Assignment #2

Step one

Chapter 4 reflection – DRAFT

I was relieved when I completed assignment one before the submission date, I felt like I could take a bit of a step back before starting the next stage of my assignment. But once I realised it was about restating financial statements and ratios, I knew I needed to stay ahead with all my readings or I would definitely fall behind in assignment two. To be honest, I have no understanding of what ratios are. In my senior year of high school, I didn’t choose to do a business class and I also wasn’t in the smartest maths class. I made those choices because I didn’t know what I wanted to do when I left school and I just thought, well why bother learning about accounting or parallelograms if I’m never going to use them? Learning about restating financial statements and ratios could really help me in the job that I’m in now, but I’m not sure how useful this information will be to me in the future, but I hope I can still retain the information that we learn in this unit.

I wasn’t very interested in reading chapter four as I knew it would be hard for me to understand. It took me nearly the whole working week to get through this chapter as I was pretty unmotivated to get started. I found that the example of the fish market didn’t really make sense to me, maybe I just didn’t read it properly or didn’t want to understand it. I did however enjoy the quote from Niccolo Machiavelli. “Whoever wishes to foresee the future must consult the past”. I believe that you need to acknowledge what has happened in the past to be able to move forward, in personal lives and in businesses. If I was to look at my firms financial statements from the last four years, I would be able to have a clear understanding of how the firm was doing at those times, as I believe that numbers tell their own story.

The further I read through the chapter, the more I realised that were plenty of new acronyms that I know I needed to learn. When I wrote down my KCQs for this chapter, I also wrote down all the acronyms in the chapter, along with their full names so I could refer back to them. I found it interesting that firms can add value to their equity investors by earning return on net operating assets that are more than the cost of capital. Although I didn’t really understand it at first, it made sense that the firm can create more value by doing so. To be honest, when I came across the tables in the chapter, I just skimmed passed them as they made absolutely no sense to me whatsoever. A big part of that was me not wanting to understand them as I started to become overwhelmed. I then realised that I needed to go back and try to understand them, even if that meant going over them again and again. I knew as soon as I read what assignment two was that I wasn’t going to enjoy it, mostly because accounting doesn’t interest me and neither does analysing financial statements, but that doesn’t mean I’m not going to put in any effort. This unit is a stepping stone on the way to achieving my Diploma of Business Studies.

I found it rather helpful the way Martin separated his firms operating and financial assets and liabilities. This really breaks down the balance sheet in the financial statements in a way that I was able to understand. Although I have not completed it myself as of yet, I do intend on keeping that one under my belt for this unit. I was also able to understand why a firm won’t always be able to match their cash flows. For example; cash flow is when a company needs money. They often take out loans to get them through until their revenue comes in. firms are able to determine the amount of money they need before it comes in, which assists them with what they need to do to make the cash available.

I really enjoyed reading the paragraph where Martin talks about restating financial statements and that they are a bit like learning how to open a Kinder Surprise. That was definitely one way to grab my attention. I understand the point that Martin was getting at and I wish restating my financial statements was just as easy and fun as trying to open a Kinder Surprise, but in reality I’m prepared to tear my hair out when I attempt that step of our assignment. Who would have thought you could use chocolate as an example when explaining how to restate financial statements? I think it’s a great way to draw someone, like myself in who isn’t very interested in reading about restating financial statements. However, I don’t think I agree that restating my firms financial statements are just as fun as opening a Kinder Surprise. I’d much rather be eating copious amounts of chocolate!

To conclude chapter four, I didn’t really understand most of it and I know what this step of the assignment is going to be really challenging for me. There was a quote at the beginning of the profitability and efficiency chapter that said, “information is not knowledge”. By Albert Einstein. I found that very relatable as it’s almost takes no effort to read something, but if I really want to gain the knowledge of basic accounting, I know that I need to be putting in just that little bit more of an effort to really understand the things I’m reading. I find that doing these reflections on the chapters are really helpful, even though I feel like I’m rambling on the whole time. I’m not looking forward to how stressful it’s going to be to restate my financial statements, however I am keen on discovering how much I’ve learnt so far.

STEP TWO

Chapter 6 reflection – DRAFT

I was instantly overwhelmed when I came across chapter six, “Understand key costs and relationships”. There was so much to read and I knew that I needed to try and understand at least half of it to be able to start the next step of the assignment. As I’ve mentioned before, I am not enjoying this subject at all. I am way out of my depth and trying to work out a study schedule for the week proves difficult when I know I can be doing a thousand other more enjoyable activities. I have never had to know any of this information, so I don’t have any knowledge to bring to the table. The amount of times I’ve sat down at my laptop to study, then gotten up to clean the house, check my phone or literally do ANYTHING else is absurd. I’m finding it really difficult to focus on something that I have no interest in and then having to reflect back on it. I feel like I’m just complaining about every chapter.

I may as well jump straight into my KCQS before I decide to get up and avoid studying for another day. I discovered many concepts that were unfamiliar to me, but I also found that parts of the chapter were new to me. I was able to grasp the concept of direct and indirect costs, I mean it seems pretty obvious that direct costs would be things such as; labour costs and costs of materials, as they are general requirements for any business. Indirect costs however, are necessary things that keep the business running, such as; rent, utilities, general office expenses etc. all those things are crucial to keeping a business alive and although they can’t be directly applied to a specific produce or service, they still serve as indirect costs, because without them, the business wouldn’t be operating.

I hadn’t heard of the term ‘cost objects’ before and I didn’t quite understand it at first. However, as I kept reading further into the chapter, I understood why the importance on allocating costs to certain parts of a firm is so vital for a business. I also liked the analogy of the messy bedroom where Martin states that putting things back where they belong can make things seem a lot tidier. I can relate to this because I can’t handle things not being where they are supposed to be. I think that after reading the analogy about the bedroom, I have more of an understanding of cost objects. I mean the way I see it, if my firm hadn’t allocated any costs to any parts of their firm, how would I know what all the figures in the financial statements mean? I wouldn’t, because the accounting side of things would be messy and out of place.

There were also a couple of other aspects of the chapters that I found rather informative. Even though I didn’t really understand most of them. For example, I know that understanding costs is a crucial part of basic accounting. It took me a few goes to realise that there are numerous methods a manager can take to analyse them. It was interesting, as someone who is new to studying accounting, I found this part of the chapter crucial as it gave me a reason to really pay attention to what I was reading and taking notes of. It doesn’t take much to read something, but another to really understand what you are reading. Firms need to be able to measure profitability and economic performance during a period. This is why managers must know how the costs in their firms are being handled. I wish I had more of a personal example of understanding costs in a firm. I can only hope that what knowledge I’ve gained in this chapter can help me just that little bit more in my current job role as a Receptionist at an accounting firm.

In conclusion, I strongly believe that in order to run a successful business, you need to be able to understand the key cost and relationships of a business. The costs of a business are inevitable, and they are connected to every aspect of on organisation. Every accounting term that has been mentioned so far in this unit has been new to me and although I think that the knowledge I have gained so far will assist me in my current job role, I don’t believe that I will need to know how to restate financial statements in my future job role. I am however looking forward to reading chapter seven on budgeting as that is one thing I have always been good at.

Step three

Restating Financial Statements – DRAFT

I definitely found that restating my firms financials statements was a challenge. It’s not something I enjoyed doing, nor do I wish to do it again. Click the link below to view my sad attempt at restating my firms financials statements.

Step four

Feedback Given

STEP five

Chapter 7 Reflection – DRAFT

I am big fan of working out my own personal budget. However, I’m not a numbers person, but ever since I started earning my own money I would always sit down and work out how much I had and what I was able to do with it. So When I came across this chapter I became a bit more invested in what I was reading, as I have an understanding of the importance of budgeting. I was interested in learning about how businesses need to budget.

“The conventional definition of management is getting work done through people, but real management is developing people through work”. – Agha Hason Abedi.

The above quote made me thing back to when I was a manager at McDonalds’ and The Coffee Club. Managers were expected to follow strict budgets. For example, if the store was having a quiet day and I had one too many employees rostered on, I would send them for a break or give them the option to go home early, therefore reducing my labour costs for the day. However, this would only work if the other managers rostered on that day worked together by also reducing their labour costs throughout the day.

Businesses need to have budgets in order for things to run smoothly. It wasn’t surprising to learn that in businesses they need to coordinate, communicate, delegate and motivate in order to reach their goals. How is a business supposed to succeed without these? It wouldn’t. This also required the employees to work together to achieve their goal and budgets are put in place to make it clear of what is expected of them.

Martin described a story about the Heathrow Airport that was enjoyable to read, I also found it extremely relevant. When employees are given a target to reach, they’re only thinking about the simplest way to get the job done and receive their bonus. This was a case of severely poor planning on the managers part. There is a lot more to setting a goal for employees than just telling them what they need to do to achieve it. They need to be motivated. For example, sometimes it’s really hard for me to get up and get myself to the gym when I am lacking motivation. I don’t always enjoy my workouts, but exercising is good for my mental and physical health and I feel so much better when I’ve completed a workout, even more so when it’s one I didn’t think I had the motivation to finish. It makes sense that the employee at the Heathrow Airport would only be concerned about how quickly the first bag hits the carousel because that bag first bag determines whether or not he would receive his bonus. So why would he bother about how fast all the other bags hit the carousel? The reality of it is that the employees aren’t focused on how well the company is doing if it doesn’t benefit them in some way.

The concept of participative budgeting really appealed to me because I believe all businesses should budget this way. Budgets that are created by those who sit behind a desk and have never set foot in the warehouse or on the floor are more than likely to fail. This is because they have not had the hands-on experience like lower level managers and employees.

As Henry Ford states; coming together is a beginning; keeping together is progress; working together is success. For a business to reach their short-term and long-term goals employees, managers and directors need to work together. For example, when I worked at McDonald’s, my store manager would provide us with the target for the day, which meant it was up to me and the other staff to achieve it, whether we needed to cut back labour costs or upsell a large meal. If my store manager hadn’t provided me with a budget to work with for that day, I wouldn’t have had anything to work towards before the end of my shift. It’s obvious that communicating goals within a business is crucial if you want to succeed.

Successful businesses need to invest time to create and manage budgets, prepare and review business plans. Having a structured plan can make all the difference to the growth of the business. It will enable the managers to concentrate resources on improving profits, reducing costs and increasing returns on investment. Small businesses that are just starting out may not see the need for a budget, but if larger businesses want to continue to grow, they need to create a budget that will help them control their expenditure. The example of Purple Chocolates was great, once I was able to fully understand it. I now know that having a cash budget is very important, especially for smaller businesses. A cash flow budget is an estimate of all cash receipts and all cash expenditures that are expected to occur during a certain period. It allows businesses to establish the amount of credit that it can extend to customers without having problems with liquidity. Having a cash budget also helps to avoid a shortage of cash during periods in which a company encounters a high number of expenses.

My understanding of a budgeted income statement is that it’s simply a predicted income statement for a future period of time and the cash budget is usually expected not to line up with it. This is because businesses may receive cash from customers at all different times or even pay for various expenses at any given time. 

When I plan out my weekly budget I account for every single bill I have and I work out exactly how much money I am allocating for food, fuel, rent etc. But just because I’ve set y budget, doesn’t mean I’m always able to stick to it. There are times when unexpected bills pop up and throw my budget out of whack. For example, Ergon Energy recently replaced my meters to digital ones and instead of received my bills quarterly, I now receive them monthly. The reason it threw out my budget was because I had just paid a quarterly bill and once they changed the meters over, they charged me for whatever amount was left remaining on the old meters. My point is, life is full of surprises and you can’t control everything that happens to you, which is why it’s important for managers to have a backup plan when the business gets thrown a curve ball.

Budgeting is always helpful since it helps to track revenue and expenses and manage cash flow. But creating a budget that does nothing more than set spending limits can damage any business. I firmly believe that if the budget has been created the correct way, it will always have a positive effect on the business and managers will be more prepared when the unexpected happens.

In conclusion I found this chapter to be very informative and easy enough for me to follow. I’ve found that most of the previous chapters have been a struggle for me to try and understand. However, I am delighted to say that I was able to relate to this chapter about budgeting and provide some examples of my personal life to further my understanding.

Assignment Two – Step 6

Chapter 8 Reflection

Coming into the last chapter of the study guide I’m so excited, as throughout this unit I’ve struggled to some extent, trying to find the time to sit down and read the chapters, as well as take notes and provide KCQs. I am usually very organised and manage my time well. However, I think that because this unit hasn’t been one of my favourites (in case you didn’t notice). I’ve avoided doing parts of the assignment for as long as I could. I realise that’s not really ideal, but now that we’re coming up the end of the term in a few weeks, I’m pretty determined to complete the remaining steps of assignment two.

It’s obvious that there is more to decision-making than one might think. I mean, you can’t really make a decision without thinking about the effect it’s going to have down the track. For example, If I was to send home an employee one hour early because it was a slow day and I needed to save labour costs, and then for that hour the store was the busiest it had been all day. I would be understaffed and not providing the best customer service I could. I didn’t think of the effect it would have on me later on when I made the decision to send that employee home. My point is, managers are under a lot of pressure, which is why it’s important to consider all the factors when making a decision for their firm.

It was refreshing to see how Robinhood solved their issues with poor profit. When I first read the paragraph I was a bit confused and didn’t really understand what I was reading. But like I’ve mentioned in previous reflections, sometimes I need to re-read things a couple times to really understand and this was one of those times. It all comes down to problem solving really. I mean, if something doesn’t balance or you’re losing money on a new product (as Robinhood was). What would you do to fix it? It’s simple really. Go over everything with a fine tooth comb to determine what went wrong and come up with a solution to the problem.

It was interesting to read about the time value of money, I’ve never really thought about how time is literally money and that the value of the money you have now is not the same as it will be in the future. If I was given $50 today, there’s no way I would hang onto it for the future, I would spend it nearly straight away. Why would I hold off on spending it if it is only going to be worth much less than it is now, in the future?

I couldn’t be more excited for this term to end. This subject has challenged me in all aspects and I can’t say that I enjoyed it very much at all. I know that I’ve put an emphasis on that in my previous reflections, but I can’t stress enough how extremely difficult it is to put in the effort to do something that I have no interest in. I’m usually very good at managing my time, but I did also find it difficult to stay on top of the communication side of things. While trying to read the study guide and come up with KCQs for each chapter, as well as post on my blog and also logging onto PeerWise to answer, rate and comment on other students questions, I just found everything a bit overwhelming. Especially as this had to be continued throughout the whole unit. I’m also not one to ask for help from others, even if I need it. So connecting with the other students via email, blogging and Facebook was challenging too. Although the students I was in contact with were very helpful and informative, I still struggled to chat openly about my progress and assignments in this unit.

I obviously want to pass this unit and I can only hope that the work I’ve put in over the last couple of months has been enough to get me to where I need to be.

assignment two – step 7-9

Step 7

Product	Selling price	Estimated variable cost	Contribution margin
https://stellaluna.co/fw19/red-carpet/red-carpet-sandal-multicolor-satin	$524.39	$220.00	$304.39
https://stellaluna.co/fw19/lucien/lucien-pink	$319.48	$130.00	$189.48
https://stellaluna.co/fw19/lucien/lucien-otk	$1,089.12	$220.00	$869.12

I have chosen three different types of shoes from my company. A sandal, sneaker and boot. I’ve done this because I was interested to see the difference in the variable costs for each different shoe. The selling price was already listed on the website, so to get a rough estimate on the variable cost, I researched the cost of individual materials used on each shoe. I then added up the variable costs and took the total amount from the selling price, which gave me my estimated contribution margin for each of the products.

Stella International Holdings Pty Ltd has a wide range of shoes, which may be targeted at all different age groups. This can explain why the contribution margin between some shoes are greater or lesser than others. For example, Kmart has a lower contribution margin that is aimed at lower income earners.  They are focused more on volume sales rather than creating profit.

One resource constraint that Stella may face is running out of product, more specifically leather. I can see that majority of their products are made from high end quality leather and what if for whatever reason, there was a massive shortage on that particular leather product? Stella would not be able to produce their top-quality products. Leather is an expensive and demanding product around the world and it may be difficult to source the particular product they want.

The constraint I mentioned above is relative when making decisions about how much products to produce and whether or not they should be produced. It is important to try to keep the supply level with demand as close as possible. If Stella manufactures too many products, they may not be able to sell them all in an acceptable timeline or they may even run out of materials to produce the amount of products they planned for.

Step 8

Profitability Ratios

When calculating the profitability ratios I noticed that Stella’s profit margin decreased over two years. When I saw that I had to double check my formulas and make sure I had linked the figures correctly, for some reason I thought I may have made a mistake. But after going back and double checking my working, I found that the formulas were correct and Stella had in fact made a loss for the previous last two years.

Efficiency Ratios

The days of inventory ratio shows the average number of days it takes the firm to sell its inventory. In my own opinion I think the results are rather reasonable. Stella does not sell large products, as most of their stock consists of different types of shoes such as; heels, sandals, sneakers, boots and a range of genuine leather products. I noticed that in the 2015, 2017 & 2018 years that the average days of inventory stayed relatively the same, with 2016 being the highest.

Liquidity Ratios

The current ratio compares the firm’s total assets and total liabilities and also shows us the firm’s ability to pay its bills. Stella’s ratios each year was rather low over the four years, with 2016 being 3.72%. this could mean that Stella received cash from their customers before they needed to pay their suppliers.

Financial Structure Ratios

The debt/equity ratio is calculated by dividing a company’s total liabilities by its shareholder equity. The figures are usually available on the balance sheet of a firm’s financial statements. Usually, if a lot of debt is used to finance growth, a company could potentially generate more earnings that it would have without financing. I leverage increases earnings by a greater amount than the debt’s cost, then shareholders should expect to benefit. The cost of debt can vary with market conditions. In saying that, you can see by Stella’s debt/equity ratio that there has been a steady growth over the last four years in their total equity.

Financial Structure Ratios
Debt/Equity Ratio	Debt/equity	22.9%	26.6%	19.6%	26.0%
Equity Ratio	Equity/total assets	134.8%	127.4%	137.2%	121.8%

When using the debt/equity ratio, it’s important to consider the industry within which the company exists. Different industries have different capital needs and growth rates, a relatively high debt/equity ratio may be common in one industry, meanwhile, a relatively low debt/equity ratio may be common in another. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above two, while tech or services firms could have a typical debt/equity ratio under 0.5.

Market Ratios

After looking over the earnings per share (EPS) for Stella, I noticed that there was a steady decrease in 2015-2017 with some minor improvement in 2018 to 0.079, indicating improved business performance. I’ve also noted that the number of dividends per share (DPS) remained the same for the full four year period. However, ratio has steadily decreased over the four years, indicating less dividends have been paid out. This is consistent with other ratios calculated which as a whole, indicate declined economic performance.

Market Ratios
Earnings per Share (EPS)	Net profit after tax/nos of issued ordinary shares	0.079	0.076	0.102	0.151
Dividends per Share (DPS)	Dividends/number of issued ordinary shares	0.077	0.090	0.110	0.110
Price Earnings Ratio	Market price per share/earnings per share	121.483	154.872	122.135	126.004

Ratios Based on Reformulated Financial Statements

As previously noted, with the earnings per share (EPS) and economic profit there was a trend of decreasing return on equity from the years 2015-2017 with a marginal increase noted in 2018. This 2018 result is good news for shareholders as they would have seen a better return on their investment than in the previous three years.

Economic Profit

The economic profit or loss is the difference between the revenue received from the sale of an output and the costs of all inputs used and any opportunity costs. When calculating economic profit, opportunity costs and explicit costs are deducted from revenues earned. In Stella’s case, the economic profit shows a similar trend to the earnings per share (EPS) ratio, in that there was a decline each year from 2015-2017 followed by a minor increase in 2018. This indicated improved economic performance in 2018. Although the economic profit has decreased overall since 2015, it is still a profit and not an economic loss. Which would potentially bring into question the viability of the business.

Step 9

Stella International Holdings Pty Ltd has been given two opportunities to partake in some very exciting projects. The first was to open a new brick and mortar store in Sydney to give customers a chance to try on their high-end products without the hesitation of buying online. The second option was to open a leather farm. This would potentially assist with any delays Stella may have from the leather manufactures. This could also reduce the cost of what they would normally spend on leather, which would also reduce shipping costs. This could also potentially add additional revenue for selling excess product. After calculating the Payback Period (PP), Net Present Value (NPV) and Internal Rate of Return (IRR) for the two options, it’s advised that Stella does not choose option one, as opening a new store these days has projected more of a loss than a profit. If they were to take the cost and benefits from their store in ten years and add them together and look at it at this point in time, would it really be worth it? These days retail is shifting to online more and more each day and trying to keep up with the cost of rent in a popular Sydney location could potentially lead Stella to closing its doors. As for option two, leather products are one of the most traded products globally. The leather industry trade is currently exceeding billions of dollars a year. I believe that the consumption of leather products is very common and used frequently. This is why it would be a good investment for Stella International Holdings Pty Ltd to partake in leather farming. As mentioned previously, this will reduce the cost of shipping and manufacturing and potentially add additional revenue to the company