Accounting for Decision-Making - BHP Billiton - Case Study Example

Table of Contents Table of Contents 1 Executive summary 2 Balance Sheet Review 2 Income statement review 4 Review of the statement of cashflows 5 Review of stock holder’s equity 7 Conclusion 8 B. Sports Revenue 8 References: 10 A. BHP Billiton Executive summary Founded in the 1860s, BHP Billiton has grown to become one of the biggest companies in the mining industry globally. The company has been described as a leading global resources company and is among the world’s top producers of major commodities that include iron ore, metallurgical and energy coal, conventional and unconventional oil and gas, copper, Aluminium, manganese, uranium, nickel and silver. By the year 2014, the company employed around $123,800 people while it had over 130 contractors in 21 countries. The company operates under a dual listed company structure having two parent companies including BHP Billiton limited and BHP Billiton plc. listed in London and Australia stock exchange. The company is headed by the board that run and manages it (BHP Billiton, 2014). The company adopts a divisional structure where although the CEO runs the company on a day to day basis, various group presidents have been appointed to run the company’s various divisions. This report presents an analysis of the company’s financial performance for the year 2014 in comparison to the year 2013. In so doing, the company’s balance sheet, income statement as well as the Cashflow statement is compared. In addition, the company’s stock holder’s equity over the two years is compared. In so doing, it will be concluded that the company’s performance over the two years is promising. This is because all the above elements have showed improved performance over the two years period on comparison. It will be argued that this is promising especially for investors who may want to invest in the company. Balance Sheet Review a) Total current assets The company’s total current assets as at June 2014 amounted to $22,296 million while the total current assets for the company in June 2013 amounted to $18,953 million. % change = (2014 total current assets- 2013 total current assets)/2013 total current assets)*100% = ($22,296,000,000-$18,953,000,000)/18,953,000,000)) 100% = 17.64% increase b) Total non-current assets The company’s total non –current assets amounted to $129,117,000,000 in 2014 which was an increase compared to $120,225,000,000 in June 2013. % change = (2014 total non-current assets-2013 total non-current assets)/2013 Total non- current assets)*100% = ($129,117,000,000-$120,225,000,000)/$129,117,000,000)) 100% =6.89% increase c) Total current liabilities The company’s total current liabilities in June 2014 amounted to $18,064,000,000. This was a decline from the June 2013 figure of $20,139,000,000. % change = (2014 total current liabilities- 2013 total current liabilities)/2013 total current liabilities)) 100% = ($18,064,000,000-$20,139,000,000)/$20,139,000,000)) 100% =10.30% decline d) Total non-current liabilities The company’s total non-current liabilities in June 2014 amounted to $47,967,000,000. This was an increase in comparison to June 2013 figure of $43,748,000,000 % change = (2014 total non-current liabilities- 2013 total non-current liabilities)/ 2013 total non-current liabilities)*100% = ($47,967,000,000- $43,748,000,000) /$43,748,000,000)) 100% = 9.64% increase e) Total stockholder’s equity The company’s total stock holders’ equity in June 2014 was $85,382,000,000. This was an increase compared to $75,291,000,000 in 2013. % change = (2014 total non- stockholder’s equity- 2013 total stock holder’s equity)/2013 total stock holder’s equity)) 100% = ($85, 382, 000, 000- $75,291, 000, 000)/ $75,291,000,000)) 100% =13.40% Conclusion The comparison of the company’s balance sheet for the two years shows an improving financial condition for the company. This is because all the aspects of the balance sheet that were being compared have been found to have improved from last year’s level. In other words, the company’s assets significantly increased while the current liabilities declined (Jared, 2011). In addition, the company’s total assets also increased. This shows an improving comparative financial position of the company. Income statement review a) Total (operating ) revenue The company’s total operating revenue was $67,206,000,000 in June 2014. This was an increase from the June 2013 figure of $65,953,000,000 % change = (2014 total revenue- 2013 total revenue)/2013 total revenue)) 100% = (67,206,000,000-65,953,000,000)/65,953,000,000)100% =1.90% increase b) Cost of goods sold The company’s cost of goods sold amounted to $46,513,000,000 in June 2014 compared to $50,040,000,000 in June 2013. Hence, this is a decline. % change = (2014 cost of goods sold -2013 cost of goods sold) 2013 cost of goods sold)) 100% = (46,513,000,000- $50,040,000,000)/$50,040,000,000)) 100% =7.05 decline c) Total expenses (before income taxes) The total expenses before taxation in June 2014 amounted to $1,176,000,000 which was a decline from the June 2013 figure of $1,276,000,000. % change = (2014 expenses -2013 expenses)/2013 expenses *100% = (1,176,000,000-1,276,000,000)/1,276,000,000)100% =7.84% decline d) Any non-operating (or extraordinary ) gains and losses The company’s gains in June 2014 amounted to $1,524,000,000 while the gains amounted to $3,947,000,000 in June 2013. % change = (gain in June 2014- Gain in June 2013)/ Gain in 2013)) 100% = ($1,524,000,000- $3,947,000,000)/$3,947,000,000)) 100% =61.39% e) Earnings per common share The company’s earnings per common share amounted to 260.0 cents in 2014 which was an increase from210.9 cent. % change = (2014 earnings per common share – 2013 earnings per common share)/2013 earnings per common share)) 100% = (260-210.9)/210.9 =18.88% increase Conclusion The comparison of the company’s financial performance shows an overall improvement over the two years. This is because while the company’s overall revenue increased, the associated costs generally declined thus resulting in increasing profits and hence better performance for the company’s shareholders. Review of the statement of cashflows a) Net cash inflow from operating activities The company’s net cash inflows from operating activities amounted to $ 25,364,000,000 in June 2014 which was an improvement compared with the June 2013 level of $20,154,000,000 % change = (2014 level – 2013 level)/2013 level)) 100% = (25,364,000,000-20,154,000,000)/20,154,000,000))*100% =25.85% increase b) Net cash inflow from investing activities The company’s net investing cash outflows for the year ending June 2014 amounted to $15,834,000,000. This was a decline compared to $18,726,000,000 recorded in June 2013. % change = (2014 level – 2013 level)/2013 level)) 100% = (15,834,000,000-$18,726,000,000)/$18,726,000,000)) 100% = 15.44% decline c) Net cash inflow from financing activities The company’s Net financing cash outflows amounted to $6,468,000,000 which is a great increase from the June 2013 level of $198,000,000 % change = (2014 level – 2013 level)/2013 level)) 100% = (198,000,000- $6,468,000,000)/ (198,000,000)) 100% =3166.67% increase d) Net increase in cash during the year The company’s cash increased from $5,667,000,000 in June 2013 to $8,752,000,000 in June 2014. % change = (2014 level – 2013 level)/2013 level)) 100% = (8,752,000,000 -$5,667,000,000)/$5,667,000,000)) 100% =54.43% Increase (Paul, D2014) Conclusion A general increase in the company’s Cashflows has been noted. It should be noted that the improvement resulted from the increased cashflows from operating activities. Though there was an increase in cash outflows from investing and financing activities, the company’s cash balances generally increased by more than 54% implying improving financial operation in the company. Review of stock holder’s equity a) Stockholder’s equity The company’s total stockholder’s equity increased from $70,667,000,000 in June 2013 to $79,143,000,000 in June 2014 % change = (2014 level – 2013 level)/2013 level)) 100% = ($79,143,000,000- $70, 667,000,000)/$70,667,000,000))*100% =11.99% increase b) Number of outstanding shares The company had 3,210,206,876 shares in 2014 which was a decline in comparison to 2013 when the company had 3,211,448,895 shares. % change = (2014 level – 2013 level)/2013 level)) 100% = (3,210,206,876 -3,211,448,895)/3,211,448,895)) 100% = 0.39% decline (BHP Billiton, 2014) Conclusion on shareholder’s equity There was an improvement in the stockholders equity over the two years though the number of outstanding shares declined. This show improving returns to the shareholders. Conclusion The general state of the company’s financial status The company’s financial status generally improved in 2014 compared to the year 2013. As can be seen above, all the financial status indicators of the balance sheet, the income statement and the Cashflow statements indicate improving performance. Similarly, returns to shareholders as well as the shareholders equity is noted to have improved though the number of shares slightly declined (Ariel, 2008). As such, BHP Billiton is a company where one can invest his money in since it shows growth in all aspects of its financial performance. B. Sports Revenue 1. The organizers have various alternatives at their disposal for recognizing revenues from the sale of tickets. The alternatives to be adopted will largely depend on whether the company uses accrual type of accounting or cash basis of accounting. The various alternatives for recognizing revenue at the organizers disposal include the following; a) Sales basis of recognition/ accrual basis – In this case, the organizers will recognize revenue at the time of sale or at the time the service is transferred to the buyer (Paul, 2015). In other words, revenue would only be recognized after the match has taken place and hence the buyers of the ticket have already enjoyed attending the match. In this case, the organizers cannot recognize revenue even if they have received cash unless the match has been attended. b) Cash basis of revenue recognition- in this case, the organizers will recognize revenue immediately they receive cash from ticket purchases. This will be regardless of whether the match has taken place or not. c) Recognize revenue after ticket is delivered – In this case, the organizers will recognize revenue only after the tickets have been delivered or after five days. The assumption is that there is no option for returning the ticket once purchased and hence the revenue would be recognized once the ticket has been delivered regardless of whether or not the match has taken place. Despite the above alternatives, I would recommend that the organizers use the sale/accrual basis of revenue recognition where revenue is only recognized when the related service has been delivered. In this case after the match has taken place. This is because the method is the one recommended for use by IFRS. This is an effective method for financial management as well as monitoring activities. In this case, the recognizers will have had a clear picture of how much revenue to expect as well as the related expenses. In addition, this is an accurate method that gives a clear depiction of their financial resources and responsibilities and hence they can be accurately managed. 2. My answer would not differ if it is included in the sale of tickets that if the customers are not happy, the tickets may be returned within one month. This is because using the sale/accrual basis of recognition; we only recognize revenue after the match has taken place. This implies that we will only account for those tickets that are returned/used during the match day. However, the tickets returned after one month will be recorded as sales returns and hence deducted from total revenue since the related cash would have to be returned to those that have returned tickets. In other words, whether or not revenue is recognized after one month would not matter as any ticket returned would be treated as sales returns and hence deducted from total revenues as cash is returned to those who return the tickets. 3. If the organizers have contracted a selling agent that takes care of all selling and marketing responsibilities who is given 10% commission, with a policy of no return no exchange, then the organizers ought to recognize revenue immediately after the sales agent has made sales . It will be assumed that the agent will be allowed to subtract his own commission and hence the company will recognize revenue at 90% of all the money received from the tickets sold by the agent. Since there is a no return, no exchange policy, the revenue can be recognized on a cash basis in this case and hence immediately after the tickets are sold. 4. The accounting profession does have the skills to provide the services to authenticate. This is a case that involves fraud and hence the accountants should use forensic auditing in order to authenticate the validity of signatures (Jacqueline, 2011). This is the same way accountants can identify fake stock or monetary fraud using forensic auditing. 5. Cost of goods sold in this case is very important because it would enable the event organizers to determine how much profits they have made by organizing the event. Related costs may include money paid to the signatories, any money used in hiring the facilities, the winnings by the participants, commissions paid to sales agents, advertising expenses and other related costs that would have to be subtracted from the company’s total revenue in a bid to establish the profit that has been generated by organizing the event. In this regard, the cost of goods sold is applied by subtracting it from total revenues in a bid to arrive at the event’s profits. 6. If the signatories were to get a fixed fee for the effort, the organizers ought to recognize the expense immediately after a deal has been entered between them and the signatory. This is because the fixed amount is not expected to change and it does not depend with the number of tickets sold. Therefore, it would be wise to recognize it immediately after the contract has been signed or when the cash is paid whichever is earlier. 7. If the signatories were to get a 5% commission on the sales of their signed tickets, the organizers would be forced to recognize the expense after total revenue has been determined. This is because at this point, they will be able to determine the total amount of commission to pay to the signatories since in this case; the pay depends with the number of tickets sold. References: Jared, B2011, Accounting for decision making and control, London, Rutledge. Ariel, D2008, Accounting for decision making, Sydney, Prentice Hall. Paul, M2015, Accounting for managers: Interpreting accounting information for decision making, New York, John Willey & Sons. Jacqueline, B2011, Accounting business reporting for decision making, New York, John Willey & Sons. Paul, D2014, Financial accounting tools for decision making, Sydney, Prentice Hall. BHP Billiton, 2014, Annual report 2014. Read More