ACT204 Financial Accounting - Free Samples to Students

Cash Generating Unit or CGU can be defined as a smallest group of assets that helps the organizations in generating cash flows (Hoyle, Schaefer and Doupnik 2015). This are independent from cash flows generated from other assets. In the given case, the CFO of the firm Wentnor Dairy Company Ltd is aiming to evaluate the reasons for impairment testing and factors to be considered in determining the CGU’s.

Impairment testing is done while comparing recoverable amount of an asset with the higher of the asset’s value in use and fair value less costs of disposal. It also requires future cash flow estimation in order to derive the asset and price of bearing the inherent risk factor in the asset (Scott 2015).

In case of some assets, there are no separate cash flows generated independently from other assets. (Williams 2014). For example, in case of Went

As per AASB 136, there are several factors to be considered in case of determination of CGU’s of The Wentnor Dairy Company Ltd. These are as follows:-

• The process through which the organizations operational activities will be monitored needs to be determined. It may be through product, factory or district. This have been given in AASB 136.
• The management of the firm should make decisions regarding whether to continue with separate CGU’s or to sale a part of it (Hoyle, Schaefer and Doupnik 2015).
• In case of Wentnor Dairy Company Ltd, the milk produced by the company can be used in separate milk products and milk production section can also be used as separate CGU. It depends upon the organization whether to choose it separately or together.

These are the factors to be considered by Wentnor Dairy Company Ltd in case of determination of CGU’s.

 Table 1: Ratio analysis of the organization Woolworths

From the above analysis, several recommendations can be given to an investor of the organization Woolworths. It can be inferred that the return on equity of the firm has increased in the current year in comparison with the previous year. This can be considered as a positive sign for the organization. However, dividend payout ratio can be considered as too high. It can be inferred that if dividend payout ratio is on the higher side, therefore, the dividend may not be sustainable for the investor (Weygandt, Kimmel and Kieso 2015). The acid test ratio of the organization is also on the lower side, therefore, it can be inferred that the liquidity of the organization is also on the lower side. On the positive sign, it can be inferred that the gross profit margin of the organization has improved in comparison to the previous year (Woolworthsgroup.com.au. 2018). This is a positive indication that the organization is improving in terms of profitability. Apart from this, rate of return on net sales have improved by a higher percentage, which infers that the returns earned by the firm is quite significant. Receivable turnover ratio reflects the credit worthiness policy of an organization. In addition to this, days in receivables turnover has declined in 2017 in comparison with 2016. This reflects that the organization is not risk adverse and the customers are paying off their bills within a shorter period of time.

From the above ratio analysis, it can be inferred that the organization is having a higher receivables turnover ratio. However, the inventory turnover ratio has declined for the firm. This suggests that the organization is having excess inventory in comparison to the previous year. The current ratio of the firm has also declined in comparison to the previous year. This reflects that the firm is not being able to manage its working capital cycle in an effective manner (Zeff 2016). On the other hand, earning per share of the firm has increased considerably, which can be considered as a positive sign for any investor who is planning to invest in the organization. In addition to this, it has been seen that the debt equity ratio of the firm is on the lower side. This reflects the organization is managing its debts effectively. Net profit margin has also increased and this can be considered as a positive sign for the firm. On the other hand, the asset turnover ratio has declined, which further reflects that the firm is not utilizing its assets in its revenue in an effective manner. The return on equity is on the higher side in comparison to the previous year and this can be considered as a positive sign for an investor. Therefore, by considering all the factors, it can be inferred that the firm Woolworths is good for investment due to its higher return on equity, payout and efficiency ratios. However, it may not be considered as sustainable for an investor in the long run due to its lower liquidity ratio and too higher dividend payout ratios.

The ideal Current Ratio for businesses should be 2:1 and the Acid Test between1.5 to 1 (Scott 2015). However, in case of the organization Woolworths the current ratio for 2017 is 0.793 and acid test ratio is 0.328. This reflects that the organization is not meeting the industry standards. This is mainly because the organization is failing to manage its working capital cycle in an effective manner, as they are not able to meet their debt obligations. This can be a cause of concern for the firm.

The given analysis reflects Note ii (p. 91) of the Qantas Annual Report 2017. This note reflects foreign operations of the organization by translating foreign currency to domestic currency. The transactions of assets and liabilities of foreign operations is on the higher side and therefore it is mandatory for the firm to record its transactions in its annual report (Investor.qantas.com. 2018). Due to this reason, they want to translate the amount in Australian Dollars along with the given dates of transactions. The given difference in the amounts of the foreign currency in comparison to domestic currency will be recorded in comprehensive income statement and any potential revenues will be transferred to Foreign Currency Translation Reserve.

References

Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.

Investor.qantas.com. 2018. Qantas Investors | Investor Centre. [online] Available at: https://investor.qantas.com/investors/?page=annual-reports [Accessed 17 May 2018].

Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.

Woolworthsgroup.com.au. 2018. Woolworths Group: Quality Brands and Trusted Retailing. [online] Available at: https://www.woolworthsgroup.com.au [Accessed 17 May 2018].

Zeff, S.A., 2016. Forging accounting principles in five countries: A history and an analysis of trends. Routledge.