ACC 111

ASSESSMENT 2 – PROJECT

Adam Muhammad

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.

Answer is given in Excel file

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.

Answer is given in Excel file

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

Profitability analysis can help key personnel in an enterprise to:

 Identify the most and least profitable products or services.

 Discover which sources of information offer the most reliable facts.

 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”.