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ABERCROMBIE & FITCH VERSUS HENNES & MAURTIZ

Module 1 CASE ACC501 Accounting for Decision Making

Introduction Financial accounting is defined as reporting the financial performance of a company or business through its financial statements. These statements are created by persons trained in accounting procedures and are issued to interested parties outside of the business (such as investors) on a periodic basis, usually monthly and quarterly. In this paper I will discuss the differences in accounting standards in the United States and Internationally. Also, I will attempt to explain how the differences are depicted on the financial worksheets used by the accountants for the organizations. Abercrombie & Fitch Abercrombie & Fitch is a retailer which has its business organization based out of the Unites States. The focus of the retailer is on casual wear for the 18 to 22 year old market. It has

ABERCROMBIE & FITCH VERSUS HENNES & MAURTIZ several offshoot brands which fall under the Abercrombie & Fitch heading; these are Abercrombie Childrenswear, Hollister Co., and Gilly Hicks. While this is a United States based company with its headquarters located in New Albany, Ohio, its sales are international. All of the distribution for the products from this organization originates from its home office area (Abercrombie & Fitch, 2012). Accounting Standards Abercrombie & Fitch is a United States based company; there are certain rules it must follow or adhere to in the area of its financial accounting. We must remember that the goal of financial accounting is to measure and report the financial information for an organization to personnel outside of the organization itself (Larry Walther, 2010). Those outside of the organization have no control over the preparation of the reports being built for them or the resources that are used to build the reports. They must trust that the information is correct and be able to understand the how the reports are compiled, this is achieved by a private group called the Financial Accounting Standards Board (FASB) setting the rules in by which the financial reports are created (Larry Walther, 2010). The standards that the FASB set in place are the generally accepted accounting principles (GAAP) which is what Abercrombie & Fitch accountants use to create the company reports. GAAP standards lay out the acceptable practices for the preparing of all financial statements of non-governmental organizations within the United States. Basically GAPP sets the rules in which financial accountants have to follow in showing financial data on the income statement, balance sheet, and statement of cash flow.

Hennes & Mauritz (H&M) Hennes & Maurits (H&M) traces its roots to 1947 as Hennes womens clothing store from Vasteras, Sweden. Now, H&M has nearly 2,500 stores on 44 markets across the world and

ABERCROMBIE & FITCH VERSUS HENNES & MAURTIZ strives to offer fashion and quality at the best price (H&M: Facts about H&M, 2012). H&M continues to focus on fashion but now offers fashion for the entire family. H&M has few middlemen, buys in volume, has an internal design and buying departments and works hard to be cost-conscious in order to continue to be able to off its customers the best price for its products. Accounting Standards Like Abercrombie & Fitch, H&M also has accounting standards that it must follow. The difference is because H&M is an international based organization; they follow the International Financial Reporting Standards (IFRS) in order to complete their financial statements. The IFRS are as set of international accounting standards that state how certain types of transactions and reports should be reported in financial statements. All of these standards are established and issued by the International Accounting Standards Board (International Financial Reporting Standards - IFRS, 2012). The IFRB works together with the FASB to ensure the standards being published by both entities are converging in hopes that there will eventually be a single set of international reporting standards (Larry Walther, 2010).

Auditing Standards I have found nothing to dictate that international organizations are held to any special type of auditing standards that United States organizations are not held to. Both United States and International organizations are required to follow a strict set of standards in regards to auditing. These standards are established by the International Auditing and Assurance Standards Board (IAASB). The IAASB is an independent organization that sets the standards for auditing, quality control, reviewing, and other services (Auditing and Assurance: IAASB, 2011). These standards are designed to serve the public interest by setting high-quality standards for all organizations to follow for auditing. An audit is defined as an examination of all records and

ABERCROMBIE & FITCH VERSUS HENNES & MAURTIZ financial accounts to simply check for complete accuracy (The Free Dictionary: auditing, 2012). To ensure that audits show the most realistic facts about an organization, the auditors should be independent from the organization being auditing, in other words, they should have no ties to the parent organization. Auditors also have guidelines that they are required to follow; these are the Generally Accepted Auditing Standards (GAAS) (Generally Accepted Auditing Standards GAAS, 2012). These standards ensure the accuracy, consistency and verifiability of all the reports that the auditors create. The standards are set in place to not only make all accounting and reporting the same but also are designed to benefit the organization being audited because the auditor has nothing to gain or lose from the audit. I can only imagine that in order to draw investors international organizations follow the same type of rules of auditing.

Annual Statements Compared Financial statements are required by GAAP to have an income statement, a balance sheet, a statement of cash flow and a statement of retained earnings, however; this rule only applies to United States based organizations. For this reason, when you compare the financial statements of Abercrombie & Fitch and H&M you can notice a few differences. One of the biggest differences is the way that the financial statements are set up and displayed. Below is an example of the financial summary from the Abercrombie & Fitch 10-K filling for 2011.

ABERCROMBIE & FITCH VERSUS HENNES & MAURTIZ

(Abercrombie & Fitch Investors, 2012) It is easy to notice that the entire summary of operations is covered on this spread sheet page, more information is covered as you go through the entire document however. But for a quick snapshot of how the organization did during the covered period compared to past years all you need to look at is this one page. Compared to the summary sheet from H&M (see below), the Abercrombie & Fitch spread sheet is a very easy read.

ABERCROMBIE & FITCH VERSUS HENNES & MAURTIZ

(About H&M, 2012) Because H&M is an international organization, its full year report shows not only profits and losses for the company but as you read through the entire document it separates by country how the organization has done over the rated period. The Abercrombie & Fitch spread sheet also covers how the organization has done but it only discusses the locations in the United States on its year end review. The H&M spread sheet also provided the reader with information on yearend sales before and after taxes, something that is not covered on the Abercrombie & Fitch spread sheet. In a quick review it is easy to see that the Abercrombie & Fitch summary is much

ABERCROMBIE & FITCH VERSUS HENNES & MAURTIZ easier to read and understand, it also provides more information on one page than the international version. Based on the standards established by the FASB, United States organizations accounting records are much easier for outside entities to review and understand. Comparison Understanding how an organization is doing financially is important not only to the business leaders but also to outside interests such as investors and creditors. Understanding how to read the organizations quarterly and annual reports makes it easier for the creditors and investors to quickly see what is going on within an organization. The GAAP standard that applies to all United States organizations requires certain information be presented in the organizations reports. This required information makes it much easier to read and understand the reports generated by the organizations. Because international organizations do not have to follow the same rules when generating their monthly or annual reports it is a little more difficult to understand their reports if you are not familiar with them. There are some elements that are found on both United States and International businesses reports though. Below is a small graphic table which represents some of the general information that can be found on reports from Abercrombie & Fitch and Hennes & Mauritz AB.

ABERCROMBIE & FITCH VERSUS HENNES & MAURTIZ

Abercrombie & Fitch 2011 Balance Sheet Total Current Assets Total Liabilities & Equity Accounts Payable Retained Earnings 1,488,775 3,048,153 211,368 2,320,571 1,433,268 2,947,902 137,235 2,272,317 1,235,846 2,821,866 110,212 2,183,690 39,918 60,188 4,307 28,563 2010 2009 2011

H&M 2010 2009

40,932 59,182 3,965 25,653

36,081 54,363 3,667 22,508

Cash Flow Depreciation Net Cash for Investments Dividend 232,956 -340,689 -60,956 229,153 -92,976 -61,656 238,752 -111,561 -61,500 3,262 -4,056 -15,723 3,061 -10,129 -13,239 2,830 -8,755 -12,825

Exchange Rate Effects

-2,059

2,923

3,402

-13

-803

-95

Income Satement Gross Profit 2,518,870 2,212,181 1,883,598 66,147 68,269 62,474

Total Comprehensive Income Interest Income Administrative Expenses

140,629 3,577 437,120

152,740 3,362 400,804

13,962 -1,598 353,269

15,703 568 -3,251

16,798 356 -2,859

16,477 467 -2,606

*All amounts are in Thousands

(Persson, H&M Hennes & Mauritz AB Full Year Report, 2011), (Persson, H&M Hennes & Mauritz AB Full Year Report, 2010), (Ramsden, 2011) Profits A quick look at the above table shows that Abercrombie & Fitch is more profitable than H&M. Over the past three years is easy to see that Abercrombie & Fitch not only has continued to increase its profits but has done so at a steady pace. H&M on the other hand shows a loss of profits. H&M shows that their profits were rising between 2009 and 2010 but suffered a moderate loss between 2010 and 2011. Even though H&M has a large international market it is clear that Abercrombie & Fitch is more successful in their market over the same time period.

ABERCROMBIE & FITCH VERSUS HENNES & MAURTIZ Revenue verses Income The bottom line is what is important to any organization. In other words an organization must make money to be able to stay in business. Revenue is important to all businesses as it is the money that is generated by the activities of the business itself. Looking at the trends from Abercrombie & Fitch you can see that the organization steadily increased its revenue from 2009 through 2011. But when you compare the actual income, which is the remaining revenue after all expenses have been paid, from 2009 to 2011 you actually see a sharp increase in income from 2009 to 2010 and a slight decrease from 2010 to 2011. One of the largest contributors to this decrease is the foreign currency adjustments that had to be taken in 2011. Other than that it is clear to see that Abercrombie & Fitch had an increase in operating costs for 2011 that cut into the organizations bottom line. H&M also shows a slight loss in income from 2009 to 2011. While the organization boasted a sharp increase in revenue from 2009 to 2010, and still showed an increase from 2010 to 2011, they too had increased operating costs that cut into the bottom line. The largest culprit to the decrease of income for H&M appears to be the decrease in operating profit and the profit after financial items. From 2010 to 2011 H&M was able to boast an increase in sales but in the end the profits were not enough to keep them from losing money compared to 2010. When comparing these businesses to each other I studied the annual reports for both companies. In order to pull the information I looked at the reports from 2009 through 2011. It took some time to find comparable notes as the reports do not follow the same design or rules thus have different entries on them. I referred to the GAAP standards to assist me in understanding exactly what should be shown on the United States organizations reports.

ABERCROMBIE & FITCH VERSUS HENNES & MAURTIZ Conclusion Financial statements are used to show investors and creditors how an organization is doing financially. These statements are designed to help everyone understand in a quick look where the company is spending its money and how the bottom line is affected by operating costs. There are substantial differences in how United States organizations and International organizations display the information on their financial statements however. These differences can cause a misunderstanding for the reviewer if they are not careful and understand how to draw out the information they looking for and how it is compared. There are also rules that accountants must follow when creating financial documents for United States organizations. These rules apply to information that must be contained in all financial statements in order to ensure that all information is correct and shows a true picture of the organization. These rules also help outside interested persons follow the financial statements easily. The ability to quickly review reports and compare two businesses not only helps the business but also the creditors and investors stay abreast of their investments and identify any financial issues that may be happening in the organization.

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ABERCROMBIE & FITCH VERSUS HENNES & MAURTIZ References Abercrombie & Fitch. (2012). Retrieved April 14, 2012, from Abercrombie & Fitch: http://www.abercrombie.com/webapp/wcs/stores/servlet/StoreView?storeId=10051&cata logId=10901&langId=-1 Abercrombie & Fitch Investors. (2012). Retrieved April 13, 2012, from Abercrombie & Fitch : http://www.abercrombie.com/anf/investors/investorrelations.html About H&M. (2012). Retrieved April 12, 2012, from H&M.com: http://about.hm.com/content/dam/hm/about/documents/en/cision/1573157_en.pdf Auditing and Assurance: IAASB. (2011). Retrieved April 12, 2012, from Internation Federation of Accountants: http://www.ifac.org/auditing-assurance Generally Accepted Auditing Standards - GAAS. (2012). Retrieved April 12, 2012, from Investopedia: http://www.investopedia.com/terms/g/gaas.asp#axzz1s1DIstVd H&M: Facts about H&M. (2012). Retrieved April 13, 2012, from H&M: http://about.hm.com/content/hm/AboutSection/en_us/About/Facts-About-HM.html International Financial Reporting Standards - IFRS. (2012). Retrieved April 12, 2012, from Invetopedia: http://www.investopedia.com/terms/i/ifrs.asp#axzz1s1DIstVd Larry Walther, P. (2010). Chapter One: Welcome to the World of Accounting. Retrieved April 10, 2012, from Principals of Accounting.com: http://www.principlesofaccounting.com/chapter1/chapter1.html Persson, K.-J. (2010). H&M Hennes & Mauritz AB Full Year Report. Vsters, Sweden: H&M Group. Persson, K.-J. (2011). H&M Hennes & Mauritz AB Full Year Report. Vsters, Sweden: H&M Group. Ramsden, J. E. (2011). Abercrombie & Fitch . Washington, D.C.: Abercrombie & Fitch . The Free Dictionary: auditing. (2012). Retrieved April 14 , 2012, from The Free Dictionary: http://www.thefreedictionary.com/auditing

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