AGL 97D1 - CRE Learning  · Web viewASSIGNMENT 11.0 - SUMMARY LECTURE FOR PART 1. 11.10 LEARNING...

110
AGLWP AUTOMATED GROUP LEARNING (AGL) NO. 1 - FINANCE FOR MANAGERS DAILY WORK PACK - PART I (Not retained)

Transcript of AGL 97D1 - CRE Learning  · Web viewASSIGNMENT 11.0 - SUMMARY LECTURE FOR PART 1. 11.10 LEARNING...

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AGLWP

AUTOMATED GROUP LEARNING

(AGL)

NO. 1 - FINANCE FOR MANAGERS

DAILY WORK PACK - PART I (Not retained)

Copyright: RGAB/IR 2006/1 No copies of without written permission.

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WELCOME TO THE PROGRAM

1. Good morning. Welcome to AGL No. 1 Finance for Non-financial Managers. AGL. Automated group learning.

2. During the next two days you will achieve a rapid grasp of the basics of finance. This is the first in a series of a five programs related to finance and accounting.

3. The course represents many years of development and testing in thirty countries around the world, in nine languages by thousands of participants. Their criticisms and suggestions have been incorporated into the programme.

4. After two days learning with the AGL method you will understand and use the information and reports issued by your finance and accounting division; and you will retain the skills and knowledge accumulated for a long period.

5. While you may be used to traditional educational methods, you will be agreeably surprised by your learning results of the next two days. We will provide you with a controlled environment for learning.

6. It may seem strange for you to learn without an instructor, but be assured that we have structured the course to enable you to find the answers to all your questions in the learning materials provided.

7. Your course organiser is trained to run the program and to help you obtain the most benefit from the course. You will have to work hard, but you will learn a great deal, and to retain the knowledge. So now let us start with abbreviations some which follow ...

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ABBREVIATIONS

AGL - AUTOMATED GROUP LEARNING

IND - INDIVIDUAL

SG - SMALL GROUP

CSG - COMBINED SMALL GROUP

MG - MAIN GROUP

ASS - ACCOUNTING STEP BY STEP

PL - PROGRAMME LEARNING

L - LECTURE

D - DISCUSSION

CH - CHAPTER

LRT - LEARNING RECALL TAPE

IAS - INTERNATIONAL ACCOUNTING STANDARDS

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THE PROGRAM

2-day course 3-day course

Ass. Activity Group Day 1 Day 1

1. Introduction IND 08.00 - 08.30 10.00 - 10.15SG (new)

2. Quiz IND 08.30 - 09.15 10.15 - 11.00 SG

Coffee

3. ASS.Ch. 1 & 2 IND 09.15 - 10.15 11.10 - 12.00Accounting Reports

4. Lecture: MG 10.15 - 10.30 12.00 - 12.15Accounting Reports SG

5. Case: IND 10.45 - 12.00 12.15 - 13.00

John Marais SG Lunch

Case: CSG 14.00 - 14.30 13.00 - 14.30.

6. Lecture: MG 12.00 - 12.30 14.30 - 15.00John Marais CSG

Lunch

7. ASS.Ch. 3 IND 13.30 - 14.45 15.00 - 16.15Balance Sheet SG (new)

Tea

8. Lecture: MG 14.45 - 15.00 16.30 - 16.45Balance Sheet

9. Case: IND 15.00 - 15.45 16.45 - 17.30Cape Electronics SG

Tea DAY II

- Case: CSG 16.00 - 16.45 10.00 - 10.45Cape Electronics

10. Lecture: MG 16.45 - 17.15 10.45 - 11.00Cape Electronics CSG

Coffee

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11. Summary Lecture MG 17.15 - 18.00 11.10 - 11.30

ASSIGNMENT 1.0 - INTRODUCTION

1.1 SPECIFIC OBJECTIVES

The program provides members with the opportunity to understand financial terms, techniques and reports so that they become more complete managers. This broadening of knowledge and skills will enables them to capitalise on business opportunities and to accelerate their career development. The specific learning objectives are to:

(a) Understand accounting language and concepts(b) Interpret balance sheets and income statements(c) Use basic financial ratios(d) Develop confidence in using accounting and financial data(e) Motivate further study in the future

The syllabus of the program includes: accounting terminology, accounting reports, liquidity, profitability, evaluating the business potential for new ventures and projects, accounting concepts, activity analysis, operating statements, reserves, equity, financial forecasting, budgeting and the LAPP system of financial analysis.

1.2 AUTOMATED GROUP LEARNING (AGL)

The AGL method is designed to achieve rapid individual learning using special material and the stimulus of group activity without a formal instructor. The groups use the material to find the answers to all problems and questions.

1.3 GROUP ARRANGEMENTS

The work will be done:

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(a) IND - Individually, or (b) SG - Small Group (in small groups of four members which

will change half daily) ,or (c) CSG - Combined Small Group (two small groups together), or

(d) MG - Main Group (short lectures with visual aids).

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ASSIGNMENT 1.0 - INTRODUCTION

1.4 SG - SMALL GROUPS

Group names provided on name lists. Note the name of your SG and the names of the other members.

1.5 LEARNING MATERIALS

(a) Retained by members

Textbook (ASS)Notebook - for recording every key point Daily Course Diary Learning Recall Tape Articles CAI

(b) Used by not retained by members:

Daily work packs including: introduction, lectures, cases, exercises and key learning points

NOTE:

Please use your notebook. Do not mark the Daily Work Pack which must be handed back at the end of each day. You receive all the materials in your SG. Don't look ahead in the work pack until you are specifically asked to do so!

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ASSIGNMENT 1.0 - INTRODUCTION

1.6 METHOD

Try to complete every task in the time allowed. A pattern of learning methods will be used including:

(a) Programmed learning

(b) Case analysis

(c) Lectures

(d) Quizzes

(e) Learning patterns

(f) Homework reading

(g) Learning Recall Tape (LRT)

(h) CAI

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ASSIGNMENT 1.0 - INTRODUCTION

1.7 LEARNING PATTERNS - REVIEW

S12 S12 1.71.7 LEARNING PATTERNS - REVIEWLEARNING PATTERNS - REVIEW2. Learning

continuous activity ....• IND SG CSG MG

S82 11.10 LEARNING PATTERNS - REVIEWS82 11.10 LEARNING PATTERNS - REVIEWAccounting ConceptsAccounting Concepts

Conservatism Consistency Materiality Comparability CostIAS Profit realisation Accounting period Entity

S11 S11 1.71.7 LEARNING PATTERNS - REVIEWLEARNING PATTERNS - REVIEW 1. Objectives

Language RatiosConcepts Forecasting Balance Sheets

Income Statements Financial Health

CONFIDENCE

1.8 INSTRUCTIONS (15 MINUTES)

(a) Assemble in SG's to introduce yourself, indicate your past experience in finance and what you hope to contribute to and gain from the course.

(b) Complete the registration sheet in the Daily Course Diary.

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NOTE: Please check that you have a full set of learning materials

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ASSIGNMENT 2.0 - QUIZ (45 MINUTES)

2.1 INSTRUCTIONS SMALL GROUP WORK

(a) Assemble in SG

(b) Answer the quiz of 100 questions; mark your answers a, b, c, or d with a clear "x" on the special form provided in the course diary

(c) Work as quickly as possible but don't guess - leave blanks

(d) Hand in your answer sheet to the Organiser who will mark it and give you a quantitative measure of your financial knowledge at the start of the course

(e) Reassemble in MG when the bell rings

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ASSIGNMENT 3.0 - PROGRAMME LEARNING (60 MINUTES)

3.1 INSTRUCTIONS - INDIVIDUAL WORK

(a) Assemble in SG

(b) Read ASS pages 9 and 10 "How to use the programme"

(c) Quickly read ASS Ch. 1 Do ASS Ch. 2 in writing

(d) Record significant points in your notebook

(e) Reassemble in MG when the bell rings

NOTE: Work very quickly. Write the answers in the ASS book; check out one question at a time; don't hesitate to "cheat" when you don't know the answer ... in finance a little cheating can be very educational ...

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ASSIGNMENT 4.0 - LECTURE ON ACCOUNTING REPORTS

4.1 METHOD

Read aloud, listen and respond verbally to any questions.

4.2 ACCOUNTING REPORTS

(a) Income Statement (IS)

Profit and Loss Account or Operating StatementAccounting period is one yearSales less cost of goods actually sold = gross profitGross profit less expenses = net profitRatios are thermometersGross profit over sales = gross profit percentageNet profit over sales = net profit percentage

(b) Balance Sheet (BS)

Situation at the beginning of accounting periodSituation at end of accounting periodAssets of a business are financed by liabilities and

owners equity

4.3 ASSETS (A)

Things owned by a business which have measurable cost: cash, accounts receivable (debtors), inventories (stock), prepayments, equipment, buildings, land, etc.

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ASSIGNMENT 4.0 - LECTURE ON ACCOUNTING REPORTS

4.4 LIABILITIES (L)

Amounts due to be paid (cash must be paid to "them") accounts payable, trade creditors, other liabilities, taxation payable, long term liabilities.

4.5 OWNERS' EQUITY

Rights of the owners of a business Initial capital plus profitsAssets less liabilities = owners' equityProfits increase owners' equityLosses reduce owners' equity

4.6 EQUITY:DEBT (LIABILITIES) (E:D)

This means equity as distinct from liabilitiesRatio of assets financed from owners' equity and liabilities

4.7 TRANSACTIONS

Each transaction has a dual effectAssets increase and cash decreases, orAssets increase and liabilities increase, orCash decreases and liabilities decrease

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ASSIGNMENT 4.0 - LECTURE ON ACCOUNTING REPORTS

4.8 LEARNING PATTERNS - REVIEW

S26 4.8S26 4.8 LEARNING PATTERNS - REVIEWLEARNING PATTERNS - REVIEW2. Income Statements

• C + E + P = S • C + E + P = S • C + E + P = S

S25 4.8S25 4.8 LEARNING PATTERNS - REVIEWLEARNING PATTERNS - REVIEW1. Key Issues

• CASH• INVENTORY• ORDERS

S27 4.8S27 4.8 LEARNING PATTERNS - REVIEWLEARNING PATTERNS - REVIEW3. Balancs Sheets

• A = L + OE• OE = A - L• L = A - OE

S28 4.8S28 4.8 LEARNING PATTERNS - REVIEWLEARNING PATTERNS - REVIEW4. Transactions

CASH 0 A + L +

CASH - A 0 L -

4.9 INSTRUCTIONS (10 MINUTES)

(a) Reassemble in SG.

(b) Study the lecture very carefully and record key points in your notebook.

(c) Discuss any outstanding questions in SG.

(d) When the bell rings carry on with the case study which follows.

ASSIGNMENT 5.0 CASE STUDY - JOHN MARAIS

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5.1 INSTRUCTIONS

(a) General:

John Marais is a case study; it is the story of a business in words and figures; the questions are to help you to analyse the problems.

(b) Individual and SG work (45 minutes)

Read the case and study it carefully. Analyse all the key problems. Answer all the questions in your notebook and on the SG flip chart provided.

Discuss all the points together and formulate a specific plan of action; you need not all agree but you must decide.

(c) Combined small group work (30 minutes)

Groups will assemble as follows:

A+D B+E C+F

Groups A, B and C will present the answers to all of the questions on the SG flip chart; they should try to achieve a consensus of the CSG on what has happened and what should be done.

(d) Re-assemble in MG when the bell rings.

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ASSIGNMENT 5.0 CASE STUDY - JOHN MARAIS

EXHIBIT 1

On July 1, 2006 John Marais took his savings and material he found in his father's garage and started business for himself. It wasn't a large business but it did give him the pleasure of being his own boss and combined the inside work of manufacturing with the outside work of selling.

His product was a wooden crane which was priced to retail at 2.00 each. It was a realistic toy intended for boys aged 4 to 8 years.

Mr. Marais did all the work himself and had no employees.

At the end of the first six months' trading Mr. Marais took pride in his first income statement and he was so happy!

He hoped that it would be the forerunner of a long series of reports showing profitable operations. This statement is shown in Exhibit 2.

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ASSIGNMENT 5.0 CASE STUDY - JOHN MARAIS

EXHIBIT 1

QUESTIONS ON THE CASE:

1. Study the story of the case and every figure in the financial statements to determine its meaning and significance. Get a picture of what has happened. Don't miss the obvious things.

2. Roughly compute the following ratios:

Gross Profit Sales x 100% =

Net Profit

Sales x 100% =

Net Profit Owners Equity x 100% = p.a.

Current Assets : Current Liabilities =Quick Assets: Quick Liabilities =Equity : Debt =

Note: QA = cash plus receivables (not inventory).

3. Consider the financial health of the business in terms of: liquidity, activity, profitability and potential

4. List the achievements and problems of the business

5. Write out a plan of action to deal with the problems

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ASSIGNMENT 5.0 CASE STUDY - JOHN MARAIS

EXHIBIT 2

Income Statement for the six months endingDecember 31, 2006

Net Sales

4,000

Cost of Goods actually sold: Opening inventory 1.7 2006 (in garage) 200 Materials purchased 2,000 Wages (paid to J. Marais) 5,000 Rent 800 Total Manufacturing Cost 8,000 Less inventory unsold on 31.12.2006 valued at manufacturing cost 6,000

2,000

GROSS PROFIT

2,000

Expenses: Advertising and selling 950

50 1,000 NET PROFIT

1,000

Balance Sheet as at December 31, 2006 ASSETS: Cash

140

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Accounts receivable (unpaid since October this year)

50 Inventory at manufacturing cost

6,000

TOTAL ASSETS (to be financed)

6,190

LIABILITIES & OWNERS EQUITY: Liabilities: Loan: S.O. Marais (father) 2,000 Accounts payable (creditors) 1,690

3,690

Owners Equity: Capital

1,500 Accumulated profit 1,000

2,500

TOTAL FINANCE FOR THE ASSETS

6,190

ASSIGNMENT 8.0 - LECTURE ON BALANCE SHEETS

8,1 Assets

Valuable things owned by a business.

Fixed assets are for long term use in a business; valued at cost

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less depreciation, not market value; e.g., land, buildings, machinery, equipment, motor cars, etc.

Current assets are cash or near cash within one year; valued at cost or lower realisable (market) value; examples: cash, accounts receivable (debtors), inventories (stock); prepaid expenses, marketable securities.

Other assets are special assets valued at cost or lower; examples: patents, trade investments, goodwill, etc.

8.2 LIABILITIES

Amounts due to be paid by the business to someone else.

Accounts payable (creditors) are liabilities.

Current liabilities are due for payment within one year, e.g., accounts payable, creditors, other payables, income tax payable, dividends payable.

Long term liabilities are due for payment in more than one year; examples: mortgages, loans, debentures, etc.

Bank loans and overdrafts are normally classified as current liabilities whereas bank loans for more than one year are long term liabilities.

Liabilities are normally unsecured but may have special security on particular assets.

ASSIGNMENT 8.0 - LECTURE ON BALANCE SHEETS

8.3 OWNERS' EQUITY

Assets of a business are financed by either liabilities or owners' equity.

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Owners' equity is the capital issued to shareholders (stockholders), in exchange for cash, plus reserves accumulated in the business.

Reserves include capital reserves (share premium) or revenue reserves (retained earnings) or accumulated profits.

Assets less liabilities = owners' equityAssets = liabilities plus owners' equityAssets less owners' equity = liabilities

8.4 RATIOS

Ratios are like a thermometer which takes the actual temperature of a business in relation to some standard scale.

ROUGH STANDARD SCALEGood Average Poor

(a) Liquidity

CA : CL 2:1 1:1 1:2 QA : QL 1 :1 1:1 1:2 E : D 2:1 1:1 1:2

(b) Profitability

GP/S x 100% Up Same Down NP/S x 100% Up Same Down NP/OE x 100% p.a. Up Same Down

ASSIGNMENT 8.0 - LECTURE ON BALANCE SHEETS

8.5 LEARNING PATTERNS - REVIEW

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S50 8.5 LEARNING PATTERNS - REVIEWS50 8.5 LEARNING PATTERNS - REVIEW2. Receivables & Payables2. Receivables & Payables

R - receives the cash ,...

P - pays the cash ...

S49 8.5 LEARNING PATTERNS - REVIEWS49 8.5 LEARNING PATTERNS - REVIEW1. Asset Structure1. Asset Structure

FA FA FA CA CA CA OA OA OA

S51 8.5 LEARNING PATTERNS - REVIEWS51 8.5 LEARNING PATTERNS - REVIEW3. Funding Structure3. Funding Structure

CL CL CL LTL LTL LTL TL TL TL OE OE OE

8.6 INSTRUCTIONS (10 MINUTES)

(a) Reassemble in SG

(b) Study the lecture carefully

(c) Record key points in your notebook

(d) Discuss outstanding questions

(e) When the bell rings, carry on with the case study which follow

ASSIGNMENT 10.0 - CASE: CAPE ELECTRONICS

9.1 INSTRUCTIONS

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(a) In SG study the case carefully and answer all the questions in your notebook and on the SG flipchart (45 minutes)

(b) Work in CSG as follows:

A + E B + F C + D

with groups D, E, F responsible for the CSG discussion (45 minutes)

(c) Reassemble in MG when the bell rings

ASSIGNMENT 10.0 - CASE: CAPE ELECTRONICS

EXHIBIT 1

QUESTIONS ON THE CASE

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1. Study the story of the case and every figure in the financial statements to determine its meaning and significance. Get a picture of what has happened. Don't miss the obvious things.

2. Roughly compute the following ratios:Actual GoodRatio

Standard

(a) Liquidity

Current Assets : Current Liabilities 2 : 1

Quick Assets : Quick Liabilities 1 1/2 : 1

Equity : Debt 2 : 1

(b) Activity

Sales Assets (times turned over p.a.) 1+

Cost of goods sold Inventories (times turned over p.a.) 2+

(c) Profitability

Gross Profit Sales x 100%

30%

Net Profit Sales x 100%

8%

Net Profit Owners Equity x 100% p.a.(before tax)

25%

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ASSIGNMENT 10.0 - CASE: CAPE ELECTRONICS

EXHIBIT 1 QUESTIONS ON THE CASE (continued)

3. Compute a better figure of net profit (2,480) by deducting charges for:

(a) depreciation of equipment (10 years life)

(b) cost of labour (3.00 per hour)

(c) depreciation patent (4 years life)

(d) overhead (say 100)

The revised net profit is:

4. Consider the financial health of the business in terms of: liquidity, activity, profitability and potential

5. List the achievements and problems of the business. How many units would have to be sold to "break even" with their present salaries?

6. List the seven alternatives and write out a specific plan of action to deal with the problems

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ASSIGNMENT 10.0 - CASE: CAPE ELECTRONICS

EXHIBIT 2

After six months of part-time operations, Pete and Charlie met to decide whether to make Cape Electronics Company, not a part-time but a full-time venture.

Pete was Production Engineer for GMC Manufacturing Company and Charlie was the Sales Manager. Each earned a salary of 14,000 per annum. Pete had invented a new electronics switch which controlled a number of electric circuits in sequence automatically. He developed a working model, applied for a patent and on May 2, 2006 sold twenty units at 375 each to GMC.

Pete and Charlie immediately formed Cape Electronics Company, and each took 200 shares in exchange for 2,000 in cash. Pete also assigned his invention to the company in exchange for a non-interest bearing twenty year note for 5,000.

The manufacture of this electronic switch involved mainly assembly and wiring. The two men did this themselves in a garage working evenings and weekends. Twenty units were then completed and paid for by September 2006. Meanwhile, Charlie placed a small advertisement in the trade papers and this resulted in enquiries that lead to orders for five additional units from other companies.

In September he placed larger advertisements costing 1,000. To fill the orders expected from the advertising promptly, they continued to assemble, and by October 31, they had 6 units on hand. They also had on hand a supply of components. During the period May 1 to October 31, they worked ten hours each week on production plus additional time dealing with prospective customers and other problems. They drew no salary.

They decided that the time had come to think about devoting full-time to the business, so Charlie prepared the financial statement shown as Exhibit 3. There were no outstanding sales orders but they had placed orders for

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components for 2,800 for delivery in November.

ASSIGNMENT 10.0 - CASE: CAPE ELECTRONICS

EXHIBIT 3

Financial Statements as of October 31, 2006BALANCE SHEET

ASSETS:

Current Assets:Cash 289Receivables (debtors) 750Inventory of components (at cost) 2,362Inventory of finished switches (at cost) 1,187

4,588

Fixed Assets: Equipment (at cost)4 2,879Patent right (at cost) 5,000

7,879

Total Assets

12,467

FINANCED BY LIABILITIES AND OWNERS EQUITY:

Liabilities:Accounts payable (creditors)

987Note Payable

5,000

Total Liabilities 5,987

Owners' Equity:

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Share capital 4,000Accumulated Profit 2,480

6,480

Total Liabilities and Owners Equity

12,467

INCOME STATEMENT FOR SIX MONTHS ENDED OCTOBER 31, 2006

Sales

9,375

Cost of sales

4,862

Gross Profit

4,513

Advertising 1,463Other Expenses 570

2,033

Net Profit

2,480

ASSIGNMENT 11.0 - SUMMARY LECTURE FOR PART 1

11.1 OBJECTIVES

(a) Understand accounting language and concepts

(b) Interpret balance sheets and profit and loss accounts

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(c) Use basic financial ratios

(d) Develop confidence in using accounting and financial data

(e) Motivate further study in the future

11.2 ACCOUNTING LANGUAGE (a) Glossary of ASS is a continuous reference

(b) Two hundred words (only) is the basic vocabulary

(c) The USA/European Accounting languages may be compared:

U.S.A. EUROPEANreceivables debtorspayables creditorsinventory stockcapital stock share capitalcapital surplus capital reserveearned surplus) accumulated profitretained savings) revenue reserveearnings statement)operating statement) profit and loss accountincome statement)

Note: The layout of the financial statements may not affect the content; you just have to search harder to find the data that you want.

ASSIGNMENT 11.0 - SUMMARY LECTURE FOR PART 1

11.3 ACCOUNTING CONCEPTS

Records of transactions are converted into accounting reports by using practical accounting concepts:

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cost (assets generally at cost)consistency conservatismcomparabilityaccounting periodgoing concern (not break-up values)entity (the business not its workers)profit realisationaccrual (cash and credit transactions included)true and fair (as possible)MATERIALITY (most important of all!)

11.4 ACCOUNTING PERIOD

Accounting periods create uncertainty and doubt.

Try to associate all sales costs, expenses and profits with a specific accounting period. All accounting figures are estimates not scientific facts.

11.5 PROFIT AND LOSS ACCOUNT

Sales less cost of goods sold equals gross profit.

Gross profit less selling and administrative expenses equals net profit for the accounting period.

Profit depends upon: charging all the proper costs and stock valuation.

ASSIGNMENT 11.0 - SUMMARY LECTURE FOR PART 1

11.6 BALANCE SHEET

Assets of the business: how they are financed from liabilities and owners equity.

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Fixed assets valued at cost less depreciation (based on the working life of the asset).

Fixed assets such as land and building may have to be revalued periodically.

Current assets (one year only) valued at cost or lower realisable (market) value.

Stock valued at the lower cost or market value.

11.7 HEALTH OF THE BUSINESS

LAPP System

Liquidity - cash is more important than profit. & Gearing

Activity - turning over the assets and the inventory; more activity requires more assets!

Profitability - gross and net profit related to sales and owners equity.

Potential - depends upon: market, product life cycle, facilities, management, strategy etc.

ASSIGNMENT 11.0 - SUMMARY LECTURE FOR PART 1

11.8 BASIC FINANCIAL RATIOS

ROUGH STANDARD SCALE

Good Average Poor

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a) Liquidity:

CA : CL 2 : 1 1 : 1 1 : 2QA : QL 1+: 1 1 : 1 1 : 2 E : D 2 : 1 1 : 1 1 : 2

b) Activity:

Sales Assets Up Same Down

CGS Stock Up Same Down

c) Profitability:

Gross ProfitSales Up Same Down

Net ProfitSales Up Same Down

Net ProfitOwners Equity Up Same Down

ASSIGNMENT 11.0 - SUMMARY LECTURE FOR PART 1

11.9 MATERIALITY

Look for the big figures which are significant. Compare them with the past, the future and the industry averages to determine the significance of changes.

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Look for the big figures ... the coconuts ... ignore the peanuts ...

Look for "CHANGE" and ask the reasons why.

ASSIGNMENT 11.0 - SUMMARY LECTURE FOR PART 1

11.10 LEARNING PATTERNS - REVIEW

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S81 11.10 LEARNING PATTERNS - REVIEWS81 11.10 LEARNING PATTERNS - REVIEW1. BS & IS1. BS & IS

• Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr.5• IS IS IS ISIS•

• S S S SS• C C C CC• P P P PP•

• BS BS BS BS BSBS

S82 11.10 LEARNING PATTERNS - REVIEWS82 11.10 LEARNING PATTERNS - REVIEWAccounting ConceptsAccounting Concepts

Conservatism ConsistencyMateriality Comparability CostIAS Profit realisation Accounting period Entity

S83 11.10 LEARNING PATTERNS - REVIEWS83 11.10 LEARNING PATTERNS - REVIEW 3. Financial Formulae 3. Financial Formulae

• A - L = OE• A - OE = L• OE + L = A• S - C - E = P

S84 11.10 LEARNING PATTERNS - REVIEWS84 11.10 LEARNING PATTERNS - REVIEW 4. More Financial Formulae 4. More Financial Formulae

• CA:CL• QA: QL• E: D• S/A• CGS/I• GP/S• NP/S• NP/OE

ASSIGNMENT 11.0 - SUMMARY LECTURE FOR PART 1

11.11 INSTRUCTIONS (20 minutes)

(a) Reassemble in SG

(b) Review the Summary Lecture for Part I in the course diary and discuss questions arising

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(c) To get the best out of Part II of the program, try to complete ALL of the following homework tonight:

1. Read the articles on the accounting2. In the ASS text, review the chapter

summaries and the glossary3. Do the "optional" exercises in the course

diary and check the answers4. Review the summary lecture for Part I in the

course diary5. Review your notes for Part I of the course

and list outstanding questions to be resolved in Part II

(d) Now, would you please return the workpack to the organiser?

NOTE OF APPRECIATION

Thank you for working so hard today We hope the AGL experience is rewarding for you From tomorrow ... it's downhill all the way ... !!

S 8 5 1 1 . 1 0 L E A R N I N G P A T T E R N S - R E V I E WS 8 5 1 1 . 1 0 L E A R N I N G P A T T E R N S - R E V I E W 4 . M a t e r i a l i t y 4 . M a t e r i a l i t y

• P e a n u t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a n d c o c o n u t s . . .

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AGL97D2

AUTOMATED GROUP LEARNING (AGL)

NO. 1 - FINANCE FOR MANAGERS

DAILY WORK PACK - PART II (Not retained)

Copyright: RGAB/IR 2006/3 No copies of without written permission.

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PROGRAMME - PART II

2-day course 3-day course

Assign. Activity Group Day II Day II

1. Review & Quiz SG (new) 08.00 - 08.45 11.30 - 12.00

2. ASS.Ch. 4 IND 08.45 - 10.00 12.00 - 13.00Income Statements

Lunch

3. Lecture: MG 10.00 - 10.30 14.00 - 14.30Income Statements SG

Coffee

4. Case: IND 10.45 - 11.45 14.30 - 15.30Tom Lyster SG

CSG

5. Lecture: MG 11.45 - 12.15 15.30 - 16.00Tom Lyster CSG

6. Case: IND 12.15 - 12.30 16.00 - 16.15Bill Brown SG

Lunch Tea- Case:

Bill Brown SG 13.30 - 13.45 16.30 - 16.45

7. ASS. Ch. 5 IND 13.45 - 14.15 16.45 - 17.15Account. Reports SG (new)

8. Lecture: MG 14.15 - 14.45 17.15 - 17.30Account. Reports SG

Day III

9. Case: IND 14.45 - 15.30 10.00 - 10.30Special Supply SG

- Case: CSG 15.30 - 16.00 10.30 - 11.00Special Supply

Tea Coffee

10. Lecture: MG 16.15 - 16.45 11.15 - 11.45

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Special Supply CSG

11. Quiz IND 16.45 - 17.30 11.45 - 12.30

12. Summary Lecture MG 17.30 - 18.00 12.30 - 13.00& Feedback Report

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ASSIGNMENT 1.0 - REVIEW AND SHORT QUIZ

1.1 INSTRUCTIONS

(a) Assemble in new SG

(b) Discuss outstanding questions from Part I

(c) Do the short quiz which follows. Work on each question individually and then compare answers in SG

(d) When all answers have been completed, check with the correct solution and discuss points arising

(e) Reassemble in MG when the bell rings

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ASSIGNMENT 1.0 - REVIEW AND SHORT QUIZ

For a manufacturing company show the effect of each of the transactions listed below as of the time the event described takes place: cash, current assets, net working capital (current assets less current liabilities), net profit for the current period. In the spaces provided enter: plus sign (+) to indicate an increase, or minus sign (-) to indicate a decrease, or zero (0) to indicate no effect at all. Item No. 0 is given as an example.

Example: Cash CA NWC

NP

0. Wages earned by employees during the period were paid in cash and charged to expense

- - - - . Materials purchased for cash and

charged to inventory

2. Some of the above materials (inventory) were used up and sold for cash at a profit and the cost was charged to cost of goods sold

3. Capital (share) stock was issued for cash

4. Depreciation for the period wasestimated and recorded in the books

5. Money was borrowed from the bank on a

30-day note payable (disregard interest) 6. Equipment (fixed asset) was purchased

for cash (ignore depreciation)

7. Equipment was purchased on long termcredit (ignore depreciation)

8. An account (creditor) payable wasreduced by a cash payment

9. Dividends were paid in cash andcharged to accumulated profit

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10. Wages accrued in a prior accountingperiod were paid in cash

11. A fixed asset sold for cash at a profit

12. A fully depreciated asset was scrappedfor no valueScore: /48

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ANSWERS TO THE SHORT QUIZ

.Materials purchased for cash andcharged to inventory - 0 0 0

2. Some of the above materials (ininventory) were used up and sold for cash at a profit and the costwas charged to cost of goods sold + + + +

3. Capital (share) stock was issuedfor cash + + + 0

4. Depreciation for the period wasestimated and recorded in the books 0 0 0 -

5. Money was borrowed from the bank + + 0 0

on a 30-day note payable(disregard interest)

6. Equipment (fixed asset) was purchased

for cash (ignore depreciation) - - - 0

7. Equipment was purchased on long termcredit (ignore depreciation) 0 0 0 0

8. An account (creditor) payable wasreduced by a cash payment - - 0 0

9. Dividends were paid in cash andcharged to accumulated profit - - - 0

10. Wages accrued in a prior accountingperiod were paid in cash - - 0 0

11. A fixed asset sold for cash at aprofit + + + +

12. A fully depreciated asset wasscrapped for no value 0 0 0

0

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ASSIGNMENT 2.0 PROGRAMME LEARNING

2.1 INSTRUCTIONS

(a) Reassemble in SG

(b) Review the summaries of ASS Ch. 1, 2, and 3

(c) Do Ch. 4 in writing

(d) Record key points in your notebook

(e) Reassemble in MG when the bell rings

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ASSIGNMENT 3.0 - LECTURE - INCOME STATEMENTS

3.1 ACCOUNTING PERIOD CONCEPT

Income statement (profit and loss account, earnings statement) for the accounting period.

Balance sheet at the start and end of the accounting period.

Normally one year.

3.2 ACCRUAL CONCEPT

Sales, cost and expenses may be for cash or credit.

Income statement includes both cash and credit transactions.

3.3 INCOME STATEMENTS AND BALANCE SHEETS

Income statement shows how the profit was made

Balance sheet shows assets and how they are financed..

.

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ASSIGNMENT 3.0 - LECTURE - INCOME STATEMENTS

3.4 SALES AND GROSS PROFIT

A measure of activity is: Sales/Assets

Cost of goods sold means cost of sales.

"Trading Account" is part of income statement which indicates:sales less cost of sales = gross profit.

Cost of sales for a trading company (buying and selling finished goods) is: opening inventory plus purchases of finished goods less closing inventory.

Cost of sales for a manufacturing company is different because it does not purchase finished goods. Finished goods are manufactured from factory labour, raw materials and manufacturing overhead.

Manufacturing cost of finished goods must be adjusted for workin process changes.

For a manufacturer, therefore: manufacturing labour + manufacturing materials used + manufacturing overhead + or work in process changes = cost of finished goods manufactured for the period.

This is the same as the "purchase of finished goods" by a trading company.

Work in process is inventory unfinished. As the amount at the beginning and end of the accounting period changes, this difference must be added or deducted to manufacturing cost incurred, in order to compute cost of finished goods manufactured.

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ASSIGNMENT 3.0 - LECTURE - INCOME STATEMENTS

3.5 NET PROFIT

Net income, net earnings, net profit.

Expenses divided into:

(a) normal operating expenses, and

(b) special non-operating expenses

Operating expenses (including selling, general and administrative) are normal costs not connected with manufacturing.

Non-operating expenses are abnormal costs not connected with normal operations (e.g., loss of sales of assets, interest paid).

There may be non-operating income too! (e.g., profit on sales of assets, dividends received, etc.)

Gross profit less operating expenses = operating profit.

Operating profit less non-operating expenses = profit before taxes.

Profit before taxes less income tax = net profit.

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ASSIGNMENT 3.0 - LECTURE - INCOME STATEMENTS

3.6 RATIOS

Profitability:

Gross ProfitSalesx 100%

Net ProfitSalesx 100%

Net ProfitOwners Equity x 100% (p.a.)

Activity:

Sales Assets = measure of "turnover" of assets (p.a.)

Cost of Goods Sold Inventory = measure of "turnover" of inventory (p.a.)

3.7 ACCUMULATED PROFIT

Retained earnings, revenue reserves. Part of the Reserves in the Owners Equity part of the Balance Sheet. Appropriation Account or Statement of Retained Earnings.

Balance brought forward + net profit less dividends = balance c/f

Profit increases owners equity. Reserves increase the equity of the business but not necessarily the cash. Cash may have been used to buy more assets or pay creditors.

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ASSIGNMENT 3.0 - LECTURE - INCOME STATEMENTS

3.8 LEARNING PATTERNS - REVIEW

S115 3.8 LEARNING PATTERNS - REVIEWS115 3.8 LEARNING PATTERNS - REVIEW 1. Credit Transactions 1. Credit Transactions

• Buy now A + L+• Pay later A - L -

S116 3.8 LEARNING PATTERNS - REVIEWS116 3.8 LEARNING PATTERNS - REVIEW2. Cost of Goods Sold - Trading2. Cost of Goods Sold - Trading

• Inventory + Purchases - Closing Inventory =• Cost of goods sold

S117 3.8 LEARNING PATTERNS - REVIEWS117 3.8 LEARNING PATTERNS - REVIEW 3. Cost of Goods Sold - Manufacturing 3. Cost of Goods Sold - Manufacturing

• RM + Labour + Manufacturing Overhead• - Work in Process Changes =•• Cost of Finished Goods "purchased" from the

factory

S118 3.8 LEARNING PATTERNS - REVIEWS118 3.8 LEARNING PATTERNS - REVIEW 4. Charges 4. Charges

Type - material, labour, overhead Function - production, sales, administration

3.9 INSTRUCTIONS (10 MINUTES)

(a) Reassemble in SG

(b) Study the lecture carefully and record key points in your notebook

(c) Discuss outstanding questions

(d) When the bell rings continue with the case study which follows.

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ASSIGNMENT 4.0 CASE - TOM LYSTER

4.1 INSTRUCTIONS

(a) Reassemble in SG

(b) Study the case and answer all the questions in your notebook and on the SG flipchart (30 minutes)

(c) Then work in CSG as follows:

A + D B + E C + F

with groups A, B, and C responsible for the CSG discussion

(d) Reassemble in MG when the bell rings

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ASSIGNMENT 4.0 CASE - TOM LYSTER

EXHIBIT 1 In September 1996, Tom Lyster reviewed the operations of his company for the past year in comparison with the previous year. He was trying to evaluate whether the company had done well or not.

He also planned to forecast operations for the year following to August 31, 2006 using the following assumptions given to him by other departments:

(a) Sales 4,000,000

(b) Direct labour, 24% of sales

(c) Materials in proportion to sales

(d) Depreciation 106,000

(e) Overhead costs to rise by 9% of the additional sales volume due to variable costs

(f) Selling expenses to increase by 100,000

(g) General and administrative expense in proportion to sales

(h) Income tax at 50%

(i) Non-operating income from dividends 400,000

(j) Non-operating expense of interest paid 100,000

(k) Work in process unchanged

He decided to compare all three years to determine significant changes in the company's operations by amount and percentage.

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ASSIGNMENT 4.0 CASE - TOM LYSTER

QUESTIONS ON THE CASE:

1. Study the case to discover the meaning and significance of every word and figure.

2. Evaluate every aspect of this year's performance (sales, cost, expense, profit, etc.). Did the company do well in this year?

3. Prepare a budgeted operating statement for next year from the assumptions given.

4. Comment on the key differences between this year and next year.

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ASSIGNMENT 4.0 CASE - TOM LYSTER

EXHIBIT 2

Operating Statements - Year ended August 31, 1996compared with 1995 and budget for 2006

1995 1996 2006Actual Actual Budget 000 % 000 % 000 %

Net Sales 5,000 100 3,240 100 4,000 100

Less cost of goods sold:Direct labour 1,850 37 810 25Materials 750 15 486 15Depreciation 150 3 130 4Manufacturing overhead 1,000 20 680 21

3,750 75 2,106 65

Gross Profit 1,250 25 1,134 35

Operating ExpenseSelling 300 6 292 9General & administrative 300 6 194 6

600 12 486 15

Operating Profit 650 13 648 20

Non-operating income & expensesDividends received 450 9 200 7Interest paid (200) (4) (200) (7)

250 5 0 0

Profit before taxes 900 18 648 20Income tax 450 9 324 10

NET PROFIT 000 50 9% 324 10%

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ASSIGNMENT ASSIGNMENT 6.0 - BILL BROWN

6.1 INSTRUCTIONS

(a) Reassemble in SG

(b) Study the case and individually answer all the questions (on the worksheet in the diary)

(c) Compare your answers in SG

(d) When the bell rings, stop for lunch!

(e) After lunch, check with the correct solutions and discuss outstanding questions.

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ASSIGNMENT ASSIGNMENT 6.0 - BILL BROWN

EXHIBIT 1 QUESTIONS ON THE CASE

Study the attached financial statement for the year ended December 31, 1996 (exhibits 2 and 3) and complete the following:

1. The current assets were:

2. The current liabilities were:

3. The working capital was:

4. The issued common stock (ordinary share capital) totalled:

5. The owners equity was:

6. Total liabilities were:

7. Net fixed assets were:

8. The opening inventory (stock) was:

9. The closing inventory (stock) was:

10. The cost of sales was:

11. The gross profit percentage to sales was:

12. The net profit percentage to sales was:

13. The net profit percentage to owners equity was:

14. The ratio of current assets to current liabilities was about:

15. Acid test or "quick ratio" was about:

16. The par (nominal) value of one common (ordinary) share was:

17. The book value of one common share was:

18. The preference (preferred stock) dividend was:

19. The EPS (Earnings per Share) for each ordinary shareholder: net profit ... less preferred dividend ... equals ... ; divided by the 2,000 issued ordinary shares ...

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20. The market value of one common share was:

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ASSIGNMENT ASSIGNMENT 6.0 - BILL BROWN

EXHIBIT 2

Balance Sheet as at December 31, 1996 (000)ASSETSCurrent Assets:Cash 3,499Marketable investments (market value 260) 246Debtors (receivables) 5,944Prepaid expenses 389Inventory at the lower of cost or market 12,623 22,651 Fixed Assets:Land, buildings, equipment 26,946Less: accumulated depreciation 18,534 8,412

Other Assets:Trade investments at cost 560Patents at cost less depreciation 1,030Goodwill 1,533Research & development at cost 2,050 5,173

______TOTAL ASSETS 36,236

LIABILITIES & OWNERS EQUITYCurrent Liabilities:Accounts payable (trade creditors) 4,029Accrued expenses 641Current tax liability 1,744Deferred income received 205 6,619

Long Term Liabilities:Mortgage loan 3,500Bonds (unsecured) 2,000 5,500

Owners Equity:Authorised Capital:500 6% Preferred shares ($10 par) 5,0005000 Ordinary (common) shares ($1 par) 5,000 ==== Issued Capital:

500 6% Preferred share ($10 par) 5,0002000 Ordinary (common) shares ($1 par) 2,000 7,000

Capital Surplus (reserve):Share Premium 3,000General reserve 5,000

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Retained earnings 9,117 17,117

TOTAL FINANCING 36,236

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ASSIGNMENT 6.0 - BILL BROWN

EXHIBIT 3

Trading Account (detailed) year ended December 31, 1996 (000)

Gross Sales (less sales tax) 80,000

Less: Sales returns and allowances 522Sales cash discounts 4,000 4,522 75,478Cost of Sales:Opening inventory 13,620Plus: Purchases from suppliers 51,230

64,850Less: ending inventory 12,623 52,227GROSS PROFIT 23,251

Income Statement, year ended December 31, 1996

Net Sales 75,478Cost of Sales 52,227

GROSS PROFIT 23,251

Operating Expenses:Selling 8,389Administrative 6,422General 1,974 16,785

OPERATING PROFIT 6,466Non-Operating Expenses: (see note below) 844

PROFIT - PRETAX 5,622Income Tax 2,500

NET PROFIT 3,122

Statement of Retained Earnings (Accumulated Profit) (000)Balance brought forward 8,295Add:Net Profit for year 3,122 11,417Less: Preferred dividend paid 300Ordinary (common) dividend paid 2,000 2,300

Balance carried forward as part of Owners

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Equity in the Balance Sheet (ending balance) 9,117

Note: Examples of non-operating expenses are: interest paid, loss on disposal of fixed assets, amortisation of goodwill, and loss on investment sales.

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ASSIGNMENT ASSIGNMENT 6.0 - BILL BROWN

EXHIBIT 4

ANSWERS

1. The current assets were 22,6512. The current liabilities were 6,619

3. The working capital was 16,0324. The issued common stock (ordinary share capital) was 2,000

5. The owners equity was 24,1176. Total liabilities were 12,119

7. Net fixed assets were 8,4128. The opening inventory (stock) was 13,620

9. The closing inventory (stock) was 12,62310. The cost of sales was 52,227

11. The gross profit percentage to sales was:23,251/75.478 x 100% about 30%

. The net profit percentage to sales was:3,122/75.478 x 100% about 4%

13. The net profit percentage to owners

equity was: 3122/24,117 x 100% about 12% . The ratio of current assets to current

liabilities was 22,651 : 6,619 = 3 1/2 : 1

. Acid test or "Quick Ratio" was9,639 : 6,414 = 1 1/2 : 1

16. The par (nominal) value of one common share was 1.00

. The book value of one common share was (24,117 - 5,000)/2000 about: 9 1/2

18. The preferred stock dividend was 300

19. The EPS for each common shareholder was:net profit 3,122 less preference dividend300 = 2,822; divided by the number of commonshares issued: 2,822/2,000 = 1.41

20. The market value of one common share was not known

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NOTE: Record score in the diary SCORE____/20

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ASSIGNMENT 7.0 PROGRAMME LEARNING

7.1 INSTRUCTIONS

(a) Reassemble in new SG

(b) Do Assignment Ch. 5 in writing

(c) Review the summary and glossary

(d) Record outstanding questions in your notebook

(e) Reassemble in MG when the bell rings

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ASSIGNMENT 8.0 - THE PACKAGE OF ACCOUNTING REPORTS

8.1 OBJECTIVES

True and fair view (old idea)Fair in accordance with accounting concepts (new view) MaterialityJudgementEstimates not scientific facts

8.2 THE PACKAGE

Balance sheet at beginningIncome statement for the periodStatement of accumulated profit for the periodBalance sheet at end

Cash flow and funds flow (AGL 10)

8.3 STATEMENT OF ACCUMULATED PROFIT

Retained earnings statementAppropriation accountConnects one balance sheet with anotherBalance brought forward plus net profit less dividends equals

balance carried forwardSpecial charges to accumulated profit (i.e. not charged via

the income statement) need special investigation!

8.4 METHOD OF FINANCIAL ANALYSIS

Understand the languageDetermine the story behind the figuresCompare figures and ratios against standardsConcentrate of material (significant) items

Ask questions

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ASSIGNMENT 8.0 - THE PACKAGE OF ACCOUNTING REPORTS

8.5 LAPP SYSTEM OF FINANCIAL ANALYSIS

(a) Liquidity & Gearing Standard

Current Assets : Cur. Liabilities 2 : 1Quick Assets : Quick Liabilities 1 1/2 : 1Equity : Debt 2 : 1

(b) Activity:

Sales p.a. 1 or betterAssets

Cost of Sales p.a. 2 or betterInventory

Receivables x 360 days steady or decreasingSales

Payables x 360 days steady or decreasingCost of Sales

(c) Profitability:

Gross Profit steady or increasingSales

Net Profit steady or increasingSales

Net Profit steady or increasingOwners Equity

(d) Potential: Product, Market, Facilities (human and physical)Management, Finance

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ASSIGNMENT 8.0 - THE PACKAGE OF ACCOUNTING REPORTS

8.6 COMPARISON - KEY TO FINANCIAL ANALYSIS

Compare the amounts and ratios against a standard: Ask: What is important? Did it change? Why did it change? Standard may be: past, budget, industry average

8.7 POTENTIAL FOR THE FUTURE

Forecast forward to show what will happen under a range of specificassumptions.

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ASSIGNMENT 8.0 - THE PACKAGE OF ACCOUNTING REPORTS

8.8 LEARNING PATTERNS REVIEW

S147 8 .8 LEARNING PATTERNS - REVIEWS147 8 .8 LEARNING PATTERNS - REVIEW 1. Reports 1. Reports

• UK/USA/Germany/Russia .... IAS

S148 8.8 LEARNING PATTERNS - REVIEWS148 8.8 LEARNING PATTERNS - REVIEW 2. The Package 2. The Package

• BS• IS• Cash flow• Funds flow• BS

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ASSIGNMENT 8.0 - THE PACKAGE OF ACCOUNTING REPORTS

8.8 LEARNING PATTERNS REVIEW

S149 8.8 LEARNING PATTERNS - REVIEWS149 8.8 LEARNING PATTERNS - REVIEW 3. L.A.P.P. 3. L.A.P.P.

Liquidity and Gearing Activity Profitability Potential

S150 8.8 LEARNING PATTERNS - REVIEWS150 8.8 LEARNING PATTERNS - REVIEW 4. Effect of Expansion 4. Effect of Expansion

• Sales•••••••• Inventory & Receivables

8.9 INSTRUCTIONS (10 MINUTES)

(a) Reassemble in SG

(b) Study the lecture carefully and record key points in your notebook

(c) Discuss outstanding questions

(d) When the bell rings, carry on with the case study which follows

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ASSIGNMENT 9.0 CASE - SPECIAL SUPPLY CO.

9.1 INSTRUCTIONS

(a) Reassemble in SG

(b) Study the case carefully and answer all the questions in your notebook and on the SG flipchart (45 minutes)

(c) Work in CSG as follows:

A + E, B + F, C + D

with groups D, E, F responsible for the CSG.

D, E, F represent the SSC.

A, B, C represent the bankers.

(d) Reassemble in MG when the bell rings

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ASSIGNMENT 9.0 CASE - SPECIAL SUPPLY CO.

QUESTIONS ON THE CASE

1. Study the case carefully to understand the story behind the figures. Don't miss the obvious things! (Exhibits 2 and 3)

2. Compute the actual ratios for 1996 (next page).

3. Review the health of the company for 1996 in terms of: liquidity, activity, profitability and potential.

4. Which standard of performance (1995 actual or 1996 forecast) should be used to measure:

(a) management effectiveness during 1996?(b) general trend of operations?

6. Set out the "seven alternatives" and a plan of action for:

(a) the company

(b) the banker

NOTE: Remember to answer every question fully.

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ASSIGNMENT 9.0 CASE - SPECIAL SUPPLY CO.

EXHIBIT 1

QUESTIONS ON THE CASE (cont.)

RATIOS

1995 1996 1996Actual Forecast Actual Comment

(a) Liquidity

CA : CL 4.9 : 1 3.1 : 1QA : QL 1.7 : 1 1.1 : 1E : D 4.5 : 1 2.8 : 1

(b) Activity

S = times p.a. 3.4 3.3A

CGS = times p.a. 3.8 4.0I

Receivables (drs.) -Days of Sales 24 30

Payables (crs.) -Days of CGS 14 9

(c) Profitability

GP = % 35.0 37.0S

NP = % 4.3 5.6

S

NP = % 18 25OE

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ASSIGNMENT 9.0 CASE - SPECIAL SUPPLY CO.

EXHIBIT 2

SPECIAL SUPPLY COMPANY

On January 15, 2006, Mr. Jameson, the manager of the Standard Bank, was reviewing the 75,000 loan (overdraft) facility of the Special Supply Company (SSC). The overdraft was due to be reduced by 25,000 on January 31, 2006. That same day Mr. Jameson had received a letter from SSC enclosing the financial statements for the year ended December 31, 1996 and pointing out that "Sales thus far this year were running ahead of those of a year ago and he hoped to reach a sales volume of 2,500,000 in 2006).

The Special Supply Company (SSC) was formed in 1992 as a distributor of electrical supplies. SSC's volume of business expanded rapidly and in late 1995 SSC decided to construct on its property a new warehouse building. It was hoped to expand sales extensively and yet to maintain credit terms of net 30 days from debtors (receivables) and continue to get cash discounts from suppliers by quick payment.

In January 1996 SSC officials visited the Standard Bank to discuss with Mr. Jameson the results for 1995 and the forecast for 1996 which indicated that a bank loan of about 30,000 would be required. SSC had banked with Standard Bank since its inception in 1992 and this was the first time that they had asked for a loan.

Mr. Jameson agreed to provide loan (overdraft) facilities of up to 75,000 to finance not only the construction of the new building (40,000), but also additional working capital (35,000). The loan was established on a three year basis calling for a reduction of 25,000 each year beginning with 25,000 on January 31, 2006.

From time to time during 1996 the company officials called to see Mr. Jameson to report progress on construction which was completed in April 1996. They also reported a very successful increase in sales and profit.

Mr. Jameson developed the comparative financial reports (Exhibit 3) and was now concerned as to how to deal with the situation.

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ASSIGNMENT 9.0 CASE - SPECIAL SUPPLY CO.

EXHIBIT 3

Balance Sheets as of December 31 (000)

Actual Forecast Actual 1995 1996 1996

Assets

Current assets:Cash 27 - -Accounts receivable (debtors) 63 96 127Inventory (stock) 166 183 314

256 279 441Fixed assets:

At cost 39 80 92Less: accumulated depreciation 7 10 12

32 70 80Total Assets 288 349 521

Liabilities & Owners Equity

Current liabilities:Accounts payable (creditors) 24 18 139Provision for income tax 28 43 45Bank overdraft (loan) 30* 75

52 91 259Owners Equity:

Capital 100 100 100Retained Earnings 136 158 162

236 258 262Total liabilities & OE 288 349 521

Income Statements for year ended December 31 (000)Actual Forecast Actual 1995 1996 1996

Net sales 969 1,163 1,583Cost of goods sold 630 733 1,053

Gross Profit 339 430 530Operating expenses 269 322 416

Operating profit 70 108 114Income tax (40%) 28 43 45

Net profit after tax 42 65 69Dividend paid 28 43 43

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ASSIGNMENT 11.0 - QUIZ

11.1 INSTRUCTIONS

(a) Reassemble in SG

(b) Do the quiz of 100 questions on the answer sheet in the diary

(c) Check your answer with the organiser and resolve outstanding questions

(d) Complete the first feedback form in the course diary and give to the organiser.

(e) Reassemble in MG when the bell rings

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12.0 SUMMARY LECTURE FOR PART II

12.1 WORK COMPLETED

ASSPackage of accounting reportsBasic financial analysis

12.2 POINTS ON CASES

Tom Lyster Ratios: GP/S and NP/S Comparison with past years, budget and industry averages

Forecasting a future profit and loss account based on assump-tions of: sales, ratios, estimates

Bill BrownInterpretation of financial statementsWorking capital (CA - CL)Par and book value of owners equity; EPS

Special Supply CompanyComparison of financial statements against past and forecast figuresRatio analysisEffect of increased sales on assets requiredDeterioration of E : D ratioBank problemsDividend reduction to save cashNeed for equity base for larger expansion

Compare them against a standard (past, forecast, or industry average)Find out why they changed Coconuts not peanuts please !!!

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12.0 SUMMARY LECTURE FOR PART II

12.3 MATERIALITY

Compare data by amounts and ratios Concentrate on the big figures

12.4 TRENDS TO BE EXPECTED IN A HEALTHY COMPANY

Sales and profits increase

Profitability ratios increase

Inventory and receivables in relation to sales

Equity : Debt (2 : 1 strong) but not usually less than 1 : 1

Note: "In the EU of the 1990's the "health" of a business may well depend upon keeping up with both national and international industry averages ... "

12.5 BALANCE SHEET

Fixed assets and current assets financed by liabilities and owners equity. Investigate how and why the assets are valued! Should they be "revalued" to more realistic current values?

Note on liabilities : In some countries, there may be a long delay in actually paying corporation tax on profits; this may lead to two figures of tax liabilities on the balance sheet:

a. Current tax liability - probably tax on the previous year's profit, and

b. Deferred taxation - probably tax on the current year's profit

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12.0 SUMMARY LECTURE FOR PART II

12.6 PROFIT AND LOSS ACCOUNT

Sales less cost and expense gives profit for the accounting period.

Distinguish operating (normal) profit from non-operating profits and losses.

Investigate profit and losses NOT charged to the income statement but charged to:

a. Accumulated profit

b. Capital reserve

In some countries published financial statements often do not reveal gross profit or identify operating expenses.

However from 2006 onwards, they should always show a reconciliation of the profit figure with IAS (International Accounting Standards).

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12.0 SUMMARY LECTURE FOR PART II

12.7 RATIOS

ROUGH STANDARD

Good Average Poora) Liquidity:

CA : CL 2 : 1 1 : 1 1 : 2QA : QL 1+: 1 1 : 1 1 : 2

E : D 2 : 1 1 : 1 1 : 2

(b) Activity:S p.a. 2 1 1/2A

CGS p.a. 3 2 1I

Receivables - Days of Sales 30 60 120

Payables - Days of CGS 30 60 120

(c) Profitability GP 40% 30% 10%S

NP 10% 5% 1%S

NP p.a. 25% 15% 5%OE

Note: The above are only rough standards; much better standards are: industry averages, budgets or forecasts, or even past results

(d) Potential - Product, Market, Facilities, Management, and of course ... Finance.

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12.0 SUMMARY LECTURE FOR PART II

12.9 CONCLUSIONS

The program was designed to help you to develop financial lan-guage, concepts and confidence and to motivate you toward further study and practice in the future.

Financial analysis helps to tease out the questions to ask; the layout of the financial statements is not important, provided you have the confidence to find your way around the data.

Cash (liquidity) is more important than profit. Sales orders outstanding and inventory valuation are the keys to profit! (Orders outstanding effect the inventory valuation which can have an important effect on profit).

Profit must be judged in relation to target or budget or industry ratios, not merely last years performance.

Financial statements are based on accounting concepts (which are as flexible as proverbs -- one for every occasion!). However, always ask for a reconciliation of the net profit, with "International Accounting Standards" and investigate any differences arising.

Figures are only estimates; compare them against a useful standard to determine their significance. Don't pretend to be too accurate!

Try to find out management's objectives in preparing the specific financial statements that you study (taxes? shareholders? bank? mergers? efficiency? etc.).

Study the "notes to the financial statements" very carefully!

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Question the valuation of the assets. Always consider the effect of inflation on asset values and profits during the accounting period.

12.0 SUMMARY LECTURE FOR PART II

12.9 CONCLUSIONS

Look out for possible "manipulation", which is often politely re-ferred to as "aggressive" or "creative" accounting.

Check that financial reports have been audited by a firm that is professionally recognised, independent and adequately paid to do a full audit to international auditing standards.

Look for timely financial reports, completed and audited within two months after the end the accounting period. Long delays in producing and publishing financial statements (months or even years) are always justification for "concern" ... regardless of the reasons suggested ...

For every critical financial problem, do a PFD (Provision for Disaster) brain-storming, to avoid the dreaded EI (Emotional Investment) in only one course of action ...

There are always seven alternatives for every financial decision .... so watch out for EI, PFD, peanuts and coconuts ... get into your helicopter ... but come down again and resolve the problems ...

Note: In finance good luck is helpful, so ALWAYS remember Napoleon ... who said: I want good generals ... but ... I want lucky ones too!

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12.0 SUMMARY LECTURE FOR PART II

This ends our AGL program; the first of a six part series (finance, cost control, budgets and business planning, capital investment analysis, forex & risk management, and finally, EVA and the management of working capital. We hope it has inspired you to develop your skills by practical application.

Thank you for your interest and hard work. Keep ASS glossary handy as a daily reference for accounting language.

We hope that you have much enjoyed the AGL experience and that it motivates you to read widely in finance and accounting and to continue your studies in the future.

Now reinforce your learning from the program by using the LRT (Learning Recall Tape) to help you with the "Learning Maintenance Program" (Exhibit A which follows), as explained by the organiser.

Then please send us the Final Feedback Summary and quiz results on day 34.

We trust that you have found AGL to be both "efficient" (doing things right) and "effective" (doing the right things). Thank you for being a member of our programs.

RGAB/IR5.9.2006

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DAYS 4-34LEARNING MAINTENANCE PROGRAM

EXHIBIT A

1. Objective - to ensure that learning from the course is both MAINTAINED and REINFORCED !!!

2. Help - discuss problems arising with your local Controllers, and for any outstanding questions, do not hesitate to FAX or Email us for whatever assistance may be needed.

3. Routine -

a. Play the LRT (Learning Recall Tape) several times to

reinforce the your learning recall, achieve deeper understanding of EVERY aspect of the course, and to identify the learning materials that will require extra study time.

b. Study the WSJ (supplied without charge for 30 days) for at least 20 minutes daily. Use the special note provided, to interpret the more difficult technical sections.

c. Review all the course learning materials.

d. From day 15 onwards, study the text book Analysis for Financial Management (Higgins) which is used in the MBA Program of the Harvard Business School..

4. On day 34, complete the quiz of 100 questions (open book) and return it to the Organiser with your mature feedback on the course content and its direct application to your area of responsibility.

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