Financial Accounting Introduction Concepts Essay

Question:

Discuss About The Financial Accounting Introduction Concepts?

Answer:

Introducation

Wesfarmers is the largest retrial company listed on Australian stock exchange that was originated in year 1914. The business operations of organization is diverse that involves hotel and convenience stores, supermarkets, liquor, office supplies, home improvement, energy and fertilizers, chemicals, industrial division in office supplies, coal and safety products. The primary objective of organization is to create wealth for shareholders and provide them with satisfactory return. Openness, accountability, integrity and boldness are the core values of organization. Wesfarmers is the largest private sector employing 220000 employees and has a shareholder base of 530000 (wesfarmers.com.au 2017). The positioning of business would help organization in improving their range, service and value along with growth achievement. Group concentrates on improving operational efficiency and in this regard, the outlook seems to be challenging in short-term. Performance of group has been offset by challenging trade conditions and restructuring activities of one of its group that is Target. Wesfarmers have continued to deliver long-term growth and improved return to shareholders by continuing making investment in customer value, service, online stores and merchandize ranges so that they are able to sustaining the competitive environment. The performances of industrial division have been significantly affected by depressed conditions across retail sector. Earning of respective divisions has declined considerably (Reeve et al. 2014). Organization has good corporate governance, excellent employees and their business portfolio has helped in generating cash over time.

Brief summary of director’s report:

The managing director of Wesfarmers group is Richard Goyder AO and Rob Scott is managing ditector of Wesfarmers industrials in year 2015. Guy Russo joined group as managing director of Kmart and John Durkan was appointeds as managing director of Coles in year 2014.

Director report incorporates indemnification and insurance of directors and officers, remuneration of directors and other officers, significant changes in state of affairs and reviewing of operations and results. It involves discussion about corporate governance, environmental performance and regulations, auditor’s declaration to directors of Wesfarmers limited. The organization has entered into deeds of Insurance indemnity and access with each of directors in accordance with constitution of company (Hoskin et al. 2014). Premium has been paid by group in respect of contracts insuring officers and directors and against certain liabilities that are incurred in capacity. Report also discusses about the remuneration that is paid to senior executives and directors and policies that determines the amount and nature of remuneration payable.

Some of significant changes in the state of affairs of group are discussed in director’s report and they involve:

  • There has been increase in revenue generated from ordinary activities to $ 65981 million from $ 62447 million.
  • Total value of shareholder’s equity decreased to $ 22949 million as compared to $ 24781 million in last year to $ 65981 million
  • Fall or decline in net cash from operating activities to $3365 million from $ 3791 million.
  • Value of total assets increased to $ 40783 million from $ 40402 million (com.au 2017).
  • Profit of group has declined significantly to $ 407 million as against $ 2440 million that reduced the dividend that is paid to shareholders. Dividend per share in year 2015 stood at $ 2 cents per share in financial year 2015 as against $ 1.86 in year 2016.

Ernst and Young is the auditor of company that has also provide non audited services to consolidated entity of group and they make provision of services. Report also incorporates discussion about company secretary and it depicts that Lenda Kenyon was appointed as secretary of company in year 2002. They are member of leadership team of Wesfarmers and company secretary of number of subsidiaries of group. As legal counsel, Lenda join Wesfarmers in year 1987.

The declaration of auditors to the directors of Wesfarmers is provided in director’s report that discloses that there have been no contraventions regarding applicable and professional code of conduct while carrying audit (Weil et al. 2013). Moreover, it also depicts that there is no contraventions of the requirement of Corporation act of auditor’s independence.

Brief summary of auditor’s report:

The auditor of Wesfarmers is Ernst and Young that provided non audited services to the consolidated entity of group as well. Audit report incorporates report on financial report, responsibility of auditors, responsibility of directors to the financial report, report on remuneration report and their opinion. All the financial statements involving consolidated balance sheet, consolidated income statement, consolidated statement of changes in equity, consolidated statement of comprehensive income and consolidate cash flow statement have been audited by auditors. Moreover, they have also audited notes to financial statements and all explanatory information from time to time or at the end of financial year.

Responsibility of director to express an opinion on financial statements based on audit and audit has been conducted by auditors according to auditing standards of Australia. Audit plan and management have complied with ethical requirements and indicating that financial statements are free from any material misstatement by obtaining reasonable assurances (Otley and Emmanuel 2013).

Analyzing the financial health of Wesfarmers limited:

As depicted from annual report of Wesfarmers limited that there has been increase in value of sales in financial year 2016. Net sales for year 2016 were recorded at $ 65981 million as against $ 62447 million in year 2015. Revenue from departmental stores increased up to $ 8. 6 billion. Some of subsidiary of Wesfarmers group such as Coles Express has recorded higher volume of sales due to lower fuel price and lower fuel volume (wesfarmers.com.au 2017). Sales of convenience store have also increased due to compelling value offering that continuously resonated with customers. Earnings before interest and taxes were improved due to productivity gains, good trading and disciplines of operating costs (Kemp and Waybright 2016). Across all the areas of business, group experienced growth in value of sales.

The net cash flow from operating activities witnessed decline in year 2016. Value of net cash flows from operating activities was recorded at $ 3791 million in financial year 2015 as against $ 3365 million in year 2016 respectively. This indicates that operating cash flow has reduced by 11.2% or reduced by $ 426 million. Fall in net operating cash flow reflects that across retail portfolio there has been higher working capital investments. Moreover, this decline was also attributable to initiatives taken fir improvement in availability of stocks.

As observed from the figures provided in consolidated balance sheet of group, there has been reduction in value of retained earnings. Retained earnings stood at $ 2742 million in year 2015 as compared to $ 874 million in year 2016. Wesfarmers has interest bearing loan and borrowing and the amount of loan borrowed has increased in year 2016. The value of borrowings and interest bearing loan has increased from $4615 million in year 2015 to $ 5617 billion in year 2016 respectively. However, no loans were made by group in year 2016 between the management and key personnel and any other related parties. Amount of borrowing and loans is initially recognized at fair value by deducting transaction costs that is measured at amortized cost subsequently using the effective method of interest rate (Maynard 2017).

Evaluating the financial health of Wesfarmers limited using ratio analysis:

Profitability ratios:

Years

2016

2015

2014

Net Profit Margin

0.62%

3.91%

4.47%

Return on Assets

1.62

1.55

1.51

Return on Equity

1.71%

9.61%

10.34%

The profitability position of group has been evaluated by calculating net profit margin, return on assets and return on equity generated. It can be depicted from above table that there has been decline in net profit margin of group from 4.47% in year 2014 to 3.91% in year 2016 and further to 0.62% in year 2016 respectively. Return on assets have improved from 1.55 in year 2015 to 1.62 in year 2016 that indicates that assets have been utilized efficiently. Considerable decline is witnessed in return from equity from 10.34% in year 2014 to 1.71% in year 2016. It is indicative of the fact that organizations ability to generate profit from shareholders investment has reduced (Crawley and Wahlen 2014).

Liquidity ratios:

Liquidity position is analyzed by calculating current and quick ratio.

Current Ratio

0.93

0.93

1.13

Quick Ratio

0.33

0.37

0.48

Cash flow from operations to current liabilities

0.3228127

0.38977997

0.392028

Current ratio has remained constant at 0.93 for two consecutive years; however it has declined from 1.13 in year 2014 that reflect that liquidity position has not improved. Cash flow ratio has also fallen by some points. This depicts that Wesfarmers management has not been efficient in utilizing their current assets for paying off their short-term obligations (Hoskin et al. 2014).

Efficiency ratios:

Accounts Receivable Turnover Ratio

21.34

20.49

15.33

Inventory Turnover Ratio

7.27

7.83

7.76

Asset turnover ratio

0.271398326

0.08596139

0.059096

Accounts receivable ratio has increased from 15.33 in year 2014 to 21.34 in year 2016 that indicates that receivables are collected more frequently that is good for business. Inventory turnover, on other hand has reduced by fewer points from 7.83 in year 2015 to 7.27 in year 2016 respectively. It reflects that inventories are converted into sales at regular intervals. Asset turnover ratio has increased from 0.08 in year 2-015 to 0.27 in year 2016 that indicates that organization has efficiently utilized assets for profit generation (Spieceland et al. 2013). Therefore, it can be said that overall efficiency of organization has improved in recent years.

Leverage ratios:

Leverage position of organization is analyzed by calculating debt to total assets, debt to equity and capital structure leverage

Debt to Equity Ratio

0.32

0.26

0.194905

Capital Structure Leverage

1.29

1.59

1.891339

Debt to total assets

0.43729

0.386639

0.34586

Debt to equity ratio has increased from 0.19 in year 2014 to 0.32 in year 2016 that reflects that proportion of dent to total value of equity has increased. It depicts increased dependence of Wesfarmers on loan and borrowings. Debt to total assets has increased to 0.43 in year 2016 compared to 0.38 in year 2015. Organization for financing assets is making use of borrowed capital that is not regarded as good sign. Capital structure leverage has reduced considerably from 1.89 in year 2014 to 1.29 in year 2016. It reflects that proportion of debt to total value of capital has declined.

References:

Crawley, M. and Wahlen, J., 2014. Analytics in empirical/archival financial accounting research. Business Horizons, 57(5), pp.583-593.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting) (Vol. 29). Financial.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Hoggett, J., Edwards, L., Medlin, J., Chalmers, K., Hellmann, A., Beattie, C. and Maxfield, J., 2014. Financial accounting.

Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial Accounting: a user perspective. Wiley Global Education.

Kahng, L., 2015. Perspectives on the Relationship between Tax and Financial Accounting.

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Oldroyd, D., Tyson, T.N. and Fleischman, R.K., 2015. American ideology, socialism and financial accounting theory: A counter view. Critical Perspectives on Accounting, 27, pp.209-218.

Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer.

Reeve, J.M., Warren, C.S., Duchac, J.E. and Wang, W., 2014. Principles of financial accounting with conceptual emphasis on IFRS. Cengage Learning Asia Pte Limited.

Spieceland, D.J., Thomas, W. and Herrmann, D., 2013. Financial accounting. McGraw-Hill Higher Education.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Wesfarmers.com.au. (2017). Home . Available at: [Accessed 15 Sep. 2017].

Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.

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