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Analysis

Discuss about the Accounting for Business Decisions for A2 Milk Company Limited.

A2 Milk Company Limited is listed in ASX 200 as public listed company. A2 Milk Company will be commercializing in the intellectual property about the milk related products of A2.  A2 Milk Company was founded in New Zealand in the year 2000. A2 Milk Company of Australia is one of the major producers of A2 milk, infant formula and other dairy products which is supplied in local as well as international market. A2 Milk Company has headquartered in Sydney, Australia. A2 Milk Company is the heir of A2 Corporation Limited. Primary focus of the company was on the breeding program of dairy program for development of herds which will be producing for A2 Milk. Due to opposition of Fonterra, A2’s launch was delayed. In December $ 1.1 million interest was sold to A2 Australia to a giant in food and marketing giant in the Asian Market to Fraser & Neave. A2 Corporation was focusing on the recovery of death of founder. In 2015, there was launch of A2 Milk Whole powder and A2 Ice creams. A2 Milk is only milk which contains Beta-Casine who is one of the A2 type instead of A1 Protein regularly found in all the milk. A2 milk is premium and healthier product which aims in digestion as compared to rest of the milk. In the year 2007, selling of A2 milk had increased with great speed in Australia and New Zealand. In 2013, A2 Corporation also launched an formula for infant in New Zealand as well as Australia. In the year 2015, A2 got listed in ASX, which added few more points to the goodwill of the company (The a2 Milk Company.2016).

Analysis of the A2 Corporation will be done on the four aspect of the financial statement. Namely, balance sheet, stockholder’s equity, income statement and cash flow statement by analyzing and reviewing the increase and decrease in trend of the amount of the balance sheet.

Balance sheet is one of the final and most important parts in predicting as well as forecasting position of the company. Balance sheet is showing the position of the company in terms of Assets, liabilities and equity (Deegan 2013). Asset is referred to as items which are actually owned by the business or items from where the company will be having profit and generating income which can be in the form of current asset and fixed asset. Liabilities will be having items which are paid to the investors and to whom the company is liable to pay, which can be in the form of creditors, bank loan, provisions, etc,. Equity are described as those items which stand as part of Shareholders equity and contain elements of like share capital, retained earnings, and various reserve, etc.,. Balance sheet is an important entity which has to be maintained by all the business entity. Each and every balance sheet is unique in itself. Balance of the company helps in evaluating the strength of the company and leave space for the future forecasting of business. After having prepared an accurate balance sheet company can determine the productivity as well as solvency of the company. Balance Sheet is also helpful in determining the capital which will be retained by the company. Balance sheet also shows how quickly the assets of the business will be transformed into capital. Balance sheet of the business will be highlighting financial performance as integral part of companies’ financial statement.  Balance sheet of the company tells the shareholder as well as investors of the company related to some fundamentals of the company (Weil et al., 2013).

Balance Sheet Analysis

From the given situation it has been analyzed that A2’ total non-current asset has increased by 11.08% from the previous year which is a good indication for the business. This implies that company in expanding or it is growing. In A2 non- current asset includes property, plant & equipment, goodwill, other intangible assets and deferred tax assets this entire element has increased by some percentage (Deegan 2012). Similarly A2's current assets has also increased by 18.37% from the previous year which is comparatively is also better indicator. A2 ‘s current assets include cash and short-terms deposits, trade and other receivables, prepaid expenses, inventories and current tax asset this entire element has increased by some percentage. Moreover, there has been boosting increasing in the total non-current liabilities that is 937% which in not a good indication. Non-current liabilities of the A2 are included as accounts payable and deferred tax liability (The a2 Milk Company.2016). Accounts payable of the company still has a slight percentage of increase, the boosting increase in the assets is mainly due to deferred tax liability. Deferred tax liability was not present in 2014. This has been a new component which is not good for the position of the company (Pratt 2013). It is increasing the tax burden on the company and will be decreasing the profit of the company. Further it has been noticed that there has been increase in the current liabilities of the business by 62% this increase is due to inclusion of current tax liabilities on the business, which has become a tax burden on the company. Finally, in this section there has been slight increase in the stockholder’s equity by 0.026%, which is very minor change in the position but with positive effect and good for the company’s position (Edwards 2013).

Stockholder’s Equity plays a major role in the balance sheet of the company. Stockholder’s equity is also known as net worth of the business (Horngren et al., 2013). Stockholder’s equity records the proportion of capital invested by the owner of the company as well as contribution of the co-owners of the business after the shares has been purchased, which includes any primary contribution and additional paid-in capital. It also gives the reflection of the profit, which has been distributed and retained in the shareholders of the company. Retained earnings are referred to as profit retained or loss incurred by the business. Dividend is said to be the distribution of the shareholders (Samkin and Deegan 2012). In a business is operating for large number of years and there is huge balance of retained earnings within the head of stockholder’s equity, it can be said that business is not distributing the profit of the company as dividends to the shareholders. This in terms indicates high level of net worth as well as long-term profitability position in the company. Moreover it can be said that business has main aim in increasing the debt-to-equity ratio. While assessing the credit worthiness and attracting for getting loans of the business, there has to reduction in the ratio (Henderson et al., 2015).

Stockholder’s Equity Analysis

In the given company it is observed that there has been slight increase in the stockholder’s equity by 0.026%, which is very minor change in the position but with positive effect and good for the company’s position. Similarly as in terms of measuring the outstanding ordinary share of the company, there has been no change in the number of shares (The a2 Milk Company.2016).  

Income statement can be also referred to as the profit and loss statement or revenue statement or earning statement or statement of operations of the company (Horngren et al., 2012). This statement will measure the performance of the company in terms of revenue and expenses which is in specific financial period. It is indicating the relationship between revenue and expenses of the company. Income statements convert the revenue and expense into net profit or income (Freeman et al., 2014). Income statement helps the business in calculating the profit or loss for the company which will help in giving retained earnings for company. For displaying the identified revenues of a particular period, the cost and expense are charged against the revenue of company, which is included as revenue and tax. The main aim of the income statement is to tell the investors as well as manager of the company, whether the company has made profit or loss for a particular period of time. Another aspect to keep in mind of the income statement is that NGO’s need not produce this statement (Beatty and Liao 2014). Rather they show similar statement which reflects sources of the fund which is compared to programmed expenses, administrative expense and other operating cost of the organization. Therefore, this statement is called as statement of activities. Basically, income statement can be made through two processes. First is “single step income statement” which is very easy approach, just add all the revenues and then deduct it from total of the expenses to get bottom line or net profit. Another is “Multi – Step income statement” which involves number of step to get net profit. First operating expense is calculated then deduction is made from the gross profit which will generate amount for income and operation. Next there will be deduction of tax to get the net income of the business (Näsi et al., 2014).

From the income statement it has been analyzed that total revenue has increased by 39.94% which implies that companies sales have been increased which can result in generating more income for the business. Similarly there has been increase in cost of goods sold by 41.79% which is even good indication, for result in generating revenue for the business. If there will be increase in revenue as well as cost of goods sold, which indicates good signal for the company for generation of income (Bryer 2013). Total expense has been increased by 40%, which is not good signal, but as the sales and cost of goods sold is increasing, it is natural phenomena that expense will increase, but for covering that loss, increase in the revenue will cover the effect.  Furthermore it has been analyzed that company non-operating has decreased by 35% as compared to last year because there has been payments made for the property and plant and additional investment has been done the UK unit of A2 Milk Company (The a2 Milk Company.2016). Due to this effect in the non-operating activities loses for the previous has been covered to some extent. Moreover a new trend has been observed that earnings per common share have been incorporated in the current year, which is adding to the value of the company (Mattessich 2013).

Income Statement Analysis

Cash flow statement is also called statement of cash flow. Earlier cash flow statement was called to be “flow of funds statement”. Cash flow statement shows changes income and its effect on cash and cash equivalents as well as on the balance sheet with division of operating, financing and investing activity of the company. Cash flow statement of the company is related to cash inflow and outflow of the business (Psaltopoulos and Skuras 2015). The statement records present operating expense as well as accompanying changes but in relation with balance sheet. It is said to be an analytical tool for evaluating the short-term viability of the specific company, regarding payments of debts of the company. Cash flow statement is prepared only to analyze the company’s payroll as well as immediate expense paying capacity of the company. Cash flow statement helps in giving clear and transparent picture to the potential investors and creditors for paying the debts of the firm (Christensen et al., 2014). Cash Flow statement is basically divided into three activities which are namely, operating, financing and investing activities Under the operating activity receipts related to sale of debt or equity items are taken in the portfolio., interest received on loans, depreciation, deferred tax, amortizations, write-offs, dividends received, payments made to the supplier of goods and services come under this division. Investing activity of the company will have purchase and sale of fixed assets, loans received and taken, payments done during mergers and acquisitions (Kaplan and Atkinson 2015). Financing activity will include payments of dividends payments for buying back shares of company, Sale of shares, net borrowings, Payment of dividend tax, repayment of debt. Generally there is two method of preparing statement of cash flow. Direct method of preparing statement of cash flow is prepared and understood easily. In universal, there is basically use of indirect method because of FAS 95 which is necessary for making supplement report (Sethi and Kaur 2013).

In the given company it has been observed that A2 cash flow is not operating properly. There has been immense decrease in the cash from operating activities it is because in the current year the company did not receive and refund from the tax department. Interest paid amount was increased by the employees was increased by 9 million. Payment made to suppliers and employees had also increased (Browne et al., 2012). Taxed paid to the government is also showing an increase. Due to this following change, the company cash from operating activities was decreased by to such extent that it resulted in loss. Moreover, the amount of the investing activity was decreased to 51%, in other words, the loss from the previous year had been recovered a bit, i.e., percentage of loss had been decreased as compared to previous year (Schröter et al., 2014). This has occurred because there no acquisition and merger had taken place in the current year. Next comparing the financing activity of the company, trend has been observed that there has been tremendous decrease in the investing activity has decreased by 98%. The decrease has occurred because in the current year there is no cash received by the UK branch of A2. Due to increase in the exchange rate of the country in the current year, there has been immense increase in the cash activities form exchange rate. These affected in decreasing the cash level of financing activity (Rosado et al., 2014). Finally, to make last analysis it is observed that net decrease in the cash level of the current year has decreased tremendously by 131% (The a2 Milk Company.2016).  

Conclusion

Finally to conclude the report of A2 Company limited it can be said that there all the analysis and comparison has been done correctly. Each and every criterion of the project has been fully achieved with extraction of data from the company's annual report. A2 Milk Limited is fastest and newly growing company of Australia. It has been observed that company needs to invest more in the purchase of land, equipment, and property for the purpose of expansion. The company should more focus by investing in the promotional activity of the company. This will help the company in improving the overall position of the company. Analysis of the financial statement is for getting evaluation of the company, for the purpose of investment as well as to measure the performance of the company. 

On the overall analysis of the financial statement there has been positive effect in all the perspective except the cash flow statement needs some recommendations which are given as follows:-

A2 should reduce the amount of deferred tax as that is effecting the operating activity and resulting in increase in tax burden every year.

There should be provision or reserve made for exchange rate effect, as that will help in increasing the cash from financing activities.

Moreover, a company should try to get cash from the subsidiary of A2 in UK, because that will help the company in generating enough cash for the company.

A2 should increase the level of cash and short-term deposits of the company.

Further the company should not involve in any acquisition and merger because presently the company is not sound enough for getting engage in any new venture.

A2 should try to decrease or recover the loss caused due to non-operating expense.

References

Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics,58(2), pp.339-383.

Browne, D., O'Regan, B. and Moles, R., 2012. Comparison of energy flow accounting, energy flow metabolism ratio analysis and ecological footprinting as tools for measuring urban sustainability: A case-study of an Irish city-region. Ecological Economics, 83, pp.97-107.

Bryer, R., 2013. Americanism and financial accounting theory–Part 3: Adam Smith, the rise and fall of socialism, and Irving Fisher's theory of accounting.Critical Perspectives on Accounting, 24(7), pp.572-615.

Christensen, T.E., Baker, R.E. and Cottrell, D.M., 2014. Advanced Financial Accounting. The McGraw-Hill Companies, Inc.

Deegan, C., 2012. Australian financial accounting. McGraw-Hill Education Australia.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting)(Vol. 29). Routledge.

Freeman, R.J., Shoulders, C.D., Allison, G.S., Smith Jr, G.R. and Becker, C.J., 2014. Governmental and nonprofit accounting: theory and practice.JPAEJOURNAL OF PUBLIC AFFAIRS EDUCATION VOLUME 20 NUMBER 3, p.441.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D. and Tan, R., 2012.Financial Accounting. Pearson Higher Education AU.

Horngren, C.T., Sundem, G.L., Schatzberg, J.O. and Burgstahler, D., 2013.Introduction to management accounting. Pearson Higher Ed.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Mattessich, R., 2013. The Rise and Significance of Modern Analytical Methods in Accounting. Part I-A Review Essay of Accounting Theory-An Information Content Perspective, of John A. Christensen and Joel Demski.Energeia, 2(1).

Näsi, S., Saccon, C., Wüstemann, S. and Walton, P., 2014. European accounting theory: evolution and evaluation. The Routledge Companion to Accounting, Reporting and Regulation, pp.54-71.

Pratt, J., 2013. Financial accounting in an economic context. Wiley Global Education.

Psaltopoulos, D. and Skuras, D., 2015. 9 social accounting analysis.Handbook of Research Methods and Applications in Economic Geography, p.193.

Rosado, L., Niza, S. and Ferrão, P., 2014. A material flow accounting case study of the Lisbon metropolitan area using the urban metabolism analyst model. Journal of Industrial Ecology, 18(1), pp.84-101.

Samkin, G. and Deegan, C., 2012. New Zealand financial accounting. McGraw-Hill Education Australia.

Schröter, M., Barton, D.N., Remme, R.P. and Hein, L., 2014. Accounting for capacity and flow of ecosystem services: A conceptual model and a case study for Telemark, Norway. Ecological Indicators, 36, pp.539-551.

Sethi, A.S. and Kaur, S., 2013. Growth Accounting Analysis in India with Specific Reference to the Economies of Punjab and Haryana. The Journal of Income and Wealth, 35(2), pp.147-168.

The a2 Milk Company. (2016). The a2 Milk Company. [online] Available at: https://thea2milkcompany.com/ [Accessed 24 Sep. 2016].

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

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