Comparison Of Financial Reports For Manufacturing And Retail Businesses

Nature of Business

The report demonstrates the nature of two types of business that is retail business and manufacturing business. Manufacturing business is responsible for preparing the finished goods by using component and part of raw materials. On the other hand, retail business acts as intermediary between final consumers and manufacturing business. It involves the process of selling goods and services to individual consumers using different channel of distributions (Acito and Khatri 2014). Explanation of the report has been done in context of transaction records, nature of business, financial report preparation and extent of disclosure of both types of business. The later part of report deals with the comparison of formats of preparing financial report, recording transactions of two types of business. For representation of the formats of the financial report of two different types of business, one retail and manufacturing business has been selected from Australia. Adelaide Brighton limited is the manufacturing business and Wesfarmers limited is retail business. Adelaide Brighton limited is the manufactures of lime, cement and dry blended products in Australia and has manufacturing and distribution facilities. On other hand, Wesfarmers limited operated with their supermarket stores and has diverse business operation. It has various industrial businesses.

Manufacturing business is responsible for buying the raw materials and selling them to retailers at prevailing selling price by converting them into finished goods. It is type of business that generally make use of parts, components and raw materials for manufacturing finished goods. In today’s world, manufacturing business is generally comprised of computers, machines, robots and humans for creating a product in specific manner. Assembly line are mostly used by such business that is a process where the products are placed in sequence from one station to another. Only few parts are required to be assembled in such business, as the process of assembling the huge parts can be very complicated (Biondi and Zambon2013). Usually, manufacturing business have more environmental laws and legal regulations compared to other types of business. In manufacturing business, the products or raw materials are bought with the intention of producing another product by using the materials. Thus, there is a transformation of products into final products that are bought either by another manufacturing business or by retail business.

The financial report of manufacturing business comprise of balance sheet, income statement, statement of cash flow and cost of goods manufactured statements. There are a number of manufacturing financial statement relationships in addition to important financial statement terminology. The major difference between the retail business and manufacturing business is the know-how of computing cost of goods manufactured. There are several different accounts prepared by manufacturing companies compared to retail and services business (Palepuet al. 2013). Manufacturing companies for producing the products intended for sales use purchased raw material. It has three types of inventory accounts and this comprise of raw material, Work in progress and finished goods. Inventories involve of raw materials, materials, and parts coming up to be used in the process of production. Work in progress comprised of labor, materials and manufacturing costs gathereduntil date (Eyraud2016). Finished goods account include completed products that are ready for sale.

Transaction Records

The manufacturing business has a number of unique transaction records that are not found in retail business. Most common types of transaction of manufacturing business includes purchasing of raw materials, freight on material purchased, factory insurance, material allowance and return, incurrence of manufacturing overhead and incurrence of direct factory labor. Three types of transactions are related to factory labor, material and manufacturing overhead. Accounting cycles of manufacturing business are comprised of making journal entries including the post to accounts and transactions related to manufacturing costs. It also includes preparation of trail balance, making adjusting entries and post to general ledger, preparing adjusted trial balance, making closed entries for expenses and revenue accounts, making entries for appropriately transferring manufacturing cost to cost of goods manufactured account. There are some extended disclosures made by manufacturing companies in agreement with Integrated Financial Reporting standards (Storozhuk2013).The basic element of cost of goods manufactured are manufactured used, manufacturing overhead, factory labor and work in process inventory.  There are there basic cost elements involved in cost of goods manufactured and this involves factory labor, materials and manufacturing overhead.

The report format for the manufacturing business Adelaide Brighton limited is presented by taking the example of the manufacturing company in Australia. For this purpose, Adelaide Brighton limited has been selected that prepares income statement, statement of comprehensive income, statement of changes in equity, statement of cash flow and balance sheet in accordance with the Australian accounting standard and interpretations issued by Corporation act 2001 and Australian standard accounting board (Collier 2015). Preparation of financial statement is done for the company is a profit entity. The various consolidated financial statement of the group also comply with the International accounting standard board and international financial reporting standard. All the liabilities and assets of the subsidiaries are incorporated in the financial statements. In the financial report, the companies and its subsidiaries are referred to as group. There are various assumptions and estimates in preparing the financial statement. The estimates of accounting will rarely equal the actual results. All the business combinations involving business and equities under common control is the acquisition method of accounting (Dillard and Vinnari 2017).  

Under the existing GAAP, there are some extended disclosures made by manufacturing companies. They are required to make careful assessment for determining whether excise duty should be netted off under the accounting standard as it is levied on production of goods. Gross inflow of economic benefits are considered as revenue and this involves receivables, inflow of cash and other considerations. Recognition of revenue is required to me made in disclosure of the statement. If there is a contract manufacturing arrangement and these needs to be determined in the disclosures. It needs to depict some of other considerations of tax, conceptual matters, barter arrangement, any form of leases, and disclosure about various expenses relating to sales promotion (Horngrenet al. 2013). Disclosure about the current accounting policies along with previous accounting policies and some extraordinary items are mentioned in the notes as a part of financial statement disclosures. Extended disclosures are considered relevant to investors as the disclosures accompanying the financial statements provides the information about the decisions that needs to be made concerning various accounting judgment that is made by management of manufacturing businessin financial statement preparation (Brincaet al. 2016).

Comparison of Financial Report Formats

The organization receives assistance with corporate disclosures and for the disclosures purpose, financial liabilities rational value and assets must be assessed for acknowledgement and measurement. Financial instruments carrying amount are disclosed in the balance sheet approximate to their fair values. As per the accounting standard 13, it requires the discovery of fair value measurement by level of fair value measurement pyramid. Value measurement hierarchy consist of three levels. Level 1 is the quoted prices in the active market for identical liabilities and assets. Level 2 is included in the level 1 and are apparent for liabilities and assets. Level 3 is for the liabilities and assets that are not based on the market data that are observable (www.annualreports.com 2017). There are several assets and liabilities of the group that are not measured in fair value and are required to be disclosed in the group.

Retail companies purchase inventories and that is sold to final consumers. Assets are considered used up when the inventories are sold and the cost associated with that inventories are transferred to income statement from balance sheet that is treated as expense. Such expense is referred to as cost of goods sold and the inventory account is referred to as merchandizing inventory. Retail business traditionally conduct business in cash particularly in regarding to identity of purchasers. There is cash sales transaction record that records for all the sales made involving any amount of cheques that have been received. It makes the recording of various business purchases that is maintained in account statement. Various business expenses are recorded such as electricity, rent, telephone, expense and motor vehicle expenses. In this regard, we have taken Wesfarmers limited for depicting the financial report formats and presentation.

There are three types of financial statements prepared by retail business and this comprise of balance sheet, cash flow statement and profit and loss statement. Income statement of retail business is prepared in accordance with the International account standard1 presentation of financial statements. Financial statement are prepared generally on accrual basis of accounting and it does not report transactions related to owners of equity.

For the depiction of the financial report of the retail business, the retail company has been selected from the Australian stock exchange. For this purpose, the selected company is Wesfarmers limited. The financial report of the Wesfarmers limited has been prepared in agreement with Australian Corporation act 2001, requirements and in accordance with the International accounting standard board and Australian accounting standards board. Financial report of the group has been prepared based on historical cost conventions. The consolidated financial statement comprised of all the financial statement of the group. Preparation of financial report has been done by eliminating all the intercompany balances and transactions, profit and losses, all the intragroup transactions and income statement. 

Financial Statement Disclosures

The notes to financial statement of the Wesfarmers limited provides information on items that requires disclosure for complying with the Australian accounting standard and some other regulatory pronouncement. Nevertheless, these are not considered as critical in understanding the group financial position. Several disclosures arise because of financial instrument being denominated in the currency. For the fair value of measurement, the group as that of manufacturing company mentioned above uses the same categories. Requirement of disclosures are made in accordance with Australian Accounting standard board. Organization comply with Tier 1 reporting requirement that needs to provide with disclosures for enabling the users to evaluate changes in the liabilities arising from cash flow, non-cash flow and other financing activities. Some of the disclosures about the nature of liability covered by premiums paid and insurance subject to requirement to confidentiality requirement under insurance contract (Wesfarmers.com.au 2017). Financial report also contain the disclosure of information about tax that are publishable in separate taxes paid report. Report also makes disclosures about all the procedures for obtaining audit evidence.

The financial statements of manufacturing firms are more or less similar to those of retail business in many respects. However, the manufacturing business have basic differences concerning inventories, existence of certain transactions relating to labor, material and overhead.

The balance sheet of manufacturing business is identical to balance sheet of retail business in terms of basic elements. Only difference in two type of business in balance sheet presentation is section of current assets. Manufacturing has three types on inventory account unlike retail business having one inventory account. Manufacturing business has three types of basic inventories account that is raw material account, work in progress and finished goods accounts. Contrary to this, retail business has only one inventory account typically inventory accounts. Unlike retail business, manufacturing firm typically has statement of cost of goods manufactured. There are many complexities involved in accounting for overhead in manufacturing firms(Waybrightet al. 2013). The component for computing cost of goods sold for both types of business can be explained with the help of an example.

Manufacturing business (Adelaide Brighton limited)	Retail business (Wesfarmers limited)
Cash	Cash
Cost of goods manufactured	Merchandize inventory
Accounts receivable	Accounts receivable
Finished goods (Beginning)	Freight expenses
Finished goods (Ending)	Selling expense
Selling expenses	Merchandize purchase

The above table depicts the difference in computation of cost of goods manufactured.

Inventories of manufacturing business is called finished goods unlike merchandise inventory in case of retail business. Accounting for merchandized purchased is far more complicated that accounting for finished goods.

Conclusion:

From the above discussion, it can be concluded that financial report of manufacturing business is similar to retail business in many respects. There are certain transactions made by manufacturing business that forms the basis of preparing the financial statements. The manufacturing firms has the separate section if cost of goods manufactured unlike retail business as the former in involved in producing the product that is sold to retail business. Financial statement of both the business should be well understood for making better financial decisions as the objectives are associated with the liabilities, assets, expenses, revenue and capital.  

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