ACCG101 Accounting and Governance: Wesfarmers Inventory Analysis

This report reviews Wesfarmers' inventory disclosures, as required by ACCG101 Accounting and Governance. It evaluates the inventory system used (perpetual), cost assumptions (weighted average), and the impact on the profit and loss statement. The report also discusses factors influencing inventory valuation policies, such as organizational goals, material flow, deflation, and financial reporting standards. It concludes that Wesfarmers provides sufficient inventory disclosures in its annual report, adhering to accounting standards and best practices, and analyzes the factors that accountants should consider when setting up accounting policies.

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ACCG101 Accounting and Governance

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Executive Summary
Wesfarmers has been selected to review its annual report in order to analyse the inventory
disclosures made in notes to accounts section of financial statement. There are sufficient
disclosures in respect of inventories made by Wesfarmers in its annual report. Factors that decide
accounting policies in relation to inventory are evaluated in detail in addition to review of
disclosures made.

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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Part 1: Review of inventory disclosures made by the Wesfarmers in their annual report...............4
Part 2: Factors to be considered by Accountants for setting up accounting policy related to
inventory valuation can be stated as follows...................................................................................6
Conclusion.......................................................................................................................................6
References........................................................................................................................................8

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Introduction
IAS: 2 Inventories, mandates every company to make disclosures regarding the method
used to value the inventory, inventory system used, cost assumptions used and other decision
useful information. To review the disclosures made by company it has been decided to take
annual report of Wesfarmers Company. Wesfarmers is a retail company of Australia and it has
provided sufficient disclosures regarding the inventories in its annual report. Annual report 2017
has been thoroughly examined to have information required to answer the part one of undertaken
assignment. Part two of will discuss the factors that impact the inventory accounting policies.
Part 1: Review of inventory disclosures made by the Wesfarmers in their annual report
Wesfarmers is biggest retail company of Australia and maintains inventory in form of
finished goods, work in progress and raw materials. Following points will provide detailed
information on how the inventory has been presented in annual report of Wesfarmers:
Inventory System: There are mainly two types of inventory system that is used by company to
maintain the records of inventory in financial statements. These two inventory systems are
perpetual inventory and periodic inventory system. On the basis of annual report it has been
found that Wesfarmers has used perpetual inventory system to record the inventory (Annual
Report, 2017). In perpetual inventory system change in inventory figures are being continuous
updated to reflect the change in value of inventory after each transaction (Allman, 2010).

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(Source: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-
annual-report.pdf?sfvrsn=0 )
Cost assumptions: Weighted Average basis method has been used by Wesfarmers to find the
value of beginning inventory, cost of goods sold and finished goods inventory (Annual Report,
2017).
Impact of cost assumption on profit & loss account: The affect of weighted average basis
method is that value of inventory of each unit is somewhere between cost of old and new
inventory. Similarly cost of goods is valued in profit and loss account (Kieso, 2010).

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Evaluation of inventory: Inventory shown by Wesfarmers is presented in three parts: raw
material, manufactured finished goods, and work in progress. Retail and merchandised finished
goods is represented separately in book of accounts (Annual Report, 2017). Inventories are either
measured at cost or net realizable value whichever is lower.
Particulars 2017 2016
$m $m
Raw materials 91 92
Work in progress 15 18
Finished Goods 6424 6150
6530 6260
Part 2: Factors to be considered by Accountants for setting up accounting policy related to
inventory valuation can be stated as follows
Organizational Goals
It is important for accountants to determine the company goals and the best available
options before selection of an appropriate value of inventory. The selection of either LIFO or
FIFO method by the company should be based entirely on the long-term goals and objectives of
organization.
Flow of Material
This is another important factor to be considered during valuing an inventory by the
company. For example, in the companies operating in the food and beverage industry the flow of

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materials is carried out as per expiry dates. The oldest items are takeoff first while the fresh sock
is left on the shelves. Thus, an accountant should select the FIFO method for valuation an
inventory. On the other hand, in industries where flow of materials is of new materials and old
materials required to be left on the shelves should adopt the use of LIFO method.
Deflation
There is also an implication of deflation on the method of inventory valuation section.
The decrease in the cost of goods sold will cause the company to incur higher charges on the
inventory hat is purchased recently. As such, an accountant should select the LIFO method in
period of deflation as it would lead to increase in the profitability of the company and also its tax
liability (Pratt, 2009).
Financial Reporting
The selection of an inventory valuation method should also consider the financial
standards that are followed by a company. The use of LIFO method is prohibited under the
GAAP and IFRS standards. IRS has enabled the companies to adopt the use of both LIFO and
FIFO method. Thus, if an accountant is adopting the use of LIFO method for tax purposes, then
it is required to value the inventory twice, that is, primarily by using LIFO for IRS and FIFO for
financial reporting (Bachara, 2018).
Conclusion
In this report Inventory disclosures made by Wesfarmers in annual report in regards to
the inventory has been evaluated and it has been found that company uses perpetual inventory
system to record the inventory. It has been found that there were sufficient disclosures made in

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relation to the inventory measurement, cost assumptions and other relevant information. In
addition to this, factors that accountant should consider to set up the accounting policies in
regards to the inventory have been analyzed in detail to understand the role of each factor that
affect the accounting policies.

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References
Allman, K. 2010. Corporate Valuation Modeling: A Step-by-Step Guide. John Wiley & Sons.
Annual Report. 2017. Wesfarmers. [Online]. Available at:
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0 [Accessed on: 7 October 2018].
Bachara, M. 2018. LIFO vs. FIFO - 5 Factors You Should Consider Before Selecting a Valuation
Method. [Online]. Available at: https://www.procountwest.com/mikes-blog/factors-to-select-
automotive-parts-inventory-method [Accessed on: 7 October 2018].
Kieso, D. 2010. Intermediate Accounting: IFRS Edition. John Wiley & Sons.
Pratt, S. 2009. Business Valuation Discounts and Premiums. John Wiley & Sons.