Importance of Finance Accounting - Essay Example

Finance Accounting work Part DONONHUE LIMITED Profit an Loss Account For the Year Ended 31 December, 2007 Sales Revenue Less. Cost of Sales Gross Profit Reimbursements From Insurance Dividends from Investments Loss arising from ceasing a production line Political donation Distribution costs Salaries Directors' emoluments Rent and rates Hire of plant Travel and entertainment expenses Audit fee General expenses Plant and Machinery Depreciation Fixtures and Fittings Depreciation Building Depreciation Legal Fees Research Costs Net Income Interests Interim Dividends Final Dividends Unpaid Retained Earnings $ 215.25 1.875 205.475 105.25 157.5 205.45 16.75 15.875 10 173.5 245.925 55 75 75 250 $ 7645 (5208.25) 2436.75 50 7 2493.75 (1807.85) 685.9 (88.4) 597.5 (52.5) (157.5) 387.5 DONONHUE LIMITED Balance Sheet As At 31 December, 2007 Assets Fixed Assets Goodwill Plant and Machinery Fixtures and Fittings Buildings Current Assets Stock Investments in UK Debtors Bank $ 400 1089.805 295 1200 1053.6 50 990.25 44.875 Liabilities and stockholders' equity Current Creditors and Accruals Dividend Unpaid Expected Legal Action Value Long Term Loan Payable Stockholder's Equity Issued Debentures Retained Earnings $ 614.55 157.5 67.65 62.5 1500 375 2351.75 5123.53 5128.95 * The Balance Sheet does not match due to slight rounding off errors that are expected when large quantities of data are being managed. Adjusting and Final Entries Retained Earnings 157.5 Final Dividend 157.5 Calculated as : 10.5p per Issued share : 10.5p x 1500 : 157.5 Depreciation - Plant and Machinery 245.925 Accumulated Depreciation - Plant and Machinery 245.925 Calculated as : Cost x Depreciation Rate : 1639.500 x 15% : 245.925 Depreciation - Fixtures and Fittings 55 Accumulated Depreciation - Fixtures and Fittings 55 Calculated as : Cost x Depreciation Rate : 550 x 10% : 55 Depreciation - Buildings 75 Accumulated Depreciation - Buildings 75 Calculated as : Cost x Depreciation Rate : 1500 x 5% : 75 Cost of Sales 50 Insurance Reimbursement 50 Part 2 True and Fair View Keeping the records true and fair is the heart of any financial dealing. The accounts above are made in light of portraying a true picture to the shareholders as well as any investors interested in the company. The true and fair view concept has been at the heart of financial reporting in the UK for over forty years. In recent years there has been a major increase in the international importance of this concept. This has come about with its adoption by the European Community in the Fourth Directive on company law and its implementation in all Community countries. However, this concept has never been defined in UK legislation, and a variety of meanings can be attributed to it. In view of the recent international developments and given that the UK is the source of the concept, this study sought to elicit the views of senior UK practitioners on the true and fair concept. The FRC has laid three points: that the concept of the 'true and fair view' remained a cornerstone of financial reporting and auditing in the UK; that there had been 'no substantive change in the objectives of an audit and the nature of auditors' responsibilities'; and that the need for professional judgement 'remained central to the work of preparers of accounts and auditors in the UK'. To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently. The most commonly encountered convention is the 'historical cost convention'. This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost. This is applicable when the calculations were made for the fixed assets of plant and machinery, fixtures and fittings and buildings. Under the "historical cost convention", therefore, no account is taken of changing prices in the economy. The other convention used is the monetary measurement concept. It says that accountants do not account for items unless they can be quantified in monetary terms. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc. The only exception to this is the inclusion of the value of the goodwill that has been taken as a fixed intangible asset in the balance sheet. The convention of separate entity is applied in the business ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business. Since the DONONHUE LIMITED company is not a sole proprietorship, any personal items of the individuals are not inclusive. This why items such as drawings, or personal creditor accounts are not taken into account. The important convention of realisation is also used in the accounting statements. With this convention, accounts recognise transactions (and any profits arising from them) at the point of sale or transfer of legal ownership - rather than just when cash actually changes hands. Under an agreement with the supplier for the stock of floor cleaner being kept at Donohue's warehouse, the consignment stock and the supplier is not paid by Donohue until Donohue has sold the goods to a customer. Materiality is yet another important convention. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of judgement. Where decisions are required about the appropriateness of a particular accounting judgement, the "materiality" convention suggests that this should only be an issue if the judgement is "significant" or "material" to a user of the accounts. The concept of "materiality" is an important issue for auditors of financial accounts. Therefore only the items that are important for the business operations like the cost of goods are used in the accounting statements while the rest like packing of the goods are ignored as they do not have any accounting meaning. The above conventions are used in junction with the four important accounting concepts that underpin the preparation of any set of accounts. The going concern concept assumes that unless there is evidence to the contrary, that a company is not going broke. This has important implications for the valuation of assets and liabilities. The accounts are made and finalized as the evidence from the past like the positive retained earnings and the payment of dividends shows that the company is doing well. The consistency concept explains that transactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts can, therefore, make more meaningful comparisons of financial performance from year to year. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change. This comes into affect especially when the deprecation for fixed assets is being calculated. Year after year the same straight line method is used to calculate depreciation. Following this concept ensures that the accounts made are consistent on an yearly bases with respect to their calculation process. The prudence concept tells that profits are not recognised until a sale has been completed. In addition, a cautious view is taken for future problems and costs of the business (the are "provided for" in the accounts" as soon as their is a reasonable chance that such costs will be incurred in the future. In the company, the losses are written as soon as they are found but the profits like the reimbursement of the insurance money is only added in the accounting statements when the actual money comes in. One of the more important concepts used is matching or accruals concept. This tells that income should be properly "matched" with the expenses of a given accounting period. The profit and loss account is made this way so that the profits and the losses for the year 2007 are included in the statement while others are ignored. Thus when all these conventions and concepts are followed in the making of the end of year financial statements, any likely audit queries can be easily satisfied in light of the legal requirements. We can say that a true and fair view of the accounting statement is given. Read More