Foundations of Accounting

Question: Discuss about theFoundations of Accounting. Answer: Introduction of AGL Energy Limited and Abilene Oil and Gas Limited AGL Energy Limited AGL Energy Limited is comes into oldest company of Australia. It has been established in 1837 (Energy in action). The company work for the community and environment and it believes in change. Recently in 2015, it established largest solar plant in Australia. AGL is handling the operation of producing electricity in Australia and it is the largest owner of the listed ASX. AGL is the leading company of Australia. The responsibility of declining greenhouse gas emission is taken by the company. Experience of 175 years has been acquired by the company. In the Eastern Australia, company provided the gas, electricity, solar PV and related products and services to the customers (AGL Annual Report, 2015). Abilene Oil and Gas Limited Abilene Oil and Gas Limited is an Australian company which was formerly known as World Oil Resources Limited. The company is engaged in resource investigation and investment in Australia and overseas. Oil and gas are the main focus for the company (Financial Times, 2016). The company assets are situated in Kansas. The strategy of company is focused on building up oil production assets, rising drilling spots and adding exploration estate in the region. The strategy of company is based on a mixture of targeting high return projects and inventive funding during the maintenance of low overhead and company costs (Abilene Oil and Gas Limited, 2015). Financial Statements Analysis AGL Energy Limited and Abilene Oil and Gas Limited Under financial statement analysis or financial analysis, analyze the income statement, balance sheet, cash flow statement and statement of changes in equity (Ready Ratios, 2016). This analysis is used to take better economic decisions. It is a process of reviewing and analyzing the financial statements of a company. Financial Analysis of the Entities Profitability Profitability of an organization can be measured by profitability ratio. Managements performance can be measured by profitability ratio. Net profit ratio, return on assets and return on investments are calculated under profitability ratio. How well the business has done or in other words, performance of business can be measured by profitability ratio (Financial Analysis). The net profit ratio of AGL Ltd is 5.4572% in 2014 and 2.0416% in 2015 which is decreasing and showing that organizations performance is getting down in 2015. In case of Abilene Oil and Gas Limited, company is getting losses which are increases in 2015 with compare to 2014. Net loss ratio of Abilene is 599.4475% in 2014 and 1160.0645%. It shows that losses are increasing with high rate and companys performance is decreasing. Profits are decreasing of AGL Ltd in 2015 so return on assets ratio and return on investments/equity ratio is reducing in 2015. Same in case of Abilene Oil and Gas Limited, losses are increasing in 2015 so return on assets ratio and return on investments/equity ratio is negative and reducing in 2015. Financial Analysis of the Entities Liquidity Capacity of meeting financial obligations by using financial resources can be measured by liquidity analysis. Entities liquidity can be measured by current ratio, quick ratio or liquid ratio and absolute liquidity ratio (The Analysis of Entitys Liquidity). Current ratio can be identified by dividing current assets with current liabilities (Stickney, Weil, Schipper and Francis, 2009). The ideal current ratio is 2:1 which tells that current assets must be double of current liabilities. Current ratio of AGL Limited decreasing from 1.6328 to 1.4576 while increasing of Abilene limited from 0.4710 to 0.8609. Liquid ratio or quick ratio or acid test ratio is calculated by dividing liquid assets with current liabilities. Liquid assets exclude stock or inventory and prepaid expenses from current assets. The standard liquid ratio is 1:1 which tells that liquid assets must be equal to current liabilities. Liquid ratio of AGL Energy Limited decreasing from 1.5414 to 1.2908 while increasing of Abilene limited from 0.4572 to 0.7675. Absolute liquid ratio is identified by dividing absolute liquid assets with current liabilities. Absolute liquid assets refer to the combination of cash in hand, cash at bank and marketable securities. It is decreasing in case of AGL Energy Limited from 0.2183 to 0.1091 while increasing in case of Abilene Oil and Gas Limited from 0.4484 to 0.5594. Financial Analysis of the Entities Efficiency Efficiency can be termed as turnover ratio. Relation between net sales or revenue and other items (like inventory, average receivables, working capital, fixed assets and capital employed) is known as turnover / efficiency / performance / activity ratio. These ratios can help in improving efficiency or performance of business. Stock turnover ratio tells whether investment in stock is efficiently utilized or not (Ojugo, 2009). It also indicates, how many times the inventory turnover in business during a financial year. In 2014, it is 54.6859 times which decreases in 2015 to 26.9646 times of AGL Energy Limited. It reflects that investment in stock is not utilized effectively. No information found related to stock/inventory in annual report of Abilene Oil and Gas Limited so stock turnover ratio cannot be determined. Receivable turnover ratio tells that in a financial year, how many times a business can collect its average account receivables. In case of AGL Energy Limited, it is increasing from 5.4916 to 5.6378 times and in case of Abilene Limited, it is decreasing from 53.0003 to 18.8193 times. Working capital turnover ratio tells about the effective utilization of working capital. If working capital ratio is higher, it is good and shows proper utility of working capital. In 2014, it is 7.9009 times which increasing in 2015 to 9.8324 times, it is good. In case of Abilene Limited it is negative due to negative working capital. Financial Analysis of the Entities Capital Structure and Market Performance Capital Structure Ratio: Capital structure ratios can be calculated on the basis of capital structure of the company (Xplaind, 2015). Debt to equity ratio is used to identify that company has how much debt with compare to equity available. It reflects relation between total debts and equity of an organization. In case of AGL Energy Limited debt to equity ratio decreasing from 86.2678% to 79.6143% and reducing from 16.7849% to 6.3866% of Abilene limited. Equity ratio is used to identify relation between total equity and total assets of company. In case of AGL Energy Limited equity ratio is increasing from 53.6861% to 55.6749% and also increasing from 85.6275% to 93.9968% of Abilene limited. Market Performance: Market performance of any organization can be evaluated easily by calculating earnings per share and dividend per share. When net earnings for equity shareholders are divided by number of equity shares, earnings per share can be achieved. In case of AGL Energy Limited earning per share decreases from 98.2291 to 33.3473 while increases of Abilene limited. In case of Abilene limited earning per share is negative and changes from -5.7059 to -4.8856. Dividend per share can be calculated by dividing dividend declared by company with number of equity shares. In case of AGL Energy Limited, dividend per share increases from 63 to 64 and no information found in case of Abilene limited for dividend per share in the annual report of company. Note: All the information related to financial statements of both the companies is taken from annual report. Amount of AGL Energy Limited reflected in $m and of Abilene Oil and Gas Limited reflected in $. Conclusion The profitability ratio shows that performance of both the companies is not good. But it can be said that AGL Energy Limited performing better than Abilene Oil and Gas Limited. Liquidity analysis shows that capacity of meeting obligations of Abilene Oil and Gas Limited is better than AGL Energy Limited because in 2015 all liquidity ratios are increasing of Abilene Limited while decreasing of AGL Energy Limited. Although both companies are not meeting standard of current ratio and Abilene ratios are lower than AGL ratios. But ratios of AGL Energy Limited are decreasing and increasing of Abilene Limited which shows that Abilene Limited is enhancing its capacity of meeting obligations. In case of AGL Energy Limited, decreasing ratios shows that capacity of meeting obligations is decreasing. The ideal current ratio must be 2:1. Both the companies are not meeting standard current ratio. In case of AGL Energy limited current ratio is decreasing and it is nearly to the ideal current ratio. But in case of Abilene limited current ratio is least which shows that company has fewer current assets while its current ratio is increasing with compare to previous year. The standard liquid ratio must be 1:1. AGL limited meets the aspect of standard liquid ratio but Abilene limited is unable to meet the ideal ratio. In case of AGL limited, it is decreasing but in case of Abilene limited it is increasing. Absolute liquidity ratio is also same as it increasing in case of Abilene limited but decreasing in AGL limited. All the three liquidity ratios shows that Abilene limited has better capacity with compare to AGL Energy limited. Stock turnover ratio of AGL Energy limited is decreasing which tells that investment in stock is not utilizing properly. Receivable turnover ratio is increasing minor in case of AGL limited while decreasing high in case of Abilene limited. It shows that AGL is able to pay more time to its trade receivables while Abilene is not. Working capital turnover ratio of AGL limited is increasing and it is negative of Abilene limited. Debt to equity ratio of AGL limited and Abilene limited is decreasing and equity ratio of both the companies is increasing. It shows that both companies has almost same trend of capital structure. Earnings per share of AGL limited is decreasing and negative of Abilene limited. And dividend per share is increasing of AGL limited. On the basis of earnings per share, it can be said that AGL is not performing well and Abilene has poor financial condition. Recommendation AGL Energy Limited has to focus on increasing its profits by reducing its cost and expenses. Because reduced profits shows that companys financial position is not sound. Current liabilities of company are increasing which is not good. It impacts on liquidity ratio so company should reduce its current liabilities. As well as company should focus on its total liabilities to enhance companys financial performance. Abilene Oil and Gas limited has to improve its performance by reducing its expenses and also has to focus on reducing its losses. Total assets and owners equity are decreasing so company should have to focus on them. Both current assets and current liabilities are decreasing. It is better to decrease current liabilities but current assets must not be reduced. Current liabilities of company are more than its current assets which is not good to meet out obligations. So it should be decreasing its current liabilities or increasing current assets. References Financial Times, (2016). Abilene Oil and Gas Ltd: About the company. Retrieved on 13 September 2016 from: https://markets.ft.com/data/equities/tearsheet/profile?s=WOIIF:PNK Ready Ratios, (2016). Financial Statement Analysis. Retrieved on 14 September 2016 from: https://www.readyratios.com/reference/analysis/financial_statement_analysis.html Annual Report, (2015). Abilene Oil and Gas Limited. Retrieved on 13 September 2016 from: file:///C:/Users/Guest/Downloads/735929_ABL.pdf Stickney, C. P., Weil, R. L., Schipper, K. and Francis, J., (2009). Financial Accounting: An Introduction to Concepts, Methods and Uses. (Edition 13): Cengage Learning Ojugo, C., (2009). Practical Food and Beverage Cost Control. (Edition 2): Cengage Learning The Analysis of Entitys Liquidity. Retrieved on 14 September 2016 from: https://steconomiceuoradea.ro/anale/volume/2007/v2-finances-accounting-and-banks/13.pdf Xplaind, (2015). Capital Structure. Retrieved on 14 September 2016 from: https://xplaind.com/160137/capital-structure ASX Release, (2015). AGL Annual Report 2015. Retrieved on 13 September 2016 from: https://www.asx.com.au/asxpdf/20150826/pdf/430t27pwhhbmr3.pdf AGL energy in action. our company. Retrieved on 13 September 2016 from: https://www.agl.com.au/about-agl/who-we-are/our-company Chapter 18. Financial Analysis. Retrieved on 14 September 2016 from: file:///C:/Users/Guest/Downloads/Financial%20Interpretations%20with%20Models%20%20Formats%20(unit%202).pdf Abilene Oil and Gas Limited, (2015). Retrieved on 13 September 2016 from: https://www.abilene.com.au/