Importance Of Accounting And Management Principles For Success In Business

Basic Accounting Principles

Discuss about the Accounting Principle of Myer Company.

Every organization needs to follow the accounting principles and management principles in order to get success in the business. There are many accounting principles that need to be incorporated in the accounting process so that financial statement represents true and fair view. In addition to accounting principles there are some management accounting principles that need to follow by the management in order to get success in the business. If company follows all the basic principles of accounting and management perfectly than there will more chances that business organization will get success in future.

In this report the case of Myer Company has been evaluated in detail through using economic and financial analysis. Financial analysis has been conducted using the ratios analysis of the company for last five years.

The most important basic accounting principles upon which modern accounting are based are as follows:

• Accrual Principle: As per this principle accounting entries should be recorded as and when they occurred rather than when the actual cash transactions have taken place.
• Conservatism Principle: According to this principle expenses and liabilities should be recorded as earliest it is possible and records the revenues and assets when it is sure that it will definitely occur.
• Consistency Principle: As per this accounting principle entity should perform the accounting process use the same method as it was using until a better principle or method has been introduced (Brealey, Myers and Marcus, 2007).
• Cost Principle: As per this concept entities should record all the assets, liabilities, and other equity investment at the original purchase cost.
• Economic entity principle: This principle explains that transactions of business must be kept separate from the owners and other businesses.
• Full Disclosure Principle: Entity must disclose all the material facts and information in the financial statements and notes to accounts.
• Going concern principle: According to this principle it is assumed that business will remain to continue for the foreseeable future.
• Matching principle: According to this principle, it is certain that for recording any revenue there should be expenses to matches the accounting transaction.
• Materiality Principle: It is important to record all the transaction in the books of accounts so that it will help in decision making process. In case if any material information has been missed from recording in the book of accounts that it will certainly impact the decision for future period.
• Reliability Principle: Only those transactions should be recorded that can be proven.
• Revenue Recognition Principle: Entity must recognize the revenue when it is actually earned and not when there is only assumption that revenue will arise (Brigham and Michael, 2013).

 Some important, but not limited to, management accounting principles are as follows:

• Designing and Compiling
• Management by Exception
• Control at Source Accounting
• Accounting for Inflation
• Use of Return on Investment
• Utility
• Integration
• Absorption of Overhead Costs
• Controllable and Uncontrollable Costs
• Utilization of Resources
• Forward Looking Approach
• Appropriate Means
• Personal Contacts

The four main financial statements are income statement, balance sheet, cash flow statement and statement of change in equity. The roles of these statements in management decision making process are as under:

• Income Statement: Income statement of any entity reflects the projected profitability position over the period of time. Income statement consists of information like total revenue, expenses occurred during the period and net profit earned in the similar period. The content present in the income statement helps to make decisions that control the operating expenses and cot expenses in order to increase the net profit of the company.
• Balance Sheet: The information presented in the balance sheet helps to take many business decisions such as decision regarding the collection of receivables, capital structure decisions and credibility decisions to keep proper liquidity in the company.
• Cash flow Statement: The content present in the cash flow statement help to take many types of management decisions such as cash credit management, cash collection from the customer and cash control decisions (Bromwich and Bhimani, 2005).
• Statement of change in equity: This statement contains information on the change in shareholder equity over the year. Management can track the increase or decrease in retained earnings, cash generated by the issues new capital and similar decisions through use of statement if change in equity.

Financial Data for last five years

(Investor Relation: Myer Holding. 2018)

Ratio Analysis

(Investor Relation: Myer Holding. 2018)

Financial performance of company on the basis of above ratios

• Long term solvency or capital structure analysis: It has been found in case of Myer Holding Limited the debt equity ratio has decreased a lot in year 2017 as compared to previous years and interest coverage ratio is also increased a lot in current as compared to past year results. It shows that there was improvement in the capital structure of company in the current year as compared to previous years.
• Liquidity Analysis: On the basis of calculation of liquidity ratios of last five years it can be said that liquidity performance of the company was decreased in current year as compare previous year. It can be seen through decrease in current ratio, negative working capital ratio (Damodaran, 2011)
• Profitability Analysis: Profitability position of Myer Holding in the current is decreased a lot as compared to previous year profitability position. There is continuous decrease in net profit ratio, return on assets ratio, and return on equity ratio. All these factors clearly show the company was not able to earn the same revenue as it was earning previously. There can be multiple reasons for this decrease in profitability ratios.
• Efficiency ratio: There in improvement in the efficiency ratios due to decrease in sales figures in the current year. So the net improvement in the efficiency ratio will be offset by the decrease in the profitability of the company (Davies and Crawford, 2011).

Myer has recorded a rise in its net profit by about 5.3% in the current times after it has gone major restructuring of being listed as public company after it was sold by Coles to a private equity group. However, it is still facing an issue of it stagnant sales growth as it has recorded an increase of about 0.3% in comparison to the expectations of analysts of about 2%. The company has set a target of increasing its sales by about 3% between the years 2016-2020. However, the presence of a highly competitive retail environment within Australia can negatively impact its sales growth in the future period of time.

The company needs to cut out its operational cost for improving its profitability position. This can be achieved by the company by simplifying the administration processes that will enable it to reduce the operational expenses to a large extent. The simplification of business model by the company will enable it to reduce the operational costs and improve the efficiency of business processes. This will significantly help the company to improve its sales realization and thus strengthen its profitability position (Cut GST threshold on overseas goods: Myer, 2012).

Management Accounting Principles

The presence of political uncertainty in the Australian market can have a major impact on the potential success and growth of Myer. The implementation of new tax such as carbon tax can have a negative effect in the consumer spending. Also, the stagnation that can be caused before an election is adding to the uncertainty in the political environment. This is causing the lack of trust and confidence among investors and restricting the capital inflows. In addition to this, the rising labor costs is also causing poor sentiment in the business sector and reducing the investment in the sector. Thus, political uncertainty is causing the occurrence of situation in Australia where investors, households and business are cutting the expenses till the election results are declared. This can have a negative impact on the growth and success of the company to large extent in future context (Political uncertainty weighs on Australian economy, 2013).

There are some ethical obligations that a business entity listed on ASX need to comply if it’s on the edge of becoming insolvent as per the Corporations Act 2001. The identification of strong risk of insolvency poses major obligations on the business directors. One of the major obligations on the director in this context is to carry out the responsibilities in an ethical manner and keep a record of all the economic operations carried out during the condition of insolvency. Business leaders also need to maintain integrity in all the business operations for ensuring to meet the legal obligations of all the stakeholders adequately. Director need to place emphasis that they should not indulge themselves in any unethical behavior for promoting their own interests. Directors must be aware of the ethical rules and standards that a business entity need to comply effectively under the situation of insolvency. This is necessary because insolvency can lead to punishment of the directors and also if found guilty of misconduct can got them convicted. Also, it is the responsibility of a business director to ensure that the company is not involved in any type of legal trading during the condition of insolvency. This is because the company is currently under the situation of debt and therefore should not engage itself in any business activity that my further increase its insolvency.

Business leaders also need to hire a liquidator for meeting the claims and obligations of the creditors who suffered financial loss due to company’s insolvency. Australian securities and Investment commission has also established a Bankruptcy act under which a director would be disqualified from managing nay corporation in the future in the condition of his company becoming insolvent. In this context, it is essential for the director of Myer to identify the risk of insolvency in advance and take necessary measures to mitigate the threats to prevent the occurrence of condition of insolvency (Sydenham, 2004).

Financial Statements and Management Decision Making Process

The major external factors that need to be taken into consideration that can impact the business functions are political stability such as trade regulation, anti-trust laws, labor availability and employee laws and regulations. The economic factors that need to be taken into consideration are exchange rates, financial markets efficiency, workforce skill level and labor costs. The social factors can also impact the business functions such as education level, attitude of people and income level of consumers. In addition to this, the technological factors that can impact the business functions of the company are technology diffusion and developments that have a wide impact on the business activities. Moreover, the environmental changes such as rising pollution level or increasing shift towards sourcing green products in the retailing sector can impact the growth and productivity of the company. The legal factors that can impact the business operations are the laws related to intellectual property rights that can impact the business activities (Bösecke, 2009).

Myer at present is not having a sound financial growth and therefore a potential corporate merger or acquisition can have a major impact on the growth prospects of the company. The company after being separated from Coles was on the verge of being merged with David Jones. However, the merger did not take place but the company at present is recommended to undertake a merger or acquisition for stabilizing its financial growth. This will help the company in increase in size and also it is essential for its survival in the highly competitive retail sector of Australia. The financing condition of the company can significantly be improved after merger or acquisition by realizing economies of scale and thus improving its profitability by decrease in the operational cost. The company chances of being acquired or merged at present is high due to uncertainty of its future growth potential and therefore it is more favorable if company enters into a strategic alliance to improve its profitability (Cooper and Finkelstein, 2014).

Recommendation and Conclusion

On the basis of above analysis I will not invest in the above business as profitability position of the company is continuously decreasing and business is not performing as it was planned by the management. Myer Holding Company is needed to restructure in order to get on track and earn the good revenue in future. Unprofitable or loss making units need to be shut down and investment needs to be made in the units that are providing good profits.

References

Bösecke, K. 2009. Value Creation in Mergers, Acquisitions, and Alliances. Springer Science & Business Media.

Brealey, R., Myers, S.C. and Marcus, A.J., 2007. FundamentalsofCorporate Finance. Mc Graw Hill, New York.

Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Cengage Learning.

Bromwich, M. and Bhimani, A., 2005. Management accounting: Pathways to progress. Cima publishing.

Cooper, C. and Finkelstein, S. 2014. Advances in Mergers and Acquisitions. Emerald Group Publishing.

Cut GST threshold on overseas goods: Myer. 2012. Retrieved 29 April, 2018, from https://www.smh.com.au/business/cut-gst-threshold-on-overseas-goods-myer-20121207-2azgs.html

Damodaran, A, 2011. Applied corporate finance. John Wiley & sons.

Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.

Investor Relation: Myer Holding. 2018. Annual reports.  Retrieved 29 April, 2018, from https://investor.myer.com.au/Investor-Centre/

Pash, C. 2017. Myer has returned to profit growth. Retrieved 29 April, 2018, from https://www.businessinsider.com.au/myer-has-returned-to-profit-growth-2017-3

Political uncertainty weighs on Australian economy. 2013. Retrieved 29 April, 2018, from https://www.instreet.com.au/content/political-uncertainty-weighs-australian-economy-%E2%80%93-instreet-market-and-economic-opinion

Sydenham, P.H. 2004. Systems Approach to Engineering Design. Artech House.

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