The Importance Of Accounting Concepts: A Case Study On Woolworths Limited Essay.

Accounting concepts are necessary for determining the ethical factors within the company’s financial statements. Moreover, the general purpose of financial statements would need to be maintained by providing necessary information through the annual statements (Zimmerman and Yahya-Zadeh, 2011, p.259).

In this study, ASX 100 listed company Woolworths Limited has been chosen and the necessary accounting issues have been discussed based on the financial statements of the company. Moreover, the concept of accounting theories have been related with the accounting issues of the chosen company. All the discussed issues have stated the consolidated and extended knowledge of components of company’s financial statements. That means the overall contribution of this study has stated the necessity of accounting standards and theoretical concepts for preparation of accounting statements for the year ended.

Background of the organisation: 

The chosen company Woolworths Limited is a public listed company based on Australia. The company has provided several ranges of products and services for meeting customer expectation.

The company has spread their business in New Zealand and India also. It has been evaluated that the company has reduction values in their revenue level, operating income and net profit level during the financial year 2016. However, the company has increased their employee strength more than 200000 by the end of 2011. The company basically focuses on the range of food products through their retail stores. However, the company has no affiliation form the US Company F.W Woolworth. That means the company has its own market strength in national and international level (Woolworths.com, 2016).

 the financial year 2006, the company has executed several activities for increasing their business in international market. Due to reducing the intermediary option for sourcing the company has opened an office in Hong Kong. Along with this, the company has been announced a venture with Tata Group in India, which was necessary for introducing a subsidiary company Dick Smith Electronics in India.

The company was incorporated on December 5^th in 1924.The company is doing business in Australian and New Zealand in retail sector and is second largest company of earning revenue in Retail Sector. The company has segments of business operations in Australia –Food and Petrol, hotels, Endeavour Drinks Groups and BIGW and in New Zealand it has supermarkets. The goal of the company is the customer is supreme and in all the brands and in all situations customer comes first. The company has mainly customer focus strategy. The company is working with an aim for increasing shareholder’s funds by enhancing the shareholders value. Board of Directors govern the company and also the managing director and Chief Executive officers is selected by the shareholders of the company (Official Website of Woolworth Limited)

1924: Woolworths begins

We opened our doors for business on Friday, 5 December 1924.

On Friday, 5 December 1924, Woolworths Stupendous Bargain Basement opened for business in Sydney's Imperial Arcade.  

Percy Christmas, Founding CEO said of the event: ‘Every city needs a Woolworths: Sydney has it now. Every man, woman and child needs a handy place where good things are cheap.’

Little did he know, that more than 92 years later, these words would still form the basis of our team philosophy and values.

The Financial Statements of the company the summarization of the financial transactions of the company for the particular year showing true and fair view of the company affairs. The financial statement consists of:

1. Consolidated Income Statement – This statement comprises all the sources of revenue and expenses during the particular period showing the financial progress of the company. The major point in company profit & loss account are:

• Continuing Operations revenue has been decline by 1.23% from previous year of $ 59,001.3 million in 2015 to $ 58,275.5 in 2016 in million.
• Main Operating Expenses consists of Brach and Administrative Expenses of $ 14,271.1 million in 2016 which shows the hike in expenses in comparison to $ 12,770.6 million in 2015.
• The cost of Financing has been reduced from $ 253.3 million in 2015 to $ 245.6 million in 2016.
• The company has earned a profit from continuing business operations of $ 840.1 million in 2016 as compared to $ 2,300.8 million in 2015.
• There was a huge loss after tax from discontinued operations for the company in 2016 of $ 2,347.9 million making negative returns to the shareholders value.  (Anastasia, 2015)

1. Comprehensive Income: -The losses and gain which cannot be the part of profit & loss account are part of Other Comprehensive Income. These are unrealized loss and gain on underlying investment of company of foreign exchange difference.

1. Consolidated Balance Sheet: - This statement shows the financial position of the company on a particular date. The following are key points:

• Current Assets consist of Cash and Cash Equivalents of $ 948.1 Million, Accounts Receivable of $ 763.9 million, Inventories of $ 4558.5 million, other Financial Assets of $ 56 million and Assets held of sale of $ 1100.5 million in 2016 which makes total of $ 7427.0 million.
• Current Liabilities are of $ 8992.7 million which consist of Trade Payable of $ 6266.1 million, Borrowings of $ 490.7 million, Tax liabilities of $ 39.5 million, Financial Liabilities of $ 120.3 million, Provisions of $ 1873.5 million and liabilities of assets of $ 202.6 million.
• The totals of Current Assets are lower than Current Liabilities for both year 2015 & 2016. The Working Capital for the company is $ -1565.70 million in 2016 as compared to $ - 1507.70 million in 2015 showing that the company does not sufficient short term funds to pay of its short term obligations.(Appendix)
• Non Current Provisions have been increased in current drastically from $ 599.4 million to $ 1382. 4 million and on the other side current provisions are increased from $ 1079.9 million in 2015 to 1873.5 million in 2016.

2016. Consolidated Cash Flows: - This statement shows the flow of cash both inflow and outflow for the year 2016. The main point are :

• Cash generated from the operations is decreased from $ 3345.1 million in 2015 to $ 2357.5 million.
• Cash which used in Investment made has upward movement from $ - 1333.90 million to $ - 1266.7 million showing less investment made during year 2016.
• Cash used in Financing the business also ahs upward movement from $ -1610.8 million in 2015 to $ 1474.9 million in 2016.
• There is net decrease in cash and cash equivalent of $ -384.1 million in 2016 in comparison to net increase in 2015 of $ 400.4 million.

1. Changes in Equity Statement:-This shows that the capital equity may consists of Paid up and Issued Capital, Reserves, Retained Earnings, Other Reserves and shares which has been issued to Non-Controlling interest. (FGL,2013)

The different accounting ratio as calculated in Appendix has been discussed in details as follows:

• Current Ratio which indicates the relationship between current assets and current liabilities is 0.83:1 in 2016 as compared to 0.84:1 in 2015 showing that the company does not have sufficient short term funds to pay of its short term obligation but the company is maintaining the similar relation in both years.
• Quick Ratio also known as Acid Test Ratio was 0.32:1 in 2016 in comparison to 0.30:1 in 2015 showing that inventory level maintained is same as of previous year. The company has not decrease the carrying and holding cost of inventory in spite of decrease in revenue.
• Inventory Turnover Ratio is 9.36 times in 2016 as compared to 8.82 times in 2015 when calculated on Closing Inventory showing that the company’s operating cycle is consistent. It also depicted from days sales in inventory which 39 days in 2016 correspond to 41.38 days in 2015.
• Debt to Equity Ratio is increased in 2016 from 0.44:1 to 0.28:1 in 2015 showing that more long term borrowings are taken and more financial leverage in the company in spite decrease in company’s revenue.
• Equity ratio shows the total assets which are available for shareholders at a particular date. It is 0.37:1 in 2016 in relation to 0.44:1 in 2015 showing that the assets for shareholders funds are less than the amount invested by them.
• Earnings per share that is also known as Share Ratio is negative $ -97.7 per share in 2016 as $ 170.8 in 2015 showing that the shareholders value are decreasing in 2016. In spite of this fact the company has paid dividend from retained earnings in 2016 of $ 93.7 per share to maintain shareholders reliance.
• Effect of Business on Share Price – Since the company is earning huge losses in 2016, share price can effect negatively but the past performance and dividend paid from retained earnings reduces the impact of decrease in Share price.( Lan , 2012)

From the above ratio analysis, evaluation of the various aspects of company’s performance in relation to its operations and financial matters can be ascertained on that basis liquidity, solvency and other position is judged. (Bajkowski , 1999).

Road map is necessary for any of the job and in case of business accounting theories and accounting approaches are the key road map for doing analysis of any of the business. Accounting theories and accounting approaches are defined in the conceptual Framework of Accounting which the company follows in the preparation and presentation of the financial statements to show them free from material misstatements also called Faithful Representation.

These statements are then reliable and relevant for the internal and external users of the accounting (Capital Markets Advisory Committee Meeting, 2013).They may also help in proper recognition of income and expenses and adequate measurement of assets and liabilities in particular period under reporting. The approaches to Accounting theories are Practical and Theoretical. Most common accounting approaches are Normative Accounting Theory and Positive Accounting Theory which are used by business along with Conceptual Framework to represent its Financial Statement with Prudence.

Following are main parameters which show how the company under consideration that is Woolworths Limited is applying the approaches to accounting theories along with Conceptual framework which has been laid by Australian Government:

• Inventories - These are managed with consistency policy of accounting by company. The valuation principles used is Cost or Net value which may be realized on sale of inventory which is lower. Out of the total inventory of $ 4558.50 million, the inventory which is value at net market price is 447.80 million in 2016.(Zion, 2005)
• Accounts Receivables – The company has receivables period of 30days and they are recognized at reasonable value which calculated by deducting impairment provision from book value. The company has made impairment provision of $ 10.6 million in 2016 on $ 135.4 of account receivables.
• Intangibles- The intangibles consist of Goodwill, Brands, Gaming and Liquor License and other which are amounting to $ 5978.3 million in 2016 balance sheet. Goodwill is valued on the difference of the acquisition cost and net fair value of shares acquired. Other intangibles are valued at carrying cost minus impairment loss or fair value on acquisition. Estimate has been made for impairing the intangibles on straight line method.
• Remuneration Report- Corporation Act, 2001 mandates the board of directors of every company in Australia give remuneration report along with the director’s report. It lays down Remuneration framework and list of executives of the company which has responsibility for directions, control, plans the business operations. The remuneration is paid in two parts that is fixed consist of normal salary and variable salary that sales incentives. Higher the sales higher will be the salary of key managerial personnel and this can create the fear of manipulation in minds of personnel to enhance the revenue in order to get high pay.
• Property, Plant & Equipment- the Company is showing $ 8262.8 million as value of Property, Plant & Equipment at the end of 2016 which compromise of Freeholder Land and properties, Leasehold Improvements, Plant & Equipment and Development Properties. They are valued at carrying amount less accumulated depreciation on them. Depreciation is calculated on individual assets on straight line basis on the basis of estimated life. Any gain and loss on sale of assets are shown in Consolidated Profit & Loss Account.

From the above parameters, we can clearly have a look how the different approaches of accounting theories are complied in accordance with Conceptual Framework as defined in Australian Accounting Generally accepted Principles along with prudence policy.(IASB,2010)

It is recommended from study, Woolworths Limited as the company is major business player in Australia and have a very Customer, Employee base with high Goodwill in Market. The Company’s Financial Statements are one of the best examples for viewing all the parameters related to Accounting theory and Conceptual Framework compliance. The Financial Analysis shows that the company is running into hard period but the policies adopted and customer equated by the company tells its success story from its birth.

Conclusion 

Woolworths Limited being second largest company in Australia has earned losses in the current year due to one of the discontinued operations in comparison to profits from continuing operations, The large volume and past goodwill which has created by the company helps the company in future growth . In order to conclude, the company is following all the applicable rules, regulation and statutes in the preparation and presentation of financial statements in accordance with Conceptual Framework of Accounting in line with Prudence policy to show its Financial Statement free from errors and frauds.

References

Bajkowski J, (1999), “Financial Accounting Ratios: Putting the Numbers to Work”, AAII Journal, August 1999 issue, Pages 1-7.

an J., (2012), “16 Financial Ratios for Analysing a Company’s Strengths and Weaknesses”, AAII Journal, September 2012 issue available on https://www.aaii.com/journal/article/16-financial-ratios-for-analyzing-a-companys-strengths-and-weaknesses.touch      accessed on 09/05/2017.

Woolworths Limited official website available on https://www.woolworthslimited.com.au/page/Invest_In_Us/Reports/Reports/ accessed on 09/05/2017.

FGL,(2013),“Accounting Ratios” available on https://frostgroup.co.uk/articles/2013/accounting-ratios    accessed on 09/05/2017.

Zions Bank Official Website,(2005) “How to Analyse your business using Financial Ratios”, available on https://www.zionsbank.com/pdfs/biz_resources_book-6.pdf      Accessed on 09/05/2017.

International Accounting Standards Board, (2010), “Conceptual Framework for Financial Reporting 2010” , pages 16-21

Anastasia, (2015), “Financial Statement Analysis: An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/   accessed on 09/05/2017

Capital Markets Advisory Committee Meeting, (2013), “Conceptual Framework” available on https://www.ifrs.org/Meetings/MeetingDocs/Other%20Meeting/2013/March/AP%203%20conceptual%20framework.pdf  accessed on 09/05/2017.