Financial accounting in an economic context - Coursework Example

FINANCIAL ACCOUNTING By Financial accounting Question one A ment of financial position, which is also referred to as the balance sheet, is a brief summary of the financial position of a company at a particular date. It usually consists of three components namely the assets, liabilities and equity. Assets are items with an economic value attached to them which are owned by an individual or a company and which could easily be converted into cash. Assets, which mainly deliver their financial benefit for a period longer than one year, are referred to as the noncurrent assets.

Machinery, buildings and land are a few examples of the noncurrent assets. Conversely, current assets such as cash, inventory and accounts receivables are assets, which are expected to provide the economic benefits for less than one year. Liabilities are financial obligations that are owed to other entities by the company. They are classified as current or non-current depending on the time the company intends to settle the liability. Equity is the investments that are made by the shareholders of the company to the company itself.

Statement of financial position assists the users to assess the financial health of a business and determine the financial risk and credit worthiness of the company. Investing in a new engine and car factories will increase the noncurrent assets owned by the company while reducing the current assets and specifically cash in hand. The decision will also affect equity. Financing the factory construction from debts will reduce the owners’ equity. The income statement is a brief summary of the financial performance of a company over a specific accounting fiscal period.

The financial performance is examined by comparing the revenues generated against the expenses incurred by the company so as to show the net profit or loss that is incurred over a specific accounting period. Construction of the companies will result in an increase in the net profit of the company. Building the factories in China, which is a lucrative market, will reduce the cost of shipping the cars as well as labor which is cheaper in China than in United Kingdom. Question 2 There are several modes of asset financing at the disposal of Jaguar Land Rover to choose from in the construction of its factories, which are long-term assets.

The methods includes equity financing such as common stock, corporate bonds which are long-term debt instruments with a maturity period of more than one year from the date of issue and capital notes which are securities which can be converted be converted into shares. Question 3 The advantages of equity financing are that they are less risky in terms of cash flow commitments. Conversely, the disadvantages are that the cost of capital is very high and there is dilution of ownership and control of the company since the holders of the shares have a measure of control in the company.

The advantage of using capital notes is that there is a reduced risk of defaulting payment as the time-frame for the payments is usually higher and no assets are used as collateral. The disadvantages are that the risk reward is not reflected in the percentage discount. Car makers ‘printing cash’ in China Question 1 Since China has been a lucrative market for General Motors for a sometimes, there would be a reduction in their net profit since its operations in the country are fetching enormous incomes compared to other ventures in other parts of the world.

This may be attributed to lower cost of doing business in the country as well as cheap availability of cheap labor. China has occupied the top spot as the world’s largest market fro Volkswagen vehicles with 31%. A huge chunk of Volkswagen profits also emanated from china and therefore pulling out of the China market would be accompanied by a huge drop in the income and net profit of the company. Question 2 The recall crisis has resulted in an increase in expenses by $3.1 billion and therefore in the income statement, there would be an increase in the reduction in the net profit since the revenues remains the same.

Ford commits to Cologne Fiesta plant in union deal Question 1 The action taken by Ford will reduce its production cost by reducing the labor cost and therefore enable it to continue its Cologne factory. Therefore the profit margins will be higher as a result of reduced expenses. Question 2 Relocating to a lower cost market would result in the closure of the Cologne factory and therefore it will not be generating any income. However, the lower cost market in which it will relocate can provide a higher profit margin than in Germany where the cost of production is higher.

Question 3 The shareholder has granted the power to make quick decisions that would affect the profitability of the company to the board of directors. The shareholders will be content with the decision since they would want the highest return on their investment. Reference Pratt, J. (2011). Financial accounting in an economic context. [Hoboken, NJ], Wiley.