Accounting Fundamentals: Analysis of Wesfarmers and Woolworths Reports

This assignment provides a comprehensive analysis of accounting fundamentals, using the financial reports of Wesfarmers and Woolworths as case studies. Part A focuses on Wesfarmers, examining current liabilities, major liabilities (trade payables and interest-bearing debt), and provisions, including employee benefits, lease provisions, and self-insured risks, referencing IAS 37. It also explores interest-bearing loans and borrowings, secured liabilities, and non-current liabilities. Part B shifts to Woolworths, addressing Australian Accounting Standard AASB 112 on income taxes and contrasting it with partnership firms. It then delves into retained earnings, issued share capital, and the preparation of cash flow statements, comparing the practices of corporations and partnership firms. The assignment highlights key differences in accounting practices, such as how partnerships handle income tax, capital, and cash flow statements compared to corporations.

Running Head: FUNDAMENTALS OF ACCOUNTING
Accounting

Fundamentals of accounting 2
Part A
Question 1
The current liabilities are the short term debts or obligations which are required to be paid
within a period of one year. They are reported in the company’s balance sheet on the
liabilities side (Kieso, Weygandt and Warfield, 2010).The current liabilities of Wesfarmers
have reduced over the period. In year 2016, total current liabilities were $10,424 million and
in 2017, they were reported at $10,417 million. There has been a reduction of $7 million in
the total current liabilities of Wesfarmers. Under classification “Current Liabilities”, items
like creditors, Interest-bearing loans and borrowings, Income tax, Provisions, Derivatives and
others are recorded (Wesfarmers.com.au. 2017).
Question 2
The most common liabilities of a company generally have largest balances. Covering high
portion of total liabilities make them major for the company, as they are required to be paid
off quickly. Considering the annual reports of 2017 of Wesfarmers, the major liabilities of the
company were its trade payables classified in the section “current liabilities”. Among all the
items, accounts payable is the major liability as it carries largest balances. Similarly, under
section “Non-current liabilities”, Interest bearing debt also known as long term obligations
are consider to be the major liability for the company as it has the highest balance. These are
two liabilities which Wesfarmers is required to pay off as soon as possible
(Wesfarmers.com.au. 2017).
Question 3
Referring to the Note 9 of Notes to Financial Statements, items included under the heading
‘Provisions’ in the ‘Current Liabilities’ are:
 Employee benefits: It include long service leave entitlements, annual leave and
incentives.
 Wages and Salaries: they include amounts which are to be paid within a year of the
recording date and are recognized in provisions with regard to the service rendered by
employees (Wesfarmers.com.au. 2017).
 Annual and Long service leave: these leaves are measured as the future expected
payments for the employee services. (Wesfarmers.com.au. 2017).
 Lease Provision: it covers the lease arrangement for enabling the lease expenditure to
be recognized on straight-line basis.
 Off-market contracts: Wesfarmers also make provisions for the contracts, the terms of
which can be affected by the changes in market condition as compare to the market
condition prevails at the date of acquisition.
 Self-insured risks: provision is made on the worker’s compensation and general
liability claims recorded and the estimation of claims that are incurred but not
recorded.
 Mining and plant rehabilitation: provisions related to remediation are calculated on
assuming current technologies.
 Restructuring and make good: For restructuring, provision is made in the situation
where activities like implementation of comprehensive plan, negotiations with the
employees is done and employee cost is recognized.

Fundamentals of accounting 3
According to IAS 37, provision means an uncertain liability. A company is required to
recognize a provision if,
 Present obligation arises due to past events.
 Probable payment and
 A dependable estimate of amount is needed to be done (Epstein and Jermakowicz,
2010).
Wesfarmers purely comply with the definition of provisions given under IAS 37. Provisions
made for employee benefit include the estimation of the future expected payments to me
made for the employees’ services. Wages and salaries which are to be paid within 12 months
are the present obligations arise due to the services rendered in the past. Provision for the
same has been made by the company. Remaining other provisions also satisfy the definition
of provisions under IAS 37.
The liabilities for employee benefits have been decreased over the year from $1,154 million
in 2016 to $1,150 million. They have reduced by an amount of $4 million
(Wesfarmers.com.au. 2017).
Question 4
Interest bearing loans and borrowings are known as the financial obligations of a company
carried over more than one year. These are those debts which require the payment of interest
over the predetermined period (Needles, Powers and Crosson, 2013).
The financial report of Wesfarmers says that, loans and borrowings are recognized at fair
value initially and then they are measured at amortised cost, using effective interest method.
No cash has been raised from the interest bearing loans, instead they are been paid off during
the year. In year 2016, the total interest bearing borrowings were reported at $7,303 million
and in 2017, they were at $5,413 million. This implies that within the year, company has set
off its long term liability by an amount of $1,890 million. This also resulted in the decrease of
interest expense over the year (Wesfarmers.com.au. 2017).
Question 5
Secured liabilities are the debts of the company which are secured by an underlying asset or
collateral in order to reduce the risk associated with borrowings. Non- current liabilities
mainly include long term debt or interest bearing loans and borrowings. The loan taken by
keeping an asset as a collateral security towards it is described as a secured non-current
liability (Friedberg, 2015). However, the annual report of Wesfarmers does not showcase any
non-current debts which are secured. Wesfarmers’ non-current liabilities mainly include its
interest-bearing loans and borrowings. The note number 14 of notes to financial statements
shows the details of interest-bearing loans and borrowings which includes unsecured current
and non-current loans. It does not provide any information regarding secured non-current
liabilities.
Question 6
Provisions included under the heading ‘Non-current Liabilities’ are basically the provision
made for those liabilities which are likely to arise in future. The amount is set apart for those
liabilities or expenditures in terms of provisions or reserves, which a company may require to

Fundamentals of accounting 4
pay in future if they occur. Non-current liabilities include non current provisions for
employee benefits, provisions for taxation and dividend which are to be paid in near future
(Bhattacharyya, 2012). In note 9 of annual report of Wesfarmers, all the information related
to the provisions made by the company is given. It includes current and non-current
provisions or reserves for certain items such as employee benefits, self-insured risk, lease
provision and many others.
Part B
Question 1
The Australian Accounting Standards Board formulates an Accounting Standard AASB 112
for the treatment of Income taxes. All the companies operating in Australia are required to
comply with this standard while reporting about their taxes. The purpose of this standard is to
provide an accounting treatment for income tax to make sure that the companies report to the
tax consequences in the same way it accounts other items. The tax expense should be
included in company’s profit and losses and should be shown in the income statement of the
entity. The standard also includes the recognition of deferred tax assets and liabilities
(Henderson, et. al. 2015).
Woolworth is an Australian company and the income statement shows a deduction of income
tax expense worth amount $650.4 million in year 2017 and was $486.4in 2016
(Woolworthsgroup.com.au, 2017). The income tax shown comprises of two elements.
Current tax is the income tax which is to be paid on the income earned to taxation authorities,
using the tax rates. Deferred tax is calculated at the rates which are expected to be applied at
time of realisation of an asset or settling of a liability.
However, in case of a partnership firm, AASB 112 is not applicable as the partnership does
not pay the tax on profits earned. The tax is been paid by the partners when each of them
prepare their income tax return and report their share of partnership income in it. The partners
are required to pay tax on their share of profits at individual tax rate (Business.gov.au, 2017).
The partnership firm has its own Tax File Number (TFN) and if want can apply for
Australian Business Number (ABN). As it does not pay income tax, the firm has to lodge a
partnership tax return which reports all the incomes and deductions made and also show the
distribution of net profit and loss between the partners (ATO 2018).
Question 2
Retained earnings are basically the amount of profits reinvested in the business by the
company. The earnings demonstrate what company did with its profits. The reinvestment
done is either in form of asset purchase or liability reduction. These are company’s profit
used for the purpose of paying dividend to its shareholders (Wahlen, Jones and Pagach,
2012).As per the Woolworth’s financial report of 2017, changes in equity statement shows
that the net profit earned by the company after deducting tax is $1535.7 million. This profit or
amount of retained earnings is used to pay the dividends and other liabilities of the company.
The dividends paid in 2017 were amounted to $859.6 million and other liabilities were worth
$5.6 million. Along with this, an amount of $2.2 million is received by the company as
dividend on Treasury shares. The balance of retained earnings recorded at the 30th June 2017
was $3797.2 million including the opening balance also. This is how the total profit is
appropriated in the annual report of Woolworth (Woolworthsgroup.com.au, 2017).

Fundamentals of accounting 5
Talking about a partnership firm, according to the Australian Partnership Act, the profits and
losses are equally bear by the partners of the firm, irrespective of their share of capital in the
business (Latimer, 2011). In general terms, a partnership firm prepares accounts like Profit
and Loss Appropriation account, partners’ capital account. The firm determines the profit
before deducting the partner’s salaries and the appropriation account shows how the profit
earned is spent by the business. Salary paid to the partners, their interest on capital, partners’
commission all are paid out of the profits earned by the firm. These items are shown in the
P&L appropriation account.
The owners of a corporation or company receive their share of profits directly proportional to
the number of shares owned by them. However, in case of partnership firm, the proportion of
capital invested is not the basis for distributing the profits among partners. Generally it is
distributed equally among the partners.
Question 3
Issued share capital means the amount of shares, a company offers to the investors for the
purpose of sale. The number of issued shares is usually equal to the amount of subscribed
share capital. It basically consists of the shares which are been sold to the shareholders or
investors against cash or some other consideration. Companies show the issued capital in
their balance sheet under the head ‘Equities and Liabilities’ along with the number of shares
issued and the price per share (Ferran and Ho, 2014). Woolworth’s balance sheet reports an
increase in the issued share of the company of 1,294,416,480 fully paid ordinary shares in
year 2017 than that of in 2016.
The treatment for raising a capital in the business is different in a typical partnership firm.
The capital is generally brought by the partners in the business and if the firm requires
additional capital, it can raise it from bringing the additional partners in the business who can
act as an investor or a active partner. Another method to raise funds is to take a loan from
bank or additional capital invested by the existing partners. The partners have the right to
earn interest on their capital and can withdraw it from the business as and when required.
Unlike corporations, partnership firms do not issue shares for the purpose of sale to raise
funds.
Question 4
According to the Australian Accounting Standard Board, a standard 107 is made for cash
flow statements. It states that companies should prepare CFSs and should also mention the
manner in which it is prepared. It says that the statement has to prepare in a proper format
with the classification of the cash flows as operating, investing and financing activities (Mills
and Woodford, 2015).As Woolworth is an Australia based company, so its complies with the
standard and prepares a cash flow statement periodically which is included in its annual
financial statements.
However, the standards only apply to the corporations and companies, so partnership firms in
Australia are not required to prepare cash flow statements and include them in its final
accounts. The financial statements of a partnership firm include P&L account, P$L
appropriation account, Partner’s capital and current account and lastly a balance sheet which
shows the financial position of the entity.

Fundamentals of accounting 6
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Fundamentals of accounting 7
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