Woolworth and Wesfarmers Limited Analysis - Case Study Example

Name: Lecturer: Course name: Course code: Date Table of content Woolworth limited Analysis Wesfarmers limited analysis Conclusion Introduction Report on the flexible nature of accounting policies and estimates and the effect they have on the financial statements of the companies. A. Woolworth limited Background information about the company Woolworth is a key Australian corporation that has an extensive retail interest in Australia as well as New Zealand. It is a chief corporation by market capitalization as well as the sales revenue. The company recorded revenue of $59, 56 billion in the year 2013 realizing a profit of $ 2.26 billion and employs 202,000 workers. Basis of preparation The company’s Financial statement has been prepared on an historical convention apart from for available-for-sale property, derivative instruments, financial assets valued inform of wide proceeds and supplementary amount overdue that are ascertained at appreciated sum or reasonable price, Significant accounting estimates The financial statement of the company was prepared in consistency with (AAS).The standard commands practitioner to make conclusion, estimation as well as hypothesis which affects the use of guiding principle and reported value of an assets as well as liabilities, proceeds and operating cost. The estimates and connected hypothesis are based on historical practice and diverse factors that are practical under the conditions, the consequences of which form the foundation of making the conclusion concerning carrying values of assets and liabilities that are not obvious from supplementary sources. Real outcome may be different from this judgment. Organization, together with the Audit, Risk department as well as the Compliance commission, ascertains the development, assortment and exposure of the merged entity’s important accounting guideline and judgment as well as the application of these policies and estimates. Significant Accounting Policies 1A) Inventory valuation Method Stocks are prized at the lesser of cost and the net realizable value. Cost comprise of entire procurement associated with refund, payment markdown and supplementary expenses expended to make inventory to its current state and location for sale.Net realizable value is the anticipated selling value in the usual time of trade, less the probable outlay of conclusion and selling operating cost. This approach of valuing inventory will help reduce the consequence of over-estimating the net profit or under-estimating the net profit as well as observing the accounting prudential and materiality concepts. 2013 2012 2011 Inventory 4,205 3,698. 3,736.5 (1B)Depreciation on: (1) Buildings, plant and equipment Buildings, plant, and equipment are depreciated on a straight-line basis over the anticipated valuable life of the asset to the combined entity. Approximations of the residual useful lives are made on a standard foundation for the entire assets. depreciation {Straight-line} = Initial outlay-salvage value Useful life of the asset 1C) Property, plant and equipment Freehold property, storehouse, retail, development and other chattels are held at the lower of cost less accrued depreciation and recoverable Charge. Items of plant and equipment are stated at cost less accrued depreciation. Where parts of an item of property, plant and equipment encompass diverse useful lives, they are accounted for as distinct items of property, plant and equipment. Useful life 2013 2012 2011 Plant and equipment 2.5 10 years 2.5 2011 2012 2013 Gross Property Plant and Equipment 15,616.8 17,227.8 17,783.3 Accumulated Depreciation -6,996.5 -7,638.8 -8,537.2 net property plant and equipment 8,620.3 9,589.0 9,246.1 The above trend depicts an increasing trend in value of depreciation. This is majorly caused by increase in capital asset. The company acquired more capital assets from the year 2011 to the year ending December 2013 1D) Capitalising versus expensing assets Woolworth capital lease is capitalized following the General Accepted Accounting Principle since; the lease is treated as comparable to acquisition by the lessee and hence is capitalized on the lessee’s statement of financial position. This is depicted in the Woolworth statement of financial position where the company reported the following capital lease for the last three years. Borrowing, holding and development expenditure on property under expansion are capitalized in anticipation of conclusion of the improvement hence increasing the return on assets (ROA) and return on Equity (ROE) 2011 2012 2013 Capital lease 2.8 5.4 5.3 Effect of capitalized lease on; 1d) ROA (return on asset) ROA=Net income/Average asset) 2013 2012 ROA 2,259.4 1,816.7 It can be concluded from the above graph analysis that, Increase in capitalised lease would lead to increase in return on assets. 1d) ROE (return on equity)- ROE= (Net income/shareholders equity) 2011 2012 2013 ROE 2107.3/7845.8 2178.7/8446.3 2249.7/9300.5 ROE 26% 25.8% 24.2% 1E) Provision for bad and doubtful debt A provision is realized in the combined statement of financial position when the combined entity has a positive commitment because of a precedent occasion and it is plausible that an outflow of financial advantage will be necessary to reconcile the commitment. The sum realized as a provision is the superlative assumption of the contemplation necessary to resolve the current commitment at reporting date. Where a Provision is ascertained using the cash flows anticipated to clear up the current commitment, its carrying value is the present value of those cash flows. .B) Wesfarmers limited Background information about the company Wesfarmers limited is one of the main Australian public corporation as well as key Australian retailers, the company has it is headquarter in Perth, Western Australia; the company employs a 200,000 workers countrywide. In the year ending 2013, the company realized total revenue of $ 59.09 billion and net profit of $3.13 billion. The company assets are worth $ 42.31 billion with a total equity of $ 25.63 billion. 2A).Depreciation of assets 2013 2012 2011 Total asset 43,155 42,312 40,814 Depreciation &amortization -1,071 -995 -923 Net asset 42,084 41,317 39,891 2B) Capitalizing versus expensing assets The capitalization rate concluded on the sum of borrowing outlay to be capitalized is the weighted standard interest charge, exclusive of disallowed interest outlay, relevant to the company’s exceptional borrowings during the financial period... Capitalized borrowing cost 2011 2012 2013 7.32 8.39 Effect of Capitalized interest and Capitalized borrowing cost on ROA ROA=Net income/Average asset) 2B) ROA (return on asset) ROA=Net income/Average asset) 2011 2012 2013 ROA {1922/20,828.4/2}= {2126/21,581.1/2) {2261/22,250.2/2} 2.2 2.03 2.2 2B).ROE (return on equity)- ROE= (Net income/shareholders equity) 2011 2012 2013 ROA {1922/7,845.8}= {2126/8,446.3) {2261/9,300.5} 0.2445 0.252 0.243 From the above graph analysis, it can be depicted that, Capitalizing on lease will increase the return on assets (ROA) and return on Equity and hence decline when the value of the lease decline in the year 2013. Deprecation of assets together with goodwill and intangibles with Infinite remaining lives The company ascertains if the assets as well as goodwill and intangibles with an infinite useful life are depreciated yearly. It therefore commands a judgment of the recoverable sum of the cash producing division to which the goodwill and intangibles with infinite useful lives are apportioned. The realized sum of the cash-producing department has been ascertained using cash flow forecasting. 2C).Inventory valuation Method The net realizable price of stock is the probable selling price in the normal routine of business with a reduction of probable outlay to sell. The major hypothesis, which necessitate the use of executive conclusion, are the factors affecting anticipated expenditure to sell and the expenditure selling price and thus the management reviews this major hypothesis yearly. Combined inventories 2013 $m 2012 $m Raw material 103 92 Work in progress 27 39 Finished goods 4917 4675 whole inventories at the lower of cost and net realizable value 5047 5006 The company documented inventories as cost for the year ended 30 June 2013 totaling $42,218 million and for the year ending 2012 totaling $40,987 million 2D) Provision for Bad and doubtful debt Trade receivables for the year ending 30 June 2013was $291 million and as at 2012 totaled $275 million. These receivables were for earlier period owing but unimpaired. These transmit to a number of autonomous clientele for whom current history of non-payment or signs of impairment does not exist. In relation to debtors that are depreciated or historically unpaid, there are no signs as of the reporting date that the trade receivables will fail to meet their imbursement responsibility. Debtors who desire to trade on credit terms are subject to credit confirmation measures, as well as an appraisal of their autonomous credit rating, economic situation, historic understanding and industry reputation. Debtor’s balances are examined on a continuing basis with the outcome that the experience to bad debts is not considerable. 2E) Examination of trade receivable 2013 million $ 2012 million $ Category of three months 243 202 Category of six months 33 51 in excess of six months 15 22 Total trade receivable 291 275 Conclusion Accounting policy adopted by a company majorly affects its income statement and the statement of financial position and hence appropriate method of stock valuation is deemed relevant since inventories affects the net reported profit of the company (Belverd Needles, 2013). Provision for bad and doubtful debt affects the profitability as well as the liquidity ratio of the company and for this reason, it is appropriate to ensure that minimum value of bad and doubtful debt is maintained. This is achieved by guaranteeing that the debtor’s payment period is short while allowing long creditors payment. In this case, the working capital of the business will be enhanced. Appropriate management of stock is significance for any company. The manner in which a company ascertains its stock can be varying between the surplus and deficits. Inventory valuation affects the company’s profits margin, working capital as well as the shareholders equity. Inventory valuation methods The technique a company employs to ascertain its cost of inventory proportionately affects the company’s financial statement. Devoid of inflation, the three approach of stock valuation can generate similar returns. Conversely, Prices do increase over the years and the company’s costing method affects the estimation ratio (Clyde Stickney, 2009). The first in first out approach (FIFO) increases the net income leading to enhanced tax indebted. Last in first out method (LIFO).in this approach; lower closing stock will be reported leading to lower current ratio as well as the shareholders equity. Hence, under FIFO assets less liabilities will generate higher results. Under LIFO, return on assets (ROA) is enhanced. Other ratio to check on are return on equity (ROE=Net income/Average asset), assets turnover = sales /total assets) and inventory turnover =COGS/average inventories) Accounting for bad and doubtful debts Provision for doubtful debt account represent management best assumptions of the amount of account receivable that will fail to be paid by the debtors of the company and thus, where the management is of the opinion that real experience changes then alterations ought to be made to bring the reserves more to the arrangement with real results. Where a business employees the accrual method of accounting, It must record the provisions of doubtful debt because, it provide an approximation of the prospect bad debt that enhance the accuracy of the company’s financial statement (David Alexander, 2007). The mere consequences that Provision for bad and doubtful debt will have on the income statement are the initial charge to bad debt expense when the write-offs of the financial records receivable merely affect the statement of financial position. Acquisition and depreciation of assets Even though accounting assumption of capitalizing and depreciating fixed assets is theoretically simple, applying the hypothesis in practise provide a rise to numerous difficulty, which ought to be, addressed (Jan Bebbington, 2001). Accounting and depreciation of fixed assets entails estimate and is precise. The salvage value, useful life of the assets and the trade-in value can be anticipated. Conversely, in compliance with the generally accepted accounting principle (GAAP), fixed assets accounting policy entails estimates and the policy must correspond to the GAAP. Purchase, depreciation and disposal of fixed assets generate numerous cases, which have the propensity to make the accounting for every fixed asset different. Revaluation of assets Revaluation of fixed assets is a practice that may be essential to precisely depict the exact worth of the capital goods. The reason for revaluing fixed assets is to bring into books the fair market value of the fixed assets. Where an asset is to be disposed, Revaluation is essential in order to arrange for sales concession (Jan Bebbington, 2001). The reason for revaluation of capital assets is to show the real rate of return on capital employed as well as retaining adequate funds in the company for substitution of capital assets at the end of the their useful life. Provision for depreciation based on historical cost will depict the inflated profit and lead to payment of excessive dividend. Revaluation of asset also depicts the fair market value of assets that appreciate Capitalising versus expensing assets When a business incurs expense, it can either be capitalized and accounted for in the balance or expensed profit and loss account. An item of expenditure is capitalized and incorporated in the value of the asset toward which the cost is expensed merely when the advantage from expense multiply for more than one accounting time (John J. Glynn, 2008). The accounting standard and the fundamental hypothesis define the rules of capitalizing or expensing of the charge. Capitalizing an expense will lead to an increase in return on assets as well as return on Equity. It can be concluded that the consequence of capitalizing and expensing the financial statement is similar when considered for a long-term and it is relevant to conform to the accounting standard and to guarantee the right treatment for the expense. Off-balance sheet financing This is a technique of financing in which large capital outlay are maintained off the company’s balance sheet by way of numerous classification approach (Ketz, 2003). Business will keep off balance sheet financing in order to keep their debt to equity ratio as well as the leverage ratio low more specifically if the insertion of a huge outlay will split the negative debt agreement It can be observed therefore that Woolworth is the best company against wesfarmers in terms of capital and fund statement since; the company is having a high return on asset as well as return on equity against wesfarmers implying that the business return on investment is relatively high. This is a strong indication that investment on this company’s security will yield a return, Reference list Bibliography Belverd E. Needles, ‎. P. (2008). Thomas R. Robinson, ‎Elaine Henry, ‎Wendy L. Pirie . Belverd Needles, ‎. P. (2013). Financial and Managerial Accounting. Clyde Stickney, ‎. W. (2009). Financial Accounting: An Introduction to Concepts, Methods . David Alexander, ‎. B. (2007). International Financial Reporting and Analysis. Jan Bebbington, ‎. G. (2001). Financial Accounting: Practice and Principles. John J. Glynn, ‎. M. (2008). Accounting for Managers . Jonathan E. Duchac, ‎. M. (2006). Financial Accounting: An Integrated Statements Approach:. Jonathan E. Duchac, ‎. M. (2006). Financial Accounting: An Integrated Statements Approach: An ... Ketz, J. E. (2003). Hidden Financial Risk: Understanding Off-Balance Sheet. KUPPAPALLY, J. J. (2008). ACCOUNTING FOR MANAGERS. N. M. Singhvi, ‎. J. (2006). Management Accounting Text And Cases . Nandakumar Ankarath, ‎. J. (2010). Understanding IFRS Fundamentals: International Financial . Paul D. Kimmel, ‎. J. (2010). Financial Accounting: Tools for Business Decision Making. Reckers, P. M. (2002). Advances in Accounting. Susan Crosson, ‎. N. (2010). Managerial Accounting . Thomas R. Robinson, ‎. H. (2012). 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