Posts

Thinking of Christmas already?

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Pricing is an important area of ACCA and CIMA. There are a variety of pricing methods discussed in the syllabus including customer based pricing and competition based pricing. Broadly speaking, the former is based on the amount that customers would be willing to pay for benefits whilst the latter involves setting prices based on the prices of competing products.

In the UK, the Toy Retailers Association has just released their list of the top 12 toys that they expect to be most in demand in the UK this coming Christmas.

The interesting thing about the list is that the average price of the toys is just over £26. This compares to an average price of £32 in the Christmas 2007 list. This represents a fall of nearly 20%.

Has this fall been driven by cost savings by the manufacturer on labour or material? Or maybe reductions in transport and storage costs?

My guess is that the toy manufacturers are aware of the recession and the impact on parents buying power (customer based pricing issue). They are also aware that the toy industry is an extremely competitive industry and at the moment their competitors will be offering cheaper products (competition based pricing).

Either way, I’m sure that there won’t be a lot of children debating this issue on Christmas day when they open their presents!

Do you know your cost of capital?

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The other day I was talking to a few local business owners and I asked them if they knew what their cost of capital was. I got a few blank stares.

When we discussed the issue further, people started to warm up to the idea that the cost of capital can be viewed in terms of opportunity costs:

1. One owner said his cost of capital was the interest rate on his bank loans. I suppose he was 100% debt financed and probably not planning to refinance any time soon! Good luck to him!

2. A second owner said he took out all his savings from the bank and put it into his business. Since the bank deposit rate was so low, he figured his opportunity cost was pretty low as well. He has a point, though he must realize that he has moved into a higher risk category by withdrawing his money from the bank and investing it in a start-up business.

3. Another business owner said he started his company by borrowing from his relatives. Since they haven’t asked for it back he assumes its cost is zero. But he does pay a price, I suppose: at family gatherings he gets dirty looks from his relatives and his wife gives him constant grief. He suspects that the relatives complain about him to his wife.

Since all three owners want to expand their businesses, they asked me if I could recommend new sources of finance. I thought of sending them to our P4 candidates (after the exam!).

Cider and spreadsheets

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Cider drinks and spreadsheets – what’s the link?

Cider is an alcoholic drink made out of apples and has become more popular in recent years in the UK. One of the most popular brands of cider in the UK is Magners cider, the brand owned by the C&C Group.

We all know that there are lots of benefits of using spreadsheets such as Excel (e.g. speed of use, quantity of data that can be analyzed, etc) but we should all be aware that mistakes do happen with spreadsheet.

Earlier this summer shares in the C&C Group fell approximately 15% after the group said that revenue in the 4 months to the end of June had fallen by 5% rather than the 3% increase that had been reported a week earlier!

The group’s Finance Director said that the error in the earlier announcement occurred after data was incorrectly transferred from an accounting system to a spreadsheet used to produce the trading statement. Quite an embarrassing mistake and a valuable lesson in that even if spreadsheets are extremely powerful tools in business if the wrong data is inputted you will receive misleading results.

Also, it should be stated that consuming excessive amounts of cider when using excel could result in unpredictable results…

What kind of dog are you?

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Way back in 1896 in the famous Kingston Cotton Mill Case, was Lord Justice Lopes suggesting that auditors need a dog licence?

The facts of this case were basically that an action was brought against the auditors of the company for negligence, in failing to detect a fraud which involved the management of the company wilfully overstating the value of the company’s inventory.

In finding that the auditors were not guilty of negligence, the Judge famously said the following:

“An auditor is not bound to be a detective, or … to approach his work with suspicion, or with a foregone conclusion that there is something wrong. He is a watchdog, not a bloodhound.”

The Oxford English Dictionary provides us with the following definitions:

Watchdog: ‘A dog kept to guard private property.’

Bloodhound: ‘A large hound with a very keen sense of smell, used in tracking.’

It’s a long time since 1896 and nowadays, there is perhaps more a way of thinking that auditors should be a little bit less of a sleepy old watchdog, and rather more of an active bloodhound.

Make sure that you are up to date on an auditor’s responsibility for detection of fraud.

My 85kg and ratio analysis…

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I weigh 85kg (approx 13.5 stone or 187lbs).

So, how am I doing weight wise? More to the point, what has this got to do with the exams?

Ratio analysis is an important area of the syllabus and one overriding principle to remember when looking at ratio analysis is that a ratio is irrelevant when looked at in isolation. Ratios must be looked at against comparatives or benchmarks in order to interpret them and then to look at the underlying causes.

So, back to my weight of 85kg. How am I doing? Is my weight ok?

85kg by itself is irrelevant. We need to look at comparatives for somebody who is my gender and my height. For example, 85kg for an adult male with a height of 1.90m (6 foot, 3 inches) is a healthy weight. 85kg for an adult female with a height of 1.60m (5 foot, 3 inches) is an unhealthy weight with the person being classified as obese.

Using my example of 85kg, by comparing it with people who are the same height as me is in effect comparing it with “industry standards”.

What about my performance over time? Is my weight increasing, decreasing or remaining static when compared to last year and the year before. Comparing movements within this personal ratio analysis unfortunately reveals that my weight has increased.

Now onto the important issue behind ratio analysis and that is of looking at the underlying cause of the movement in the ratio. Unfortunately, it looks like the cake I have with my afternoon tea could be on the way out…

Looking for a good bedtime read?

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Reporter Norman C. Miller won a Pulitzer Prize in 1964 for his reporting on the De Angelis story.

Tino De Angelis was the ‘brains’ behind ‘The Great Salad Oil Swindle’ (the name of the book).

This case showed quite clearly that attendance at stocktaking by an auditor, will not provide, in itself, sufficient appropriate audit evidence on which to base the audit opinion.

I have always found one of the most interesting ways of studying internal control systems and auditing procedures is by looking at reports on frauds, indicating where things have gone wrong in real life.

Last time I looked on Amazon there were some copies of one of my favourite books available, alternatively perhaps try your local library.
Happy bedtime reading!