HI5001: Accounting For Business Decisions - Stockholders’ Equity - Statement Of Cash Flow - Assessment Answer

Accounting For Business Decisions Assignment

Assignment Task

Provide an executive summary which states the problem, how it was investigated, what was found, and what the findings mean. The introduction may include the company’s background relating to business structure, operations, services and all other business activities that are conducted, etc. Main Body

A. Statement of Financial Position

Use the annual report for the year ending 30 June 2015. Your group will need to review the major sections of this report in order to familiarize yourselves with the content of each of the financial statements and appropriate notes to the financial statements. Review the balance sheet of the company and indicate the amount of the following:

a) Total current assets

b) Total non-current assets

c) Total current liabilities

d) Total non-current liabilities

e) Total stockholder’s equity Compare the above figures with the previous year and compute the percentage increase or decrease and comment on the comparative financial condition of the company.

B. Stockholders’ Equity

Review the stockholders' equity section in your chosen company's most recent year-end balance sheet and compare that with the previous year-end balance sheet. Compare percentage increase or decrease. List the stockholders' equity account balances and number of outstanding shares from these two balance sheets and compute the increase or decrease for each during this past year.

C. Statement of Profit & Loss Review the income statement and indicate the following:

a) Total (operating) revenues

b) Cost of Goods Sold (if relevant)

c) Total expenses (before income taxes) d) Any non-operating (or extraordinary) gains and losses e) Earnings per common share Compare the above figures with the previous year and compute the percentage increase or decrease and comment on the comparative financial operation of the company. HI5001M Assignment T2 16

D. Statement of Cash Flow Review the statement of cash flows for the most recent year and indicate the following:<

a) net cash inflow (outflow) from operating activities

b) net cash inflow (outflow) from financing activitie<

c) net cash inflow (outflow) from investing activities

d) net increase (decrease) in cash during the year Analyse the Cash Flow Statements for the last 2 years and comment on the cash position of the company. What is the course of action based on your conclusion?

Introduction

Alchemy Resources Ltd. is a MATERIALSbased industry company listed on the Australian stock exchange. It basically is involved in the exploration of the Bryah basin project. The current focus of the company is on the identification and exploration of gold and base metal projects and expansion through strategic acquisition and exploration projects. The projects are a joint venture between Alchemy, Independence Group and Northern Star Resources. Ltd

The discussion that follows will analyse the financials of the company on the parameters instructed in the assignment and report findings, conclusions and recommendations thereon.

Part 2 Main Body

A Statement of Financial position

Chart 1 clearly indicates that the Comparative financial position of Alchemy has improved overall in terms of the annualized components. The current assets have shown an increase of 201.45 % compared to 2014. This increase is caused by the increase in cash and cash equivalents to the tune of $ 1,268,592. The deposits on call of the company are the main cash equivalents of the company contributing to this rise as per Note 6. This indicated strong liquidity for the company in the current year compared to last year. The other components of the current assets like receivables and other current currents are not significant contributors to this increase. However, the management ought to invest the surplus cash at its best opportunity costs after thorough cost benefit analysis

The Total non- current assets have reduced by 30.36 % compared to 2014. The cause of the reduction is attributed to the drop in exploration and evaluation expenditure as well as plant and machinery. As per Note 9, an impairment expense of $ 3,958,878 has been charged in the year which has pushed the asset value to a drop of 30.36 %. The total reduction in expenditure compared to last year is $ 5,355,151. The note further provides that the carrying value of tenements includes those that were sold in relation to the Hermes and adjacent tenements during March 2015. The impairment expense is also in relation to these tenements. Exploration and evaluation assets are recognised in the current year only when the rights to the relevant area of interest are current and the recoupment of such expenditures are expected through development and sale for profit and secondly activities for the relevant area of interest do not at the reporting date indicate an impairment or doubt to the economic recoverability of the reserves and are continuing in nature. The drop in property, plant and equipment is attributed to drop in motor vehicle, mobile accommodation, office equipment, field equipment and computer equipment’s; all contributing to the drop in the value of non-current assets.

The drop in non-current assets may adversely affect the fixed assets turnover as fewer assets are available to earn revenue. It is therefore important that fixed assets are valued at fair market price and do not significantly drop.(Smallbusiness.chron.com, 2016) In order to maintain an ideal current and quick ratio and a working capital, current assets increase is considered beneficial, However, increase in profitability is always attributed to the increase in fixed assets as current assets are regarded as less profitable.

The non-current liabilities for the current year are nil implying a 100 % reduction in this component as the liability of $ 10,638 was paid off. Since the company does not rely on debt in the current year for its finances, it is 100% owned with an excellent risk return profile. Investors favour investment in such companies provided other parameters hold good as well.

The current liabilities have dropped by 48.94 % implying better liquidity ratios for the company as discussed above. The drop is majorly attributed to the fall in trade creditors by $ 46,443 as provided in Note 12. The lease liabilities of $ 38,077 have also been paid off during the year. Provisions for employee benefits have decreased to the extent of $ 7,485.

The equity has reduced by 22.31 % mainly attributed to the increase in accumulated losses of the company to the tune of $ 4,776,086. The contributed equity in the current year has increased by $ 650,000 attributed to issue of shares.

Chart 1 (Appendicle 1)

B Stockholders Equity

As per Chart 2, all components of stockholder’s equity have improved during the year. The issue of shares to Troy Resources Ltd. and placement to Northern Star Resources Ltd. to the tune of $ 150,000 and $ 500,000 respectively have increased the contributed equity of the company, causing the number of outstanding shares to increase by 23.37 %. The balance in the equity account has increased by 2.27 % thereby. To be noted that a non-renounceable issue of shares was made to the shareholders in 2014 to the tune of 28,601,746 shares at $ 715,044. The issue of shares is inevitable as a source of financing as the company does not rely on external debt.

The company purchased in February 2015, the contingent Reserve Payment of $690,000 due to Troy Resources Limited by issuing the shares. In March 2015, the company sold the Hermes gold resource to Northern Star Resources Limited for $1,450,000 and placed 33.33 million shares to raise $500,000.

The accumulated losses have increased by 44.75 % compared to last year 2014. The loss is attributable in whole to the stockholders as the company is 100% equity financed in the current year. The reserves attributable to equity holders have increased by 6.01%. An analysis into the cause of the increase indicates that the impairment expense on $ 3,958,878 in respect of exploration and evaluation have pushed up the current year loss of the company. However, in keeping with the accounting policy for recognition of impairment, the recognition was inevitable. Note 3 m provides that Exploration and evaluation expenditure as well as acquisition costs of licences and permit is capitalised as an asset on the area of interest basis. Before the company obtains the legal right to the area of interest the expenses are recognized in the statement of profit or loss.

Increase in the equity for the company implies increase in net assets of the company and increased investor confidence on the company of its shareholders and prospective investors. It also implies increase in number of shares, revenues and profits of the concerned company and can be regarded as a positive sign of financial position.

C. Statement of Profit & Loss

As per Chart 3, the total operating revenues and cost of goods for Alchemy Resources Ltd. are nil for 2015 and 2014. The reason for the nil status of the above components is simply that the company belongs tothe material exploration industry. The company also does not report any extraordinary expenses gains or losses for both the years under analysis. These costs and revenues may be regarded as irrelevant for comparison for the material industry due to the significant difference in accounting for its assets and recognition of income and expenses thereby.

The total expenses before income taxes have increased by 190.48 % compared to 2014. An analysis into the cause of the increase indicates that the impairment expense on $ 3,958,878 in respect of exploration and evaluation have pushed up the current year loss of the company. Intangible assets and other assets having indefinite useful life are subject to annual impairment, sometimes even twice a year where circumstances indicate the need for impairment such that the carrying amount may not be recoverable. An impairment loss is recognised when the carrying amount exceeds its recoverable amount. An increase in total expenses indicates falling profitability, liquidity and efficiency of a company. (Smallbusiness.chron.com, 2016)

Exploration and evaluation costs of $494,947 were expensed in 2015 compared to $1,047,926 in 2014 in respect of relinquished tenements as per the accounting policy of the company. Significant improvement in employee and administration expenses to the tune of $541,084 in 2015 compared to $696,277 in 2014 was noted. The reason of the reduction indicates improved operational efficiency and is attributed to to the reduction in staff due to natural attrition and a reduction in non-executive directors’ fees and the re-negotiation of contract.

The accumulated losses per share has increased by 141 % in the current year. As per note r, the Basic earnings per share is computed by dividing the income/loss available for the stockholders of the company (direct costs of equity are duly deducted) by the weighted average outstanding equity shares during the year, duly adjusted for bonus and treasury shares.

D. Statement of Cash Flow

As per Chart 4, the net operating inflow for Alchemy has improved significantly by 49.22 %. The decrease is attributed to the decrease in payments to suppliers and employees and is about $ 248,722 in amount. The position has improved in the sense that the outflows in the year are lower than 2014. Normally, a net operating cash inflow is indicative of improved liquidity and profitability of the company as it indicates that the company operations are generating sufficient cash to meet its operating expenses. In this sense, the company has improved the ratio of its operating cash inflows. The research and development tax rebate received in the year has also contributed to the improved operating cash flow position in 2015. The rebate is for $ 183,832.

The cash inflow from investing activities is better by 186.74 %. The proceeds from sale of prospects to the tune of $ 1,450,000 and proceeds from the sale of plant and machinery to the tune of $ 60,000 have resulted in the net inflows for the current year. The reduction in the cash outflow on account of payment for exploration during the year have also contributed to the increasing inflow for the company. These payments have dropped by $ 802,900 in 2015. Sale of fixed assets and prospects not only implies increased cash flow but also denotes that replacement of the fixed assets will entail the revenue so as to to further generate profits for the company.(Investopedia, 2015)

The financing cash flows of the company have reduced by 31.10%. The reduction is attributed to the low level of proceeds from the issue of share in 2015 compared to 2014. The financing cash flows of the company throw light on the sources of finance used by the company in the year to meet its current and long term obligations and invest them for further growth and profitability. Financing cash flows clearly indicate the flow of cash between the company and the providers of finance. Cash is also required to meet the operating expenses of the company as the company has not generated any operating inflow of cash during the year. (Smith, 2011)

The cash and cash equivalent have significantly increased by 216.56 % implying that the liquidity position of the company has also significantly improved for the year in spite of huge accumulated losses and increase in the loss per share. The cause for this improvement is attributed to the timing and recognition of cash inflow or revenue for the material industry accounting.(Tiffany C. Wright, 2016)The company plans to utilize the surplus cash on further exploration of high-value gold and base metal projects.

Part 3 Conclusion

The Comparative financial position of Alchemy has improved overall in terms of the annualized components. The current assets have shown an increase of 201.45 % compared to 2014. This indicated strong liquidity for the company in the current year compared to last year. The Total non- current assets have reduced by 30.36 % compared to 2014. The drop in non-current assets may adversely affect the fixed assets turnover as fewer assets are available to earn revenue. The current liabilities have dropped by 48.94 % implying better liquidity ratios for the company as discussed above.

All components of stockholder’s equity have improved during the year. The accumulated losses have increased by 44.75 % compared to last year 2014. Increase in the equity for the company implies increase in net assets of the company and increased investor confidence on the company of its shareholders and prospective investors. It also implies increase in number of shares, revenues and profits of the concerned company and can be regarded as a positive sign of financial position form this point of view.

The total operating revenues and cost of goods for Alchemy Resources Ltd. are nil for 2015 and 2014 The Company also does not report any extraordinary expenses gains or losses for both the years under analysis. These costs and revenues may be regarded as irrelevant for comparison for the material industry due to the significant difference in accounting for its assets and recognition of income and expenses thereby.

The total expenses before income taxes have increased indicating falling profitability, liquidity and efficiency of the company. This does not indicate a very comfortable performance for the company in the current year.

The net operating inflow for Alchemy has improved significantly by 49.22 %. Normally, a net operating cash inflow is indicative of improved liquidity and profitability of the company as it indicates that the company operations are generating sufficient cash to meet its operating expenses. In this sense, the company has improved the ratio of its operating cash inflows. The cash inflow from investing activities is better by 186.74 % and is actually implying an improvement from outflow to inflow in the current year in respect of investing activities of the company. This inflow is caused due to the peculiar nature of the material exploration industry. The financing cash flows of the company have reduced by 31.10%. The financing cash flows of the company throw light on the sources of finance used by the company in the year to meet its current and long term obligations and invest them for further growth and profitability. Financing cash flows clearly indicate the flow of cash between the company and the providers of finance. The cash and cash equivalent have significantly increased by 216.56 % implying that the liquidity position of the company has also significantly improved for the year in spite of huge accumulated losses and increase in the loss per share during the year. The cause for this improvement is attributed to the timing and recognition of cash inflow or revenue for the material industry accounting. The company plans to utilize the surplus cash on further exploration of high-value gold and base metal projects.