Discuss about the Accounting for Managers Wesfarmers Limited.
The report describes about the assumptions, and judgments that need to be made in preparing the financial statements for the company. These assumptions and judgments differ from company to company, hence for better understanding to the topic, report describes about the impact of these judgments on the financial performances of the company (Saccer, Malis & Pavic, 2016). Besides this, the report does ratio analysis for wesfarmers limited which is an Australian company, founded in 1914. The report after ratio analysis does a critical analysis over the company ratios. At last the, the impact of ratio analysis on the company shareholders has been described.
The financial statements in a company are prepared according to the rules and regulations formed by (IFRS) International financial reporting standards. The company must also follow the rules and regulations formed by (IASB) International accounting standard board (KPMG, 2017). According to the board, the management of the company is required to make some assumptions and estimates. The compliance of accounting policies in the financial statements required some assumptions and judgments. These assumptions make the understanding of financial statements complex (Chea, 2011). Every company’s management has different assumptions and judgments in regard to compliance with the accounting policies. These judgments and assumptions are variable in nature that is, it changes according to the changes in market condition or change in organizational structure. Management has to take care while forming a judgment that is judgment should be formed while considering the uncertainties, and future plans of organization (Deloitte, 2017). After forming appropriate judgments and estimations, the management needs to mention these judgments in footnotes of the company’s financial statements. The judgments formed by the financial managements of the company affect the net amount that would be recorded in the financial statements. The report discusses about the various aspects where various assumptions and judgments can be applied (Deloitte, 2010). These are as follows:
Assets are to be recognized at book value. This means that the changes in market value or face value have to be ignored. However the changes in the valuation of assets and liabilities would be considered while valuing the goodwill (International federation of accountants, 2011).
Only those transactions are disclosed which can martially affect the decisions of investor. This is done for better understanding the working of organization and to reduce complexity, as more transactions and dealings if mentioned can lead to confusion in the minds of the consumer (John Wiley & Sons, 2006).
In accounting policies, revenue and expenses are recognized on accrual basis. That is, as the revenue or expense is due it has to be recorded in the financial statements, no matter whether the payment has been received or paid or not (Essentials performance objectives).
To recognize the uncertainties, management need to make provisions for example provision for doubtful debts, provision for taxation etc. the amount to these provision is from profit for the year, hence increase in the provisions will reduce the profit of the entity (EC staff, 2011).
The use of judgments and estimation effects the presentation of financial statements. The use of judgements leads to changes in valuation of tangible and intangible assets in financial statements. The financial statement helps the management in quantifying the impact of judgments on overall performances of financial and operational management. The effect of judgment in assets and liability structure of the financial statements can be in terms of rate of depreciation applied, life of the asset or license, scrap value of fixed assets, value to be shown in the financial statements, of the fixed assets installed in the organization. However implications of judgements in the financial statements have not made any affect in valuation of current assets and current liabilities (Deloitte, 2009).
Wesfarmers is a public company diversified into chemicals, coal mining, fisheries, and industrial and safety products. The company is founded in 1914, headquartered in Perth, Western Australia. The chairman of the company is Michael Chaney, and CEO is Richard Goyder. The company targets consumers of Australia, Bangladesh, Ireland, New Zealand, and United Kingdom. The main competitors of Wesfarmers limited are: Best & Less, Myer, Woolworths and hs home (Wesfarmers).
The company deals in diversified range of products. Company involves in liquor, supermarkets, convenience stores, hotels, office supplies, home improvement, and departmental stores. The company is also involved in providing industry products such as fertilizers, chemicals, energy and safety products. It is one of the largest companies in Australia having more than 2, 20,000 employees and a shareholder base of more than 5, 30,000 (Keith, 2012).
Internal factors
Internal factors are those which affect the company internally. These are the factors that can be controlled by the management itself. Internal factors in a company can be said as: strength, weakness, competitive advantage, employees, technology, machinery, human resource, and marketing plans. However there are many internal plans that can impact the performance of the company. In case of wesfarmers limited some of the internal factors which can make some impact in the performance are discussed as below:
External factors
The external factors are those, which are out of the control from company. This means that company cannot eliminate these completely. However the company can reduce the impact of these factors on the performances. In the given case study of wesfarmers limited the external factors which can affect the company performances are as: opportunity, threats, political and legal factors, social and cultural factors, technological factors (Kazmi, 2008).
Ratios are calculated from the items mentioned in income statement and balance sheet of the company. It enables the comparison from one company to another in terms of financial data. Ratio analysis describes about the company performance and helps in doing comparison with industry or other competitor. There are wide ratios to facilitate the comparison of the company either from itself or from other rivalry competitor. The given report discusses about the liquidity ratio, efficiency ratio, profitability ratio, coverage ratio and market share ratio (Business, 2016).
Liquidity ratio depicts the relationship of short term assets and short term liabilities. It tells the company that whether it would be able to meet the short term liabilities from its short term assets. The liquidity ratio consists of current ratio and quick ratio (Tracy, 2012).
It is also called as asset turnover ratio. Efficiency ratio describes about the efficiency of management to generate sales from its assets, inventory. This ratio is used by management to identify inefficiency; it is also used by creditors to get ensure about the liquidity of the company. In efficiency ratio, the report has done an analysis over inventory turnover ratio, day’s sales in inventory, accounts receivable turnover, day’s sales outstanding, total assets turnover and fixed assets turnover (Bragg, 2012).
It depicts the company ability to pay of fixed payment from the company earnings and equity. It describes about the long term solvency of the company. In case of leverage ratio, total debt ratio, debt to equity ratio, equity multiplier, times interest earned, cash coverage has been analyzed (Friedlob & Welton, 2008).
Profitability ratio defines the relationship between the sales of the company and its profits. It depicts the percentage of profits that is arrived from sales. In profitability ratio, the report does a critical evaluation over operating profit margin, profit margin, and return on assets (ROA), Return on equity (ROE), and ROA (Du Point) (Gibson, 2009).
This is the main ratio that needs to be analyzed by the shareholders before investing in any company. This ratio depicts the earning of the company in terms of assets equipped in the company. It also defines the relationship between the market value and book value of the company. The report describes about market value performance, earning per share, price earnings ratio and market to book ratio (Nuhu, 2014).
Following is a tabular presentation of ratio analysis of wesfarmers limited.
|
Wesfarmers limited |
||
|
Particulars |
Amount (m$) |
|
|
2015 |
2016 |
|
|
current assets |
9093 |
9684 |
|
current liabilities |
9726 |
10424 |
|
inventory |
5497 |
6260 |
|
average inventory |
5878.5 |
|
|
quick assets |
3596 |
3424 |
|
net sales |
62447 |
65981 |
|
account recievable |
2269 |
2463 |
|
Average receivables |
1134.5 |
|
|
total assets |
40402 |
40783 |
|
fixed assets |
31309 |
31099 |
|
total debts |
17834 |
15621 |
|
total equity |
24781 |
22949 |
|
EBIT |
3759 |
1346 |
|
Depreciation |
1219 |
1296 |
|
Interest expense |
315 |
308 |
|
EAT |
2240 |
407 |
|
Shares outstanding |
21844 |
21937 |
|
Market price per share |
41.31 |
39.92 |
|
Earnings price per share |
216.1 |
36.2 |
|
Book value per share |
22.05 |
23 |
|
Ratio abalysis |
||
|
Liquidity ratio |
||
|
Current ratio |
0.934916718 |
0.929009977 |
|
Quick ratio |
0.369730619 |
0.328472755 |
|
Efficiency ratio |
||
|
Inventory turnover |
10.62294803 |
|
|
Days sales in inventory |
34.35957692 |
|
|
Accounts receivable turnover |
55.04363156 |
|
|
Days sales outstanding |
6.631103175 |
|
|
Total Asset turnover |
1.545641305 |
1.617855479 |
|
Fixed asset turnover |
1.994538312 |
65981 |
|
Leverage ratio |
||
|
Total debt ratio |
0.441413791 |
0.383027242 |
|
Debt to equity ratio |
0.719664259 |
0.680683254 |
|
Equity multiplier |
1.263427626 |
1.777114471 |
|
Times interest earned |
11.93333333 |
4.37012987 |
|
Cash coverage |
15.8031746 |
8.577922078 |
|
Profitability ratios |
||
|
Operating profit margin |
6.01950454 |
2.039981207 |
|
Profit margin |
3.587041811 |
0.616844243 |
|
Return on assets (ROA) |
0.0554428 |
0.009979648 |
|
Return on Equity (ROE) |
9.039183245 |
1.773497756 |
|
ROA (DuPont) |
0.0554428 |
0.009979648 |
|
Market value performance |
||
|
Earnings per share |
0.102545321 |
0.018553129 |
|
Price earnings ratio |
0.191161499 |
1.102762431 |
|
Market to book ratio |
1.873469388 |
1.735652174 |
(Wesfarmers, 2016).
The company has increase in liquidity ratio, which means that company is improving over its liquidity. In case of inventory receivables in days company takes 34 days to convert its inventory into sales. While in case of account receivable in days, company takes only 6 days to covert its receivables into cash. This shows the efficiency of management. Here in calculation of account receivables and inventory ratio, the number of days in a year is assumed as 365 days for better understanding to the ratio. In case of leverage ratio, the debt has been increase in 2016 in comparison to 2015. This has created some risk to equity shareholders. Hence company should take some measures to ensure the shareholders in terms of risk and payment of dividend. Total asset multiplier depicts the assets of the company in terms of number of shares held. In 2016, equity multiplier ratio has been decreased due to fall in equity in 2016 by 0.42%. Times interest expenses shows the amount of EBIT that is earning before interest and tax on interest expenses. The company has increase time interest earned in 2016, by 63%. This was due to increase in earnings before interest and taxes by 64% in 2016. The company has increased its cash coverage ratio by 9% in 2016. The operating profits and net profit margin has reduced in comparison to 2015. This is due to decrease in the net sales. In calculation of profit margin, EAT means earning after tax. Return on assets defines the amount of profits earned due to assets, while return on equity defines the relationship between the earning available to equity shareholders and number of shareholders in the company. In the given case of wesfarmers, the company has increased its return on assets and return on equity due to increase in profits. Du point analysis defines the relationship between the profits and total assets of the company. Wesfarmers has increased its du point ratio due to increase in the earnings in 2016. In case of market value performances, the earning per share has been increase by 81% in 2016, this is due to increase in earning of the company and decrease in the shareholding of the company. Due to increase in the earnings per share in 2016, the price earnings ratio has been declined in 2016. There are not much variation in market to book value ratio in 2016 as compare to 2015, due to not much variation in market value and book value of the shares (Dalabeeh, 2013).
By analyzing the company ratio analysis, it can be said that the company has a good position in the market. It has a good liquidity position. Besides this the company has sufficient profits to provide dividend to the shareholders and pay off the interest expenses on long term debts. Hence it is advisable for investors to increase the shareholding wesfarmers limited (Adedeji, 2014).
Conclusion
It has been assumed by the unsophisticated readers that the data mentioned in the financial statements is purely on objective basis. The elements in financial statements involve little elements of judgment. Judgments can differ from company to company; hence it is the responsibility of the financial management of the company to disclose all the judgments in financial statements of the company. According to the ratio analysis, it has been analyzed that company has good command over liquidity has efficiency in getting converted its inventory and receivables into cash. This lays a positive impact in the mind of investors. Besides this the company profits are increased by a large percentage, which builds confidence in the minds of shareholders of the company.
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