Accounting Policies at Woolworth Limited - Case Study Example

Name of the student: Course Tittle: Name of the professor: Date 1.0 Inventory valuation methods In the Woolworth Limited, inventories that are of short life are being valued at the lower of average cost and net realizable. Durable stock according to the Company policies is valued using the retail inventory method to arrive at the cost of the stock. The Company management believes that the inventory method is useful in determining the cost by reducing the value of the inventory by appropriate percentage margin that factor in the markdown prices. The stock in the warehouse is valued at the lower of average cost and net realizable value. The Company management argues that these two methods of stock valuation help in achieving the accounting of stocks at approximately lower cost and the realizable value. In the calculation, the cost includes purchase related cost rebates, discount settlement and other related cost incurred during the transportation and bringing inventory into the Company. In stock valuation, the net realizable value is estimated by subtracting the estimated cost of completion and other selling expenses from selling price. In calculation of the company inventory ratios, Year 2011=52,609.1/3,736.5= 14.08, Year 2012=55,129.8/3,698.3=14.91 Year 2013=58,516.4/4,205.4=13.91 From the analysis, the inventory ration of Woolworth Ltd varies from 2011 to 2013. For WesFamers LTD the inventories are being valued at the lower cost and at the realizable. Costs incurred in bringing the stock used in the production to the Company and place of production are accounted (Wesfarmer, 2013). Raw material- The cost of purchase is accounted for on weighted basis according to the Company policy. Manufactured stock, work in progress, finished goods, cost of direct material, labor, and part of manufacturing overheads are calculated based on the normal operating capacity and the Company excludes borrowing costs in the calculation. In calculating cost of stock, work in progress also includes Run-of Mine coal stock, cost of drilling, blustering and other associated cost are included here (Wesfarmer, 2013). . On the retail and wholesale merchandized, and finished product, the purchase cost are calculated on average basis, and it is done after deducting any settlement discount and also including other logistic expenses incurred during the process of bringing the inventory into the Company (Wesfarmer, 2013). The rebates that are related to volumes and suppliers, promotional rebates in situations where it exceeds the actual amount spend on the promotional activities are normally recognized as a reduction to the cost of inventory. The net realizable value is normally estimated by deducting the cost of completion and other estimated cost from the selling price. In the inventory turning ratio of the company, Inventory turnover = sales/inventories of finished goods Year 2011= 52,891/4,987=10.61; Year 2012=55,897/5,006=11.17; Year 2013=57,467/5,047=11.37 The turnover ratio increases from 2011 to 2013 From the two companies’ inventory calculation and policies, both the Woolworth Limited and WestFamers LTD are using similar accounting policies in accounting for retail goods and services. The ratio are consistence and with minimal variation for the three years. The method and concept in determining the gross profit margin is the same that is, net realizable value estimated by deducting the cost of completion and other estimated cost from the selling price. The different in the two accounting for inventories is in the part of manufacturing goods and services. WestFamers LTD are accounting for goods in progress, finished goods and manufactured goods while Woolworth Limited has not indicated on how they account for manufactured goods for all their annual financial incomes. The consistency in the policy is supported by GAAP and AASB policies. 2.0 Accounting for bad and doubtful debts For the Woolworth Limited the provision for bad debts is recognized in the consolidated balance sheet at the time when the consolidated entities have presented their legal obligation because of present activity or event(WoolWorth, 2013).. They present legal constructive obligation because of a past activity in the Company and most probably an activity, which result in the outflow of an economic benefit, which requires settlement of that obligation WoolWorth, 2012). Whenever all or part of the Company obligations on economic benefits, there is, need to provide provision as the economic value is expected to be recovered from the third party. The account receivable is recognized in the balance sheet as an asset if it is virtually certain that it will be recovered with high reliability. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date and at the same time taking into consideration the risk involve and other surrounding uncertainties, which surrounds the obligation (WoolWorth, 2012). The Company has adopted to measure the provision using the cash flows estimated to settle the current obligation. The carrying value of the obligation is the present value of the cash flow. In the annual report for three year, debtor’s ratio is as follows Yea 2011= (52,609.1/1,122.2) =46%; Year 2012= (55,129.8/8, 69.9) =63.37% Year 2013= (58,516.4/9,686) =60.42% The debtor’s turnover is not very much consistence in the three years. This might be attributed to variation in the width of debtor’s the company has accumulated over the three years. For WESFARMERS LTD, provision for bad debts is recognized in the consolidated balance sheet at the time when the consolidated entities have presented their legal obligation because of present activity or event. They present legal constructive obligation because of a past activity in the Company and most probably an activity, which result in the outflow of an economic benefit, which requires settlement of that obligation. The account receivable is recognized in the balance sheet as an asset if it is virtually certain that it will be recovered with high reliability. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date and at the same time taking into consideration the risk involve and other surrounding uncertainties, which surrounds the obligation. 2011= 52,891/122,200= 47% 2012=55,897/238400= 23% 2013=57,467/2,341=25% From the provision of bad debts, the two companies use similar approach in calculating and providing for the provision. They both follow the rules established by the Australian Accounting Standard Board (AASB) and the International financial Reporting Standards (IFRS). The provision is very necessary, as it will help in accounting and reporting the actual Company profits. the ratio are reasonable and shows that the company is performing well. 3.0 Acquisition and depreciation For the Woolworth Limited, the assets are being acquired either through purchase or through lease. Lease is a situation where by the consolidated entity assumes the substantial or all of the risk and rewards of ownership and the Company classifies the as finances leases. The amount acquired by way of finance lease is normally started at the amount, which is equal to the lower of its fair value and the present value of the minimum lease, which was paid during the time of inception of the lease and the accumulated depreciation and impairment losses. Lease payments are accounted using the Australian Accounting Standard Board and the International Financial reporting Standards (WoolWorth, 2013). Depreciation of building, plants and equipment are done on straight-line basis over the estimated useful life of the asset and then it is consolidated into the entity accounting book. The estimates of the remaining useful lives are normally made on the regular basis all the assets in this category (WoolWorth, 2013). The leasehold improvement costs are usually amortized over the remaining time of the individual lease. The Company can also use the estimated useful life of the asset improvement to the consolidated entity when reporting. The one that is convenient for the accountant and finance officer will be used. The reporting period of amortization is 20 years for the retail properties while 40 years for hotels as per the Company policy. Plants and equipment’s including shop fittings software’s and other related assets are normally depreciated in straight-line basis over the estimated useful life period of that asset. The sale proceeds of assets are usually recognized at the date an unconditional contract of sale is exchange with the purchaser the net gain or loss is transferred into the income statement with the associated expenses. According to the WESFARMERS LTD, the useful life of property, equipment’s and plants are normally being reviewed annually (Wesfarmer, 2013). . This judgment is applied in determining the useful lifetime of the property. Plants and equipment’s including shop fittings software’s and other related assets are normally depreciated in straight-line basis over the estimated useful life period of that asset. The sale proceeds of assets are usually recognized at the date an unconditional contract of sale is exchange with the purchaser the net gain or loss is transferred into the income statement with the associated expenses (WesFarmer, 2013). . The Company also accounts for intangible assets where assets with infinite life period are being reviewed annually according to Company policy and in line with IFRS and AASB policies. Software’s are given useful life period of seven years and the depreciation is amortized over the life period of the software’s and it is done in the straight-line method of depreciation (Westfarmers Ltd, 2012). Depreciation of building, plants and equipment are done on straight-line basis over the estimated useful life of the asset and then it is consolidated into the entity accounting book. The estimates of the remaining useful lives are normally made on the regular basis all the assets in this category (Wesfarmer, 2013). From the two companies, the accounting for depreciation is similar since both are using straight-line method of depreciation. This method is simple and easy to calculate. The different in the depreciation is in lease and intangible assets. While Wefarmers accounts for intangible assets in their financial reports, WoolWorth does not account for it. However, WoolWorth LTD accounts for lease of assets WesFarmers does not account for leases hence there was no lease policies in their annual report. 4.0 Revaluation of assets The assets valuations for both companies are done on annual basis on both companies. The revaluation policies are mostly depend on the depreciation method adopted but in most cases only houses and buildings are being revalued when they are being sold out (Westfarmers Ltd, 2012). For WoolWorth LTD, the revaluation on leases is done depending the life of the lease agreement. 5.0 Conclusion The accounting policies used by the two companies have the potentiality of affecting the net profit that is being reported at the end of trading period. The method of stock valuation used will affect the cost of goods sold and the amount of closing stock hence directly influencing the gross profit. The depreciation method used affect the cost of net profit as it will affect the expenses and also will affect the dividends distributed. As required by the AASB, the accounting policies adopted by the Company should be in a position to present a true and fair view of the Company operations. References Wesfarmers | Annual Report (2013) Westfarmers LTD http://ir.wesfarmers.com.au/phoenix.zhtml?c=144042&p=irol-irhome; Retrieved on 24th April 2014 Westfarmers Ltd (2012) http://ir.wesfarmers.com.au/phoenix.zhtml?c=144042&p=irol-irhome; retrived on 24 April 2014 WoolWorth Annual Report (2012): Woolworths LTD http://www.woolworthslimited.com.au/page/Invest_In_Us/Reports/Reports/ Retrieved on 24th April 2014 WoolWorth Annual Report (2013): Woolworths LTD http://www.woolworthslimited.com.au/page/Invest_In_Us/Reports/Reports/ Retrieved on 24th April 2014 Read More