ACCT11059 ACCOUNTING, LEARNING AND ONLNE COMMUNICATION

ASSIGNMENT STAGE 1 (ASS#1)Christopher Peters

CQUniversity

STEP 2: MOODLE PROFILE AND PERSONAL BLOG

Personal Moodle Profile Christopher Peters

Personal Blog Link Stay Calm and Keep Accounting

STEP 3: MY COMPANY – XTEP INTERNATIONAL HOLDINGS LIMITED

The company that I have been assigned is XTEP INTERNATIONAL HOLDINGS LIMITED. Since being assigned this company on Friday week 1, I feel that I have been on a journey of discovery and learning with this company. I have already posted twice on my blog, the first being an introduction to this company and the second being a deeper dive into the company however I feel that I am learning more about the company and learning how to understand the annual reports as the days pass and I hope this reflects in Step 3 of assignment #1.

Below are links to my company posts on my blog.

My company revealed as Xtep International Holdings Limited a quick introduction

Touch down in the land of the sleeping dragon - my journey of discovery who is Xtep International Holdings Limited.

ACCT11059 ACCOUNTING, LEARNING AND ONLNE COMMUNICATION

MY INITIAL IMPRESSIONS

Leading up to the company assignments, part of me was hoping for an Australian listed company, something I was comfortable with and could relate to. Whilst the other the other half of me wanted something that would challenge my knowledge and my learning. At the end of the day therefore I am here.

I was really split when I initially seen that I had been assigned a Hong Kong based company. It was obvious to me that being assigned XTEP INTERNATIONAL HOLDINGS LIMITED was going to take be outside my comfort zone and challenge my knowledge and learning. This was great but also in the back of the mind was this fear of the unknown.

From the moment, I opened the company website (http://www.xtep.com.hk/) it was clear to me that the company’s primary sports focus was running and manufacturing shoes and associated apparel for running. The company appeared to me to be bright, young and energetic, a real player in the sportswear market in China.

The currency RMB’000 is very foreign to me so it presented a learning opportunity. I could see there was reference to a share price so that told me there was shareholder equity invested in the company and possibly subsidiaries. I mean the ‘HOLDINGS’ in the company name suggests it is holding a group of companies or assets under its control. I could read total revenue of RMB 2,310.8 million, Gross Profit Margin of 43.9% which is up 0.6p. p, Net Profit of RMB 310.3 million and a dividend payout ratio of 52.4%. They all seemed to be positive numbers but didn’t really mean a lot other than being impressively big.

Overall, I’m happy with my company and look forward to learning more about XTEP INTERNATIONAL HOLDINGS LIMITED throughout the unit.

AN OVERVIEW MY COMPANY

XTEP International Holdings Limited is a limited liability company incorporated in the Cayman Islands. The principle place of business is in Hong Kong. The Company and its subsidiaries (collectively referred to as the “Group”) established its own sportswear brand XTEP in 2002 and XTEP is now a leading professional sports brand with stylish and functional products in the PRC. The Group engage in the design, development, manufacture and marketing of sportswear, including footwear, apparel and accessory products, sold mainly under the self-owned XTEP brand. The Group manages an extensive distribution network with exclusive

ACCT11059 ACCOUNTING, LEARNING AND ONLNE COMMUNICATION

distributors that includes approximately 6800 stores nationwide covering 31 provinces, autonomous regions and municipalities across the PRC.

Let me touch on a couple of the financial highlights for the group in 2016. Total Revenue increased by 1.9% to RMB5,396.6 million (2015: RMB5295.1 million). The gross profit margin increased by 1.0 percentage point to 43.2%. Net profits for the year declined 15.2% to RMB527.9 million (2015: RMB622.5 million) related to a restructure and re-alignment. Strong cashflow report with total bank deposits and bank balances of RMB4245.3 million and net cash inflow from operating activities of RMB345.8 million. The currency symbol RMB which means Renminbi was foreign to me – literally!

Whilst reading the Chairman’s Statement in the 2016 company annual report it was clear to me that the year of 2016 was a ‘Year of Change’ for the group. He writes about restructuring to ensure future sustainable growth. Restructuring towards being a professional sports brand with stylish and functional products with internal resource re-alignment a key focus. Running remains the core sports category focus for the group, however they have expended and are now opening up the XTEP brand to the younger population through XTEP kids.

They are big on marketing their professional sports brand image. In 2016 the Group’s advertising and promotional costs amounted to approximately RMB637.2 million and accounted for about 11.8% of the Groups revenue. The group is the sportswear sponsor of the most number of marathons in China in 2016, with 44 marathons and running events sponsored or organised by the group. How’s that for reaching your target audience and consumers – the Chinese runners. Although market data shows penetration of running in China is still low, the potential for growth is still high. Looking ahead the company believes running will have a long growth cycle in China. Football in China is a rising sports category and XTEP are well positioned ahead of their peers to take advantage of growth in the future. In 2016 the group launched new products in this sports category and continues to support Footballs growth in China through sponsorship and new products. E-commerce has become a key driver in business growth and is the groups fastest growing sales channel. The group have maintained their position as the top sports footwear product seller on tmall.com and JD.com by volume, surpassing al other domestic and international brands. It’s clear that E-commerce will be a key growth driver for the group.

After reading the financial highlights for the group in 2016, I was really interested in the company’s finical statements detailed in the 2016

ACCT11059 ACCOUNTING, LEARNING AND ONLNE COMMUNICATION

company annual report and to see if i could recall and apply the accounting equation learned in week 1, Assets = Equity + Liabilities. The first real test of deep understanding!

I started with the Consolidated Statement of Financial Position report (Balance Sheet). I could see straight away the accounting equation set out in this report, Total Assets = RMB956,879 (Total Non-Current Assets) + RMB7,217,061 (Total Current Assets) = RMB8,173,940. Total Liabilities = RMB121,697 (Total Current Liabilities) + RMB3,029,481 (Total Current Liabilities) = RMB3,151,178. Equity = RMB 5,022,762. So, RMB8,173,940 (Assets) = RMB 5,022,762 (Equity) + RMB3,151,178 (Labilities). A lightbulb moment! A real opportunity to apply learning. I next looked over the income statements. Once again this was a knowledge recall check point for the last two elements of the equation, Revenue and Expenses. I found this fairly easy to read.

Of all the financial statements in the annual report then one that troubled me most was probably the Consolidated Statement of Changes in Equity. There are a lot of numbers and unfamiliar terminology used on this report. I could make sense of the total equity and most of the elements. I could see that the total from the previous financial year equalled the value for the new financial year. I’m having trouble understanding the big box labelled reserves although the more I read his statements the more comfortable I get with understanding it.

FINAL THOUGHTS

XTEP International Holdings Limited is a strong brand within the professional sportswear market. This can be seen from the year on year results and market presence. They are well placed to continue to support the growth of professional sports in China. The group appear to operate largely within China and a challenge i see for them in the future is if the Chinese market slows down, how do the react to this change and maintain a profitable business. Its clear that they are managing this growth risk by playing a role in the progression and growth of sports inside China, however they may have to look at international markets to offsite and market slides. International market may prove default and competition with the likes of Nike, Adidas will be difficult.

For me, I hope I have shown progress in my learnings from my initial posts through to this Assignment and I am looking forward to continuing to learn.

PEER DISCUSSIONS AND BLOGGING

ACCT11059 ACCOUNTING, LEARNING AND ONLNE COMMUNICATION

Although I have been active with the online communications across the different platforms it’s always hard to gauge how much is too much and whether it is enough. I have tried to comment were necessary and follow student blogs. I have found that peer to peer discussion is a valuable tool for learning and something I believe should be encouraged through all units. I’m open to constructive feedback weather good or bad as I believe this is the best way to learn. It also allows the student providing the feedback to learn.

MY TOP THREE BLOGS

I found this part of the assignment interesting and challenging. I am the first to admit that I am not the best at providing feedback. There always that awkward moment when you don’t know how it will be received so I seem to urge on the side of caution and give good feedback. strangely I like when people provide me constructive feedback both good and bad.

Choosing a top three was difficult as there are a lot of good blogs. To make the decision somewhat easier for my top three I used 3 simple selection criteria top three:

1. Presentation and Title – I enjoy reading well-presented blog and a title that grabs my attention.

2. Blogs from students that have commonality with my assigned firm, and

3. Blogs that connect with my personal interests.

Check out my top 3 blog post here Arghhh i just cant decide on my top 3 blogs - there is to many to choose from.

Keira Esler – A University Adventure

Keira’s blog features in my top 3 as I find this blog very well presented and I connect with the detail of the blogs. I remember the notes from Kiera’s notes when she posted on the Blog Link Forum “Looks like we’ll all be learning something new with our blogs” and this really resonated with me. The title of Keira’s blog grabbed my attention ‘A University Adventure’ also resonates with me because I feel we are all on an adventure in this unit.

Top three blog #1 https://keiraesleraccounting.wordpress.com/

Isabella Plautza – Hold the vison, Trust the process

Why did I choose Isabella’s blog in my top three? Isabella was one of the very first students to comment on my page so this gave me confidence

ACCT11059 ACCOUNTING, LEARNING AND ONLNE COMMUNICATION

that my blog was working. I like how Isabella has set out here blog it is easy to navigate and well presented. Like me, Isabella has been assigned a Chinese (Hong Kong) based firm and although they are not within the same industry I am hoping we can collaborate, share our ideas and learn from each other.

Top three blog #2 https://isabellaplautzaccounting.wordpress.com/

Aaron Chambalo – Money Never Sleeps

I was looking for that number three and it appeared when I was reading comments from other students. Aaron had commented on a couple of my blogs so I visited his blog page and found what I was looking for. It was clear that he had similar interests (Investing) to me and I look forward to following his from here on in.

Top three blog #3 https://wallstreetmoneyneversleeps.wordpress.com/

NUMBER ONE BLOG

My number one pick from my top 3 was a last-minute decision. It was disappointing to read the email from Maria regarding the misuse of peer wise as I found peewise to be both enjoyable and a great learning platform. So, when I read Keira’s blog post on peerwise it was something that really made me stop and think about what I had learnt from using peerwise and how I can improve my contributions. Its blogs like this that make you stop and reflect on your own journey.

Check out her peerwise blog post here Keira Esler Peer wise Blog

STEP 4: COMPANY FINANCIAL STATEMENTS

XTEP INTERNATIONAL HOLDINGS LIMITED ANNUAL REPORTS

ANNUAL REPORT 2013

ANNUAL REPORT 2014

ANNUAL REPORT 2015

ANNUAL REPORT 2016

Company Spreadsheet link…to be added.

STEP 5: CHAPTERS 2 & 3 (SECTIONS 3.1 and 3.2) REFLECTIONS

ACCT11059 ACCOUNTING, LEARNING AND ONLNE COMMUNICATION

UNDERSTANDING THE GAME

I have always had a genuine interest in learning how to read financial statements to gain a true understanding of the intrinsic value of a company. Maybe that’s the little investor in me. I have read many books including one written by Warren Buffet named the Warren Buffet way. This book details innovative strategies for using financial statements to understand the intrinsic value of a company. I have also studied material published by the ASX but I felt that I still have not grasped the underlying concepts that define the structure of financial statements.

So, my reaction when I opened the study guide and read the heading ‘Understanding the Game’ was one of excitement. I really felt that this was the chance I had been looking for to capitalise on my knowledge and put the remaining pieces together. What I mean is, learn the underlying fundamentals (Rules) to financial statements and accounting (The Game).

Rules and regulations, enough already! Why is this country governed by so many rules and regulations! There is a rule for everything. Anyway, whinge over! Well as it turns out, in accounting there isn’t. Why? There are too many shades of grey in the world to have a rule everything. However, accountants do have rules they need to follow when preparing financial statements. They are called general accepted accounting principles (GAAP). They ae issued by the Financial Accounting Standards Board (FASB) Although these rules apply to accountants preparing financial statements for external parties, they do not apply to accounting information used inside the firm. It was interesting to note that accountants will often use the GAAP rules when preparing financial statements for use inside a firm to maintain one accounting system. So, does this mean if they choose not to follow GAAP rules then they can make it up as they go? This is concerning that some accountants could possibly manipulate figures. How much does this effect equity investors?

I wasn’t aware of the different terms used to define the different statements that are used within the company and those that are publish outside of the company. I understood that financial statements are common to all party’s weather inside a firm or outside of a firm. I now understand that in simple terms management accounting is accounting information that is shared with in a firm with management and financial accounting is accounting information that can be shared outside of a firm with the likes of equity investors.

I found it interesting reading early on this study guide where if made reference to directors having accounting backgrounds. Whilst reading that the AASB conceptual framework states that ‘management of an entity has

ACCT11059 ACCOUNTING, LEARNING AND ONLNE COMMUNICATION

the primary responsibility for the preparation and presentation of the financial statements of an entity, I straight away thought, I know understand why directors have accounting backgrounds. I can’t image the difficulty one would have putting a financial statement together with no knowledge or experience.

The concept of accrual accounting was something that resonated with me. I have heard this concept been thrown around a lot in my workplace, almost like a buzz word. Whenever I here this world being used I often ask myself, do these people really know what they are talking about? You know there are just people who can talk the talk! But did I really understand accrual accounting? Although I had heard it many times before I didn’t really have good an understanding of meaning of accrual accounting. If there is one thing I have learnt in this unit to date, is that it will continue throw challenges at you and question your knowledge. After reading Martins examples of accrual accounting I understand it to be a firm can sell a product today but not receive the payment for some time due to trading terms and this income is accrued.

INTRODUCING FINANCIAL STATEMENTS

As I turned to chapter 3 I was really hoping to be done with the rules and regulations, although very important and start to get on with learning about financial statements.

I was familiar with simple balance statements however I wasn’t aware there were actually four general purpose financial statements nor the alternate names for the statements. I had seen on annual reports the title Consolidated Statements of Financial Position but wasn’t aware that this was an alternate name for Balance Sheet. Likewise, the Consolidated Statement of Financial Performance is also known as Income Statements, another learning opportunity.

Martin talks a lot about ‘understanding’ something and making a connection to our own lives and prior knowledge. For me this was very powerful, as I felt when I completed my own company financial statements for this unit there was moment where I could connect all my prior knowledge with what I had learnt to date and all of a sudden things started to make sense.

The quote by Richard Loth “The financial highlights offered at the beginning of the report tends to focus on what they (the company) want you to see – but that’s just an appetizer. The second course – the big plate of meat and potatoes – is the financial statements” was on point for my firm’s annual reports. The highlights were full of impressively big numbers

ACCT11059 ACCOUNTING, LEARNING AND ONLNE COMMUNICATION

that caught my attention but I knew I had to get into the financial statements to make sense of these highlights.

I enjoyed the section on balance sheets as I found it closed a couple of gaps for me. The one thing that got me was the date. I understood the balance sheet to be a snapshot of the company at a given point in time. But was it just a date that the group picked to show the value of the company at that chosen point? My company is Hong Kong based and their financial statements states the 31 December. I did some digging and identified this is the end of financial year date in the PRC – Peoples Republic of China. Well that makes sense! I also found when reading this section that I could now see the elements of the accounting equation, that being assets, liabilities and equity and with the use of referencing my own company’s balance sheet I could how they are represented. I do make a lot of references to my own company’s financial statements as this is how I learn best.

I enjoyed the section on income statements and Martins explanation. Whilst reading my company’s annual report I noticed two types of income statements, one called Consolidated Income Statement and the other was called Consolidate Statement of Comprehensive Income. Which one do I use? I could see the revenue and expenses and it all started to make sense. In the previous section we covered the 3 main accounts of the balance sheet being asset, liabilities and equity. Now reading about the income statement accounts of revenue and expenses I could see the extended accounting equation come to life, Assets = Equity + (Revenue – Expenses) + Liabilities.

Moving onto the Consolidated Statement of Changes in Equity. This was the most challenging to understand and I wonder now if I really do understand what this information is telling me. I could see and relate to items such as total comprehensive income and dividends paid and I continue to ask myself if I was an investor or potential investor, would I pay more attention to this statement. But still do I really understand what the purpose of this statement is? Maybe I am overthinking this or maybe there is more to this statement than my current understanding?

The final statement to read was the Cash flow is cash flow. Cash is king, I think Martin hit the nail on the head with his explanation about cash flow and regardless of the amount of assets held by a company, the moment you the company runs out of cash there is trouble, deep trouble, and the company can no longer operate. So how can the company increase cash flow? In the face of low to no business activity, they could possibly seel of assets to generate cash. I can relate to this as a close friend was in this

ACCT11059 ACCOUNTING, LEARNING AND ONLNE COMMUNICATION

situation. A multimillion dollar contracting firm riding the resource construction boom and when he seen a number on his cash flow statement that wasn’t right. This followed a meeting with the accountant and transposed into a reduction of about 500 employees, multiple asset sell-offs and restructures and luckily, he was able to save the company.

Interesting to note the trust relationship in business can be viewed through the financial statements. The relationship exists between the firm and its equity owners and the balance sheet is the statement that represents this relationship at a single point in time. It clearly shows the that everything the firm does has two effects: one of its owner (equity) and the other on itself (Assets and Liabilities). I could see this relationship clearly on my company’s balance sheet.

It’s a feel-good moment when you actually know what you are looking at and you can make sense of what the numbers mean. Well I won’t get to far ahead of myself yet but these two chapters have been very encouraging and I can now say that I actually understand it – well the basics that is. None the less it’s still encouraging.

To close out chapter 2 and 3.1 and 3.2. The quote from The Rules of the Game movie “if you are going to play the game than you better know the rules, cos one day you’ll need ‘em to save you”. What this means to me is if I’m going to pass this unit and go onto to be a successful accountant then I need to not just understand the rules but embrace them and never let them go.

STEP 6: FEEDBACK FOR DRAFT ASSIGNMENT #1

To do..