7901AFE Accounting and Reporting

ASSIGNMENT 2

Trimester 1 2021

DUE DATE:      Sunday May 16

DUE TIME:       11.59pm

WEIGHTING:   40%

REQUIREMENTS:

  1. Students are required to complete the project individually.
  2. Complete the requirements as set out in this document.
  3. All answers must use proper English expression and grammar and is considered when marking written responses to questions.
  4. Word limits for each question are a guide only and are the maximum number of words required.
  5. Do not re-write the question in your assignment submission, otherwise you will get a high % match in text matching
  6. When referring to items in the annual reports include the note number and page number as in-text referencing.
  7. The assignment is marked according to the rubric where applicable
  8. Assignment Coversheetcomplete electronic Assignment Coversheet indicating that you acknowledge all of the statements in the Academic Integrity Declaration.  Your submission of this electronic coversheet will be taken as the equivalent of your signature on a hardcopy version of the document. 

Assignment Resources:

Access the 2020 Elixinol Annual Report from the assignment

Access the excel file from the assignment tab

A relative comes to you after reading the following news article. He is intrigued that cannabis is now legal in medicinal form and that you can buy shares in companies such as Elixinol. He asks you whether you think it would be a good investment if he was to consider purchasing shares in Elixinol. The assignment questions pertain to Elixinol.

Elixinol to bag German CBD brand for $13.9m   By David Simmons, 15 March 2021

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Australian cannabis company Elixinol’s (ASX: EXL) plans to push further into Europe will be accelerated via the proposed nine million-euro (AUD$13.9 million) acquisition of a leading German CBD brand.

The deal will see Elixinol acquire CannaCare Health GmbH, the owner of CANOBO and comes as cannabis-competitors ECS (ASX: ECS) and Little Green Pharma (ASX: LGP) make their own waves in the industry today.

If CannaCare attains FY21 revenues of 12.9 million euros and 20 per cent EBITDA, the maximum earn-out of 15 million euros is payable in Elixinol shares, making a total potential consideration of 24 million euros (AUD$37 million).

The acquisition is Elixinol’s latest play in Europe and will see the Sydney-based company gain a serious foothold in Germany’s fast-growing CBD market, forecast to grow to a total market size of US$600 million.

CANOBO already has an established presence in Germany too, with more than 4,500 bricks and mortar retail distribution points, and an extensive range of 20 products consisting of CBD oils, sprays and skincare products which are manufactured in Europe.

Elixinol expects the acquisition, which still requires shareholder and regulatory approval, to fast-track revenue and give it a path to profitability.

CannaCare delivered 2.6 million euros of revenue in FY20, with breakeven EBITDA.

At the maximum FY21 revenue earn-out threshold of 12.9 million euros, CannaCare would be contributing more than 100 per cent growth on standalone FY20 group revenue to Elixinol.

“We are incredibly excited about this transformational opportunity which leapfrogs Elixinol closer to its vision of becoming a profitable, global, hemp derived consumer goods wellness business,” Elixinol global CEO Oliver Horn said.

“By acquiring CannaCare we gain a strong foothold in Europe’s fastest growth market of Germany and, together with our established UK business, will become a leading pan-European business of scale.

“This acquisition enables us not only to quickly reach critical scale but importantly opens up new opportunities to cross sell our portfolios, leverage the new scale to reduce our cost of doing business and apply best practices across global business.”

Importantly, the move comes after the United Nations Commission on Narcotic Drugs accepted a World Health Organisation recommendation to down schedule cannabis and cannabis resin.

This move is expected to lead to a novel foods regime for CBD being implemented across Europe – the world’s second largest CBD market after the USA.

The acquisition will be funded by three million euros in cash, funded from existing cash reserves, and 6 million Euros paid by the issue of fully paid ordinary shares in EXL.

At 31 December 2020, Elixinol had cash reserves of $27.7 million.

Shares in EXL are up 10.26 per cent to $0.22 per share at 12.26pm AEDT.

A.  Accounting Policy Choice exercise in the preparation of the Financial Statements and implications for users                                                                                                             (5 Marks-400 words)

Explain in terms of Accounting policy choice why Elixinol and another company in the same industry as Elixinol with similar operations and customer base, could report very different results in their financial statements. Your answer is to specifically address implications for users in the choice entities can make in accounting for intangibles, bad & doubtful debts, inventories and depreciation. Consider also why the Accounting Standard Setting bodies allow entities to choose alternate  accounting methods.

Parts B and C are based on the Elixinol 2020 Annual Report.

B.  Elixinol Statement of Profit and Loss & Other Comprehensive Income and its Statement of Cash Flows in its 2020 Annual Report                                                                           (10 Marks-500 words)

1. In relation to Elixinol’s net profit for the year and cashflow, explain four (4) reasons why the amount of net profit and net cash flows might differ.      

2. State the total net cash flows for each of the 3 categories of cash flows and the overall net cashflow and cashflow balance. Which category provided most cash inflows? Which category had the greatest outflows? Is this a healthy picture?  

3.  Identify and explain three (3) items on Elixinol’s cash flow statement that could be indicators of potential liquidity and risk issues for Elixinol. 

4.  Looking at the Consolidated Statement of Cash Flows for Elixinol for the year ended 31 December 2020, explain how the Proceeds from the issue of shares appear to have been used.

C. Financial Statement Analysis                                                                            (25 Marks-750 words) 

The assignment documents contain an excel file that has each of the following financial statements loaded that will assist in completing the following questions.

Using the financial statements, Consolidated Statement of Profit or Loss and Other Comprehensive Income (Income Statement), Consolidated Statement of Financial Position (Balance Sheet) Consolidated Statement of Cash Flows:

1. Complete the Table below:

Calculate ratios indicated for 2020 and 2019.   Round all ratios to two decimal places.

Describe what the ratio indicates about Elixinol                                              

NOTE: To calculate Gross profit use  ‘Raw materials and consumables used and processing expenses’ as Cost of Goods Sold’

For the calculation of ‘quick’ assets prepayments are disclosed in Note 13 to the Financial Statements        

CategoryRatioFormula20202019Describe what the ratio indicates about Elixinol
ProfitabilityGross profit marginGross profit / Revenue     
 Net profit marginNet profit for the year / Revenue   
EfficiencyAccounts Receivable turnoverRevenue / Average Trade and other receivables   
 Inventory turnoverCost of sales / Average inventory   
 Inventory turnover in days365 days / Inventory turnover   
Short Term SolvencyCurrentCurrent assets / Current liabilities   
 Quick(Quick assets – inventory) / current liabilities   
 Cash Flow from Operations to current liabilitiesOperating cash flows/current liabilities   
Long Term SolvencyCash Flow from operations to total liabilitiesOperating cash flows/total liabilities   
 Debt to EquityTotal Liabilities/total shareholders’ equity   
 Debt to Total AssetsTotal Liabilities/total assets   

2.  Based on your ratio analysis in Part C and Cashflows in Part B do you think investing in Elixinol is a wise investment for your relative? Explain why

END OF ASSIGNMENT

           7901AFE Accounting and Reporting Trimester 1 2021 – Rubric for Assignment 2

CriteriaExcellentVery GoodGoodSatisfactoryUnsatisfactoryMark
1. PART A:  Demonstrate an understanding of Accounting Policy Choice in preparing financial statements and implications for usersThe student has shown a very high level of ability in demonstrating an understanding of Accounting Policy Choice in preparing financial statements and implications for usersThe student has shown a high level of ability in demonstrating an understanding of Accounting Policy Choice in preparing financial statements and implications for usersThe student has shown a good level of ability in demonstrating an understanding Accounting Policy Choice in preparing financial statements and implications for usersThe student has shown some level of ability in demonstrating an understanding of Accounting Policy Choice in preparing financial statements and implications for usersThe student has shown a limited level of ability in demonstrating an understanding of Accounting Policy Choice in preparing financial statements and implications for users     /5
2. PART B: Demonstrate an understanding the interaction between financial statements.The student has shown a very high level of ability in demonstrating an understanding of the interaction between financial statementsThe student has shown a high level of ability in demonstrating an understanding of the interaction between financial statementsThe student has shown a good level of ability in demonstrating an understanding of the interaction between financial statementsThe student has shown some level of ability in demonstrating an understanding of the interaction between financial statementsThe student has shown a limited level of ability in demonstrating an understanding of the interaction between financial statements     /10
3. PART C: Demonstrate an understanding of ratio analysisThe student has shown a very high level of ability in demonstrating an understanding of ratio analysisThe student has shown a high level of ability in demonstrating an understanding of ratio analysisThe student has shown a good level of ability in demonstrating an understanding of ratio analysisThe student has shown some level of ability in demonstrating an understanding of ratio analysisThe student has shown a limited level of ability in demonstrating an understanding of ratio analysis/25  
TOTAL and comments          /40
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