Question: Ocado Group plc: reporting inventory Established in
Ocado Group plc: reporting inventory Established in 2000 and listed on the London Stock Exchange in July 2010, Ocado is the world’s largest dedicated online grocery retailer, with over 580,000 active customers. Our objective is to provide our retail and corporate customers with the best proposition in online shopping at the lowest possible operating cost. This enables us to build a strong, sustainable and growing business designed to deliver long-term value for our shareholders.
Strategic report
We face the unique challenge that around half of our sales lie within fresh and chilled categories and as a delivery operation we have to ensure this freshness is preserved right up to our customers’ front doors. To enable this we operate a shelf life promise whereby a minimum of approximately two-thirds of the total life of the product is guaranteed by the time it reaches the customer. In traditional store-based competitors this is difficult for a number of reasons including additional human touchpoints and disrupted stock rotation due to manual customer intervention as they personally handle the products. Our model enables us to carry lower inventory levels and to operate a perfect “first in first out†stock rotation dependent on shelf life. This allows us to operate with what we believe to be the lowest product waste in the industry at 0.7% of sales across our CFCs and underlines the sustainability benefits of our operating model.
Accounting policy: inventories
Inventories comprise goods held for resale, fuel and other consumable goods. Inventories are valued at the lower of cost and net realizable value as provided in IAS 2 “Inventoriesâ€. Goods held for resale and consumables are valued using the weighted average cost basis. Net realizable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. It also takes into account slow-moving, obsolete and defective inventory. Fuel stocks are valued at calculated average cost. Costs include all direct expenditure and other appropriate attributable costs incurred in bringing inventories to their present location and condition. There has been no security granted over inventory unless stated otherwise.
The Group has a mix of grocery and general merchandise items within inventory which have different characteristics. For example, grocery lines have high inventory turnover, while non-food lines are typically held within inventory for a longer period of time and so run a higher risk of obsolescence. As inventories are carried at the lower of cost and net realizable value, this requires the estimation of the eventual sales price of goods to customers in the future. Judgement is applied when estimating the impact on the carrying value of inventories such as slow-moving, obsolete and defective inventory, which includes reviewing the quantity, age and condition of inventories throughout the year.
Note to the balance sheet: inventories
Discussion points
1. What do you discover about the valuation of inventory from the strategic report?
2. What do you discover about the valuation of inventory from the accounting policy?
3. How do the narrative descriptions provide deeper understanding of the figures in the balance sheet for inventory?
> At the end of Year 3 the Bed Company has a statement of financial position (balance sheet) comprising £3,000 receivables (debtors), £8,000 other assets and £11,000 ownership interest, consisting of £2,000 ownership interest at the start of the period and
> 16. Which of the following is correct? (a) Contribution = sales − variable costs (b) Contribution = gross margin − fixed costs (c) Gross margin = sales − variable costs (c) Gross margin = contribut
> 26. Selling price per unit is £12. Variable cost per unit is £10. Fixed costs of the period are £800. Using absorption costing, the profit of period 2 is: (a) 2,940 (b) 1,460 (c) 1,260 (d) 1,180 27. Selling p
> 16. Which of the following items will appear in a job cost record? (a) A budget plan for the job (b) An organisation chart for the job (c) Cost of direct materials for the job (d) A working capital plan for the job 17. Which of the following defines
> 29. Which of the following types of cost would not form part of the prime cost of a product? (a) The factory overhead costs (b) The direct labour costs (c) The direct expense costs (d) The direct material costs 30. For Week 1, the budgeted labour ho
> 19. In most companies, direct labour is treated as: (a) product cost (b) period cost (c) fixed cost (d) sunk cost 20. Which of the following is a direct labour cost? (a) The wages of an operative paid on the basis of output achieved (b) A bonus pa
> 13. Which of the following describes a fixed cost? (a) Any overhead cost that is incurred in the factory of a manufacturing company (b) Any selling, general or administrative cost incurred in a manufacturing company (c) A total cost that remains const
> 11. Which of the following indicates an outward focus of management accounting? (a) Management accounting focuses on the business entity alone. (b) Management accounting directs attention to effective linkages that will improve competitive positions.
> 31. The reported net profit of a company for the year is £20m after charging depreciation of £5m. During the year, there was an increase of £6m in stocks. Trade debtors and trade creditors remained constant. What is the net cash inflow from operating act
> 20. Which of the following is the best explanation of why depreciation is added back to operating profit while calculating the cash flow from operations? (a) Depreciation is a subjective amount in the profit calculation, and so must be taken out to leav
> 28. Which of the following is a correct statement about the strategic report? (a) A forward-looking aspect is not permitted. (b) A forward-looking aspect is encouraged. (c) The content of the strategic report is prescribed by an international financia
> On 1 September Year 1, a company paid £1,800 as an insurance premium to give accident cover for the 12 months ahead. The accounting year-end is 31 December. Required: Prepare an accounting equation spreadsheet to show the effect of the prepayment in th
> 9. Which of the following is the most accurate definition of return on shareholders’ equity? (a) Profit after tax as a percentage of share capital (b) Profit after tax as a percentage of share capital and reserves (c) Sales (revenue)
> 13. Which of the following items is/are likely to be found in a company’s statement of changes in equity? (i) Dividends paid (ii) Surplus on revaluation of non-current (fixed) assets (iii) Premium on the issue of shares Is it (a) (
> 10. Which of the following will not normally be found under the heading ‘Liabilities due after 1 year’? (a) Deferred taxation (b) Unsecured loan (c) Bank overdraft (d) Provision for reorganization costs 11. Which of the following most accurately des
> 12. Which of the following is/are normally treated as a contingent liability? (i) The corporation tax liability for the reporting period (ii) Claim for damages by a customer, where the reporting company believes the customer will be unsuccessful (iii)
> 24. On 1 April Year 1, a company paid £2,800 in advance for 1 year’s fire insurance. On the financial statement date of 31 December, what is the correct accounting treatment for this information? (a) Insurance expense of £700: current liability of £2,10
> 14. Which of the following would be included in a statement of financial position (balance sheet) under the heading ‘inventory’ (‘stock’)? (i) Raw materials (ii) Bank deposits (ii
> 28. The following is a list of non-current (fixed) assets: (i) Plant and equipment (ii) Patents (iii) Shares in subsidiary companies (iv) Trade marks Which of the above are classed as intangible assets? (a) (i) and (ii) (b) (ii) and (iii) (c) (ii
> 18. JK Builders Co purchases a new excavator costing £40,000. Its expected useful life is 10 years, at which point it is anticipated that the excavator will have a residual value of £6,000. If the straight-line method of depreciation is used, what is the
> 20. Which of the following is the best description of convergence of accounting in Europe? (a) From 2005, all accounting standards in the European Union are prepared by the European Commission. (b) From 2005, all listed companies in the European Union
> 16. A manufacturing company has carried out the following business transactions: • 500 kg of raw materials has been purchased for cash at a price of £3 per kg. • 300 kg of the raw materials has been put into production process. • 1 kg of raw material
> On 1 January Year 1, Company A purchased a bus costing £70,000. It was estimated to have a useful life of three years and a residual value of £4,000. It was sold for £8,000 on the last day of Year 3. On 1 January Year 1, Company B purchased a bus also co
> 6. Which of the following reflects the effect of the delivery of finished goods to customers on the accounting equation? (a) Assets decrease: ownership interest decreases (b) Assets decrease: ownership interest increases (c) Assets increase: ownership
> 6. Which of the following reflects the effects of a payment to creditors on the accounting equation? (a) Assets decrease: ownership interest decreases. (b) Assets decrease: ownership interest increases. (c) Assets increase: liabilities decrease. (d)
> 17. Which of the following statement is/are correct? (a) All pages of the annual report of a typical public company are heavily regulated by the company law. (b) The auditors are responsible for preparing a company’s annual financial statements. (c) T
> J Sainsbury plc: annual report of a service business We want to be a place where people love to work and shop. That means harnessing the talent, creativity and diversity of our colleagues to ensure that customers receive great service every time they sho
> Scope and quality of audits needs reform, say City chiefs Auditors have had their “heads in the sand” and must provide a far more rounded view of companies’ health than the current statutory “truth and fairness” opinions if they are to win back public tr
> Whitbread plc: main points from financial statements Extracts from the Annual Report Whitbread is the UK’s leading hospitality company We have built two of the UK’s most successful hospitality brands, Premier Inn and C
> The Financial Reporting Council (FRC) in the UK has set out an accounting standard for micro entities, which are the very smallest companies. Typically they have fewer than 10 employees. One permitted outline for a statement of financial position (balanc
> Oxfam Great Britain’s purpose is to help create lasting solutions to the injustice of poverty. As stated in its Memorandum of Association, the objects for which Oxfam is established for the public benefit are: • to prevent and relieve poverty and to prot
> Associated British Foods is a diversified international food, ingredients and retail group with sales of £13.4 billion, 130,000 employees and operations in 50 countries across Europe, southern Africa, the Americas, Asia and Australia. Business strategies
> The Bristol Port Company was formed in 1991 when entrepreneurs Terence Mordaunt and David Ord purchased the Port of Bristol from Bristol City Council. Since privatisation over £475 million has been invested to create a modern, thriving business offering
> Explain how the accounting equation spreadsheet of your answer to question B8.4 would alter if the building had been sold for £250,000. Data from Question B8.4: Angela’s Employment Agency sells the building for £285,000 on the final day of December Year
> More than half a million students have lived with us during our 25-year history and we continue to grow. In 2016, we opened five new properties which means we have the privilege of housing our largest ever number of students, 49,000. As the UKâ
> At our core, we are a successful branded soft drinks business, building a diverse and differentiated portfolio of great tasting brands that people love. We make it our business to understand what our consumers want. Whether it’s our iconic IRN-BRU, launc
> The case study shows a typical announcement of budget plans where management accounting is helpful but must be read in conjunction with short-term requirements and longer term strategic plans. Read the case now but only attempt the discussion points afte
> Plymouth-based super yacht company Princess Yachts has almost doubled its order book this year as it embarks on a £100m investment program. The company said that orders following the Cannes Yachting Festival reached a record £640m – 85pc higher than at t
> How much should I charge for my cakes? I have read that a good way to price cakes is to charge for the cost of ingredients times 2 (or 3). We firmly believe that the ‘ingredients times 2 or 3’ method of pricing is arbitrary and not rooted in any kind of
> Whirlpool said Monday it swung to a profit in the fourth quarter driven by higher prices and sales in North America, though the appliance maker’s 2019 outlook disappointed investors. Stronger prices for its products and fixed cost reduction boosted Whirl
> The purpose as ever of this annual road haulage cost movement report is to assist members and their customers to understand trends in the industry. It reflects cost movements, reasons for changes, and makes predictions. Every firm has different costs and
> Chartered Institute of Management Accounting (CIMA) What is management accounting? Management accounting is the sourcing, analysis, communication and use of decision-relevant financial and non-financial information to generate and preserve value for orga
> Unless it can reduce inventory and working capital, dividends may be at risk Everyone likes a bargain, particularly investors. Hennes & Mauritz, Sweden’s purveyor of Scandi fashions worldwide, offers value on the high street. Unfortunately, fears of “pea
> Our business model is designed to generate long-term sustainable value. We focus on mission-critical and highly engineered equipment with intensive aftermarket care and comprehensive global support. This model creates positive outcomes for our customers
> Angela’s Employment Agency sells the building for £285,000 on the final day of December Year 3. Record the transactions and events of Year 3 in an accounting equation spreadsheet. Assume depreciation is calculated in full for Year 3.
> The following extracts show the different ways in which three companies report their operating profit margins (operating profit as a percentage of sales). This ratio is an indicator of the performance of the business, or segments of the business. It prov
> Thames Water is one of ten regional licensed and regulated companies providing water and wastewater services in England and Wales. With 15 million customers we serve about 25% of the population of England and Wales. Dividends The Companyâ€
> We are a global energy company with wide reach across the world’s energy system. We have operations in Europe, North and South America, Australasia, Asia and Africa. Decommissioning Liabilities for decommissioning costs are recognized when the group has
> We use our cost advantage and number one and number two network positions in strong markets to deliver low fares and operational efficiency on point-to-point routes, with our people making the difference by offering friendly service for our customers. S
> Investment by UK companies has fallen for three consecutive quarters, in a decline that highlights how uncertainty about Brexit is prompting consumers and businesses to tighten their belts. Business investment was 2.2 per cent lower in the third quarter
> Domino’s Pizza International Franchising Inc. (‘DPIF’) is the owner of the Domino’s brand across the globe. We have two Master Franchise Agreements in place with DPIF, which gives us exclusive rights to the markets in the UK, the Republic of Ireland, Swi
> Mulberry is a vertically integrated luxury brand which was founded in 1971 in Somerset. The Group designs, develops, manufactures, markets and sells products under the Mulberry brand name. The Group has over 1,400 employees (full time equivalents), the m
> The following information has been gathered from the accounting records of Jonathan’s Hair Stylists. Using the accounting equation, calculate (a) the amount of ownership interest at 30 September Year 8; (b) the amount of net profit fo
> Read the dialogue between David and Leona. What errors can occur in reporting the amount of ‘inventories’ (stocks) in financial statements?
> Assume that fee income and costs are the same in Year 2 as in Year 1. Record the transactions and events of Year 2 in an accounting equation spreadsheet. Prepare the statement of financial position (balance sheet) at the end of Year 2 and the income stat
> Weston plc produced the following draft statement of financial position (balance sheet) as on 1 May Year 4. During June, the following transactions and events occurred: 1. The company bought stock costing £66,000 from its suppliers on 2 mon
> You are the recently appointed financial controller of Motorway Catering Supplies Ltd (MCS) that has successfully operated motorway service stations for many years. It has been given the opportunity by the Transport Construction Group (TCG), the builders
> The board of directors of Kirkside Glassware Ltd is considering the following proposed investment projects: It is estimated that each product will provide benefits in terms of reduced cash outflows, measured over the coming five years. The outlays and ca
> Binding Machines Ltd sells wire-loop binding machines to printing units. The company has three separate departments: Department A: sells new machines Department B: sells second-hand machines Department C: repairs machines for external customers and ov
> You are the management accountant at the head office of a company which owns retail shoe shops throughout the country. The shops are grouped into areas, each having an area manager. Goods for sale are bought through a central purchasing scheme administer
> Write an essay of approximately 500 to 750 words on the topic: ‘It is questionable whether variance reporting is a useful tool of management’.
> As a further development of that answer, it is possible to link the cash flow to the gross profit using the changes in working capital. Attempt now to set out a calculation that links cash flow to gross profit in this way. In the world of business, it is
> Holyrood Products Ltd makes cassette recorders. The management accountant has produced the following summary of the company’s trading in the year ended 30 June Year 3: The following additional information is available: (a) Works and adm
> Woollens Ltd manufactures high-quality sweaters. At present, the company sells direct to retail stores, but sales through those outlets have been declining due to overseas competition − the profit last year was only £160,00
> Super toys Ltd is the sole manufacturer in Scotland of the Super-robot toy. The current level of production and sales is 40,000 toys per annum. The selling price of each Super robot is £20. The contribution from each toy is 20 per cent of the selling pri
> Which components are currently covered by an audit report of the type illustrated? Discuss the problems and potential benefits of having an audit opinion covering all categories of financial information.
> A company is able to sell four products and is planning its production mix for the next period. Estimated costs, sales and production data are as follows: Required (a) Based on the foregoing information, show the most profitable production mix under each
> A small business manufactures two products. Product A is a high-volume product of relatively low sales value and Product B is a low-volume product of relatively high sales value. Product A results from an automated process where the labour input is from
> An independent bus company on an island operates 15 routes and has 50 buses. Two routes take one hour for a journey round the island each; the remaining routes take 30 minutes for a return journey to various villages from a central hub in the main town.
> Florence Ltd is a manufacturing company with a financial year ending on 31 December Year 1. The company manufactures wooden storage units for schools and colleges, each job being planned to meet a customer’s specific order. A predetermined overhead rate
> Oldham Ltd is a small manufacturing company producing a variety of pumps for the oil industry. It operates from one factory that is geographically separated from its head office. The components for the pumps are assembled in the assembling department; th
> Timberchair Company produces custom-made chairs to suit individual customer requirements. The company’s main material is timber. It also uses glue and nails. The company has a small buying department that purchases timber from around the world. It also h
> You have been asked for advice by the owner of a small business who has previously estimated overhead costs as a percentage of direct labor cost. This method has produced quite reasonable results because the products have all been of similar sales value
> In a general engineering works the following routine has been followed for several years to arrive at an estimate of the price for a contract. The process of estimating is started by referring to a job cost card for some previous similar job and evaluat
> In a school, the head of the history unit is responsible for cost control. The finance office has produced the following statement of costs for the history unit cost centre. State which of them are controllable and which of them are non-controllable cost
> Complete the following table of cost classification for a shop selling bicycles:
> Explain why users require all the information and not merely the primary financial statements with notes to the accounts.
> Tots Ltd manufactures babies’ play suits for sale to retail stores. All play suits are of the same design. There are two departments: the cutting department and the machining department. You are asked to classify the costs listed below under the headings
> Supermarket checkout operators are paid a weekly wage plus overtime at an hourly rate. One operator has recently resigned from work. The supermarket manager has been asked whether the direct costs of the supermarket operation could be maintained within t
> The following information has been extracted from the financial statements of Casings Ltd. Income statement (profit and loss account) extract for the year to 31 December Year 2 Statement of changes in equity Equity holders’ funds at sta
> Consider the following: Statements of financial position (balance sheets) at 31 December Further information 1. The dividend paid during Year 2 was £25m. The retained earnings increased by £77m profit of the period and decreased
> Carry out a trend analysis on Safe and Sure plc, using the historical summary set out in Appendix I. Write a short report on the key features emerging from the trends.
> Prepare a full ratio analysis and commentary for Craigielaw. Assume that a share price of 160 pence is applicable at both year-end dates. Industry average ratios for both Year 7 and Year 6 are as follows:
> The summarised version of the Year 7 accounts of Worldchem plc is shown below along with comparative figures for the previous year. Most of the notes in the accounts, which give further details about nearly every item, are omitted here. Required: (a) C
> Carry out a ratio analysis of Safe and Sure plc, using the financial statements set out in Appendix I (at the end of this book) and applying the method of analysis set out in section 13.6. Making a comparison of Year 7 with Year 6, write a short commenta
> The following table sets out business transactions and events for Chris Brown Ltd. Required: (a) Using the accounting equation spreadsheet provided, record the effect of each transaction and events of Chris Brown Ltd for its first year of trading. (b)
> The following is a list of assets, liabilities and ownership interest of D. James Ltd on 1 January Year 5 when the company began to trade. The company has an issued share capital of 100,000 £1 ordinary shares. The following transactions were
> The following list of transactions relates to the business of Electrical Retailers during the month of November. Required: (a) Make entries in a spreadsheet for the above transactions. (b) Using the information you have entered in the spreadsheet, prepa
> Suggest six non-financial performance measures for a company which offers contract gardening services to companies which have landscaped sites surrounding their offices. Give reasons for your choice.
> As a result of organizational cost-cutting, new-hire orientation is cut short to a few days. Describe how this will affect retention.
> Organizations use different selection devices to recruit new employees. Are all methods equally good for all jobs?
> In Malaysia, certain industries like IT and customer services, are increasingly dependent on specialist human resource providers as a common source of trained manpower. Companies like the US-based ManpowerGroup provide professional HRM services to client
> Can a labor union help prevent employees from being unfairly terminated?
> What are the main challenges facing organizational designs today?
> How could a job-sharing arrangement be made effective? What would a job sharer need to do to make the arrangement work?
> There is evidence that an organization’s size will affect its structure. The larger the number of employees, the more mechanistic the organization will tend to become. Can this problem be overcome?
> In terms of organizational designs, what is a simple structure?
> Why is structure important? Why does an organization need a clear structure? Are there any other reasons for organizational structures beyond the formal arrangement of jobs, roles, and responsibilities?
> Discuss why you think an organization might be keen to increase its managers’ span of control.
> Internet sales comprise about 20 percent of all retail sales in the UK, with a record of £1.9 billion in online sales in December 2018. And for advancements in online sales, December 7, 2016, is a special delivery day for the country. On this day, one Am
