Category: Accountancy

Introduction

The International Accounting Standards Board (IASB) is an independent committee of accounting experts who sets the standard of accounts as regulated by the International Financial Reporting Standard (IFRS). The board was formed to succeed the International Accounting Standards Committee (IASC) in 2001. The board has a task of constituting accounting standards to be used by the different stakeholders in the financial environment.

The standards are set to bring conformity when preparing accounting data and information. Different organizations and governments use this information to compare different financial positions in firms. The board has 14 members who are selected to head the International Accounting Standards Board. The members are selected on merit.

They should be able to prepare and establish accounting standards to be used globally by different firms when preparing their financial accounts. The members should have experience in standard setting, preparing, and using accounts. The International Financial Reporting Standard Foundation raises most of its funding from banks and other financial institutions that use this information and want to promote same international standards (Greuning, Scott and Terblanche 45).

International Financial Reporting Standards

The Financial Reporting Standards (IFRS) refer to the criteria used by accountants and financial analysts to bring business affairs to an understandable level around the world. In this case, each company can use the standards and get better results that can be compared with other companies results. The standards are derived to harmonize accounting knowledge around the world.

The International Accounting Standards Committee (IASC) is trusted with the task of harmonizing accounting regulations and procedures across the world. This is aimed at establishing a common language so that accounting information can be understandable across the world. The international accounting standards have been used to replace national accounting standards in different countries (Larkin and DiTommaso 23).

In the United States, Generally Accepted Accounting Principles (GAAP) is a set of rules and regulations that help to govern the accounting industry in the country. The set of rules has been derived by the U.S Securities and Exchange Commission (SEC). The rules are used to prepare the financial statements in different organizations and governments.

When the financial statements are prepared, they are presented and reported according to the principles set by GAAP. The US government requires same accounting procedures and rules to be followed when preparing accounting statements for public companies, as well as nongovernmental organizations (NGOs). The International Financial Reporting Committee is an internationally recognized committee that helps to establish and improve standards of international financial accounting and reporting.

The IFRS differs from GAAP in terms of the authority and control. GAAP only applies to companies in the United States while IFRS applies to firms all over the world. The IFRS takes precedence when applied to companies in the United States (Flood, 89).

Comparison between the US GAAP and IFRS

IFRS and GAAP are used to set rules that concern the accounting field. The two are used by different firms in the U.S to prepare, present, and report accounting information. Both organizations use the same procedure, but they only differ when it comes to area of jurisdiction. In this case, IFRS is used globally, whereas GAAP is only used by the American firms.

The only difference is the codification used by the two entitles. For example, IAS 1 in IFRS is the same as ASC 205 in the U.S GAAP (Greuning, Scott and Terblanche 28). Rules that are based on accounting standards internationally are accepted and applied all over the international accounting field.

On the other hand, principles based on accounting standards differ from one area of application to the other. Rules are common in all accounting environments and do not change. However, principles may change according to the preference of users and the concerned bodies (Walton, 37).

Convergence between U.S GAAP and IFRS

The IFRS refers to the statement of financial position after the completion of a fiscal year. On the other hand, U.S GAAP regards this as an income statement. The IFRS and US GAAP recognize the statement of cash flows for the period in a similar manner. Thus, there is a lot of comparison between U.S GAAP an IFRS with very little difference between them (Walton, 33).

The Accounting Standards Board (FASB) can be defined as an organization that develops the GAAP in the United States. The board has the mandate of improving the usefulness of accounting information and preparation. This is meant to create reliability in the accounting field. FASB also establishes clear accounting standards for use by firms in the United State. This is done by promoting international convergence to the quality of financial information (Delaney, 49).

The Securities Exchange Commission (SEC) is a commission in the United States checks how different accounting boards are operating. It also checks the function the Financial Accounting Standards Board (FASB) and gives it the mandate to develop GAAP. The likelihood of SEC requiring firms listed in the US to follow IFRS when preparing financial statements is very low (Walton, 37).

Works Cited

Delaney, Patrick R. Gaap: Interpretation and Application. New York: John Wiley, 1985. Print.

Flood, Joanne. Wiley Gaap 2013: Interpretation and Application of Generally Accepted Accounting Principles. New York: Wiley, 2012. Print.

Greuning, Hennie , D. Scott, and S. Terblanche. International Financial Reporting Standards: A Practical Guide. Washington, D.C: World Bank, 2011. Print.

Larkin, Richard F, and M. DiTommaso. Wiley Not-for-Profit Gaap 2012: Interpretation and Application of Generally Accepted Accounting Principles. Hoboken [N. J.: John Wiley & Sons, 2012. Print.

Walton, Peter J. An Executives Guide for Moving from U.S. Gaap to Ifrs. New York, NY: Business Expert Press, 2009. Print.

It was not too long ago that the competition at the global market, which generally stayed at the same level or increased very slowly, allowed corporate accountants to take their time collecting, assessing and packaging financial data for organizations (Gullberg, 2016). However, in the past few years, the situation has changed drastically due to the emergence of e-commerce, which created the conditions for the transfer to a fast-paced, highly competitive, and rapidly developing global market (Simkin, Norman, & Rose, 2014).

Production cycles have shortened considerably, whereas the pace of innovation has gained momentum. The companies that wanted to keep up with the new speed had to leave behind annual and monthly budget reports as inadequate, old-fashioned tools, unable to meet the requirements of the coming era in business. The major problem with them was that they gave an overview of the past events ignoring the present and giving no prognoses for the future (Gullberg, 2016). In order to stay afloat, enterprises had to transfer to the so-called new economy, which presupposed the introduction of real-time reporting in accounting (Trigo, Belfo, & Estébanez, 2014).

Real-time reporting in accounting has a number of considerable advantages over traditional accounting system, based on monthly, quarterly or annual reports. First and foremost, it gives executives an unprecedented facility to react immediately to the changing market environment, working out problems as they come up  an opportunity that has taken production management to a new level (Trigo et al., 2014).

Moreover, real-time accounting helps to rescue data which traditional systems usually lock away. It happens because of the elimination of the time gap between the moment when the information is fed into the system and the moment when it becomes accessible and capable to add value to the problem-solving process. In fact, real-time accounting can anticipate possible outcomes even before particular business conditions emerge (Gullberg, 2016).

Real-time reporting necessitates significant advancement of Accounting Information System, which is made possible with the use of modern technologies. These are:

• business process management, which supports never-ceasing monitoring of business activities;
• mobile phones, which make it possible to keep in touch with the situation and to have access to the reports anytime from anywhere;
• cloud computing, which gives an opportunity to share information among all those who need to stay updated in order to make decisions regarding the current state of things;
• business intelligence, which allows selecting the most relevant information about routine business operations;
• enterprise architecture and enterprise application integration, which is aimed to structure data with the purpose of creating real-time reports having an added value for users (Trigo et al., 2014).

As it is evident from the technological trends in real-time accounting, their implementation was preconditioned by the need to access, collect, store, evaluate, and share infinitude of data. This leads us to the concept of big data, which encompasses all the internal and external information concerning the enterprise, including both structured and unstructured facts that are crucial for making smart, reasonable, and well-grounded decisions at any given moment of time (Bhimani & Willcocks, 2014).

The influence of big data is now so profound that it has fundamentally changed the principles of business operations, including the accounting system. It led to the appearance of the technologies and digital channels that provide improved mechanisms of data collection and delivery and enable faster and more accurate analysis, which was quite impossible to perform within the traditional system of accounting.

However, it would be fair to admit that, although the ability to receive and store huge amounts of information is now experiencing enormous growth, the technical capacity to process these amounts is still lagging behind. Major innovations are still in store for the future generation of accounting systems (Vasarhelyi, Kogan, & Tuttle, 2015).

The above-mentioned tools for data collection, storage, and sharing has told on the way accountants now view the financial performance of the organization, develop monthly budgets, and assist executives in the process of decision-making. Being able to evaluate the most recent possible information about the demand, accountants can now rely not only on the previous experience in order to make prognoses for the future (Vasarhelyi et al., 2015).

Besides, the importance and the scale of big data led to the appearance of new professional tools in accounting. Excel, which was used before for all kinds of processing, is now suitable only for small projects as it does not allow analyzing vast quantities of non-numeric data. New data processing tools (e.g. VMob) visualize information in order to juxtapose, compare, find correlations, contrast, and finally make sense of it.

Thus, with the appearance of big data, reporting, which now actually goes far beyond mere accounting, is no longer limited to the financial aspect. It has three dimensions: financial and non-financial data, mandated and voluntary, qualitative and quantitative (Trigo et al., 2014). The main point is that real-time reporting requires the accountant to add value by using all varieties of data with the purpose of improving production quality (Bhimani & Willcocks, 2014).

Since big data has had an impact not only on accounting but also on the entire process of business operation, there arises a need of enhancing productivity by coordinating and optimizing of all the activities within the enterprise. This makes Business Process Management one of the essential spheres of operation management nowadays. Like accounting, it has been recently using the real-time approach in order to ensure the possibility to observe and control business processes with the view to establish and maintain an ongoing internal control (Dumas, La Rosa, Mendling, & Reijers, 2013).

Its primary objective is to make companies more flexible, more productive, and more capable of modernization. It is the most relevant policy-making method, which estimates business activities in order to comprehend, manage, and improve them in the process of creating value-added goods and services that would completely satisfy the potential consumer (Trigo et al., 2014).

Business Process Management Suites have been lately evolving into the system that is highly demonstrative of the new epoch of intelligent business. It now features a modern module called the Business Activity Monitoring (BAM), which gives managers an opportunity to access real-time dashboards that show all the current activities of employees inside the company. It was initially created for providing the holistic picture of business processes to operation managers and chief executives. Real-time accounting is answering the need to process the incoming information for managers to react quickly and reasonably. BAM is successfully implemented in BMP as one of the most efficient technologies for real-time reporting and control (Trigo et al., 2014).

Thus, as we can see, the present role of Business Process Management in establishing internal control is hard to overestimate. This has become especially evident since the focus of attention was shifted from the automation of business processes with the application of recent technologies to human-driven activities that accompany the usage of machines (Dumas et al., 2013)

Basically, BPM tools perform the following tasks in order to establish ultimate control over the organizational performance:

• visualizing business processes;
• identifying required measures in order to ensure success;
• comparing and contrasting variants in order to opt for the one that is most likely to lead to improvement;
• applying the improvement and create conditions for the next one;
• controlling the performance in real-time in order to introduce corrections in case of necessity;
• re-engineering the entire process from the very beginning in case the results are not satisfactory enough (Becker, Kugeler, & Rosemann, 2013).

All the enumerated activities allow introducing changes that are accounted for by the real-time data, not only hypotheses, which makes them more grounded.

Thus, the conclusion that can be drawn is that real-time reporting in accounting marks the beginning of a new era of production management. It still has to overcome a lot of challenges some of which can already be dealt with through the use of such modern technologies as BMP and BMA, mobile phones, cloud storages, business intelligence, and enterprise architecture and enterprise application integration (Trigo et al., 2014).

References

Becker, J., Kugeler, M., & Rosemann, M. (2013). Process management: a guide for the design of business processes. Heidelberg: Springer Science & Business Media.

Bhimani, A., & Willcocks, L. (2014). Digitisation,Big Dataand the transformation of accounting information. Accounting and Business Research, 44(4), 469-490.

Dumas, M., La Rosa, M., Mendling, J., & Reijers, H. A. (2013). Fundamentals of business process management. Heidelberg: Springer Science & Business Media.

Gullberg, C. (2016). What makes accounting information timely? Qualitative Research in Accounting & Management, 13(2).

Simkin, M. G., Norman, C. S., & Rose, J. M. (2014). Core concepts of accounting information systems, (13^th ed.). Australia: John Wiley and Sons.

Trigo, A., Belfo, F., & Estébanez, R. P. (2014). Accounting information systems: The challenge of the real-time reporting. Procedia Technology, 16, 118-127.

Vasarhelyi, M. A., Kogan, A., & Tuttle, B. M. (2015). Big data in accounting: An overview. Accounting Horizons, 29(2), 381-396.

Abstract

Financial statements are an accumulation of reports of a firms monetary outcome, money-related condition, and cash flows. Budgetary statements signify a formal record of the money-related activities of an organization. These are composed of reports that measure the financial status, execution, and liquidity of an organization. Financial statements reveal the budgetary impacts of business investments in the organization

The paper discusses the importance of financial statements and reports. The users of financial reports were identified and discussed. Using Debenhams Plc as a case study, the financial ratios were calculated and analyzed. The ratios discussed include profitability, liquidity, and efficiency. Recommendations were made based on the companys financial statement.

Introduction

Debenhams Plc is among the biggest clothing and textile retailers in the United Kingdom (Varley 2014). The organization started as a small franchise selling parasol, hats, and gloves (Debenhams PLC Annual Report & Accounts 2017). In 1813, the company changed its name to Clark and Debenhams. There was a hostile takeover by the Bruton Group, which affected the organization. However, the organization recovered its self-ruling when it demerged from the Burton Group to become the Arcadia Group plc. Debenhams stock was enlisted into the LSE in 2006 (Debenhams PLC Annual Report & Accounts 2016). This organization has over 240 stores across 27 nations. Debenhams is a global name in womens clothing and the retail industry. The firms rivals include Tesco, Wal-Mart, and Sainsbury. It was found that the firms total assets rose to 2,800 in 2013 (Figure 1).

Revenues, Fixed & Total Assets

Retained Earnings

Figure 1: Assets and Liabilities (Debenhams PLC Annual Report & Accounts 2016, p. 156).

Financial Reports and Statements

Budget articulation or financial statements are reports of a firms monetary outcome, financial condition, and cash flows. Budgetary statements signify a formal record of the financial activities of an organization (Aderemi 2017). These are composed of reports that measure the execution and liquidity of an organization. Financial statements reveal the budgetary impacts of business investments in the organization. In summary, financial information provides many opportunities. The importance of financial statements can be summarised below.

1. To evaluate the capacity of an investment to generate income
2. To decide if a business can repay its obligations
3. To evaluate financial decisions and manage profitability issues
4. To get financial ratios from the reports that show the state of the business.
5. To research the points of interest of certain business investments, as described in the revelations that come with the announcements.

Financial specialists and potential investors are keen on their benefits and the security of their investment. As a result, income can be assessed from past execution as appeared in the financial report. The security of their business decision will be uncovered by the financial status of the organization as appeared in the balance sheet and budget position (Avakmovic & Avakumovic 2016). Thus, the users of financial statements include investors, market analysts or speculators, lenders, government agencies, employees, and customers.

Workers and employees need to know whether a business can offer secure investments and conceivable pay rises. They will likewise have a distinct interest in the pay rates and wages of their management (Fabozz 2009). Information about productivity will likewise be valuable if the organization faces insolvency and bankruptcy. Loan specialists need to know whether they will be reimbursed when investment funds are released. By implication, loan institutions rely on the firms solvency ratio, which is covered by the financial statement. Financial institutions rely on the balance sheet to evaluate its assets and liabilities, which are vital variables for long-term loans. It was found that the firms assets and liabilities were stable in 2013 (Figure 2).

A government institution is another user of financial statements. Government agencies assess the economy and its policy interventions using financial records. Tax institutions use the financial statement to calculate the firms tax deductions or waivers (Francis, Terry & Steven 2013).

Investment suppliers use financial statements to make business decisions on supply and demand (Zentes, Morschett & Schramm 2011). By implication, outsourcing suppliers need to know whether they will be paid. Consequently, new entrants may require assurance concerning the financial status of the organization. Clients need to determine that an organization can sustain its product. This is valid if the client is relying on an organization for specific supplies. Finally, the speculators and the public may wish to evaluate the impact of the organization on the economy, local, and international environment. Please note that business rivals and competitors would likewise utilize financial statements and reports to make managerial and marketing monetary choices.

Comprehensive Income Statement

A comprehensive financial statement provides information for business analysis. It displays the firms performance and profit margin. This section of the paper will discuss the relevance of three financial ratios. The evaluation includes profitability, liquidity, and efficiency ratios. Debenhams finical records for four consecutive years will be used for this analysis.

Profitability Ratios

A firms profit margin can be evaluated by using its profitability ratios. In summary, the profitability ratio suggests the capacity to produce positive returns for the investors, which can be appropriated as profit, and some segments can be held for future operations. By implication, profitability ratios are the outcome of favorable and effective policy management. For an organizations survival and expansion, profitability and productivity are fundamental. Therefore, Debenhamss profitability capacity can be assessed using its profit ratio, gross ratio, and net profit ratio.

Debenhamss Gross Profit Ratio

A firms gross profit is computed by taking a net profit. It uncovers the level of gross benefit accomplished by an organization on its net deals. The benefit produced from the immediate investment and operations is called the gross profit ratio. It is the essential estimation of the profit as there are some different elements, which may harm the benefit. Higher gross benefit prompts high profitability. It was found that the firms total cash dropped to 40 million in 2017 (Table 2).

The firms gross profit margin = revenue  cost of revenue / revenue.

Based on the analysis, it is discovered that the proportion of gross profit is expanding. The financial statement revealed a patterned value of 12.08, in 2014, 12.88 in 2015, 12.53 in 2016, and 11.34 in 2017. In summary, the high cost of sales accounts for its deteriorating gross profit ratio. The organization should reduce its cost of goods (revenue) to have a higher gross profit margin.

Debenhamss Operating Profit

A firms operating profit is the balance of its revenue for that period. By implication, a deduction from the gross profit is called the operating profit ratio. To compute Debenhamss operating profit, total expenditures would be deducted from its gross profit. It was found that the firms net income dropped to 49 million in 2017 (Table 1).

The operating margin = the operating income / net sales.

The Debenhams operating margin was 5.56 in 2014, 5.77 in 2015, 5.06 in 2016, and 3.05 in 2017. The value shows deteriorating revenue before tax and interest. This approach is more appropriate than the gross ratio as the results are more accurate. Based on its financial statement for the fiscal year, Debenhams has a lower operating profit. Low gross profit and poor management influence the outcome.

Net Profit Ratio

The most used measurement for estimating a firms income is the net profit. Net profit is accumulated after deducting all the costs of operations during a fiscal year. The cost of operations includes all direct and indirect expenditures accrued during one financial year.

Net profit margin = profit /revenue

The companys net profit margin was 3.77% in 2014, 4.03% in 2015, 3.67% in 2016, and 2.09% in 2017. Based on these assumptions, Debenhamss net profit shows poor financial strength. As a result, its dividend rate is deteriorating.

Liquidity Ratios

A firms liquidity ratio describes its ability to meet all financial obligations. By implication, Debenhamss liquidity ratio demonstrates the managements capacity to pay for its operating cost. Therefore, liquidity is fundamental for the efficient running of a business (Weribgelegha & Egoro 2017). If the organization has poor liquidity, it would be difficult to manage credit facilities over a short and long-term investment. A firms liquidity ratio can be assessed using its quick and current ratios.

Debenhamss Current Ratio

A firms current ratio is the proportion between the present resources and current liabilities. Both assets and liabilities are the fundamental elements of the working capital. The current ratio describes the firms capacity to settle its liabilities

Current ratio = current asset/ total liabilities

Debenhamss current ratio was 0.64 in 2014, 0.66 in 2015, 0.73 in 2016, and 0.66 in 2017. Debenhamss current ratio shows a negative value as the present proportion falls below one. It implies the organization has more liabilities to pay than its assets (Graham, Smart & Megginson 2012).

Debenhamss Quick Ratio

The quick ratio is the extent between liquid assets and liabilities. Items that are not changed into fluid money are deducted from the firms assets and liabilities.

The quick acid ratio formula = asset  inventory/ liabilities

Its quick ratio was 0.12 in 2014, 0.09 in 2015, 0.13 in 2016, and 0.1 in 2017

Based on its financial report, Debenhamss quick ratio was 0.1 in 2017, which demonstrates a liquidity crunch (Robinson et al. 2015).

Efficiency Ratios

A firms efficiency ratio is evaluated using a standard measurement. By implication, the efficiency ratio is any value over the normal measurement. As a result, the organization creates a standard measurement or indicator for its operations.

Receivable Turnover

Receivable turnover is the time permitted to account holders for paying off their duty. The receivable turnover can be computed by dividing credit deals by income received.

Receivable turnover ratio = Total Credit sales/Average accounts receivable

The firms turnover was 102.56 days in 2014, 92.54 in 2015, 90.24 in 2016, and 85.69 in 2017. Based on the assumptions, Debenhams takes 86 days to reimburse business debtors in 2017. This ratio reveals how effective the organization can meet its financial obligations.

Asset Turnover Margin

Asset turnover proportion is a productivity proportion that measures an organizations capacity to create deals from its assets by contrasting net deals and aggregate resources. In summary, a firms asset ratio proportion demonstrates how an organization can utilize its resources for creating deals. Asset turnover was 1.08 in 2015, 2015, and 2016. The firms asset turnover was reduced to 1.06 in 2017.

Inventory Ratio

A firms inventory ratio computes the raw materials expended for a specific year and the leftover segment. It is a critical component of a firms resources. In most business investments, an extensive sum is locked for emergencies. The inventory ratio estimates the recurrence of stock cleared during a productive year. Debenhamss inventory turnover was 5.78 in 2014, 5.89 in 2015, 6.23 in 2016, and 6.43 in 2017.

Conclusions and Recommendations

As demonstrated in the present analysis ratios, Debenhamss liquidity ratio is below average, suggesting the organization cannot meet money-related commitments. The organization would money-related challenges as banks and lending institutions may not provide credit facilities for short-term investments. To maintain a strategic distance from these conditions, it is prudent for Debenhams Plc to build their assets, through equity issuance. Besides, the organization has a higher profitability ratio, which indicates the effective allocation of assets. Nevertheless, the companys liquidity ratio is deteriorating. However, the firm is effective in overseeing its assets to generate income. The company is efferent in settling financial obligations to creditors and shareholders. As a result, the company is effective in debt management from clients and customers.

Based on its gearing ratio, the business environment is challenging because of the diminishing capacity to cover its interest commitments. This analysis reveals that the firms assets are procured using loan facilities. Along these lines, the organization should attempt to diminish the debt profile because a high debt ratio expands obligation load. From the above estimations, Debenhams Plc should focus on expanding its income since they incur huge financial obligations from direct and indirect expenditures. The firms ratio analysis shows inadmissible conditions except for the profitability ratio, thus the organization should conduct an audit analysis of its operations. The overall financial statement is positive, however, the organization should attempt to discover new investments, which will upgrade its turnover ratio and interest ratio. Debenhams Plc should attempt to use its competitive advantage and competencies in womens clothing to sustain its presence in the industry. The organization has a decent receivable and payable administrations approach.

Reference List

Aderemi, A 2017, Financial reports and shareholders decision making in Nigeria: any connectedness? Journal of Internet Banking and Commerce, vol. 22, no. 8, pp. 1-14.

Avakmovic, J & Avakumovic, J 2016, Method of financial analysis and impact on quality of decision making, EuroEconomica, vol. 35, no. 2, pp. 17-19.

Cho, s & Kang, S 2017, The effect of accounting information quality and competition on investment inefficiency: evidence from Korea, Asia-Pacific Journal of Accounting & Economics, vol. 1, no. 1, pp. 4-13.

Debenhams PLC DBHSF: balance Sheet 2018, Web.

Debenhams PLC DBHSF: income statement 2018, Web.

Debenhams PLC Annual Report & Accounts 2016 2016, Web.

Debenhams PLC Annual Report & Accounts 2017 2017, Web.

Fabozz, F 2009, Institutional investment management: equity and bond portfolio strategies and applications, John Wiley & Sons, London.

Francis, G, Terry, G, & Steven, T 2013, International bibliography of business history, Routledge, London.

Graham, J, Smart, S, & Megginson, W 2012, Introduction to corporate finance, Cengage Learning, Australia.

Robinson, T, Henry, E, Pirie, W & Broihahn, M 2015, International financial statement analysis, Wiley, Hoboken.

Varley, R 2014, Retail product management: buying and merchandising, Routledge, London.

Weribgelegha, A & Egoro, S 2017, Financial ratios as a veritable tool for investment decision making in an organization, Journal of Finance, Banking and Investment, vol. 4, no. 1, pp. 1-8.

Zentes, J, Morschett, D & Schramm, K 2011, Strategic retail management: text and international cases, Gabler, Wiesbaden.

Appendices

Table 1: Debenhams Plc Income Statement. (Morningstar 2018, p. 4).

Introduction

This would involve a short picture of Wal-mart food, Inc& It is the earths largest vendor it functions, in the course of an enormous foundation of Wal-Mart supplies, supercenters of Wal-Mart, etc. The main purpose of the Final Project is to apply the concepts and techniques of the module to the analysis of real-world situations or problems. The major region of focus in this study is the management accounting of Wal-Mart. The organizations preserve more than 6,900 supplies and workplaces everywhere on the earth, with almost 2,900 of its supplies are situated globally. The company possesses a worldwide brand name in fast food supply channels. In addition to that, the company follows a quite reliable, transparent, and effortless management accounting scheme globally in its processes. The average Wal-mart customer is 42 to 46 years old, with household income $30,000 to $ 35, OOO and an average purchase of $30. Wal-mart Supercenters, located in 45 states, are larger stores that combine a full-line supermarket with discount department stores (Plunkett, 2007).

The management accounting system of Wal-mart offers the various data required for efficient judgment making. Administrators of the Wal-mart stores make use of this information to make the most suitable decision. Management accounting system needed for every aspect of the Wal-mart operations so the discussion with regards to this topic is very much necessary.

Wal  Marts budgeting process

Wal mart uses management tools like budgeting to establish itself as a team leader. In Wal- mart budgeting process is mainly used for the detection of blockage of funds and for setting up targets against which the companys performance can be measured and decisions can be made. The review of Wal- marts balance sheet shows that the firm has many lenders. The financial information helps in the portrayal of its competitors in Wal  mart. Wal-Mart emphasized cost-cutting, and since human resource management does not directly generate sales, the function was treated as an unfortunate cost of doing business (Noe 2006, p.204).

Wal-marts marketing department is of big-budget because the company focuses a lot on marketing and the marketing budget is prepared based on the population and other costs of the area in which the company is opening its new store. Wal- marts generates for each of its stores weekly and monthly budgeted costs for its labor cost. This budget is prepared according to the sales in each store. The store managers are required to prepare a projected budget report which they send to the head authorities for approval. Regarding the capital budgeting process, the Wal-Mart uses direct foreign investment as a measure to increase its cash flow by applying its business concept to other foreign countries. Wal-mart has a considerably big advertising budget. The research and development budget has also increased in recent years. Using the management accounting concepts Wal-marts improves its sales and its profitability.

Wal- Marts costing process

Wal- Mart uses the management accounting concepts to make appropriate decisions and to provide its customers products of high quality at reasonable prices. Wal  Mart uses software for the management of data warehouses. Wal- mart has an automated product ordering and replenishment system which helps in the delivery of the right products at the right time and at the right place. The product assortment is done in Wal-mart based on the requirements by customers in all the entity stores of Wal-Mart. The product assortment technique is a management tool adopted by Wal-Mart. Every sale is tracked in Wal-Mart using the sale device point and this helps in the maintenance of adequate stock in Wal Mart. This helps in maintaining the correct amount of stock at very low prices and is an efficient budgeting tool.

Wal-Marts below invoice prices on a handful of items were also below average variable cost. Under this logic, the fact that below- invoice prices on pharmaceuticals items might increase Wal- Marts profits on other items is irrelevant for a predatory pricing inquiry (Coate & Kleit 1996, p.196).

Wal- mart uses the electronic product code which is a barcoding system and helps to track the items that are in stock and the items that have been sold. This type of management tool helps Wal-mart in increasing its efficiency in product management and costing. Wal-mart saves dollars using this type of coding system which helps in the proper decision making regarding the stock details. Wal-mart can dictate the cost at which goods should be supplied and enforces its demands by sourcing elsewhere; leaving the supplier unable to plug the gap such an important client leaves behind (Werther & Chandler 2006, p.33).

The cost price of Wal- Mart items is around 15 % less compared to other groceries and the reason behind this is the efficient management of accounting information. Wal mart costing process is such that it squeezes its labor costs and other production costs. The firm mainly reduces its costing process by the efficient control of its supply chain and also cuts costs by involving in actions that have specific purposes like lessening the earnings in the retail sector. Wal- mart has an efficient inventory costing tool in the form of the electronic product coding system. Wal  Mart has an efficient management accounting system in its stores and its employees are a part of its information dissemination group. In Wal-Mart the electronic commerce system is used to manage its excellent retail sales growth. In Wal- Mart stores were encouraged to directly deal with the suppliers overseas and to implement new strategies which can help them earn profits at a low budget.

Capital decisions

All company decision is linked using in one means or any more by way of the monetary and financial circumstance of the business. The outcome of the capital decision study will aid in the determination of the companies capability to stay in a particular column of the company. To fully understand the companys financial position a financial manager must consider the amount of networking capital available. The networking capital is the differences between the current assets and current liabilities (Capital structure Walmart, 2010).

Capital Decision constructs a particular type of software and offers a wide variety of resolutions in the Capital Marketplace freedom. The company offers various modified packages of the manufacturing goods resolving for every organization reporting requirement, preserved and ad-hoc comprises risk information. Capital Decision is also extremely Capital decisions are extremely significant to the monetary achievement of an organization. Wal-mart is the worldwide brand name in fast food supply channels and also the proper management accounting is very much vital for increasing the profitability as well to increase the sales volume of the company.

Capital acquisition and structure

So it is necessary to understand the capital acquisition and structure of the capital decision. And also the management toll of the Wal-mart like supply and value chain to regulate necessities and measures and keep the costs of business low down. In Wal  Mart management system is used in all decision-making regarding the banking sector, the choice of wholesalers and retailers, and the pricing process and marketing. The use of a management accounting system in Wal-mart helps in most well-organized amass administration schemes by using electronic commerce to decrease the manufacture and the relief costs is a highly significant management accounting tool. Capital acquisition resources help to address the various subjects matters. The term capital structure refers to the percentage of capital (money) at work in a business by type. Broadly speaking, there are two forms of capital: equity capital and debt capital. Each has its benefits and drawbacks and a substantial part of wise corporate stewardship and management is attempting to find the perfect capital structure in terms of risk/reward payoff for shareholders (Kennon 2010). The financing choices of any organization normally consist of the quantity of debt and equity ratio. In addition, this the competitive essentials in the marketplace, changing consumers requirements and food flavors, legislative interferences, and the all general financial atmosphere also affect the overall functioning of the Wal-mart. So all these factors also affect the assets structuring, exercise of debt assets, and the requirement to enlarge resources and earnings of the organization in the course of equitable way.

Conclusion

Wal Mart uses an efficient management accounting system in its costing, budgeting, and capital decision-making process and devises new strategies and techniques to be the retail leader in the US. The adoption of information technology further improved the management accounting system of Wal-Mart. The use of a management accounting system in Wal-mart helps in efficient store management system by using electronic commerce to reduce the production and the delivery costs are highly important management accounting tool.

Reference List

Capital structure Walmart, 2010. [Online] Oppapers.com.

Coate, M. B. & Kleit, A. N., 1996. The economics of the antitrust process. [Online] Springer, p.196. 

Kennon, J., 2010. An Introduction to Capital Structure. 

Noe., 2006. Fundamentals of human resource. [Online] Tata McGraw-Hill, p.204. 

Plunkett, J. W., 2007. The Almanac of American employers 2008: Market research, statistics and trends pertaining to the leading corporate employers in America. [Online] Plunkett Research, Ltd. 

Werther, W. B. & Chandler, D., 2006. Strategic corporate social responsibility: Stakeholders in a global environment. [Online] SAGE, p.33. 

Introduction

ZXY is an investment company that is considering investment in 2 new products. The company specializes in food products meaning they may not have difficulty in movement. The proposed expansion requires $7 million in initial investment. The equipment to be invested in has an estimated life of ten years after which it should be disposed for $1 million. The organization needs an ROI of 12%.

Financial Analysis: Revenue

The above figure shows the projected revenue for both products over a period of ten years. In the first year, product A had a projected revenue of 2.4 million which increases to 2.8 million in the 2 subsequent years. Product B starts providing revenue in year 4 at 0.9 million while A is at 3.24 million. From yea5 to year 10, A maintains at 3.9 million. Over 10 years, product A has yielded a total of 34.64 million while B has yielded a total of 22 million. The total for both products is 56.84 million. The projections show that product A is projected to start yielding revenue earlier than B and will eventually have bigger totals than B at the end of the 10 year period.

Financial Information: Expenses

• Cost of Goods Sold (COGS) : Total = $23,675,993
• Expenses other than COGS: Total = $5,374,724
• Expenses Total : $29,050,717

The above breakdown is for the total expenses. The cost of goods sold were 1.8 million on the first year, 2 million in the second year. 2.48 in the third and 2.31 in the fourth. In the fifth year, COGS total was 2.37 which increased to 2.4 million in the sixth year. In the seventh year, the COGS was 2.45 while in the eighth year t was 2.544 million. it was 2.6 million in the 9^th year and 2.64 million in the final year. The total COGS totalled 23675993 million. On the row about expenses other than COGS, the first year total was 470627, 592 964 on the second year and 658777 in the third. In the fourth, the total was 633220 while in the fifth, the value was 593194 while the value was 560623 in the sixth year. In the seventh year, the value was 512725 and 469647 in the eighth year. Finally in the final two years, the values were 445193 and 437 765 respectively. The total yielded was 5.374 million. Combining this with COGS total yields 29 million dollars.

Risks Associated With the Project

From the financial statements, the project takes too long to recoup their initial investment. The projected was only able to make back the initial investment in the fourth year. The projections also indicate huge losses in the first three years with 73 357 dollars in the first year, 321 680 loss in the second year and 992 727 in the third year. These three years indicate that the company is likely to experience tumultuous times going forth with the investment; even if the tide does turn in the fourth quarter, it would be preferrable if the company kicked off with profits since the products are said to be staples.

Straight Line Depreciation

The investment cost is 7 million USD. The residual value is given as 1 million USD. After subtracting 1 million from 7 million, the depreciable value becomes 6 million. Dividing this depreciable by the useful value of 10 years yields 600000 per year.

MACRS Depreciation

The above table shows the calculation of the NPV under MARCS. After the first year, the after tax cash flows were (42733) and the present value of cash flows was 38154. in the second year, the same variables were (121460) and (96 827). On the third year the values were still negative at (740944) and (527389). The fourth year yielded the first positive values at 762725 and 485725. The values stayed positive for the remainder of the period until the tenth year when they become 4411100 and 1420256. The present value of total cashflows becomes 6, 977, 667. After adding the residual value at end of year 10 by a rate of 0.32, it becomes 7, 2669, 641. Subtracting this value from the initial investment, the NPV is 269, 641.

Comparing MARCS with Straight Line

The annual depreciation under straight line method is higher than that from MARCS depreciation indicating that the tax liability would be lower for the company which the company could use to enhance their cash flow. The straight line depreciation method is a simplistic way of calculating depreciation where it is assumed to follow a linear path with the equipment falling by equal values each year. MARCS methodology, on the other hand, allows the capitalised cost of the asset to be redeemed over a particular period through annual deductions.

Recommendation for Investment

The initial investment of the project is 269641 dollars from the NPV calculation. The positive value is important for investors who are always looking for investments that generate profit over their useful lifetime. For this reason, the company should go ahead with the investment. All investments come with some risk. Even though the company takes time to earn some profit, it does well in the subsequent years which helps in the recovery. The straight line depreciation approach shows that the value is higher than the MARCS approach. This even further bolsters the recommendation for accepting the investment since the company would have less tax liability increasing their cashflow (Marshall et al., 2020).

Reasons for Recommendation

Net present value is the difference between current cash inflows and the current value cash outflow values over a certain period. NPV is applied in capital budgeting and in planning for investments to assess the projected profitability of the investment. NPV enables one to assess todays value of future revenue streams. NPV allows comparisons of different alternatives. NPV takes into consideration the discount rate and could be obtained from the value of capita required to invest. Negative NPV values typically void a project (Marshall et al., 2020). In this example, the NPV was positive which is why ZXY should make the investment.

Reason For Recommendation: Cash flow

Cash flow means the flow of money in and out of business. Cashflow is important because it indicates that the company is engaging in business operations such as paying taxes, investing, paying employees and meeting operating costs (Marshall et al., 2020). When a company has positive cash flow, it shows that its liquid assets are increasing. Positive cash flow enables a business to settle debts, plough back, pay dividends to shareholders, meet expenses and buffer itself against future challenges (Marshall et al., 2020). On the other hand, negative cash flow shows that the liquid assets of the company are on the decline which cannot be a good thing. In the case of ZXY cashflow was positive which is a good sign.

Reasons for Recommendation: Risks are Endemic in All Investments

From the financial projections, it is evident that the investment ZXY intends to undertake is not all rosy. There are some pitfalls such as the lack of cashflow in the first 3 years. However, it is common for companies to experience a low period before the business takes off as it attempts to carve its space in the market. This is but one among many types of risks that investors must contend with and should not deter the investment as long as the fundamental indicators, in this case NPV, suggests that the investment is promising.

Conclusion

The paper was about ZXY company that intends to expand its operations by investing in equipment for the manufacture of 2 new products. The expansion will cost 7 million dollars for an equipment that will last 10 years and have a residual value of 1 million. The company expects an ROI of 12%. From an analysis of the financial statement, the company does not have cash flow for the first 3 years. From MARCS depreciation, the company has an NPV of $269641 while the straight line depreciation value is higher. This means the company will pay lesser taxes which will leave it with more cash. The NPV value is positive which shows that the investment is viable.

References

Marshall, D. H., McManus, W. W., & Viele, D. F. (2020). Accounting: What the numbers mean (12th ed.). McGraw-Hill.

Appendix 1

Appendix 2

Appendix 3

Financial ratios

Group one

The first group contains the returns on capital employed. It is a fundamental ratio that is used to assess the financial health of an institution. Return on capital employed is obtained by dividing operating profit and capital employed. It is a suitable measure of the profitability of an entity. Even though it is not adequate, it provides a good indication of how a business makes use of total resources to generate profit. A high value of return on capital employed is preferred at a low cost.

Group two

The second group is made up of liquidity ratios. The ratios measure the ease with which an entity can pay current liabilities using current assets. A sound financial institution should have adequate current assets that can quickly pay off current liabilities. The current ratio is obtained by dividing current assets and current liabilities. A ratio that lies between 1.5 times and 2.5 times is regarded as suitable.

On the other hand, the acid test ratio is a conservative ratio that measures the ability of a company to pay current assets. Acid test eliminates assets that cannot be quickly converted to cash, such as inventory from the existing assets. The resulting quick assets are divided by current liabilities to obtain the quick ratio. Apart from measuring the ability of a company to pay off current liabilities, the ratio also indicates how a company manages existing assets. An extremely high liquidity ratio could indicate that a company keeps a lot of money as liquid assets which might not be productive or that cannot be used to generate sales. Thus, corrective measures can be taken in such instances.

Group three

The third group comprises of turnover ratios. The ratios measure the efficiency of a company. Inventory turnover measures the number of times within an accounting period that a company replenishes its stock. A high turnover ratio is favourable. Accounts receivable ratio shows the efficiency of a company in collecting debts. A high ratio might indicate that a company operates on a cash basis. Accounts payable turnover measures the speed at which a company pays its creditors. A high accounts payable turnover ratio indicates that the company pays the creditors at a faster rate. Finally, the total assets turnover ratio measures the number of sales that are generated from a unit of the assets. A high ratio is favourable since it indicates that the company can generate many sales from each unit of assets. Thus, high-efficiency ratios are favourable and preferred.

Group four

The ratios in the fourth group measure the profitability of a company. Return on equity shows the amount of profit that is generated for each unit of shareholders equity. Return on total assets measures the amount of net income that is generated from each unit of total assets. Finally, operating profit margin measures the ability of the company to manage the cost of operating the business to generate an operating profit. Thus, the profitability ratios measure the ability of the company of a company to use resources available efficiently to generate profits. High profitability ratios are preferred.

Group Five

Earning per share is the ratio of total net income attributable to shareholders divided by the number of weighted average outstanding shares. Earnings per share is an indicator of a companys profitability. High earnings per share indicate that the profitability of a company is high. Dividends pay per share shows the number of dividends paid per share. A high ratio of dividend pay per share is preferred to low ratios.

Group six

The sixth group measures the leverage of the company. Debt to equity ratio is a ratio of debt to equity. A high debt to equity ratio is not favourable since it shows that the company if highly levered. This might not be a good indication for a potential investor. Interest coverage ratio shows the number of times that interest can be paid from operating income. A high-interest coverage ratio is suitable since it shows that the company can pay for interest expense. Finally, gearing ratios also look at the leverage of the company. It focuses on the ratio of total assets to total equity.

Discussion of ratios for the entities

Middle State bank

As mentioned in the case, the bank is a potential debt provider. The bank would be interested in ratios in group six. These are debt-equity ratio, interest coverage and gearing. From the table, the debt to equity ratio of the company was high. It ranged between 1.37x and 1.41x. Besides, the ratios were above the industry average. The interest coverage ratios were high. They ranged between 3.70x and 6.80x. However, they were declining over the period. Besides, they were below the industry averages. The ratios do not show a good indication since the company is highly levered, and the company is also facing difficulties in paying interest expenses.

Another set of ratios that would be of concern to the bank is the profitability ratios. These are ratios in group four. The ratios for the company are low and declining. Further, they are below the industry average. The ratios do not portray a good indication of the financial health of the company. The two groups are vital for a potential debt provider would be interested in the trend of profitability.

Majestik Company

The supplier would focus on the efficiency of the company. These are the ratios in group three. More specifically, the supplier will focus on the inventory turnover and the accounts payable turnover. The ratios will show the number of times the company buys assets and how frequently the company settles accounts payable. This information is suitable for deciding on whether to interact with the company. From the data of the company, it is evident that efficiency ratios of the company are declining and below the industry average. The trend of the ratios is not suitable for a potential supplier. Also, a supplier would be interested in the profitability of the company. These ratios are in group four.

Investment trust

Ms Lisa Brown, the analyst, will focus on ratios in group five. The earnings per share will show the amount of profit that is attributed to each share. It indicates the amount of profit per share. The ratio is suitable since it will show the investor the profitability of each share in comparison to other companies. Dividend pay per share also shows how much a potential investor will earn periodically. The productivity of the shares and the earnings of the share is necessary when deciding to include the shares of Smart electronics in the new proposed portfolio. These two ratios are declining, and the shares are not suitable for inclusion in the portfolio.

The working capital management committee

The committee will focus on the return on capital employed. It is the ratio in group one. The ratio shows the profitability of capital employed. It shows the profitability of capital employed in the business. This ratio indicates how the company would efficiently use capital employed and working capital to generate returns. Another important ratio for the committee will be the efficiency ratio. These ratios will provide the underlying operational efficiency of the company in the management of capital employed and working capital.

Additional ratios for the entities

The ratios mentioned in the section above are fundamental in analyzing the financial position of the company. However, there are other additional ratios that four entities might require to make information on the financial health of the company. For instance, the working capital management committee will need to review the return on assets and return on equity so as assess the profitability of the company. This is necessary when estimating the optimal amount of working capital.

Further, they will also need the liquidity ratios. Secondly, the investment trust will require the return on equity of the company. This would be vital in indicating how efficient the company is in managing shareholders funds to generate revenue. The Majestik company will also be interested in the liquidity position of the company. This will indicate the ability of the company to meet its current obligations. The ratio is important for the supplier, especially when it will provide goods on credit to the supplier.

Finally, the Middle State bank will also require the efficiency ratios of the company. The shows will be relevant to the bank since they show efficient the company is in managing resources.

The financial position of Smart Electronics

Financial statements provide the users with a narrow insight into the financial strengths and weaknesses of business because reported values do not give an in-depth depiction of the performance of an entity. Financial analysis using ratios breaks down the financial data into various components for better understanding. It helps in giving trends in performance over time. Various ratios are discussed below.

Profitability

The profitability ratios of the company declined over the three years. Return on capital employed declined from 34% in 2008 to 25% in 2010. Similarly, the return on equity declined from 27% in 2008 to 23% in 2010. Further, the return on total assets declined from 12.3% in 2008 to 9.1% in 2010. Finally, the operating profit margin declined from 16.2% in 2008 to 14.1% in 2010. On average, the profitability of the company was below the industry average. The declining trend in profitability is a bad indication of the financial health of the company. The graph below shows the trend of profitability of the company.

Liquidity

The current and quick ratio indicates the liquidity position. The current ratio declined from 2.09x in 2008 to 1.09x in 2010. Similarly, the quick ratio declined from 1.15x in 2008 to 0.65x in 2010. The ratios are below the industry average for the three years. Besides, they are declining, as shown in the graph below. This is a bad indication of the liquidity position of the company.

Leverage

The leverage ratios show the level of debt financing of the company. The debt to equity ratio increased from 1.41x in 2008 to 1.44x in 2010. Similarly, gearing ratio increased from 39% in 2008 to 49% in 2010. The ratios were higher than the industry average. This is unfavourable. Finally, the interest coverage ratio declined from 6.08X to 3.70X. Besides, they were lower than the industry average.

Efficiency

Inventory turnover declined from 2.40x in 2008 to 2.02x in 2010. Similarly, accounts receivable turnover declined from 6.50x in 2008 to 5.80x in 2010. Also, accounts payable turnover declined from 4.00x in 2008 to 2.80x in 2010. Finally, total asset turnover declined from 2.40x in 2008 to 1.70x in 2010, as shown in the graph below. All the ratios were below the industry averages apart from accounts receivable turnover. The high accounts receivable turnover can be attributed to more sales in cash. The declining ratios are not favourable.

Investment ratios

The investment ratios indicate the performance of the shares of the company. This is indicated by the earnings per share which declined from $2.15 in 2008 to $1.75 in 2010 and dividend pay per share which also declined from 50% in 2008 to 35% in 2010 as shown in the graph below. The earnings per share were below the industry average.

From the analysis above, it is evident that the financial health of the company is deteriorating. This is indicated by the decline in key ratios of the company.

Ethical issues

An ethical issue arising in the case is the use of insider information to make decisions about the future relationship with the company. This is evident in the conversation between George Meckler (new supplier) and Ms Lind Brown (analyst at the brokerage firm). George is aware of a potential loss that may arise from the sale to one of the potential customers that are the government. The sale of the company might have serious consequences on the financial position of the company. Use of such information in making decisions gives the two-player undue advantage over the other players in the market. Insider trading is unethical, and it is an unfair trade practice.

Introduction

When Dakota Office Supplies was confronted with the problem of reduced profits despite having improved sales the company identified the reason for such a scenario as the weaknesses in the costing system. Therefore the company proposed to introduce Activity Based Costing System (ABC) in their organization to improve the costing structure and revise the pricing according to the new costs arrived. It was found that the existing costing system was inadequate since the system could not provide proper costing information even on all the known cost areas including the desktop delivery service and the cost of 10% finance costs the company had to pay a higher level of working capital in the form of accounts receivable. (Kaplan, 2003 p 4) The company found the Activity Based Costing (ABC) system as a better approach to measure performance through identification, description and assigning of the costs and to report on the operations of Dakota Office products. The introduction of ABC system enabled Dakota to identify the areas where the company was incurring excess costs and control them suitably. (Caplan, Melumad & Ziv, 2005) ABC principles are used to focus managements attention on the total cost to produce a product or service and as a basis for full cost recovery of a production or service process.

Learning

Through the study of the case of Dakota Office Products it is realized that traditional product costing system as employed by Dakota was suitable for companies having one homogenous product with large fixed costs. The system can work well in situations where only a limitation on the data collection techniques and analysis tools is there and where there are below line costs. However this method cannot be found to accommodate the costing needs of an industry like Dakota where there is a highly diversified product mix. Since in Dakota after the implementation of ABC system the costs were allocated to different products by measuring the cost-allocation bases of different activities used by different products which lead to more accurate product costs, the importance of installing a more accurate costing system is realized. Activity Based Costing (ABC) was found to be useful in a meaningful allocation of the cost elements to arrive at a realistic cost base of the product. The necessity of controlling even insignificant cost elements like the negligence of the interest charges is learned as an outcome from the study.

Application of the Knowledge to Construction Industry

The implications of the knowledge gained from the case of Dakota Office Products with respect to the implementation of ABC system to the construction industry can be studied in a construction project perspective. From the construction project perspective the objective is to assign all costs except general administrative costs and direct material costs to different works or job packages under the contract. Usually in the absence of no rational basis for the allocation the general administrative costs are not assigned to the individual jobs. Similarly there is no need to assign the direct material costs also as they are applied to each job individually.

ABC system enables:

• the assignment of overhead costs to each work division, area or individual construction activity,
• cost visibility as to where the costs get accumulated in the various business processes.

This way by engaging ABC costing it is possible to derive accurate costs for each project. This greatly prevents cost distortion. In addition since ABC system is capable of providing detailed activity wise costing information there is the possibility to identify the potential savings by following different procurement routes. In fact this was the major issue with the costing information with Dakota as the company was unable to identify the customer orders which will result in higher earnings to the company.

Another advantage that can be derived by the construction industry by including direct labor under ABC is that the companies can easily identify non-value adding activities like reworks. While the labor costs are allocated on the basis of activity drivers the construction companies can have complete information on labor costs including those incurred on material handling and similar other activities. This may not be possible in the traditional costing systems adopted by the industry. The firms can thus formulate new strategies for different construction activities based on the costs being incurred in each individual activity of construction. This will provide vital and more detailed knowledge on the costing of different projects which so far the firms would not have the chance of assimilating.

Borealis

Borealis has adopted a new financial and steering system replacing the traditional budget system. The new control tools consist of rolling financial forecasts, balanced score card, activity based costing and investment management which aim at improving the organizational performance at all levels. This case study details the adoption of balanced score card approach in Borealis. One of the key elements implied in introducing the balanced score card approach is to reduce the defects and improving yields in its manufacturing process. In order to improve the quality the company needs to obtain real time data about manufacturing process parameters and to implement advanced process control methods. At the beginning of the year the company specified the objectives, measures, initiatives to achieve the objectives and target performance. The target levels for non-financial measures were based on the competitor benchmarks. They indicated the performance levels needed to meet the customer needs compete effectively and achieve financial goals. Against these targets the actual performance is compared at the end of the year.

Learning Outcomes

The study of Borealis gave a new perspective to the managerial control in medium and large sized business organizations. While the application of the balanced scorecard approach enabled the company to evolve different metrics for the measurement of the performance of the employees from the financial perspective, Customer perspective, Internal business perspective and Learning and growth perspective, the other techniques of rolling forecasts, ABC system and investment management supplemented the balanced scorecard approach and enabled the company to enhance the profitability from the new strategy. Because cost reduction as compared to the cost of competitors and growth are the key strategy initiatives of Borealis, the financial perspective focuses on how much of operating income and return on capital employed results from reducing costs and selling more units. The company was able to identify and measure the targeted market segments and could evaluate the companys success in these segments. The study also revealed the use of benchmarking on the basis of the cost analysis of the competitors based on published financial statements, prevailing prices, industry experts and financial analysis. Moreover the use of non-financial metrics to assess the employee capabilities and capabilities in different other functional areas of the company could be appreciated.

Application of the Knowledge

The knowledge gained in the study of Borealis can be applied to the situations in any manufacturing industry including an organization manufacturing and distributing programmable chips to different electronic equipment manufacturers. Here the systems adopted by Borealis can be employed to reduce costs in improving the quality  improving the quality implies the reduction in the number of defective items and improving yield in the manufacturing process. Another area where the companies in this industry can make use of balanced score card and other management control models is the reduction in the costs of order delivery process by undertaking a reengineering in this activity. Reengineering is the fundamental rethinking and redesigning of business processes to achieve improvements in critical measures of performance such as quality, cost, service, speed, and customer satisfaction. This would need the undertaking of an in-depth analysis of all the processes involved from the receiving the raw materials and components till the customer service. For instance there may be inefficiencies in transferring the customer orders through various departments like sales, manufacturing, shipping, billing and accounting which may delay the process of order processing and result in customer dissatisfaction due to delay in order deliveries. Here it may be possible to reengineer the whole process by forming a team comprising of the representatives of the people from all the departments involved. However there is the necessity to establish set performance standards in all the four perspectives of balanced scorecard approach before this process can be undertaken by the company. The reengineering is one of the examples of the metrics of internal business process perspective where the objective is to reduce the delivery time to the customers and the measure is the order delivery time. The initiative shall take the form of reengineering the order delivery process. The target and actual performance may be set in terms of the number of days the order processing time takes. The new strategies that may be adopted by the company for improving the working may take the objectives of revenue growth, customer satisfaction ratings, order delivery time, on-time delivery; percentage of front-line workers empowered to manage processes, and employee satisfaction ratings. However it is important that the balance scorecard is aligned with the company strategies to ensure the success of the management control initiatives.

References

Caplan, D., Melumad, N. D., & Ziv, A. 2005, Activity-Based Costing and cost interdependencies among products: The denim finishing company Issues in Accounting Education, vol. 20 no 1, pp 51.

Kaplan, R., 2003, Dakota office products. Harvard Business School, 9-102-021.

Introduction

Business leaders are becoming increasingly aware that environmental factors affect their profits in significant ways. As a result, Environmental Management Accounting (EMA) has emerged as a mechanism for assessing the extent to which organizational activities affect the environment in addition to how the underlying costs influence their businesses. EMA aims at achieving sustainable business practices. Hence, it is crucial to critically evaluate the contribution of management accounting, specifically EMA, including the role that an environmental administrative accountant plays in ensuring sustainable development. Volkswagens (VW) Balanced Scorecard (BSC) will be used to show some of the best practices that can be adopted in line with lessons learned from EMA discourses.

Critical Evaluation of EMA

What EMA Entails

EMA denotes the intersection of administrative accounting and environmental management. However, the term carries varying definitions according to different authors. Gunarathne and Lee (2015) describe EMA as a source of information regarding the usage and flow of water, energy, and materials, as well as details on environment-related costs and revenues. However, Burritts (2004) definition seems detailed and explicit because it captures the issue of sustainability that is omitted in the description given by Gunarathne and Lee (2015). In particular, Burritt (2004) presents EMA as a field that entails the creation, analysis, and utilization of fiscal and non-fiscal information to optimize environmental and economic aspects of business toward achieving sustainability. Hence, from these authors, two broad categories of EMA, namely, monetary and physical are apparent. A study by Lisi (2015) offers the distinction between these two categories. While monetary EMA, shortened as MEMA, is concerned with environmental elements of corporate processes expressed in pecuniary terms, PEMA (physical EMA) addresses aspects of business functions conveyed in physical units.

Environmental Management Accountants and Sustainability Practices

Burnett and Hansen (2008) introduce an interesting observation that EMA has been adopted throughout the world, both in developed and developing nations, with particular emphasis in the manufacturing sector. Businesses are increasingly cognizant of the implications of their actions and products to the environment. In particular, Masanet-Llodra (2006) presents environmental risks as inherent components of any modern business. Although this author emphasizes the need to factor in such threats (Masanet-Llodra, 2006), Burritt (2004) reveals a worrying finding that businesses often ignore environmental costs in their financial reports. Instead, they regard them as part of general overhead expenses. Consequently, environmental management accountants find it difficult to manage these costs. While Christ and Burritt (2013) indicate the way such accountants are unaware of the existence or potential implications of these expenses to business operations, Schaltegger, Gibassier, and Zvezdov (2013) explain that most accounting management tools significantly overlook the cost of unsustainable environmental behaviors.

The above observation reveals that indeed environmental management accountants have contributed minimally to accounting for sustainable developments. As a result, Lisi (2015) identifies energy usage as an obvious scenario. Confirming this assertion, Webb, Hawkey, and Tingey (2016) present a recent report published by the UK government indicating the extent to which companies exceeded energy utilization expectations by 30% annually due to inefficient environmental management accounting practices. Christ and Burritt (2013) discuss a multi-dimensional framework whereby corporations can place and assign various techniques of EMA such as environmental cost accounting. However, Burnett and Hansens (2008) models, specifically, the Environment-Related Management Accounting Pyramid, seems effective because it has been tested and proven resourceful not only in evaluating EMA practices but also assisting in the design and implementation of new systems.

The Significance of EMA

EMA helps not only in the identification of cost-saving alternatives but also in the performance of Environment Health and Safety (EHS) activities. Researchers such as Masanet-Llodra (2006) have recently found that EMA can be used during investment assessment sessions. Through venture appraisals, Masanet-Llodra (2006) clarifies that organizations can make sound strategic decisions. While analyzing the return on investment, organizations should identify environment-related costs that affect the overall operation. However, such a procedure may require a scenario analysis carried out by the appropriate experts. EMA can also be used to assess investment projects, including costs related to the products and materials used. According to Gunarathne and Lee (2015), the assessment of products is known as the Life-Cycle Assessment (LCA) that allows several organizations to perform information aggregation to identify mistakes within the production process. Gunarathne and Lees (2015) view of the LCA is not exhaustive because it does capture the supply chain as part of organizational elements. Schaltegger, Gibassier, and Zvezdov (2013) include this aspect in their explanation of the LCA. According to them, the aggregation of EMA-type information can help to improve Supply Chain Environmental Management (SCEM) (Schaltegger, Gibassier & Zvezdov, 2013).

Different organizational levels require proper decision-making mechanisms for enhancing continuous development. Through EMA, the concept of Environmental Performance Indicators (EPI) was created to help in making informed decisions. It is imperative to note that EPIs may be physical or monetary, although both forms can be deployed in the collection of information (Masanet-Llodra, 2006). Most management practitioners assert that EMA can be used to perform external reporting to the appropriate stakeholders. Despite the popularity of internal reporting, Gunarathne and Lee (2015) reveal the extent to which modern-day business ethics calls for prompt relaying of important information to stakeholders. Through the application of EMA, financial information and environmental performance reports are presented to investors. The consideration of the environment has come at a time when organizations are faced with myriad challenges in dealing with pollution. Such issues mostly emanate from legislators, the community, and customers among others.

Through the application of EMA strategies, businesses effectively collect and analyze environmental cost information that guarantees their competitive advantages. According to Schaltegger, Gibassier, and Zvezdov (2013), EMA has helped many organizations that did not have systems capable of validly estimating environmental costs. Christ and Burritt (2013) assert that environmental costs are often debated in boardrooms due to their ambiguous nature. Through EMA, eco-control was introduced to organizations to help in the analysis of environmental performance. As such, environmental concerns are effectively addressed by the provision of incentives to the appropriate personnel. It is crucial to examine a company that can deploy EMA, specifically, the balanced scorecard, to boost its operations and, consequently, profitability.

VWs Sustainability Balanced Scorecard

According to Tsalis et al. (2015), the sustainability balanced scorecard (SBSC) has been developed as an improvement to the conventional BSC with the view of effectively addressing the ecological, economic, and social aspects of businesses. This section presents an SBSC that has helped VW to improve its practices concerning environmental management. In 2015, the company faced harsh criticism for deploying a defeat device that was designed to mislead the EPA concerning the actual amount of emissions from its cars (Patra, 2016). In the aftermath of this embarrassment that resulted in heavy penalties and reduced profitability levels, the company is making strides to not only repair its image but also promote sustainable business practices. According to Kaplan (1992), it can benefit from adopting a sustainable BSC that captures financial, learning, society, and process perspectives.

The monetary perspective entails goals that are set towards the manufacturing of electric vehicle models. As such, the financial department should channel resources towards achieving this agenda (Tsalis et al., 2015). The allocation of money to this segment will be done by conducting a comparison on the companys expenditure over the past few years beginning from 2015 when its profits went down following the impact of the emission scandal. Consequently, resources channeled to the diesel division will be redirected to the electric car segment to achieve the already set objectives. Regarding the learning perspective, it is imperative for VW to build its brand as one that promotes collaboration with local universities. Such partners can support networks via the companys cooperation with graduates who express their desire to work with it. The process perspective requires VW to seek positive partnerships with all its suppliers to remain competitive in the automotive industry (Patra, 2016). This strategy should then be promptly communicated to stakeholders to guarantee maximum support for its initiatives. Regarding the society-based perspective, VW should implement integrated mobility concepts from which customers can choose. Further, VW needs to work toward reducing emissions per car. Finally, it should consider using employees as image carriers to help in repairing its already tainted reputation.

Conclusion

In the recent years, discussions regarding environmental sustainability have been witnessed in various academic disciplines. Occurrences such as the Exxon oil of 1989 and the Bhopal chemical leak play a substantial role in influencing the need for incorporating environmental aspects in the field of accounting. With these growing concerns, companies are also striving to monitor their activities, which contribute to global environmental change. Developed and developing countries have adopted EMA in various sectors. The implication here is that they are aware of the role that EMA plays in making strategic decisions aimed at reducing operating costs. Through the application of SBSC, VW can optimize its operations while at the same time remaining competitive in the automobile industry.

Reference List

Burnett, R. & Hansen, D. (2008) Ecoefficiency: defining a role for environmental cost management. Accounting, Organizations and Society, 33(6), 551-581.

Burritt, R. (2004) Environmental management accounting: roadblocks on the way to the green and pleasant land. Business Strategy and the Environment, 13(1), 13-32.

Christ, K. & Burritt, R. (2013) Environmental management accounting: the significance of contingent variables for adoption. Journal of Cleaner Production, 41, 163-173.

Gunarathne, N. & Lee, K. (2015) Environmental management accounting (EMA) for environmental management and organizational change: an eco-control approach. Journal of Accounting & Organizational Change, 11(3), 362-383.

Kaplan, R. (1992) The balanced scorecard -measures that drive performance. Harvard Business Review, 71-79.

Lisi, I. (2015) Translating environmental motivations into performance: the role of environmental performance measurement systems. Management Accounting Research, 29, 27-44.

Masanet-Llodra, M. (2006) Environmental management accounting: a case study research on innovative strategy, Journal of Business Ethics, 68(4), 393-408.

Patra, B. (2016) The deliberate deception: case study on Volkswagen emission scandal. Vilakshan: The XIMB Journal of Management, 13(1), 139-148.

Schaltegger, S., Gibassier, D. & Zvezdov, D. (2013) Is environmental management accounting a discipline? A bibliometric literature review. Meditari Accountancy Research, 21(1), 4-31.

Tsalis, A., Nikolaou, E., Grigoroudis, E. & Tsagarakis, P. (2015) A dynamic sustainability balanced scorecard methodology as a navigator for exploring the dynamics and complexity of corporate sustainability strategy. Civil Engineering Systems, 32(4), 281-300.

Webb, J., Hawkey, D. & Tingey, M. (2016) Governing cities for sustainable energy: the UK case. Cities, 54, 28-35.

Introduction

All entities involved in the management and the oversight of governmental operations and all parties that work in the sphere of local or state finances need to have an understanding of governmental accounting, which is based on a specific set of principles and procedures. Thus, government accounting is defined as a process targeted at recording, analyzing, and interpreting financial data relevant to a specific government. Critical objectives of government accounting are making sure that all relevant financial operations are carried out in time and keeping track of financial records necessary for efficient budgetary control. In this paper, the goal is to review relevant research articles on the topic of government accounting in order to get a deeper understanding of the subject.

Summary

All resources are chosen for the assignment review the concept of government accounting from different perspectives. The complex nature of government accounting as a process is given extensive attention in order to provide an explanation of how the procedure takes place. The relevant keywords used in the articles chosen for analysis include accounting, government accounting, accrual accounting, national governments, and budgeting. As the definition of government accounting has already been provided, it is important to define the following:

• Accounting is a comprehensive and continuous recording of financial information relevant to a business for the purpose of analyzing and reporting them to tax collection and oversight agencies;
• Accrual accounting refers to a method of accounting that focuses on the position and the performance of an entity on the basis of economic events and environment, disregarding the occurrence of cash transactions;
• The national government is defined as a government that has members from multiple political parties and can often refer to the central government in unitary states;
• Budgeting refers to the process of collecting and preparing financial statements in great detail in order to provide coverage for a relevant time period.

Literature Review

Issues in Government Accounting

Upon reviewing relevant literature on the topic of government accounting, it was revealed that the process itself is extremely complex and requires continuous improvement and modernization to ensure that it is done correctly and efficiently. According to the study by Caperchione, Christiaens, and Lapsley (2013), specific principles that relate to the complexity of government accounting include reform processes, ambiguity in accounting implementation, as well as accounting and power. When it comes to ambiguity, it is revealed that performance indicators are rarely used for making decisions related to governmental accounting, which often leads to inconsistencies (Caperchione et al., 2013). In terms of power relationships, government accounting also relies on the nature of political contexts within countries as well as interrelationships of partnerships and joint ventures within the public sector. The most important point that influences government accounting refers to reform procedures. Caperchione et al. (2013) pointed out that despite the continuous efforts of governments to pass unified accounting and budgeting reforms, there is still continuous struggle in terms of reaching a consensus.

Accrual accounting has been the main focus of researchers who investigated government accounting due to its higher reliability in measuring the financial performance of government activities (Salleh, Aziz, & Bakar, 2014). Thus, the key goal of accrual accounting within the governmental context is showing the financial condition of the country and adopting relevant measures for optimizing the utilization of available funds. Compared to fund accounting, accrual accounting offers several advantages that governments can use. For instance, it can show the financial position of an entity in the context of economic changes, provide an opportunity for demonstrating successful resource management, evaluate an ongoing ability of an entity to finance its activities, as well as evaluate performance on the basis of efficiency, costs, and accomplishments (Salleh et al., 2014). Overall, government accounting encompasses a broad range of activities that depend on the state of the financial environment in a country.

Differences in Approaches

The process of government accounting is complex and may range from one country to another due to the variability of financial policies that different countries establish. When comparing financial accounting procedures, it can be revealed that there are numerous issues associated with the nature of assets or that there are constant debates over policy development and implementation (Caperchione & Lapsley, 2011). In addition, different countries may approach the process of government accounting due to the challenges in reforms and accounting regulations, as mentioned by Caperchione and Lapsley (2011). Therefore, the comparative approach toward the analysis of accounting procedures in different countries usually reveals interesting insights about states financial policies and operations.

In order to provide examples of how different government accounting can be in various contexts, Jones, Lande, Lüder, and Portals (2013) research should be reviewed. Their study focuses on providing a comparison of government accounting reforms and budgeting efforts in the United Kingdom, the United States, France, and Germany. Jones et al. (2013) reveal that there is no consensus among the mentioned countries in terms of establishing the most appropriate package of reform possibilities (p. 421).

France is identified as a commitment- and cash-based accounting system that has changed throughout its development. For instance, the form of the annual budget has changed to a system of programs, missions, and actions that are being expressed at low levels in measurable outputs (Jones et al., 2013). Also, the country added continuous and annual accrual-based accounting to measure the effectiveness of the new budget systems. Germany has modified its accounting system in order to restructure the approach toward its budget to structure it according to departments. As a result, the country now manages two sets of accrual-based data: the data for liabilities and assets and the data for revenues and expenses (Jones et al., 2013). This shows that countries cannot establish the same systems for government accounting because all of them started developing their processes differently.

After comparing the budgeting and accounting efforts in four countries, Jones et al. (2013) came to a conclusion that the United Kingdom was an exception because it had its own budgeting basis and its own basis for accrual valuations, and it defined the reporting entity for the whole of government uniquely (p. 438). In France, the UK, and Germany, each set of accrual accounting policies is based on business accounting; in the US, however, such policies do not explicitly rely on the same principles of accounting (Jones et al., 2013). This means that it is challenging to establish unified policies regarding government accounting since different countries approach this process in various ways. On the other hand, neither harmonization nor standardization of government accounting and budgeting efforts is necessary for resolving economic crises.

Future of Government Accounting

Government accounting has reached its best performance and development in highly populated areas, which means that the existing processes can vary from one part of a country to another (Chatters, 2002). This occurs due to the lack of coordination between local governments as well as inconsistencies in terms of office between county and city officials. Therefore, the future of government accounting depends on the financial and economic trends in a governmental organization as well as the employment of qualified practitioners.

Chatters (2002) identified that constructive accounting in the government field was needed for strengthening the financial system and making sure that audits of municipal and other accounts reach a satisfactory stage. In order to do so, appropriate measures and reforms are needed for laying a solid foundation for future accounting procedures. As mentioned by Gan (2016), when countries establish effective government accounting standards under the supervision of a certified governmental accounting board, future endeavors associated with the measurement of financial performance will be more consistent.

Analysis of Findings

Government accounting is shown to be a complex process that requires countries to understand the nature of their financial transactions for meeting the requirements of success. Accrual-based accounting is the preferred approach due to its focus on the financial position of an entity rather than on transactions that it makes. However, countries significantly vary in the way their governmental accounting efforts developed because of the differences in their financial progression. Jones et al. (2013) contribution to the comparison of countries approaches toward government accounting is especially important to note because the researchers managed to conclude that there was no need in enforcing the unification of accounting procedures because it would not solve the problems that came along with economic instabilities.

On the other hand, it should be mentioned that despite the efforts of introducing unified systems of government accounting, countries still have different procedures for ensuring the effectiveness of accountants operations. It is also important to note that in governmental contexts, budgeting and accounting can be either separate or joined elements of a countrys accounting framework, which makes it harder to establish one system in different governments (Jones et al., 2013). Overall, the future outlook for government accounting suggests that countries need to have a deeper understanding of the economic and political trends in order to establish effective accounting policies. It is expected that governments that cooperate on the financial basis will lean toward the trend of unification; however, the primary goal of any government accounting agency is making sure that their efforts align with the environment in which financial operations take place.

Concluding Remarks

Research on government accounting showed that countries around the world do not have the same approach toward the procedure. This does not mean that there should be one unified way of analyzing and communicating relevant financial data; rather, it indicates that various economic and political environments shape the way in which governmental accounting takes place. The outlook for governmental accounting implies the understanding of unique processes within the economic environment and implementing relevant measures to adapt to these processes. Codes of practices created by major financial institutions should take into account the developments and guidelines in matters of internal governance in order to ensure that governmental accounting efforts do not undermine the financial integrity of a country or any other jurisdiction.

References

Caperchione, E., & Lapsley, I. (2011). Making comparisons in government accounting. Financial Accountability and Management, 27(2), 103-106.

Caperchione, E., Christiaens, J., & Lapsley, I. (2013). The primacy of, and complexity of, accounting for government. Financial Accountability and Management, 29(4), 349-353.

Chatters, C. (2002). Present and future of government accounting. The Accounting Review, 14(1), 48-51.

Gan, F. (2016). New achievements of government accounting reform in China  Governmental accounting standards  basic standards. Modern Economy, 7(4), 450-455.

Jones, R., Lande, E., Lüder, K., & Portal, M. (2013). A comparison of budgeting and accounting reforms in the national governments of France, Germany, the UK and the US. Financial Accountability and Management, 29(4), 419-441.

Salleh, K., Aziz, A. R., & Bakar, Y. N. A. (2014). Accrual accounting in government: Is fund accounting still relevant? Procedia  Social and Behavioral Sciences, 164, 172-179.

Introduction

It is imperative for all companies to set out their strategic plans which they use as guidelines and these plans indeed assist them in setting up the scope of their operations and controls which in turn ensure the sustainability of business and achievability of profits in the period that lies ahead. As Peter Drucker (1974) stated that the prime task is to think through the overall mission of a business which is an integrated part of strategic planning. Without a precise strategic plan, it becomes somewhat impossible for the companies to obtain their desired objectives. The implementation of companies strategic plans through well-directed strategic management initiatives is essential for companies to gain a competitive advantage. This statement will be evaluated in the current paper by examining the case of Marks & Spencer and determining how different ways of strategic management accounting can assist the company in achieving its strategic plans as set out in its Annual Report and Financial Statements 2008.

Strategic Management Accounting

Strategic Management is defined as an ongoing process of formulating, implementing and controlling broad plans guide the organization in achieving the strategic goods available in the internal and external environment (Bromwich and Bhimani 1994). Strategic management is a form of descriptive management plans which companies develop for improving their approach to selling their products or services. Strategic management accounting which is a relatively new development in management accounting since the term was introduced by Simmonds (1981) has been defined as accounting for management (Ward, 1992) (Ward). This implies that strategic management accounting helps the management to develop financials associated with their alternate business strategies. A more precise definition provided by Bromwich (1990) is the provision and analysis of financial information on the firms products markers and competitors cost and cost structures and the monitoring of the enterprises strategies and those of its competitors in these markets over a number of periods. This suggests that strategic management accounting does not just emphasize providing financial information related to external factors but also assembling important non-financial information and internally generated information. The implications for strategic management accounting for Marks & Spencer strategic plans set out in its financial report will be discussed in the following paragraphs however before this analysis is carried out a brief history of the company would allow us to delve more into the companys strategic positioning strategy.

Short History of M&S

The history of Marks and Spencer dates back to 1888 when its pioneer Michael Marks, a Russian expatriate, set up a Penny Bazaar where no item was sold at a price more than one penny. After ten years Tom Spencer joined Michael Marks as a partner and the joint effort actually turned the business around and by the early 20th century their business had 12 shops and 24 stalls in covered markets. The partnership excelled in its business ventures and by 1926 Marks and Spencer decided to go public by gaining a listing on the London Stock Exchange. It was not until 1984 that a non-family member was appointed as the Chairman of the company and till then it was the endless endeavors of the family members of both Michael Marks and Tom Spencer which led the development of the company to become a countrywide retail phenomenon. By the 1980s the stock Marks and Spencer was one of the most sought in terms of its holding by shareholders (Whitehead, 1994). Over the years the company has successfully diversified by developing a product portfolio offered to its customers via a chain of retail outlets. The company not just deals in fashion clothing but also succeeded in establishing strong brand affiliation for its products and services including food, furnishings, accessories, property development and financial services. The company-maintained loyalty by establishing close ties with the British suppliers to provide high-quality products to its customers and making its operations simplified. The company has relished upon its relationships with suppliers, employees, and customers to become one of the worlds renowned entities and gain recognition for its self-developed brand St Michaels. The gushing popularity has allowed the company to have the strongest financials in the retail sector and now Marks and Spencer is one of the UKs leading retailing company which has over 21 million customers visiting its globally spread network of stores (Burns 2008).

Strategic Plan

The company has set out its strategic plan in its Annual Report 2008 for the next year which suggests that it plans to continue providing high standards of customer-oriented retailing. The focus has been clearly set out in five different objective areas. These objectives will be addressed through an in-depth analysis based on Strategic Management Accounting (SMA) techniques to justify whether their achievability is possible or not.

Activity-Based Management

This technique evaluates a companys activities which add to indirect costs however in long term they result in achieving a competitive advantage. Marks and Spencer have placed significant emphasis on addressing some issues related to its social and environmental obligations. The company launched is Plan A in January 2007 the company set out a 5-year plan for ensuring that the environmental impact of its business operation is reduced to minimum levels by investing £200mn (FSN 2007). The company is set out to become carbon neutral, culminate waste landfills, and extend sustainable raw material sourcing. Also, it invests heavily in healthy life programs for its employees and developed means of ethical trading. The major contribution of Plan A has been the reduction of CO2 emissions by 48,000 tons or 9% compared to the last year. Despite an increase in the number of stores the energy usage has been reduced by 4% due to the use of renewable energy and the waste sent to landfills is decreased by 6% in 2008. The company expects short-term cost cuttings from Plan A however long-term competitive advantage is achievable from these projects (Sir Rose, 2008). The company also entered into an agreement with N-Power for the largest retail renewable energy project worth £2.0bn which will shift the use of electricity to renewable sources through M&S retail outlets (Wilkes, 2009). The company invests £14.8mn of pretax profits on community programs that are aimed at different development programs.

The company has also invested in expanding its floor space by 5.5% in 2008/09 and modernized further 10% of the existing stores (M&S, 2008). The company views this as an attempt to face the difficult period of economic slowdown by giving their customers a look that may induce them to shop more at M&S thereby gaining a competitive advantage.

Benchmarking

This assesses the practices adopted by a company and compares its performance based on those practices with the goal of improvement (McNair and Leibfried, 1992). M&S has been criticized for not responding quickly to changes in the market trends and competitors initiatives. The programs that M&S offers are considered to be reactive to the changes in the market. Different product differentiation and customer relationships programs that a company operates are in response to the steps undertaken by its competitors (Thompson and Martin, 2005). The company seems to lack the due importance it should give to the timing of such steps which can yield much better results.

Competitive Position Monitoring

This provides information regarding business competitors based on sales, market share, volume and unit cost (Simmonds 1981). M&S faces competition from companies in Department Stores Industry in addition to competition in the Appral & Accessories Retail, Grocery Retail and Home Furnishings and Housewares Retail sectors. M&S is the sixth-largest retailer in the UK (M&S, 2008) with 623 stores covering 14.3mn sq ft in the UK (M&S 2008). M&S is the largest clothing retailer and it is mainly used for shopping on special occasions for grocery shopping (Katz, 2009). Other market competitors are Sainsbury, Tesco, Asda, Safeway, Aldi, Waitrose, Selfridges and other local and regional retail outlets. M&S has its own brand whereas most of its competitors have a range of external brands displayed in their outlets. The following the Key Performance Indicators that can be used to provide effective competitive position monitoring of Marks and Spencer:

Information from Annual Reports of M&S (2008), Tesco Plc (2008), J Sainsbury Plc (2008) and Next Plc (2009)

Table 1: Key Performance Indicators

Figures in Table 1 suggest that the company is lagging behind in the grocery market share this is because the customers do not consider M&S as their choice for weekly grocery shopping and they prefer other retailers which offer different products and brands. The gross profit remains higher than its competitors as the company continues its premium pricing strategy which may not be suitable in the current retail scenario which is pushing away customers from their buying habits. In addition to this M&S has invested expanding its store space by investing in its UK property portfolio and improving the outlook of its store to provide its customers a refreshing shopping experience.

Competitor Cost Assessment

This technique adds more information to the previous method by providing information on the cost structures of competitors (Simmonds 1981). This analysis could be carried out by comparing the cost of sales as a percentage of revenue turnover of all companies:

Figures from Annual Reports of M&S (2008), Tesco Plc (2008), J Sainsbury Plc (2008) and Next Plc (2009)

Table 2: Cost Comparison

The vertical analysis carried out by simply dividing the cost of sales of each company by their revenue it is clear that the stated controls of M&S are efficient to keep the cost of sales down. Almost 80% of clothing sold in M&S retail outlets is manufactured overseas. This major shift has been mainly due to the companys decline in the early 1990s which forced the strategists to move from exclusive support for British suppliers to overseas manufacturers.

Competitor Performance Appraisal

Moon and Bates (1993) identified this technique which draws information from published annual reports of competitors and adopts various financial analysis techniques. The important financial information related to M&S and its major competitors is summarized in the following table:

Figures from Annual Reports of M&S (2008), Tesco Plc (2008), J Sainsbury Plc (2008) and Next Plc (2009)

Table 3: Key Financial Figures

This table indicates that Tesco Plc is the largest in terms of revenue and net profit for the year. The EPS of M&S is higher than Tesco and Sainsbury however it is lower than Next Plc. This is mainly to the difference in the common shares issued to the shareholders. The company has higher total assets compared to Next Plc but lower than others which may suggest higher asset turnover for the company.

Customer Accounting

This technique focuses on customer relationships deriving information from relationship marketing that businesses implement through their marketing communication techniques (Bellis-Jones, 1989). A report published by Scottish Food and Drink suggested that the customers doing their shopping from M&S are of affluent nature as 75% of its customers have an average age of 45 years old that are considered to have considerable disposable income. The company has also developed its promotional strategy that includes exclusive sales periods in seasonal periods. These promotions include either price reductions or typically combined sales i.e. 2 for the price of 1 or similar. The company has been able to gain more sales in the difficult times by cutting down the prices on food and clothing that slowing the decline in the companys sales from 7.1% to 4.2% (Wilson, 2009).

Strategic Pricing

Over the years, the company has enjoyed its inspirational positioning in the market and has commanded a premium pricing strategy. As the profile of its customers suggests that they have comparatively larger disposable incomes, therefore they expect to pay a premium for M&S products. In return, the company makes all efforts to meet its customers expectations regarding quality, innovation and trust. This is the reason that M&S prices are comparatively higher than its competitors prices (Hamilton, 2005). This is apparent from the high gross profit margins indicated in Table 1. However, during 2008 M&S reviewed its pricing strategy to attract a broad range of customers as an attempt to prevent further decline in its sales that are badly affected by the downturn in the UK economy. This would increase the price span of products sold in its supermarkets. The company aims to offer pricing which would enable it to perform better than its competitors would. The company maintains a consistent pricing strategy which has helped the company to increase its volume share.

Conclusion

It is concluded from the above analysis that M&S is a strategically strong company however with changing trends in consumer demand and behavior the company needs to focus more on its fashion and design to add more value for its customers. Furthermore, techniques of SMA used in the above analysis may seem to be incomplete because of the information available to the researcher. However, it is clear from the above analysis that M&S will remain a strong participant in the UK retail industry as its position itself in the market as a premium product and service retailer and the brand value attached to the company would ensure that the company survives the economic slowdown in the global and especially the UK economy.

List of References

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