Business Accounting - Statistics Project Example

Changes to Balance Sheet – Assets As on Additions Deletions As on 31-Dec-06 20007 2007 31-Dec-07 Non-Current Assets Property Plant and Equipment Premises 76000 0 0 76000 Plant cost 50000 (a)10000 60000 Depreciation 8000 6000 14000 Net plant cost 42000 46000 Current Assets Inventories 23000 59000 71000* 11000 Trade Receivables 21000 95000 99000** 17000 Cash at Bank 11000 139000a 112000a 38000 Total 173000 188000 Part 1 Lee and Company * Inventories Sold (c) 63000 + Owner’s personal use (b) 8000 ** Trade receivables collected (e) 97000 + (f) Bad debts 2000 a From cash flow statement Changes to Balance Sheet – Liabilities As on Additions Deletions As on 31-Dec-06 20007 2007 31-Dec-07 Capital Balance as on 31 Dec 2006 102000 35000* 19000** 118000 Non Current Liabilities Borrowings 45,000 45000 Current Liabilities Trade Payables 26000 (d)59000 (g)61000 24000 Outstanding Expenses 1000 1000 Total 173000 188000 * Net Income for the year from Income statement ** Cash drawings (b) 11000 + Inventory taken for personal use (b) 8000 Cash flow for the year 2007 Receipts Payments Cash at Bank – Opening 11000 Cost of Plant (a) 10000 Sales (c) 42000 Drawings – Owner (b) 11000 Trade Receivables (e) 97000 Trade Payables (g) 61000 Electricity charges (h) 3000 Wages (i) 12000 Interest (j) 4000 General Expenses (k) 11000 Closing Balance 31 Dec 2007 38000 Total 150000 Total 150000 Income Statement for the Year 2007 Income Expenses Sales (c) 137000 Cost of Inventory (c) 63000 Bad debts (f) 2000 Electricity charges (h) 4000 Wages (i) 12000 Interest (j) 4000 General Expenses (k) 11000 Depreciation 6000 Net Income 35000 Total 137000 137000 Balance Sheet As at 31st December 2007 Non-Current Assets Property Plant Equipment Capital Premises 76000 Balance as on 31 Dec 2007 118000 Plant cost 60000 Non Current Liabilities Less: Depreciation 14000 Borrowings 45000 Net plant cost 46000 Current Liabilities Current Assets Trade Payables 24000 Inventories 11000 Outstanding Expenses 1000 Trade Receivables 17000 Cash at Bank 38000 Total 188000 Total 188000 Part 2 1. “The auditors are appointed by the directors to make sure that the company’s financial statements are correct and, if not, to correct them.” This statement seems to have been made without a proper understanding of the role and functions of an auditor. As back as in the year 1896 an English judge in the well known Kingston Cotton Mills case stated that ‘an auditor is a watch dog and not a bloodhound’. This statement clearly establishes the role and functions of an auditor with respect to the accounts and financial statements of a company. (Raghuvir Srinivasan, 2002) An auditor is an outside accountant engaged by the board of directors to review the financial statements prepared by the accounting staff of the company. The main function of the auditor is to judge the accuracy of the financial statements prepared by the staff of the organization. His job is to report back to the board of directors about any material mistakes or misstatements which may affect the true reporting on the financial position of the company. For this purpose the auditor usually undertakes some test-checking of some of the typical transactions. He is also expected to review the internal control systems in practice and accounting procedures being followed by the company. In addition he also reviews the financial reporting systems of the company to identify and report any weaknesses he may find in the systems. Quite often the auditor also makes suggestions on developing effective financial control systems in the organization. (Board Source) Therefore an audit is only a spot check of information. Not in any case it can be considered as an exhaustive review of the entire financial transactions of the company. Further the responsibility of an auditor extends only to the extent of checking and determining the accuracy of the financial statements only in “all material aspects”. A clean report on the financial reports of a company from the auditor implies that the auditor is convinced that all the financial statements represent the true financial position of the company and they do not contain any misrepresentation of the financial position of the company in any respect. In any case the auditor’s report does not guarantee a one hundred percent of the accuracy of the financial statements prepared and presented by the company. (Board Source) Another point in this connection is that the auditors are not given any specific responsibility of uncovering frauds. Since the auditors rely mostly on the information and documents being provided to them by the management the auditor may not be in a position to detect small scale frauds that were committed by more than one of the staff of the organization. Therefore with the limited extension of the responsibility of the auditor he cannot one hundred percent check the financial and accounting transactions of the company except that he can undertake some random checking to satisfy the accuracy of the financial statements prepared and presented to him for checking. From the above discussion it is clear that an auditor is appointed by the board to check and report on the accuracy of the financial statements prepared by the company and not to correct them if they are wrong. 2. “A public limited company is one that is owned by the government, whereas a private limited company is one that is owned by the Stock Exchange. Do you agree if it is good for the UK government to have bought Northern Rock?” It is to be understood that both private limited and public limited companies are part of the private sector of an economy. The statement that a public limited company is one owned by the government does not represent the true nature of the company form of organization. The public company is one in which the shares are freely transferable. As distinct from the private limited companies have requirements of a larger number of minimum shareholders and the maximum number of shareholders for the public company is unlimited. The shares of a public company can be registered in a stock exchange and can be bought and sold by the public freely in the prevalent market prices without any restrictions. Stock exchange does not have to do anything with the private limited company. Although both the public limited and private limited companies raise the capital needed by them by issuing shares a private company cannot list its shares on the stock exchange while a public company ahs this privilege. (Blurtit) A private limited company can sell its shares to friends and family members. However the reselling of the shares can take place only with the consent of all the shareholders. Thus the transferability of the shares of the private company is restricted and there are different requirements for the minimum and maximum number of shareholders. Moreover some of the stringent requirements that are applicable to the public companies are not made applicable to private limited companies. Now it is not the question of whether it is good or not the UK government taking over the Northern Rock as things have drifted to such an extent that this onetime high-street bank has mounted liabilities to the tune of £ 91 billion which the bank does not seem to have any source to meet. Therefore it has become imperative that the government involves itself in the nationalization of this premier institution so that the interest of the creditors of the bank is protected. But from the point of view of the shareholders this move will not be received by them happily as they will receive nothing against their shares. Still it remains unsolved as why an earlier attempt from the Lloyds TSB an arch rival of Northern Rock was not allowed by the Chancellor which would have been a feasible and welcome solution for the shareholders as they would have got at least something in return for their original investments. However the bankers are of the view that the government move is not advisable in view of the fact that such a move would eventually make the Northern Rock divided into pieces and sold rather than as a going concern. The bank will slowly shrink in size and ultimately only private equity firms will be willing to buy individual books of mortgage but they may not have any interest in running it as a viable regional bank. In my view although the government’s move may be considered good at the larger interests of the creditors the move to take over Northern Rock by the government cannot be considered good from the purview of the shareholders as it will not do any good to them. From the business point of view also as the bank will slowly meet its natural death over the period this move of the government cannot be considered good. The people of UK also will lose the services of the bank and hence it is not good for them the government has taken over the bank. (Francis Elliott, 2008) References Blurtit ‘What is the Difference between Private Limited and Public Limited’ available online http://www.blurtit.com/q474794.html Accessed on 27th November 2008 Board Source ‘What is the Auditor’s Role in ensuring Financial Propriety’ available online at http://www.boardsource.org/Knowledge.asp?ID=3.385 Accessed on 27th November 2008 Francis Elliott ‘Northern Rock Takeover brings back Nationalisation’ available at http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3386895.ece Accessed on 27th November 2008 Raghuvir Srinivasan ‘Policing the Auditor’ available online at http://www.thehindubusinessline.com/iw/2002/07/07/stories/2002070700600700.htm Accessed on 27th November 2008 Read More