Accounting for Business Decision Largest Supermarket Chain

Question: Describe about the Accounting for Business Decision of Largest Supermarket Chain. Answer: Introduction Woolworths Ltd. is largest supermarket chain of Australia headquartered in Sydney being established in the year 1924. It is mainly involved in food improvement, liquor and owning of petrol stations business in Australia (Annual report 2015: Woolworth). The company has a huge workforce diversity of about 111,000 people in its retail stores and distribution centers that enables it to offer high quality products and services to the customers. The company emphasizes on providing highest range of products to the customers and has established about 961 stores in the country to serve customer needs easily and instantly. Woolworths is recognized as Fresh Food People in Australia due to its emphasis in providing fresh food products to the customers. It works in close-association with Australian farmers and growers to procure fresh food ingredients for manufacturing its food products. The suppliers are considered as strategic partner by the company so that they provide highest quality raw mate rials for manufacturing best in class products for the customers (Woolworths Supermarkets, 2012). The company owns a large market share in retail sector of Australia and is second largest in terms of revenue in the county. It is recognized as largest liquor retailer in Australia. Woolworths also has a strong market presence in New Zealand retail sector. The four strategic objectives as outlined by the company are as follows: Gaining expansion in food and liquor business segments Optimizing shareholder value Developing and maintaining its growth record in newly developed business segments such as home improvements Establishing new era of growth The company aims to provide new and innovative products to the customers for meeting their changing needs and expectations. The senior managers of the company places strong focus on meeting the changing customer needs through identifying innovative ways of growth (Annual report 2015: Woolworth). As such, the company has established its various stores for home improvement and is also promoting its online sales for achieving customer satisfaction. It is investing largely in expanding its liquor and petrol business with the aim of increasing its market share in supermarket of Australia. The companys strategy also integrates on achieving sustainability through ensuring that its operational activities do not have any adverse impact on the community and environment. It has implemented effective strategies for reducing carbon and greenhouse gas emissions for supporting the development of community and environment (Mc Arthur, 2013). The company although enjoys a profitable position in the retail market of Australia but is presently declining in its financial performance. The main reason behind the declining profitability is its huge investment in home improvement sector that is not turning out to be profitable for the company. Also, it has placed large focus on developing its business in home improvement that has resulted in its less emphasis on its core segment of food products. However, it is now placing strong focus on regaining its momentum in the retail sector of the country with placing more focus on manufacturing its core food products (Woolworths Supermarkets, 2012). The present report, in this regard, examines and analyzed the financial performance of Woolworths for identifying the areas of improvement needed for enhancing its profitability in the future context. Financial Analysis of statements to accounts of Woolworths This section explains all the important items that are presented in the financial statements of the company and changes that occur in one year time period will be noted to form an opinion on the financial performance of the company (Brigham and Ehrhardt, 2011). Woolworth published its annual report every year that contains audited financial statements and for this report, annual report of year 2015 has been selected to review on. In order find out the increase or decrease in major items of balance sheet, the financial data of year 2015 will be compared to financial data of year 2014. The increase or decrease in the items will be presented in the form of percentage so that it is useful to analyze the data. The major financial statements are: Statement of Financial Position Statement of Profit and Loss Statement of Cash Flow Statement of Change in Equity Statement of Financial Position Statement of financial position is one of the most important statements among all four statements as it shows all the values of assets and liabilities presented with the company (Mumba, 2013). This statement is also known as balance sheet because this statement is based on the well known accounting equation: Assets = Liabilities + Stockholders Equity. As the per rule to make the balance sheet, all the present values of items in balance sheet are adjusted to the values at the beginning of year so that net change can be seen. The principle used in the framing the balance sheet is similar to the accounting equation and according to this equation both side of balance sheet must be equal. As discussed earlier this statement is most important among all, so it must be prepared with proper caution and high level of integrity. It helps investors and users of financial statement to evaluate the performance of organization through use of various financial tools like accounting ratio (Buckle, Bu ckle, and Thompson, 2004). In other words it can be said that this statement present the true and fair picture of organization activities. The major items present in the balance sheet are current assets, current liabilities, shareholders equity, long term liabilities and long term assets. As per IFRS, there is specific format to present the balance and it is mandatory for all the listed companies to follow that structure. As per that structure balance sheet must be drawn vertically instead of horizontally. This section will evaluate important items presented in the balance sheet of Woolworth Limited. In order to make comment on the performance of the company in year 2015, figures of year 2015 are compared with figures of year 2014 and any increase or decrease will be noted. It must be noted that every item in the balance sheet has its own importance while evaluating the performance of the company. In order to provide all necessary information to the performance of the company, notes to financial statements will also be evaluated along with primary values in the balance sheet. The following table shows all important figures of balance sheet in year 2014 and 2015: Statement of Financial Position Woolworth Limited Items 2015 2014 Increase of Decrease % Increase or Decrease in year 2015 Total Current Assets $ 7,661.00 $ 7,175.00 $ 486.00 6.77% Total Non-Current Assets $17,676.00 $ 17,030.00 $ 646.00 3.79% Total Assets $25,337.00 $ 24,205.00 $ 1,132.00 4.68% Total Current Liabilities $ 7,558.00 $ 9,169.00 $ (1,611.00) -17.57% Total Non Current Liabilities $ 5,334.00 $ 6,395.00 $ (1,061.00) -16.59% Total Liabilities $25,337.00 $ 24,205.00 $ 1,132.00 4.68% Total Equity $10,253.00 $ 10,834.00 $ (581.00) -5.36% Above table list the figures of important items in balance sheet along with the increase or decrease in value of items. The percentage of increase or decrease is calculated using the value of year 2014 as base and difference in value of year 2015 and 2014 as numerator (Buckle, Buckle, and Thompson, 2004). Through having looked at the values of various items in balance sheet it can be said that Woolworth has performed better in year 2015 as compare to year 2014. The management at Woolworth has made efforts to increase the value of current assets and non current assets in year 2015 as compare to year 2014. The value of current assets has been increased by 6.77 % and value of current liabilities got reduced by 17.57 %. This indicates that liquidity performance has got major change in year 2015 (Annual report 2015: Woolworth). The value of non current assets has also been raised by 3.79% due to purchase of new plant and machinery and other fixed for the expansion of business. The expansi on of business has been financed through issue of share capital (Brigham and Ehrhardt, 2011). The debt equity position of the Woolworth is also good as company has least amount of long term as compared to equity share capital (Buckle, Buckle, and Thompson, 2004). This shows the presence of balanced capital structure of Woolworth in both the years under analysis. Woolworth has invested more than 400 million dollars in plant and equipments in order to make major expansion in business. Company has used some part of reserves and part of net profit to finance the purchase of assets. There was decrease in amount of borrowing from financial institutions in year 2015 as compare to year 2014. Company has repaid the debt of more than 1000 million dollars in year 2015 (Annual report 2015: Woolworth). Statement of Profit and Loss The profit and loss account statement reflects the balances of sales revenue, cost of goods sold and net income earned in the particular year. This statement is important from the point of view of investors as it shows the earning efficiency of the company. Statement of Profit and Loss Woolworth Limited Items 2015 2014 Increase of Decrease % Increase or Decrease in year 2015 Revenue $60,868.00 $ 60,952.00 $ (84.00) -0.14% Cost of Goods Sold $44,345.00 $ 44,475.00 $ (130.00) -0.29% Non operating gain or (loss) $ 3,042.00 $ 3,533.00 $ (491.00) -13.90% Earning per Share $ 1.71 $ 1.97 $ (0.26) -13.20% Income Tax $ 930.00 $ 1,057.00 $ (127.00) -12.02% Finance Cost (Interest) $ 255.00 $ 278.00 $ (23.00) -8.27% Net Income $ 2,146.00 $ 2,452.00 $ (306.00) -12.48% The above table presents the values of major items present in the profit and loss account of Woolworth in year 2015 and year 2015. Along with the values, percentage increase and decrease has also been shown in order to comment on the profitability position of company in the year 2015 when compared to year 2014. Overall performance of company was good in year 2015 but when it is compared with performance in year 2014, there has been negative shift in revenue and net profit. It indicates that performance of company is not as per budget drawn for year 2015. There was 13.20% decrease in earning per share in year 2015 that indicates that market performance of company was not up to the mark (Annual report 2015: Woolworth). The negative trend in the net profit of the company itself tells whole story of the company in year 2015. It is indication of downfall of food and retail market in Australia and as per future estimates it can be said that there will be major downfall in net revenue in ne xt upcoming year (Houston and Brigham, 2009). Statement of Change in Equity Statement of change in equity points of various items that make up the value of shareholders equity such as retained earnings, change in foreign exchange reserves, value of equity etc. This statement is useful to notice the change in various value of shareholders equity over the period of time (Buckle, Buckle, and Thompson, 2004). Statement of Change in Equity Woolworth Limited Items 2015 2014 Increase of Decrease % Increase or Decrease in year 2015 Issued Capital $ 5,064.90 $ 4,850.10 $ 214.80 4.43% Number of Shares (in million) 1256.6 1248 8.60 0.69% Foreign Currency Reserve $ (37.20) $ 67.70 $ (104.90) -154.95% Retained Earnings $ 5,830.10 $ 5,423.10 $ 407.00 7.50% Non Control Interest $ 297.80 $ 272.90 $ 24.90 9.12% The above table shows important items that makes the statement of equity of Woolworth (Brigham and Ehrhardt, 2011). The table shows that company has raised $214.80 million of equity capital in year 2015 through issue of 8.60 million equity shares in the market. Looking at the adverse condition of market, company decided to increase the value of retained earnings through adding $ 407 million to the previous balance of retained earnings. The table indicates that there was increase in value of non controlled interest by $24.90 million reflecting an increase of 9.12% in year 2015 as compare to year 2014 (Annual report 2015: Woolworth). Statement of Cash Flow Cash flow statement generally gives information on the cash spent by the company in operating, investing and financing activities (Bull, 2007). Statement of Cash flow Woolworth Limited Items 2015 2014 Increase of Decrease % Increase or Decrease in year 2015 Net cash inflow (outflow) from operating activities $ 3,345.10 $ 3,472.70 $ (127.60) -3.67% Net cash inflow (outflow) from financing activities $(1,610.80) $ (1,371.90) $ (238.90) 17.41% Net cash inflow (outflow) from investing activities $(1,333.90) $ (2,031.40) $ 697.50 -34.34% Net increase (decrease) in cash during the year $ 1,333.40 $ 922.60 $ 410.80 44.53% This table reflects increase or decrease in values of major activities shown in cash flow statement of Woolworth in year 2015 as compare to year 2014. The cash flow from operating activity has decreased in year 2015 by 127.60 million dollars showing the net fall of 3.67 %. The decrease in cash inflow from operating activity indicates poor strategies used for cash collection and creditability rating. Company has used 238.90 million more dollars in year 2015 as compare to year 2014 to finance the activities related to financing such as repayment of borrowing, payment of dividend and many others activities. It can be seen from above table that company was able to generated 410.80 more cash in year 2015 as compare to year 2014 but overall performance of company has got adverse in year 2015 due slow down in market (Annual report 2015: Woolworth). Conclusion It can be summarized from the overall discussion held in the report that Woolworths need to improve its financial performance for regaining its market leader position in the retail sector of Australia. The analysis of the financial statements of the year 2015 depicted that company has improved its financial performance somewhat in comparison to the financial year 2014. It has increased the dividend paid to shareholders for maximizing shareholder value and obtaining their trust for supporting its future growth plans. The financial statements analyzed also reveals that companys capital structure incorporates large use of debt as compared to equity. However, the proportion of debt in its capital structure has reduced to a significant extent in the year 2015 as compared to the previous year. This indicates that company is focusing presently on achieving a stable financial condition and is therefore implementing effective strategies for eliminating risk in its business model. Woolworths i s divesting its non-profitable business of home improvement for generating funds in order to improve the proportion of equity in its capital as compared to the debt. The report has presented significant information about the financial condition of the company that will help the investors to make decision regarding holding or buying its shares. The main aim of preparing the report is fulfilled by developing a proper understanding of the different items of the financial statement so that performance of the company can be measured and economic decision can be drawn. Financial statements analysis has provided all the information regarding the financial position, changes in equity, performance and cash generated by the company. All these details would prove to be largely beneficial for the investors to make the opinion on investment decision and act as proper guide to them. Recommendations On the basis of findings obtained from reviewing the financial statements of Woolworths, the company is recommended to implement new growth strategies for improving its financial performance. It has been analyzed from the financial statements of the company that it is largely incorporating the use of debt in its capital structuring rather than issuing equity shares. The increase in debt structure will raise its liability therefore hampering its sustainability. The new investment of the company in home improvement business is not proving to be profitable and therefore it is recommended to divest it for raising equity capital. It should emphasize on investing its profitable business segment of food and liquor for regaining its market leader position in the retail sector of Australia. The investment in profitable business segments would lead to increased sales and revenue generation of the company. This would further support its expansion plans in food and liquor retail sector. Also, it should emphasis more on the development of online channels for reaching to its target customers easily and instantly. This would help the company to achieve increased customer satisfaction further improving the sales and profitability (Mumba, 2013). The development of online channels would also help the company to reduce its operational cost by eliminating the need of physical distribution centers for offering its wide range of products to the customers. In addition to this, the company is also recommended to enhance its reserves and retained earnings for meeting the contingency conditions. It can be seen from the review of the financial statements that company does not hold enough reserves and retained earnings that can negatively impact its future growth strategies. Thus, Woolwor ths is recommended to increase its retained earnings and reserves for meeting the occurrence of any adverse situations. References Annual report 2015: Woolworth. [Online]. Available at: www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2015.pdf [Accessed on:22 Spetember, 2016]. Brigham, E. F. and Ehrhardt, M. C. 2011. Financial Management: Theory and Practice. Mason: Cengage Learning. Buckle, M.J., Buckle, M. and Thompson, J. 2004 . The UK Financial System. 4th ed. New York: Manchester University Press. Bull, R. 2007. Financial Ratios: How to use financial ratios to maximise value and success for your business'. UK: Elsevier. Houston, J.F. and Brigham, E.F. 2009. Fundamentals of Financial Management. Cengage Learning. Mc Arthur, T. 2013. Woolworths makes progress on its strategic priorities. [Online]. Available at: https://www.fool.com.au/2013/08/29/woolworths-makes-progress-on-its-strategic-priorities/ [Accessed on: 12 September 2016]. Mumba, C. 2013. Understanding Accounting and Finance: Theory and Practice. USA: Trafford Publishing. Woolworths Supermarkets. 2012. [Online]. Available at: https://www.woolworthslimited.com.au/page/Who_We_Are/Our_Brands/Supermarkets/Woolworths/ [Accessed on: 12 September 2016].