Accounting Theory and Issues and Manufactures

Question: Discuss about the Accounting Theory and Issues and Manufactures. Answer: Introduction: Nestle is one of the biggest wellness, health and nutrition company. Their primary mission is Good Food, Good Life and to offer the most nutritious, best tasting choices to the customers with a broad range of eating occasions, beverages and foods from morning to night. For the last few decades their promises to manufacture foods to fulfil the unique requirements of people is the secret behind the success they achieved. Nestle Australia is the subsidiary of Nestle SA. There are more than 5000 employees in nestle Oceania that operates 20 offices, 5 distribution centres and 12 operates all around the Oceania region that includes Pacific Islands, New Zealand and Australia. Although, nestle is famous for their confectionary products, that is just a small part of their dealings. They have some products, which are best loved in Australia, for example, Milo, uncle Tobys, Maggi, Nescafe and Purina (Rosendal et al., 2015, pp. 112-125). Building value for share is a crucial part of carrying out their business. They strongly believe that to protect and enlarge their business they must think beyond sustainability and compliance and must generate greater value for the shareholders, society and customers as a whole. They use four simple words to explain their business. Those words are: Good Food, Good Life. They believe that to be enable to enjoy life people must have a balanced approach about the things they drink and eat. Safety, reliable level of quality and great tastes, convenience and value for money strategies also improves the enjoyment of life and food (Mialon et al., 2016, p.283). Accounting issues: The accounting procedure of nestle accounts for the offices as well as the factories. The balance sheet and their implementation with the financial reports of the company are combined together. The objectives of doing this are the implementation of the financial statements reveal the status of the company. It is very crucial with regard to the audit and needs a strong control for maintain the financial records for 50 years. This procedure serves better corporate governance and confidence for the company as a whole (Celik et al., 2016). Traditionally, nestle had allowed every local organization to carry on their business with consideration to the business culture and local conditions. To assist in this decentralized approach, they had 80 units for information technology that operated on 15 mainframes, 900 IBM AS/400 midrange computers and 200 UNIX systems that enabled the users to explain their infrastructure as genuine. Surprisingly, despite of its big, they did not have any corporate centre for their computer. Thus, the management of nestle found that allowing the local differences led to extra cost and inefficiencies that refrained the company in competing effectively in the e-commerce world. To coordinate and standardize their information into the business processes they installed a program called SAP R/3 ERP (enterprise resource planning) to incorporate the accounting applications, distribution and material (Yu et al., 2016, p.189). Conceptual framework: The primary objective of conceptual framework is to provide the information related to the reporting company, which is required by the investors, stakeholders, creditors and potential investors. The consolidated financial statement complies with the IFRS (International Financial Reporting Standards) released by the International Accounting Standard Board (IASB). Their accounts are prepared on the accrual basis and under the method of historical cost, unless otherwise stated. Accounting policies are added in the relevant notes to the financial statement (Li, Woo Selomulya, 2016, pp.196-204). The assumptions and estimates are evaluated on ongoing basis. Revisions for accounting estimations are made during the period in which period the transactions have impact. In individual companies, foreign currency transactions are transacted based on the prevailing exchange rate on the transaction date. Monetary liabilities and assets are translated based on the year-end rates. Any differences arising due to the exchange rate are adjusted against the income statement. Sales explain the receivable and received amount from the third parties for the supply of goods and services. Sales are recorded only after the awards and risks related to the particular transaction are transferred to the purchaser. COGS is calculated based on the cost of purchase or production and adjusted for the difference in inventories. All other expenses related to the operation, such as, promotions and advertising are transacted when the group accepts all the rewards and risk related to the expenses. Assets that are held for disposal and sale are shown separately in the current segment of balance sheet when the following objectives are fulfilled: The company is committed to dispose or sale the assets An active plan for sale has been started Sale is anticipated to be completed within the period of 12 months. Cash inflow for the disposals of business mainly related to several disposals of significant and non-significant items. The consolidated financial report involves the transactions of Nestle SA and other companies under the group. Companies under the group are consolidated fully from the date of their acquisition. The group gain the control over a company when they can control the return of that company and has the ability to influence the return from their involvement. Business combination is accounted for utilising the method of acquisition. Where not all the equity of the subsidiaries are acquired through non-controlling interest are identified as the non-controlling share of interest for the total identifiable asset. After obtaining the control of the business, the group revaluate the equity interest which were held previously and identified as the loss or gain in the revenue statement. Changes in the IFRS after 31 December that could affect the group are as follows: IFRS 9-Financial instrument: This standard states the financial reporting for the financial liabilities and financial assets involving the measurement, classification, impairment, hedge accounting and de-recognition. IFRS 15 Revenue from the agreements with customers: This standard combines, replaces and enhances guidance for identifying the revenue with single standard. IFRS 16 Leases: This standard will alter IAS 17 and prepare the objectives for measurement, presentation, recognition and disclosures of the leases. The crucial effect on the group is that this IFRS introduces a unique model for lessee accounting and needs a lessee to identify the liabilities and assets for all leases. Other amendments and improvements related to IFRS/IAS: Various standards have been altered on diverse points. None of these alterations are probable to have a significant effect on the financial statement of the group. Challenges and sustainability: Nestle defines the term sustainable development as the process of maximising the global access towards higher quality of food. At the same time they assures contributing towards long-term economic and social development and safeguard the environment for the future generations. To continue their commitments towards social and environmental sustainability that are necessary for operating their factories and for the development and growth of the countries and communities in which they operate manage their function actively. They recognised that their position in the society calls for responsibilities as well as opportunities to carry on their business with compliance to the international standards, national laws and business values. They believe that the business, which is based on the high quality beverage products and food can sustain for long-term development. The primary objective for locating the prospect of production in developing world is more important than sourcing the raw material. Even though it consists only one third of their profit, they have 48% of their employees and 45% of their factories are in developing countries. They have publicly declared that the fundamental principle for their economic investment is that they must be good for the company as well as the country. Through these objectives, nestle seeks to be the true associate for sustainable development. Their primary objective is to attain the requirements of their consumers and customers for the quality food items that are value for money. By implementing this successfully, they are able to create long-term development, sustainable results for economics for all the stakeholders. With their factories in more than 80 countries all over the world, developments of their business can be felt by the economies all over the world. These take place in various ways. For instance, through the transfer of technology, through the programmes of apprentice, training for the employees to comply with the international standards, and paying the taxes that will assist in construction of local infrastructure. Nestle is contributing to the sustainable development of economies all over the world and improving the quality of the locally available foods at the same time. Financial performance and graphs for different years: Particulars (Amount in Million CHF) 2012 2013 2014 2015 Sales 89,721 92,158 91,612 88,785 Operating profit 13,464 14,047 10,905 12,408 Net profit 10,677 10,445 14,904 9,467 Earnings per share 3.21 3.14 4.54 2.90 Current assets 30,066 34,020 33,961 29,434 Non-current assets 91,857 90,376 99,489 94,558 Total Assets 125,877 120,442 133,450 123,992 Current liabilities 38,597 32,917 32,895 33,321 Non-current liabilities 24,616 23,386 28,671 26,685 Total liabilities 63,213 56,303 66,566 60,006 Total equity 62,664 64,139 71,884 63,986 Table 1: Financial performance (Source: nestle.com, 2017) Calculation of ratios: Ratio Formula 2012 2013 2014 2015 Current ratio Current assets/ current liabilities 0.78 1.03 1.03 0.88 Debt asset ratio Total debt / total assets 0.22 0.18 0.16 0.17 operating margin ratio operating profit/ sales 0.15 0.15 0.12 0.14 Return on asset ratio Net profit/ Total assets 0.08 0.09 0.11 0.08 Inventory turnover ratio Sales/ Inventory 10.04 10.99 9.99 10.89 Table 1: Financial performance (Source: Created by author) Four basic ratios that are calculated to evaluate the performance of a company are: Liquidity ratio: It includes current ratio of a company and measures the liquidity position of a company. This ratio states the company is able to pay- off their short-term obligations. A ratio of more than one is generally considered good. From the above table, it can be seen that the current ratio of the company for the year 2013 and 2014 is above the average. However, the ratio for 2012 and again for the year 2015 is below than the average requirement. They can improve the ratio through paying the debt or converting the short-term debt into long-term (Van Den End Kruidhof, 2013, pp. 91-106). Solvency ratio: It indicates the financial stability of a company and includes the debt asset ratio. A company with more debt will not be able to manage their cash flows efficiently. From the above table, it can be seen that the total debt of the company with consideration to its total asset is in a better position, which indicates that the company is financially viable (Xia, Fei Liu, 2015, pp. 317-324). Profitability ratio: It states the ability of management to convert their sale revenue into cash flow and profits. It is measured based on the operating profit to sales ratio, return on asset ratio (Lartey, Antwi and Boadi, 2013). A higher ratio indicates that the company is able to create return for their shareholders. From the above table, it can be seen that the profitability ratio of the company, that is, operating margin ratio as well as the return on asset ratio are very low. It indicates the company is not able to convert their revenue from sales into profits (Ehrhardt Brigham, 2016). Efficiency ratio: Common efficiency ratios are inventory turnover ratio and receivable turnover ratio (Park et al., 2014, 361-368). High inventory ratio indicates that the company is able to convert their inventory into sales successfully (Eng, 2013, pp. 153-167). From the above table, it is seen that the inventory turnover ratio of the company over the past years are stable. Social and economic responsibility: They understand their responsibilities in sourcing the raw materials through the ethical manner and at the same time, they are well aware about the probable impact on communities as well as on environment. They also understand the shareholders and consumers always look for the information related to the origination and production of the ingredients. This also assists in creating transparency and traceability in the supply chain. In the year 2013, they invested greater than $03.8 million in maintaining and upgrading their production sites in Oceania. They are committed to enlarge their business through investing in their factories, brands and customers. Their main objective is to be active in the society in which they carry on their business through focussing their hard work in those segments where they can add maximum value, such as, nutrition, health, environmental sustainability and encouraging active lifestyle (Day, 2014). Their good life programmes starts with a wide range of spo nsor activities, specific programs and partnership. In the year 2013, they build development program for aboriginal youth to provide support to the people who contributed in creating difference in the lives of the aboriginal women all around Australia. In the year 2013, they worked with more than 1000 girls from secondary school (Caplan et al., 2016, pp. 57-66). Approximately 200 girls and their mothers participated in the Mother Daughter Program, which was commenced in 50% of all RMLA academies. The Mother Daughter Program involved the launch of an aboriginal cookbook in 2013. They also trained 15 Aboriginal women to become Nutrition Champions and trained 12 Graduates, aged 45 Years in Communication (Phillips, 2014). In past few years their main targets in Oceania were: The program must be continued in all RMLA academics 400 women and girls must participate in the Nestl Mother Daughter Program 30 women from Indigenous community were trained as Nestl Nutrition Champions Nestl employees must volunteer a total of 4,500 hours They are committed to play an active part in minimising the emissions of greenhouse gas through improving the efficiency of resources, investing more for renewable energy and switching to cleaner fuels. Greater than 91% among usage of all energy in the year 2013 was used for producing the products, whereas, 29% was sourced from renewable energy and their target for 2020 is 20%. Conclusion: From the above discussions, it can be concluded that the company is aware about their duties in sourcing the raw materials through the ethical manner and at the same time, they are well aware about the probable impact on communities as well as on environment. Their main objective is to operate their business actively in the society in which they operate their business through focussing their hard work in those segments where they can add maximum value, such as, nutrition, health, environmental sustainability and encouraging active lifestyle. Recommendation: From the financial performance table, it can be seen that the company is not able to convert their revenue from sales into profits and their operating margin ratio as well as the return on asset ratio are very low. The company should take necessary steps to minimise their operating expenses and maximise the usage of available resources. Moreover, to increase their liquidity position they should pay off their short-term borrowing immediately or if not possible, then should take measures to convert their short-term loan into ling term. Reference: Caplan, D., Dutta, S.K. and Lawson, R.A., 2016. 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