Module 2 Areas Of Judgement Financial Statements example essay topic

Introduction This report provides data obtained through ratio analysis, about the profitability, liquidity, asset management and debt utilization of Mayne Group Ltd. for the years 2001-2002. Mayne Group Limited is one of Australia's leading providers of private healthcare services. Mayne Group is mainly involved in the manufacture of pharmaceuticals & consumer products, and providing of healthcare and logistic services. In this report Mayne Groups financial status has been compared with two companies, Black mores Limited and Gribbles Group Limited. Both these companies provide same products and services as Mayne Group and are classified in the HealthCare Equipment & Services industry along with Mayne by the Australian Stock Exchange. This report will highlight the strengths and weaknesses of Mayne Group in comparison with its competing companies and at the same time will offer some explanation for the changes observed.

The report will also comment on the prospects of the company from an investor's point of view and make recommendations that would improve Mayne Group Ltd's current performance. Module 2 Areas of Judgement Financial statements not only involve cash transactions, but also cash equivalents of assets & liabilities. This involves a fair amount of judgement in terms of valuations, which may escape the attention of unsophisticated readers of financial statements. The main areas of judgement dealt in this report with respect to Mayne Group are: 1.

Fixed Assets 2. Inventory 3. Debtors 2.1 Fixed Assets: Property, plant & equipment are classified as fixed assets. But this includes a wide range of elements. Uncertainty arises in what needs to be included specially when small items run into large numbers and varieties. Example in the case to Mayne Group test tubes, syringes, and other small equipment to be included leads to logistical problems & judgement calls.

Depreciation also forms a major area of judgement for fixed assets. Incase Mayne Group depreciation for plant & equipment is carried out using straight-line method at various rates and their appropriate estimated useful life. But how was the useful life of equipment estimated, or the residual value. An accountant needs to consider the technical, commercial & legal life of an element while calculating the useful life. This involves a fair amount of judgement. Fixed assets also require periodic valuations to accurately estimate their market value.

Mayne Group revalues their land and buildings every three years to their fair values on their highest and best values. The area of uncertainty here is how is the evaluation done and who should be in charge of doing it. 2.2 Inventories: Inventories mainly include raw materials, work in progress & finished goods. The element of judgement arises mainly in work in progress and finished goods. There are many ways of measuring inventories viz. FIFO, LIFO, average cost etc.

Which of these methods will be used to value inventory? Which kind of costing principles the company will employ? These are areas of judgement involved. Also inventory is yet to be sold, so will they realize their market value is uncertain. Hence the company has to anticipate losses and set a net realizable value for the stock below the original cost. For this there has to be review of all raw materials to ensure that they are worthy of production process.

Also an appropriate way of including manufacturing cost & overheads has to be applied. The logistical problems arising out of the above exercise are immense if one considers the large quantity of inventory held by a large company like Mayne Group. The accountant has to also consider the completing time for the product and its final sale value. This requires a fairly large amount of judgement and is considered by many accountants as one of the elements where largest judgement calls are made In Mayne group inventory held for internal use or resale & raw materials are valued at lower cost and net resizable value. Work in progress is valued using percentage of completion method. 2.3 Debtors: The valuation of receivables is an important issue, as complete 100% of debts are never collected.

The uncollected portion is called bad debts. The main area of judgement and problem is estimating the amount of receivables that will become bad. Also a provision for bad debts has to be made. Investigating bad debts takes time as it may involve both high value debts and numerous low value debts. Most enterprises provide for both. But this involves a fair amount of judgement on the part of the enterprises as to how much to provide.

In Mayne Group, trade debtors are settled within 30 days. Specific provision is made for doubtful debts and a general provision is also provided. This report has dealt with only three areas where financial judgements are made. In practice all non-cash elements of financial statements involve a certain degree of judgement. It is presumed that the management applies the need of judgement in an unbiased way though instances of biased judgements are not uncommon.