accounting for dummies�lessons from the for

Just so readers understand the veritable ways that accounting or bookcooking can be construed,this is a CUT&PASTE of a qualified accountant that was employed in the federal finance sphere for 8 years.Iwould put him up there with the likes of David Mond a former lead taxation investigator for the ATO niegh on 12 years,and now has a reputable accounting and actuary company.

I pasted 3 only for starters


Accounting for Dummies�Lessons from the Forest Industry
John Lawrence
25.04.10 8:57 am

The suggestion in the title is that accountants are smarter than the average. Most aren�t.

Accounting is essentially about debits and credits, plusses and minuses to use the generic terms. Not exactly rocket science. But much of what is presented in financial statements confuses rather than promotes understanding, deliberately so at times, unfortunately not an uncommon occurrence amongst professions.

The following is an attempt to outline the lessons, 17 in total, from the financial statements of Great Southern, Timbercorp, FEA, Gunns and FT, by presenting a common sense interpretation of some of the more significant features, and perhaps provide the new Minister with an accounting analysis of the current forest industry, lest he thinks it is in suitable shape to provide a springboard for the future.

Lesson No 1.

Beware of companies whose profits are consistently higher than their net operating cash flow. This means there�s a lot of book entries.

The net operating cash flow, revenue less expenses, forms the cornerstone of a company�s net profit. The difference between the two is represented by book entries. Normally the book entry for depreciation is sufficient to ensure that net profit is less than net operating cash flow.

Gunns� net operating cash flow over the last 8 years was $505 million and their depreciation and amortisation claims were $156 million. Furthermore a book entry for the value of harvested trees reduced profit by a further $158 million. Then there�s impairment charges (bad debts for instance) and accrued employee benefits which further reduce profit.

Yet profit was $612 million over the 8 year period boosted by book entries, the major ones being a $204 million increase in the value of standing trees, $141 million in yet to be received harvest commissions and about $250 million for MIS amounts still owing by investors.

FT is even shakier. In 2009 its net operating cash flow was $3 million, yet its net profit was $32 million. An increase in the book value of trees of $43 million was partially offset by a $15 million increase in FT�s unfunded superannuation liability.

Lesson No 2.

Check the cash flow statement to ascertain the source of cash, whether from operations, from asset sales, from borrowings or from shareholders.

A company�s cash flow statement splits cash flow into three, cash from operations (revenues less expenses), cash from investing (sales of existing assets and investments less purchases of new assets and investments ) and cash from financing (new loans, share issues less dividends, loan repayments etc).

It is an invaluable statement because it allows the reader to determine if the business is being supported by its operations or by its borrowings and how new assets etc are being paid for.

In Gunns� case, operating cash flow was $505 million for 8 years, net borrowings produced only $28 million in extra cash, sale of assets $185 million (mainly the Auspine trees) and equity raisings another $531 million.

In FT�s case operating cash flow is miserable, $5 million in 2008 and $3 million in 2009. CFA capital grants are included as cash from investing (because it�s supposed to be spent on plant and plantations, etc which are investing activities). A total of $42 million was received from this source in 2009 and $14 million in 2008. There is nil cash from financing for FT, as there have been no further borrowings, nor has the Government contributed any more equity.

Not yet anyway.

Lesson No 3.

Check to see where all the cash went, whether on new plant and equipment, investments in other companies, loan repayments or dividend payments. Beware of companies paying dividends from borrowings or share proceeds.

Gunns� spent $173 million planting its own trees, say $200 million updating its plant and equipment (an estimate only as the depreciation for the period was $156 million) and $150 million on the pulp mill. This just about exhausts the net operating cash flow of $505 million.

But another $154 million was spent on new plant, $327 million on investments (mainly Auspine), and $280 million paying dividends.

It�s a bit of a chicken and egg argument. Were the dividends paid from operating cash flow or from share issues, as the borrowings were negligible? If the former is to be argued then the implication is that there was insufficient cash remaining to keep planting its trees and updating its plant, in other words to keep operating its core activities, without further equity raisings. And that is not a healthy sign.

To put it another way, Gunns either raised equity to pay dividends, or it exhausted its operating cash flow with dividend payments so that equity raisings were required to fund the balance of new plant and trees normally funded out of cash flow. Either way a warning sign.

In the 2000/01 year Gunns paid $407 million to acquire the woodchipping and plantation businesses of Boral and North Forest Products. It raised $130 million with a share issue. Its net borrowings for the year were $300 million. Since then Gunns� debt has only increased by $28 million, so arguably its core debt of $300 million relating to the Boral and Norths� businesses still remain. What are those assets now worth?

Interestingly the Auspine purchase of $348 million only required $266 million in cash, with the rest paid with Gunns� shares. But $334 million was raised from shareholders, and $173 million received when pine trees were sold to GMO. Looking with hindsight the Auspine deal was probably a back door way of financing the pulp mill. The same occurred in the last 6 months with new equity raisings of $145 million for the ITC Timber purchase of $88 million.

In FT�s case, in 2009, $12 million was spent on new plantations and $18 million on new plant. Yet only $3 million was provided from operations. A bit tight!! Without CFA grants, FT will be unable to keep investing, unless its shareholder puts in more.

FT must be finding it harder to pay its operating expenses. At the end of 2009 FT started using unspent CFA funds to pay operating expenses. The Auditor General made FT aware of his concerns.