An Examination Questions about Fundamentals of Financial Accounting - Assignment Example

Finance and Accounting Contents Contents 1 Role of Accounting in Society 2 Focus on International Issues 2 Recording Business Events under the Accounting Equation 3 Preparing Financial Statements 4 Horizontal Financial Statement Model 5 The Effects of Sarbanes-Oxley Act on Financial Reporting 6 Differences between Managerial and Financial Accounting 6 Product Costing in Manufacturing Companies 7 Schedule of Cost of Goods manufactured and Sold 8 Just-in Time Inventory 9 Statement of Ethical Professional Practice 9 Emerging Trends in Managerial Accounting 9 Works Cited 11 Role of Accounting in Society Accounting is an extremely important activity of business, which plays a critical role in the market economy. For instance, through accounting, it is possible for various stakeholders of different companies, especially investors to evaluate the risks and returns that they speculate to incur or gain from investing in various organizations (Ingram and Albright 22). This is because accounting allows for full and fair disclosure of such companies’ financial information and performance. Secondly, accounting provides capital markets with reliable information about business activities of various organizations. In turn, this information is used by investors to determine profitable companies, in which they can invest (Ingram and Albright 22). This leads to addition of value to the society because right decisions to invest and allocate resources to efficient and effective companies are made by the use of accounting information. In addition, accounting plays a role in the evaluation of contracts by society because it avails relevant information (Ingram and Albright 22). Accounting puts organizations on check, so that they can observe environmental laws and conserve the environment while carrying out their operations, which benefits the host society of such organizations at large. For instance, responsibility accounting is charged with informational responsibilities to the society in respect to law (Bebbington, Laughlin and Gray 407). Focus on International Issues The recent trends of globalization have influenced accounting practices significantly. For instance, trade and investments between countries have increased. The amount of capital, goods and service flow across domestic borders has increased (Saudagaran 1). This requires that accounting information has to be prepared to meet the required international standards of transparency, reliability and comparability (CGA Magazine). There has to be global communication. Information technology determines the ease and rate at which business information is made available to accounting professionals which affects the practice itself. As a result of the aforementioned international factors, there is a need to adopt international accounting and auditing standards to enhance reliability and comparability in financial statements across regions and jurisdictions (CGA Magazine Par 15). These include generally accepted accounting principles, generally accepted auditing standards, international financial reporting standards. In view of the international requirements of accounting information, it is imperative that national GAAPs have to be identical to IFRS. Therefore, accountants and auditors are required to adhere to GAAPs, GAAS, IAS and IFRS in their profession. Recording Business Events under the Accounting Equation The accounting equation shows the relationship between a company’s assets, liabilities and stockholders’ equity or capital. Assets are a company’s resources while liabilities are obligations of a company (Stice, Stice and Swain 26). Stockholders’ equity, or capital, as it is commonly referred to, is the difference between assets and liabilities. Therefore, the amount that remains after subtraction of the value of all liabilities from the value of assets is what is referred to as the stockholders’ equity. The combined value of liabilities and stockholders’ equity of an entity is equivalent to the value of the entity’s assets. Therefore, according to the accounting equation, assets are equivalent to the sum of liabilities and stockholders’ equity (Assets = Liabilities + Stockholders’ Equity/Capital) (Warren, Reeve and Duchac 9). Normally, in recording business event, liabilities are shown before the stockholders’ equity because creditors have first rights to the rights. This means that in case of bankruptcy, creditors have the first priority and they will be paid first from the proceeds realized from sale of a company’s assets, after which stockholders will be paid from the residue. Various transactions affect a business’s financial condition. Business transactions are stated in terms of changes in the elements of the accounting equation (Warren, Reeve and Duchac 9). Assets, liabilities and capital are sub-divided into accounts in which transactions are recorded to compile financial statements. Two or more accounts are increased or decreased in such a way to maintain the equality of the accounting equation when a business transaction occurs. Therefore, operating transactions have to be recorded to show how they affect asset or liability accounts and how they either increase or decrease the retained earnings in the shareholders’ equity value. Increases in the asset accounts and decreases in liability and equity accounts are placed on the right side of the entry (Pratt 152). Decreases in asset accounts, and increases in liability and equity accounts are placed in the left side of the entry. This is because these increases and decreases are accompanied by increases in assets or decreases in liabilities and equities which are indicated on the left side or right side of the account (Pratt 152). Therefore, these rules should be followed so as to maintain the equality of the accounting equation and communicating the effects of any economic event effectively on the financial statements (Pratt 152). Preparing Financial Statements When preparing financial statements, accountants have to apply acceptable and coherent, basic accounting principles. This will enable users to understand the essential concepts underlying the preparation and presentation of financial statements. Also, users are able to interpret the information that is contained in a set of financial statements when they are prepared in accordance with IFRS (Greuning, Scott and Terblanche 5). Therefore, accountants should prepare financial statements that have information which is readily understandable by users, especially those who have basic knowledge of business and accounting, as well as, economic activities (Greuning, Scott and Terblanche 5). Financial statements should be relevant and reliable, which means that the information in such statements has to be neutral, faithful representation, prudent and complete. Financial statements should also be comparable. This means that financial information in such statements has to be consistent over time and it should also be consistent between entities. This facilitates significant comparisons (Greuning, Scott and Terblanche 5). Financial statements should be preparation in accordance to the going concern concept, whereby management is required to assess the ability of an organization to continue operating in a foreseen future (Kwok 27). Horizontal Financial Statement Model In horizontal analysis of financial statements, a series of financial statements are evaluated over a period of time. This analysis is used when carrying out intercompany comparisons. Since financial statements are provided for a minimum of two years, it is possible to make comparisons. It is essential in determining the increases or decreases that have taken place (Weygandt, Kieso and Kimmel 647). This uses common size statements which express financial statements in percentage terms, and this enables users and accountants to highlight differences. In analyzing financial statements using the horizontal financial statement model, financial statement elements are arranged in a horizontal manner across a page. Financial statement elements comprise of the balance sheet, the income statement and the statement of cash flows. Therefore, these elements are arranged horizontally, whereby the balance sheet is put at the left of the page and the statement of cash flows is put at the right end of the page. The income statement is usually placed between the balance sheet and the statement of cash flows. Therefore, in the horizontal financial statement model, the balance sheet comes first, followed by the income statement, which is also followed by the statement of cash flows. The effects produced by each event are understood through the horizontal financial statement model and I should be used always. The Effects of Sarbanes-Oxley Act on Financial Reporting The Sarbanes-Oxley Act is a legislation that was put in place by the US Congress to administer regulations on the responsibilities of auditors, corporate managers and boards of directors pertaining to financial statement preparation and reporting. Through the Sarbanes-Oxley Act restrictions on the activities of external auditors were specified to increase their independence from their audit clients (Ingram and Albright 223). This has increased the responsibilities of corporate managers to produce reliable financial reports. Therefore, the Sarbanes-Oxley Act tightens corporate governance and accountability (CGA Magazine, Par 12). Responsibility has been vested upon auditors, book keepers and management to ensure that the financial reporting is reliable by presenting the fair value of a company’s financial status. Differences between Managerial and Financial Accounting Managerial accounting reports on the flows of costs and systems for relating costs to an organization’s products and services for managerial decisions while financial accounting accumulates and presents financial data for external users such as investors and creditors. Financial accounting classifies, records, presents and interprets, in monetary terms, transactions and events while managerial accounting classifies information, records and interprets transactions in material and labor and overhead terms (Weygandt, Kieso and Kimmel 5). Third, the users of financial accounting statements are investors, shareholders, the government and creditors, among others while the users of managerial accounting information are internal members of the company, and that is the company’s management. Managerial accounting records are prepared as frequently as they are needed while financial statements are prepared on a quarterly, semi-annual and annual basis. The financial statements prepared in financial accounting are for general purposes while the managerial accounting statements are for special purposes for specific decisions. Financial accounting is limited to double entry while managerial accounting extends beyond double entry. Financial accounting statement preparation follows GAAPs while managerial accounting statement preparation does not follow GAAPs but adopts standards relevant to decision making (Weygandt, Kieso and Kimmel 5). Finally, financial accounting statements are audited by CPAs while there are no independent audits in managerial accounting statements or records. Product Costing in Manufacturing Companies Some manufacturing companies use job order costing as a product costing method for their products and services. Under this product costing system, costs are classified by manufacturing firms into manufacturing costs such as direct material and indirect material costs, direct labor, manufacturing overheads (Jiambalvo 36). Costs are allocated to these classifications to determine the cost of products. However, this costing system does not present the true manufacturing cost of products. Most modern manufacturing companies use ABC costing for their products. This type of product costing is called ABC because it is activity based. ABC is concerned with work activities and not the transactions associated with the business operations. It links costs to cost out products or services the most efficient manner. This is because costs are allocated to cost drivers, which facilitates efficient costing because every cost is allocated to what drives that cost. Schedule of Cost of Goods manufactured and Sold The cost of goods manufactured schedule is prepared to show the total manufacturing cost of gods completed during the current period. In this case, only the manufacturing costs of direct materials, direct labor and overhead are assigned to the goods completed in that period. The cost of raw materials at the beginning of a period is added to the cost raw materials purchased and all other costs of production such as and direct overhead and labor (Epstein and Jermakowicz 94). In the schedule of goods manufactured and sold, the costs found in ending work in progress should be subtracted to obtain the cost of goods manufactured. Also, the costs of goods manufactured can be divided by the number of units produced to get the cost of goods manufactures per product. The schedule for the cost of goods sold, on the other hand is prepared after the cost of goods manufactured statement has been prepared. This can be computed by finding the manufacturing cost of the units that were sold during that period (Hansen, Mowen and Guan 32). The cost of goods sold may be or may not be equal to the cost of goods manufactured. The schedule for the cost of goods sold is usually prepared at the end of a reporting period which may be quarterly, semi-annually or annually. Just-in Time Inventory Just-in-time inventory is a system that is designed to reduce the costs associated with purchasing and storing inventory. This is done by purchasing only the inventory that is enough for manufacturing or making the required products only (Longenecker, Petty and Palich 571). For instance, a company can decide to manufacture six vehicles as ordered by six clients at a time, rather than manufacturing twenty vehicles and keeping them in the show room awaiting purchase. This means that the company will purchase raw materials that just enough for the manufacture of six vehicles. This saves the company the costs associated with storing excessive inventory that would have been purchased, as well as the cost of storing the excessive vehicles manufactured. Statement of Ethical Professional Practice In the preparation of financial statements accountants and other members who are responsible for the preparation and auditing of financial records ought to behave ethically. They should commit themselves to the professional practices as required by the IMA statement of ethical professional practice (Needles, Powers and Crosson 815). Such practices include principles, values and standards that guide conduct, which include responsibility, objectivity, honesty and fairness. The standards include integrity, confidentiality, competence and credibility (Needles, Powers and Crosson 815). Emerging Trends in Managerial Accounting Managerial accounting is affected directly by the business environment, which has recorded dramatic changes over time. There have been changes in the way businesses carry out their activities due to technological advances, emergence of the internet and the opening of global markets (Heitger, Mowen and Hansen 8). This has led to increased competitiveness and complexity in strategy. Organizations have changed the way they manage their supply chains and reach out to customers. Therefore, managerial accounting systems need to be changed to suit to the new trends by providing crucial information for company control, planning and decision making (Heitger, Mowen and Hansen 8). Works Cited Bebbington, Jan, Richard Laughlin and R H Gray. Financial Accounting: Practice and Principles. London: Thomson Learning Press, 2001. Print. CGA Magazine. "International Accounting Issues ." June 2006. Web. 12 January 2014. Epstein, Barry Jay and Eva K Jermakowicz. Wiley IFRS 2008: Interpretation and Application of International Accounting and Financial Reporting Standards 2008. Hoboken: John Wiley Press, 2008. Print. Greuning, Hennie van, Darrel Scott and Simonet Terblanche. International Financial Reporting Standards: A Practical Guide. Washington D.C: World Bank , 2011. Print. Hansen, Don R, Maryanne M Mowen and Liming Guan. Cost Management: Accounting and Control. Mason: South-Western Press, 2009. Print. Heitger, Dan, Maryanne Mowen and Don Hansen. Fundamental Cornerstones of Managerial Accounting. Mason: Thomson/South-Western Press , 2008. Print. Ingram, Robert W and Thomas L Albright. Financial Accounting: Information for Decisions. Mason: Thomson/South-Western Press, 2007. Print. Ingram, Robert W. and Thomas L. Albright. Financial Accounting: Information for Decisions: Information for Decisions. Mason: Thomson/South-Western Press, 2007. Print. Jiambalvo, James. Managerial Accounting. Hoboken: John Wiley Press, 2009. Print. Kwok, Benny K. B. Accounting Irregularities in Financial Statements: A Definitive Guide for Litigators, Auditors, and Fraud Investigators. Aldershot: Ashgate Press, 2005. Print. Longenecker, ustin, et al. Small Business Management. New York: Cengage Learning Press, 2013. Print. Needles, Belverd, Marian Powers and Susan Crosson. Principles of Accounting. Mason: Cengage Learning Press, 2011. Print. Pratt, Jamie. Financial Accounting in an Economic Context. Hoboken : Wiley and Sons Press, 2011. Print. Saudagaran, Shahrokh M. International Accounting: A User Perspective. Chicago: CCH Press, 2009. Print. Stice, Earl K., James D. Stice and Monte R. Swain. Accounting: Concepts and Applications. Mason: South-Western/Cengage Learning Press, 2011. Print. Warren, Carl, James Reeve and Jonathan Duchac. Financial & Managerial Accounting. New York: Cengage Learning Press, 2013. Print. Weygandt, Jerry J, Donald E Kieso and Paul D Kimmel. Managerial Accounting: Tools for Business Decision Making. Hoboken: Wiley and Sons Press, 2010. Print. Read More