Commentary on Step 2

Step 2

I left this step until last, and in hindsight… Baaddddd decision! I struggled through my ‘Restated Statements of Movement in Equity’, I think it took me around 4 hours. Around half way through and I’d had just about enough when it finally dawned on me to read the study guide again, wow did I think I was stupid. I opened it up and went through the chapter as I was restating my report and this made it a help of a lot easier. The notes in the reports helped slightly, however a great deal of progress came through the study guide and perseverance, lots and lots of perseverance.

As I was completing my initial restated report, I came across some major hurdles. Whilst restating my Restated Statements of Movements in Equity report it became evident that figures from my previous report (not restated) were not aligning with those of the restated report. I came to the conclusion through calculating the figures one by one to find which was out of place, the ‘Relating to acquisition of a subsidiary’ and ‘Relating to purchase of non-controlling interests’ amounts for 2014 were featured below the ‘Total comprehensive income (losses)’ tab in the financial statements report. However in the restated reports I moved them above this total and therefor they were calculated along with the other figures.

This lead to the figure for ‘Total comprehensive income (losses)’ being lower on the restated report as opposed to the norm. I did not change this however, as I believe that they should feature in the ‘Total comprehensive income’ calculations as they relate to that category. The same happened for ‘Relating to purchase/acquisition of non-controlling interests

and subsidiaries’ as well as ‘Transactions costs (losses)’ in the year 2013. However these categories should also lie in the ‘Total comprehensive income’ calculations as they relate to the income sections as opposed to transactions with shareholders.

Therefore, due to this variance in amounts they ‘Total other financial comprehensive income’, ‘Total other comprehensive income (losses)’ and therefore ‘Total comprehensive income’ sections are misaligned between the two reports. The ‘At 31 December each year (2011 to 2014)’ tab however is matching perfectly in regards to the amounts on both reports.

The following two reports, ‘…Financial Position’ and ‘…Financial Performance’, were a great deal easier than the initial report. I believe this is due to the fact that I now had an understanding of the basic operations that go with restating a financial report as I was able to think more for myself and rely a lot less on the study guide and peers in the forums. No major dramas had to be overcome when doing these reports, I’m choosing to take that as a good thing and believing that I have completed them correctly as opposed to the alternative… haha! My only question I couldn’t figure out myself however is in regards to the balance sheet; why is the entirety of this report not included as part of the restated report however in the origin report everything is present? I assume that this is due to the fact that not all figure of this report are needed for the restated report, however I remain uncertain.

I never thought that I would say this but I actually enjoyed this assignment, yes I know. The overwhelming amount of frustration and sleepless nights I will not miss however now that I have completed this step the greatest feeling of fulfilment has rushed through me. I am happy to be finished this step, however it is something I would welcome experience again.

Step 2: Restated Financial Reports - Check them out!

 

 

Step 3 of ASS #2

Step 3

Hutchison Whampoa Limited (HWL) is one of the largest companies that is listed on The Hong Kong Stock Exchange main board. HWL comprises of six core business industries, ports and related services, property and hotels, retail, infrastructure, energy and telecommunications. Due to the overwhelming diversity of HWL, I chose to feature my three products or services from the retail sector of my company, however I chose from three different companies within the industry. HWL’s retail giant, A.S. Watson Group, is comprised of various companies which make up HWL’s retail companies. The companies fall into categories the Health and Beauty; Luxury Perfumeries and Cosmetics and Food, Electronics and Wine, which make up the products respectively.

Product 1

From United Kingdom based company Superdrug

http://www.superdrug.com/

Babyliss Curl Secret

Product 2

From Netherland and France based company ICI PARIS XL

http://www.iciparisxl.be/fr_BE/index.html

Chanel N°5 Eau De Parfum

 

Product 3

From Honk Kong based company PARKnSHOP

http://www.parknshop.com/

Moet & Chandon Imperial Rose Nv

Table 1: HWL’s products and prices

	Product
	Babyliss Curl Secret	Chanel N°5 Eau De Parfum	Moet & Chandon Imperial Rose Nv
Selling price (SP) $AUD (Pound £)	$246.93 (£119.99)	$174.92 (€113.40)	$89.18 (HK$486.00)
Estimated variable cost (VC) $AUD (Euro €)	$92.58 (£44.99)	$53.97 (€34.99)	$29.73 (HK$162.00)
Contribution margin (CM) $AUD (Hong Kong $) (SP) – (VC) = (CM)	$154.35 (£75.00)	$120.95 (€78.41)	$59.45 (HK$324.00)

The contribution margin of HWL’s products differ, this is due to multiple factors such as various production scales or demand scales, geographical location as there are several countries in HWL’s retail sector, time of year and seasons along with many other components. For Hutchison Whampoa Limited to have a competitive market presence in all industries, including retail, it is vital that they remain to have a large variety of products ranging across all walks of retail, this will ensure repeat customers. However each product has a different production process which results in differing variable costs, along with different customer value which results in different selling prices. For HWL to individualise each contribution margin as customer demands and competitor prices may differ.

For instance, if HWL decided they wanted the contribution margin of Chanel N°5 Eau De Parfum to be the same as Moet & Chandon Imperial Rose Nv which would be $59.45, they would have to decrease the selling price of the champagne on order for the fixed costs process to be covered and make profit on sales.

Table 2: Same Variable Cost between Product 2 and 3

	Original	New
Selling price	$174.92	$113.42*
Estimated variable cost	$53.97	$53.97
Contribution margin	$120.95	$59.45

$113.42* = CM + VC = $59.45 + $53.97

This may cause customers to assume the product was of lesser quality however as a dramatic price fall has occurred. It could also cause customers to find an alternative product had the price risen dramatically as they could no longer be able to afford the product. This is an example of one reason that contribution margins could differ between some products.

It is reasonable to assume the contribution margin of HWL’s retail company’s products to be similar as HWL are likely to price their products in harmony with a positive ratio of its variable costs. For instance HWL may decide that the variable cost for all retail products should cover 65% of their selling price. This would mean that products that have similar variable costs should feature a similar contribution margin as shown in Table 3 below. It can be observed the changes in contribution margin figures in comparison with both Chanel N°5 Eau De Parfum and Moet & Chandon Imperial Rose Nv (products 1 and 2 respectively), after the new selling price is applied as to the original contribution margins.

Table 3: Variable costs of Product 2 and 3 with 65% of selling price accounted for

	Chanel N°5 Eau De Parfum		Moet & Chandon Imperial Rose Nv
	Original	New	Original	New
Estimated Selling Price	$174.92	$83.03*	$89.18	$45.74*
Variable Cost	$53.97	$53.97	$29.73	$29.73
Contribution Margin	$120.95	$29.06	$59.45	$16.01
	$83.03* = Variable cost / 65% = $53.97 / 0.65 (rounded)		$45.74* = Variable cost / 65% = $29.73 / 0.65 (rounded)

Why Do Contribution Margins Vary?

One of Hutchison Whampoa Limited goals is to provide their customers with the widest range of products in the retail and more specifically the Health and Beauty; Luxury Perfumeries and Cosmetics and Food, Electronics and Wine industries, and at the most competitive prices. By doing so, HWL believe they will build a reputation of being the leading retail group in the world. For HWL to be able to do so however, may mean they are required to stock less profitable items, i.e. such items that possess lower contribution margins, in an attempt to uphold their desired reputation.

It is possible that HWL will find they are able to operate by only selling products of higher popularity by having smaller contribution margins, i.e. by reducing the selling price. Although in regards to the less popular products, a higher contribution margin may be necessary in order to reduce the unprofitability.

Resource Constraints

The major resource constraint for me is the ability to bring the product to the customer, rather than the customer having to come to the product. In order for this to be a possibility multiple product outlets and stores need to be established as close to densely populated areas to make it as convenient as possible for potential customers.

Storage and Distribution Centres

Judging from my working life, the troubles that the company I work for goes through may be similar to that of HWL. Our distribution centre (DC), although has the ability to store more than the average amounts of stock, my company is by no means average sized, neither is HWL. This means that products may need to be stored at secondary locations further away from the customer’s outlets. This makes it harder for the DC to keep up with demand and ensure that there is a constant flow of products leaving and arriving at the DC, especially around peak trade periods such as Australia Day, Easter and Christmas in BCF’s case. The cost of purchasing new assets in order to store HWL’s products could amount rapidly, costs such as maintenance and electricity along with the need for more staff, and must be taken into consideration whilst deciding the value of such an asset. If the profit of selling the additional products is larger than the cost of purchasing and running additional assets, it becomes worthwhile.

Updated Operating

As technology and the ways we incorporate technology into our workplaces is rapidly increasing, risks can arise in producing or purchasing large amounts of inventory as they hold the possibly of becoming outdated extremely fast. HWL may have to look at decreasing their products selling price in an attempt to clear stock from outlets in order to make way for newer products which holder greater demand, this would however have a negative effect of contribution margins.

Step 1 of ASS #2

Step 1 
Chapter 4: Analysing financial statements

Introduction
Upon opening this chapter my motivation was high and I was actually excited to commence an accounting assignment. When I first read the words ‘Chapter 4: Analysing financial statements’, I thought okay… here we go. I’ve managed to get through my work so far and here it is, my downfall. But then, as always, that second wind that I always seem to get and talk about struck me as I realised this is actually going to help me to further my career in business, and so I began reading. 
The first thing that stood out to me as I started to read the chapter was the need to take past experiences or possibly figures in order to gain a better understanding of the data and progress into the future with more informed decisions. Not having had any previous experiences with finances made it somewhat hard for me to fully understand the level of which you need to address the past. So I drew upon the thing I know best which was the sports I currently play. Unfortunately I have been blessed with troublesome knees and have had many injuries regarding them. Progressively as each injury occurred I became better at handling them and getting back to full ability. I suppose you gather this know-how through experience and I figure that financial statements are a company’s equivalent of my knees. When finished reading the introduction I understood the concept of learning from the past very clearly but I still struggled to understand how simply restating the financial statements of my company, would allow me to further understand the company. As I read on I began to gain more of an understanding as to why…

4.1 How firms add value
This section is where I initially started having trouble grasping the content, Martins terminology however helped this process as I was able to relate what he was talking bout with his relation the real world to some extent. By using his examples however I was able to link this to my life on a more personal level and once I was able to do that the content was a lot easier to comprehend. So while initially I found discounted cash flow and free cash flow hard to follow, after a while I felt pretty good about the understanding I had on the topics. The way in which Martin uses examples, this time relating them to Ryman Healthcare helped a great deal in relating FCF to my own company, Hutchison Whampoa Limited. I went off what Martin had said about his company and found the same parts and figures in my financial reports. The company I work for (BCF – Boating Camping and Fishing), is in the retail industry and as such our products, more often than not, have similar products sold by a competitor to rival ours. Due to this adding value through products will sometimes work momentarily but rarely permanently, so we place great concentration to add value through service and presentation. While our service and presentation may not necessarily add an amount of value, the repercussions of this keeps customers from spending their dollar elsewhere as we have provided a greater experience then our competitors.

Economic profit, whoaaa what a handful. I really struggled to understand this concept upon first reading, it was only after reading ahead through the chapter that I clicked. It took me a few times and some insight from old faithful (mum), but eventually I got a grasp on how to apply RNOA and understanding its significance. Reading this section started to make me notice that like my favourite sport: golf, you need to be firing in all departments of your game to have great success. I consider the dividends, cash flow and economic profit to be like my long game, short game and putting game.
All three seem to intertwine and link together through my swing, and therefore if my swing is off so is my game.

4.2 Operating and financial activities
I found this section easier to understand than previous parts of the study guide, it aided my understanding of splitting my financial statements into the two groups. I now understand the importance to restating a firms reports in order to find the strongest and weakest aspects of the company. By keeping pervious years reports and gaining an understanding of them is perhaps the only sensible way of enabling the company to further its financial position, after all, it’s quite useless keeping figures from previous years if you are not able to understand them. I find dividing the figures into operating and financial activities an effective way of organising the data. To some extent I tend to think of financial activities are additional operating activities found within a business, it also appears to me that they are somewhat a more essential component of business’s operations.

4.3 Restate two key financial statements
As I was reading through this section I was having a horrible time following what the Martin was putting down, the examples and terms he used was what made it hard for me to understand. I attempted to restate my own financial as I went along reading the chapter, progressing slower than the West Indies run rate in a Boxing Day Test Match. Without the aid of the ‘O’ or ‘F’ strategy Martin talks about I would have been in big strife, this allowed the restating my financial reports a great deal easier. 

Conclusion
All in all this chapter was quite helpful regarding the assessment, however I found it to be the chapter that bored me the most thus far. I lost interest quite easily and had very little motivation for the most part of this chapter, even though I was able to understand most key concepts after reading then two or three times and relating them on a personal level. I am however looking forward just quietly to the remainder of the workload as I feel I have progressed a great deal in regards to my understanding of accounting thanks to Martin and my peers.