Accounting for Management Decisions

Question: Discuss about theAccounting for Management Decisions. Answer: Introduction: Wesfarmers Limited: From their establishment in 1914, who was formed as Western Australian Farmer Cooperative, they have qualified to be the largest among the listed companies of Australia. They have their head office in Western Australia. Their wide variety of business involves liquor, supermarkets, convenience stores, hotels, office supplies and home improvement. They also have business departments in fertilisers and energy, chemicals, coal, safety and industrial products. Wesfarmers positioned among the largest employers in private sector employing approximately 220,000 employees and shareholder stands of around 530,000 (Wesfarmers.com.au 2016). Wesfarmers aims to attain their objectives through: Fulfilling the requirements of consumers by proving the services and goods on a professional and competitive basis Through carrying out existing operations in an effective way and seeking enlargement opportunities, contributing to the prosperity and growth of the company. Providing a fulfilling and safe working atmosphere for the workers, giving award for exceptional performance and making way for advancement prospects Giving much importance to environment protection Operating with honesty and integrity in carrying out outside as well as inside trading of the company Woolworths Limited: Woolworths is the biggest chain for supermarket in Australia. They operate 961 stores and employ 111,000 team members around Australia. They provide their customers with support offices and allocation centres to offer their consumers with better value, range, services and convenience. Woolworths are confident about working closely with farmers and growers from Australia to assure that the best produces are available to their consumers. Their available sources for 96% of vegetables and fresh fruits and 100% of fresh meats are from the growers and farmers of Australia. As the leading retailer of Australia, they appreciate that the customers always search for simple and new way for shopping. To facilitate the consumers to avail the facility of shopping on the go, they had introduces the App for Woolworths supermarket and the best thing is that the groceries are delivered directly to the kitchen bench ("Woolworths Supermarket - Buy Groceries Online", 2016) Woolworths fulfils their objectives through maintain these basic things: Products prices are same in both stores and online If there is any offer related to free delivery, % off on particular product or dollar off, there are always their employee to assist They always keep their static, text and animated banners updated, to help the consumers with changes in website and fresh creativity Customers can track their order delivery to the closest 30 minutes. Cash Flow Analysis: Wesfarmers Limited: Net cash received from operating activities amounted to $3365 million for the year ended 2016. The main receipt under this head was receipt from customers and the major payment was towards the employees and suppliers. Net cash from investing activities were amounted to ($2132) million. The major payments involved the payment towards the plant, equipments, property and intangibles. Their net cash flows from financing activities are ($1333) million. Major transactions involved under this were proceeds from borrowing and repayment of borrowing. Their year-end cash equivalent and cash was $611 million. In creation of earnings and cash flow, the company utilize exceptional well teams of management who have the capabilities to earn long-term growth and profit. This is obtained by employing best practice principles in maintenance and execution of operation for long-term target concerning results and strategy. The company observes to improve the effectiveness of working capital on a continuous basis for their business. In addition, the company assures the tough discipline with regards to capital expenses and decision of investment. Net increase in cash or cash equivalents comes in negative figures and amounted to ($100); Only the inclusion of opening cash balance turned the closing balance into positive, which amounted to $611 million (Wesfarmers.com.au 2016) Woolworths Limited Net cash received from operating activities amounted to $2357.50 million for the year ended 2016. The main receipt under this head was receipt from customers and the major payment was towards the employees and suppliers. Net cash from investing activities were amounted to ($1266.7) million. The major payments involved the payment towards the plant, equipments, property and intangibles. Their net cash flows from financing activities are ($1474.9) million. Major payments involved under this were payment of dividend and repayment of borrowing. Their year-end cash equivalent and cash was $956 million. Their cash and cash equivalents in the statements of cash flow includes call deposits and cash balance with a maturity period of three months or less than three months. Only the cash from operating activities has been achieved positive results. Cash from financing activities and investing activities are in negative figures, that is, loss. The differences in foreign currency were due to conv ersion of foreign operations. Differences in exchange causes due to receivable of monetary item or future payment to foreign operation for the agreement to the subject matter, which were not intended or not probable to take place in the near future. These hedges and monetary items are considered being part of the total investment in international operation and classified again into loss or profit on disposal of the total investment. Net increase in cash or cash equivalents comes in negative figures and amounted to ($384.10); Only the inclusion of opening cash balance turned the closing balance into positive, which amounted to $956 million (Woolworths Annual Report 2016). Ratio Analysis Cash flow ratio: Cash Adequacy Ratio:(Cash from operating activities)/(Capital Expenditure + Drawing) Wesfarmers limited: $3365/$3798 = 0.88 times or 88% Woolworths limited: $2358/$1983 = 1.19 times or 11.9% Cash flow ratio: (cash from operating activities)/Current liabilities) Wesfarmers limited: $3365/$10424 = 0.32 times or 32% Woolworths limited: $2358/$8993 = 0.26 times or 26% Debt coverage ratio: (Non-current liabilities)/(cash from operating activities) Wesfarmers limited: $7410/$3365 = 2.20 times or 22% Woolworths limited: $6039/$2358 = 2.56 times or 25.60% Cash flow to sales ratio: (cash from operating activities)/(Net sales) Wesfarmers limited: ($3365/$65981)*100 = 5.10% Woolworths limited: ($2357.5/$58275.5)*100 = 4.05% Liquidity Ratio: Current ratio: current assets/current Liabilities Wesfarmers limited: $9684/$17834 = 0.54 Woolworths limited: $7427/$8993 = 0.83 Return on equity: Profits available to owners/Average owners equity*100 Wesfarmers limited: $407/$22949*100 = 1.77 Woolworths limited: ($1235)/$8471 = -0.15 #year-end owners equity is used instead of the average figure Return on asset ratio: (i)Using profit: Profit/Average total asset# Wesfarmers limited: $407/$40783*100 = 0.99% Woolworths limited: ($1235)/$7427*100 = -16.63% # year-end total assets is used instead of the average figure (ii)Using EBIT: Earnings before interest and tax (EBIT)# / Average total asset Wesfarmers limited: $1346/$40783*100 = 3.30% Woolworths limited: $2564/$7427*100 = 34.52% #EBIT = profit after tax + tax expense + net interest expense Debt to equity ratio: Total liabilities/Total equity*100 Wesfarmers limited: $17843/$22949*100 = 77.75% Woolworths limited: $15032/$8471*100 = 177.45% (Source: Wesfarmers.com.au 2016) (Source: Woolworths Annual Report 2016) Comparative Analysis: Operating cash flow ratio: The operating cash flow is a measure to calculate the liquidity of a company. If the ratio of cash flow from operation comes less than 1, that means the company has not created enough cash in the related period to pay off their liabilities over short-term period. It is a parameter of how well the companys current obligations are covered up by the companys flow of cash from operations (Gupta et al., 2014). Manipulating the flow of cash against the income is regarded as more accurate, cleaner method as the revenues can be influenced. The operating cash flow ratio of Wesfarmers limited is 0.32 and that of Woolworths limited is 0.26. The industry average is 1. Both the companys operating cash flow ratio is below the average. However, if the two companies are compared, Wesfarmers Limited is in slightly better position than Woolworths Limited (Biddle, Ma Song, 2013). Debt coverage ratio: Debt coverage ratio is a method of calculating the available cash flow to pay off the obligation of current debt. This ratio explains the total operating income as a compound of debt liability payable within the period of one year and it includes principal, sinking fund, lease payment and interest. In finance of government, it is the export earning required meeting the yearly principal and interest payments on a nations external borrowings. On the other hand, in individual finance, the officers of bank loan to estimate the borrowings on property income apply this ratio (Rasoolpur, 2014). Debt coverage ratio greater than 1 means the company - whether company, person or government has capability to pay off its current borrowing liabilities with its available income. Debt coverage ratio of less than 1 means the company is not viable. The debt coverage ratio of Wesfarmers limited is 2.20 times and that of Woolworths limited is 2.56 times and the industry average is 1. Both the companys debt coverage ratio is above the average. However, if the two companies are compared, Woolworths Limited is in slightly better position than Wesfarmers Limited. However, the high ratio always does not mean that the companies are in very good position. It also indicates that the company is not utilising its income properly and are afraid of taking debt from outsides for improvement purpose (Keister Bech, 2012). Cash flow to sales ratio: This ratio evaluates the sales revenue with the operating cash flows. This ratio scrutinizes the capability of a company to earn cash from its sales and help the investors to make their investment decisions. It is stated in percentage terms. Ideally, with the increase in sales, there should be increase in operating cash flow (Friesenbichler, Hlzl Hlzl, 2016). The situation will be troublesome if the movements of cash flows are not corresponding to the movement in sales. The more the ratio, the better the position the company in. it is always desirable to have larger amount of cash flows from operations. The Cash flow to sales ratio of Wesfarmers limited is 5.10% and that of Woolworths limited is 4.05%. It reveals that Wesfarmers is in a better position to generate cash from sales compared to Woolworths Limited (Douglas, Huang Vetzal, 2016). Conclusions and Recommendations: Base on the above analysis it is concluded that With regard to the short-term credit risk, Woolworths Limited is in a better position as their debt coverage ratio is better than that of Wesfarmers Limited. Both the companies do not have satisfactory cash resources as both the companys operating cash flow ratio could not meet the minimum required industry average of 1. Solvency is stated as a companys capability to pay off their long-term liabilities. A company will be considered as solvent if it is able to meet its long-term debt obligation and other obligations. As both the companys debt coverage ratio is far better than industry average, they are considered viable in the long-run. Wesfarmers limited is better in generating cash from sales revenue as their revenue is $65981 million compared to Woolworths revenue of $58275.5 million. Both the company should attempt to take necessary steps to increase their operating cash flow ratio and to meet at least the industry average of 1. Major portion of the payment for the companies are for supplies and payment to employees. The companies should should take initiatives to increase their production with available supplies and employees so that, their operating income can be increased with minimisation of cost. References and Bibliography: Biddle, G. C., Ma, M. L., Song, F. M. (2013). The risk management role of accounting conservatism for operating cash flows.Available at SSRN 1695629. Douglas, A. V., Huang, A. G., Vetzal, K. R. (2016). Cash flow volatility and corporate bond yield spreads.Review of Quantitative Finance and Accounting,46(2), 417-458. Friesenbichler, K. S., Hlzl, W., Hlzl, K. (2016). Cash-Flow-to-Sales Ratio Unchanged in 2015. Profitability of Austrian Manufacturing.WIFO Bulletin,21(11), 136-145. Gupta, J., Wilson, N., Gregoriou, A., Healy, J. (2014). The value of operating cash flow in modelling credit risk for SMEs.Applied Financial Economics,24(9), 649-660. Home - Woolworths Annual Report 2016. (2016). Wow2016ar.qreports.com.au. Retrieved 26 December 2016, from https://wow2016ar.qreports.com.au/ Home. (2016). Wesfarmers.com.au. Retrieved 26 December 2016, from https://www.wesfarmers.com.au/ Kaplan, R. S., Atkinson, A. A. (2015).Advanced management accounting. PHI Learning. Keister, T., Bech, M. L. (2012). On the liquidity coverage ratio and monetary policy implementation.BIS Quarterly Review December. Rasoolpur, G. S. (2014). Impact of Cash Flow Coverage, Debt Service Current Ratio on Capital Structure Decisions: Empirical Evidence from the Indian Corporate Sector.Journal of Research in Marketing,3(1), 232-238. Reports. (2016). Wesfarmers.com.au. Retrieved 26 December 2016, from https://www.wesfarmers.com.au/investor-centre/company-performance-news/reports Sheets, f. (2016). level i. Woolworths Supermarket - Buy Groceries Online. (2016). Woolworths Online. Retrieved 26 December 2016, from https://www.woolworths.com.au/