I therefore could not say if my firm could manage its inventories better than it already does, as there was not enough details in the annual reports to report on this, it would be something that could only be garnered from a more ‘on the ground’ approach.

My own experience with inventories is reporting both in the periodic and perpetual methods. All of the smaller firms that I work for do not record inventories, but only record a closing stock and opening stock balance at year end and beginning. At all times, the closing stock value is calculated using the weighted average method. This is done simply from a time management and cost perspective. The medium to big firms that I do work for all manage their inventory using the perpetual method. That is, they all record stock levels



(quantities and cost) and sell the inventory from their stock, when the cost is then recorded as a cost of goods sold. Each business is required to do a stocktake at year end to either record their closing balance (for the smaller businesses) or to double check their stock holdings and make adjustments as necessary (for the larger businesses). The larger businesses that I work for also record their stock cost using the weighted average method. I have never utilised the Specific Identification method or FIFO method.

One company for which I was brought in at the time that they were changing accounting programs and who had not utilised the services of a bookkeeper in the past, I was required to set up their inventory after they had used the periodic method for many years but were getting too big to continue doing so, and I chose to use the weighted average costing method going forward. The opening stock however was recorded at their last buy in price, which I now know is not permitted under the International Financial Reporting Standards, as it would have resulted in a higher opening inventory value and therefore a higher COGS going forward, resulting in a lower profit going forward. It was however the easiest way of doing things at the time, given that the amount of inventory was quite significant and that no-one working there at the time had much idea about anything. Had I known then what I know now, I would have spent the extra time to record it more accurately.

Step 10 – ALS Depreciation Policies

ALS Ltd shows an Amortisation and Depreciation expense in the Profit and Loss report for each of the years as follows:

2018 2017 2016 2015Amortisation and Depreciation 70.6M 66.7M 101.6M 95.5M

The balance sheet does not show the depreciation listed, but simply one line titled – Property, Plant and Equipment. To further investigate the amount of depreciation included in this one line, the notes section must be inspected and from reading the notes it quickly becomes a lot more entailed than the original one line from the balance sheet.

In 2018 the Property, Plant and Equipment is simply recorded as 400.0M. This Property Plant and Equipment is divided up into five further section, being Freehold Land and Buildings, Plant and Equipment, Leasehold Improvements, Leased Plant and Equipment and Capital Works in Progress. These five divisions are also broken up into cost values and accumulated depreciations, the cost value being the original cost of the Asset, with the accumulated depreciation being the total written down value since the purchase.

Though further inspecting just one of the sections – Freehold Land and Buildings, I was unable to determine how the accumulated depreciation of -49.6M was gained from the opening balance of -43.6M and adding on the depreciation expense for the year of -6.7M. I could only assume that either the additions or disposals, transfers or assets held for sale may have contained an amount of depreciation that was factored in to the closing figures.



The notes section explained that depreciation is calculated on the depreciable amount, being the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation is charged to the profit and loss statement on a straight line or diminishing value basis over the estimated useful lives of each part of an item of Property, Plant and Equipment. Land is not depreciated.

The notes did not give further detail regarding exactly what items were used using the straight line method, nor the diminishing value methods, just that both methods were being utilised.

It did however give the estimated useful lives being as follows:

Buildings 20-40 years.Plant & Equipment 3-10 yearsLeasehold Improvements 3-20 years.Leased Plant and Equipment 4-5 years.



The notes on depreciation methods for each financial year were identical, so ALS had not changed the methods used throughout that time, however, the notes also went on to state that the residual value, useful life and depreciation method applied to an asset were all reassessed at least annually and adjusted if appropriate. If this was indeed done at any stage, there was nothing in the notes to suggest this.

While the Depreciation and Amortisation expense is quite large for each financial year, I would not say it is a significant expense for ALS, given that it equates to approximately 1/17th of the total expense for ALS Ltd in the 2018 financial year. However, the total of Property Plant & Equipment at the end of the 2018 reporting period, was recorded at cost to the value of $1.1B and was already depreciated in the amount of $700M. This would suggest that in general, the PP&E is approximately 64% through its useful life cycle, which in itself is quite significant and would suggest that capital expenditure will be in the pipeline in the coming years.

The notes on the Amortisation for ALS Ltd also suggest that is it handled in exactly the same manner as depreciation, in that it is calculated on the cost of the asset less its residual value, it is charged to the P&L on a straight line basis over the estimated useful life of the intangible assets (which are also listed) and that both the amortisation method and residual value are reassessed annually and adjusted if appropriate.

Journal 1:

Amortisation and Depreciation DR$6,700,00

0 Freehold Land and Buildings Accum Depreciation CR

$6,700,000

Record Depreciation Expense for Freehold Land and Buildings This Journal has the effect of increasing the Amortisation and Depreciation Expense, as well as increasing the Accumulated Depreciation for Freehold Land and Buildings.

Journal 2:

Amortisation and Depreciation DR$9,700,00

0

Leasehold Improvements Accum Depreciation CR $9,700,00

0Record Depreciation Expense for Leasehold Improvements

This Journal has the effect of increasing the Amortisation and Depreciation Expense, as well as increasing the Accumulated Depreciation for Leasehold Improvements.

Journal 3: Plant and Equipment DR $900 Credit Card CR $900

Record Purchase of Saxon 10x-80x Gemological Microscope



This journal is to record the purchase of a piece of capital equipment. It has been deemed to have a useful life of 3 years with no residual value and will be written off using the straight line depreciation method for each of three years using the following journal.

Depreciation Journal - recorded for 3 years - 2016, 2017 & 2018 - to write off in entirety

Amortisation and DepreciationDR

300

Plant and Equipment - Accumulated Depreciation CR 30

0Record Depreciation Expense for Plant & Equipment

To write the microscope off using the straight line method of depreciation, the above depreciation journal would have been used to write down the capital item, over three years. At the end of the three years the microscope would have had no value on the Balance Sheet and would have been shown as below:

Plant and Equipment (at cost) DR 900 Plant and Equipment - Accumulated Depreciation CR 900

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