Discuss about the Accounting Theory for Cost Accounting Projects.
Every company uses accounting theory in its management of accounting practices. These theories define the set of assumptions and methodology that used in the accounting study and function of financial reporting principles (Drury, 2013). This report explains the different accounting issues which led to the collapse of Dick Smith. Further, it discusses that there are different stakeholders that affected due to the collapse of the company.
Moreover, this report evaluates that there are two main motivating factors that influence the management of Dick smith to make accounting issues. The positive theory is also discusses that explain the actions of Dick Smith’s management. Two different financial accounting theories is explain that used by the accountant in accounting practices.
There are various accounting issues which led to the collapse of Dick Smith. These issues are Misapplication of International Financial Reporting Standards (IFRS) framework, unfair employee’s policies, Misrepresentation of financial Information, inflated earnings, and shortfall in audit quality, manipulated sales, and code of ethics. International Financial Reporting Standards (IFRS) defined as the framework that used to understand the company accounts and it also compare the company accounts with the global boundaries (Malley, 2016). This standard also defines the rules that used by the company’s accountant to maintain their books of accounts that ensure the reliable, relevant and understandable report for the internal and external users. But, this standard is not followed by the accountant of Dick Smith group.
Moreover, at the peak stage, the International Forum of Independent Audit Regulators (IFIAR) has confirmed that audit quality as the accounting problem. They also address the shortfall in the audit quality. For accounting business, code of ethics is required because it shows that accountants act in the public interest. But, Dick Smith Group does not comply the code of ethics (The Canberra Times, 2016). Inflated earnings are the other accounting issues that decline the expected profit margin of the DCG. Accountants of DCG use principle-based approach and also use the strict application of accounting standard and law. Hence, it is the big reason to declines the expected revenue and profit margin (Kaplan and Atkinson, 2015).
There are different stakeholders that have been affected by the collapse. These stakeholders are included the shareholders, banks, suppliers, employees, community and government. Following are the key stakeholders of Dick smith:
Stockholders
Stockholders are the owners of the company because they buy its shares. Hence, they have the right to claim on the company. They have right to get the company’s profit in the form of dividends. In the case of Dick smith, shareholders are concern that they cannot get the actually invested amount excluding the dividends. Since, scant financial information has disclosed by the Dick smith for shareholders. Further, Dick Smith Group get the $71.9 million earnings in the 2015 financial year but, it totally offset by a $67.1 million due to increase in working capital to fund new inventory (Low, 2016). As a result, DCG is unable to declare the dividend for their shareholders.
Banks
The company uses lenders to get finance for a business expansion, for purchasing the building and asset. Therefore, banks provide loans for major purchasing like acquiring new building. Banks expect that company meets its payment on deadlines responsibly. For this, business maintains their good relationships with creditors and to get quality financing in the long run (The Canberra Times, 2016). Dick smith gets the loan from banks to purchase the inventory and to expand the operation. But, company unable to pay the payment to banks on deadlines because of reducing profit margin and expected revenues. In this way, banks concern that they cannot recover the loan because its inventory and assets written down value have declined (Parker, et al., 2011). Hence, banks will be suffered losses in the future.
Employees
Employees are the key stakeholder who expects to earn better salaries and good perks. The company acts ethically towards their employees and also accomplishes their requirements by generating the occupational structure and providing the equitable and fair remuneration for their contribution (Nielsen, et al., 2015). But, Dick Smith group provides less salary to their employees. Further, they also announce to lose the 3300 employees from their organization due to the bad financial structure. Hence, employees are concern about to keep their job in the long run.
Suppliers
Suppliers are more critical stakeholders for the organization. Companies build the loyal relationship with suppliers. It is effective for a company to accomplish its goals and objectives. Furthermore, suppliers provide credit on the basis of company’s reputation and credit rating in the market. In the case of Dick smith, suppliers provide credit supply because it expanded their operation and its reputation in the market was good (Deegan, 2013). But, due to changes in demand pattern of the customer production cost are increased. Moreover, cash sales and cash receipts have declined. Hence, companies unable to provide the payment to suppliers on the time (Drury, 2013). Suppliers are concern about their payment due to declines creditworthiness of the company.
In the present business world, different accounting issues arise because of several motives. These accounting issues are Overstatement of revenues, Understatement of expenses, overstatement of assets and understatement of liabilities, and Misapplication of International Financial Reporting Standards (IFRS) framework (Knapp, 2016). Another is Misrepresentation of financial Information, inflated earnings, and a shortfall in audit quality manipulated sales and code of ethics.
Management of Dick smith represented misleading financial information in the market to attract investors and shareholders. Further, the shareholders and market reaction depends upon the managers and directors’ actions. These actions were increasing profit, growth, EPS, and have large bonuses at stake (Malley, 2016). Therefore, companies’ wants to misrepresent the financial reports that investors want to see.
Another motive is showing the good credit worthiness of the company in the market. Moreover, creative accounting is used by management to hide the particular bad year of the company. It also forces the exceptionally good year for the company. This is also used by management of Dick smith to demonstrate the continued pressure to do best. It is effective for management to smooth out the outcome because of showing the favorable impression about the stability and sustained improvement (The Canberra Times, 2016). Besides this, to boost the assets and to avoid the takeover, the company obtains accounting issues.
Positive theories explain the actions of Dick Smiths management because this theory is based on the assumption. In this theory, the company represents modify financial information that its stakeholders wants to see. Hence, its stakeholders invest the capital and provide the credit. But, this investment does not provide the benefits because of accounting issues (Hatch, 2016). As a result, company collapse and its stakeholders suffer loss.
Following two different accounting theories have relevance for the company.
Normative Theory
This theory is based on the researcher’s beliefs about particular circumstances. It provides prescription and also discussed the existing act of accountants. In this theory, accounting standard is more consistent and logical. This theory also increases the international compatibility for the accounting standard (Knapp, 2016). Therefore, standard setters are more accountable to make the feasible decisions.
In contrast to this, the smaller organization may feel overburden due to report requirement. This theory only focuses on the economic aspects hence ignore the transactions that are not involved in the market contact and exchange of property rights (Knight, 2016). Moreover, it represents the codification of current accounting practice.
Positive Theory
Positive accounting theory is concerned with explaining and predicting the accounting practices. It is based on the assumption that all individuals are self-interested and motivated through the wealth maximization. In this theory, the company makes the prediction by using the real world observations (Govendir and Wells, 2016). It also makes modification in the accounting practices. This modification is based on the actual observation.
Moreover, this theory highlighted the accountants and explains that how accounting can be used to assist in the performance of make relationships. These relationships can exist between the owners and managers, and between managers and the firm’s debt providers. But, this theory does not incorporate the notions of loyalty or morality.
On the basis of above interpretation, it is said that normative theory is an important theory because it is not based on the observation (Low, 2016). Through using this theory, accountants provide accurate financial information about the company because it entails the existing accounting practices.
Conclusion
On the basis of above interpretation, it is concluded that dick smith collapsed due to different accounting issues that were existing in the company. There are four key stakeholders that got affected due to the collapse of the company. Further, some motivating factors are influencing the management of Dick smith to take the accounting issues action. Normative and positive are two accounting theories that are used by the company in accounting practices. The positive theory explains the action of the Dick smith. But, the normative theory is important to provide reliable accounting information.
Deegan, C. (2013) Financial accounting theory. Australia: McGraw-Hill Education.
Drury, C. M. (2013) Management and cost accounting. Chicago: Springer.
Govendir, B., and Wells, P. (2016) Why Did Dick Smith Fail? [Online]. Available at: https://www.lifehacker.com.au/2016/07/why-did-dick-smith-sale/ (Accessed: 2 September 2016).
Hatch, P. (2016) Dick Smith accused of inflating earnings to meet performance expectations. [Online]. Available at: https://www.smh.com.au/business/retail/dick-smith-accused-of-inflating-earnings-to-meet-performance-expectations-20160711-gq3kit.html (Accessed: 2 September 2016).
Kaplan, R. S., and Atkinson, A. A. (2015) Advanced management accounting. USA: PHI Learning.
Knapp, J. (2016) From Float to Failure: The Ugly Story of Dick Smith. [Online]. Available at: https://www.lifehacker.com.au/2016/03/from-float-to-failure-the-ugly-story-of-dick-smith/ (Accessed: 2 September 2016).
Knight, E. (2016) Dick Smith Group’s autopsy – bad strategy, not foul play. [Online]. Available at: https://www.smh.com.au/business/comment-and-analysis/dick-smith-groups-autopsy–bad-strategy-not-foul-play-20160713-gq4t8b.html (Accessed: 2 September 2016).
Low, C. (2016) Dick Smith suppliers, dividends in liquidator’s sights. [Online]. Available at:
https://www.smh.com.au/business/retail/dick-smith-suppliers-dividends-in-liquidators-sights-20160714-gq5m3e.html (Accessed: 2 September 2016).
Malley, A. (2016) Dick Smith collapse raises more questions for the accounting profession. [Online]. Available at: https://www.smh.com.au/business/retail/dick-smith-collapse-raises-more-questions-for-accounting-profession-20160721-gqagz5.html (Accessed: 2 September 2016).
Nielsen, L. B., Mitchell, F., and Nørreklit, H. (2015) ‘Management accounting and decision making: Two case studies of outsourcing’, In Accounting Forum, 39 (1), pp. 64-82.
Parker, L, Guthrie, J and Linacre, S (2011) ‘The relationship between academic accounting research and professional practice’, Accounting, Auditing & Accountability Journal, 24 (1), pp. 5-14.
The Canberra Times (2016) Dick Smith collapse needs close scrutiny. [Online]. Available at: https://www.canberratimes.com.au/comment/ct-editorial/dick-smith-collapse-needs-close-scrutiny-20160105-gm038s.html (Accessed: 2 September 2016).
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