The current assignment aims to choose two business types and comparing the same in terms of the financial statement reporting procedure of both the organisations and the other disclosures provided to the users. In this context, Nobes (2014) remarked that financial reporting takes into account the disclosure of financial information to the management and the public of an organisation over a particular timeframe. The two types of organisations that have been selected for meeting the purpose of this assignment include the service business and the retail business in Australia. The service organisation selected is Telstra Corporation and the retail organisation selected is Woolworths Limited. Therefore, the assignment sheds light on comparing the two organisations in terms of business nature, records of transactions, production of financial reports, format of financial reports and extent of disclosure.
Nature of the business, transaction records, preparation of financial reports, financial report formats and extent of disclosure:
Nature of the business:
Telstra Corporation is one of the largest telecommunication organisations in Australia having significant interest in providing mobile services to the nation. It began its journey in 1901 and it is now engaged in operating telecommunications networks and markets voice, internet access, mobile, paid television and other entertainment services (Telstra.com.au 2017). The organisation works in close association with customers and the other stakeholders associated with the organisation.
The nature of the business of Telstra Corporation is associated closely with the procedure that the Australian economy grows and operates (Jung, Park and Chung 2016). In times of positive economic environment, the spending ability and the consumption of the individuals increase. As a result, it helps in raising the demand for both telecommunication services. Hence, this emerges out as a source of demand for the organisation, which would go into the mode of boom during such stages. An instance of such phase includes the timeframe from 2000 to 2007 during the period of global boom. However, such trend might decline in case of economic slowdown (Leuz and Wysocki 2016). This is because the individuals tend to minimise their spending on availing telecommunication services.
Transaction records:
In order to record the transactions, Telstra Corporation records purchase, sales, repayment and loan at the time of occurrence. After that, these transactions are totalled into ledger accounts. These accounts consider a particular activity category like expenditures, revenue, accounts receivable, accounts payable and cash in hand. As a service provider carries an inventory, it would need to use the accrual method, instead of cash method at the time of developing accounts for taxation (Frias?Aceituno, Rodríguez?Ariza and Garcia?Sánchez 2014). In case of Telstra Corporation, credit sale is listed at the time of delivery of products, instead of the final payments of the customers. In order to depict this method, the accountants of the organisation conduct adjusting entries to the ledgers. This denotes that addition of entries does not depict the record of transactions, which is made through reference to the documents like invoices, instead of cash records.
At the time of tracking inventory when the expenses are matched to costs and in valuation of assets at the end of the accounting year, Telstra Corporation places value on each item. In this case, the organisation uses First-In-First-Out (FIFO) method by treating each sold unit, as if the addition has been made recently. This is because Last-in-First-Out method could not be used in “International Financial Reporting Standards (IFRS)”.
Preparation of financial reports:
As Telstra Corporation is a service organisation in Australia, it mainly focuses on three types of accounts related to inventory, which include raw materials, work-in-progress and finished goods. In this context, Martínez?Ferrero, Garcia?Sanchez and Cuadrado?Ballesteros (2015) cited that a service organisation utilises human labour for developing a service for sale. The inventory of Telstra Corporation comprises of raw materials, which include materials that are to be used in developing service. In addition, it also comprises of work-in-progress that include labour, material and other cost of services obtained until date for service yet to be finished (Schrand et al. 2016). Furthermore, it takes into account the finished services, which include the cost of finished services ready to be sold. Such inventory valuation is disclosed in the financial statements of the organisation. The amounts are depicted individually on the face of balance sheet and they are disclosed in footnotes.
Format of financial reports:
Telstra Corporation provides three different kinds of financial reports, which include income statement, balance sheet statement and cash flow statement. In this case, the income statement and the balance sheet statement of the organisation have been taken into consideration. The format of each of this report of the organisation has been illustrated as follows:
Income statement:
According to the above figure, the organisation has subtracted cost of sales along with from the sale of goods and services along with other operating revenue to arrive at the gross income. After that, the operating costs are subtracted to arrive at the profit before interest expense and income tax. The financing cost and income tax expense are subtracted after that to arrive at the net income of the year (Cheng, Dhaliwal and Zhang 2013).
Balance sheet statement:
The above table denotes that Telstra Corporation classifies assets as current assets and non-current assets, while the liabilities are categorised as current liabilities and non-current liabilities. The overall liabilities are subtracted from the total assets to arrive at the net assets. The items of the equity values are totalled and then they are matched with the net asset value (Biddle et al. 2015).
Extent of disclosure:
The following tables help in demonstrating the extent to which Telstra Corporation has made its accounting disclosures:
From the above table, it has been found that the non-current asset value comprising of impairment loss reversal has $1,314 million in 2016. The losses related to impairment have been realised after Telstra Group has been consolidated. In addition, the organisation has depicted its expenditure commitments related to property, plant and equipment of $1,101 million in 2016; however, the realisation is not depicted in the financial statements. Some of the other disclosures of the organisation include indemnities, performance guarantees and financial support. Along with this, the organisation has made disclosures regarding its tax funding arrangements, controlled security investment, joint venture interest and associated entities through utilisation of the cost method.
Nature of the business, transaction records, preparation of financial reports, financial reports formats and extent of disclosure:
Woolworths Limited is one of the leading food retailers in Australia and it is founded in 1924. It focuses on price reduction and the quality of its products (Woolworthsgroup.com.au 2017). Moreover, the intention is to maximise shareholders’ wealth along with providing maximum customer satisfaction. Since the size of the organisation is large, there is greater cost of operations. This has lead to rising level of debt and declining revenue margins (Hanlon, Hoopes and Shroff 2014). The opportunity to increase the overall sales of the organisation is achieved through rise in demand.
For transaction recording, Woolworths Limited uses to record purchase, sales, repayment and loan, when they take place. After that, such transactions are totalled into ledger accounts. In addition, such accounts take into account a particular activity category like expenditures, revenue, accounts receivable, accounts payable and cash in hand (Hunton, Libby and Mazza 2015). Since inventory is carried on the part of the retailer, cash method could be used, instead of accrual method at the time of developing accounts for taxation (Flower 2016). For Woolworths Limited, credit sale is listed at the time of final payments of the customers, instead of the delivery of products. No adjusting entries to the ledger accounts are needed in this case. Hence, it could be stated that omission of entries fails to depict the record of transactions, which is made by referencing documents like cash records, instead of invoices.
As Woolworths Limited is a retail organisation in Australia, it mainly focuses on three types of accounts related to inventory, which include raw materials, work-in-progress and finished goods. In this context, Zeff, Van Der Wel and Camfferman (2016) cited that a retail organisation utilises direct materials to prepare a product for sale. The inventory of Woolworths Limited comprises of raw materials, which include materials that are to be used in developing products. In addition, it also comprises of work-in-progress that include labour, material and other cost of services obtained until date for service yet to be finished (Cascino et al. 2016). Furthermore, it takes into account the finished services, which include the cost of finished services ready to be sold. Such inventory valuation is disclosed in the financial statements of the organisation. The amounts are depicted individually on the face of balance sheet and they are disclosed in footnotes.
Woolworths Limited provides three different kinds of financial reports, which include income statement, balance sheet statement and cash flow statement. In this case, the income statement and the balance sheet statement of the organisation have been taken into consideration. The format of each of this report of the organisation has been illustrated as follows:
Based on the above table, the cost of revenues has been subtracted from the sale of goods and services along with other operating revenue for determining the gross profit. After that, the deduction of operating costs is made to determine the profit before interest expense and income tax. After that, the deduction of operating costs is made to ascertain the profit before financing cost and income tax. The deduction of cost of financing and income tax is made for ascertaining the net income of the year (Skaife, Veenman and Wangerin 2013).
From the above table, it could be identified that Woolworths Limited segregates assets in the form of current assets and non-current assets. In a similar fashion, the organisation is involved in segregating in the form of current liabilities and non-current liabilities. The deduction of total liabilities from the overall asset base is made to ascertain net assets. The items related to equity values are totalled and then the value is matched with the value of net assets
Woolworths Limited has made disclosures related to operating segment reporting, in which the organisation has presented different groups of reporting segments and the revenues realised from each segment.
In addition, the organisation has provided detailed description of the depreciation and amortisation expenses annually along with impairment and employee benefits expenses. Finally, the organisation has provided detailed description of the financing costs along with the description of trade receivables, inventories, other financial assets, property, plant and equipment and intangible assets.
From the above evaluation, it has been found that the demand for Telstra Corporation might decline during economic slowdown. On the other hand, the demand for the products of Woolworths Limited would not decline as much as Telstra Corporation, as food products and other grocery items are always in demand in the market. For recording inventory, the accrual method is used on the part of Telstra Corporation, while the cash method is used on the part of Woolworths Limited. However, both the organisations have represented the financial statements in a similar manner. In terms of disclosures, the level of the same is greater in case of Woolworths Limited compared to Telstra Corporation. The main reason behind this is that the former has disclosed segment wise operating revenue, which was not disclosed in the annual report of Telstra Corporation. Thus, in terms of quality of financial reporting, Woolworths Limited has been enjoying competitive edge over Telstra Corporation.
Conclusion
Based on the above evaluation, it could be stated that Telstra Corporation is one of the largest telecommunication organisations in Australia having significant interest in providing mobile services to the nation. As a service provider carries an inventory, it would need to use the accrual method, instead of cash method at the time of developing accounts for taxation. On the other hand, Woolworths Limited is a giant food and other grocery retailers in Australia that records purchase, sales, repayment and loan at the time of occurrence. After that, these transactions are totalled into ledger accounts. For recording its inventory, the organisation uses cash method, instead of accrual method. In terms of quality of financial reporting, Woolworths Limited has been enjoying competitive edge over Telstra Corporation due to disclosure of segment wise revenue.
References:
Biddle, G.C., Callahan, C.M., Hong, H.A. and Knowles, R.L., 2015. Do Adoptions of International Financial Reporting Standards Enhance Capital Investment Efficiency?.
Cascino, S., Clatworthy, M., García Osma, B., Gassen, J., Imam, S. and Jeanjean, T., 2016. Professional investors and the decision usefulness of financial reporting.
Cheng, M., Dhaliwal, D. and Zhang, Y., 2013. Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting?. Journal of Accounting and Economics, 56(1), pp.1-18.
Flower, J., 2016. European financial reporting: adapting to a changing world. Springer.
Frias?Aceituno, J.V., Rodríguez?Ariza, L. and Garcia?Sánchez, I.M., 2014. Explanatory factors of integrated sustainability and financial reporting. Business strategy and the environment, 23(1), pp.56-72.
Hanlon, M., Hoopes, J.L. and Shroff, N., 2014. The effect of tax authority monitoring and enforcement on financial reporting quality. The Journal of the American Taxation Association, 36(2), pp.137-170.
Hunton, J.E., Libby, R. and Mazza, C., 2015. Retraction: Financial Reporting Transparency and Earnings Management. The Accounting Review, 90(4), pp.1711-1711.
Jung, W.O., Park, S.O. and Chung, H., 2016. Debt financing and voluntary adoption of the international financial reporting standards: Evidence from Korean unlisted firms. Emerging Markets Finance and Trade, 52(1), pp.39-51.
Leuz, C. and Wysocki, P.D., 2016. The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), pp.525-622.
Martínez?Ferrero, J., Garcia?Sanchez, I.M. and Cuadrado?Ballesteros, B., 2015. Effect of financial reporting quality on sustainability information disclosure. Corporate Social Responsibility and Environmental Management, 22(1), pp.45-64.
Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.
Schrand, C.M., Armstrong, C.S., Taylor, D.J., Verrecchia, R.E., Wagenhofer, A., Casey, R.J., Gao, F., Kirschenheiter, M.T., Li, S., Pandit, S. and Hribar, P., 2016. Journal of Financial Reporting A Publication of the Financial Accounting and Reporting Section of the American Accounting Association.
Skaife, H.A., Veenman, D. and Wangerin, D., 2013. Internal control over financial reporting and managerial rent extraction: Evidence from the profitability of insider trading. Journal of Accounting and Economics, 55(1), pp.91-110.
Telstra.com.au. (2017). Telstra – Annual reports – Investors. [online] Available at: https://www.telstra.com.au/aboutus/investors/financial-information/reports [Accessed 30 May 2017].
Woolworthsgroup.com.au. (2017). Woolworths Group: Quality Brands and Trusted Retailing. [online] Available at: https://www.woolworthsgroup.com.au/ [Accessed 30 May 2017].
Zeff, S.A., Van Der Wel, F. and Camfferman, C., 2016. Company financial reporting: A historical and comparative study of the Dutch regulatory process. Routledge.
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