Accounting For Business Income In Measuring Top Income – Analysis Of Wesfarmers Limited

Discussion of the Report

Discuss about the Accounting For Business Income In Measuring Top Income.

For the purpose of analysis of the annual report the chosen company that is listed on the Australian Stock exchange (ASX) is Wesfarmers limited which is the largest retail business in Australia. It deals with the super market, mining, chemical, fertilizers and safety products. The chosen company offers stable cash flows and comparatively low risks and it facilitates payment to the investors along with the potential long-term growth. It seeks to establish the diversified portfolio with regard to regulated utility infrastructure assets and continuing to be in the lead position under the Australian infrastructure investment fund (Gates, Prachyl and Sullivan 2016.). Moreover, the values upon which the company is maintaining its growth are honesty, fairness, maximising the value of the security holder and maintenance of the high corporate governance standards.

In order Analysis of the profitability of the chosen company of Wesfarmers limited of recent two years the profitability ratios have been calculated. The two ratios gross profit ratio and net profit ratio has been assessed (Haslam et al. 2015). The gross profit ratio of the present year is 0.32 in 2017 which has increased from 0.30 in the year 2016, which is a very nominal change. It can be said that there is positive change in the operational profit in the last two years.

While calculating the net profit ratio of the two years 2016 and 2017 it can be observed that there has been significant rise in the net profit of the company of Wesfarmers limited from 0.30 to 0.32. The percentage has changes is having a positive effect in profit indicating a sound financial performance. This is due to the better operating profit that took place in the year 2017(Wahlen, Baginski and Bradshaw 2014).

While conducting the company wise analysis that is comparing with the competitor in order to find out the profitability (Kraft 2014). In the present case the company of Woolworths has been taken as the competitor. Woolworths is engaged in the retail business in Australia similar to Wesfarmers limited in the same industry. From the analysis it can be seen that gross profit has been remained more in case of Wesfarmers limited although showing a nominal change. The net profit ratio of Wesfarmers is more as compared to Woolworth which is 0.05 in 2017 and Woolworths has 0.02. Therefore the profitability of Wesfarmers is betters as compared to Woolworths.

Profitability analysis both company wise and year wise

The below table shows the profitability analysis of Wes farmersin last years with its competitor Woolworths

By the evaluation and analysis of the cash flow statements of the business organizations, it becomes easier to gain an understanding of their inflows as well as outflows. For this paper Wesfarmers limited has been chosen and each item of its cash flow statement is analysed. The cash flow statement mainly consist of three sections that involves cash flow from investing activities, operating activities, financing activities and net cash as well as cash equivalents. The items that are included in the operating activities involves depreciation, adjustments to net income, liabilities changes, inventory changes, changes in accounts receivable and changes in other operating activities. The items that are included in the investment activities are capital expenses, investments and other cash flow from investment activities. In this cash flow statement of Wesfarmers limited, financing activities mainly consists of the paid dividends, net borrowings, purchase as well as sale of stocks and other cash flows from the financing activities (Brigham, Ehrhardt, Nason and Gessaroli 2016). It has been seen that the total cash flow of operating activities has increased in the year 2017 to $ 4226000 from the year 2016 which was $3365000. It is evident that the total cash used for the investment activities in the year 2016 was -$2132000then decreased to $ -53000in the year 2017.There has been rise in total cash used in the financing activities in the year 2017 to -$ 3771000in comparison to 2106 the cash out flow has been decreased from $-1333000. Moreover, the change in cash and cash equivalents amounts to $402000in the year 2017, $-100000 in the year 2016.

Critical analysis of the balance sheet statement of the firm Wesfarmers limited reveals that the total assets of firm decreased to $40115000 in the year 2017 in comparison to $40783000 registered during the year 2016. The decrease in total assets of the firm is mainly due to relative decrease in quick assets, loans as well as advances, goodwill along with different intangible assets (Kozlowski, Searcy and Bardecki 2015). The decrease in assets of the firm during the current period in comparison to the year ago period can be considered to not desirable financial condition of the organisation.

Again, liabilities of the firm are also observed to have decreased during the period 2017 as compared to the year ago period. In essence, the liabilities of the firm reflecting and downward moving trend representing a favourable financial condition of the corporation. Critical analysis of the balance sheet statement of the firm Wesfarmers limited reveals that the total liabilities of firm decreased to $16174000 in the year 2017 in comparison to $17834000 registered during the year 2016

Analysis of the cash flow statement

Evaluation of the balance sheet also replicates the fact that the net assets of the firm also enhanced although very insignificantly (Grant 2016). So, the net assets of the firm is said to have remained almost the same.

Current ratio is a balance sheet ration that shows capability of the firm to pay off the liabilities possessed by the firm in the short term period using the assets possessed by the firm (Wilson 2015). Current ratio which is found out by dividing the total current assets with the total liabilities of the firm has remained same throughout the period 2017 in comparison to the period 2016 (Zietlow, et al. 2018). The constant current ratio is said to be have no effect for change in the present two financial condition as lower ratio indicates an unfavourable condition and higher represents good condition.

Quick Ratio is a balance sheet ratio that where liquid assets of the firm are used for repaying current assets of the firm. The quick ratio of the firm has decreased in 2017 in comparison to year ago period, representing a comparatively worse financial condition of the corporation (Shin and Eksioglu, 2015).

Ratio analysis is the process analysis of the financial statements of the company to evaluate the aspects of the operating and the financial performance of the company with the help of the efficiency, liquidity, profitability and solvency ratio (Warren and Jones,  2018). The following ratios for three financial years based on the information from annual Report of Wesfarmers limited for the year 2017 gas been calculated. The ratios analysis of Wesfarmers limited includes:

• Return on Assets: The return on asset which is also known as ROA is the financial ratio that represents the profit of the company that it earns in relation to its overall resources. The net profit is calculated by dividing the total income by the total assets(Weygandt, Kimmel and Kieso 2015). The return on asset of Wesfarmers limited in 2017 is 0.72 and in 2016 is 0.01. It can be said that it has been improved drastically.

• Inventory Turnover: The Inventory turnover is a ratio showing how many times the inventory of a company is sold and replaced over a period of time. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand. It is calculated as sales divided by average inventory. In Wesfarmers limited the inventory turnover is 8.53 in 2017 and 8.57 in 2016, showing a minimal decrease in the value of the assets.

Inventory turnover: Sales/Inventories

• Quick Ratio: The quick ratio is the mechanism of analysing the ability of a company to meet its short-term financial liabilities. In order to find out the quick ratio of the company the liquid asset is divided by the total current liabilities (Öker and Ad?güzel 2016). The liquid asset is the sum of all the current assets deducting the inventories. This ratio is also known as the acid test ratio. In 2017 it is 0.30 in Wesfarmers limited and in 2016 it was 0.33 Therefore it has been a fall in the ability of the company to meet the short term obligations (Robinson et al. 2015).

Quick assets=Liquid assets/Current liabilities, Liquid asset=Current assets- inventories

• Price-Earnings Ratio: The price-earnings ratio or the P/E ratio is the ratio for valuing a company that measures its current share price relative to its per-share earnings (Patten and Zhao 2014). The price-earnings ratio is also sometimes known as the price multipleor the earnings multiple. In Wesfarmers limited the PE ratio for 2017 is 0.23 and in 2016 it is 0.18

P/E ratio: Market Value per Share / Earnings per Share

Corporate governance statements and the practice of the integrity policy inside the business: In the company of Wesfarmers limited maintains sound corporate governance as per the Annual report of 2017. The Wesfarmers limited Group’s approach in terms of corporate governance is to increase long-term shareholder value (Brinca et al., 2016). The Wesfarmers limited Group Board and management are committed to policies and practices that meet high levels of disclosure and compliance. The Wesfarmers limited has followed each of the recommendations of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations throughout the reporting period (Paugam, Astolfi and Ramond 2015).

Management’s approach towards:

Taking and managing business risks: The Wesfarmers limited comprises of complex organizations that are presented to a strategic range, budgetary, operational and consistence related risks that are intrinsic while working in on the online and retail and markets (Sapozhnikova  and Mohammed 2014). The Group has risk management framework structure which, together with corporate governance, gives a sound system to deal with the material risks(Michelon, Pilonato and Ricceri 2015). The Group’s execution could likewise be influenced by other generic risks that apply to most organizations and Australian household that includes unfavourable changes to the macroeconomic monetary condition, environmental change and risks that are emerging.

Analysis of the balance sheet

Attitudes and actions toward financial reporting: Wesfarmers limited is a profit making company which is incorporated and domiciled in Australia. The Financial Report of the Company is for the 52-week period ended 25 June 2017 and comprises the Company and its subsidiaries. The Financial Report was authorised for issue by the directors on 23 August 2017. By maintaining a strong balance sheet, the Group aims to provide a competitive cost and access to capital in order to allow the Group to act when value-creating opportunities present themselves (Bull 2014). The Consolidated Financial Statements have been prepared on the historical cost basis except for financial assets at fair value through other comprehensive income, derivative assets and liabilities, and certain financial liabilities which have been measured at fair value, as explained in the accounting policies.

Attitudes toward information processing and accounting functions and personnel: The chosen Wesfarmers limited has established policies, standards and training regarding business operations, including people safety, health and wellbeing, food and product safety. The company invests in the operational capability across processes, technology and cyber security (Alstadsæter et al. 2016). A Business Resilience Framework is in place to manage the response to major operational incidents and business disruptions.

Business operations:  The chosen company of Wesfarmers has grown into one of Australia’s largest listed companies. With headquarters in Western Australia, its diverse business operations covers the supermarkets, liquor, hotels and convenience stores; home improvement; department stores; office supplies; and an Industrials division with businesses in chemicals, energy and fertilisers, industrial and safety products and coal (Schaltegger, Etxeberria, and Ortas, 2017.)
. Wesfarmers is Australia’s largest private sector employer with around 223,000 employees that includes more than 4,200 Indigenous team members and has a shareholder base of approximately 515,000. 

Investments and investment activities: The investment activities of the Wesfarmers limited include the capital expenses, investments and other long term investments. The Group applies a long-term horizon to investment decisions and remains much disciplined in its approach to evaluation, with the most important filter being whether the investment is going to create value for shareholders over time (Scott 2016). 

Industry size: The industry of Wesfarmers limited includes the retail industry that Retail refers to the activity of reselling. A retailer is any person or organisation is a reseller who sells goods or services directly to consumers or end-users (Zeff 2017). Some retailers may sell to business customers, and such sales are termed non-retail activity. In some jurisdictions or regions, legal definitions of retail specify that at least 80 percent of sales activity must be to end-users.

The balance sheet ratio for determining the financial positions

Major players/competitors: The major market players of theWesfarmers limited Company include TESCO, ALDI, Woolworth, Wal-Mart and many more.

Conclusion

The above analysis has analysed and evaluated the financial, operational and managerial performance of the chosen company Wesfarmers limited which is one of the largest Australian retail businesses. It deals with the super market, mining, chemical, fertilizers and safety products. The chosen company offers stable cash flows and comparatively low risks and it facilitates payment to the investors along with the potential long-term growth.  It can be said from the analysis that both the financial position of the company as compared to the prior year and with other competitors the managerial and operational performance it quite sound making it the largest retail business in Australia has been impressive.

References

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