Accounting Theory and Analysis - Assignment Example

Accounting Theory and Analysis 308 SECTION A: Two important areas of Accounting Theory Accounting Theory refers to the logical explanation of the principles and practices that guide the accounting function, such that an accountant would understand exactly why different accounting activities are undertaken in the way they are done, and not in a different way (Chambers & Dean, 2013). In this respect, accounting theory serves as the basis upon which the accountants draw their accounting practices, so that they can be able to establish books of accounts and financial statements in a manner that is universal, for the sake of serving the interest of all the stakeholders. Therefore, Accounting Theory charts the scientific way of establishing logical solutions to problems faced in the real world business environment, especially related to financial reporting and the applicable accounting practices that enables the realization of the prudent financial reporting for different business and organizations (Funnell, Warwick & Cooper, 2012). The major two areas that are covered under the Accounting Theory, which are applicable and relevant for this job position are the Accounting Objectives and the Accounting assumptions. Accounting Objective as an important area of Accounting Theory The Accounting Theory establishes the objectives of the accounting function within a business organization, meant to prepare the accountants to understand what their roles under the accounting functions of an organization entail. Thus, the Accounting Theory stipulates the major objective of the accounting function as that of financial reporting (Chambers & Dean, 2013). The function of reporting the financial position of a business entails the preparation of the relevant financial records, maintaining books of accountants, which entails the preparation of the relevant financial account statements and accounts reports. Under the financial reporting objective of accounting, the accountant is supposed to maintain the records of the daily transactions of an organization or business, ranging from all the purchases, sales, payments, assets acquired and the liabilities incurred, which are then converted into monthly financial statements in the form of balance sheets and income statements, and finally into annual financial reports (Picker, 2010). This way, the accountant is in a position to show the exact financial position of a business on a daily, monthly, quarterly and annual basis. Financial reporting seeks to update the stakeholders of the organization on the progress of the business organization, which then enables the different stakeholders to make the relevant decisions for the business (Funnell, Warwick & Cooper, 2012). The management may use the financial statements to make policies and strategies that are relevant for the business to continue its growth prospective, while the potential investors may determine whether it is worth to invest in the business. On the other hand, the shareholders determine the likely value of their business and the government determining the amount of tax to be charged on the business. The relevance of this area of the Accounting Theory to the job position of an assistant accountant in the Australian Gold Mining Company is that; it provides for the procedures to be followed in preparing the monthly financial accounts and reports to the senior management, while at the same time defining the parameters that are applicable in auditing the accounts of the company and providing the necessary guideline for tax compliance financial accounting. This way, the accounting objective of the Accounting Theory is useful for this job position, since it defines the procedures and guidelines under which the required accounting activities of the company will be undertaken. Accounting Assumptions as an important area of Accounting Theory The other important area that the Accounting Theory covers, is the area of accounting assumptions, which offers the major suppositions under which the accounting function works. The first accounting assumption as presented under the accounting theory; is the going concern assumption, which provides that in the preparation of the financial accounts, the assumptions should always be that the business will continue to operate in the near future (Dagwell & Lambert, 2007). The assumption helps to guide how accounting of certain future costs should be done, for example depreciation of the company’s asset, which should be spread through to the foreseeable future of the company as a future cost. This assumption is an essential guideline for the position of an assistant accountant in the Australian Gold Mining Company, since the job description entails advising on resource allocations and accruals adjustment, which are activities guided by the going concern assumption (Greite, 2007). The other relevant assumption under the Accounting Theory is the historical cost assumption, which requires that all the assets of the company are recorded in the balance sheet on the basis of their historical value, as opposed to the current market value, for the sake of ensuring consistency in the valuation of the company’s asset value worth (Langfield-Smith & Thorne, 2002). This assumption is also very essential for the position of an assistant accountant in the company, since it helps in guiding the accountant on how to account for assets of the company, to be able to reflect the true worth of the company, due to the fact that one of the duties of the assistant accountant in the company is that of financial accounts reconciliation. Bibliography 1. Chambers, R.J. and Dean, Graeme W. Chambers on Accounting: Logic, Law and Ethics. (Routledge, 2013). 2. Funnell, Warwick, and Kathie Cooper. Public Sector Accounting and Accountability in Australia. (Sydney: UNSW Press, 2012). 3. Picker, Ruth. Australian Accounting Standards. (Milton, Qld: John Wiley & Sons Australia, Ltd, 2010). 4. Dagwell, Ron and Cecilia Lambert. Corporate Accounting in Australia. (Sydney, N.S.W.: University of New South Wales Press, 2007). 5. Greite, Stefan. The development of the Australian accounting standards after the end of the G4+1. (München: GRIN Verlag, 2007). 6. Langfield-Smith, Kim, and Helen Thorne. Management Accounting: An Australian Perspective. (Sydney: McGraw-Hill, 2002). SECTION B: Accounting standards and regulation does little to stop company failure The argument that “accounting standards and regulation does little to stop company failure” can be held to be misleading, on the one hand, but also to be reflective of the true situation on the other hand, owing to the fact that the accounting standards and regulation have registered mixed reactions for companies, where they have helped to deter possible frauds that would have collapsed major companies at times, while being blamed for the failure of other companies (Picker, 2010). The collapse of the major Australian companies such as the ABC Learning, HIH Insurance and One.Tel has been largely blamed on the failure of the accounting standards and regulations, since the major causes of failure of such companies has been traced back to the accounting function of the companies (Langfield-Smith & Thorne, 2002). In this respect, it would be rightly argued that the existence of accounting standards and regulations have done little to prevent company failures, since these major companies failed when there were still strong accounting standards and regulations guiding how companies should undertake the accounting and financial reporting functions. Nevertheless, while the accounting standards and regulations have been blamed for these failures, it is the ethical factor, more than the accounting factor that can be attributed to the failure of the three major Australian companies (Langfield-Smith & Thorne, 2002). Additionally, owing to the fact that there is still a gap in the Australian accounting standards, which have to depend on the USA GAAP for guidance where the requisite Australian accounting standards are missing, then the accounting standards and regulations can rightly be blamed for the failure of the companies (Chambers & Dean, 2013). Nevertheless, the argument that the accounting standards and regulation does little to stop company failures can be termed as misleading, owing to the fact that it is due to the existence of accounting standards that many companies have been able to survive, grow and emerge as industry giants or even global outfits. Secondly, the ever changing economic environment, corporate social responsibility demands, political interference, coupled with the corporate governance pressures on the accounting function of different companies can be blamed for the failures of companies, as opposed to blaming the accounting function (Godfrey, 2010). This is because, with the proper application of the accounting standards, the business organizations are shielded against losses that might arise from the misappropriation of the company assets, since the accounting standards guide how each asset and liability of the business should be accounted for (Funnell, Warwick & Cooper, 2012). Thus, without the existence of the accounting standards and regulations, it would be very difficult to effectively account for all the assets and liabilities of the business organizations, since different businesses organizations could apply different formats, principles and standards of accounting, which in turn could eliminate the universal advantage derived from standardized financial reporting for all business organizations, in terms of the comparability. The Australian accounting standards are regulated by two main legislations, being the Uniform Tax Act and the Uniform Companies Act, which are in agreement with the International Financial Reporting Standards, while differing a in certain aspects with the USA GAAP (Chambers & Dean, 2013). Despite the fact that company failures have still occurred even with such regulations, they have helped to avert the collapse of many companies, through streamlining the financial accounting and reporting practices for companies (Hagan & Staunton, 1986). The recent accounting debate is on how the American Generally Accepted Accounting Principles (GAAP) can be harmonized with the International Financial Reporting Standards (IFRS), such that a universal global system of financial accounting and reporting can be established, which will ensure that all business organizations globally follow the same system of accounting (Langfield-Smith & Thorne, 2002).The need for this move has been informed by the fact that there is a need for harmonized financial reporting system for businesses globally, which would help to offer universal comparability and eliminate any discrepancies in the financial accounting for different business entities globally. The technological advancement, globalization of businesses, increased public and business community awareness and education are major factors that have increased pressure on the accounting functions of companies, creating even more difficulties for the accounting standards and regulations to work appropriately towards shielding companies from failures (Godfrey, 2010). The ethical factor also plays a great role in determining the failure of companies, due to the fact that ethics cannot be regulated through accounting standards and regulations (Porwal, 2001). This explains the need to harmonize the global accounting standards and regulations, as a way of curbing the accounting loopholes that could arise from the existence of parallel systems of financial accounting and reporting, which in turn would help to avoid company failures. This way, any disparity in the financial statements can easily be noticed, and the problem resolved in good time, just before the discrepancies becomes huge losses that might lead to the failure of businesses (Hoggett, Edwards & Medlin, 2003). Therefore, the existence of accounting standards and regulation has been instrumental in helping to avoid company failures. Bibliography 1. Picker, Ruth. Australian Accounting Standards. (Milton, Qld: John Wiley & Sons Australia, Ltd, 2010). 2. Dagwell, Ron and Cecilia Lambert. Corporate Accounting in Australia. (Sydney, N.S.W.: University of New South Wales Press, 2007). 3. Langfield-Smith, Kim, and Helen Thorne. Management Accounting: An Australian Perspective. (Sydney: McGraw-Hill, 2002). 4. Chambers, R.J. and Dean, Graeme W. Chambers on Accounting: Logic, Law and Ethics. (Routledge, 2013). 5. Godfrey, Jayne M. Accounting Theory. (Milton, Qld: John Wiley, 2010), 12 6. Hagan, L. L., and J. J. Staunton. Nonprofit Accounting and Australian Accounting Standards. (Armidale, N.S.W., Australia: University of New England, 1986). 7. Porwal, L. S. Accounting Theory: An Introduction. (New Delhi: Tata McGraw-Hill, 2001). 8. Hoggett, John, Lew Edwards, and John Medlin. Financial Accounting in Australia. (Milton, Qld: John Wiley & Sons Australia, 2003) SECTION C: Caltex Australia Case study Question (a) The balance date of the financial statements is 24 February 2014 (Caltex, 20014 p3), and the financial statements are prepared in USA dollar ($) as the reporting currency (Caltex, 20014 p4). Question (b) The company’s net profit for the current year is 2013 full year of $530 million, while the net profit of the company for the previous year was $57 million (Caltex, 20014 p6). Question (c) The directors explain the profit for the current year by saying that the profit shot upwards due to the incorporation of several gains that the company made from some extra-operational business transactions. First, the company made $26 million after tax gains, having sold its Sydney bitumen business (Caltex, 20014 p6). In addition, the company registered an inventory gain of $172 million after tax in products and crude oil, which is a great gain compared to the $92 million after tax losses that the company had incurred in inventory in the year 2012 (Caltex, 20014 p6). Further, marketing and product distribution recorded a 4% growth in the 2013 compared to the same in 2012, thus increasing the profitability of the company (Caltex, 20014 p6). In relation to the future growth prospective, the directors say that the company will continue to grow its supply chain of high growth products to more geographies ad channels (Caltex, 20014 p7). Further, the company targets to change its Kurnell refinery from a refinery into a fuel import terminal, to enhance the reception of crude oil from the suppliers, while leveraging its Lytton refinery for higher productivity (Caltex, 20014 p7). With such prospective changes, the directors are optimistic that the company will continue to grow both in its market and profitability, despite the increasing competitiveness of the industry. Question (d) The company’s debt position is impressive, owing to the fact that the company had a Net debt of $742 million as at 31 December 2013 (Caltex, 20014 p7), which then gives the impression of a high credit rating for the company, since the company made a profit of $530 million for the same year (Caltex, 20014 p6). Question (e) Legitimacy theory has been applied in the financial report, under the changing landscape section of the report, where the company explains its commitment to Australia for the last 113 years, where it has evolved in structure and strategy for the sake of meeting its customers-ever evolving needs (Caltex, 20014 p6). Consequently, the company ranks as the largest fuel products offering company as well as the outright leader in transport fuels throughout the whole of Australia (Caltex, 20014 p6). Question (f) The quality of company’s corporate governance systems is good, due to the fact that the governance system allows for extra disclosure of information that could otherwise be concealed. This is done by allowing the disclosure of the company’s replacement cost of sales profit basis, which excludes the net inventory gains, despite the fact that such disclosure would show the profitability of the company as low (Caltex, 20014 p35). Question (g) The company addresses “agency costs” through its corporate governance systems, through for example, providing its management with incentives that are not considered as profit sharing, even though they might end up reducing the shareholders value (Caltex, 20014 p74). The payment of such incentives are based on factoring in externalities that are not well defined, thus the level of such incentives cannot be limited to certain levels. Question (h) The company has reported philanthropy in their annual report, which states that the company is committed to serve the communities in which it works and lives, and as a result, the company has supported a wide range of events, programs and organizations, as well as offering direct support to local communities, through its refineries, import terminals and service stations, wherever they are distributed (Caltex, 20014 p48). Question (i) Philanthropy is an important element for accountants to acknowledge and consider in business because; it entails financial expenditure by the business outside its normal operational expenses (Porwal, 2001). This then requires that such expenses must be accounted for, in order for the revenues of the business to balance with the overall expenditure. Bibliography 1. Caltex. Caltex Australia: 2013 Annual Review. (Caltex: 24 February 2014)1-162. 2. Porwal, L. S. Accounting Theory: An Introduction. (New Delhi: Tata McGraw-Hill, 2001). Read More