Assignment 2 – Step 3 Ratios Commentary.

Reflection on Beacon Lighting Financial Ratio Analysis

Before understanding what accounting really means, my commonsense approach was to look at a firm’s profit and sales in its financials and see if they were increasing year by year. If so, great, right? Well, as I’ve progressed through my studies, I’ve learned that this question isn’t as straightforward as it seems. Accounting is not just about the numbers.

As we begin to analyse our firm’s ratios and what they reveal, I’m genuinely excited to uncover what these numbers truly represent. In previous studies, I’ve used ratios without fully understanding their implications. In Assignment One, I found calculating the ratios fairly straightforward, although Martin pointed out one mistake by using the wrong year for a particular calculation.

Starting with the profitability ratios, I looked at Return on Assets (ROA) and  Net profit margin to assess Beacon Lighting’s performance. I noticed that ROA gradually decreased by around 37% over the four years from 2021 to 2024 (from 13% to 8.2%). At first glance, this appears concerning, as ROA measures how efficiently a company uses its assets to generate after-tax profit.

I also observed a similar decline in Return on Net Operating Assets (RNOA), which dropped by about 43% over the same period. There seems to be a similar connection with both these ratios, although RNOA focuses on returns generated from core operations, and the fact that both ROA and RNOA are declining, signals that Beacon’s operational efficiency is weakening.

Net profit margin also dropped from 13% to 9.3%, indicating shrinking margins. This could be due to rising costs (e.g., inflation, as noted in annual reports) and decreased demand for products, putting pressure on sales. These falling profitability ratios suggest that Beacon Lighting is facing cost pressures and reduced consumer demand. Operational leverage may also be contracting due to rising production costs.

Moving to liquidity, Beacon Lighting’s current ratio improved from 1.4 to 1.68 over the four years, suggesting it should be able to meet short-term obligations without major cash flow concerns. However, this increase was driven largely by a doubling of trade and other receivables, while this may seem positive, it could also indicate that customers are taking longer to pay or that Beacon has loosened its credit terms.

The quick ratio, however, tells a different story. It declined in 2022 and 2023 before recovering in 2024. During this time, inventories increased by 30% (from 2021 to 2022), possibly reflecting slower stock turnover as consumer spending fell. Prepayments also rose during this period, contributing to a quick ratio below 1, which is less than ideal.

Efficiency ratios also declined over the 4 years, with total asset turnover by 12% and current asset turnover by 21%, supporting the view that stock was building up and not moving as quickly. Broader economic conditions likely contributed to this, with reduced consumer spending having a noticeable impact on Beacon Lighting’s performance.

Looking at solvency, the debt-to-equity ratio fell by 24% over the four years, suggesting that Beacon is reducing its reliance on debt and managing financial risk more conservatively. Meanwhile equity ratio on the other hand increased by 19% over the 4 years, which at first sight looks confusing. By calculating the equity divided by assets, it would suggest by increasing, Beacon is not relying on as much debt to finance assets and using more of their own funds.

In terms of market ratios, earnings per share (EPS) fell from $0.17 in 2021 to $0.13 in 2024, reflecting lower net profits and a slight increase in shares issued. Interestingly, the price-to-earnings (P/E) ratio jumped significantly, by 59% from 2023 to 2024, rising from 11.36 to 18.05. This suggests that investors are willing to pay more per dollar of earnings, possibly because they expect stronger future performance. This view is supported by a share price increase from $1.71 in 2023 to $2.41 in 2024.

Accounting Drivers – Commentary

The key drivers of Beacon Lighting’s economic profit (Abnormal Operating Income, or Abnormal OI) are Return on Net Operating Assets (RNOA), cost of capital, and Net Operating Assets (NOA).

Economic profit is calculated as:
(RNOA – Cost of Capital) × NOA

While economic profit remained positive from 2021 to 2024, it declined from $34,597 to $25,183. This drop appears to be primarily driven by a steady decline in RNOA, especially after 2022. This reflects tighter margins and reduced asset turnover, likely due to increased operating costs as noted in the annual report. While Beacon is still creating value, the downward trend is a concern. . While Beacon is still adding value, it would be a sign of declining economic profit.

As noted earlier, the profit margin declined over the four years. The asset turnover ratio (ATO) also dropped, from 3.43 to 2.55,indicating a decrease in asset efficiency. Together, these two metrics explain the decline in RNOA.

The cost of capital, given to us by Martin, remained constant at 8% throughout the four-year period. This standard Weighted average of Cost of Capital (WACC) assumption highlights, that the decrease in economic profit stems primarily from falling returns, not rising costs of capital.

Net Operating Assets (NOA) increased from $84,434 to $126,880 over the period. Since NOA represents capital invested in operations, this increase suggests Beacon is continuing to invest in growth. Notably, Beacon holds a 50% interest in the Large Format Property Fund, which owns seven retail properties. Four of these properties were fully tenanted throughout 2024, and three properties were development projects. In 2024, the Fund acquired additional land in Bathurst for future development, expanding its footprint further.

Free Cash Flow (FCF), calculated as Operating Income minus the change in NOA, was the most volatile metric across the four years. It started at $21,432 in 2021, dropped to a low of $8,056 in 2023, then rebounded sharply to $42,279 in 2024. This fluctuation reflects the combination of falling operating income (aligned with RNOA and PM) and rising investment in operations, particularly in 2023. The improvement in 2024 likely reflects more disciplined capital investment and better cash flow management.

Despite these declines, the firm is still generating strong positive returns, which is rare and valuable for any firm moving forward

Beacon Lighting

Assignment 1 Step 3

Website: Beacon Lighting – Lights, Fans and More

Annual Report 2024: BLX-Annual-Report-FY2024.pdf

Beacon Lighting Group Limited is Australia’s leading specialist retailer of lights, ceiling fans, and globes. Founded in 1967, the company has grown to operate over 126 stores across Australia, with a presence in international markets including New Zealand, Hong Kong, Germany, the USA, and China. Beacon designs, sources, imports, and sells a wide range of lighting and cooling products, including exclusive brands like Lucci, LED lux, and FANAWAY.

With 1130 employees and a strong focus on innovation, energy efficiency, and style, Beacon serves both residential and commercial customers through retail stores, online platforms, and commercial sales offices. The company is committed to providing expert advice and outstanding customer service, supported by accredited lighting designers and a nationwide team of over 1,000 employees.

Key Concepts and Strategies of Beacon Lighting

The one thing that comes out strongly from reading the history and strategies of Beacon Lighting is that it revolves around delivering exceptional service to its customers, whether its residential, commercial, and trade. Beacon lighting provides multiple convenient shopping channels, whether that’s in store, online or home service. It provides a  strong physical retail footprint (126 stores) complemented by a well-integrated online store, same-day delivery, Click & Collect, and rich digital resources.

It is interesting to read, The Beacon Lighting Group has a 50% investment in the Large Format Property Fund. The fund purchased blocks in NSW and Quensland for 2024. I had to look up what these large format  property funds are about and have found, they offer a space of retail and industrial in one space, offering customers a different shopping experience. It would suit a lighting design layout, giving customers a feel for the product.

Beacon Lighting is a vertically integrated business that designs, develops, sources, imports, distributes, merchandises, markets, and sells its product range to meet the needs of our retail I would say that this type of business would have needed a large capital outlay to operate this way. Interestingly, more than 85% of the products sold by Beacon Lighting are designed in-house in Melbourne and are exclusively branded for the Beacon Lighting Group.

The products also offer multiple price points to suit the different types of customer and budgets. A simple LED downlight is available in 3 different tiers, all differing in design, features, benefits and price. With having a “good, better, best” structure, I feel it offers all customers a friendly product that also works commercially for Beacon lighting. It allows Beacon to cater to price-sensitive shoppers while still promoting premium innovation to those who want the best.

Beacon Design Studio and In-Home Design Services offer professional consultations with lighting designers, setting them apart from basic retail competitors. In my view this offers in house solutions for customers wanting specific layouts which offers just another bow than just ordinary retail products. Beacon designs and sources most of its products internationally through several sources and then are managed through in-house, high-quality control.

As with the current global trends with energy products, Beacon has a strong alignment with sustainability and energy saving products to reduce greenhouse gas emissions. With the focus on the high cost of electricity in the current climate and with Beacon aiming to reduce power bills and  environmental impacts, it gives them a strong allegiance with modern customer values and regulatory directions.

Utilizing Henry Mintzberg’s 5 Ps for Strategy  

 Plan:

  • Expand as a national and international leader in lighting and cooling solutions.
  • Offer innovative, energy-efficient, and fashionable lighting products. For 2025, bring the latest fashion, innovative and energy efficient lighting, fans, and electrical accessory products to market to continue to excite and inspire our retail and trade customers.
  • Operate through owned stores, franchising, online channels, and commercial sales offices.( 124 company stores and 2 franchised stores.)

Ploy:

  • Develop exclusive product ranges (Lucci, LED lux, FANAWAY) not available to competitors.
  • Offer VIP member discounts, early access, and trade loyalty programs to lock in customers. Trade customers have responded very well to many  trade initiatives, which included Beacon Cash rebates, new trade-specific products, the referral program, trade perks, and surprise and delight gifts.
  • Use premium design services and accredited lighting consultants to create a competitive edge.

Pattern:

  • Consistent expansion strategy: From one store in 1967 to over 126 company-owned stores today.
  • Continued focus on design, energy efficiency, and innovation.
  • History of award-winning customer service and operational excellence.

Position:

  • Positioned as Australia’s number one specialist retailer for lighting and ceiling fans.
  • Serves multiple segments: residential, commercial, and trade.
  • Emphasises sustainability and energy efficiency, aligning with environmental values.

Perspective:

  • Strong internal culture of customer obsession, innovation, and sustainability.
  • Sees itself not just as a retailer, but as a lifestyle enhancer and design partner.
  • Values continuous improvement and team development through training and rewards.

Personal reflections on financial reports and statements

On a personal note, I feel I have known the company well, without perhaps visiting one of their stores or purchasing one of their products. Growing up as a late teen in Frankston Victoria, I have read the very 1st franchised store was set up in the main street. The name and bright yellow wall or signage has been with me since that store first opened in 1989. Working at Goodyear tyres at the time, I also remember Bob Jane setting up his 1st store as competition. Look at both companies now, it must have been a period of strategic entrepreneurial inspiration. Obviously, I wasn’t inspired at the time.

1st glance at the financial statements for the 4 years we are restating, I notice in the income statements and balance sheets, they have a different end date for each year, although within the week ending June 30. I guess, they are working on the end of the working week for each financial year. I haven’t seen this before and I am not sure how to state this on my excel spreadsheet.

Revenue growth for Beacon Lighting has steadily increased each year from 2021  but has slowed in the last couple of years. The main concern is that operating income has decreased from 2022, because of the significant increase in operating expenses. Along with net income decreasing from 2022, it shows that there maybe cost pressures within the firm.

Another concern is the shrinking of the profit margins, perhaps due to rising costs of production, wage increases and customer demand and preferences. Inflation would have something to say with the larger increases in operating expenses. Profit Before Income Tax decreased year-on-year after 2022, from $53.8M in 2021 to $43.3M in 2024. Net Profit After Tax dropped from $40.7M 2022 to $30.1M 2024, highlighting margin pressure.  Declining profit margins despite relatively stable revenue indicates cost growth is outpacing revenue growth. Perhaps Foreign Exchange and Financing Pressures are emerging factors as well.

From the financial position, liquidity looks strong with increase in cash reserves. There is an increase in inventory which suggests, stock is not moving as quick, or with the addition of 9 new stores, inventory is maintained at a higher level. With total assets increasing by over 30% since 2021, regular investment in PPE shows continued business expansion and upgrades.

It is also interesting from the financial summary in the directors’ report in 2024 (figure 1), he mentions it is difficult to compare the Statutory FY2024 result to the Statutory FY2023 result. The Statutory FY2024 result was for 53 weeks, while the Statutory FY2023 result was for 52 weeks. To make the results comparable, it is necessary to adjust the Statutory FY2024 result by one week to produce an Underlying FY2024 result (Group, Beacon Lighting, 2024)

A summary of the report concludes, Beacon Lighting navigated 2024 well, growing trade sales, improving gross margin, and expanding its store footprint. However, rising operating expenses due to inflation and weaker retail consumer spending pressured the bottom line. The trade channel, commercial segment, and property investmentsprovide solid strategic pillars for future growth.

Understanding the past.

Assignment 1- Step 6.

Chapter 4 emphasises the importance of understanding a firm’s past to gain insights for predicting its future. Reflecting on my studies over the past year, i sometimes wonder if have i done enough? Have i learned enough to completely change my career path? To answer this, i am about to embark on my capstone unit, which will indicate whether i need to delve deeper and refine my studies to ensure my final year provides the necessary foundation to move forward. Will i add value with my studies for future endeavours?

As my double degree nears completion, it is crucial not just to have learned the material but to have grasped its core principles and demonstrated academic growth. Just as valuation must include all earnings to provide a complete picture, mastering all relevant skills is essential for academic and professional success. Gaps in understanding would leave an incomplete perspective.

In the past, I have made tough financial decisions, such as selling my first unit while on a fixed interest rate. Breaking that fixed rate cost me all the money i had made from the investment, which  frustratingly doesn’t happen anymore. I have started over twice, but from previous experience, i am determined, i will not make the same mistakes again. Every effort from now on  is to add value, to ensure my children have something in the future. The lessons from past failures will hopefully secure my family’s financial future.

Studying ACCT11059 Accounting, Learning & Online Communication introduced a powerful perspective by learning early that  separating a firm’s operating and financial activities enhances financial analysis. Operating expenses became more straightforward once i understood the line items in financial statements. A useful analogy for separation is by  comparing a football team’s skill and fitness (operating aspect) to management and ownership’s financial responsibilities, such as player acquisitions and sales (financial aspect).  While both are working together with one goal to achieve success, we can see by separating the two aspects, it maybe easier to look where improvements can be made.

Abnormal earnings is a classification that seems so pronounced, it sounds like a business has done something out of the norm to add extra income for the company’s financial statements. Fundamentally they really indicate whether a company is creating shareholder value beyond just generating accounting profits. This concept aligns with long-term investment decisions and strategic financial planning. Studying abnormal earnings has deepened my appreciation for valuation methods, emphasising the importance of assessing economic profits rather than just accounting numbers.

The discussion on Modigliani-Miller Theorems is really interesting. It suggests that, in efficient markets, debt versus equity,  should not impact firm value. However, real-world factors like taxes, interest rates, and investor behaviour can create anomalies from this theory. The key takeaway is that operating activities are the real drivers of value, while financial decisions mostly affect how value is distributed rather than created.

Traditional financial statements do not necessarily give a true reflection of the economic reality of a firm, thus the next section of restating a balance sheet will give investors the power to evaluate operational features separately from the financial aspects. While the study guide mentions the process of restating to be a very technical exercise, I cannot remember how difficult or complex it was in my early studies. Hopefully once I commence the restating part it will be easier as suggested and give me more knowledge on the theoretical sides of the process. The classification of the items I think where the most challenging aspect of restating  financial statements.

Financial Leverage where you are financing assets through debt rather than equity and operating leverage where you are financing assets through suppliers or customers makes it fascinating in the case of Ryman Healthcare. Firms don’t need to fully fund their assets through equity, making it easier to generate higher Return on Equity (ROE). Ryman Healthcare’s strategy of using customer advances as a form of operating leverage is quite interesting. Instead of  the suppliers funding working capital , customers are effectively lending to the company interest-free. Ryman healthcare achieved a lot higher percentage of ROE (23%), than their Return on Operating Assets (ROOA) (9.3%). The risks for Ryman in this case would probably be if the property market falls or collapses therefore reducing profitability.

Efficiency by way of Asset Turnover (ATO), reflects how efficiently assets generates sales. If the property market falls, ATO whose acronym tells me it’s the Australian tax office every time I look at it, tends to be more stable than Profit Margin (PM). Meaning asset efficiency is perhaps critical for  Ryman Healthcare for long-term resilience. The Study guide does mention that Ryman Healthcare has some key drivers to maintain a healthy profitability by having high demand for retirement village units, fuelled by an aging population .Good turnover of dwelling occupation and a high marketing reputation. This is why it is getting easier to see financial analysis is not just about looking at past data but using it to anticipate future changes. Borrowing needs to be profitable so it exceeds the cost of debt.

Assignment 1- Step 2

Assignment 1 Step 2

Chapter 2 – How a firm adds value

Carrying on from last week, I’ve heard Martin mention a few times that accounting is more than just numbers. I find that somewhat amusing because, from the outside, people often perceive it as exactly that, just numbers! I remember my sister suggesting, when I was considering a career change, that since I’m good with numbers, I should try accounting. But from my early units of study, I quickly realized it’s much more than that.

That’s why this unit is so exciting. We’ve progressed from simple accounting equations and establishing financial statements to understanding what they truly mean and, more importantly, what they mean for a business.

The idea of looking forward, rather than focusing solely on past performance, is both exciting and intimidating. Making judgments about investments or business decisions requires more than just historical data; it involves understanding economic and business trends, risk factors, and strategic direction.

Strategy is another key concept. For a firm, it serves as a roadmap, an idea, a direction, and a plan to generate economic returns over time. Understanding a company’s strategy goes beyond financial statements; it requires an assessment of market conditions, competitive advantages, and risks.

This reminds me of my Favourite game, League Manager, where managing a professional Premier League team is all about strategy. At the start of the season, you must set clear goals, whether it’s winning the league, qualifying for European competitions, or simply avoiding relegation (which has huge financial implications).

In football, every team has a unique strategy, whether it’s possession-based play, counter-attacking, or high pressing. But strategy alone doesn’t guarantee success; execution, adaptability, and external factors (like weather, refereeing decisions, and player injuries) all come into play. Just like a business, a football club must allocate resources wisely balancing talent acquisition (transfers), financial sustainability, and long-term growth .The best football teams create value over time by winning trophies, growing their fanbase, and increasing commercial revenue. Similarly, a business must generate returns above its costs to remain competitive.

Where a team finishes in the league doesn’t just depend on its own strategy but also on how well its competitors have spent in the transfer market. Established clubs just like Woolworths and Coles in retail have a distinct advantage because they can attract and invest more due to their high turnover and financial strength. The final piece is the performance of the players. Do the staff and management have a big say on whether a firm can add value? How much does organisational behaviour, which I studied in the 1st year, have an impact on economic value?

Martin’s example of Ryman Healthcare highlights how strategic positioning can create a competitive advantage. The increasing demand for retirement housing was something I personally witnessed when handling my father’s will on the Gold Coast. The simple block house will fetch a staggering price, and the demand to get into retirement village was eye-opening. Mintzberg’s Five Ps of Strategy provide a useful framework for understanding how businesses like Ryman navigate industry opportunities and challenges.

Can accounts be Trusted? This question initially makes me think of financial mismanagement or unethical behaviour, where numbers are manipulated to hide the truth. But as we dig deeper, it becomes clear that trust in financial statements is about more than just ethics it’s about understanding the role of judgment in financial reporting. Financial statements are not a perfect reflection of economic and business realities. They are a structured representation based on accounting principles and assumptions

. Chapter 2 – Many ways to assess value

Chapter 3 begins with a history lesson, as Martin takes us on a journey through the ages, exploring the development of financial statement analysis and the origins of financial ratios. Like many innovations, financial analysis in the 19th century was likely driven by necessity. At the time, businesses had limited frameworks to guide their analysis, making it a more intuitive and adaptive process.

What fascinates me is that financial ratios date back as far as the Euclidean era. Today, we have instant access to sophisticated financial tools and real-time data, but back then, analysts relied purely on imagination and forward thinking. While ratios remain valuable, they should always be used in context rather than as standalone predictive tools.

The influence of the banking sector on financial disclosures makes perfect sense. Banks need reliable financial data to assess credit risk. As financial analysis has evolved over time, we can still see a blend of traditional and modern techniques being used to evaluate business performance and predict future value.

A key distinction between good and great investors is their ability to anticipate business trends. The digital age has enabled savvy investors to capitalize on emerging opportunities. Companies like Netflix and YouTube thrived by recognising an industry shift by predicting that consumers would prefer streaming content from their TVs, computers, and smartphones without leaving home, rather than relying on traditional media.

Beyond predicting future growth, successful investing also requires data analysis. If I had capital to invest, I would likely focus on blue-chip companies with a track record of sustainable long-term growth, as they tend to be more resilient during economic downturns. That said, no valuation method guarantees success, valuation is always an estimate, and no one can predict the future with certainty.

Finally, we arrive at two major valuation models each with its own set of ugly, complex formulas:

  • The Discounted Dividend (DD) Model
  • The Discounted Cash Flow (DCF) Model

I remember studying Business Finance and keeping a side list of formulas. The real challenge was determining which formula to apply in each scenario. Many looked similar, but once you chose the right one, the calculations became more straightforward.

Reading about the limitations of the DD model, particularly its reliance on predicting future dividends, makes me question its usefulness. If the DCF model addresses some of these shortcomings and Free Cash Flow (FCF) provides a better valuation, why not use those instead? Perhaps I’m missing something here at this early stage of the study guide, but it’s an interesting point to explore further.

A firm’s equity value is based on the present value of future dividends, yet it is mentioned the  dividends themselves do not determine value. Instead, a deeper focus on cash flow and economic profit can provide clearer insights into a firm’s ability to generate value for shareholders. Looking forward in the study guide, I expect to see, a structured approach to financial statement analysis will help me better understand and assess a firm’s long-term value.

My Personal Reflections on My Journey Through Accounting and Finance. Assignment 1 – Step 1

Five years ago, without seeking others’ opinions, I took a gamble. I wanted to challenge myself and explore a potential career change that aligned with my interests and ideal lifestyle in the later years of my working life. To hedge my bets, I committed to a double degree in Accounting and Business, along with a master’s in finance.

The challenge? Completing 32 units while juggling full-time work that doesn’t connect with my studies, a family of seven, and my soccer committee commitments. Would I have the motivation to go the distance, especially after not studying for 30 years? Could I keep up, while still maintaining a family lifestyle?

Now, looking back, it feels like I started this journey in the 19th century. It’s been that long and that demanding! But in reality, it’s only been 5.5 years, and I’m just two units away from the finish line.

One of my first subjects, ACCT11059 Accounting, Learning & Online Communication, still stands out in my memory with such things the study Guide, Peer Wise, KCQs, and even setting up a blog. But have I retained enough knowledge from all those past units to help me transition into a new career? It’s interesting how I can clearly recall the accounting equation from my first unit, but many of the topics in between sometimes feel like a blur.

Preface

That said, one key concept, Discounted Cash Flow (DCF), has stuck with me. I encountered it in two property finance units and in business finance. But do I fully understand how it all fits together? Probably not. Hopefully, this unit will refresh my memory quickly. That’s why revisiting these foundational concepts feels so valuable, it brings everything back into focus.

One thing that stood out from the Preface was this idea:
“The goal is not merely to analyse financial statements in isolation but to use them as tools to understand the real economic and business environment of firms.”

I remember focusing heavily on ratios and trends in Business Finance, but I don’t really recall how we incorporated industry conditions, competitive positioning, or management decisions to get a more complete picture of a business’s outlook. Which leads straight into Chapter one, Fundamental Analysis and how all these elements come together.

It’s fascinating to see how financial information has evolved over centuries. Just as the way businesses use financial data has changed, so has the way we study. We’ve moved from rote memorization to focusing on where and how we can find information. In the last five years, this shift has accelerated even more with the rise of Artificial Intelligence (AI).

It’s been a long road, but I’m excited to see where this final stretch leads!

Chapter 1

Diving deeper into fundamental analysis and using structured frameworks to analyse financial statements will be an invaluable learning experience. It will allow me to form my own understanding of how a business or investment performs and determine its true worth. This realization has reinforced why fundamental analysis was such an essential concept in property finance and has helped me connect previous learnings in a more meaningful way.

One of the most important concepts introduced in Chapter 1 is the need for a conceptualframework. Without it, financial information could easily mislead potential investors. A conceptual framework acts as a map, guiding us through financial data much like a road map,  helps us navigate from point A to point B. Without this structured approach, we risk getting lost  in misleading figures and assumptions and not arriving at our destination.

The Conceptual Framework for Financial Reporting, as established by accounting standards such as IFRS and GAAP, defines the fundamental qualitative characteristics, objectives, and elements of financial statements.

To put this into perspective in my own personal life, I run a 5-a-side soccer competition on the Sunshine Coast, and without a clear framework, it would be impossible to promote a fair and structured competition. In many ways, the qualitative characteristics of financial reporting can be compared to running the tournament. Referees ensure the game is played fairly, just like financial statements should faithfully represent a business’s reality. A clear schedule of fixtures and timekeeping maintains order, similar to how financial reporting follows structured guidelines. Weekly league tables and results provide transparency and enables teams to see how they are performing much like financial reports help investors assess performance.

As we progress through Chapter 1, we encounter two key frameworks for analysing firms: Discounted Cash Flow (DCF) Analysis and Economic Profit Analysis. I have previously worked with DCF models, but this deeper dive helps me see how it integrates into a broader financial strategy. Economic profit, on the other hand, measures the true profitability of a business by considering the total opportunity cost what is potentially sacrificed when choosing one investment over another.

Opportunity cost is a concept I have come across multiple times in my studies, but only now am I truly beginning to grasp its significance. In fact, I vividly remember encountering it in my first unit, where it initially left me completely confused.

A personal example of opportunity cost in my own life is how this current course has affected my time management. As the years have gone on, my motivation for study has fluctuated. After a long, exhausting workday, instead of dedicating one or two hours to study, I have sometimes chosen to watch a football game or a TV show instead. The next day, I may not have fully caught up on those missed hours, leading to potential sacrifices in exam performance or assessment marks.

This realization highlights the importance of discipline and structured decision-making, not just in finance but in everyday life. As I approach the end of this journey, I am more aware than ever and look forward to increasing my knowledge of how financial and personal frameworks help shape better investment decisions and life choices.

Step 4

Step 4

Practising the recording process.

I really enjoyed doing this exercise as it was not only participating and learning how to formulate a chart of accounts, but also turning these items and preparing my own income statement.

A few years back, my wife and I began budgeting, by working out what we could spend on certain items compared to what we earned. Keeping strict guidelines on this, enabled us to pay off a couple of large debts fairly quickly. It was basically comparing revenue against expenses, in what we are doing here in step 4.  What I have learnt from doing the chart of accounts and income statement is, not so much the profit/loss. but seeing the extra expenses creeping in, as we list all the transactions for the period.

Its great having a positive balance at the end of your statement, but this concept gives you a complete rundown of what’s coming in and out and enables you to see some areas where you could possibly trim some fat. I found categorising the chart of accounts was very much up to interpretation. Obviously, the majority are allocated to income and expenses, but the categorising of the transactions in those accounts could vary on how you looked at them. For me fuel is a vehicle expense as others reported it as general living expenses.

My main query was classifying a transfer to my savings account, as this was money going out of the account I was grouping. But then again, I was not losing any money as it ended up in my other account, so could this be classified as equity?  I realised Maria talked about this in the video and classified it as an asset as a savings account, so I ended up going with that.  I would of thought it could have been also categorised as cash at bank also.

a/

A Chart of accounts is a list of accounts that yourself or a firm can use to categorise their daily transactions. The list of transactions can cover a particular period any you and be as specific as you need it to be. My chart of accounts was very similar to the one illustrated but categorised slightly different as mentioned above.  Also, I had 2 accounts for assets as shown below

My Chart of Accounts
1 – Revenue
1.1 Bank Account Refund
1.2 Rent Income
1.3 Wages Income
1.4 Benefits Income
2 – Expenses
2.1 Telephone Expense
2.2 Rent Expense
2.3 Entertainment Expense
2.4 Car Expense
2.5 General Living Expense (Groceries Takeaway)
3 – Assets
3.1 Cash at Bank
3.2 Bank Transfer to Savings Account
 

b/

If there is one thing I can add to my chart of accounts, is splitting up the general living expenses even further, by having separate subcategories for takeaway and grocery shopping etc. As we have one account for the both of us, I do not really need to separate wages or mobile phone accounts for his or hers as we share the same purpose. But this would be useful for a firm to be more customer specific so that you can trace each individual company and see any amounts outstanding.

c/

As this was only a fortnightly snapshot of my income statement, it didn’t really reflect how we ae performing budgeting wise, as there are a few monthly expenses still missing for example, another mobile phone bill, car insurance expense or even a possible electricity and water bill. I would really need to do a chart of accounts for at least a month, to get a true indication. As for electricity, rates water etc, I guess that’s where accrual method of accounting steps in for an individual as you are receiving a commodity, with money changing hands. For electricity, you could split the previous bill by 6 to give a fortnightly expense that would add to your general living expenses.

For a firm, it would be obvious they need a much larger time line to view the there financial statements to see how they are performing and comparing the figures on a year to year basis would help in some way how they are performing.

Although this was a useful exercise in double entry accounting, it didn’t really help me in defining where I stand financially.

d/

I sort of answered the accrual basis of accounting question, in part c.  There are a few transactions missing in my fortnightly list of transaction, that would only appear, monthly, quarterly, or yearly.  These include car insurance, car registration, contents insurance, electricity, water charges and even school fees.  As mentioned, you could divide the total amount by the number of fortnights for that period to get a true reflection of your profit and loss for the two weeks

Step 3 ACCT 11059

ASSIGNMENT 1 STEP 3

ACCT-11081

My Company

GR Engineering Services

Website:  https://www.gres.com.au/

Annual Reports:  2019, 2018,2017

Seeing my company for the first time, it did not fill me with too much excitement. My first thoughts of engineering and mining is that it is a technical and a broad industry and one that I do not really know much about. On the plus side, it will be interesting to read up on GR Engineering and learn a little of what they do and go outside the scope of something different. At the end of the day the financials are what we are here for, so the type of industry does not really matter.

GR Engineering is a process engineering consulting and contracting company that specialises in providing high quality engineering design and construction services to the mining and mineral processing industries. It provides services to over 20 countries, but most interestingly has only just over 200 direct employees’ around Australia. I would guess that these employees are highly qualified professionals and of high calibre for the engineering business. Each site would then have direct site construction personal and subcontractors. 73 of the 116 current projects are based in Australia, with 70% of those in Western Australia.

Undertaking feasibility studies for processing plants and associated services and infrastructure is a key feature of GR engineering’s business model.

Looking at some of the figures for the first time in the company’s financial reports, one thing stood out strait away in the 2019 Consolidated statement of Profit and Loss. Revenue dropped by some 36% from the previous year.  From 2016 to 2018, revenue was fairly stagnant with only a 12% increase in those two years.  The main reason for the decrease in revenue for 2019, which is mentioned in the chairman and directors’ reports was the volatility in commodity prices, that resulted in ongoing market uncertainty and project delays.

Looking further into the reasons, for the downturn, was the awarding of a major project in November 2018. The Thunderbird Mineral Sands Project located on the Dampier Peninsula about 65 km west of Derby, Western Australia is still waiting for commencement. GR Engineering has entered into an EPC Contract for the design and construction of the mineral separation plant. The commencement of work under the Contract remains subject to GR Engineering  Services being issued with a full notice to proceed, which is dependent on Sheffield satisfying remaining financing conditions ahead of a final investment decision being made to pursue the development of the Project. (GR engineering projects, 2020)

Picture 1.1 Thunderbird Mineral Sands Project

Picture 1.2 Location

On the plus side a significant contribution was made by GR Engineering subsidiary company, Upstream production solutions. This is primarily from the provision of cold seam gas services in Queensland, which added about 50% of the 2019 revenue.  From my previous studies I have learnt being the parent company of a subsidiary, you own all of the stock and control the activities.

Going through expenses in the Income statement, the majority of those expenses did decrease from 2018.  Wages decreased by 24%, although I noticed workers compensation expenses increased by 50% Depreciation and amortisation remained the same for the year and as mentioned in step 2, I am keen to learn more about this, as I still do not fully understand the concept. There was a significant increase in marketing expenses, which by the way I am currently studying in my other unit. This seems to have worked as they have gained quality exposure to a number of new projects in 2020, which will give them plenty of design and construction opportunities in the future.

Another major part of the financials as indicated by the Chairman and directors report, was the consolidated entity significantly increased its cash balance form 21.8 million to 31.4 million over the financial year. This makes for a strong balance sheet and I noticed there was a strong reduction in bad and doubtful debts in the income statement, which could explain for some of the cash received.

The end result of the financial statements in the profit and loss and the consolidated statement of changes in equity, showed a reduction of profit of just under 50%.  This can be contributed to the delays in projects, which seem to be out of GR Engineering’s control.

Dividends were paid twice during the financial year. Once in October at an unfranked rate of 5.00 cents per share and in April of a fully franked share of 4.00 cents. I guess because of the downturn for this period, they have subsequently decided to pay an unfranked dividend of 2.00 cents per share in October 2019. This area of Equity and payments to shareholders is still a little confusing for me at this point of time. I understand what franking is to some degree, Franking credit = (dividend amount / (1-company tax rate)) – dividend amount, but I still require some deeper understanding of the whole process.

A further discussion by the directors on the financial position involved the underlying earnings before interest, tax, depreciation, and amortisation (EBITDA). The final figure showed 11.2 million, in which I am not able to tie it up with any of the financial statements.  I remember EBITDA from my first experience in ACCT11059 with Geely automotive and that it gives a current gage on the firm’s profitability. I am not really sure how that amount stacks up as far as GR Engineering are concerned.

Remembering back to chapter 1 in the study guide about the definition of revenue and that revenue are increases in assets and decreases in liabilities which result in increases in equity. (the basic accounting equation), there was some interesting information of reporting revenue in the notes of the financial reports for 2019.  Martin mentions, although there is not a definition of revenue under AASB CF Framework, there is a definition of revenue in AASB 15 Revenue from Contracts with Customers (Appendix A).

In GR engineering’s financial report, note 2, they mention that the consolidated entity has adopted the modified transition approach of AASB 15, in that the entity shall recognise revenue as control of a good or service transfers to a customer. AASB 15 establishes a five-step framework for determining the timing and quantum of revenue recognised. They adopted AASB 15 for the entire year from July 1st, 2018 to ensure revenue recognition.  I was surprised to find this information so early in the piece and goes to show that it is an important part of accounting policies.

There are another 16 pages of note 2 explaining the instructions and definitions of the significant accounting policies, which goes to show there is so much detail for every input of the financial reports. Once we got into the additional footnotes for the rest of the statements, it was good to see them set out as little mini statements for each particular note, so you could easily see the figures from 2018 to 2019 in front of you.  This is something that I really did not see in my previous company from ACCT11059 Geely Automotive.

Compared to my previous company, GR Engineering seems a little easy and more compact to understand. Geely was a global company from China, and on a much larger scale and I had to deal with a foreign currency. Their annual report was over twice as long but gave you a good insight of its current performance in the first few pages as it had an overview of the last four years figures. I am happy now that I have read a bit of information on GR Engineering and like the fact it is a local company mainly basing its operations in Australia.

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