Accounting Management Issues - Essay Example

For a business to remain sustainable, it has to deal with a lot of threats that come it's way. The threat of new entrants and the threat of substitute products are major threats that a business faces. Erecting barriers to entry can be an effective strategy to prevent new entrants from entering the market. Branding, investing heavy amounts in R&D or patents, lowering costs substantially by achieving economies of scale, restricting the supply of materials, high customer loyalty, and legal barriers are some of the barriers to entry that a company can erect to defend against the threat of new entrants.

Increasing the switching costs of the customer so that the existing customers do not buy the substitute product can help in defending against the threat of substitutes. The strategy of differentiation can also help in mitigating the threat of substitutes as effective differentiation leads to customer loyalty and a loyal customer will not shift to a substitute product For example, MacBook’s customers are very loyal to the brand and do not switch to substitute products due to the effective differentiation strategy implemented by Apple. The relative price and performance can also help in mitigating the threat of substitutes. If a product provides superior performance at a very low cost as compared to competitors, consumers would prefer that product.

Depreciation is a non-cash expense that provides for the physical wear and tear of the fixed asset in the future. The depreciation rate or method that a company applies is highly subjective and a company is free to choose a particular depreciation method to record depreciation on fixed assets. If a company uses a low depreciation rate or uses a straight-line depreciation method, it can result in lower depreciation expense and thus overstated assets. Difficulties in estimating the number of future commitments (such as guarantees) can result in an understatement of liabilities. Furthermore, not recording a liability such as a loan payable may also understate the liabilities.

Management usually engages in these types of choices to show an inflated income in the income statement or to show a healthy financial position of the company. Not recording a loan payable intentionally can be categorized as fraud but all the other policies used to inflate the earnings are by the allowed practices of accounting.

According to Bob Herz, executives usually hide their bad decisions by blaming the accountants. But the actual purpose of accounting is to inform the investors and the capital markets about the company. The difference in accounting policies is blamed for presenting a poor picture of the company. Critics argue that a company can manipulate its financial position by using different accounting policies and hence this leads to making wrong decisions. Bob Herz argues that it is the poor business decisions and faltering financial condition that brings the downfall of companies and leads to crisis. Blaming accounting for misrepresenting reality is not the solution instead executives should own up to their business decisions that lead to the downfall of the company.

The company’s profitability has increased over the years and this increase in profitability has also resulted in a higher operating cash flow of the company, which indicates that the earnings are translated into operating cash. The net income and cash flow figures indicate that the company is in good financial health.

The company has paid cash dividends to its shareholders and has also repurchased shares from the shareholders. The amount of cash dividend per share increased from $0.675 in 2011 to $0.975 in 2012. This may indicate that the company is investing the excess cash in the business to explore investment opportunities.