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Orientation week tutorial answers. Includes both owners and tutor's answers. ...

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Week 0 – Tutorial Questions WOW – Woolworths Question 1 Obtain the general purpose financial report of Woolworths and consider: 1. Who are the various parties that have provided resources to the company that are essential for its undertaking its business activities? To facilitate this look at the Statement of Profit or Loss and Statement of Cash Flows, which may be used to identify parties who the firm has business transactions with; and, [ANS: Creditors and Investors]  Supermarkets and recently they provide delivery services which means they have adequate logistics resources  Parties provided resources: Logistics provider, suppliers, employees, banks 2. Why they might be interested in the information provided in the financial statements? [ANS: Investors need financial information to analyse the way the company is performing. They use financial statement analysis to determine what to do with their investments in the company. So depending on how the company is doing, they will either hold onto their stock, sell it or buy more. Creditors are interested in knowing if a company will be able to honor its payments as they become due. They use cash flow analysis of the company’s accounting records to measure the company’s liquidity, or its ability to make short-term payments.]  Suppliers: need to know if WOW able to pay for their services or goods  Employees: management team is likely to own shares are their salary package, they would be interested in the financial performance of WOW, as that would affect share price  Banks: they want to know if WOW meets the conditions in loan covenant, ability to pay back debt and some finances go towards funding purchases (purchase land for stores or acquired subsidiaries) Question 2 Obtain the general purpose financial report of Woolworths and consider: 1. Does the company have a management compensation contract that rewards managers for performance? [ANS: Yes] 2. What performance measures are used as the basis for determining compensation? [ANS: Performance measures are critical often including accounting based performance measures and stock returns]  look at the remuneration structured  under short term incentives  Sakes  Earnings before interest and tax  Working capital

 Customer satisfaction  Safety 3. What form does management compensation take (cash or equity)? [ANS: Equity compensation]  Both cash and equity 4. When is the management compensation paid (current period or deferred)? [ANS: Can be defined before or after interest, preferred dividends, taxes, unusual items and bonus expense]  Deferred Who has to prepare financial reports? Accounting team falls onto the management team - Directors and management team have to prepare financial reports. They need to ensure the quality of financial information by having appropriate processes and records to support information in financial reports 2. What is included in financial reports? - External financial statements (i.e. income statement, statement of comprehensive income, balance sheet, statement of cash flows and statement of stockholders’ equity - Notes to the financial statements (disclosures) - Quarterly and annual reports to stockholders - Remuneration report (Directors’ report), independent auditor’s report 3. Why is ASIC interested in financial reports? Helps to predetermine future banking, tax and industry-specific reporting numbers. - ASIC is a government body that regulates corporations, markets and financial services and consumer credit. Their role is to promote investor and consumer trust and confidence, ensuring fair and efficient markets and providing efficient registration services. To do so, they need to bridge information gap between investors and corporations (publicly listed). - Under corporations act, ASIC utilises compliance programs to ensure entities meet their obligations. One of their obligations is to send financial reports to ASIC’s public register. They also have a surveillance program. 1.

MEDIA ARTICLE From ASIC’s media article, “ASIC calls on preparers to focus on quality of financial report information”. Number of focus areas: - Impairment testing and asset values - Revenue recognition - Expense deferral - Off balance sheet arrangement  Not on your balance sheet. E.g. operating leases - Tax accounting  Deferred tax asset / deferred tax liability - Estimates and accounting policy judgements...