Major Issues in Business Accounting - Assignment Example

Unit 5: Business Accounting P1. Describe the purpose of accounting for an organisation [IE] Accounting can be defined as the action of recording, reporting, and analysing financial transactions of business to be used for decision making by the firm’s stakeholders (Juan 2). In addition, accounting practice and profession has been growing over the years since the ancient ages when business activities were primarily based on barter systems. The Industrial Revolution of 19th century coupled with an increase in population introduced the development of commercial activities within continents, as well as increased production of goods and services and the evolution of credit facilities, thus necessitating the need of accounting services. This made the recording of business transactions and activities an important factor. In recent years, accounting has undergone several transformations; among its purposes include having a permanent record of all of the business’ transactions, keeping records of income and expenses, and keeping records of assets and liabilities for ascertaining financial position of the business. Another purpose is to keep control of the expenses while maximizing profits, keep records of customers and the amount they owe to the business, know suppliers and their owing to the business, and eventually to have information for legal and tax purposes in relation to the location of the business (Juan 3). In this paper the chosen organization is Apple Inc. Like every other MNCs, Apple also publish their Cash flow statement, Profit and Loss statement and balance sheet every year. It is not only helpful for the investor to analyse the performance of the company but at the same time experts also make their prediction based on these report regarding how the organization is going to perform in coming years. P2. Explain the difference between capital and revenue items on expenditure and income [TW] According to Collins Richards, all income received and all expenditure spend in a business should always be accounted for either in terms of capital or revenue (42). The difference between capital and revenue items of expenditure and income is the total amount of wealth found in a business that has subsequently been used to produce income. In the books of accounts, capital does not change – it is maintained intact - separated from other forms of finance with a clear clarification showing losses and profits. Revenue items in the books of accounts on the other hand are either income or the expenditure showing the daily business transactions. Income is represented by profits while expenditure is represented by losses. As profits withdrawn from the income reduce the available capital, the losses incurred by the business reduce the available capital too (Richards, 42). In common terms, expenses in terms of fixed assets are classified under following two heads: Capital Expenditure and revenue Expenditure. Capital expenditure can be define as expenses incurred by any organization while acquiring any fixed assets for their own development and as par their business strategy along with any other expenses which in long run can help the organization to increased its earnings as well as profitability. Capital expenditure generally consisted of following: Cost of purchasing any particular asset for future, cost of delivery and legal cost; cost associated with installation of the same as well as cost incurred in maintaining that particular asset and replacement cost associated with the same. Likewise, revenue expenditure is another critical aspect of any organization. It is basically associated with maintaining the assets of the organization which are key for increasing the earning capacity. These are more frequent expenses of any organization and the benefit of this kind of expenditure are also obtained within a short timeframe. The components of revenue costs are: repairing cost and the maintenance charges of any device, cost incurred while repairing any particular machinery and renewal expenses associated with the same such as maintenance, warranty extension, servicing etc. P3. Prepare a 12-month cash flow forecast to enable an organisation to manage its cash [CT,RL,SM] A Figure showing cash flow forecast for Apple Cash Flow forecast Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Opening Balance 0 1090 1090 1150 1090 1140 1290 1320 1420 1660 1725 1720 Capital 1000 Sales Paid 50 70 80 60 100 200 150 200 300 200 100 100 Loans 200 150 200 100 150 150 100 100 150 100 50 150 Total Income 1250 1220 280 160 250 350 250 300 450 300 150 250 Expenditure Salaries 50 50 70 70 50 50 65 50 50 50 65 65 Office Rent 100 100 100 100 100 100 100 100 100 100 120 120 Utilities 20 25 30 25 20 20 25 20 25 30 25 25 Taxes 10 25 20 25 30 30 30 30 35 55 45 15 Total Expenditure 180 200 220 220 200 200 220 200 210 235 155 225 Balance 1070 20 60 -60 150 150 30 100 240 65 -5 25 Cumulative Balance 1070 1090 1150 1090 1140 1290 1320 1420 1660 1725 1720 1745 Reference (Graham, 15) If we analyse the cash flow statement, it is very clear that along with the time, the expenditure is continuously increasing along with the cumulative balance. Generally any cash flow statement is divided into three different parts: operation, investment and financing. Generally by analysing the cash flow statement one can easily understand how the company is looking to raise fund and under what heads they are making expenses. From the above cash flow analysis of Apple it is clear that in long run company is expecting to increase its earning from sales and therefore the volume of loan will come down considerably. Over the time, the income of the company will gradually increase and also to ensure the growth of the organization expenditure on account for salaries, taxes will continue to grow. Overall, the cumulative balance of the company will increase over the time. P4. Prepare a profit and loss account and balance sheet for a given organisation [SM] A profit and loss account and balance sheet for company ABC for the year ending December 31st 2013 $ $ Sales Revenue 10,000 Less Cost of Sales Opening Stock 5000 Purchases 3500 Less closing stock 1,500 Gross Profit 8,500 Less Expense Utility 20 Salaries 300 Supplies costs 75 400 Net Profit 8,100 Less Tax 350 Net Profit after tax 7,750 Source: (Pinson 69): Keeping the Books: Basic Recordkeeping and Accounting for the Successful Small Business. Apple’s Balance Sheet for 2012-2013 (Hypothetical) Parameters Budgeted Actual   Million $ Million $ Income 125000 117230       Sales 80000 74580 Patent rights 20000 18000 Miscellaneous 25000 24650       Expenses 84866 79308       Salaries 29750 28540 Expense of Internet 5800 5400 Electricity 3254 3256 Property Rate & Tax 7450 5460 Insurance 1250 1200 Advertising Cost 10000 9800 Stationary 8000 7800 Bank Charge/interest 13560 12450 Tax Expenses 5802 5402       Total Earning 40134 37922 P5. Perform ratio analysis to measure the profitability, liquidity and efficiency of a given organisation [CT] Liquidity Ratio = 23.1 The basic significance of liquidity ratio is it helps the investors to decide on their future strategies and that is whether to invest in the particular organization or not. Here in case of Apple INC. the liquidity ratio is positive which clearly indicates that it is a great option for investors to invest. Profitability Ratio = 5.6 Basically the profitability ratio is helpful to analyse whether the company is in a good position to make future profit or not. This helps the investors to analyse the capacity of the company to generate profit, increase sale volume and also help to analyse the capacity of the company to acquire more assets for their expansion. Generally if the profitability ratio is high then it is a clear representation that the company is in very good state in terms of future business performance. Efficiency Ratio Efficiency Ratio = 1184.09 Source: (Ungson &Wong, 498). M1. Analyse the cash flow problems a business might experience Adequate cash flow is a significant factor that keeps a successful business running, but in a situation when a business has insufficient cash to handle daily expenditures, it results into a cash flow problem. The cash flow problem can be contributed by several factors. First, drop in bank account balances below the normal average levels is typical sign of a cash flow problem. This can be due to an increase in business expense without a considerable equal amount of profit from sales to counteract it and either neutralize it or boost savings. An increase in sale means a subsequent increase in the amount of profit, hence more revenues (Weltman & Silberman 78). Another factor that is more likely to contribute to problems in cash flow is a dip in sales outlook; a decrease in the level of sales in a business affects the business negatively. Low sales lead t less revenues and subsequently less profit, especially when expenditure does not proportionately decline. This automatically affects the cash flow stability and forthwith cash flow problems (Weltman & Silberman 78). When stock takes a little bit more time on the shelf without being bought or for unexpected longer period, it brings a situation of less sales hence low revenue. A delay in settling significant business bills will eventually indicate the onset of the cash problem; a default payment of some debts leads to a penalty or accrued interests, which further puts pressure on the revenue earned by the business, setting a future scenario of cash flow problem (Weltman & Silberman 78). Generally, a business experiences cash flow problems when its sales and revenue do not match its expenditure; that is, its expenditure level outweighs its income, and this can actually lead to its closure. M2. Analyse the performance of a business using suitable ratios Financial ratio can be described as a relative magnitude comprising of two numerical values, which are normally selected from a business financial statements. They are to quantify several business aspects and are important part of financial statement analysis. According to Groppelli & Nikbakht, financial ratios are normally categorized as per the financial aspect of the business, which the ratio measures. The Liquidity ratios are used to measure the availability of cash to pay the debt, which the business owes. The efficiency ratio is used to measure how fast a business converts assets, which are not in cash form to the actual cash assets (Groppelli & Nikbakht, 433). Profitability ratios are used to measure the business’s use of its resources or assets in controlling its expenses to generate viable profits. In business setting, financial ratios allow comparisons between companies, financial periods, and between a company and its industrial environment amongst others. They can only be useful if they are compared by some of the factors named above (Groppelli & Nikbakht, 433). D1. Justify actions a business might take when experiencing cash flow problems Pitt, Handford & Lisboa reiterate that, however small a business is, proper management of cash flow should always be highly followed to avoid pitfalls and risk business closures (105). The gap between revenue and expenditure should always be checked. Moreover, payment of bills on time is among the actions a business should take in order to restore cash flow. Bills paid on time reduce the amount of extra cost charged by creditors on overdue debts through interests; this eats up on the revenue base of a business (Pitt, Handford & Lisboa,, 105). Increase of sales through advertising and introduction of after sales services will automatically boost the revenue base, as the more the sales, the more the revenue, and a comfortable income condition. Strategically raising the price of the goods or services of the business will subsequently increase the revenue. The owner of the business can decide to add value to the goods or services he/she offers their customers and in return will raise a certain percentage of the prices without the customer feeling unfairly discriminated upon. Business should use cash flow tracking methods that will promptly show the onset of cash flow problem and implement methods to curtail it before it worsens into a crisis (Pitt, Handford & Lisboa, 105). D2. Evaluate the financial performance and position of a business using ratio analysis Financial ratios are actually not directly comparable between two different firms, which use accounting methods that are different. Liquidity ratios are significant in a way that they normally measure how better a firm is in a position to settle its credit standings without applying unfavorable contingent methods. Firms can use efficiency ratio to signal an increasingly alarming liquidity problem if returns start to go against credit terms. The ratio analysis has the ability to assist an organization to identify several areas that are needed to be evaluated and improved henceforth (Brigham & Houston 90). 2013 2012 2011 2010 Gross Profit $64,304,000 $68,662,000 $43,818,000 $25,684,000 Net Sales $170,910,000 $156,508,000 $108,249,000 $65,225,000 Profitability ratio 0.38 0.44 0.40 0.39 Source: NASDAQ The profitability ratio shows that position of Apple’s profits has shown a slight fall from 2012 to 2013 and so has its profitability. Their position in 2012 had shown a sharp increase compared to previous years. 2013 2012 2011 2010 current assets $73,286,000 $57,653,000 $44,988,000 $41,678,000 current liabilities $43,658,000 $38,542,000 $27,970,000 $20,722,000 current ratio (liquidity) 1.68 1.50 1.61 2.01 NASDAQ The current ratio/liquidity ratio shows that the ability of the company to meet its debt over next 12 months has been improving from 2012 to 2013. But it had showed a fall from 2010 to 2012. There is no abnormal increase which shows that there is no idle resource. Efficiency ratios 2013 2012 2011 2010 credit purchase 36223000.00 32589000.00 23879000.00 17738000.00 cost of sales 106,606,000 87,846,000 64,431,000 39,541,000 creditors payment period (days)= (credit purchase/cost of sales)*365 124.0211151 135.4072468 135.2739365 163.7381452 (NASDAQ) The above table shows that the company’s position in paying off its creditors’ has improved as the number of days has decreased overtime. 2013 2012 2011 2010 net receivables (trade debtors) $24,094,000 $21,275,000 $13,731,000 $11,560,000 net sales $170,910,000 $156,508,000 $108,249,000 $65,225,000 debtors days (net receivables/net sales)*365 51.45579545 49.61647328 46.29894964 64.68991951 (NASDAQ, 2013) Business is taking more time gradually to convert credit sales into cash. This might be combated by giving some early payment incentives etc. 2013 2012 2011 2010 inventory $1,764,000 $791,000 $776,000 $1,051,000 cost of sales $106,606,000 $87,846,000 $64,431,000 $39,541,000 Stocks’ turnover ratio (cost of sales/inventory) 60.43424036 111.05689 83.02963918 37.62226451 (NASDAQ) The quicker a business turns off its stock the better. However one has to do that profitably. The above results show an improvement in this respect. So as per efficiency ratios the company Apple, Inc has been performing well. References & Bibliography Brigham, Eugene & Joel Houston. Fundamentals of Financial Management. OH: Cengage Learning, 2009. Graham, Alastair. Cash Flow Management-Cash Flow Forecasting and Liquidity. Chicago: Global Professional Publishing, 2000. Groppelli, Angelico & Ehsan Nikbakht. Finance. NY: Barrons Educational Series, Inc., 2000. Juan, Donatila. Fundamentals of Accounting: Basic Accounting Principles Simplified for Accounting Students. Bloomington: AuthorHouse, 2007 NASDAQ, Apple Inc, 2013, Pinson, Linda. Keeping the Books: Basic Recordkeeping and Accounting for the Successful Small Business. Chicago: Kaplan Publishing, 2007. Pitt, Angela, Michael Handford & Martin Lisboan. Business Advantage Intermediate Students Book. Cambridge: Cambridge University Press: 2012. Richards, Collins. Keeping Books and Accounts for Small to Medium Size Businesses. NY: Beforts Press Herts, 2012. Ungson, Gerardo & Yim-Yu Wong. Global Strategic Management. NY: M.E. Sharpe Publishing, 2010. Weltman, Barbara & Jerry Silberman. Small Business Survival Book: 12 Surefire Ways for Your Business to Survive and Thrive. NJ; Wiley Publishers, 2006. Read More