FINAL PROJECT INTERMEDIATE ACCOUNTING II CASH FLOW AND DISCLOSURE OF FINANCIAL STATEMENTS

Arranged by : Endah Riwayatun (1142074) Accounting Department Economic Faculty

UNIVERSITAS INTERNASIONAL BATAM 2013

1. SUMMARY OF CASH FLOW PAPER : Relative ability of earnings

and cash flow data in forecasting future cash flow (some Australian evidence) a. Objective The objective of this cash flow paper is to investigate the ability of earnings, cash flow from operating activities and two traditional measures of cash flow. Or in formula is earnings plus depreciation and amortization expense and working capital from operation. This investigation objective is to predict future cash flow in Australian companies, in other word is forecasting. The author conducted this research with consideration of the companys size as a major factor that influences the prediction. This research involved 4,615 samples that represent 355 companies in the beginning of planning, but reduce to 3,512 samples that represent 323 companies. This decision made by author to eliminate the sample with sales less than A$ 10,000. The research sample is from 1992 result because this is the time when the AASB required Australian company to report the statement of cash flow, and its ends in 2004 to avoid any structural changes, because in the 2005, Australia adopted international financial reporting standard. b. Theory To conduct this research, the author has use many theory, such as Bowen et al approach to calculate the WCFO as below: WCFO = cash flow from operation + (changes in current assets other than cash changes in current liabilities other than short term debt) Then Barth et al to scale all of the variable by average total assets. The authors also use Theil inequality coefficient as an out-of-sample forecast error to show the accuracy of forecasted cash flow from operation to its actual value, and many other theories. c. Literature review The authors seek to extend the cash flow prediction literature in three aspects. One of the literatures is prior research by the US researcher where the capital market is larger and more sophisticated. In the Australian capital market setting with a small market capitalization, the generalizability of these
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findings may be limited. Chan et al.(2005, p.212) acknowledged this potential problem. d. Research Design Several formulas had developed by authors to predict the future cash flow of the company. Then the result of the formula is compared to the result of the out-of-sample forecasting tests, because the higher result doesnt automatically reflect superior predictive ability. e. Finding This research found that the cash flow from operation has a better predictability to forecast the future cash flow than earnings. Cash flow operation also has a better predictive ability compared to the two traditional cash flow measures in predicting future cash flow. Size of firm is also be a great influence in this research, the authors found that the larger company has a greater predictability than medium and small firm in earnings and cash flow from operation. The superiority of cash flow from operation to earnings in forecasting future cash flow remains stable no matter how big the firm is. This research highlights the importance of reporting cash flow from operation to Australian companies that listed in Australian stock. In line with the other recent related studies, this research also questioned the position of accounting standard setters, in particular FASB, that accrual-based earning is better to predict the future cash flow than cash flow from operation. This research also failed to confirm the earlier studies that said the traditional cash flow measures are more relevant than cash flow from operation. This research agrees to the AASB policy, that all of company must prepare statement of cash flow rather than funds statement. This research also gives the warning to the users of accounting information in assessing the future cash flow as firm size decrease.

2. DISCLOSURE IN FINANCIAL REPORTING

a. The purpose of preparing financial statement is to provide information

about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statement consist of Statement of financial Position, Income Statement, Statement of changes in Equity, Statement of Cash Flow, and Notes to Financial Statement.
b. Company mean by providing notes to the financial statements is to

explain the items presented in the main body of financial statement. Also company can provide supplementary data of quantitative nature to expand the information in the financial statements.
c. The items that company should disclose in general are: 1) Inventory: Basis of which inventory amounts are stated (lower-

of-cost or net realizeable value), the method in determining cost (FIFO or average cost). Manufacturing company should report the composition of their inventory (raw materials, work-in-process, and finished goods). Companies should report the other significant financial arrangement such as transaction with related parties, product financing arrangement, firm purchase commitments, and pledging of inventories as collateral.
2) Property, Plant, and Equipment: Basis of valuation for PPE

(revaluation or historical), also the pledges, liens, and other commitment related to these assets. In presentation of depreciation, companies shoul disclose these items in financial statement or in the notes: a) Depreciation expense for the period b) Balance of major classes of depreciable assets, by nature and function, at the statement date c) Accumulated depreciation, by major classes or in total, at statement date d) Method in computing depreciation expense respect to major classes of depreciable assets
3) Creditor Claims: disclose the nature and cost of creditors

claim. For example financial statement report an obligation. The notes disclose additional information about the obligation, like how the obligation fund uses, the cost that will bear in future periods, and the timing of future cash outflow. Companies also must disclose 5 year following the statement date the aggregate
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amounts of maturities and any sinking fund to cover long-term borrowings.

4) Equity Holdersclaim: companies must disclose the number of

share authorized, share issued, and outstanding with the par value. Also contracts and senior securities outstanding that might affect the various claims of the residual equity holders, such as convertible debt, share options, redeeemable preferences shares, and convertible preferences shares. It is necessary too to disclose the amount available to distibution.
5) Contingencies and Commitment: companies have to disclose

gain or loss contingencies in notes to financial statements, include litigation, debt and other guarantees, possible tax assessment, renegotiation of government contracts, and sales receivable with recourse. Also commitments related to devidend restriction, purchase agreements, hedge contract, and employment contract.
6) Fair Values: Companies should disclose both the cost and the

fair value of their assets and liabilities (investment, revaluation of PPE, impairment of long-lived assets). Also the the input use to measure the fair value implementation.
7) Deferred Taxes, Pensions, and Leases: companies must

disclose detailed information in each items, to help users to measure the future financing needs, and quality of companys earning.
8) Changes in Accounting Policies: companies should disclose

the changes in accounting policies in the part of summary of significant accounting policies. The changes can be the changes in inventory measurement, depreciation method, etc.

3. ANALYSIS OF PT ULTRAJAYA MILK INDUSTRIES AND TRADING

COMPANY., TBK a. Spesific items that company discuss in Summary of Significant Accounting Policies are:
1) Basis of preparation of the consolidated financial Statements

a) Prepared in accordance with PSAK and guidelines for financial statement for Bapepam-LK b) Financial statement prepared on a basis of accrual, except statement of cash flow
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c) Statement of cash flow prepared using direct method d) Currency used is Indonesian Rupiah e) New accounting standard adopted by company and subsidiaries effectively per 1 January 2011. Changes in accounting policies is required accordance to implementation of revised PSAK. There are list of implementation of new PSAK: PSAK No. 1 (revised 2009) Presentation of Financial Statements PSAK No. 4 (revised 2009) Consolidated and Separated Financial Statements PSAK 7 (revised 2010 Related Party Disclosures Others 2) Consolidation Principle a) Subsidiaries Subsidiaries are entities over which the company has the power to govern the financial and operating policies. This entities are fully consolidated from the date on which control is transferred to the company and are deconsolidated from the date on which that control ceases. Company accounts for the acquisition of subsidiary by applying the acquisition method. Company remeasures its previously held equity investment at fair value and report gain or loss at statement of comprehensive income. Changes in the parents ownership interest in a subsidiary that not result in the loss of control are accounted for as equity transaction. b) Transaction with non-controlling interest Non-controlling interest represent the proportion of the result and net assets of subsidiaries not attributable to the company. Company treats transaction as transaction with equity owners of the company. c) Associates and jointly controlled entities Associates are entities which the company exercises significant influence. Jointly controlled entities are entities which the company jointly controls with one or more other venturers. Accounting for these entities use equity method. 3) Foreign currency translation Financial statements are presented in rupiah, which is the companys functional currency and the companys reporting currency. 4) Cash and cash equivalents

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Include cash on hand, deposits held on call with banks and other short-term highly liquid investment with original maturities of three months or less. Accounts receivable and other receivables Recognized initially at fair value and sudsequently measured at amortized cost using the effective interest method less any provision or impairment. Allowance for impairment is the difference between the carrying value of receivables with a collectible values. Impairment expense is recorded as part of operating expenses. If receivable is not recoverable, account receivable will be eliminated by reducing the provision for impairment. Recoveries of receivable that have been written off are credited in the statement of comprehensive income. Inventories Inventories consist if raw materials, finished goods, cattle woofs and spare-part. These are stated at lower-of-cost or net realizeable value. Cost is determined using the moving average method. Profit/loss from usual operation like in physical count differences and damaged inventory are corrected from inventory value and charged to other revenue(expense). Allowance for obsolete inventories is determined using usefulness estimation of each inventory in the future. Investment Investment in companies with ownership of less than 20% of the voting and investee company fair value is not available but in tended for long-term investment share stated at cost and the adjustment is only conducted for non-temporary impairment of any investment. Impairment charged to statement of comprehensive income for the period. Fixed assets direct acquisition Fixed assets are stated at cost less accumulated depreciation. Cost include expenditure that is directly attributable to the acquisition of related assets. Land is not depreciated. Depreciation on other asstes is calculated using the straight line method over the estimated useful life. Cost of routine maintenance and repairs are charged to operation as incurred. Significant renewals and maintenance that extend the useful life of assets are capitalized. When the assets sold,retired, or dispose, the carrying value and accumulated depreciation are removed from account, gain or loss are presented in statement of comprehensive income. Assets under construction stated at cost up to the date when contruction is completed. During the construction, borrowing cost are capitalized proportionally to the average payment in the period. Leases
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Lease transaction are recorded as capital lease when the company has the option to purchase leased asset at a price mutually agreed upon the inceptionof the lease agreement, minimum lese period is two years, and all periodec lease payment made by the leese plus residual value shall represent a return of the cost of leased asset and interest thereob as the profit for the lessor. If leases transaction do not meet the criteria above are recorded as operating leases. 10) Deferred charge Cost incurred relating to the processing of renewal of the legal title on land rights were deferred and amortized using the straight-line method over their period of useful life. 11) Employee benefits The companys net liability in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustment for recognized actuarial gains or losses and unrecognized past-service cost. The defined benefit of obligation is calculated annually by ndependent actuaries using the projected unit credit method. 12) Revenues and expenses recognition Revenue from local sales is recognized when goods are delivered to customer, while exports sales are recognized when goods are shipped. Expenses are recognized when these are incurred. 13) Income tax The company calculates tax effects on recovery of assets and settlement of liability at carrying value. Company also calculates and recognized deferred tax asset and liabilities for tax effects which might be realized in future periods of current transaction recognized in financial statements, including fiscal loss carryover which could be compensated. 14) Earning per share (EPS) Net income per share is computed by dividing income from current period with weighted average number of shares outstanding during the year. There is no potential dillutive shares, so the dillutive EPS is the sames as basic EPS. 15) Dividends Dividend distribution are recognized as a liability when the dividends are approved in the companys General meeting of the shareholders. Interim dividend distributions are recognized as a liability when the dividends are approved by a Board of Directors Resolution, approvel has been obtained from the Board of Commisioners and a public announcement has been made. 16) Segment information Segment information is presented by bussiness segment. A bussiness segment is a distinguishable unit that produces a
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different product or service and managed separately. Bussiness segment information is consistent with operational information that is routinely reported to the highest level of operational decision-makers in the company 17) Offsetting financial instrument Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to offset the recognised amount and there is an intention to settle on basis, or realise the asset and sttle the liability simultaneously. 18) Impairment of financial assets At the end of each reporting period, the company assesses wheter there is objective evidence that a financial asset or group of financial assets is impaired. The impairment loss and reversal are recognized in the statement of comprehensive income.
b. Segmented information presented for, largest segment of

bussiness line, companys largest customer Segmented information is presented for highest level of operational decision-makers in the company (Board of Directors), thata are used to make a strategic decisions. There are two major business operation in PT Ultrajaya Milk and Trading Company, Tbk and subsidiaries, those are Foods and Beverages. The largest bussiness line is beverages, with contribution more than 90% of total bussiness. Companys largest customer is domestic consumer.

c. Interim information does company reported Interim financial report per quarter of the year reported the consolidation of financial condition of the company and subsidiary with the last year condition. Report compare the financial position of the current quarter with the last year-ended financial position, for example, for secong quarter of 2011 compare June 2011 and December 2010 statements. But in income statement, changes in equity and cash flow statement compare with condition in same quarter in last year, for example, for second quarter of 2011 compare June 2011 and June 2010 statements. So in the interim information theres just amount of financial condition during the begginning of the aurrent year until the current quarter.

d. Similarities and differences between the independent auditors report 2010 and 2011 Similarities between these two independent author report are: Auditors state that they have audited the financial statement of the company and subsidiaries, they conducted the audits in accordance with auditing standard established by Indonesian Institute of Certified Public Accountants, and their opinion that the financial statement is fairly in all material respect in conformity with Indonesian Financial Accounting Standards. The difference between these two independent author report is that in 2010. Since 1 January 2010 company and subsidiaries have adopted a new accounting standard (revised PSAK) those are PSAK no. 50 (revised 2006) and PSAK no. 55 (revised 2006). But in 2011 statement there are statements that company adopted many more different new accounting standard, like PSAK no. 1 (revised 2009), PSAK 4 (revised 2009) and others. e. Accounting changes report for year 2010 and 2011 For the year 2010 and 2011, there are no accounting changes applied in this company and subsidiary. The accounting is same with the prior period, but there are more disclosure about financial statements.
f. Calculate and explain the analytical use of six ratio, what the

investors can learn about operating effeciency. N o 1 2 3 4 5 6 Financial Ratio

RNAs financial stability and 2011 2010 Current Industry Average 2.5 1.4 Rp 5.75 38% 1.6 5.5

Current ratio Acid-test Ratio Times interest earned Profit Margin (Gross) on Sales

1.52 0.91 Rp 5.80 30% 0.96 4

2.00 1.25 Rp 4.87 31% 0.94 4

Asset Turnover (Total) Inventory turnover (Sales)

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Financial ratio for PT Ultrajaya above shows that:

1) Its current ratio decrease by 0.48 from 2010 to 2011, and both

are below the current industry average ratio. Those are indicated that the liquidity of the company is not in good range, its ability of current assets to pay its short-term debt is poor. 2) Its acid-test ratio or quick ratio decrease by 0.31 from 2010 to 2011, and both are below the current industry average ratio. Those are indicated that the companys liquidity over inventory is poor too. 3) Times interest earned show that Rp 1 interest is resulted by Rp 4.87 in 2010 and Rp 5.80 in 2011. Increase indicate a good performance of company, and 2011 it already pass the current industry average ratio.
4) Profit

margin on sales (gross) indicate that company performance in produce profit is poorer than the average industry, even decrease 1% in 2011.

5) Total asset turnover for this company increase by 0.02 in 2011, but it still far away from the current industry average ratio. It means that the efficiency of asset to produce sales in PT Ultrajaya is not optimal yet.
6) Inventory turnover in the two years period is same, it indicated

there is no movement to increase or decrease company performance, but it still below the industry average ratio. It may caused by high loan to produce inventory and keep inventory too much in warehouse.

From these ratio investors can learn that financial stability and operating efficiency for PT Ultrajaya is lower than the average industry in foods and beverages bussiness unit. So it also mean that existing investor must be aware to companys financial condition, and new investor who interesting in investing in this company shares must be carefully learn the benefit and risk to invest there.

g. Limitation of ratio analysis

Although ratio analysis is very important tool to judge the company's performance , financial ratio analysis has some disadvantages. Some key demerits of financial ratio analysis are:
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1) Ratios are generally distorted by inflation. Different companies operate in different industries each having different environmental conditions such as regulation, market structure, etc. Such factors are so significant that a comparison of two companies from different industries might be misleading. 2) Financial accounting information is affected by estimates and assumptions. Accounting standards allow different accounting policies, which impairs comparability and hence ratio analysis is less useful in such situations. 3) Ratio analysis explains relationships between past information while users are more concerned about current and future information. 4) Ratios are tools of quantitative analysis, which ignore qualitative points of view. 5) Ratios give false result, if they are calculated from incorrect accounting data. 6) Ratios are calculated on the basis of past data. Therefore, they do not provide complete information for future forecasting. 7) Ratios may be misleading, if they are based on false or windowdressed accounting information.

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