Financial Accounting And Financial Report †Myassignmenthelp.Com

Question: Discuss About The Financial Accounting And Financial Reporting? Answer: Introducation Financial accounting is an activity through which the transactions entered into by the company are recorded on the regular basis and the results thereon are provided to the management of the company. Simultaneously the financial reporting is done. It is materialized with the preparation of the report namely annual report. Annual report helps in providing the financial information for the benefit of the stakeholders of the company. The report under study has followed the route beginning from accounting policies adopted by the company and ending with the framework that the company has followed for the purpose of financial accounting and reporting. For the purpose of conducting an investigation and for the preparation of the investigation report, the company has been selected from the Australia Wesfarmers Limited. The company is incorporated in Australia and listed in the Stock exchange of Australia. The report has been started with the brief description of the accounting policies which are detrimental for the organization and which helps in defining the factors which will help the company in achieving the success with full hands. Then it moves towards the identification of the leniency enjoyed by the managers in assessing and adopting the particular accounting policy and the particular accounting treatment. This leniency is further analyzed with accounting strategies that have been adopted which further had led the managers to distort the performance of the company in any manner. Along with the degree of leniency the degree at which the frauds and mistakes are being done at the accounting level and as well as at the reporting level has been detailed. The study further proceeds with the introduction to the framework of accounting and has detailed the companys compliance with the conceptual framework of accounting. The investigation has then ended up with the conclusion as to the financial accounting and the financial reporting practices adopted by the company. Estimates And Accounting Policies Before preceding the investigation report, at first the brief introduction of the working of the company shall be analysed. The company selected for the purpose of achieving the investigation is Wesfarmers Limited. The company is incorporated in the country of Australia and with the passage of time has listed itself over the recognized stock exchange of India. Earlier it was only a cooperative society in the year of 1919 and now is regarded as the largest company in the Australia. Wesfarmers Limited has been in the same line of business since its inception. It is in the business of providing the all household items and appliance at one place so that the consumers are not required to deviate from one shop to another shop. Thus, the company has been working as the super departmental store and is the one of the biggest competitor of Woolworths Limited. The company also has the industrial division wherein chemicals and fertilizers are supplied. The items that the company provides consist of fresh fruits, fresh vegetables, ovens, mixer and grinder and other similar household items and appliances. (Company Official Website, 2017). On 30th of June 2017, the financial year has ended up and the annual report of the company has been analysed for that year and the immediately preceding previous year. The investigation has been started with the identification of the key accounting policies that the company has adopted and mentioned in the notes to accounts of the annual report. These are: In the starting of the notes to the financial statement, it has been mentioned that the company has made the various judgments and estimates for future events while applying the accounting policies at the whole group level which have the material effect to financial reporting. The judgments and the estimates so made are related to the nine major items. It includes income, tax expense, inventories, Property Plant and Equipment, Goodwill and Intangible assets, Provisions, Impairment, Joint ventures and contingencies. In note number of 1 of the notes to the financial statements of the company, the recognition of the income has been described. As per the recognition principle so given, the revenue is valued at the market value of the amount that will be received or receivable from the customers for selling the goods. It is recognized when the risk related to the goods and the related rewards thereon has been passed on to the buyer and the amount so recognized as revenue can be measured in the reliable terms. The related risks and rewards are considered to be transferred when the buyer of the goods receives the possession of the goods. In the case of services, the revenue is liable to be recognized depending upon the stage of completion of the services. Interest on the advances given to other parties are recognized at the time when it get accrues to the company and is measures by using the effective interest rate which covers the discounted future cash flows over the life of the financial asset. Oth er component of revenue is the dividend which is recognized at the time when the company receives the right to have the dividend. In case of the revenues, the company has made the two key estimates one is related to the loyalty program and other one is related to the gift cards. In the former the revenue is recognized at the time when the points are redeemed and therefore the revenue is deferred in the next year. In the later the revenue is recognized at the time of redeeming the card and the purchase of goods made by the customers with companys cards or when it is explicit that the card is no longer to be used whichever is earlier. In the former case the company has deferred the revenue of 267 million dollars in the financial year ending 30th of June 2017 and in case of latter, the amount of 217 million dollars in the financial year ending 30th of June 2016 (Anastasia, 2015). In accordance with the note number six of the financial statements of the company, the inventory is valued at the lower of cost or the value which can be fetched from the market. Fetching value is equals to the selling price of the product less the cost that will be incurred in selling the product. The company has recorded the value of 6530 million dollars as the inventory for the financial year ending June 2017. The inventory consists of three items raw material, work in progress and finished goods. Raw material are measured at the purchase cost on the basis of the weighted average price method, Work in progress is measured at the amount equivalent to the amount of the direct materials paid for acquisition and the amount of the direct labor expense and the relevant portion of the manufacturing expenses and the overhead on the basis of the normal operating capacity and lastly finished goods are measured at total cost less the discounts and rebates if any. The key estimate that the c ompany has mentioned is in relation to the rebates that the supplier provides to the company. Here the management estimates are made available on the basis of the turnover level and the related forecast level. Other key estimates are related to tax expense, Property Plant and Equipment, Goodwill and Intangible assets, Provisions, Impairment, Joint ventures and contingencies and are regarded as the critical success factors for the company. Flexibility In Accounting Managers of the company are particularly given the specific function to be performed. At some level, these managers enjoy the flexibility in adopting the policies and practices at their own. Similarly on the same path, the importance of the accounting function has been analysed and the managers to some extent carries the flexibility in the accounting procedures and the practices and also to some level in the financial reporting practices. If the manager enjoys the high degree of flexibility at which the accounting can be done and mould according to the need then it delivers that the manager not only can follow the wrong practices but will also distort the true and correct picture of the working and the operation of the company (Weygandt, 2012). The motive to adopt the wrong accounting and financial reporting practices are basically comes from the view of the stakeholders and the shareholders of the company or from the own benefit of the managers of the company holding the key manager ial position or executives at same level in the company. One motive that is explainable from the statement of the profit and loss is the earnings per share which helps in determining the wealth of the shareholders of the company. The earnings per share of the company have been considerably increased from $36.2 for the financial year ending 2016 to 254.70 for the financial year ending June 2017. The increase in the earnings per share has not been made suddenly but is totally a drastic move which has increased the wealth of the investors including the shareholders of the company approximately 800 times of the previous years wealth (Cooper, 2015). Second motive that is explainable from the statement of the profit and loss is the increase in the earnings before interest and income tax expense. The increase is from 1346 million dollar in the year ending 2016 to 4402 million dollars in the year ending 2017. The increase may be to cover the covenant that may be imposed by the financial institution or the other investor or else it may be the internal decision made by the management of the company (Bryer, 2013). The above two increase has made the investigators to have suspicion that the managers have the sufficient motive to play with financial figures and the report so as to achieve the objective. It exhibits that the company has given the high degree of flexibility to the managers of the company in choosing the policies and the estimates. Evaluating Strategies Strategies are defined as the thought of doing or performing the act in the defined manner so as to achieve the objective or goal. The accounting and reporting strategy so adopted by the company has given further length to the managers to enjoy the flexibility in adopting the accounting practices and the reporting procedures. The two deviations as indicated in the preceding section dictates the interest of the managers. As per the generally accepted accounting principles and procedures, each company shall perform the function in the uniform and consistent manner so as to facilitate the comparability and understandability across the globe. A mere deviation shall be reported fully and completely. In the first deviation where the earnings per share have been considerably increased within the period of one year, it has been observed that the managers might have been forced to present the high earnings per share so as to meet the requirements of the shareholders. As they will meet the requirements of the shareholders more and more investors the company will in the future and thus will increase the net worth of the company and the reputation in the market will also go stronger (Kothari and Ball, 2014). In the second motive the earnings before interest and income tax expense is much higher as compared to previous year. The revenue has increased from 65981 million dollars in the year 2016 to 68444 million dollars in the year 2017. With this increase in revenue the earnings before interest and tax has been increased from 1346 million dollar ion the year 2016 to 4402 million dollar in the year 2017 (Company official Website, 2017). The increase in earnings before interest and tax is approximately to 300 times of the earlier year despite of only eight percent increase in the revenue of the company. The main motive for this increase is that the managers remuneration totally depends upon the figure of the revenue (Ingram, 2008). The more the figure of the revenue the higher will be the amount of the remuneration that the managers of the company will receive. It is because the one component of the remuneration consists of an incentive plan which is totally related to the amount of business that the particular manager will bring for the company which in turn will of course increase the revenue. These plans are exhibited from the remuneration report. Thus, the managers have managed to increase the earnings and thus have changed the accounting and reporting strategies. Disclosure Requirements The annual report of the company has disclosed all the material facts and also the immaterial effects in the notes to the accounts of the financial statements as well as in the section of the significant accounting policies and procedures that the company has adopted. Therefore, the disclosure made by the company seems to be an adequate (Sinha, 2012). For instance the company has mentioned in the notes to accounts of the financial statements in the annual report of the company in the beginning that the management has applied their judgments and the estimates in the specific areas which are critical for the success of the organization like income, tax expense, goodwill, property plant and equipment, etc. The items have been mentioned with the reference to the notes and wherein it has been clearly mentioned that whether the particular item has made the significant effect in the financial position and the financial performance of the company. In each of the specific item the key estimates made by the company has been detailed with the figures for the current year under consideration and the immediately previous year (Company Official Website, 2017). Secondly the auditors of the company has very well displayed the key audit matters that has been communicated to the shareholders and stakeholders of the company through the independent auditor report embedded in the annual report of the company. Thus, it shows that the auditors of the company has followed the new auditing standard number seven hundred and one in full spirit and hence it seems that not only the company has made the adequate disclosure but also the auditors have followed the same. Thus the company has made the adequate disclosure. Red flag is described as the flaws of the discrepancies that are present in the annual financial statements of the company which requires the urgent attention of the management. It is because most of the collapses across the globe have happened only because of these red flags and non consideration thereon made by the management of the company like Lehman Brother collapse, ABC Learning collapse, etc. Following red flags has been observed and noticed: At first though the revenue has been increased by only 8% but the corresponding earnings before interest and tax has been increased by 300 times as compared to previous year. The costs are in the same proportion approximately. The amount by which the revenue has been increased is nearly equivalent to the amount of increase in the earnings before interest and tax expense (Phillips and Heiser., 2011). The second red flag that has been noticed is the net increase in cash and cash equivalents amounting to 402 million dollars. It is despite of the fact that the company has paid the borrowings of 1994 million dollars (Weiss, 2014). The above two depicts that there are discrepancies in the accounting as well as reporting which requires the management to intervene and take the strong actions. Accounting Framework The framework is defined as the structure within which the particular activity is required to be performed and delivered to the users. In the same way, in the accounting of the transactions and reporting thereon, the conceptual framework of accounting is required to be followed. It states three features that shall be satisfied to claim as working under the conceptual framework of accounting. These are relevance, consistent and the faithful representation. Each has the significant meaning (Capital Markets Advisory Committee Meeting, 2013). In the notes to accounts and the significant accounting policies, it is stated that the company has complied with the provisions of the corporations act, 2001 and the accounting standards that has been developed by the Australian Accounting Standards Board and the same has been followed by the company while accounting for the transactions as well as the reporting of the information (International Accounting Standards Board, 2010). Secondly the company has made the segment reporting separately and has correctly identified and disclosed the reportable segment in the annual report of the company as Coles, Home Improvement, K Mart and Target. Thus, the company has duly and fully complied with the conceptual framework of accounting. Conclusion Managers are the integral part of the organization which helps in planning and executing the functions of the company. Each manager has different function. One has the finance function; other has the production, sales, marketing, etc. Each company provides some degree of flexibility to the managers to adopt the relevant business and accounting practices and procedures. Through this report, the managers flexibility has been analysed in relation to adoption of the accounting policies and the presentation of the financial information to the stakeholders and the shareholders of the company Wesfarmers Limited. The investigation has also been made towards the quality of the accounting and disclosure of the information made during the year and simultaneously the discrepancies have been found and listed. The investigation then made to the framework of accounting whether the company is following the conceptual framework of accounting or not. The investigation report has been concluded with t he analysis that the financial statements of the company displays that the managers have the high degree of flexibility and has led the distortion of the picture of the financial statements stating the state of affairs and the financial performance. References Anastasia, (2015), Financial Statement Analysis : An Introduction available on https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 25-09-2017 Bryer, R.A., 2013. Double-entry bookkeeping and the birth of capitalism: accounting for the commercial revolution in medieval northern Italy.Critical perspectives on Accounting,4(2), pp.113-140. 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