Discuss about the Collapse of Dick Smith.
Understanding the reason for the failure of a business is essential in identifying the life cycle of the business so as to put plans in place that can revive the business. In the bid of understanding the reasons as to why businesses fail as others succeed, examination of the business performance is essential (Osuala 2015, p. 12). Dick Smith was known to be one of the iconic electronic retailers in Australia. However, the business failed as a result of external and internal factors. This paper presents some of the accounting issues that led to the failure of the business concerning different business theories and accounting practices. 32489
Before the successful listing on the stock exchange of the organization in late 2013, it had enjoyed strong growth sales that were underpinned by the new lines of business and expansion plans. However, in the tough times, the management had a strong focus on the possibility of increasing the revenues that would hopefully lead to profit generation. Their focus leads to the expense of sustainable growth as the business struggled to maintain its performance.
The management of the company carried out massive inventory purchasing failures out of an ill-thought and with costly expansion strategies. As a result, the expensive expansion plans together with the surplus earning of the employees forced the company to get into significant borrowing deals since the process ate up all the surplus of the company. As a result, the Australian iconic electronic retailer began to lose its market as a result of a change in the customer preference. Moreover, these expansions plans were not edited and went unchecked for a long time, a situation that led to the retailer carrying too much stock that could not be sold and yet were overvalued.
A few months later, a rapid sale clearance was necessary despite the fact that it was a time of good sales, and the retailer could have achieved strong margins. Also, the cash receipts were not sufficient to meet all the commitments of the organization. This lead to the failure of the business as there was no cash resource that was sufficient to meet both its current and future commitments. The losses were attributed to very poor sales and margins lease provisions; inventory writes downs, as well as other asset impairments such as;
The major stakeholders of the business were the Anchorage Capital Partners’ Bill Wavish and Phillip Cave as they represented a private equity firm on the board of Dick Smith. The collapse of the business was grilled on the role of these two stakeholders. For instance, Mr. Cave fully corporate with the receivers on a claim of the private equity heists, an allegation that had been denied by the Anchorage Capital Partners. According to Yamey (2011, p. 89), customers are the primary stakeholders that determine the rise or fall of business. The failure of Dick Smith has also affected the customers since a business that was once an electric retail icon failed to a point of closure.
Positive accounting theory views a company or a business organization as the total of the contracts of the business. It posits that many retail businesses are fundamentally about the contracts that dictate the core values and goals of the business; efficiency is the core driver of the success of the business. Positive accounting theory hence examines the real life business occurrences as it seeks to understand and as well predict how the actual market addresses the accounting challenges and treatments. The theory hence looks into the actual world events and transactions as it examines how companies are accounting for the events with the focus on the economic consequences that affect the decision-making of the management.
On the other hand, normative accounting theory takes an opposite approach by telling the accountancy policy makers of what needs to be done depending on the theoretical principle instead of focusing on what is already happening with the companies. It is thus more of a deductive process than positive accounting as it looks into both the theory and deductible policies other than just focusing on the accounting principles. About positive and normative accounting theories, the management and stakeholders of Dick Smith failed to account for the financial securities in a manner that hid the material changes and decision-making towards beneficial values that are pertinent to the success of the business. As a result, the daily entrepreneurship of the company no longer presented accurate accounting information and progress of its financial position. The normative theory also came into view with the management system of the business that finally leads to the fall of the retail. For instance, it became difficult to judge whether the income and cost from the contract be immediately recognized, as a future lump sum, or incrementally be accepted with time according to Liveris (2011, p. 19).
Both positive and normative accounting theories usually operate in monetary unit assumption, the going concern assumption, economic entity assumption, as well as the periodicity assumption. According to the positive theory, the actions of the business owner should be separate from the business activities while the going concern has it that the business will always continue without a bankruptcy or dissolution, an assumption that is made in the process of preparing the financial statements of the business. In the case of poor performance of the business, GAAP requires that the financial statements of the business be prepared in a reflection to the liquidation basis of the business holding (Wamrack 2014, p. 15).
Positive theory requires the domination of the financial statements in relevant numerical currency depending on the business as opposed to the product units. The periodicity assumption breaks the business activities into fiscal periods as per the recurring financial annual or monthly reporting according to Rudolf (2011, p. 19). The primarily accepted business management principles require the adherence to the matching principle and the historical cost of the business. For instance, Dick Smith management would have ensured that the revenues and expenses matched into the period in which they occur so as to evaluate the predicted future performance of the business.
Normative also called prescriptive theory is mainly concerned with the recommendation of accounting policies as well as the right way of practicing accounting policy. It is hence focused on deriving the true income of accounting assets and profit figures of business and thus makes it useful in the discussion of the useful information that can be adopted in making business decisions according to Husband (2010, p. 554). In the process of adopting the expensive expansion plans together with the surplus earning of the employees, the adoption of the normative theory is essential in the decision-making process. Adopting this theory in decision making would have saved Dick Smith from getting into significant borrowing deals that lead to the instability and fall of the whole business.
Conclusion
Accounting theory is a definitive and directive principle that is framed to analyze accounting practices. It is scientific as it is based on sound reasoning thus helps in solving complicated business issues that arise from the dynamic business environment. On the other hand, accounting practices records and analyzes accounting activities such the loss and profit of the business so as to evaluate the progress of the business. Accounting practices are thus a valid way of communicating the progress of the business. It is hence clear that accounting theory and accounting practices are closely related and interdependent as they are integral to each other. The management of Dick Smith retail business could have been more successful when it adopted both accounting theories and practices.
References
Coetsee,D,2010, “The role of accounting theory in the development of accounting principles”, Meditari Accountancy Research, Vol. 18 Iss: 1, pp.1 – 16
Husband, R., 2011, “the Entity Concept in Accounting: The Accounting Review, October, Vol. 29(4) Pp552- 563.
Liveris, A, 2011, “Ethics in Business: Effective Business Planning”, vol. 29, no. 3, pgs. 17-18
Osuala, C, 2015, Introduction to accounting theory, 3rd Edition, Enugu, Africana First Publishers Limited
Rudolf, P, 2011, “The Rising Powers from emerging markets: The changing face of International Business”, The Global Strategy Journal, Vol. 10, no. 5, pgs. 15-20
Wamrack, W, 2014, “The effectiveness of accounting theory and accounting practices: A management Perspective”, International Business Journal, Vol.1, no. 2, pg.15
Yamey B, 2011, early views on the origins and Development on Book-Keeping and Accounting, Accounting and Business Research (Special Accounting History) issues, New York, Standard Text Press. Pp81-91
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