Managerial Accounting Concepts - Assignment Example

Financial Reporting Task 1: 1. Explain the main methods that can be used to analyse financial statements. Analysis of financial statements is generally carried out by a number of different users. Some of these are the internal users and some are external users. Various groups of people like investors, managers, executives, and even creditors can need to analyse the financials of a company for various reasons like making informed business decisions (Edmund, et.al., 2006). There are two important methods of analysis of financial statements, these can be classified into: a) Horizontal Analysis: this type of analysis of the financial statements is when the analyst uses the information provided in the report to compare it over a certain period of time. Here the items are specific and these are compared over a specific accounting period. This method can further be classified into two sub categories, namely absolute dollar and percentage comparison (Edmund, et.al., 2006). b) Vertical Analysis: The vertical analysis on the other hand is when the analysts use separate figures to one specific figure of a financial report. This comparison is generally performed in percentages. Here unlike the horizontal analysis, the analyst use one certain item and compare several different items with it, in the same accounting period. This is generally used to gather enough data to build a trend. This method is also divided into two main styles, income statement analysis and balance sheet analysis (Edmund, et.al., 2006). 2. Briefly explain the role of the narrative reports in annual reports in an analysis of financial statements. Narrative reports in annual reports are a very useful tool. These often cover a number of different aspects of the annual report. The narrative reports have been taking up higher portions of the annual reports. It has been noted by Deloitte research that these take up as much as 54% of the total annual reports (Reed, 2008). The role of the narrative reports is very clear, it is mainly present in the annual reports to provide the readers with a clear knowledge of the history of the company, a brief analysis of the changes made in the year, future plans of the company and also the illustrations and photographs that are relevant. This forms a source of information for the readers and to some extent can be considered to be a monologue. The role is to provide for a complete overview of the company. In terms of the analysing the financial statements, these reports provide the analysers with straight forward information. It includes a five to ten years of financial summary which proves to be very beneficial especially if the analyser aims at gaining comparative information over a few years of historical data of the company (Bear, 2009). These thus prove to be like the one stop place for all analysts for information of a company for until ten years ago, making the research easier and straight forward to some extent. 3. Briefly explain the main sources of information, outside the annual report, that can be used in analysing financial statements. The sources of information for a company’s stats, other than the annual report are a few external sources. These provide for additional information of the company and prove to be very useful while analysing company statements: The Industry trade Associations: These have been found to collect a lot of information of the industry and the statistics of the various companies. This is one of the best sources of information for the company information and this information can also be useful for comparison purposes. The Investments and the brokerage companies are also a very good source of information for the financial details of companies. These generally provide for statistics that are comparative and also relate to the individual companies as well as the industries as the whole. These companies can also provide specific information of selective companies as well. Credit collecting organisations also form a strong source of information for companies and the statistics of the companies. Some very famous examples of these organisations are like Dun and Bradstreet. These organisations generally possess vital information like the business ratios for a number of different industries. The Financial service organisations are the safest and best bet for any company information. This is majorly because these organisations specialise in performing researches on various companies and industries. The information provided by these form of organisations does include, the company history, financial statistics, and all other details about the company as well (Woelfel, 1994). Task 2: 1. Calculate the depreciation charge on fixtures and fittings for the year ended 31 March 20x9 and explain your calculations. Assuming that straight line depreciation method is applied to the fixtures and fittings, it is evident from the trial balance that the accumulated depreciation till 31 March 2008 is £ 13,500. It is given that the fixtures and fittings were purchased on 1 April 2006 and that they do not have any residual value. Since £ 13,500 has been the depreciation for 2 years, Depreciation for 1 year = £ 13,500 / 2 = £ 6,750 Hence the depreciation of the fixtures and fittings for the year ending 31 March 2009 is £ 6,750. 2. Produce an income statement for the year ended 31 March 20x9. Income Statement £ Sales 1,912,989 Purchases (1,203,078) Used Inventory (49,125) Gross Profit 660,786     Interest Received 18,750 Administration Expenses (262,763) Depreciation (6,750) Profit before Tax 410,023 Corporation Tax (47,500) Net Income 362,523 3. Produce a balance sheet as at 31 March 20x9. Balance Sheet £ Fixed Assets   Fixtures and Fittings 27,000 Accumulated Depreciation 20,250   6,750 Current Assets   Bank Deposit 236,775 Closing Inventory 120,000 Receivables 337,764   694,539     Total Assets 701,289     Liabilities   Capital Account Balance 18,857 Current Account (Overdraft) 3,750 Corporation Tax 46,029 Payables 262,631   331,267     Total Assets - Total Liabilities 370,022     Share Capital 7,500 Profit and Loss Account 362,523 Total 370,023 Task 3: 1. Explain in your own words the role of the IASB in the regulatory framework for accounting in countries such as the UK. Accounting plays a very important role in every company. Financial accounts of a company are designed not only to help the company but also provide information to other stakeholders like customers, employees, investors, etc. The International Accounting Standard Board refers to an independent standard setter for accounting in the UK. The International Accounting Standard Board consists of a board of members who come from different countries and have a vast and wide variety of functionalities. The IASB is a board which aims at developing and helping to improve the general purpose financial statements, to make sure that it meets to the public interest (Mill, et.al., 2003). The IASB is one of the single high qualities, simple to understand and also one of the only global accounting standards which needs complete information of the general purpose financial statements. The International Accounting Standard Board (IASB) has made various proposals to improve the conceptual framework for financial reporting. The International Accounting Standard Board has proposed to improvise the objectives of the General Purpose Financial Reports. The International Accounting Standard Board has focused on improving the General Purpose Financial Reports for potential investors and lenders. They suggest that the report aims at these groups of individuals to help them make informed decisions regarding their capital investments (IASB, 2008). The IASB also works in cooperation with the national accounting standard setters which provides for a meeting point for all the accounting standards from across the world. 2. Do you think that the use of fair value accounting as opposed to historical cost accounting could have reduced the impact of the credit crunch? The use of fair value as opposed to the historical cost accounting has always been quite a controversial choice. In this case the use of fair value would prove to be more beneficial when compared to the historical cost accounting as this would have reduced the impact of the credit crunch. In the time of a credit problem and a troubled economy, the use of fair value is one which is most beneficial. The use of fair value is beneficial majorly because the use of the fair value provides the companies with a chance to gain more loans. It is important to understand that the fair value can be equally disastrous as useful. It is not possible to classify whether it is better to use the fair value or the historic values as there have not been any set rules or guidelines that have been set down by the FASB (Kitabjian, 2008). This makes it difficult to decide whether the fair value would prove to be more beneficial when compared to the historic values here in this case. Both the methods have their own merits and demerits and it would be best if the FASB took same action and provided the general public with guidelines as to when which style would be apt to be used. However, in this case it would be best to use the fair value as this would help reduce the credit crunch to a certain extent. Task 4: 1. Produce an income statement for the year ended 31 January 20X8 using the above numbers. All numbers are in £M. The numbers should be presented in a vertical format in a form suitable for presentation. Income Statement £ million Revenue 63,962 Cost of Sales 58,767 Gross Profit 5,195     Profit arising on property - related items 138 Profit on Sale of Investments in associates 38 Profit/(Loss) from Discontinued Operations 27 Finance Income 135 Administrative Expenses 1,361 PBIT 4,172 Finance Costs 324 Profit before Tax 3,848 Taxation 1,158   2,690 Share of post-tax profits of joint ventures and associates 159 Net Income 2,849 2. Produce a balance sheet as at 31 January 20X8. All numbers are in £M. The numbers should be presented in a vertical format in a form suitable for presentation. Balance Sheet £ million Fixed Assets   Property Plant and Equipment 25,464 Investment Property 1,284 Derivative Financial Instruments 162 Investments in joint ventures and associates 471 Other Investments 12 Goodwill and other intangible assets 3,067 Deferred Tax Assets 48   30,508 Current Assets   Cash and Cash Equivalents 1,563 Trade and other receivables 1,618 Inventories 2,897 Current Tax Assets 12 Non-current assets classified as held for sale 612   6,702 Total Assets 37,210 Long Term Liabilities   Borrowings (non-current) 6,219 Der. Fin. Instruments and others (non-current) 598 Post-employment benefit obligations 1,425 Deferred Tax Liabilities 803 Provisions (non-current) 37 Other non-current liabilities 43   9,125 Current Liabilities   Borrowings (current) 2,331 Der. Fin. Instruments and others (current) 130 Trade and other payables 9,069 Minority Interests 98 Current Tax Liabilities 692 Provisions (current) 6   12,326 Total Liabilities 21,451 Total Assets - Total Liabilities 15,759 Equity   Share Capital 596 Share Premium Account 6,564 Retained Earnings 8,539 Other Reserves 60 Total Equity, Reserves and Income 15,759 Bibliography Bear, J.H., 2009, ‘Parts of an annual report’, Accessed on 15th May 2009, Retrieved from http://desktoppub.about.com/od/annualreports/a/annualrpt_parts.htm Edmonds, C., Edmonds, T., Olds, P., & Schneider, N., 2006, ‘Fundamental Managerial Accounting Concepts’, 3rd Edition, New York: McGraw-Hill Irwin IASB, 2008, 'Exposure draft of: An improved Conceptual Framework for Financial Reporting', May 2008, International Accounting Standards Board Kitabjian, S., 2008, ‘Fair Value vs. Historical Cost’, 1st December 2008, Accessed on 10th May 2009, Retrieved from http://www.articlesbase.com/writing-articles/fair-value-v-historical-cost-666307.html Mill, D., Call, W., Drew, A., 2003, ‘Foundations of Accounting’, 9th Edition, UNSW Press, Sydney Reed, K., 2008, ‘Narrative reports taking over annual reports’, 24th October 2008, Accessed on 10th May 2009, Retrieved from http://www.accountancyage.com/accountancyage/news/2229007/narrative-reporting-taking Woelfel, C.J., 1994, ‘Financial Statement Analysis’, Mc-Graw Hill Publishers, United States of America Read More