Equity and liability of Woolworths and Wesfarmers

3 3) Items recorded under liability section.4 4) Movement of items recorded under liability section.5 5) Benefits and limitations of sources of funds.6 PART B7 Concept of small company, large company and reporting entity. The items that are recorded in owner's equity section of Wools Worth and Wesfarmers are as follows - Reserves - In financial accounting, reserves are the item that is recorded under owners’ equity section and contains a credit balance.

CORPORATE FINANCIAL
ACCOUNTING

Abstract
The Report has described the items that comes under equity and liability section of two
firms that are Woolworths and Wesfarmers. Advantage and disadvantage of sources of funds. It
also explains meaning of small, large proprietary company and reporting entity.

Table of Contents
Abstract............................................................................................................................................2
INTRODUCTION...........................................................................................................................2
PART A...........................................................................................................................................2
1)Items recorded under owner's equity section............................................................................2
2. Explaining the change in the items recorded under an owner’s equity segment of the balance
sheet.............................................................................................................................................3
3) Items recorded under liability section.....................................................................................4
4) Movement of items recorded under liability section...............................................................5
5) Benefits and limitations of sources of funds...........................................................................6
PART B............................................................................................................................................7
Concept of small company, large company and reporting entity................................................7
CONCLUSION................................................................................................................................9
REFERENCES................................................................................................................................9
1

INTRODUCTION
Financial accounting is related with reporting of historical nature information. It can be
described as the field of accounting related with analysis and reporting of financial transactions.
The Report is based on two companies. Woolworths Group was founded in year 1924. It is
Headquartered in New South Wales, Australia. It offers products through chain of supermarkets
etc. Wesfarmers belongs to conglomerate industry. It was founded in year 1914. Headquarter is
located in Western Australia. It operates department stores etc. The Report will outline items that
are recorded under equity and liability section. Movement in items of equity and liability section,
sources of funds used by companies. It will also explain small, large proprietary firm and
reporting entity with difference among these.
PART A
1)Items recorded under owner's equity section.
Owner' equity
It refers to the part of the value of all the assets that owner can claim in case of sole
proprietorship or partnership firm or by the shareholders in case of company. The items that are
recorded in owner's equity section of Wools Worth and Wesfarmers are as follows -
Reserves -
In financial accounting, reserves are the item that is recorded under owners’ equity
section and contains a credit balance. It can be component of any part of equity of shareholders
except basic or contributed share capital. There may be different types of reserves such as
revenue reserves, realized reserves, capital reserves etc. For example – In year 2016, total
amount of reserves in Woolworths is $ 93.9 million.
Issued capital -
Total number of shares that can be issued by the firm is limited up to the total number of
authorized shares. Issued shares can be described as the total outstanding shares that are held by
shareholders. It forms the equity share capital of the organisation. Example – Total amount of
issued share capital of Wesfarmers in year 2017 is $ 22268 million.
Retained earnings
It can be defined as the amount of net income accumulated in different areas and has kept
in the firm. It is the amount which is left over after making payment of dividend to the owners of
shares. Generally, firm re-invest the amount of accumulated net profit for the growth of firm.
2

Profit helps to increase the amount of retained earnings while losses and payment of dividend
(Unerman, J., Bebbington and O’dwyer, 2018).
2. Explaining the change in the items recorded under an owner’s equity segment of the balance
sheet.
Amount in million ($)
Particulars Woolworths Group Limited Wesfarmers
2016 2017 % change 2018
%
change 2016 2017
%
change 2018
%
change
Contributed
stock /
issued
capital 5252 5615 6.91% 6055 7.84% 21937 22268 1.50% 22277 0.04%
Reserves 93.9 113.8 21.19% 353 211.5%
retained
earnings 3125 3797 21.50% 4073 7.27% 874 1509 72.65% 176
-
88.34%
Interpretation- The above analysis depicts that contributed stock of Woolworths Limited
is showing an increasing trend over the years. This happens due to the issuance of the additional
stock of the shares by the company which in turn dilutes value of an investors existing number of
the shares. The movements of 6.91% and 7.84% has been resulted in contributed stock over the
three years of Woolworths group which is not counted as good for the stockholders as it leads to
dilution of existing shareholding of the members. Similarly, the issued capital of Wesfarmers is
rising in past 2 years that is from 2016 to 2017 equates to 1.50% and also in 2018 it shows an
increasing trend but with a very little amount resulting as 0.04% which means that at present the
company retires its issued capital by purchasing it from the owners and in turn reducing number
of the shares issued and the no. of outstanding shares.
Reserves of Woolworths Limited is rising during the year 2016 and 17 evaluated as
21.19%. This occurs because this enterprise is generating larger profitability in its normal course
of the business and the owners are moving equity into their ordinary course of business
operations. Also, in the year 2018, the reserves of this company is increasing with an increased
percentage of movement that is 211.5%. This clearly indicates that company has made optimum
use their resources which in turn results in increased profits. Similarly, the reserves of
3

Wesfarmers Ltd is showing a rising trend and in the year 2018 it is increasing with a greater
value percentage from 14.45% to 81.05%.
Retained earnings of Woolworths is increasing over the years due to increase in the
profits that resulted from increases in sales. However, over the previous 2 years the retained
earnings of Wesfarmers Limited increases with a percentage change of 72.65% but in the last
year it decreases and resulted to -88.34% which shows that it declined from a greater value. This
happens because of the decrease in the sales and profit of the company in the previous year.
3) Items recorded under liability section.
Liability section:
It can be described as the obligations or financial debts of the firm that arises during the
course of the business. Liability can be divided into two parts that are non current and current
liabilities. Items that are recorded under the section of liabilities in Woolworths and Wesfarmers
Ltd. are as follows -
Current liabilities:
It refers to the debt or obligation that are to be payable by the firm within a year or during
an operating cycle. Current liabilities of the firm appear in liabilities section such as short term
debt, creditors etc.
Current tax payable -
It is a part of current liabilities section that is shown in balance sheet. It describes the
amount of tax payable by the company to the government. Example – Tax payable by
Woolsworth in year 2016 is $ 39.5 million and income tax payable of Wesfarmers equated to $
29 million.
Borrowings -
It is a part of current liabilities that appears on liabilities side of the balance sheet of the
organisation. Firms are required to pay short term debt within one year. Example- In year 2017,
the total amount of borrowings in Woolworths company was $ 253 million and of Wesfarmers
evaluated as $ 1347 million.
Trade and trade payables -
It refers to the amount owed by the firm from creditors like suppliers etc. It appears under
liability section of the company. Example- Total amount of payables in year 2017 in
4

Woolsworth was $ 6812 million and the trade payables of Wesfarmers resulted as $ 6615
million.
Non-current liabilities:
It refers to the obligations of the firm that are payable after one year. Examples of non-
current liabilities are long term debt, creditors etc.
Provisions - It refers to the amount set aside by the organisation for uncertain
obligations towards entity or individual. It helps firm to cover future liability. Example – In year
2016 total amount of provisions in Woolsworth is $ 1382.4 million and wesfarmers attained
provisions of $ 1554 million.
4) Movement of items recorded under liability section.
Particular
s Woolworths Group Limited Wesfarmers
2016 2017
%
change
201
8
%
change 2016 2017
%
change 2018
%
change
Current
liabilities :
Current tax
payable 39.5 81 105.06% 110 35.80% 29 292 906.90% 299 2.40%
Borrowing
s 490.7 254 -48.24% 604
137.80
% 1632 1347 -17.46% 1159
-
13.96%
Trade and
trade
payables 6266.1 6812 8.71%
696
0 2.17% 6491 6615 1.91% 6541 -1.12%
Non-
current
liabilities :
Provisions 1382.4 1011 -26.87% 942 -6.82% 1554 1511 -2.77% 1033
-
31.63%
Interpretation-
From the above table, it can be analysed that in Woolworths and in Wesfarmers the
amount of borrowings has shown declining trend from 2016 to 2017 because company has paid
the outstanding debt (Annual report of Woolsworth, 2018). Trade payables in Woolsworth has
increased from year 2016 to 2017 it means firm has to pay outstanding amount to creditors.
Amount of provisions has showing decreasing trend from 2016 to 2017 in Woolsworth and the
5

resultant amount remains unchanged in both the years that is 2017 and 2018 (Yiu, Wan and Xu,
2018).
5) Benefits and limitations of sources of funds.
There are various sources from which company can raise funds. Currently, Woolworths
and Wesfarmers are using following source of funds. Such as -
Equity-
Company can raise funds by issuing shares to shareholders. Benefit and limitations of
using equity finance for Woolworths and Wesfarmers are-
Advantage:
 There is no obligation on the firm to pay fixed amount as in case of loan.
 Equity shareholders does not expect immediate payment of return on investment.
Disadvantage:
 By issuing additional equity shares, stake of owner get diluted (Schroeder, Clark, and
Cathey, 2019). Conflict may arise due to disagreement on management style.
Debt-
It refers to borrowing funds by the firm from another party to finance growth and
operations of the organisation.
Benefits:
 Interest payable on debt is tax deductible.
 Creditor does not have control on business.
Limitations:
 Firm and lender should have good credit rating. Owner of the company may require to give personal guarantee.
Retained earnings-
It is considered as a major source of internal financing and it is a part of net profit set
aside by companies like Woolworths and Wesfarmers Ltd. It helps the firm in meeting out its
future contingency.
Advantage:
 Firms does not have to incur any acquisition expenses.
 It helps to improve financial position of firms.
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Disadvantage:
 In case of huge accumulated amount of retained earnings there may arise situation of over
capitalization (Malik and Kanwal, 2018).
PART B
Concept of small company, large company and reporting entity.
Small proprietary company:
It refers to a type of privately held firm that is operated by a single individual. It is
defined under section 45A (1) Corporations Act, 2001. Proprietary company is classified under
the category of small proprietary firm only when it fulfils conditions. These thresholds are
redefined under Corporations Amendment Regulations 2018. Further, these conditions are
applicable form 1st July, 2019. Such as -
 Total assets are not more than $ 25 million at the time when financial year ends.
 It should not have more than 100 workers at the end of financial year. Further, total gross operating revenue is not more than $ 25 million at the end of financial
year (Small Proprietary business, 2019)
Large proprietary company :
It is also defined under section 45A of Corporations Act, 2001. The section has
distinguished large companies with small companies. They differ on various basis of number of
employees, raising funds, disclosure requirements etc. Further, small and large companies are
also differentiated on the basis of operating revenue, total assets etc. A company is classified as
large proprietary firm only when it fulfils some conditions. These are as follows -
Total revenue should be at least $ 50 million at the end of financial year.
 Total assets should be at least $ 25 million at the time when financial year ends.
 Total number of employees should be minimum 100 (Epstein, 2018).
Reporting company :
Accounting Standards of Australia has defined the term Reporting entity as the firm in
which it is general to expect that the stakeholders are dependent on financial reports to obtain
information that will help them in taking decisions regarding proper utilisation of resources.
Whereas, International Financial Reporting Standards (IFRS) has provided the revised definition
of Reporting entity as the firm that chooses to prepare financial statements. Further, AASB does
not consider that it has the power to determine who should prepare financial statements.
7

Implications of different organizations-
small proprietary firm- Small proprietary companies do not require to prepare and file
financial statements, director's report etc. to ASIC unless they are controlled by foreign
company, shareholders more than 5% of total shareholders have vote to request the firm to
prepare financial report etc. (Dou, Wong and Xin, 2019). ASIC will provide relief to small
proprietary companies in respect of appointing an auditor, having financial report audited,
lodging the report of auditor etc. ASIC will consider various factors while providing relief such
as all the shareholders agrees that there is no requirement of audit, financial report is compiled
by an accountant etc. The relief is provided to small proprietary companies controlled by entity
situated in foreign country. It can avail tax benefits. Further it requires less number of
employees. Less than 100 workers are required (Crowther, 2018).
large proprietary firm- Large proprietary companies like Woolworths, Wesfarmers are
required to file director's report, financial report, and the audit report of the auditor to Australian
Securities and Investments Commission (ASIC) for every financial year. Firms like Woolworths
and Wesfarmers are required to loge audit report prepared by an auditor. Further, they have to
get audited the financial statements. Further, certain companies are exempted from this
requirement if, financial statements of large company are not audited for year ending 1993 or
financial year later than this from the requirements of the act. Large proprietary firms may
employ more than 100 employees. This will help in growth and sales of business.
Reporting entity- Reporting entities are required to prepare financial statements
according to Chapter 2M given under ASIC act. It should follow all the requirements regarding
accounting standards. Determination by the director's regarding status of entity as reporting or
non-reporting is an important factor that affects the disclosure of financial report. According to
AASB, the reporting entities are required to get audited their financial statements by an auditor.
Moreover, the auditor should provide information in the form of Report to the members of
reporting entity to get their written opinion on financial statements of the company. It has
obligation to comply all the accounting standards by preparing profit and loss statement, balance
sheet, cash flow statement etc. This helps to promote transparency in accounts. Accounting
standards are prescribed by Australian Accounting Standards Board (AASB).
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CONCLUSION
The above report has explained that there are various items that come under equity
section like issued capital, reserves, retained earnings, etc. Further, it has analysed that firm have
to pay fixed interest on debt whereas there is no such requirement on equity financing. There are
various elements of liability section like borrowings, provisions etc. Moreover, it has been
concluded that total number of employees in small proprietary firm should be maximum 100
whereas, it can exceed in case of large proprietary firm. Trade payables in Woolsworth has
increased from year 2016 to 2017 it means firm has to pay outstanding amount to creditors in
near future.
REFERENCES
Crowther, D., 2018. A Social Critique of Corporate Reporting: A Semiotic Analysis of Corporate
Financial and Environmental Reporting: A Semiotic Analysis of Corporate Financial and
Environmental Reporting. Routledge.
Dou, Y., Wong, M. F. and Xin, B., 2019. The effect of financial reporting quality on corporate
investment efficiency: Evidence from the adoption of SFAS No. 123R. Management
Science, 65(5). pp.2249-2266.
Epstein, M. J., 2018. Making sustainability work: Best practices in managing and measuring
corporate social, environmental and economic impacts. Routledge.
Malik, M. S. and Kanwal, L., 2018. Impact of corporate social responsibility disclosure on
financial performance: Case study of listed pharmaceutical firms of Pakistan. Journal of
Business Ethics, 150(1). pp.69-78.
Schroeder, R. G., Clark, M. W. and Cathey, J.M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Unerman, J., Bebbington, J. and O’dwyer, B., 2018. Corporate reporting and accounting for
externalities. Accounting and Business Research, 48(5). pp.497-522.
Warren, C. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Yiu, D. W., Wan, W. P. and Xu, Y., 2018. Alternative governance and corporate financial fraud
in transition economies: Evidence from China. Journal of Management,
p.0149206318764296.
Online
Annual report of Wesfarmers. 2017. [Online] Available Through:
<https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-
annual-report.pdf?sfvrsn=0>
Annual report of Wesfarmers. 2018. [Online] Available Through:
<https://www.wesfarmers.com.au/docs/default-source/asx-announcements/2018-annual-
report.pdf?sfvrsn=0>
Annual report of Woolsworth, 2017 [Online] Available Through:
<https://wow2017ar.qreports.com.au/home/performance-highlights/2017-at-a-
glance.html>
9

Annual report of Woolsworth. 2018 [Online] Available Through:
<https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf>
Small Proprietory firm. 2019 [Online] Available Through:
<https://home.kpmg/au/en/home/insights/2019/04/19ru-004-proprietary-company-
threshold-changes.html>
10