Air Canada Internal Control Essay
Abstract
After reading this paper you will be able to:
Know about Air Canada briefly.
Account for the initial valuation of capital assets, costs subsequent to acquisition, and the deposals of capital assets with reference to Air Canada.
Define cash and accounts receivables and explain the recognition and valuation of receivables.
Identify and compare depreciation methods.
Table of Content
Introduction
Task 1: Internal Control and Cash
Task 2: Receivables
Task 3: Noncurrent Assets
Task 4: Recommendations
Conclusion
References
Introduction
Air Canada is counter as Canada’s flag carrier. It is Canada’s largest international, domestic and US transborder airline. It is also the largest supplier of scheduled passenger services in …show more content…
the transboreder market, the US-Canada market, the Canadian market and in the international market from and to Canada. Air Canada carried 35.8 million passengers in 2013.
Air Canada was founded in 1936 and it provides services to over 178 destinations worldwide. Air Canada is the founding member of Star Alliance and it counts as the world’s seventh largest airline by fleet size, with a fleet of 170 aircrafts of different types. Since Air Canada is a part of the Star Alliance, then it can provide services to approximately 1,328 destinations in around 195 different countries.
Air Canada has subsidiaries, which help it generate revenue like Air Canada Cargo. Air Canada Cargo provides cargo services to over 150 international destinations as well as Canadian and US transborder destinations.
The Air Canada group positions itself in a highly competitive leisure market, with a competitive cost structure and a strong value proposition.
I am going to analyze the liquidity and internal controls in Air Canada for the year 2013, using their annual financial report of the year 2013. I will analyze their non current assets and workout the asset turnover. I will also give some recommendations to the airline in order to tighten their internal control and improve their liquidity.
Task 1: Internal Control and Cash
“We have audited the accompanying consolidated financial statements of Air Canada and its subsidiaries, which comprise the consolidated statement of financial position as at December 31, 2013, December 31, 2012 and January 1, 2012 and the consolidated statement of operations, statement of comprehensive income, statement of changes in equity and statement of cash flow for the years ended December 31, 2013 and December 31, 2012, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.”
Above mentioned is part of Air Canada’s auditors statement.
The main purpose of an audit is usually to offer assurance to the people who use the financial statements that these given financial statements are accurate and reliable. Opinions aren’t expressed on the client’s accounting records. Observation of tangible assets and the inspection of documents such as contracts and purchase orders, and gathering evidence from outsiders including customers, suppliers and banks, as well as analysis of the accounting records for the client.
After being done with analyzing the audit, we move on to talking about the internal controls used by Air Canada. The system of internal control is used by Air Canada to provide reasonable assurance that all the information provided is identified to the CEO and President, as well as the CFO and Vice president to make sure timely and appropriate are made regarding public disclosure. The management designed these internal controls over financial reporting, with the participating and under the supervision of Air Canada’s CEO and CFO to give sensible assurance regarding the reliability of Air Canada’s financial reports and its preparation of their different financial statements.
I presume that Air Canada uses three different types of internal control:
•Segregation of the duties: Splitting the duties among different employees, with a vision of minimizing the risk of getting an error.
•Physical controls: Ensuring that all of the physical assets are safeguarded. May even include the period checks.
•Analytical reviews: Comparing the actual data with the forecasts and even the competitors.
When analyzing Air Canada’s cash balance, we should look at the Statement of financial position. The Air Canada statement of financial position dated December 31st, 2013, shows a decrease in the cash and cash equivalents by 4 million dollars. The cash and cash equivalents have dropped from $754 million in December 31st 2012 to $750 million in December 31st 2013. Cash and cash equivalents include $186 pertaining to investments with original maturities of less than three months or three months exactly at 31st of December 2013. These investments include banker’s discount notes and banker’s investments, which may be liquidated promptly and have original maturities of three months or less.
After being done with the analyzing of the cash balance and the cash equivalents, we move on to evaluate the working capital cycle, which is defined as the time it takes a company to turn the current liabilities and the net current assets into cash.
Stock turnover:
Avg stockCOS×365 1437,396×365= 7 days.Debtors/Receivables turnover: receivablessales×365 58912,382×365= 17 days and 3hours
Creditors turnover: payablespurchases×365 1,1297,396×365=55days and 7hoursWorking capital cycle:
= stock + debtors – creditors
= 136 + 589 – 1,129
= -404.
Air Canada’s working cycle is negative which means that Air Canada has higher working Liabilities when compared with its Current Assets. It also means that Air Canada is able to presell it’s products yet get a decent credit from it’s suppliers.
Task 2: Receivables
Air Canada’s accounts receivables are about $589 million. Receivables and loans count as non-derivative financial assets that are with fixed or determinable payments that have not been quoted in the active market. Air Canada assesses if there is objective evidence that a group of financial assets or one of them is impaired, it does that at the end of each reporting period. Aircraft deposits and other related ones are counted as receivables and loans and are measured at repaid cost using the effective interest rate method. Accounts receivables are also considered as receivables and loans and are measured using the same way as aircraft deposits. For receivables and loans, the amount of the loss is measured as the difference between the asset’s carrying value and the present value of estimated future cash flow.
The receivables turnover: receivablessales×365 58912,382×365= 17 days and 3hoursAir Canada has a high receivable turnover ratio, which means that Air Canada operates and works on a cash basis or that its extension of credit and collection of accounts receivable is quite efficient.
Task 3: non- Current Assets
In Air Canada, non-current assets are categorized as assets held for sale when their carrying amount is to be regained principally by a sale transaction and a sale is counted highly probable. They are stated at the lower of carrying amount and fair value less costs to sell. There are currently no assets held for sale. The non-current assets for Air Canada for the year 2013 are $494 million.
Tangible noncurrent assets:
In Air Canada, the noncurrent tangible assets are Property/Plant/Equipment, which are worth $7,138 million.
Intangible noncurrent assets:
Where as the intangible assets are Goodwill, which is worth $311 million and the recognition and measurement of other intangibles which is worth $304 million.
Asset turnover ratio:
SalesTotal assets 12,3829,470=1.3% Depreciation
In 2013, the depreciation, amortization and impairment expense of $578 million decrease$91 million or bout 14% from 2012. Air Canada makes estimates about the expected useful lives of long-lived assets and the expected residual values of the assets based on the estimated current fair value of the assets, Air Canada’s fleet plans and the cash flows they generate. Modifications to these estimations, which can be major, could be caused by a variety of reasons, including changes in fuel jet prices, changes to maintenance programs, and other operating costs, and changing market prices for new and used aircraft of the same or similar types, and changes in utilization of the aircraft. Assumptions and Estimations are evaluated at least annually. Generally, these changes are accounted for on a prospective basis, through depreciation and amortization expense. For the purposes of sensitivity analysis on these estimates, a 50% reduction to residual values on aircraft with remaining useful lives greater than five years results in an increase of $22 million to annual depreciation expense. For aircraft with shorter remaining useful lives, the residual values are not expected to change significantly. The depreciation of assets such as trucks, furnishing, buildings, equipment, etc. causes a corporation 's net income, asset amounts, and stockholders ' equity to decrease.
Air Canada uses the straight-line method when it comes to the depreciation of its property and equipment. Air Canada mentions that Airframe and engines are depreciated over 20-25 years, with 10% to 20% estimated residual values. Whereas Cabin Interior equipment is depreciated over the lesser of five years or the remaining useful of the aircraft. Air Canada also mentions that Leasehold Improvements are amortized over the lesser of the lease term or 5 years.
Task 4: Recommendations
There are a number of recommendations that can be made in order to improve Air Canada and in order to maintain its good image that makes it stand out between other Canadian airlines. Some of these recommendations can be connected to internal control. If Air Canada decides to monitor all its employees and all the people working for it, then it will be able to figure out if all the employees are doing their work like they are supposed to and whether they are doing illegal work that they are not supposed to be doing. Another method is conduct a department that takes care of the employees and their needs in order to maintain their satisfaction which will lead to better work and job efficiency.
It is also known that noncurrent assets are long term investments, which is why Air Canada should think more thoroughly about where and I what they make their investments in order to make more money and in order to be safe from wasting any money on noncurrent assets that will not be of any use for them.
This will help air Canada in increasing their profits.
Conclusion
I would like to conclude this research paper by saying that Air Canada is doing an extraordinary job by controlling I’s internal controls and by keeping track of all the transactions that take not only in Air Canada but all the subsidiaries as well. I think that Air Canada should stay on the same track but with a little bit of changes, which they can use from the recommendations section that is mentioned above.
Air Canada’s development in financial accounting shows that they are a company that keeps looking forward and shows why they are the leading Airline in Canada and in the American region.
References.
http://www.google.com/finance?q=TSE:AC.B&fstype=iihttp://www.ccdconsultants.com/documentation/financial-ratios/receivables-turnover-ratio-interpretation.htmlhttp://www.investopedia.com/terms/r/receivableturnoverratio.asphttp://www.fitchlearning.com/uk/technical-finance-training/tangible-and-intangible-non-current-assetshttp://www.investopedia.com/terms/a/assetturnover.asp
After reading this paper you will be able to:
Know about Air Canada briefly.
Account for the initial valuation of capital assets, costs subsequent to acquisition, and the deposals of capital assets with reference to Air Canada.
Define cash and accounts receivables and explain the recognition and valuation of receivables.
Identify and compare depreciation methods.
Table of Content
Introduction
Task 1: Internal Control and Cash
Task 2: Receivables
Task 3: Noncurrent Assets
Task 4: Recommendations
Conclusion
References
Introduction
Air Canada is counter as Canada’s flag carrier. It is Canada’s largest international, domestic and US transborder airline. It is also the largest supplier of scheduled passenger services in …show more content…
the transboreder market, the US-Canada market, the Canadian market and in the international market from and to Canada. Air Canada carried 35.8 million passengers in 2013.
Air Canada was founded in 1936 and it provides services to over 178 destinations worldwide. Air Canada is the founding member of Star Alliance and it counts as the world’s seventh largest airline by fleet size, with a fleet of 170 aircrafts of different types. Since Air Canada is a part of the Star Alliance, then it can provide services to approximately 1,328 destinations in around 195 different countries.
Air Canada has subsidiaries, which help it generate revenue like Air Canada Cargo. Air Canada Cargo provides cargo services to over 150 international destinations as well as Canadian and US transborder destinations.
The Air Canada group positions itself in a highly competitive leisure market, with a competitive cost structure and a strong value proposition.
I am going to analyze the liquidity and internal controls in Air Canada for the year 2013, using their annual financial report of the year 2013. I will analyze their non current assets and workout the asset turnover. I will also give some recommendations to the airline in order to tighten their internal control and improve their liquidity.
Task 1: Internal Control and Cash
“We have audited the accompanying consolidated financial statements of Air Canada and its subsidiaries, which comprise the consolidated statement of financial position as at December 31, 2013, December 31, 2012 and January 1, 2012 and the consolidated statement of operations, statement of comprehensive income, statement of changes in equity and statement of cash flow for the years ended December 31, 2013 and December 31, 2012, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.”
Above mentioned is part of Air Canada’s auditors statement.
The main purpose of an audit is usually to offer assurance to the people who use the financial statements that these given financial statements are accurate and reliable. Opinions aren’t expressed on the client’s accounting records. Observation of tangible assets and the inspection of documents such as contracts and purchase orders, and gathering evidence from outsiders including customers, suppliers and banks, as well as analysis of the accounting records for the client.
After being done with analyzing the audit, we move on to talking about the internal controls used by Air Canada. The system of internal control is used by Air Canada to provide reasonable assurance that all the information provided is identified to the CEO and President, as well as the CFO and Vice president to make sure timely and appropriate are made regarding public disclosure. The management designed these internal controls over financial reporting, with the participating and under the supervision of Air Canada’s CEO and CFO to give sensible assurance regarding the reliability of Air Canada’s financial reports and its preparation of their different financial statements.
I presume that Air Canada uses three different types of internal control:
•Segregation of the duties: Splitting the duties among different employees, with a vision of minimizing the risk of getting an error.
•Physical controls: Ensuring that all of the physical assets are safeguarded. May even include the period checks.
•Analytical reviews: Comparing the actual data with the forecasts and even the competitors.
When analyzing Air Canada’s cash balance, we should look at the Statement of financial position. The Air Canada statement of financial position dated December 31st, 2013, shows a decrease in the cash and cash equivalents by 4 million dollars. The cash and cash equivalents have dropped from $754 million in December 31st 2012 to $750 million in December 31st 2013. Cash and cash equivalents include $186 pertaining to investments with original maturities of less than three months or three months exactly at 31st of December 2013. These investments include banker’s discount notes and banker’s investments, which may be liquidated promptly and have original maturities of three months or less.
After being done with the analyzing of the cash balance and the cash equivalents, we move on to evaluate the working capital cycle, which is defined as the time it takes a company to turn the current liabilities and the net current assets into cash.
Stock turnover:
Avg stockCOS×365 1437,396×365= 7 days.Debtors/Receivables turnover: receivablessales×365 58912,382×365= 17 days and 3hours
Creditors turnover: payablespurchases×365 1,1297,396×365=55days and 7hoursWorking capital cycle:
= stock + debtors – creditors
= 136 + 589 – 1,129
= -404.
Air Canada’s working cycle is negative which means that Air Canada has higher working Liabilities when compared with its Current Assets. It also means that Air Canada is able to presell it’s products yet get a decent credit from it’s suppliers.
Task 2: Receivables
Air Canada’s accounts receivables are about $589 million. Receivables and loans count as non-derivative financial assets that are with fixed or determinable payments that have not been quoted in the active market. Air Canada assesses if there is objective evidence that a group of financial assets or one of them is impaired, it does that at the end of each reporting period. Aircraft deposits and other related ones are counted as receivables and loans and are measured at repaid cost using the effective interest rate method. Accounts receivables are also considered as receivables and loans and are measured using the same way as aircraft deposits. For receivables and loans, the amount of the loss is measured as the difference between the asset’s carrying value and the present value of estimated future cash flow.
The receivables turnover: receivablessales×365 58912,382×365= 17 days and 3hoursAir Canada has a high receivable turnover ratio, which means that Air Canada operates and works on a cash basis or that its extension of credit and collection of accounts receivable is quite efficient.
Task 3: non- Current Assets
In Air Canada, non-current assets are categorized as assets held for sale when their carrying amount is to be regained principally by a sale transaction and a sale is counted highly probable. They are stated at the lower of carrying amount and fair value less costs to sell. There are currently no assets held for sale. The non-current assets for Air Canada for the year 2013 are $494 million.
Tangible noncurrent assets:
In Air Canada, the noncurrent tangible assets are Property/Plant/Equipment, which are worth $7,138 million.
Intangible noncurrent assets:
Where as the intangible assets are Goodwill, which is worth $311 million and the recognition and measurement of other intangibles which is worth $304 million.
Asset turnover ratio:
SalesTotal assets 12,3829,470=1.3% Depreciation
In 2013, the depreciation, amortization and impairment expense of $578 million decrease$91 million or bout 14% from 2012. Air Canada makes estimates about the expected useful lives of long-lived assets and the expected residual values of the assets based on the estimated current fair value of the assets, Air Canada’s fleet plans and the cash flows they generate. Modifications to these estimations, which can be major, could be caused by a variety of reasons, including changes in fuel jet prices, changes to maintenance programs, and other operating costs, and changing market prices for new and used aircraft of the same or similar types, and changes in utilization of the aircraft. Assumptions and Estimations are evaluated at least annually. Generally, these changes are accounted for on a prospective basis, through depreciation and amortization expense. For the purposes of sensitivity analysis on these estimates, a 50% reduction to residual values on aircraft with remaining useful lives greater than five years results in an increase of $22 million to annual depreciation expense. For aircraft with shorter remaining useful lives, the residual values are not expected to change significantly. The depreciation of assets such as trucks, furnishing, buildings, equipment, etc. causes a corporation 's net income, asset amounts, and stockholders ' equity to decrease.
Air Canada uses the straight-line method when it comes to the depreciation of its property and equipment. Air Canada mentions that Airframe and engines are depreciated over 20-25 years, with 10% to 20% estimated residual values. Whereas Cabin Interior equipment is depreciated over the lesser of five years or the remaining useful of the aircraft. Air Canada also mentions that Leasehold Improvements are amortized over the lesser of the lease term or 5 years.
Task 4: Recommendations
There are a number of recommendations that can be made in order to improve Air Canada and in order to maintain its good image that makes it stand out between other Canadian airlines. Some of these recommendations can be connected to internal control. If Air Canada decides to monitor all its employees and all the people working for it, then it will be able to figure out if all the employees are doing their work like they are supposed to and whether they are doing illegal work that they are not supposed to be doing. Another method is conduct a department that takes care of the employees and their needs in order to maintain their satisfaction which will lead to better work and job efficiency.
It is also known that noncurrent assets are long term investments, which is why Air Canada should think more thoroughly about where and I what they make their investments in order to make more money and in order to be safe from wasting any money on noncurrent assets that will not be of any use for them.
This will help air Canada in increasing their profits.
Conclusion
I would like to conclude this research paper by saying that Air Canada is doing an extraordinary job by controlling I’s internal controls and by keeping track of all the transactions that take not only in Air Canada but all the subsidiaries as well. I think that Air Canada should stay on the same track but with a little bit of changes, which they can use from the recommendations section that is mentioned above.
Air Canada’s development in financial accounting shows that they are a company that keeps looking forward and shows why they are the leading Airline in Canada and in the American region.
References.
http://www.google.com/finance?q=TSE:AC.B&fstype=iihttp://www.ccdconsultants.com/documentation/financial-ratios/receivables-turnover-ratio-interpretation.htmlhttp://www.investopedia.com/terms/r/receivableturnoverratio.asphttp://www.fitchlearning.com/uk/technical-finance-training/tangible-and-intangible-non-current-assetshttp://www.investopedia.com/terms/a/assetturnover.asp