Accounting Practices and Case Studies

This assignment delves into the accounting practices employed by Australian retail giants Metcash and Wesfarmers. Students are tasked with critically evaluating their financial statements, examining aspects like earnings management techniques, the impact of accounting conservatism, and the value relevance of various accounting measures. The analysis draws upon relevant accounting literature and considers industry-specific factors influencing these companies' reporting practices.

COMPARISON OF ACCOUNTING AND FINANCIAL
STATEMENT OF DIFFERENT COMPANIES
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Table of Contents
Introduction......................................................................................................................................3
Overviews of Considered Companies.............................................................................................3
Metcash........................................................................................................................................3
Wesfarmers..................................................................................................................................4
Woolworths..................................................................................................................................4
Concept and Importance of Accruals and Deferrals in Accounting................................................4
Accruals.......................................................................................................................................5
Deferrals.......................................................................................................................................5
Description of Annual Financial Report of Metcash.......................................................................5
Description of Annual Financial Report of Wesfarmers.................................................................7
Description of Annual Financial Report of Woolworths...............................................................10
Review of Present Conditions of Companies................................................................................13
Conclusion.....................................................................................................................................13
References......................................................................................................................................15
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Introduction
In the current business world, accounting is considered as one of the most significant operations
that are involved in the overall progress of any particular company. Hence, it becomes very
important for the designated department and authorities of any organization to be very extremely
careful and precise while doing the calculations related to accounting so that the associated
profit, losses, accruals, deferrals and certain other financial details. The major function of any
accounting department of any company is to keep a record of the business transactions that have
been done in any specific way from the company’s side. In the following study, three
organizations have been considered for the study of financial accounting services and their
financial performances have been analyzed deeply in terms of many financial aspects and details.
Overviews of Considered Companies
In order to complete the following study related to financial accounting, the companies have
been chosen from online as well as shopping retail business sectors. These companies have
successfully established their roots in the Australian Market of online groceries shopping along
with other popularly used food and beverages. The involvement of these companies in Accruals
and Deferrals has been very active and the business carried out by them has been considered by
many investors and stakeholders for their attractive policies related to accounting. Following are
the details related to the three companies along with work structure.
Metcash
The Metcash was founded in May, 1927 in Australia by its founder Joe David at the Surry Hills
of New South Wales. The company started its operations by opening a small Food Store and
gradually increased to become a Retail Giant in the retailing as well as wholesale market of
Australia. This company deals with liquor distribution, supply of fast food like groceries and also
sells hardware. The C-Distribution is mainly included in the operations that involve Campbells
Wholesale. This company is about selling of groceries along with Independent Brands in the
Liquor Marketers of Australian Continent. The operations of all the subsidies are controlled by
the Company CEO Julie Hutton. The revenue generated by Metcash by the end of Business year
of 2016 was AUD 13.5 billion (Metcash, 2017).
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Wesfarmers
Established in 1941, the Wesfarmers is currently located around many parts of Australia and is
headquartered at Western Australia’s Perth. The Wesfarmers Incorporation has been always
counted among the leading business organizations in the Australian continent as it operates in
many sectors of business. This includes Supermarkets, Retail Liquor, Auto Services, Grocery
Stores and several other business domains. The organization is presently headed by Michael
Chaney who is the current chairperson of the company along with Richard Goyder who is the
Chief Executive Officer of the Firm. The Wesfarmers group earns revenue of about AU$ 67
billion every year with over 20,000 workers and management staff working for the company.
The company also provides its services in foreign countries like United Kingdom, New Zealand,
Bangladesh and Ireland (Wesfarmers.com.au, 2017).
Woolworths
The Woolworths Incorporations is another Australian Retail giant that in involved in supply,
processing and distribution of packaged as well as fresh food in the Food markets of Australia.
This organization was established in December 1924 and presently operates in many food
markets at different locations of Australia apart from operating some wholesale distribution
chains. The director of Woolworths is Mr. Brad Banducci and has more than 100,000 employees
that work with the firm. In the year 2016, the overall turnover of Woolworths was AUD 72
billion that was earned from its operations in Australia as well as those located at United
Kingdom, Africa and New Zealand. The firm has earned a profit of AUD 3.5 billion in the year
2016 (Woolworths.com.au, 2017).
Concept and Importance of Accruals and Deferrals in Accounting
Whenever a company intends to initiate a business, it is not possible for the owners all the time
to take the initiative completely in its own capability. Hence, it becomes quite essential that the
company owners take some amount of debts and loans from those companies that are already
well established so that they can carry out the operations in a better manner (Byzalov and Basu,
2016, p.860). In the similar manner, the companies that are performing well and are well
established must contribute some efforts and help towards taking the startup forward to that the
new companies can get a strong hold in the market. This is usually done through lending some
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amount that can be received later. These lending and borrowing brings up the concept related to
Accruals and Deferrals (Iotti and Bonazzi, 2016, p.714). The detailed explanation of the two
mentioned terms has been mentioned below.
Accruals
The term Accruals means the amount that is supposed to be received from any organization or a
person after the end of a certain period. According to Kanodia and Sapra (2016, p.624), most of
the companies are likely to receive some amount of money after the end of a particular year. This
particular amount is calculated as the Accrual amount in the annual financial report that is
published every year by the firm. It is very much certain as per the company’s strategists as well
as financial experts that their company will receive that amount after the end of that year or in
the near future time. The amount that a company receives is called as the accrued profit.
Similarly, the same amount that is paid by any company or person is called as Accrued Expense.
As stated by Meyering et al. (2017, p.21), any company needs to pay the Accrued Amount only
after the necessary terms and conditions are completed successfully. This also includes the
delivery of all the desired and contracted products and services by the service provider company
to the client group.
Deferrals
The term Deferrals refers to the amount of money that is to be paid by any company or
individual before the delivery of the services. These services normally include the prepaid
services as well as the insurances. In this procedure, the company first receives the payment that
is mostly for insurances related operations and later delivers the products or services that the
client organization is entitled for as mentioned in the contract during the contract deal. The
amount that the host company or the service provider receives is known as the Deferral Profit for
the recipient company. Similarly, the same amount that is paid by the client firm or group is
called Deferral Expense. Moreover, as stated by Omonuk and Dodor (2016, p.102), the time that
is taken to complete the terms and conditions of a contract is known as tenure.
Description of Annual Financial Report of Metcash
Metcash Public Limited has generated revenue of AUD 13.54 billion in the year 2016 that seems
to be a bit higher than that in 2015 that stood at AUD 13.37 billion. The revenue generation has
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shown 1.3% variance in these two years, which doesn’t qualifies to be a significant growth as per
the stature of the firm. After completion of a performance review of the company, Choudhary et
al. (2016, p.103) have mentioned that a minor increase in revenue is observed in mostly public
companies. The tough level of competition that is given by other private sectors can be the most
significant reason for the observed performance as this led to deviation of customers towards the
privately owned organizations (Jones, 2016, p.24).
Figure 1: Annual Revenue Generation of Metcash for 2016
(Source: Metcash.com, 2017)
Depreciation Expense: Metcash has spent a sum of AUD 3.3 million in the form of depreciation
expense for properties, equipments, units and plants associated with the business functions.
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Prepaid Rent: The prepaid rents that have been paid for acquiring of business assets as well as
accounted equity investments have been about AUD 64.9 million and AUD 15.6 million
respectively for Metcash in 2016.
Interest to be paid: The Company mentioned that the payable interest to various stakeholders
was AUD 49 million.
Unearned Fees: The Unearned fees by Metcash in 2016 amounted to AUD 30.6 million.
Salaries to be paid: This amount has been AUD 14.62 as per the annual financial report of
Metcash and the amount has been paid in the form of wages to workers, suppliers and vendors.
As opined by (), the variation present in parameters of payable salaries is very small due to minor
investments on the company’s human resources.
Description of Annual Financial Report of Wesfarmers
The annual financial report of Wesfarmers has mentioned that this company generated revenue
of AUD 1.85 billion. This revenue is significantly higher than that of the previous year when the
revenue was AUD 1.74 billion. As described by Peng et al. (2016, p.91), the main reason for the
increase in the revenue was introducing some new items in their retail markets and supermarket
stores. This increased the amount of investments from external sources which ultimately led to
enhancement in revenue. Moreover, the report also mentions that the pre taxation earnings have
increased to AUD 134 million from a considerably lower value of AUD 118 million.
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Figure 2: Revenue Generation of Wesfarmers in 2016
(Source: Wesfarmers.com.au, 2017)
Depreciation Expense: All those expenses that occur due to the amortization and depreciation
have amounted to AUD 1.296 billion and this value id a bit more than the same value in 2015
which was AUD 1.219 billion. As per Rosen (2016, p.318), the enhancement in the value of
depreciation of a particular firm tells that more focus has been given on spending their funds on
services like transportation in addition to quality that are considered as supportive services. The
other expenses along with impartment have been AUD 3.1 billion and AUD 2.17 billion
respectively in 2016.
Prepaid Rent: The Company has paid the prepaid rent by paying for properties, plants,
intangibles as well as other objects (Trejo‐Pech et al. 2016, p.97). The amount paid for this
purpose in 2016 was AUD 1.9 billion. This amount is less than the prepaid rent in 2015 by about
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AUD 300 million. This signifies that the company has reduced the prices of its commodities and
less number of investments has been done by other firms (Zimmerman and Bloom, 2016, p.88).
Interest to be paid: The interests that are to be paid in the current liabilities because of trade as
well as other aspects of business are AUD 5.7 billion in the year 2016. This amount is higher
than 2015 figure of AUD 5.5 billion.
Unearned Fees: The Wesfarmers has stated that the amount that the company borrowed was
AUD 1.4 billion and it is almost double than the unearned fees that existed in the year 2015 at
AUD 722 billion.
Salaries to be paid: the salaries that the company has paid to its workers as weekly wages and
as expenses related to employee benefits have been bear about AUD 8.85 billion. This amount is
very much higher than that of 2015 which stands at AUD 8.2 billion. As described by Andries et
al. (2017, p.543), the payable salary increases when the company takes very good care of its
employees and other human resources. Apart from this, the other payables and trade stood at
AUD 6.4 billion.
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Figure 3: Annual Cash Flow Statement of Wesfarmers for 2016
(Source: Wesfarmers.com.au, 2017)
Description of Annual Financial Report of Woolworths
The complete turnover of Woolworths has been over AUD 72 billion as per what has been
mentioned by the company in their financial report of 2016. This value is higher than the
turnover that occurred in 2015 by an amount of AUD 11 billion. Kim and Zhang (2016, p.419)
have mentioned that the primary reason for this hike in turnover has been the supreme marketing
policies that were adopted by the management level authorities of the organization. The Accruals
and Deferrals amounts were calculated and maintained in a very accurate and precise manner by
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the financial experts of the organization. Some of the profits and expenses have been mentioned
below.
Figure 4: Group Statements for Annual Cash Flow of Woolworths for 2016
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(Source: Woolworthsgroup.com.au, 2017)
Depreciation Expense: The Company had to bear an amount of AUD 1.825 billion because of
the amortization and depreciation of company assets. This amount is nearly 300 million higher
than the depreciation amount of AUD 1.526 billion that came out to be in 2015. Moreover, the
financial cost incurred by this organization was about AUD 260 million lower than the
depreciation expense of 2015 at AUD 1.494, which is nearly AUD 1.234 billion. As stated by
Mostafa and Mostafa (2016, p.1759) in their journal related to accounting that obtaining of
accrued profits and asset values in a specific time can be the most evident reason for financial
sots reduction that was incurred by the company. The Woolworth Company has stated in its
annual financial report of 2016 that AUD 9 billion was the ultimate net inflow income that
occurred via trading.
Prepaid Rent: Woolworth’s operating lease accrual stood at AUD 41 million and the lease
adjustment of the firm was AUD 131 million that can be seen as an optimistic measure for the
Woolworths group. Moreover, the payments for finance lease that the Woolworths did in 2016 as
prepaid rent was AUD 12 million. This value is less than that in 2015, which was AUD 15
million. As specified by Omonuk and Dodor (2016, p.110), the prepaid rent reduction signifies
increase in expenses due to accruals for nay firm.
Interest to be paid: The annual financial report of Woolworths has mentioned that the
company’s payable interest was higher in 2016, which stood at AUD 15.7 billion compared to
that in 2015 that stood at AUD 14.9 billion.
Unearned Fees: The Woolworths Company has accounted for AUD 1.4 billion as the unearned
fees for long term equity. The same in respect to short term has been AUD 190 million.
Salaries to be paid: The Woolworths has paid AUD 4.3 billion to its shareholders as well as the
top level management authorities via 9 non controlling assets and interests.
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Figure 5: Annual Cash Flow Data at Woolworths for 2016
(Source: Woolworthsgroup.com.au, 2017)
Review of Present Conditions of Companies
It can be seen very evidently that the growth that has been shown by the considered companies
have been quite moderate and considerable from the overall point of view. Some of the figures
shown by the companies have been greater than those shown in previous years while some of
them have been quite lower (Penman, 2016, p.120). The accruals and deferrals have been
managed very efficiently by the companies and their respective management authorities. The
opening and running of new subsidiaries by the companies that already hold a good corporate
image attracts more investors that in beneficial for the company and investors (Sutton et al. 2016,
p.71).
Conclusion
After completing the study, it can be said that the efficient management of Accruals and
Deferrals related to financial operations are very important for significant growth of any
organization. The annual reports of 2016 that have been published by the three companies have
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been considered for the study that has its main focus on the operations that involve accruals and
deferrals. The major key terms that have been included in the study are aspects like Interest and
Salaries to be paid; Unearned Fees, Depreciation Expense and Prepaid Rent along with the
figures associated with them have been mentioned.
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References
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Iotti, M. and Bonazzi, G., 2016. Assessment of Biogas Plant Firms by Application of Annual
Accounts and Financial Data Analysis Approach. Energies, 9(9), pp.713-718.
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