Introduction

This report is designed to provide a brief understanding of financial accounting and its relevance. For this purpose, two accounting items that are, Accounting receivables and inventory have been chosen from the annual report of AGL Limited which is an Australian company, for the year 2016.   The report discusses the applicable accounting policy on these items along with the significance of these items on the financial statements and financial health as well. Finally, a reflection is also included in the report on the AGL’s annual report.

Significance of on financial items

Accounting receivables

Accounting receivables are the company’s assets who owe money to the company. The amount of the debtors is shown in the balance sheet, which constitutes the sum of all the outstanding invoices at a particular point of time (Deegan, 2016). These are the vital items of the current assets as they provide stakeholders a view of company’s solvency as well as flexibility.

Inventory

Inventory is another important item of the balance sheet, which constitutes of raw materials, work-in-progress goods, and finished merchandise. This account becomes useful for the management while making sales and reviewing the cost of production in the income statement. This item is significant as it enables to get an insight into the manufacturing department of the business and the efficiency with which the inventory is utilized to generate income.

Applicable Accounting Policy : Accounting receivables

Australian Accounting Standard Board 118 regulates the treatment of accounting receivables in financial statements of the companies. This policy requires the receivables to be measured at the fair value of the consideration received or receivable after deducting trade discounts and rebates, if any.

AASB 101 also requires the receivables to be broken into amounts receivable from trade customers, advance payments, receivables from parties, and other amounts.

Inventory

AASB 102 regulates the treatment of inventory in financial statements. This policy requires the inventory to be categorized as production supplies, merchandise, work in progress and finished goods.

Also, according to AASB 101, the inventories should be written down to their net realizable value while recording on the balance sheet (Franklin et al., 2017). The Australian Accounting policies also require the entities to periodically analyze the inventory quantity on hand and determine if there is any excess or obsolete stock.

Social Impact of disclosing accounting items

Companies that have effectively updated their disclosures by emphasizing on required and relevant information bring positive impacts on the society.  Proper accounting items disclosure boost up the investor confidence due to the availability of more valuable information. The efficiency in auditing is also increased which enables auditors to reveal fair information about the company to the society (Guthrie et al., 2017). The coordination in the firm gets improved across the organization, including the board of directors, and with supervisory bodies and external consultants. Furthermore, appropriate disclosure fosters the organizational social reputation and leadership.

Reflection on the annual report of AGL

As an existing shareholder of AGL Group, I have analyzed from its Annual Report that its financial position statement is quite sound. The cash flow statement is informative enough to provide an insight into the emerging liquidity position of the company. The financial statements also reflect that the company delivers high returns to the shareholders while making growth in achieving financial goals (Cherry, 2016). For instance, AGL is nearer to meet out its divestment target of 1 million AUS dollar in under-performing as well as non-strategic resources by the end of 2017.  

Also, the report shows that the legislative loss after tax of AGL distributable to shareholders in 2016 was $408 million. On the other hand, statutory cash flow from operating activities increased to $1186 million in 2016. The underlying profits have also increased to around $700 million, which enables the company to increase the final dividend payable over 35% per share (Franklin et al., 2017). However, the impairments are unsatisfactory, but I have noticed a significant net increase in the shareholders worth from the company’s upstream gas investments during the past decade.

Conclusion

On the basis of above discussion, it can be concluded that financial accounting analysis is an essential part of the business analysis of a company. The analysis of two accounting items selected in the report shows how the company uses its resources and the money invested by different stakeholders.  The accounting policies applicable to the disclosure of these items is important in providing the stakeholders a true picture of the company’s operations and potential economic benefits to be obtained resulting from the financial transactions.  Moreover, the reflection of AGL’s annual report indicates that the company is doing well and is planning to get a competitive advantage over others.

References

Deegan, C., (2016) So, who really is a “noted author” within the accounting literature? A reflection on Benson et al.(2015). Accounting, Auditing & Accountability Journal, 29(3), pp.483-490.

Guthrie, J., Guthrie, J., Parker, L.D. and Parker, L.D., (2017) Reflections and projections: 30 years of the interdisciplinary accounting, auditing and accountability search for a fairer society. Accounting, Finance ,Auditing & Accountability Journal, 30(1), pp.2-17.

Franklin, E., Lowe, D. and Stocks, M., (2017) Assessment of Market Participation Opportunities for Behind-the-meter PV/Battery Systems in the Australian Electricity Market. Energy Procedia, 110(1), pp.420-427.

Cherry, M., (2016) Accounting for Trust: A Conceptual Model for the Determinants of Trust in the Australian Public Accountant-SME Client Relationship. Australasian Accounting Business & Finance Journal, 10(2), p.3.