Accounting and Financial Reporting of Wesfarmers and Woolworths

Question: Discuss about the Financial Reporting of Wesfarmers and Woolworths. Answer: Introduction Wesfarmers Established in 1914 as Western Australian Farmers cooperative, they have reached to find its place among the biggest listed companies in Australia. Their diverse business include the departmental stores, supermarkets, fertilisers and energy, safety products, home improvements and office supplies. The main objectives of the company are to provide the satisfactory return to their shareholders. They aim to attain this objective through: Fulfilling the requirements of the customers by providing services and goods on professional and competitive basis. Delivering safe working environment for the employees with good rewards for performance and opportunity for further improvements. Giving importance to the protection of environment in which they operate Operating with integrity and honesty while dealing outside as well as inside the company. Their organizational structure reveals that they have 94 executives and 9 subsidiaries named as Bunnings, Coles Group, Target Australia, Wesfarmer chemicals (Kleenheat and CSBP), officeworks, Wesfarmers resources and Wesfarmers Industrial and Safety. During 2016, they have achieved the following things: They reduced the frequency rate of total recordable injury by 15.2% They worked to promote the diversity in the workplace and over 3300 employees were recognized as indigenous They improved the transparency under the audit program for over 3200 factories under the supply chain They were able to reduce the green house gas emissions by over 2% during the last year (Wesfarmers.com.au 2017). Woolworths On 22nd February 1878, 1st store of Woolworth was established by Frank Winfield as Woolworths great five cent store. They are one of the biggest supermarkets among Australia and accounts for 80% of the market share of Australia. Among the various products they deal with, the drink business includes BWS and Dan Murphys main objective is to deliver the convenience and best value to their customers. They are better known for selling the grocery items. However, they also deal with sales of DVDs, magazines, stationary items and currently having more than 1000 stores in Australia itself. Their main aim is to become the most preferable brand for the customers and to achieve that they have the below mentioned strategies: Building a tem and store-led culture for the customers Creating the sustainable momentum for sales of foods Becoming the lean retailer by system excellence and end-to-end procedure Empowering the portfolio business to increase the shareholders worth Develop their drink business to deliver convenience and value to the customers. Their organizational structure reveals that they have 77 executives and 5 subsidiaries named as Big W, Progressive enterprise, EziBuy, Dan Murphys and Endeavour Drinks. Among others, few notable achievements by Woolworth are as follows: They were the 1st to establish the system of best before and sell by through providing their customers with the indication of the probable time at which the good swill be reached to them They were the 1st to achieve the organic growth of the commercial crop cotton. They were the 1st to remove as much preservatives and additives as possible from the foods they deal with (Woolworths Online 2017). Identification and evaluation of financing sources Capital Structure: Wesfarmers Liabilities Amount Amount Current liabilities Trade and other payables $ 6,491.00 Interest bearing loans and borrowings $ 1,632.00 Income tax payable $ 29.00 Provisions $ 1,861.00 Derivatives $ 160.00 Other $ 251.00 Total current liabilities $ 10,424.00 Non-current liabilities Interest bearing loans and borrowings $ 5,871.00 Provisions $ 1,554.00 Derivatives $ 81.00 Other $ 104.00 Total non-current liabilities $ 7,610.00 Total liabilities $ 18,034.00 Equities Amount Amount Issued capital $21,937.00 Reserved shares $ -28.00 Retained earnings $ 874.00 Reserves $ 166.00 Total equities $ 22,949.00 Capital structure Amount of total capital $ 40,983.00 Amount of debt $ 18,034.00 Amount if equity $ 22,949.00 Debt portion (%) 44% Equity portion 56% From the above table it can be identified that the amount of capital for Wesfarmers worth $ 40,983 million. Out of the total capital, $ 18,034 that is 44% has been raised through debt and $22,949 that is 56% has been raised through equity. Further, the leverage ratio of the company that is, (Total debt/total assets) = ($22,949 / $40,983) = 44%. It states that for every dollar of the asset of the company, it has to raise $0.44 of debt (Wesfarmers.com.au 2017). Analysis of debt The debt of the company is generally raised in name of Wesfarmers and is associated with corporate guarantee. If the debt is directly raised by the joint venture or subsidiary then that will have a separate arrangement for security. The facilities associated with the bank debt funds are subjected to the threshold limit of interest coverage ratio and minimum leverage. Normally the secured debt cannot be more than a specific % of total assets. However, the set % can exceed in some specific cases like acquisition (Wesfarmers.com.au 2017). Analysis of equity The ordinary shares of Wesfarmers are fully paid and do not have any par value. Each share carries one voting vote and is entitled to receive dividends. The shares do not carry any conditions or special terms that can affect the capital entitlements or the income of the company and are simply classified under equity. The reserved shares are the ordinary shares that were repurchased by the company and are held for the purpose of future use. Woolworths Liabilities Amount Amount Current liabilities Trade and other payables $ 6,266.10 Borrowings $ 490.70 Current tax payable $ 39.50 Provisions $ 1,873.50 Liabilities associated with assets held for sale $ 202.60 Other financial liabilities $ 120.30 Total current liabilities $ 8,992.70 Non-current liabilities Borrowings $ 3,870.90 Provisions $ 1,382.40 Other $ 294.50 Other financial liabilities $ 179.80 Total non-current liabilities $ 5,727.60 Total liabilities $ 14,720.30 Equities Amount Amount Issued capital $ 5,347.00 Reserved shares $ -94.80 Retained earnings $ 3,124.50 Reserves $ 93.90 Total equities $ 8,470.60 Capital structure Amount of total capital $ 23,190.90 Amount of debt $ 14,720.30 Amount if equity $ 8,470.60 Debt portion (%) 63% Equity portion 37% From the above table it can be identified that the amount of capital for Woolworth worth $ 23,190 million. Out of the total capital, $ 14,720 that is 63% has been raised through debt and $8,470 that is 37% has been raised through equity. Further, the leverage ratio of the company that is, (Total debt/total assets) = ($14,720 / $23,502.20) = 63%. It states that for every dollar of the asset of the company, it has to raise $0.63 of debt (Woolworths Online 2017). Analysis of debt The financial arrangements are made through the bank loan and the company is able to draw the loan at any time with the associated lending agreements. Further, the bank overdraft facilities can be drawn at any time. The borrowings of the company are initially recognised at the fair value less attributable transactional costs. Consequently, the borrowings are recognised and recorded at amortised cost. The difference between redemption value and cost are recognised under the consolidated statement for profit and loss during the period of borrowing. Analysis of equity Holders of the ordinary shares are enable to get receive the dividends and are entitled to one vote for each share at the meeting of the shareholders. In the occasion of winding-up the ordinary shareholders will stand only after fulfilment of dues of the creditors and all other shareholders and are entitled for the proceeds from the liquidation (Woolworths Online 2017). Ratio analysis Ratio analysis Ratio Formula Wesfarmers Woolworths Amount Result Amount Result Liquidity and efficiency Current ratio Current assets 9,684 0.93 7427.00 0.83 Current liabilities 10,424 8992.70 Accounts receivable turnover Net sales 65,981 27.89 58275.50 70.68 Average accounts receivable 2,366 824.55 Profitability Return on asset ratio Net Income 407 1.00 -1234.80 -5.25 Total assets 40,783 23502.20 Return on sales Net income 407 0.62 -1234.80 -2.12 Sales 65,981 58275.50 Solvency Debt ratio Total liabilities 17,834 0.44 14720.30 0.63 Total assets 40,783 23502.20 Equity ratio Total equity 22,949 0.56 8781.90 0.37 Total assets 40,783 23502.20 From the above table it is recognised that the current ratio of both the companies are less than 1, which indicates that both the firms are facing problems in paying-off their current dues. However, the current ratio of Wesfarmers is slightly better at 0.93 as compared to that of Woolworths 0.83 (Arkan et al. 2016). On the other hand, the account receivable turnover of Woolworth is far better than Wesfarmers as they are able to collect their receivables up to 71 times as compared to 27 times of Wesfarmers. However, as Woolworths was not able to generate any positive income during 2016, their return on asset as well as return on sales both are negative as compared to the 0.62% return on sales of Wesfarmers (Arrozio, Gonzales and da Silva 2016). Out of the total capital of Wesfarmers, 44% has been raised through debt and 56% has been raised through equity and for Woolworths, 63% has been raised through debt and 37% has been raised through equity. As Woolworths were not able to generate any positive earning, it can be said that the financial position of Wesfarmers is better as compared to that of Woolworth (Delen, Kuzey and Uyar 2013). Financial reporting framework The consolidated financial statements of both the companies are prepared on the basis of the Corporation Act 2001, international financial reporting standards, Australianaccounting standards and interpretations and are complied with the applicable laws. The Consolidated Financial Statements are prepared based on the Australian dollars and are rounded-off to the nearest tenth of a million dollars (unless otherwise stated as per ASIC Class Order 98/100 (Luke 2016). The Financial Statements are prepared on historical cost method except for available for sale derivative financial assets that are measured at fair value and some other comprehensive income and liabilities are transacted at fair value, as explained in theaccounting policies. Theaccounting policies are consistently applied to the periods under consideration for the financial statements, unless otherwise stated. Both the companies prepare their financial statement on the same basis as they both are registered with the Australi an stock exchange and are in the similar business (Humphrey, ODwyer and Unerman 2014). Conclusion and recommendation From the above discussion, it can be concluded that the capital structure of the companies are different from each other as out of the total capital Wesfarmers raised 44% through debt while Woolworths raised 63% through debt. The ideal capital structure for an organization is one third equity and two third debt as the cost of debt is normally lower as compared to equity and moreover, debt does not have any right to the profits of the company. Therefore, Wesfarmers are suggested to finance their assets through more of debt rather than equities. Further, as the average receivable ratio of Wesfarmers is too low, they are suggested to improve their receivable ratio through proper measures. 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