Using Accounting for Decision Making - Case Study Example

Using Accounting for Decision Making Name ASS#1.doc Using Accounting for Decision Making Step 1 The name of the firm under analysis is Dixon’s Retail plc. The firm specializes in the retail of consumer electrical items as well as electrical services, trading in over 1200 stores in the whole of Europe as well as globally by way of online trading. Among the items include computers, home equipments, and communication goods as well as associated services (Dixons Retail plc Annual Report, 2011, P. 2). In the overview of Dixon’s annual report, the chairman and the chief executive of the firm reiterate the new product the company launched within that fiscal year that encompasses the company’s after sale services. The new product launched is geared towards placing the customers at the heart of what the company does and enables the entire team of the firm to focus determinedly on their customers (Dixons Retail plc Annual Report, 2011, p. 6). This probably indicates that the company had been facing a challenge of meeting the needs of their customer on a personal level. Dixon’s trading Plc has not escaped the tough economic milieu in many of its markets. In fact, the economic challenges forced the firm to close one if its operations in Spain as the market provided little opportunity for short to medium term profitable recovery. Economic backdrop and delivering to customer the right product and at the right time are the foremost aspects that have been emphasized in the annual report. However, the firm has devised ways of tackling these challenges. Dixon’s trading plc has been able to balance improving their offer for their customers whilst maintaining profitability (Dixons Retail plc Annual Report, 2011, p. 6). The firm provides an excellent and a more spirited shopping trip to their customers and the impact on their business is quite remarkable. The company’s scale across Europe forces it to continually be able to give their customers the latest products at the best prices. They do this by regularly monitoring prices against their competitors. All this is backed up by their market leading price promise to refund 110% of the difference if a customer finds the same product cheaper elsewhere (Dixons Retail plc Annual Report, 2011, p. 9). Some aspects in the firm’s financial statement are not easily understandable. These areas include; The total underlying profit of the firm dropping by 2% compared to the prior financial year. The unclear bit is that with the new changes introduced to improve sales, the company still experiences a drop in its total sales. The firm’s underlying pretax profit for the fiscal year is £85.3 million while it is mentioned that the total loss before tax is £309.4 million. It is not easy to comprehend whether the company actually made profit or loss in that particular fiscal year. There are both differences and similarities between Dixon’s Trading plc and firms studied by other colleagues. Unlike Dixon’s Trading plc, the operations of most of these firms are limited to a single country or not more than five European countries. For this reason, their annual reports as well as the financial statements are a bit straight forward. Some firms are manufacturing based while others are food stores. The complexities of financial reporting of Dixon’s plc present a challenging task in analyzing its reports. This gives one a chance to sharpen his/her analytical skills; therefore Dixon’s plc is an excellent selection. Step 2, Response to questions Question one The five elements in the extended accounting equation include; assets, liabilities, equity income and expenses. According to accounting definition an asset is considered an economic resource. In other words, any concrete or insubstantial thing that is able to be owned or managed to generate value or have constructive economic value is perceived as an asset. In summary, an asset represents possession of worth that can be transformed into cash (Heisinger, 2009, p. 112). The assets can be categorized into two; current assets and fixed assets. These are evident in the consolidated Balance sheet of Dixon’s trading plc where fixed assets totaled £1,884 million and current assets totaled £1,693. Hence the total asset for the company was £3,577million. Liability on the other hand is defined as a debt commitment of a business cropping up from precedent dealings, the repayment of which may involve the sale of assets, service provision or other future operations that have economic benefits (Heisinger, 2009, p. 112). Liability is characterized by an entity borrowing from persons or banks in order to develop a business and promises to pay in short or long time period. Liabilities can as well be classified as short term liabilities and long term ones. Short term are those that can be settled within a short time say a year or less while long term are those that the business settle within a long time period say five years. This is also evident in the consolidated balance sheet of Dixon’s trading plc. Its short term liabilities totaled £1,875.8 million and long term £1,025.1 million. Hence, its total liabilities for that fiscal year amounted to £2900.9 million. The term equity has several meanings but in the context of accounting equation, equity on a firm’s consolidated balance sheet represents the amount of the funds put in by the owners or stockholders in addition the preserved revenues or losses (Heisinger, 2009, p. 113). In the consolidated balance sheet of Dixon’s plc, the total equity totaled to £676.5 million. Income in this context is the spending and savings prospect achieved by a business within a specific time period and it is always expressed in pecuniary or monetary terms. In the consolidated income statement, Dixon’s total income for the fiscal year amounted to £8,154.4 million. Finally expenses represent an outflow of money or other important assets from one firm to the other. This funds outflow is commonly considered one region of a trade for goods or services with equal or enhanced significance to the purchaser than to the seller (Heisinger, 2009, p. 113). To be precise, an expense is an occurrence whereby an asset is utilized or debt is incurred, therefore, it has the effect of reducing the owner’s equity. In the consolidated income and expenditure statement of Dixon’s trading plc, the total expense for the period amounted to £207.9 million. Question two Accrual accounting is the system of accounting that gauges the activity and position of a business or firm by identifying economic happenings not considering the occurrence of cash transactions (Heisinger, 2009, p. 134). Basically the idea here is that economic occurrences are acknowledged by corresponding revenues to expenses at the actual transaction time and not when payment is made. This is an important accounting concept to understand as it presents a more precise picture of the company's present situation. For instance, in a company that is selling on credit and returns realized over a long time period affect its financial state at the time of the transaction. Therefore, it is logical that such activities ought to be revealed on the financial reporting in the same reporting period that these transactions took place. In the Dixon’s income statement, the sales revenue indicated does not imply that the company received payments for all its sales for that financial year. This is because the financial statement indicates that the total revenue for the year is £8, 154.9 million and actual receipt on sales is £7,689.7 million. Question three Among the sole proprietorship, partnership and companies, it is the company that is separate legal entity from the owners. The other two are not separate legal entity from the owners. The entity concept presumes that, for accounting reasons, the business venture and its owners such as shareholders or directors are two distinct and autonomous units. For this reason, transactions of the business and that of its owners are separate. A typical example is when the owners of the business inject in some money in the business. This is treated as a liability of the business to the owner; that is, the business owes the owner. In the same way, in the event that the owner takes cash or even goods from the business for his own personal use, it is not treated as an expense for the business. As a result, the records of accounts are from the business point of view rather than the owner point of view, and this concept is the very fundamental concept of accounting (Heisinger, 2009, p. 154). Dual concept is the underpinning theory of accounting. It is the basis by which all business transactions are recorded in the business accounting books. This model presumes that all business transactions have double effects; that is, each of them affects two accounts in their relevant opposite sides (Heisinger, 2009, p. 166). Consequently, the transaction is supposed to be indicated at two places. For instance, items bought in cash reflect two items; giving out cash and receiving goods hence they are supposed to be shown in the relevant sides in the books of accounts. This concept is best understood when the fundamental equation of accounting is considered thus; Assets = Liabilities + Capital This equation implies that an asset of a business is equal to the claims of the owner called capital or equity and outsiders claim known as liability. The concept of duality aids in recognizing the two elements of a transaction which assists in implementing the policies of indicating the transactions in the books (Heisinger, 2009, p. 166). The connotation of the dual concept is that each business deal has an identical effect on assets and liabilities. Therefore, this concept is related to the entity concept by clearly defining those transactions that are business related and those that are not business related and how to treat each transaction. References Dixons Retail plc, Annual Report and Accounts 2010/11, retrieved from, www.dixonsretail.com Heisinger, Kurt 2009, Essentials of Managerial Accounting .California: South-Western College Publishers. Read More