FNSACC501 Provide financial and business performance information

Assessment 2

ASSESSMENT 2 – PROJECT

For this assessment, students are required to analyse company financial data. You are to refer to
theFosters 2011 Annual Report (supplied by your assessor). Your task is to complete the following:
1. Detail what authorities / personnel / sources you would have to consult with to ensure
thefinancial data provided is accurate and complete. Give a thorough how you would reconcile
thefinancial data to confirm accuracy.

Answer: To ensure data provided is accurate and complete Foster must consult and check all the
authorities involved in the process, for example operators, warehouses, purchase clerk, sales clerk,
data entry person, accounting clerk to managers of the departments and in some cases CEO, CEO to
Board of Directors.

Financial statements cannot be useful if they are based on unreliable and inaccurate recordings of
transactions. There is no greater example of the garbage in, garbage out principle than financial
statement preparation. The problem is that financial statement users cannot usually assess the
presence of garbage simply by reading the statements. The statements may look fine, but in reality
be riddled with inaccuracies.

The two main sources of financial statement inaccuracy are deliberate dishonesty and
incompetence. There are two principle ways to combat these problems. The first method is to
regularly hire an outside accounting firm to audit the financial statements. In an audit, the outside
accountant tests reported account balances for accuracy. As importantly, the auditor tests to see
that the accounting principles used in recording transactions are in conformity with GAAP and
applied on a consistent basis. Despite some notorious recent audit failures involving large
corporations, the auditing process, in most cases, provides a reasonable safeguard against
fraudulent and inaccurate financial reporting. 

The second method used to prevent fraudulent and inaccurate financial reporting is the adoption of
adequate internal controls. Internal controls are the policies and procedures that a business can take
to safeguard its assets, insure accuracy of financial reporting, and prevent fraud. These methods are
not mutually exclusive. In the best of all worlds, firms would have both good internal controls and
regular audits.

Unfortunately, hiring outside auditors and having the very best internal controls can be expensive,
especially for small firms. The question of how much money should be spent on auditing and internal
controls is a matter of perspective and circumstances. For example, a small business owner who uses
the financial statements for internal management purposes only, has little incentive to hire an
outside auditor. On the other hand, small business lenders and outside investors have a much
greater need for audited financial statements. 
For many, if not most, small businesses, regular audits are an unnecessary expense. The same
cannot be said about adequate internal controls. Even the smallest business can benefit from well-
designed controls designed to prevent fraud, theft, and accounting errors. In fact, small business
owners are more likely to be the victims, rather than the perpetrators, of financial statement fraud.
All too frequently a lower level bookkeeper or accountant will “cook the books” in order to cover
theft and embezzlement. For this reason, it is important to have some understanding of internal
controls. 

2. Complete a Profit and Loss report for year ending 30 June 2011 as well as a debt-to-equity
ratiofor the 2011 financial year.

Please refer to the excel file attached

3. Assess the Statement of Cash Flows in the Annual report – explain why there was a
significantdecrease in cash at the end of the year ending 30 June 2011 compared with the previous
financial year.

Please refer to the excel file attached

4. Based on the above analyses, comment on the financial performance of Fosters in the
lastfinancial year – specifically on the following aspects:

a. Profitability

Profitability analysis is a component of enterprise resource planning that allows administrators to

Profitability analysis can help key personnel in an enterprise to:

 Identify the most and least profitable clients.

 Identify the most and least profitable products or services.

 Optimize responses to changing customer needs.

 Evolve the product mix to maximize profits in the medium and long term.

 Isolate and remedy the causes of decreasing profit margins

b. Financial Stability

1. Review your production and overhead expenses and determine their costs per unit. Determine
your profit margin per unit at your current sales levels. Calculate your profit margins based on lower
sales levels to determine at what sale volume level you will no longer be profitable.

2. Create a cash flow budget that shows exactly when your income will arrive and when payments
are due. Creating a budget that uses monthly averages for expenses such as insurance premiums
and sales doesn’t prepare you for times when you’ll need extra cash to pay bills. Analyze your cash
flow budget to determine if you will need to decrease spending in certain months or obtain a loan or
credit line to pay bills during certain months. Discuss whether or not you need to strengthen your
accounts receivable monitoring and collection processes.

3. Review your customer list, ranking customers by sales volume. Calculate the effect of losing each
customer, and two customers at once, on your ability to stay in business. Re-calculate your
production and overhead costs per unit based on specific customer losses to determine if you will
make a profit at these sales levels. Create a plan to reduce your dependency on one or two accounts
if you can’t survive without them.

4. Re-do your annual budget based on different sales levels to determine your ability to withstand a
decrease in sales. Re-calculate your production and overhead costs per unit based on these sales
levels to determine if you will make a profit. Create budgets that automatically trigger spending
changes when your sales decrease.

5. Discuss the effects of losses of key employees. Determine the costs to bring a replacement on
board for each key employee and the loss of productivity or sales a departure will have on your
company. Have a detailed written job description for each key employee and ask each to prepare an
operating manual for his department or function for use by his replacement.

6. Examine your lines of credit and determine the effect on your business if you lose one or more
lender. Discuss whether you can quickly replace that credit line and the effects on your business of
losing key sources of credit for 30, 60 or 90 days or longer. Create a plan for operating without credit
to determine how long you can do so.

5. Lastly, assess the financial potential of Fosters Group Ltd. Using the financial data provided
inthe 2011 financial report. Comment on what funding requirements would be required in
thefuture to continue the same rate of growth over the last financial year. Also list the statutory
obligations of the company.

Foster’s Group Limited (Foster’s) has completed the first phase of initiatives to turn around
performance, addressing fundamental business challenges and establishing a strong foundation for
future growth. Benefits of these initiatives have included improved execution, cost efficiency and a
stabilisation of market share during the year.

Foster’s reported earnings before interest and tax and before material items of $816.7 million, an
8% decrease on the prior year. The decrease reflects a 6% decline in Australian beer category
volume and higher corporate costs relative to the prior year which included onetime benefits. CUB’s
EBIT declined 6.2%, in line with the decline in the Australian beer category. However, improved cost
efficiency mitigated the impact on CUB earnings and allowed CUB to increase advertising and
promotion by more than 4%. Operating cash flow from continuing operations before interest and tax
was $872.7 million and cash conversion was 100.4%.

Earnings per share from continuing operations before material items fell 8.9% to 25.6 cents. Foster’s
declared a final dividend for fiscal 2011 of 13.25 cents per share. The total dividend for fiscal 2011
was 25.25 cents, representing an 83% payout ratio on net profit after discontinued operations but
before material items. In addition, the Board of Foster’s announced an intention to undertake capital
management of at least $500 million in fiscal 2012. Commenting on the results, Foster’s Group CEO
John Pollaers said:

“This has been a transformational year for Foster’s and I’m pleased to say that the turnaround is on
track. “The successful demerger of Treasury Wine Estates was completed in May, with the
overwhelming support of our shareholders. Foster’s is now an exciting ‘new’ company with a bright
future as a great Australian success story and a focus on beer and cider. That focus is an important
point: Foster’s is now able to dedicate all of its considerable financial resources and industry
expertise to the beer and cider business.
“The initiatives put in place as part of a phased turnaround plan at the beginning of fiscal 2011 have
addressed the fundamental business challenges we faced. “The turnaround is by no means complete
– we’re well aware of the challenges we still face. But a lot of hard work has been done to get us in
shape for the future and I am very pleased with the progress to date. “One of the key wins for us in
the past year has been stabilising our market share, correcting a long term trend of decline. The
stabilisation of market share reflects strong growth in the on-premise channel combined with a
more modest decline in the larger off- premise channel.
“As a result, CUB’s Australian beer volume decline was in line with the rest of the market, and strong
growth in cider sales saw our overall volume just over 5% lower. “The impact of that volume decline
was minimised by the tough decisions we made on costs last year. We made a very deliberate
decision not simply to cut costs, but also to increase investment in our brands, with advertising and
promotion increasing by more than 4%.

Among the highlights were Carlton Draught’s 10th consecutive year of growth and increased sales of
more than 20% for Carlton Dry. Premium international and craft led the beer category with Fat Yak
and Corona ahead in their segments. The cider category continues to grow strongly with CUB
retaining the leading cider portfolio led by Strongbow and Bulmers, and innovation with new
flavours and brands such as Bulmers Pear and Dirty Granny. “In addition to the efficiencies Foster’s
has already built into the organisation, the cost reduction program commenced in May will drive
additional benefits in 2012 and future years. “The first phase of the program will deliver $55 million
of annual benefits by the end of fiscal 2013, with $45 million of benefits emerging in fiscal 2012.

“We’ve announced the commencement of a supply footprint review. “The review involves an
assessment of the most appropriate long term asset footprint to support the CUB business. We
expect to conclude the review within the next six months and it will include a review of all Australian
production and logistics sites, and key supplier arrangements. “Meanwhile, success in the Ash wick
tax case led to a continuing operations material gain after tax of $551.6 million. “A strong credit
profile and proceeds from the Ash wick tax case have led the Board to pursue capital management
options for the return of at least $500 million to shareholders. “Options being investigated include a
capital reduction and share buyback. A capital reduction involves seeking a tax ruling from the ATO,
a process that commenced in July, as well as the approval of shareholders”.