Tuesday, May 5, 2020

Dick Smith Accounting Theory

Question: Discuss about theDick Smith Accounting Theory. Answer: Introduction: Accounting Theory refers to logically analyse a decisive number of extensive principles that assist in providing a general framework of reference which helps in evaluation of accounting practice and management of recent practices and processes (Malmi and Granlund, 2009). On July 14, 2016 McGranthNicol administrator of Dick Smith Group of Companies published its report highlighting the causes of the companies collapse. Dick Smith was considered to be fifth largest electronics retailer in Australia having a wide chain of retail stores selling consumer electronic goods. Even after running successfully in mid of 2013 it failed miserably. Dick Smith Holdings discloses as to how a booming publicly listed Australian Company exhibiting good Corporate Governance was a disaster to happen. The scrutiny into the matter discloses as to what went wrong. Firstly, Consumer Electronic market is considered to be highly competitive which experiences accelerated changes in consumer demand patterns (Holliday, Ward and Fielden, 2015). Piling up of inventory proved to be fatal for this type of business. Secondly, with interminable declining sales the market share of the company also shrank. Revenue growth of the company depended on its store growth and low margins on its commercial sales. Thirdly, inventory decisions taken by the company did not go hand in hand with the consumers demand. This led to building up of inventory and stimulated poor product mix decisions. Fourthly, the retailer was incapable to attain amicable credit terms. This negatively influenced the product mix, stocks levels, and store presentation. Fifthly, the company experienced cash flow issue in partial that crept due to wrong footed supplier agreements. It was down and out for rebates from its suppliers so t hat it could institute cash flow which is regarded to be the lifeblood of any company. But they couldnt cut it and maintain their performance and sagged regarding terms of like for like the sale. Woolworth sold off the retailer to a private equity firm Anchorage Capital Partners who floated the company on the stock exchange for $520 million a year later. This created an impression in the minds of investors that the company being worth $20 million is now @520 million. The current scenario put an impression that the investors and regulators are going to look long and hard at private equity funds. This was a lesson for the equity investors to do their bit of analysis and investigation before investing their money (Verkerk, 2013). Moreover, gifts cards bought by shoppers during Christmas became a useless piece of plastic. Investors who bought the companys share at $ 2.20 per share mere two years ago were left empty handed. Employees of the company are struggling to find new jobs and customers are reigning in their spending. Banks are considered to be aware of what is going on in a company but, it is not the same in the case of creditors and the shareholders. The management came up with diversification plan which demanded for appreciable financial commitment. This process involved bank borrowings and appreciable suppliers commitment. It is believed that business expansion at a rapid pace is generally destined to face financial distress (Bianchi and Winch, 2009). Retailers annual report highlighted the opening of 25 stores. Meanwhile, the products became less popular with customers. What the company was left with was aged and obsolete stock which was majorly written down by $ 58 million. It needed heavy discounts to boost sales of rebated stock. Strategy undertaken by the management to crop clearance sale by resorting to heavy discounts did not reap desired results (Carter, 1996). Decembers stock clearance and cash generation were below the management expectations despite prices being slashed and advertisement spending being doubled down. Its intense endeavor to trade its way out demolished the margin uplift that the rebate targeted to ach ieve. It failed to attract people to walk through and make purchases and alleviate cash pressure. This effort acted as a suicidal effort on the company. It is unfortunate on the part of Australian insolvency firms as they barely produce financial statements that assist the stakeholders in providing an understanding to what happened in a company since it last reported as a going concern. It became an ordeal for Anchorage Capital trying to float a retail business on the stock exchange. There are testimonials to other private equity floats that have disoriented their shareholders money, such as Myer and Collins Foods (Pourakbar, Sleptchenko and Dekker, 2009). It highlights that there is always going to be looped in any research but, what is worthwhile is devoting sometime in understanding an asset and its history. Some respected stock pickers marked Dick Smith a buy in recent months. It is always advisable to hold a wide range of investment which is regarded to be the best way to counter overall risk. By making an investment in just one share is assumed as a gamble, no matter how successful a company is. Putting money into many baskets smoothens out good and bad ones. Investment diversifies further when it is not limited only to share market but beyond into property, infrastructure (Campbell, 2010). A shareholder should be flexible enough to pull out its investment from a sinking company and invest elsewhere. Masters Home Improvement is one of such Australian home improvement chain that faced similar failures to despair. Masters made a blunder when they fell through to understand the wants and needs of their target market. They strived to import Lowes American Model into Australia, with an assumption that the same principle would work here without inputting fairly enough thought to it. Masters too like Dick and Smith Holdings rolled out new stores before ensuring about what the customers demanded and what it was to offer. Masters created highly widespread and attractive stores and stacked it with nonDIY products such as kitchen and appliances, along with upsetting store layouts, relatively unskilled staff and higher prices fell out to be completely contradictory to the needs of their target market. The inexperienced staffs are often found to be indefinite about the products and its location in the store. The staff being unhelpful for being ignorant about the products depicts poor customer service. It encompassed much more products which were out of the categories of hardware products. Store layout was regarded to be terrible failing to be depicting a proper hardware store. Customers rated the range of products as rubbish and overpriced where an individual can get a real tool which would last a lifetime and would not require any replacement in six months or so, therefore head back to the store again. The range of products did not meet up to the quality standards and branding of its customers. A simple customer survey could have done wonders which Masters executive team failed to do in six years (Pepe, 2011). It was an impermissible failure of the management, particularly in dealing with such a large, entrenched competitor and risking billions of dollars of shareholders fund. The objective of the organization should be clearly defined in accordance to target market at all times. This knowledge should be clearly instilled and refreshed in the minds of every staff member in the business. An accounting profession comprises of research, policy, and practice. Therefore broadly the profession of accounting is required to be more communicative and regulated between practitioners, policy makers, and academic researchers (Lombardi and Cooper, 2015). By imparting more education about the value of academic research in university programs, it is likely to enhance the importance of academic research to practitioners. More direct contact between academics and practitioners would ensure improvement in the quality of academic research. Usage of rebates from suppliers led to the Dick Smith collapse. An advanced accounting standard explaining about the basis of revenue recognition is expected to be effective from 2018. This theory is supposed to deal with some issues relat ing to the treatment of rebates (Kasztelnik, 2015). Over the years, the government has emphasized on GST collection to help Australian retailers battle against sales over electronic sales. This is merely a propaganda to grab tax justification. The demise of Dick Smith Electronics did not come as a surprise in hindsight; it is illuminating from business owners perspective to contemplate exactly what could have been the causes to the two behemoths to fall. An academic accounting researchs contribution to accounting practices aims at computation of existent accounting practices, evolution of advanced practices (Bradshaw, 2009). An academic research plays a crucial role to not only reckon the extent to which the existing practices is well suited but also enroot novel practices to address growing business, economics, and societal needs (Parker, Guthrie and Linacre, 2011). References Bianchi, C. and Winch, G. (2009). Supporting value creation in SMEs through capacity building and innovation initiatives: the danger of provoking unsustainable rapid growth.IJEV, 1(2), p.164. Bradshaw, M. (2009). Analyst Information Processing, Financial Regulation, and Academic Research.The Accounting Review, 84(4), pp.1073-1083. Campbell, J. (2010). Global Currency Hedging: What Role Should Foreign Currency Play in a Diversified Investment Portfolio?.CFA Institute Conference Proceedings Quarterly, 27(4), pp.8-18. Carter, C. (1996). Marketing electronic consumer goods.Engineering Management Journal, 6(1), p.41. Holliday, N., Ward, G. and Fielden, S. (2015). Understanding younger older consumers' needs in a changing healthcare market-supporting and developing the consumer market for electronic assisted living technologies.International Journal of Consumer Studies, 39(4), pp.305-315. Kasztelnik, K. (2015). The Value Relevance of Revenue Recognition under International Financial Reporting Standards.AFR, 4(3). Lombardi, L. and Cooper, B. (2015). Aboriginal and Torres Strait Islander People in the Accounting Profession - An Exploratory Study.Australian Accounting Review, 25(1), pp.84-99. Malmi, T. and Granlund, M. (2009). In Search of Management Accounting Theory.European Accounting Review, 18(3), pp.597-620. Parker, L., Guthrie, J. and Linacre, S. (2011). The relationship between academic accounting research and professional practice.Accounting, Auditing Accountability Journal, 24(1), pp.5-14. Pepe, M. (2011). Customer Lifetime Value: A Vital Marketing/Financial Concept For Businesses.Journal of Business Economics Research (JBER), 10(1), p.1. Pourakbar, M., Sleptchenko, A. and Dekker, R. (2009). The floating stock policy in fast moving consumer goods supply chains.Transportation Research Part E: Logistics and Transportation Review, 45(1), pp.39-49. Verkerk, M. (2013). Social Entrepreneurship And Impact Investing.Philosophia Reformata, 78(2), pp.209-221.

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