Analysis of Financial Reporting and Business Practices of Xero Limited

This essay provides an in-depth analysis of Xero Limited's financial reporting practices, focusing on the application of AASB Conceptual Framework, AASB 101, and AASB 102. The essay investigates Xero Limited's inventory measurement, revealing the company's adherence to AASB 102 and its use of the FIFO inventory system, highlighting its simplicity and suitability for specific materials. It further examines the costing system employed by Xero Limited, identifying job costing as the preferred method and explaining its advantages in managing projects and associating costs. The essay concludes by estimating the impact of different costing methods on the company's financial statements, demonstrating a comprehensive understanding of financial reporting within the context of Xero Limited's business operations.

Running head: FINANCIAL REPORTING AND BUSINESS PRACTICES OF XERO
LIMITED
Financial reporting and business practices in Xero Limited
Name of the University:
Name of the Student:
Authors Note:

1FINANCIAL REPORTING AND BUSINESS PRACTICES OF XERO LIMITED
Introduction
Xero Limited is positioned as a “Software as a Service (SaaS)” company that offers
online accounting along with business services to small businesses (Xero.com. 2019). The
objective of the essay is to realize the implementation of AASB Conceptual framework in
consideration to AASB 101 and AASB 102 inventory within financial reporting and business
practices within Australia. In analyzing the same annual report for the year 2017/ 2018 of Xero
Limited will be elaboration for recognizing the inventory system followed in this selected
company. In addition, through analyzing AASB conceptual framework the costing system
implemented by the company will be analyzed along with evaluating the impact of distinct
costing methods on the financial system of the company.
Evaluation of Inventory Measurement
The objective of AASB 102 accounting standard prescribes the accounting treatment for
inventories. This standard is implemented in XERO Limited in order to attain suitable guidance
on cost determination along with its subsequent recognition as an expense encompassing the
write down as well as net realizable value (AASB 2015). Through analyzing the inventories of
Zero Limited it has been gathered that the net realizable amount that is expected by the company
after selling the inventory within its ordinary business course. As per the “Aus 10 Paragraph of
AASB 102” it is observed that the cost of inventories of the company encompass lower cost
along with net realizable value. For the inventories held in distribution a loss of service of the
potential might be identified and is measured relied on the existence of on the recent replacement
expense which is decreased than the real acquisition expense or other subsequent carrying
amount. AASB 123 Borrowing Costs is observed to be followed in Xero Limited in which the

2FINANCIAL REPORTING AND BUSINESS PRACTICES OF XERO LIMITED
company considers its borrowing cost is encompassed within cost of inventories. Under such
statement it is observed that following AASB accounting standard the company might purchase
inventories on different settlement terms (Newberry 2015). The annual report of the company
has explained that when the arrangement effectively attains a financial element, in the element
serves as a difference between purchase prices for normal credit terms along with the paid
amount that is recognized as interest expense over a financing period.
Inventory System Application in Xero Limited
After analyzing the annual report for the year 2017/ 2018 of Xero Limited it has been
analyzed that the company uses effective inventory systems that facilitate the company in
keeping track of their stock levels along with related values on a daily basis. In analysis the
financial report of the company, it has been realized that Xero Limited follows “First-in-First-

3FINANCIAL REPORTING AND BUSINESS PRACTICES OF XERO LIMITED
Out” in its inventory system application. Considering same, as per “paragraph 25 of AASB 102”
it is evident that the company uses the same formula for all inventories having identical nature
along with use to the organization (Mookdee and Bellamy 2017). Moreover, “paragraph 27 of
AASB 102” is also confirmed by Xero Limited as in implementing FIFO inventory system, the
company assumes that the items of inventories those were manufactured first are sold first and
certain items remaining within inventory at the year-end are the ones those are produced and
purchased recently. Moreover, as per this standard, Xero Limited is observed to calculate its
inventories on a periodic basis. The advantages those are attained by the company in
implementing FIFO inventory system includes it is simple to operate and suitability of bulky
materials with increased unit process (Stadler and Nobes 2018). In addition, FIFO inventory
system used by Xero Limited facilitates the company in maintaining inventory records in a
natural manner in which recording is conducted in similar order as units are purchased ad for this
reason it becomes simpler to understand.
Costing System of the Company
From analyzing the annual report of Xero Limited over it is gathered that the company
operates within the software industry and offers modern cloud based software products to the
consumers. Xero Limited is observed to employ job costing system that is integrated with Xero
software. For the reason that the Xero projects are built within the company, it automatically
feeds costs and time within its invoices and reports (Çelebi 2015). The company has considered
employing this costing system for the reason that it facilitates the company in attaining the
ability to easily rebill time along with expenses to consumers and develop effective project
budgets that can facilitate in tracking process with the progress of Xerox projects. Implementing
job costing system facilitates the company in attaining advantage of associating expenses with

4FINANCIAL REPORTING AND BUSINESS PRACTICES OF XERO LIMITED
specific projects that makes it simpler for Xero Limited to remember costs experienced by the
company. Job costing system is implemented by Xero Limited considering the fact that it
supports the Xero software in ensuring breakdown of profit and loss and it facilitates in creating
suitable budgets through entering specified component tasks for each project (Lessambo 2018).
The job costing system of the company is deemed to be suitable in analyzing the fixed price,
time along with materials billings along with attaining capability to issue deposits for a Xero
project.
Impact of Different Costing Method
The three costing methods those are used by companies include “First-in-First-Out”,
“Last-in-Last-Out” and Average Cost inventory costing. FIFO costing method is deemed to
impact the company’s inventory management as it facilitates in analyzing the number of
inventory items acquired at the oldest cost is sold (Brandon 2016). The “Last-in-First-Out”
impacts the company’s inventory costing method that facilitates in computing a moving average
of all inventory purchase costs. The average costing method impacts the company’s calculation
on moving average of inventory purchase costs. This also facilitates in recognizing the specific
cost of each inventory item sold over a specific tie period.
Conclusion
The objective of the essay was to realize the implementation of AASB Conceptual
framework in consideration to AASB 101 and AASB 102 inventory within financial reporting
and business practices within Australia. It was gathered from the essay that AASB 123
Borrowing Costs is observed to be followed in Xero Limited in which the company considers its
borrowing cost are encompassed within cost of inventories. It has also been gathered that

5FINANCIAL REPORTING AND BUSINESS PRACTICES OF XERO LIMITED
implementing job costing system facilitates the company in attaining advantage of associating
expenses with specific projects that makes it simpler for Xero Limited to remember costs
experienced by the company.

6FINANCIAL REPORTING AND BUSINESS PRACTICES OF XERO LIMITED
References
AASB, C.A.S., 2015. Investment Property.
Brandon, G., 2016. Mid market focus: Tax treatment of consumables and stores. Taxation in
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Çelebi, D., 2015. Inventory control in a centralized distribution network using genetic
algorithms: A case study. Computers & Industrial Engineering, 87, pp.532-539.
Lessambo, F.I., 2018. Overview of Financial Statements. In Financial Statements (pp. 3-22).
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Mookdee, T. and Bellamy, S., 2017. Asset classification, subsequent measurement and
impairment testing for carbon emission trading. European Financial and Accounting
Journal, 12(3), pp.65-86.
Newberry, S., 2015. Public sector accounting: shifting concepts of accountability. Public Money
& Management, 35(5), pp.371-376.
Stadler, C. and Nobes, C.W., 2018. Accounting for government grants: Standard-setting and
accounting choice. Journal of Accounting and Public Policy, 37(2), pp.113-129.
Xero.com., 2019. [online] Available at: https://www.xero.com/content/dam/xero/pdf/About
%20Us/xero-annual-report-2018.pdf [Accessed 2 Feb. 2019].