belindamclintock.files.wordpress.com · web viewbelinda mclintock . cq university . student...

Belinda McLintock

CQ University

Student ID:12150570

INTRODUCTORY FINANCIAL ACCOUNTING – ACCT 11081

ASSIGNMENT #1

Steps 7-11

Step 7 – Inventories

I was very eager to learn more about inventories and how my firm, Millennium Hotels accounts for them. Inventories to me are goods that are purchased by a business, which are then sold on to their customers in order for the business to make a profit. Where I currently work, we purchase mungbean seed from seed producers, which we then sell to our customers for a profit. Whilst the product is stored in our shed, it is considered inventory and is an asset to the business. Reading through the study guide I discovered that I needed to broaden my mind to also consider that inventory is not only those goods ready for sale (finished goods) but is also ‘raw materials’ that are to be used in the production of goods. An example of raw materials is the steel used to construct buildings in a construction company or a motor vehicle company may purchase aluminium or copper to produce cars.

Millennium Hotels does not seem to give up too much information regarding their inventories in their Annual Reports. Upon examining my firms Annual Reports for the three years I have found that for each of those years, Millennium Hotels recorded it’s inventories at the lower of cost and net realisable value (NRV). The notes to the report stated that NRV is the estimated price in the ordinary course of business, less the estimated costs of completion and selling expenses. To me this simply means that they record the cost of their inventories at the price they paid for them, less any costs involved in selling them. I recall earlier on in this assignment, when looking at whether or not my firm held inventory or not, I was a little baffled because I did not consider that the Hotel Industry would hold inventory and if they did, what would those items be? As Millennium Hotels does not disclose what its consumable are, I have assumed them to be the small bottles of shampoo, conditioner, body wash and the items in the mini bar, which include various bottles of wine, spirits, bottled water and sometimes if you are lucky enough the odd chocolate. Other inventory items may also include the goods used in the hotel restaurant including food ingredients and alcohol for cocktails.

As the hotel industry is primarily a service industry, I did not expect that the inventory held by Millennium Hotels would be large. This was confirmed for me when I looked at my firm’s total inventory, which was recorded as set out in the below table:

2017

2018

2019

Inventories

£4

£5

£7

Its inventories have increased slightly each year, possibly due the acquisition of further hotels to the group, which may have increased inventory levels slightly. When I compared Millennium Hotels inventories with some of its other assets, I discovered that they only contribute a small portion to its total assets.

2017

2018

2019

Property, Plant & Equipment (Non-Current Asset)

£3129

£3153

£3194

Cash (Current Asset)

£354

£375

£409

Inventories (Current Asset)

£4

£5

£7

From this comparison I would conclude that Millennium Hotels does not rely on its inventory to contribute largely to its profits. I believe that its inventory is simply ‘part and parcel’ of the business it is in. Imagine going to a hotel and not being able to purchase a drink from the mini bar or purchase a meal to be delivered to you as room service? Heaven forbid! It is an expectation placed on the company by its guests to offer such products and services.

Millennium Hotels also does not let us in on the cost method they utilise. If I was to assume what method they would use I would say it would be the weighted average method. I say this because I believe FIFO would be the most advantageous for a firm who has high levels of inventory. This is because a large firm with a high level of inventory and stock turnover need to make sure their stock it turned out efficiently to ensure that stock does not expire. Millennium Hotels does not hold large amounts of inventory, so to me, it makes sense for the company to use the weighted average method. Could they use LIFO method? Perhaps, but I find it would be unlikely. It does not make much sense to me for a company to sell the stock they got in last, first. Why would you sell new stock first when you have older stock that may be going off? Seems like potential for wastage, and I hate waste! I live 57 kilometres from my nearest grocery store. With a family to feed I have a large walk-in pantry and generally buy all of our food and supplies in bulk. When I come home to pack away the groceries, I move all of the older items in my pantry to the front and the newer items to the back. In this way we use the ‘older stock’ first and the ‘newer stock’ is used last (FIFO). This means that there is minimal wastage.

Examining my firms Income Statement’s, I go searching for Cost of Goods Sold (COGS), as I am interested in how much it costs Millennium Hotels to sell its inventories. I find ‘Cost of Sales’ rather than COGS. Is Cost of Sales the same as Cost of Goods Sold? It sounds the same, but I was unsure, so I googled it. Google confirms that there is basically no difference and that they are both used to track how much it costs a business to produce a good or service. Below are the comparative figures of Millennium Hotels Revenue & Cost of Sales for the three years.

2017

2018

2019

Revenue

£1008

£997

£1025

Cost of Sales

£(431)

£(436)

£(457)

I divided the cost of sales by the amount of revenue to determine how much of my firm’s revenue is being consumed by the cost of its sales. I calculate that figure to be consistently just over 40% for each of the three years. I believe this indicates that Millennium Hotels is managing it’s inventories well.

Back when I was still in Highschool, I got my first job at a local Pharmacy. I was required to work three afternoons per week and most Saturday mornings. My duties mainly consisted of working at the front counter, serving customers and processing sales. I never did anything with the ordering of stock. However, I can recall on occasion helping the senior staff to manually count the stock on the shelves (and out the back in the holding area) as part of the stocktake process at the end of the financial year. As you would expect in the pharmacy environment it is imperative that expired stock is never sold to a customer. At the time, I didn’t think too much about it, but reflecting now, I find it funny that it was only done once per year. If you wanted to better manage your businesses inventories, would you not have been doing those stocktakes on a more regular basis? Perhaps they did do them, I just didn’t see it as I only worked casual hours. I am guessing that the method of stocktake used by the pharmacy was the periodic method. This is where the cost of inventories is calculated at the end of a period. Unlike the perpetual method where those costs are calculated on a ‘real time’ basis, so that every time there is a sale of a product, the stock levels and value of inventories are updated straight away. I guess this system would have been difficult to implement back then, with POS software not as advanced as it is now. At that time, the pharmacy was using a very primitive form of software. I wonder how beneficial it would have been to the pharmacy to have its inventories updated on a continual basis instead of just that one time every year.

Step 8

SET UP MY COMPANY FILE

Step 9

Transaction #1

01-07-2020

Repairs & maintenance of coffee machines in Biltmore Hotel, Los Angeles

$ 980

Cash received from customers for room accommodation, Hotel Singapore

$56,000

Repairs & Maintenance to Air Conditioning units, Airport Hotel, Dubai

$17,870

Venue Hire for Wedding –

B.A.M Events, Chelsea Harbour Hotel

$15,000

Transaction #2

4-07-2020

Electricity charges for Singapore Head Office

$8,500

Salon Supplies for Wellness Spa, Kuala Lumpar Hotel

$3,800

Website Charges for new website

$11,400

Cash received from hotel room bookings: -

$16,300 – Hotel Dubai

$24,500 – Baltimore Hotel, LA

TOTAL: $40,800

Transaction #3

06-07-2020

Loan approved for development of hotel property, London.

$4,000,000

Purchase of Linen supplies for Queenstown Hotel

$12,500

Capital contribution -Owners/Shareholders

$350,000

Transaction 4

07-07-2020

Cash sales from bar takings, Millennium Hotel Beijing

$4,350

Venue Hire, Paris Fashion Week, Bleriot Hotel, Paris

$22,000

Transaction 5

09-07-2020

New staff training in responsible service of alcohol, Dunedin Hotel, New Zealand

$1800

Purchase of food supplies for hotel kitchen, Times Square New York

$3400

Overcharged Venue Hire for Fashion Week, Paris on original invoice.

$1500

Transaction 6

11-07-2020

Venue Hire, Baltimore, Los Angeles for Filming of new movie – Universal Studios

$150,000

Upgrade Hotel Gym facility, Chicago

$45,000

Travel expenses (fuel) for CEO whilst in New York for business meetings

$55.90

Transaction 7

18-07-2020

Purchase of liquor supplies for mini bar, M Hotel, Singapore

$2,300

Legal fees regarding acquisition of Hotel in Australia

$15,000

Cash received from rooms occupied, Hotel China

$8,400

Transaction 8

23-07-2020

Interest received on Cash in Bank

$5,200

Purchase of new equipment – computers for reception, Hotel Manchester

$11,000

Transaction 9

28-07-2020

Development & purchase of new hotel booking software

$80,000

Repairs to Spa facility, Chicago hotel.

$2,000

Informed that B.A.M Events London, have become insolvent and are unable to pay their outstanding account owing from 2019 financial year.

$22,800

Transaction 10

30-07-2020

Travel for staff attending meeting, Head Office, Singapore

$4,300

Cash takings from restaurant/bar Hotel Glasgow

$6,500

Receive payment of Invoice from Le Fleur’ Fashion Events for venue hire

$20,500

Received notice that B.A.M Events has become insolvent and is unable to pay its account.

$15,000

Millennium Hotels Pty Ltd

All Journals

1/07/2020 To 31/07/2020

ID No.

Account No.

Account Name

Debit

Credit

PJ

1/07/2020

Purchase; Espresso Yourself Co

1

2-1510

Trade Creditors

$980.00

1

6-2100

General Repairs & Maintenance

$890.91

1

2-1220

GST Paid

$89.09

PJ

1/07/2020

Purchase; The Air Conditioning Specialists

2

2-1510

Trade Creditors

$17,870.00

2

6-2100


$16,245.45

2

2-1220

GST Paid

$1,624.55

SJ

1/07/2020

Sale; B.A.M Events

2

1-1310

Trade Debtors

$15,000.00

2

4-5000

Hotel Venue Hire

$13,636.36

2

2-1210

GST Collected

$1,363.64

CR

1/07/2020

Cash Sales

CR000006

1-1110

Business Bank Account #1

$56,000.00

CR000006

4-8000

Room Occupancy Income

$50,909.09

CR000006

2-1210

GST Collected

$5,090.91

PJ

4/07/2020

Purchase; Diamond Energy Providers

3

2-1510

Trade Creditors

$8,500.00

3

6-1700

Electricity Expenses

$7,727.27

3

2-1220

GST Paid

$772.73

PJ

4/07/2020

Purchase; Spa Products Direct

4

2-1510

Trade Creditors

$3,800.00

4

6-7400

Day Spa Consumables

$3,454.55

4

2-1220

GST Paid

$345.45

PJ

4/07/2020

Purchase; Kiao Graphic Design

5

2-1510

Trade Creditors

$11,400.00

5

6-2300

Internet

$10,363.64

5

2-1220

GST Paid

$1,036.36

CR

4/07/2020

Cash Sales

CR000009

4-8000


$14,818.18

CR000009

1-1110


$40,800.00

CR000009

2-1210

GST Collected

$3,709.09

CR000009

4-8000


$22,272.73

PJ

6/07/2020

Purchase; Sleep Tight Linen

6

2-1510

Trade Creditors

$12,500.00

6

6-7500

Linen Supplies

$11,363.64

6

2-1220

GST Paid

$1,136.36

CR

6/07/2020

CR000001

1-1110


$4,000,000.00

CR000001

2-2100

Business Loan #1

$4,000,000.00

CR

6/07/2020

CR000002

1-1110


$350,000.00

CR000002

3-1000

Owner's/Shareholder's Capital

$350,000.00

SJ

7/07/2020

Sale; Le Fleur' Fashion Events

1

1-1310

Trade Debtors

$22,000.00

1

4-5000

Hotel Venue Hire

$20,000.00

1

2-1210

GST Collected

$2,000.00

CR

7/07/2020

Cash Sales

CR000003

1-1110


$4,350.00

CR000003

4-4000

Bar Takings

$3,954.55

CR000003

2-1210

GST Collected

$395.45

PJ

9/07/2020

Purchase; RSA Training Services

7

2-1510

Trade Creditors

$1,800.00

7

6-4400

Staff Training Expenses

$1,636.36

7

2-1220

GST Paid

$163.64

PJ

9/07/2020

Purchase; NYC Food Services

8

2-1510

Trade Creditors

$3,400.00

8

1-1320

Inventory

$3,400.00

SJ

9/07/2020

Sale; Le Fleur' Fashion Events

ADJ00000001

1-1310

Trade Debtors

$1,500.00

ADJ00000001

4-5000

Hotel Venue Hire

$1,363.64

ADJ00000001

2-1210

GST Collected

$136.36

SJ

9/07/2020

Le Fleur' Fashion Events: Credit from ADJ00000001

SJ000001

1-1310

Trade Debtors

$1,500.00

SJ000001

1-1310

Trade Debtors

$1,500.00

SJ

11/07/2020

Sale; Universal Studios

2

1-1310

Trade Debtors

$150,000.00

2

4-5000

Hotel Venue Hire

$136,363.64

2

2-1210

GST Collected

$13,636.36

PJ

11/07/2020

Purchase; C.M Constructions

9

2-1510

Trade Creditors

$45,000.00

9

6-7700

Repairs & Maintenance - Buildings

$40,909.09

9

2-1220

GST Paid

$4,090.91

CD

11/07/2020

Cash Sales

1

2-1130

AMEX #1

$55.90

1

6-4600

Travel & Accom. Expenses

$50.82

1

2-1220

GST Paid

$5.08

PJ

18/07/2020

Purchase; International Liquor Supplies

10

2-1510

Trade Creditors

$2,300.00

10

1-1320

Inventory

$2,300.00

PJ

18/07/2020

Purchase; BM Legal Services

11

2-1510

Trade Creditors

$15,000.00

11

6-1900

Legal Fees

$13,636.36

11

2-1220

GST Paid

$1,363.64

PJ

23/07/2020

Purchase; CL Technology Services

12

2-1510

Trade Creditors

$11,000.00

12

6-7900

Office Equipment

$10,000.00

12

2-1220

GST Paid

$1,000.00

CR

23/07/2020

CR000004

1-1110


$5,200.00

CR000004

8-1000

Interest Income

$5,200.00

CR

23/07/2020

Cash Sales

CR000008

1-1110


$8,400.00

CR000008

4-8000


$7,636.36

CR000008

2-1210

GST Collected

$763.64

PJ

28/07/2020

Purchase; CL Technology Services

13

2-1510

Trade Creditors

$80,000.00

13

6-2400

Computer Expenses

$72,727.27

13

2-1220

GST Paid

$7,272.73

PJ

28/07/2020

Purchase; C.M Constructions

14

2-1510

Trade Creditors

$2,200.00

14

6-7700


$2,000.00

14

2-1220

GST Paid

$200.00

PJ

30/07/2020

Purchase; Singapore Airlines

15

2-1510

Trade Creditors

$4,300.00

15

6-4600


$3,909.09

15

2-1220

GST Paid

$390.91

SJ

30/07/2020

Sale; B.A.M Events

ADJ00000002

1-1310

Trade Debtors

$15,000.00

ADJ00000002

6-1500

Bad Debts

$13,636.36

ADJ00000002

2-1210

GST Collected

$1,363.64

CR

30/07/2020

Cash Sales

CR000005

4-4000

Bar Takings

$2,181.82

CR000005

1-1110


$6,500.00

CR000005

2-1210

GST Collected

$590.91

CR000005

4-7000

Restaurant Takings

$3,727.27

CR

30/07/2020

Payment; Le Fleur' Fashion Events

CR000007

1-1310

Trade Debtors

$20,500.00

CR000007

1-1110


$20,500.00

SJ

30/07/2020

B.A.M Events : Credit from ADJ00000002

SJ000002

1-1310

Trade Debtors

$15,000.00

SJ000002

1-1310

Trade Debtors

$15,000.00

Grand Total:

$4,931,855.90

$4,931,855.90


Profit & Loss Statement

July 2020

Income

Bar Takings

$6,136.37

Hotel Venue Hire

$168,636.36

Restaurant Takings

$3,727.27


$95,636.36

Total Income

$274,136.36

Gross Profit

$274,136.36

Expenses

General Expenses

Bad Debts

$13,636.36

Electricity Expenses

$7,727.27

Legal Fees

$13,636.36


$17,136.36

Internet

$10,363.64

Computer Expenses

$72,727.27

Total General Expenses

$135,227.26

Payroll Expenses

Staff Training Expenses

$1,636.36


$3,959.91

Total Payroll Expenses

$5,596.27

Insurance Expenses

Day Spa Consumables

$3,454.55

Linen Supplies

$11,363.64


$42,909.09

Office Equipment

$10,000.00

Total Insurance Expenses

$67,727.28

Total Expenses

$208,550.81

Operating Profit

$65,585.55

Other Income

Interest Income

$5,200.00

Total Other Income

$5,200.00

Total Other Expenses

$0.00

Net Profit/(Loss)

$70,785.55


Balance Sheet

As of July 2020

Assets

Current Assets

Bank Accounts


$4,491,750.00

Total Bank Accounts

$4,491,750.00

Other Current Assets

Trade Debtors

$150,000.00

Inventory

$5,700.00

Total Other Current Assets

$155,700.00

Total Current Assets

$4,647,450.00

Total Assets

$4,647,450.00

Liabilities

Current Liabilities

Credit Cards

AMEX #1

$55.90

Total Credit Cards

$55.90

GST Liabilities

GST Collected

$26,050.00

GST Paid

($19,491.45)

Total GST Liabilities

$6,558.55

Other Current Liabilities

Trade Creditors

$220,050.00

Total Other Current Liabilities

$220,050.00

Total Current Liabilities

$226,664.45

Non-Current Liabilities

Business Loan #1

$4,000,000.00

Total Non-Current Liabilities

$4,000,000.00

Total Liabilities

$4,226,664.45

Net Assets

$420,785.55

Equity


$350,000.00

Current Year Earnings

$70,785.55

Total Equity

$420,785.55


Statement of Cash Flow

July 2020

Account Name

Cash Flow from Operating Activities

Net Income

$70,785.55

Trade Debtors

($150,000.00)

Inventory

($5,700.00)

AMEX #1

$55.90

GST Collected

$26,050.00

GST Paid

($19,491.45)

Trade Creditors

$220,050.00

Net Cash Flow from Operating Activities

$141,750.00

Cash Flow from Investing Activities

Net Cash Flow from Investing Activities

$0.00

Cash Flow from Financing Activities

Business Loan #1

$4,000,000.00


$350,000.00

Net Cash Flow from Financing Activities

$4,350,000.00

Net Increase/Decrease for the period

$4,491,750.00

Cash at the Beginning of the period

$0.00

Cash at the End of the period

$4,491,750.00

Step 10

Property, plant & equipment (PPE) is generally a considerable asset for any firm and my company, Millennium Hotels is no exception. In fact, it is the company’s largest non-current asset. This of course makes complete sense as Millennium Hotels (as the name suggests) is part of the Hotel Industry, providing accommodation all over the world. It is therefore reasonable to expect their assets to mainly consist of land, buildings and equipment. The reason PPE is classified as a non-current asset is due to the fact that the nature of the asset is expected to result in future economic benefits beyond a 12-month period.

Assets depreciate that is, they ‘wear out’. Actually, nearly everything wears out eventually, even us! We all have a ‘useful life’. Depreciation is an expense amount that is calculated and applied to an asset over the term of its ‘useful life’ – that is, how long we expect that asset is going to be competent at generating revenue for our company. There are several methods that can be used to calculate depreciation and they include the straight-line, diminishing balance and the units per production methods.

Depreciation Policy

The notes to the firm financials in 2017, 2018 & 2019 state that all assets, other than freehold land, are depreciated to their residual values utilising the straight-line method of depreciation over the term of the asset’s useful life.

The below table outlines the useful life of some of Millennium Hotels assets in the 2019 year.

ASSET

ESTIMATED USEFUL LIFE

Plant & Machinery

15-20 years

Furniture & Equipment

10 years

Computer Equipment

5 years

The straight-line method essentially means that the same amount of depreciation expense is accounted for each year until the residual amount is reached. I like to also think of this method as the ‘equal’ method. The amount the asset is depreciated by is of an ‘equal’ amount each year.

Let’s assume the Hotel Group has purchased new computer equipment worth $15,000 and it has a residual value of $2000. I know from the information in the table above that the firm’s estimated useful life is 5 years. The formula for calculating depreciation using the straight-line method is the cost of the asset less its residual value, then divided by its estimated useful life.

Cost of Asset - $15,000

Residual Value - $2000

Estimated Useful Life – 5 years

$15,000 - $2,000 = $13,000

$13,000 (Total Depreciable Value)

$13,000/5 = $2600

$2600 – Annual Depreciation Amount

Based on these calculations Millennium Hotels would depreciate the computer equipment by $2,600 each year for 5 years. This method seems like quite a straight-forward method to use. It did get me wondering what the advantages are using this method as opposed to the reducing balance method. How would the depreciation expense differ if that method was used instead? I was curious to find out.

The name to this method pretty well sums it up for me. Reducing balance basically means the cost of the asset is reduced by the declining amount each year. It assumes that an asset is used more at the beginning of its useful life and less as at the end. I want to compare the depreciation expense of the computer equipment using this method.

In order to calculate this method of depreciation I need to determine what amount, as a percentage, the firm expects the asset to depreciate by each year. In this case, I will assume that Millennium Hotels expects the asset to depreciate by 40% each year.

The calculation using the reducing balance method for the computer equipment would look like this:

Year 1

13000

40%

5200

Year 2

5200

40%

2080

Year 3

2080

40%

832

Year 4

832

40%

333

Year 5

333

40%

133

TOTAL DEPRECIATION EXPENSE

8578

Here I use the amount at the end of each period and carry it over to the beginning of each new period to calculate the depreciable amount for that year. At the end of Year 5 asset has a residual value of $4,422. This is significantly higher than the amount estimated using the straight line method.

I believe that the straight-line method more accurately represents the residual value of the computer equipment. This type of equipment becomes obsolete quite quickly due to continuous technology advancements and I don’t agree that the salvageable amount of the computer equipment would be that high. Perhaps this is why Millennium Hotels do in fact use the straight-line method.

How much of an expenses is depreciation to Millennium Hotels? (Compare depreciation to total expenses)

Amortisation

I recall first coming across the term amortisation in ACCT 11059 while looking through my firms financials. At the time I didn’t give it a lot of thought and perhaps was even a little daunted by the term so I kind of pushed it to the side. Now that I have had the opportunity to discover more about it, I have realised the concept is not so hard to grasp at all. Amortisation is essentially depreciation for ‘intangible assets’, which are those assets that have no physical substance (e.g. patents, trademarks), are non-monetary and can be separately identifiable. Amortisation works the same as depreciation in that the amortisation expense is spread out over the term of the assets useful life.

Goodwill

Journal Entries

DATE

GENERAL JOURNAL

DEBIT

CREDIT

31.12.2019

Depreciation Expense – Computer Equipment

$2600

Accumulated Depreciation (Computer Equipment)

(Depreciation expense for the year)

$2600

DATE

GENERAL JOURNAL

DEBIT

CREDIT

31.12.2019

Depreciation Expense – Buildings

7

Depreciation Expense – Plant & Machinery

6

Depreciation Expense – Furniture & Equipment

2

Accumulated Depreciation (Property, Plant & Equipment)


15

DATE

GENERAL JOURNAL

DEBIT

CREDIT

31.12.2019

Depreciation Expense – Motor Vehicle

4000

Accumulated Depreciation


4000

Step 11

belindamclintock.files.wordpress.com · web viewbelinda mclintock . cq university . student...

Documents