This assignment has the purpose to evaluate different types of income statement and financial recording of different types of companies. The basic accounting statement of a business is income statement, balance sheet and cash flow statement. All types of companies prepare these financial statements for presenting the financial performance for a specific period. However, different sectors do not record the financial transaction in same order for every particular. Zadek, Evans and Pruzan (2013) has observed that manufacturing companies have different types of activities, which creates the mandate of recording those transactions. The author has found that a manufacturing company is engaged in sourcing of materials, processing and selling the same to the customers. Therefore, this type of company has to record these three different production cycles in its financial accounts. However, the service companies have no tangible or physical production. Hence, these sectors do not record the inventory or the service products in the similar form that of the manufacturing sectors. The merchandising companies have no finished products or raw inventory as these companies procure finished goods from the manufacturers and retain those products in the warehouse or in the stores for some days. Thereby, the main change in the transaction recording is observed with inventory holding and processing. In this assignment, two different companies’ financial statements are analysed – Alfamart Tbk and PT Chandra Asri Petrochemicals Tbk. Both the companies are listed in Indonesian stock exchange but are the constituents of different sectors. Further, this assignment has investigated on the major differences between recording and accounting process of these two different sectors by considering above these two firms.
The business of this company is associated with producing petrochemical products and selling the same. The company produces polypropylene, olefins, and polyethylene in Indonesia. The company is the largest petrochemical company in the country with having large-scale Naphtha cracker. CAP is producing 860 KTA ethylene, 470 KTA propylene, 400 KTA, Py-Gas and mixed C4 315 KTA (Chandra Asri Petrochemical, 2017). The company’s plants are located in Banten province of Indonesia, which is convenient to the marketing department of the company. The company is in the business of procuring naphtha from the oil refineries for cracking it to different types of polymer for selling it to the plastic companies. Therefore, the company has to source raw materials from the refining companies as well as sells the finished goods to the customers. The company has subsidiary company in the same province for producing Styrene Monomer and Butadiene (separate subsidiaries). One of its subsidiaries has another subsidiary that is engaged in the business of renting tank and jetty for the refineries and petrochemical companies in Indonesia. The company has a joint venture with Michelin Tire Company for producing synthetic environment-friendly tire in the country (Chandra Asri Petrochemical, 2017). The main advantage of this company is to sell the majority of the production to its subsidiary companies. However, the finished products of the subsidiary company are sold to external market at the end.
The transaction of financial accounting can be observed in the financial reports of the company. The annual report of the company shows that financial reporting has started with the balance sheet of the company. The management has provided details of the current assets, especially for receivables and inventories. The recording of cash and restricted cash are disclosed in the balance sheet of the firm. Additionally, the trade account receivables are being disclosed in the balance sheet including the impairment losses of last years. The next particular is inventories of the company. The management has reported the decline in value of inventories of raw materials due to price depreciation in the market. The company has produced non-current assets in the next section where the normal particulars of the assets are present. The items under non-current assets are deferred tax assets, investments, advances for properties, plants, and equipment, long-term derivative financial assets, claims for tax refunds, property, plant and equipment and other non-current assets. The next section has produced the current liabilities, non-current liabilities and equity of the business. Current liabilities are bank loans, trade payables (both related parties and third party), tax payable, accrued expenses and advances from the customers. The company has recorded equity with normal items such as issued capital, authorised capital, and retained earnings. According to Weygandt et al. (2010), the balance sheet reflects the long-term position of the financial condition of a firm by accumulating all transactions of the previous years. The balance sheet has provided the loss as well as gain in assets for CAP for the last two years accumulating the transactions of more than two years. The next segment is the income statement of the company where the reporting is started with the revenue. The order of the items shows that the next particulars are the cost of revenue, selling, administrative, finance expenses and gain/ loss from a derivative investment. The income tax is the next expense of the income statement. The recorded information of the cash flow statement has been prepared for CAP by presenting three major items – cash flow from operation, investing and finance activities. However, the notes to the accounts have shown segregating receivables and inventories of the company. The inventories of Cap are expressed in respect to realisable or purchasing cost (whichever is lower). The trade receivables of CAP are expressed by measuring the aging calculations separately. The company has provided four different types of inventories of the operation – raw materials, finished goods, work in process and spare parts. The presentation is at par the standard inventory reporting of a manufacturing company. The net inventory is measured after deducting the allowance for decline in value of the raw materials. Such practice of adjustment of inventory is known as a provision to impairment of materials (DRURY, 2013). Further, this type of presentation is known as fair value practice of inventories where the investors can obtain the information of inventories as well as current assets at current value or the future value (Weil, Schipper and Francis, 2013).
The financial report is presented for this company individually and consolidated basis (as this company has several subsidiary companies). The report is prepared by adjusting the current assets of the company as well as the cost of revenue. The cost of revenue of CAP is prepared in according to the treatment of inventory of the operation. Four different segments separate the cost of revenue for CAP – manufacturing costs, expenses related to work in process, finished goods cost accumulated from the stock of last year and cost of service. The first three components are used here to measure the cost of goods sold for the current year whereas the cost of service is added here to complete the measure of the cost of revenue. However, the expenses related to marketing, distribution, administration and finance cost are excluded from the cost of revenue. These particulars are added as the indirect expenses in the income statement.
The format of the report of CAP shows the chronological order as follows:
The business background of Alfamart is in the retail sector. The company is operating convenience store chain and managing franchise. The company has separate subsidiary for selling products in the online market. The company is based in Indonesia and its convenient stores can be observed in many parts of the country. The expansion of this company was observed after acquiring Alfa Minimart stores in 2002 (corporate.alfamartku.com, 2017). It is one of the largest retailers in the country by serving more than 3 million customers daily. The company has more than 10300 stores currently in the country. The company has employed more than 70000 employees currently (corporate.alfamartku.com, 2017). The segment of the business is divided into two parts mainly – food and a non-food section for Alfamart. The business segment of the company is trading and distribution to retail markets for food and non-food products in Indonesia. The company sources its products from the suppliers and sell the same to the retail customers. The company holds the inventories for few days in its warehouse and deploy the same as finished goods to the customers. Therefore, the financial report of the company does not document any work in process as the company only buys finished goods, hold it and sell the same. Therefore, the accounting treatment of the company is different that of the CAP.
The transaction records of the company show that balance sheet has started with current assets of the business. Cash, accounts receivables, inventories and prepaid rent are the items under current assets in the balance sheet. The inventories are documented here at cost basis (purchasing price from the suppliers) instead of fair value or realisable value). Further, the balance sheet has the items like non-current assets, current and non-current liabilities and equity. The treatment to the inventories of the business is creating an allowance for obsolescence due to the expiry date of the food items or other reasons. Further, the uselessness of the stock is adjusted to the balance at the beginning of the year and write-off during the year due to the expiry of products.
The financial report of the company is prepared to the accounting standard of Indonesia. The income statement of the company has presented the revenue of the business. The next item is the cost of revenue. The cost of revenue is adjusted with the adjusted figure of inventories in hand, stock at beginning of the year, inventories available for sale and net purchases. The accounting treatment of inventories indicates that work in process of stock is not used for this company. Further, the allowance of depreciation in inventory is considered for the stock becoming useless in future.
Report format
The first company is engaged in manufacturing and sales whereas the second company is only a sole trader. The second company only sources the finished goods from the suppliers or manufacturers and sell those products to the retail customers. However, CAP is in the business of sourcing naphtha, cracking Naphtha for manufacturing different polyethylene and other by-products. Moreover, CAP sells all of these products to its subsidiaries or to third parties.
The major difference of recording the transaction is observed in the balance sheet of these companies. The first one is a manufacturing company, which records its inventories with three stages – finished, raw material and work in process. Additionally, Alphamart has recorded its inventory on the actual cost of purchase basis whereas CAP has treated the average cost of purchasing or fair value to sell the inventories (Collier, 2015). The reason behind this difference indicates that price of raw material of CAP changes due to derivative transaction whereas retail business does not need to change the price of stock in future value. However, the retail company has to provide an allowance for obsolescence of the stock due to the expiry of food items. However, the petrochemical stock does not need such treatment as these products do not become useless in near future due to expiry (Ball, 2013).
Both the companies have used the same format for reporting the financial information of the last year. The financial report does not seem to be different for these companies. However, the accounting process of the financial information is different for a merchandising company with respect to manufacturing company. The later one has shown the process accounting in its inventory whereas such process accounting is absent in the report of merchandise business (Kieso, Weygandt and Warfield, 2010). Further, obsolescence treatment to stock is not available in the manufacturing company (as the products are petrochemicals) whereas such treatment is necessary for measuring the inventories of the retail company (for food item mainly).
Section 5: Conclusion
The learning of this assignment is different accounting treatment for inventories for a different business. The manufacturing company has segmented the inventories into three categories – finished goods, raw materials and work in process. The merchandising company (retail) has valued its inventory at purchasing price whereas manufacturing company has reported it at a fair price due to volatility in commodities. Further, this assignment has provided a lesson on reporting the cost of goods sold for two companies. The manufacturing company has accumulated the work in process in this item whereas the retail company has accumulated the purchase for sale only (with beginning and stock in hand).
References
Ball, R., 2013. Accounting informs investors and earnings management is rife: Two questionable beliefs. Accounting Horizons, 27(4), pp.847-853.
Chandra Asri Petrochemical. (2017). Chandra Asri Petrochemical. [online] Available at: https://www.chandra-asri.com/investor-relations/reports/financial-reports [Accessed 31 May 2017].
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
corporate.alfamartku.com. (2017). Annual report. [online] Available at: https://corporate.alfamartku.com/laporan-tahunan [Accessed 31 May 2017].
DRURY, C.M., 2013. Management and cost accounting. Springer.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2010. Intermediate accounting: IFRS edition (Vol. 2). John Wiley & Sons.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
Weygandt, J.J., Kimmel, P.D., KIESO, D. and Elias, R.Z., 2010. Accounting principles. Issues in Accounting Education, 25(1), pp.179-180.
Zadek, S., Evans, R. and Pruzan, P., 2013. Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.
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