Step 7

To begin with, I was very intrigued to see the inventories of Adacel Technologies. A

lot of their products are high-end market items and it would be interesting to see the

turnover for such priced goods and the stock amount Adacel withholds. Therefore, by

looking through the annual reports, as shown in Table 7.1 below, the inventories from

2013 - 2016 are summarised:

Table 7.1 – Inventories for Financial Years 2013 to 2016 as per Balance Sheet

2016$’000

2015$’000

2014$’000

2013$’000

Inventories 170 931 362 411

It is noted that Adacel had a significant amount of inventories for the 2015 financial

year, and in 2016 their inventories dropped to the lowest it had been for those 4

years. In order to see which specific inventories had increased/decreased over these

years, I went to the notes. However, to my disappointment and confusion, the only

current asset listed under inventories was ‘work-in-progress on contracts – at cost”,

as exemplified in Image 7.2:

Image 7.2 – Note for Inventories

Additionally there was also a note regarding the accounting policies for inventories in

each annual report:

“Works in progress are stated at the lower of cost and net realisable value.

Costs deferred to work in progress comprise direct materials and direct

labour. These costs are charged as expenses when the related revenue is

recognised”

This initially confused me as I am fairly new to the world of accounting. However, I

used my current understanding of accounting to come to the following conclusion. I

concluded that Adacel does not actually withhold inventory, similar to a supermarket.

However they still would use an inventory system, as they are still a retail business.

To simplify, I would say that their inventory works such that they receive orders (or

renew contracts) to customers and then source supplies needed to create the

products requested by the customer. Nevertheless, as the saying goes ‘Rome wasn't

built in day’. Adacel obviously needs time to use these supplies (which are stocked in

inventory) to create the products requested. Additionally, the ‘Inventories’ figure

includes the items from the time it takes for them to arrive until when Adacel

completes the product and it is delivered – and Adacel does not disclose what

specific items are held within their inventory such as x amount of y.

Additionally, the statement of “Works in progress are stated at the lower of cost and

net realisable value”, means that the value that is allocated to the inventory is market

value. This is based on what Adacel estimates the proceeds of the sale is going to be

minus GST and the costs of production, distribution, marketing and selling of the

product to the customers (Hoggett et al., 2015, p.818).

Furthermore, it is assumed that Adacel adopts a perpetual inventory system, as their

costing method seems to be determined between Adacel and customers, where the

customers sign a contract to obtain the goods at a specific price at the time of sale.

Also, under the perpetual system, the inventories record “shows the unit and dollar

amounts on a continuous basis for goods on hand, goods purchased and goods sold”

(Hoggett et al., 2015, p. 813). As Adacel source resources from multiple wholesalers

and suppliers, this system would allow them to track specific amounts of inventory

and consequently the amount of units produced and sold. However what method of

inventory would Adacel use given this assumption and conclusion?

From the statement provided in the footnotes regarding inventory and the business

practices of Adacel, my assumption is that their method of inventory is specific

identification. My reasons include:

1. Adacel’s business operations with their customers involve high unit priced

products and thus would have smaller units sold

2. The cost allocation procedure would be what Adacel would have to do to

keep track of costs incurred from the suppliers (cost of purchases) to

establish the cost of the goods once they are available for sale.

3. The products Adacel sells are easily distinguishable.

So what are the associated issues and costs that Adacel could possibility be facing

with their inventory management?

As the majority of goods sold are under contractual agreements, how much inventory

does Adacel require to have on hand for “quick sales”? For example, the one off

customer who just wants one ATC simulator but requires it in a quicker time than it

would take to manufacture and produce. If Adacel does not have this inventory

readily available it is possible that they may lose this customer to competitors.

However, if they did have stock on hand, they would then incur the costs of storage

and also because they produce technological products, would there not be some

depreciation in the value of their own goods?

Step 8

For this step, I used the practice account provided – Clearwater and AccountEdge

Pro. As I work on my Macbook, please find below my screenshots of my setup,

training and MYOB Online Training Quiz. Throughout this training, I did have a few

issues and obstacles as I found the Clearwater example file for AccountPro had a

few differences to the file used in the AccountRight tutorial. Therefore, I had to

freehand some of the tutorial. Chelsea Café was not in the card file and therefore I

created one for the company as well as a repairs account in the income accounts.

Screenshots:

Setup:

Training:

MYOB Quiz:

I scored 13/13 please find the screenshot to each of my answers below:

Q1:

Q2:

Q3:

Q4:

Q5:

Q6:

Q7:

Q8:

Q9:

Q10:

Q11:

Q12:

Q13:

Step 9

Background story of My Firm:

My company is Adacel and one of their business processes and procedures is to

establish new and renew contracts with customers (such as Militaries, Universities

and Training Simulators Worldwide) of their products. They also provide services (i.e.

support services) under the contracts created. These products are high-tech

equipment such as Air Traffic Simulators and Training. Therefore, contracts Adacel

signs with customers can be in the millions. However, for the purposes of this

assignment, I am assuming that this payment from the customers in such high priced

contracts would not be one lump sum, but rather a segment of payments within a

number of days. For this exercise I am going to assume that they will have 30 days

until payment becomes overdue.

Additionally, I will incorporate the expenses Adacel would incur; these will include

materials purchased and rental fees for their premises (these were extracted from the

Statement of Comprehensive Income).

The Transactions:

The hypothetical business transactions I created for Adacel include:

January 1st:

Transaction 1: ASA Brisbane signed contract for the purchase of 20 ATC

Simulators totalling $80,000 inc. GST with payment due in 30 days.

Transaction 2: Ordered 40 monitor covers from wholesaler Tech R Us for

$4,000 inc. GST and paid upon order.

January 2nd:

Transaction 3: Received bill from Real Estate East for monthly rent of

premises located in Hamptons East, Vic totalling $13,000 no GST, with a 30

day credit term.

Transaction 4: Invoiced Air Traffic Services College for simulation

training seminar conducted on 30th December 2016, for $8,000 inc. GST

with a payment due in 30 days.

January 8th:

Transaction 5: Paid bill for monthly rent to Real Estate East of premises

located in Hamptons East, VIC of $13,000 no GST by cheque.

Transaction 6: Received part-payment of $40,000 inc. GST from ASA

Brisbane for contract for order signed January 1st 2017 by cheque.

January 15th:

Transaction 7: Received payment of $8,000 inc. GST from Air Traffic

Services College from invoice sent on January 2nd by cheque.

Transaction 8: Received final outstanding payment of $40,000 inc. GST

from ASA from contract signed January 1st 2017 by cheque.

January 24th:

Transaction 9: Received bill from Electricity Co for electricity supplied

premises in Hamptons East, VIC for $3,000 inc. GST.

January 30th:

Transaction 10: Paid electricity bill from Electricity Co. totaling $3,000 inc.

GST that was received January 24th 2017.

Challenges I Encountered:

Whilst creating and entering the transactions, I encountered a number of speed

bumps along the way. I was unsure of whether the contracts that Adacel signs would

be processed as a quote, invoice or order. However, I inputted these as an order with

a 30-day credit term and was therefore able to link them to the orders placed when I

received payment from each company. I did not put the contracts as an invoice as an

invoice is charging the customer fees for a service that has already been conducted

and delivered. Therefore, the only invoiced service was to the college where Adacel

provided a simulation training seminar.

Please find below the All Journals, Balance Sheet, Profit and Loss Statement and

Cash Flow Statement:

Analysis of Hypothesized Transactions:

Firstly, on the All Journals report it was interesting to look at the Trade Creditors. This

is an account that I have heard of but would love to investigate it’s financial processt.

Trade Creditors are the expenses paid to the suppliers (i.e. Real Estate East and

Electricity Co.) where when Adacel paid the bills received from them the debits and

credits were affected for both - when the bill was received and then when it was paid.

For example, with Transaction 2, when Adacel received the bill from Real Estate

East, Adacel’s Trade Creditors account was credited as they created a liability to pay

Real Estate East, and as per double-entry bookkeeping, the rental fees account (the

expense) was debited.

Then when Adacel paid their bill on the 8th January, the Trade Creditors account was

debited, as the liability to Real Estate East was cleared, and then the business bank

account (an asset account) was credited to reflect the reduction of funds in that

account.

Through this example, it was interesting to see that in the exchange of renting a

premise and paying/receiving bills there are multiple accounts affected.

Furthermore, in the Balance Sheet, you can see that for the month of January, the

equity of Adacel has decreased. This is due to them having a negative income (loss)

as seen in the Statement of Cash Flow and also in the Profit and Loss Statement.

The tools by which the financial statements can be investigated and analysed are the

financial ratios. Similar to what was done in my previous accounting subject

(ACCT11059), I could establish the ratios such as profitability, liquidity and efficiency.

By doing so I could easily compare ratios to previous figures and other firms within

the same market and pinpoint deficiencies within the firm, further investigating the

reasons for the loss.

Step 10

Depreciation is an interesting concept to look at. Theoretically you are investing in

equipment that you know in future will have less value than what you initially pay for

it, and thus you are making a loss. However this loss can be counterbalanced with

the value of the use of the equipment that you make of it whilst it depreciates. For

example, I have a car and I know the further I drive it and the older it gets, it

depreciates. However my use of the vehicle could be making other aspects of my life

more efficient. Therefore, Thus largely this depreciation is almost balanced out by its

value of use. It will be interesting to investigate Adacel’s amount of depreciation in

relation to their revenue to see if the depreciation is benefiting the overall profits and

revenue gained. Additionally, to ascertain the methodology Adacel has adopted to

measure this depreciation and its effect on the financial statements.

The depreciation expenses were extracted from each of the annual reports and can

be seen in Table 10.1 where their depreciation had plateaued from 2013 to 2014, but

onwards there was an increase.

Table 10.1 – Adacel’s Depreciation from 2013 to 2016

2016$’000

2015$’000

2014$’00

0

2013$’000

Depreciation and Amortisation Expense (as stated in STATEMENT OF COMPREHENSIVE INCOME)

(775) (699) (467) (498)

How did Adacel calculate these figures? In the footnotes of all three annual reports it

stated that depreciation is calculated using the “straight-line method to allocate their

cost, net of residual values, over their estimated useful lives” and this is as follows in

Table 10.2:

Table 10.2 – Deprecation Rate for Property, Plant and Equipment 2014 to 2016

Class of Fixed Asset Depreciation Rate(2016)

Depreciation Rate(2015 & 2014)

Leasehold Improvements 5 – 20% 20% or Lease TermFurniture and Fittings 10 – 12.5% 10 – 50%Computer Equipment 25% N/ASoftware 25 – 50% N/AMotor Vehicles N/A 25%

As indicated in this table, Adacel had the same depreciation rates for the years 2014

and 2015. However this was modified in 2016 where the depreciation of computer

equipment and software was introduced and motor vehicles was written off.

Nevertheless they still used the straight-line method for the allocation of costs for

fixed assets. The question is why were some fixed assets introduced and others

eliminated? Was it that Adacel realised that software in particular had a major

depreciation rate? In the table the rate is 25-50%. Such a high rate is reasonable as

if we look at the technology and software that surrounds us everyday, every year, for

example, a new iPhone which is being introduced with bigger, better and faster

software and the model previous to it and all other comparable devices are reduced

in value.

The next question is how does this change of depreciation rates affect the final

statements? Firstly since there was a decrease change with some fixed assets

between 2016 and 2015, you would think that Adacel’s depreciation expenses would

be decreasing. However, since the introduction of the depreciation rate of software

and computer equipment was implemented into the calculation, considering they

have such a high depreciation rate this almost counteracts the decrease in the rate of

other statements.

Finally, with the depreciation rates as stated and the business process that Adacel

has, is depreciation a significant expense? Yes, I believe that depreciation is a

significant expense for Adacel, however the assets (software and computer

equipment) that have high depreciation rates are major assets for their business

operations. So even though they are a big expense for Adacel, in that they

depreciate quite rapidly and would require more frequent turnovers, they are

irreplaceable and without them Adacel would not be able to create their products and

this not run their business.