Sunday, 8 September 2013

Open for business, but how long is a piece of fiber optic cable

Looks like he has finally got his feet under the table. 

Well that was disappointing for me personally but perhaps Abbott is not such a bad thing. 

Things have been going back and forth in the ALP camp for some time, although admittedly I do like the policy perhaps economically speaking it’s a good thing Ruddy is out.
First off the bat will be the removal of Carbon Tax laws in the first sitting of the new house this October. 

In an election debate where the real question on climate policy – how to reach the targets guided by the science (i.e. 25 per cent or more) – has never been raised by the mainstream parties, Abbott revealed that he was quite prepared not to even make it to first base/believe in Science. If the budgeted $3.2 billion proved to be insufficient to reach the 5% reduction target – as Treasury and private analysis conclude unanimously – he would not spend another dollar to ensure that it does.

Putting aside Australia’s record high temperatures over the last 12 months, and just three weeks ahead of the IPCC report, the fact that the ALP couldn’t agree on the tax has left us in the same situation we are in now with the non-believer Abbott. Perhaps once he has brought the house together he can return some confidence to the market.

On that note, if he can bring some order to things his side the hung senate should hopefully be a bit easier to navigate.  The persuasion may be in his favour so should be able to deals but when there are deals to be made in the senate there is a price to pay. As the numbers stand, eight minor party senators from separate groups, some of them virtually unknown entities with no track record and no known policies, will be given the power to decide whether or not each government bill should be passed.

We owe this miracle to the fact that roughly 25% of the votes on Saturday went to the downright odd and obscure parties. It’s almost as if the ‘people’ couldn’t care less, or realise that we are between a rock and a hard place with these two. A gloating winning speech followed by a gloating outgoing speech on the night told a different story. Even if this was a time when you 'know you have given it your all', and time for the old guy to step down we could have had more positive change then this. As the ALP seeks to maintain as a fighting force for the future I hope for all of us we are directed towards a more definite and confident market in the interim.  

Thursday, 5 September 2013

How good is it really?

Tomorrow I will have the chance to vote in my first Australian election as a proud citizen of this country. There are quite a few things worrying me about the progress of the electioneering so far. Normally (at least in the English elections) I have decided well before, the parties have distinct divisions and there is no faux presidential race. As much as I don’t like Cameron, conservative policy is straightforward.

A word of warning, my views are distinctly Keynesian. Australia rode through the last recession on the back of the commodities, although the $900 from Rudd was a nice boost to the pokies and TV sales.

1) All of the economic changes are being proposed for the very near future. As such, a change of government is unlikely to have major implications for the growth, currency or interest rate outlook. A change of government is unlikely to result in a major shift in the regulatory of macroeconomic landscape, with limited implications for the growth outlook.

2) Australia currently has a structural budget deficit that is expected to persist at least until 2017/18. As a result, the next government is likely to face some tough choices on the structure of Australia’s tax system and the sustainability of government expenditure moving beyond the next parliamentary term. A reduction in foreign aid proposed by both parties (note not the actual reduction but a proposed holding back on the total increase this financial year) is not only sensible but also necessary.

3) Marriage policy here is a joke, and this needs to be resolved as soon as possible. Even some of the most conservative countries have moved forward on this.

4) Carbon pricing or tax is really important but a reliable solution needs to be offered. The ALP proposed bringing forward the emissions trading scheme to 1 July 2014 and cutting back Energy Security Fund from $4.3 billion to $2.5 billion.

The Coalition committed to abolish carbon price. Abolish the Climate Change Authority, Climate Commission, and the Energy security fund. Retain the Clean Energy Regulator and the National Greenhouse and Energy Reporting Scheme (NGERS) as part of the administration of the Emissions Reduction Fund.

I don’t believe that sweeping hard-line statements are the way to bring about the correct change here. Rudd's about turn made it clear that no one was really sure what was working. But some policy is better than none at all. 

Europe can claim to be ahead here: since 2005 it has had a cap-and-trade scheme which sets a limit on emissions and allows companies to trade pollution permits up to that level, thus putting a price on carbon. But the scheme is complex and has been undermined by vast exemptions—flaws which apply to China’s new scheme, too. The European Parliament will vote on an emergency fix on July 2nd. Even if a compromise is passed though, it will merely stave off collapse for a year or so.

Right now I don’t think any government or senate offers the right solution to this. I’m torn because my industry depends upon high demand, but I believe a staggered approach to allow some freedom to companies but bringing in a tax over time is the correct way to manage climate change.Corporate governance is becoming more important, over time with combined policy and public accountability I believe the right changes will come. 

Whoever wins the upcoming election; the completion of the election itself could provide a boost to the economy and that is a win for everyone. As I have been reminded many times in the last few weeks, it’s not about voting for who you want to win, it’s about trying to figure out who is telling less lies.

Tuesday, 3 September 2013

12 Technologies Set To Transform Mining

Emerging technologies are set to change the way miners operate over the next decade.

Delivering improved productivity, cost savings, and safety advancements a report from the McKinsey Global Institute has identified 12 technologies that could drive economic transformations in coming years.

While not all will directly impact mining, they will play a role in mining’s supporting sectors including manufacturing and health.

The report explains that the combined application of all 12 technologies, including advanced robotics, energy storage, and mobile internet could have a potential impact of between $14 trillion and $33 trillion a year in 2025.

Topping the list is mobile internet which is expected to improve worker productivity and service delivery.

Enhanced communication technology has not only improved mine site safety but transformed the way safety is managed.
The roll out of the Federal Government's National Broadband Network is expected to create a wealth of opportunity for the mine sites it touches, and the increased bandwidth that comes with the NBN will enable the facilitation of increased remote mining operations.

Wednesday, 14 August 2013

Chinese Steel Stock Continues to push the Iron Ore Price higher.

The base level for Iron Ore has reached its highest in 5 months.

The data provider Steel Index says the rise is on the back of heavy steel re-stocking in China, fuelled by an improvement in its property sector. Prices reached US $141.80 a tonne.  At this time last year, the iron ore price had already begun its terrifying descent towards a September low of $US86.70 ($94.10) per tonne, a price that prompted more than a few Australian miners to contemplate their existence.

Despite this rise investors are remaining cautious pending the decision from the US Federal reserve on the stimulus measures next month. A Bloomberg survey of economists found 65% believed the Fed would reduce its monthly bond purchases at next month’s meeting, up from 50% last month.

The Dow Jones Industrial Average fell 0.7%, while the S&P 500 dropped 0.5%. Like the Australian market yesterday, stocks in Toronto were flat. 

Philip Kirchlechner of the Steel Index said stocks at steel mills in China have been fairly low: about 20 days  worth of supply, whereas typically they are at 30 - 40 days.

"They're getting caught short,'' he said, ''and that causes buying to increase again and the price to spike."
Rob Brierley of Patersons Securities said other factors had also played a part: "I think China (is) ... running a leaner inventory system,'' he said.

Earlier predictions were that the price could fall below $US100 per tonne later this year. This is just one price spike in what's been a buoyant few months for iron ore miners.

While Mr Brierley admits initial predictions of a dramatic price fall were probably slightly overstated, he's still anticipating the price will moderate towards the end of the year.

"I think there's reasons why it should be a little bit softer this year than say last year but I would expect the price to moderate in the September and October period.

"We are transforming, there are a number of expansions that Rio Tinto and BHP have done and what Vale in Brazil are doing, and that will increase supply.

"So there are a lot of forecasters out there saying there will be a glut of supply coming on next year and the year after."

Mr Brierley says China is moving into a new phase of slower growth but it will still need steel.
"China is transitioning from a construction driven economy to a consumer driven economy so that means steel demand will airball or consumption will slow down but it's still very strong and not expected to peak until 2020," he said.

Iron ore miners are expected to report some of the best annual results this reporting season.

Friday, 9 August 2013

CVP Analysis: Contribution Margin Ratio


The contribution margin (CM) ratio is the ratio of contribution margin to total sales:

If the company has only one product, the CM ratio can also be computed using per unit data:

The CM ratio shows how the contribution margin will be affected by a given change in total sales.

Q = Break-even quantity
Sales = Variable expenses + Fixed expenses + Profits
Q x selling price/unit = (Q x variable expense/unit) + Fixed expenses + Profits

Break-even quantity = Fixed Expenses

To calculate the breakeven point in sales dollars, substitute ratios as a percent of sales for dollars. Or, calculate the breakeven point in units and multiply by the selling price/unit.

     The margin of safety is the excess of budgeted (or actual) sales over the break-even sales. The margin of safety can be expressed either in dollar or percentage form. The formulas are:

Operating leverage measures how a given percentage change in sales affects net operating income.  It is a measure of volatility in net income caused by high fixed expenses relative to variable expenses.

Use the income statements for Company X and Y to compute:
a.    Breakeven point in units and sales dollars.
b.    Margin of safety.
c.    Degree of operating leverage.
d.    The change in net income caused by a 10% increase in sales.

Company X
Company Y
Sales  (5,000 units) ..................
Less variable expenses..............
Contribution margin..................
Less fixed expenses...................


Net operating income................
$ 60,000

$ 60,000

Thursday, 8 August 2013

Cost Volume Profit Analysis: The Break Even Point, Contribution Margin and the Cost of Things

Break-even (or break even) is the point of balance between making either a profit or a loss. The term originates in finance, but the concept has been applied widely since.

The contribution margin approach to calculate the break-even point (i.e. the point of zero profit or loss) is based on the Cost Volume Profit (CVP) analysis concepts known as contribution margin and contribution margin ratio.

Here the Contribution margin is the difference between the sales and variable costs. When calculated for a single unit, it is called unit contribution margin. Contribution margin ratio is the ratio of contribution margin to sales.

In this method simple formulas are derived from the CVP analysis equation by rearranging the equation and then replacing certain parts with Contribution Margin formulas.


Contribution Margin = Sales Revenue - Variable Expenses

Per Unit Basis the equation is as follows:

Contribution Margin per unit of sales = Sales Revenue per Unit - Variable Expenses per Unit

Contribution Margin - Fixed Costs = Net Operating Profit or Loss

Break even can be calculated onward to the point at which a company's sales are zero - there is no profit or loss:

Break-even in Units = Total Fixed Costs/Contribution Margin per unit

In other words:

Total Revenue = Total Costs

Unit Sale Price x Number of units sold = (TFC + V) Number of Units Sold

TFC is Total Fixed Costs, P is Unit Sale Price, and V is Unit Variable Cost.

BEP in Sales Dollars

Break-even point in dollars can be calculated via:

Break-even Sales Dollars = Price per Unit × Break-even Sales Units

; or

Break-even Sales Dollars = FC ÷ CM Ratio

Tuesday, 6 August 2013

Rio Pushes On

The worlds second biggest iron ore producer continued with its plans to increase production throughout late 2012 and inter the first half of 2013. The recent uncertainty in the industry has given many of the smaller mining companies reason to want to scale back operations to combat higher costs and falling prices. The Australian metals industry has remained highly cyclical, but thanks to the long term growth of the Asia Pacific market and long term plans of the big minors we are now experiencing the boom in production that follows the boom in growth.

Rio’s reported ore production increased 5 percent in the third quarter of 2012 as mines in Western Australia’s Pilbara region achieved a quarterly record of 63 million tonnes. Analysts are predicting a massive US$4.5b in interim earnings from iron ore in the six months ended June, overcoming predicted losses in other commodities.

Cost cutting remains a focus for all the minors. Once the global growth begins to accelerate demand prices will pick up again. Production will remain the focus for the miner.

Jenny Purdie, Rio Tinto's Global Practice Leader, Technology Delivery, Innovation recently stated: "In a volatile post-GFC environment, businesses are all looking for ways to be more efficient, effective and competitive to be successful.

"Rio Tinto is no different.  Mining is cyclical and like all miners we're operating in a challenging environment of lower commodity prices, a high Australian dollar and high input costs," she said.

Productivity remains the buzz word for 2013 and the company plans to expand production capacity in the Pilbara region to 283 million tonnes annually by the end of 2013 and to more than 350 million tonnes by mid-2015.

For extended analysis head to

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Costing :LIFO and FIFO

FIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks. These methods are used to manage assumptions of cost flows related to inventory, stock repurchases (if purchased at different prices), and various other accounting purposes.
FIFO stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first but do not necessarily mean that the exact oldest physical object has been tracked and sold.
LIFO stands for last-in, first-out, meaning that the most recently produced items are recorded as sold first. Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces their income taxes.
The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve. This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method

For extended analysis head to

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Monday, 29 July 2013

What is the operating profit margin ratio? More Ratios for Business Analysis

The operating profit margin is a type of profitability ratio known as a margin ratio. The information with which to calculate the operating profit margin comes from a company'sincome statement.

Operating Profit Margin = Operating Income/Sales Revenue = _______%

Operating income is often called earnings before income and taxes or EBIT. EBIT is the income that is left, on the income statement, after all operating costs and overhead, such as selling costs and administration expenses, along with cost of goods sold, are subtracted out.

What Does the Operating Profit Margin Tell the Business Owner?
Operating Profit Margin = EBIT/Sales Revenue = ________%
The operating profit margin gives the business owner a lot of important information about the firm's profitability, particularly with regard to cost control. It shows how much cash is thrown off after most of the expenses are met. A high operating profit margin means that the company has good cost control and/or that sales are increasing faster than costs, which is the optimal situation for the company. Operating profit will be a lot lower than the gross profit since selling, administrative, and other expenses are included along with cost of goods sold.
As the company grows and sales revenue grows, overhead, or fixed costs, should become a smaller and smaller percentage of total costs and the operating profit margin should increase. A high operating profit margin usually means that the business firm has a low-cost operating model.

Tuesday, 2 July 2013

Why is understanding finance important?

The development of financial literacy skills is essential for any manager wishing to be successful in their chosen field. For example, Bernie Brookes, Myer’s Chief Executive Officer, has previously acknowledged that he entered the business world with non-business related qualifications in humanities and a view that finance was “gobbledegook”. 

In an address to a Women Chiefs of Enterprises International conference in Sydney (9 September 2011) Brookes noted “Those with financial acumen have a free kick in life …”. This awareness compelled Brookes to study the basics of finance and he told conference delegates that while he “… doesn’t understand the intricacies … (he) does understand finance now” and that “… financial literacy is essential for any entrepreneur.” Brookes also advised delegates that they should not underestimate “exception” reporting as it “…a rich source of data that explains what you need to know about your business.”

Wednesday, 5 June 2013


This implies that the accounting information that is presented is truthful, accurate, complete (nothing significant missed out) and capable of being verified (e.g. by a potential investor).

Value accounting has created numerous debates surrounding the trade-offs of the concepts of relevance and reliability. Relevance and reliability are both critical for the quality of the financial information, but both are related such that an emphasis on one will hurt the other and vice versa. Hence, we have to trade-off between them. Accounting information is relevant when it is provided in time, but at early stages information is uncertain and hence less reliable. But if we wait to gain while the information gains reliability, its relevance is lost.

Under the AASB accounting policies of March 1999:

Reliability is defined in the following sections: 

4.1.5 Reliable financial information faithfully conveys to users the underlying transactions and other events that have occurred.

4.1.6 For financial information to be reliable, it needs to be free from bias. Reliable financial information does not lead users to conclusions that serve particular needs, desires or preconceptions of the prepares of financial reports.

Paragraph 4.1.7 goes on to explain that "To be reliable, financial information also needs to be free from undue error..."

A good example of what happens when reliability fails can be found here. 

Timeliness of Accounting

Timeliness principle in accounting refers to the need for accounting information to be presented to the users in time to fulfill their decision making needs. 

Timeliness of accounting information is highly desirable since information that is presented timely is generally more relevant to users while conversely, delay in provision of information tends to render it less relevant to the decision making needs of the users. Timeliness principle is therefore closely related to the relevance principle.

Timeliness is important to protect the users of accounting information from basing their decisions on outdated information. Imagine the problem that could arise if a company was to issue its financial statements to the public after 12 months of the accounting period. The users of the financial statements, such as potential investors, would probably find it hard to assess whether the present financial circumstances of the company have changed drastically from those reflected in the financial statements.

Going Concern

Going concern is one the fundamental assumptions in accounting on the basis of which financial statements are prepared. Financial statements are prepared assuming that a business entity will continue to operate in the foreseeable future without the need or intention on the part of management to liquidate the entity or to significantly curtail its operational activities. Therefore, it is assumed that the entity will realise its assets and settle its obligations in the normal course of the business. 

The auditor evaluates an entity’s ability to continue as a going concern for a period not greater than one year following the date of the financial statements being audited. The auditor considers such items as negative trends in operating results, loan defaults, denial of trade credit from suppliers uneconomical long-term commitments, and legal proceedings in deciding if there is a substantial doubt about an entity’s ability to continue as a going concern. If so, the auditor must qualify the audit report with a statement about the problem. 

The Business Entity Concept

Financial accounting is based on the premise that the transactions and balances of a business entity are to be accounted for separately from its owners. The business entity is therefore considered to be distinct from its owners for the purpose of accounting.

Therefore, any personal expenses incurred by owners of a business will not appear in the income statement of the entity. Similarly, if any personal expenses of owners are paid out of assets of the entity, it would be considered to be drawings for the purpose of accounting much in the same way as cash drawings.

The business entity concept also explains why owners' equity appears on the liability side of a balance sheet (i.e. credit side). Share capital contributed by a sole trader to his business, for instance, represents a form of liability (known as equity) of the 'business' that is owed to its owner which is why it is presented on the credit side of the balance sheet.

Money Measurement Concept

Money Measurement Concept in accounting, also known as Measurability Concept, means that only transactions and events that are capable of being measured in monetary terms are recognized in the financial statements.

On the balance sheet:

All transactions and events recorded in the financial statements must be reduced to a unit of monetary currency. Where it is not possible to assign a reliable monetary value to a transaction or event, it shall not be recorded in the financial statements.

However, any material transactions and events that are not recorded for failing to meet the measurability criteria might need be disclosed in the supplementary notes of financial statements to assist the users in gaining a better understanding of the financial performance and position of the entity.

The recognition criteria defined by IASB and FASB require that the elements of financial statements (i.e. assets, liabilities, income and expense) must only be recognized in the financial statements if its cost or value can be measured with sufficient reliability. Therefore, an entity shall not recognize an element of financial statement unless a reliable value can be assigned to it.

In many cases however the preparers of financial statements are unable to arrive at a precise amount to be recognized in the financial statements and must resort to the use of reasonable estimates in arriving at an approximate value. The use of reasonable estimates is a very important component in the preparation of financial statements and as long as forming estimates do not involve a high degree of subjectivity and uncertainty they do not undermine the reliability of financial information.

Where a significant element of financial statement is not recognized because of the inability to measure its monetary value with sufficient reliability, it may be disclosed in the supplementary notes of financial statements to enhance the users' understandability and completeness of the presented financial information.

For example: IAS 38 Intangible Assets and ASC 350 Intangibles - Goodwill and Other require that internally generated goodwill shall not be recognized as an asset in the balance sheet. This is due to the difficulty in identifying and measuring the cost of internally generated goodwill as distinct from the cost of running the day to day operations of the business. 

Goodwill Definition

Definition of 'Goodwill'

Generally speaking in accounting terms this is the amount paid over and above during a company acquisition. 

An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company is purchased by another company.

In an acquisition, the amount paid for the company over book value usually accounts for the target firm's intangible assets.

The goodwill is seen as an intangible asset on the balance sheet because it is not a physical asset like buildings or equipment. Goodwill typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations and any patents or proprietary technology.

Tuesday, 4 June 2013

The Debt/Equity Ratio: Solvency on the balance sheet or personal finances

The debt/equity ratio is a a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. The name says it all. It indicates what proportion of equity and debt the company is using to finance its assets.

Total Liabilities/Shareholders Equity

Note: Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation.

Also known as the Personal Debt/Equity Ratio, this ratio can be applied to personal financial statements as well as corporate ones.

A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

This can be used in stock picking strategies, which will come later in the series of posts. 

Quick Ratio: The Balance Sheet Liquidity - Inventories

An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company.

Quick Ratio = (Current Assets - Inventories) / Current Liabilities

In bookkeeping, the acid test or quick ratio evaluates your company’s current assets and liabilities, but it’s a stricter test of cash flow than the similar current ratio. Many lenders prefer the acid test ratio when deciding whether to give you a loan because of that strictness; it doesn’t include the inventory account in the calculation. In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company's short-term financial strength. 

The current ratio: Balance sheet liquidity

The current ratio is a short term liquidity test to see if a company has the "cash" to pay its obligations. 

In book keeping the current ratio compares the current assets to the current liabilities of a company. The current ratio is one way lenders test your cash flow when they consider loaning you money. Lenders usually look for current ratios of 1.2 to 2, so any financial institution would consider this example’s current ratio of 2.36 to be a good sign. A current ratio under 1 is considered a danger sign because it indicates that the company doesn’t have enough cash to pay its current bills.


Current assets of $56000
Current Liabilities of $26000
= a current ratio of 2.1

Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".

Current and Noncurrent Liabilities: The Balance Sheet Continued

International Accounting Standard 1: Presentation of Financial Statements or IAS 1 is an international financial reporting standard adopted by the International Accounting Standards Board (IASB) gives clear requirements on the classification of Liabilities.

IAS 1 paragraph 60 stipulates that an entity should present current and non-current liabilities as separate classifications in its statement of financial position, except when a presentation based on liquidity provides more relevant and reliable information. Whatever the method of presentation, an entity should disclose the amount expected to be settled after more than 12 months and less than 12 months.

Paragraph 69a–d of IAS 1 states that liabilities are to be classified as current if any one of four specified conditions is met. The conditions are:

a) It expects to settle the liability in its current operating cycle

b) It holds the liability primarily for trading

c) The liability is due to be settled within 12 months

d) It does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

So in terms of classification of current liabilities on the balance sheet they are liabilities the company expects to settle within 12 months of the date on the balance sheet. Settlement comes either from the use of current assets such as cash on hand or from the current sale of inventory. Settlement can also come from swapping out one current liability for another.

Noncurrent or long-term liabilities are ones the company reckons aren’t going anywhere soon! In other words, the company doesn’t expect to be liquidating them within 12 months of the balance sheet date.

Examples of Current Liabilities include:

  • Short term notes payable: Notes due in full less than 12 months after the balance sheet date are short term. For example, a business may need a brief influx of cash to pay mandatory expenses such as payroll. A good example would be a working capital loan, a loan to be paid back in the short term after revenue is earned. 
  • Accounts payable: the account showing the amount payable to a companies lenders. 
  • Dividends payable
  • Current portion of long term notes payable: i.e. the loan amount due in the next 12 months. 
Examples of Noncurrent liabilities include:
  • Long term leases
  • Extended warranties on products
  • Bonds payable: long term amounts due outside the normal 12 months. 

Wednesday, 29 May 2013

Understanding the balance sheet: The Basic Balance Sheet

All public companies and large proprietary companies are required by law to prepare a balance sheet as part of their formal annual financial report that complies with Australian Accounting Standards.

The balance sheet states a companies assets, liabilities and equity (net worth). It is also known as a "statement of financial position". Last weeks post discussed in detail the definitions of assets and liabilities.

The balance sheet provides a good picture of the financial health of a business and is a tool used to evaluate a business's liquidity. It helps a small business owner identify trends and quickly grasp the financial strength and capabilities of their business.
How the Balance Sheet Works
The balance sheet is divided into two parts that, based on the following equation, must equal each other, or balance each other out. The main formula behind balance sheets is:

Assets = Liabilities + Shareholders\' Equity

This means that assets, or the means used to operate the company, are balanced by a company's financial obligations, along with the equity investment brought into the company and its retained earnings.

  • Current assets:
    are items of value that are expected to be consumed or converted into cash within the next 12 months. Examples include cash, inventory that is turning over regularly and accounts receivable.
  • Non-current assets:
    are not expected to be consumed or converted into cash within the next 12 months. Examples include assets that the business would generally keep for more than one year such as plant and equipment, cars and buildings.

Working Example:

Saturday, 25 May 2013

Statement of Financial Position: AKA The Balance Sheet

A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. It contains a snap shot of the assets, liabilities and equity position of the entity at a particular point in time

In company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by accountants.
For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements. They typically include four basic financial statements, accompanied by amanagement discussion and analysis:

  1. Statement of financial position: also referred to as a balance sheet, reports on a company's assets, liabilities, andownership equity at a given point in time.
  2. Statement of comprehensive income: also referred to as a profit and loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. A profit and loss statement provides information on the operation of the enterprise. These include sales and the various expenses incurred during the processing state.
  3. Statement of changes in equity: explains the changes of the company's equity throughout the reporting period
  4. Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.

Classification of assets and liabilities into significant groups in the  balance sheet is governed by the end uses of the financial statement. 

Items such as freehold premises, machinery (capital), Fixtures, Trademarks. Note assets may be tangible or intangible.

Australian Accounting Standards Board (AASB Framework, para. 49a) Defines assets as: A resource controlled by the entity as a result of past events & from which future economic benefits are expected to flow to the entity.
  • Classified primarily according to degree of liquidity 
  • Divided into current and non-current 
Future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events. Examples include overdraft, bills payable, and debentures.

AASB Framework (para. 49b): A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
  • Shown in order of repayment or maturity date 
  • Divided into current and non-current
[Assets – Liabilities = Equity]

Owners Equity: 
    The residual interest in the assets of the entity after deduction of its liabilities (AASB framework para. 49c)

  • Residual interest in the Assets after deducting Liability
Major aspects of equity are:

1. That it ranks after payment of all other liabilities in the event of winding up.
2. It is not separately identifiable like other liabilities - net position of residual.
The Vertical Layout of a Balance Sheet

The Horizontal Layout of a Balance Sheet

Reserves, Bonus Shares, and Rights Issue

In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. In nonprofit accounting, an "operating reserve" is commonly used to refer to unrestricted cash on hand available to sustain an organization, and nonprofit boards usually specify a target of maintaining several months of operating cash or a percentage of their annual income, called an Operating Reserve Ratio.


•Profits and gains made by the company that have not been distributed to shareholders
•Most common type of reserve is earned by the company that are held back for use within the company
•Other reserves may be created in certain circumstances - a reserve is created (asset revaluation reserve) when assets are re-valued at greater than their book value
•‘retained profits’ ,i.e. profits

Bonus issue of shares simply takes one form of shareholders’ equity (reserves) and transforms it into another form (share capital)

Bonus shares are additional shares a shareholder receives for an existing holding of shares in a company. If you dispose of bonus shares received on or after 20 September 1985, you may make a capital gain. You may also have to modify the cost base and the reduced cost base of your existing shares in the company if you receive bonus shares.

A rights issue is an issue of rights to buy additional securities in a company made to the company's existing security holders. When the rights are for equity securities, such asshares, in a public company, it is a way to raise capital under a seasoned equity offering. Rights issues are sometimes carried out as a shelf offering. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the firm at a specified price within a specified time. 

In a public company, a rights issue is a form of public offering (different from most other types of public offering, where shares are issued to the general public).

Share Capital

Share capital or capital stock refers to the portion of a company's equity that has been obtained (or will be obtained) by trading stock to a shareholder for cash or an equivalent item of capital value. For example, a company can issue shares in exchange for computer servers, instead of purchasing the servers with cash.

For example, suppose ABC Inc. raised $2 billion from its initial public offering. Over the next year, the total value of its shares increases to $5 billion. In this case, the value of the share capital is still only $2 billion because ABC Inc. had received only $2 billion from the sale of its securities to the investing public.

Dividends: transfers of assets made by a company to its shareholders
Partly-paid shares: shares on which the full issue price has not been paid, but the balance is to be paid in a series of installments or ‘calls’
Fully paid shares: shares on which the shareholders have paid the full issue price
Preference shares: shares which have a fixed rate of dividend that must be paid before any ordinary share dividends can be paid. These have higher priority in the event of the company going in to liquidation

Corporate Governance and The Directors

Corporate governance refers to the system by which corporations are directed and controlled.

A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors. It is often simply referred to as "the board".

The Australian Securities Exchange (ASX) Corporate Governance Council has developed Corporate Governance Principles for Australian listed entities. Companies listed on the ASX must comply with these Corporate Governance Principles on an ‘if not, why not’ basis. Although non-ASX listed companies are not required to comply with the ASX’s Corporate Governance Principles, they provide a useful framework for identifying those behaviours that are considered to be good corporate governance practices.

By Australian standards, a good corporate governance system would generally be expected to encompass the following characteristics:

  • A formalisation of the functions reserved to the board and those delegated to management.
  • A majority of the board would be independent directors. The chairperson would also be an independent director.
  • The chairperson and the Chief Executive Officer would not be the same person.
  • An established code of conduct for company officers.
  • An established trading policy for company officers.
  • An established audit committee.
  • Established policies for the oversight and management of material business risks.
  • An established remuneration policy for executives and non-executive directors.

Further details regarding corporate governance principles may be obtained from ASX’s website

The governance promotes disclosure, accountability and fairness. All large companies publish reports and have corporate govance schemes in place that adhere to these principals. 

•Public companies and ‘large’ proprietary companies must prepare annual financial reports - including financial statements and directors’ reports
•‘Small’ proprietary companies do not have these requirements unless requested by ASIC or by at least 5% of members
•To be ‘small’, they must satisfy at least 2 of:
Consolidated gross operating revenue < $25 million
Consolidated gross assets at end of year < $12.5 million
Must employ < 50 employees at end of year

Company name includes
‘Pty Ltd’
Public sale of shares
Typical size
Extent of regulation
Raise monies from public
Some restrictions
Subject to reporting requirements
Depends on size