Significant Accounting Policy Adopted by Zara Company - Case Study Example

Name: Lecturer: Course name: Course code: Date A. Zara limited Background information about the company Zara Company is a business that deals in textile industry with its head office in Spain the Company currently have main retail outlet globally. Over the last past three years, the company had an increasing trend in profit implying that the financial stability of the company is enhanced over the years. The following is an over view of significant accounting policy adopted by the company and general recommendation concerning the statement of financial statement of the company As well as the general performance. Company situation The general performance of the company depicts a positive trend and therefore proper accounting policy should be adopted on areas that are susceptible to fraud or are of high materiality. This is areas such as the inventory, provision for bad and doubtful debt as well as provision for depreciation commands high standards to be upheld if the company is to operate profitably and with good capital base since, the areas are susceptible to fraud or risk of overstatement or understatement in effect reducing the value of the reported net profit. In order to curb competition and remain stable in the competitive market, Zara limited should ensure that a proper accounting standard is upheld so as to enhance the internal control system. The following are some of the recommendation that should be made on the company significant accounting estimate in order to increase accountability as well cost reduction and profit maximizing to the company. Basis of preparation The company’s Financial statement has been prepared on an historical convention derivative instruments, financial assets valued inform of wide proceeds and supplementary amount overdue that are ascertained at appreciated sum or reasonable price, The financial statement of the company must be prepared in consistency with (IFRS).The standard commands practitioner to make conclusion, estimation as well as hypothesis which affects the use of guiding principle and reported value of an assets as well as liabilities, proceeds and operating cost. The estimates and connected hypothesis are based on historical practice and diverse factors that are practical under the conditions, the consequences of which form the foundation of making the conclusion concerning carrying values of assets and liabilities that are not obvious from supplementary sources. Real outcome may be different from this judgment. Organization, together with the Audit, Risk department as well as the Compliance commission, ascertains the development, assortment and exposure of the merged entity’s important accounting guideline and judgment as well as the application of these policies and estimate. The following ratio analysis depicts the company performance. This ratio is analysis on assumption that the company followed the relevant accounting standard in preparing their financial report. In this case the ratio will not be misleading about the company’s performance. 1. Profitability ratio Profitability ratios ascertain how well a company is performing in terms of its capability to generate profit. From the ratio analysis below, it depicts that the general performance of the company is well due to the fact that the gross margin of the company is increasing .The return on asset is a ratio that depicts how well is funds bored in terms of relaying the loan. In Zara case analysis, the return on asset increasing implying that that the company project is having returns in terms of the net profit. This therefore implies that the company yields return from their investment and hence it acts as a strong indication about the general performance of the company in terms of the profitability. 2. Liquidity ratio This ratio depicts how the company is going to repay its short term creditors using the available cash. The ratio analysis depicts favorable trends in terms of the liquidity ration. The current ratio analysis of the company depicts a favorable trend since the ratio is greater. This means that the current liability can well be mate by available cash. A good company should be able to fiancé it’s currently liability using the working capital available. In Zara financial statement, the company is able to financing it’s currently liability using the working capital. This therefore signifies that the financial stability inform of liquidity is enhanced. 3. Leverage/activity ratio This ratio is relevant in measuring a company's blend of operating costs, providing a thought of how changes in production will affect operating proceeds. Fixed as well as variable costs are the major types of operating costs; depending on the business and the industry, the mix will be at variance. An example of this ratio is the stock turnover. This ratio frequency with which goods are sold The stock turnover of Zara limited is quite encourage since the company is a having a stock turnover of more than twice implying that that the company sells is high. High sales turnover implies high returns inform of profit to the company and therefore this ratio acts as a strong indicator of how the company is performing well in the market. Industrial analysis The general trend analysis’ of the company against the industrial market is quite impressive. It is apparent that Zara financial ratio, illiquidity as well as the activity ratio is favorable in relation to market comparison. This therefore makes the company to be a market leader in textile industry and therefore it signifies that the financial position of the company and therefore investing in this company, a return will be realized. Other factors need to be considered on order to ensure that the company remains strong on the competitive other than observing on the ratio analysis and making comparison with the industrial trend. These factors are as follows. Recommendation on the following Significant Accounting Policies on Zara financial statement This ratio will be reliable and concluded on the general performance of the company where significant accounting policy has been adopted in preparing the financial statement of the company. For example 1) Inventory valuation Method Stocks are prized at the lesser of cost and the net realizable value. Cost comprise of entire procurement associated with refund, payment markdown and supplementary expenses expended to make inventory to its current state and location for sale.Net realizable value is the anticipated selling value in the usual time of trade, less the probable outlay of conclusion and selling operating cost. This approach of valuing inventory will help Zara limited to reduce the consequence of over-estimating the net profit or under-estimating the net profit as well as observing the accounting prudential and materiality concepts. 3) Provision for bad and doubtful debt A provision is realized in the combined statement of financial position when the combined entity has a positive commitment because of a precedent occasion and it is plausible that an outflow of financial advantage will be necessary to reconcile the commitment. The sum realized as a provision is the superlative assumption of the contemplation necessary to resolve the current commitment at reporting date. Where a Provision is ascertained using the cash flows anticipated to clear up the current commitment, its carrying value is the present value of those cash flows. Conclusion on the overall performance of the company The financial performance of the Zara depicts a positive trend since the company reported an increasing net profit. This is a strong indication that the financial stability of the company is enhanced as well as the company is able to fiancé its investment using the working capital. Accounting policy adopted by a company majorly affects its income statement and the statement of financial position and hence appropriate method of stock valuation is deemed relevant since inventories affects the net reported profit of the company. Provision for bad and doubtful debt affects the profitability as well as the liquidity ratio of the company and for this reason, it is appropriate to ensure that minimum value of bad and doubtful debt is maintained. This is achieved by guaranteeing that the debtor’s payment period is short while allowing long time creditors payment. In this case, the working capital of the business will be enhanced. Appropriate management of stock is significance for any company. The manner in which a company ascertains its stock can be varying between the surplus and deficits. Inventory valuation affects the company’s profits margin, working capital as well as the shareholders equity. It can be observed therefore that Zara company is performing well in terms of the capital base and fund statement since; the company is having a high return on asset as well as return on equity implying that the capital base as well as the return on investment is relatively high hence the company is financially stable. This is an attribute of good accounting estimates and policy adopted by company and hence the policy depicts the trend in performance of the company and as well predicts the future trend of the company performance. The financial performance of Zara limited therefore depicts a strong indication that investment on this company’s security will yield a return, Appendix The graphs of the depicted ratios Ratio Analysis Profitability ratio Years 2010 2011 2012 Sales Revenue 11,083,514,000, 12526595000 13,792,612 Gross profit margin= {gross profit/net sales} 2010 2011 2012 Gross profit 0.32 0.3 0.25 Return on assets= {Net income/total assets} 2010 2011 2012 Return on assets 0.034 0.092 0.1 Net gearing = [net debt/equity} 2010 2011 2012 Net gearing 1.1 1.02 1.04 Liquidity ratio Current ratio= {current asset/current liability} 2010 2011 2012 Current ratio 1.8 1.54 1.7 Activity ratio Assets turnover= {net sales/total assets} 2010 2011 2012 Assets turnover 0.47 0.65 0.87 Read More