Accounting Theory: Small Renter Premises Essay

Question:

Describe about the Accounting Theory for Small Renter Premises.

Answer:

It was in 1968 that a small rented premises in a car park in the Sydney suburb of Neutral Bay with a total capital of only AU$610, a new business was started. Initially, the business focused on installing and servicing car radios. The business began to grow and in 1969, it began moving to bigger premises. Dick opened ‘Dick Smith Wholesale’ along with the car radio business. One after another they kept spreading their wings. The collapse of Dick Smith was a remarkable example in the history of retail sales business. Apart from other issues, there were various accounting issues which led to the collapse. The business which Dick Smith was into was highly volatile and competitive. It dealt in consumer electronics, which have very short shelf life. Consumer electronics include gadgets such as personal computers, laptops, IPods, televisions, sound systems, mobile phones and the like.

The business of disposable consumer electronics is highly volatile and competitive. Low profit margins and dangerously less shelf life of the electronics are some of the key characteristics of this business (Dicksmith, 2015). However, the kind of scale at which they were operating, in order to maintain a variety range of products, they kept on piling inventories and thus, they ultimately carried huge inventories which were worth less, than that, at which they could sell it off (Chung, 2016). Another accounting method which Dick Smith adopted was to use the rebates and discounts offered by suppliers to over inflate their sales figures rather than using those rebates to offer discounts to customers and clearing the stocks.

They did this with the intention of fabricating their cash flows. But given the low profit margins and high competition and ever piling stocks, the rebate- sales figure was also unable to help Dick Smith maintain the sustainable business that was needed for its survival. Whatever little profits Dick Smith was making initially was all reapplied for reckless expansion of its businesses (Chung, 2016). And thus, the business ate up all surpluses and the company was only over hauled with unsalable stocks.
A stakeholder is any person or group of persons who get affected by the activities of a company. Stakeholders can be internal as well as external. Internal stakeholders are those within the entity such as employees, board of directors, managers etc. External stakeholders are they who are directly affected by the performance of the business are outside the entity, such as the creditors, investors, regulators etc (Melville, 2013). For dick smith, there were a number of stakeholders, some of which are employees and staffs, the lenders or creditors to whom the company owes money. The historical staff underpayments kept piling and reached an amount of almost 2.1 million dollars (Chung, 2016). The lenders of dick smith were also not paid in full. They were only given part payment of the money due to them. And the difference was a significant shortfall.


The management of Dick Smith wanted to mint money the easy way. Anchorage Capital Partners purchased dick smith from Woolworths for less than Australian dollar 100 million and floated it on the Australian stock exchange for 534 Australian dollars. This was the gravest mistake that Anchorage Capital Partners had done. They thought this would boost sales and they would be able to raise so much capital and sales. However, the opposite happened. The sales, shares price, good will, all went down. The competitors got an edge over, and made use of the weakness of the then company. The negative cash flows, poor sales, heavy discounts and stock redundancy, all of these were the causes of the fall of dick Smith. The management was over confident and were not visionaries. They had presumed the future of the company but their decisions turned out to be inconsistent and this led to the downfall of the company (Lemke, 2014).
Electronics were very expensive in Australia and dick smith wanted to use this as an opportunity. It started a large scale sales business for electronics. Successful initially but gradually it began facing an issue it hadn’t thought about- redundancy and obsolescence of goods (Lemke, 2014). A short term approach was something that hurt the continuity of the company. Another ideology which the company must have adopted was that it was continuously entering into the debt circle by servicing one debt with another. Inability to pay employees and creditors, its significantly reducing profits and gradually increasing losses are some of the parameters high had rung the alarm. The only focus of the management was to increase the cash flows. However, once the losses were beyond repair, they began to save whatever was left. For two continuous years, they kept on selling their goods at heavy discounts. However the damage had already been done and was not to be recovered in any way. The biggest mistake was to float the company at 5 times its purchase price on a stock exchange (Chung, 2016). The ides to float it at a higher price did not go well with the company and ultimately it faced a problem. The prices of the stocks fell considerably and disgustingly bad financials for the company was the result.

The theory of continuity of business which is the penultimate goal and aim of every organization was missed by dick smith. This does not imply that they wanted the business to shut down. They very much wanted it to continue. What went wrong were their business decisions and actions were inconsistent with the continuity theory. The usefulness theory states that the financial statements should provide information which is useful to the stakeholders and any reader of the financial information (Horngren, 2013). The activities of the company were being recorded in the financial statements and reports of the company. The readers of this information were at the receiving end. It is difficult to believe that the company constantly kept furnishing fabricated statements and that if it did furnish all true information, the stakeholders who had put their money into the business failed to notice the same (William, 2010). So the theory of usefulness of financial information went for a toss. Fabrication of the financial statements was the major problem and it was done to provide a rosy picture to the shareholders. This in tune kept attracting the shareholders and they were of the opinion that the company was performing effectively (Foye, 2016).

The conceptual framework of accounting provides that accounting information should be relevant, reliable, comparable and consistent. Relevance in accounting refers to the quality of information to make a difference to a decision-maker. Reliability means that users of accounting information should be able to count on the accuracy of the information. Standard accounting rules and policies enhances the quality of information (Northington, 2011). Adhering to GAAP each year, following accounting principles and policies and keeping the financial comparable are the pre requisites. Accounting theories operate on four assumptions: the economic entity
assumption, the going concern assumption, the monetary unit assumption and the periodicity assumption (Dicksmith Holding, 2015). These were also expected to be followed by Dick Smith. The very theory which was defined by the company was historical cost and matching principle. The matching principle states that the revenue and expenses should be matching which was far from real for the company.

The failure or the collapse of Dicksmith owes to various factors like the competitive nature of the consumer electronics that leads to changes in the pattern of the consumer demand. The store network was larger and hence a higher cost was seen and moreover, it has a strong reliance on the computer market (Foye, 2016). The market share declined because of the drop in sales and since revenue was linked to growth of the store and commercial sales it recorded low margins. Moreover, the expansion plan needed huge financial commitment and this led to utilization of all cash surplus. This needed bank borrowings. On the other hand, there was huge pile up of stocks that were obsolete and not active in nature needing a write-down (Foye, 2016).

Theory is very different from practice. The theories which needed to be followed were all deviated from real. From not being able to follow matching principles to being able to follow continuity theory, the company was continuously deviating from all. In such a scenario it is difficult to set standards and compare where the very existence of the company became questionable because of the management (Crane & Matten, 2010). There was no link that could be established between theory and practice. The failure of Dicksmith can be cited due to many reasons. The noteworthy among them are inability to get sufficient credit terms that influenced the stock levels, product mix and presentation of the store. Further, the cash flow pressure leads to banking problem that was not remedied. In totality it can be said that there were a string of events that led to a downfall.

References

Chung, F 2016, DICK Smith had too much crap that it couldn’t sell, viewed 31 August 2016

Crane, A., & Matten, D 2010, Business Ethics: Managing Corporate Citizenship and Sustainability in the age of globalization, New York: Oxford University press

Dicksmith 2015, Dicksmith profile. Viewed 31 August 2016

Dicksmith Holding 2015. Dicksmith Holding Annual Report and accounts 2015, viewed 13 August 2016,

Foye, B 2016, Dick Smith collapse: what we know and what we don't, viewed 31 August 2016

Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W.: Pearson Australia Group.

Lemke, L 2014, Regulation of Investment Advisers, Oxford University Press.

Melville, A 2013, International Financial Reporting – A Practical Guide, Pearson, Education Limited, UK

Northington, S 2011, Finance, New York, NY: Ferguson's.

William, L 2010, Practical Financial Management, South-Western College.

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