An Overview of the Companys Accounting Systems - Essay Example

Memorandum to the bank al affiliation AN OVERVIEW OF THE COMPANY’S ACCOUNTING SYSTEMS Thismemo provides an overview of the company’s financial systems including the basis of accounting used by the company. Also included in this memorandum are the strategies used by the company to ensure responsible accounting principles in the company and an in-depth analysis of the rules of operations. The memo also discusses the changes in operations that can be made with the aim of making the company more profitable. Then company’s financial strengths and weaknesses are also discussed in the memo. The opportunities that the company can explore are also discussed comprehensively in this memorandum. The company uses general accepted accounting principles {GAAP} Accounting Principles are basic rules that control the accounting for a business entity. Generally accepted accounting principles are a set of rules and standards provided by financial accounting board like the FASB. Being a public entity, the management of the company must ensure that its final accounts i.e. financial statements are prepared in accordance to GAAS. This ensures that entire accounting system has a similar reporting standard. It also ensures that an accounting procedures adopted is maintained. For instance, if the firm decides to use the reducing balance method to depreciate its plant property and equipment then this method is used continuously. Strategies employed by the business to ensure responsible accounting practices The company has adopted the following basic accounting principles in preparation of its accounts. The basic accounting principles include: 1. Economic Entity Assumption; the assumption ensures that there is a clear distinction between the company and its owners. 2. Monetary Unit Assumption; the business only records transactions that can be measured or that have an economic value which be clearly stated. The effects of inflation are avoided when recording accounting transactions. 3. Time Period Assumption; It assumes that it is possible to report a relatively complex and ongoing economic activities in a short period. For instance, it is recorded weekly monthly quarterly or even annually. 4. Cost Principle; all amount shown in the financial statement should be at its historical cost. Economical changes that affect value of such transactions are not reflected in the values used in financial statement like inflation. 5. Full Disclosure Principle; all-important information should be fully disclosed when preparing final financial statement. 6. Going Concern Principle; financial information should be prepare on assumption that the business will not be liquidated in the foreseeable future. Any suspicion of a financial status that may affect this principle should be categorically disclosed. 7. Matching Principle: all account should be prepared on accrual basis. It requires that revenue be matched by respective cost or expenses incurred to generate it. 8. Revenue Recognition Principle; revenue should be reorganized when it is realized rather than when cash is received. The Company has adopted the following Basic Accounting Principles in preparation of its accounts to ensure that its final accounts are well managed. For example, the financial statements are prepared in accordance with GAAS. This ensures that accounting systems of all businesses are similar reporting standards. The overall accounting process The accounting process of the company is divided into three. They include the recording reversing entry of the previous financial period, recording individual transactions and finally closing the books and preparation of financial statements as explained bellow. Beginning of Period Processing ensures that all reversing transactions are properly reversed to avoid recording a transaction more than once. The uses of individual Transactions include: The identification of each type of transaction like sales, purchases and others. The next step is preparation of documents. These documents are prepared to act as source documents of a transaction like an invoice note. Used to identify accounts. Each transaction should be recorded in various accounts like assets and liability expenses. The person in charge should ensure that a correct account is identified for all transactions. Used to record the transactions. The final step in the beginning period process is to record transactions into accounts. Period-End Processing; this step involves the arranging all the information captured in the previous steps and presenting them in a final financial accounts or statements. These accounts are prepared in the following order: Prepare trial balance: This is a list of final balance of all accounts prepared in the previous steps. Adjusting trial balance: this involves correction of various aspect of trial balance like detected errors, accruals and prepayments. Prepare financial statements: It uses adjusted trial balance to prepare final financial statements like income statement balance sheet and cash flow statement. Close the period: It balances the revenue and expense accounts and ensures that they are shifted into the retained earnings account. It also ensures that they are ready to receive transactions of the next financial period. Prepare a post-closing trial balance. This ensures that all balances of revenue and expense accounts have zero balances. The internal controls for cash that are in place The company has put in place several measures to ensure that cash is properly managed. Some of these controls includes; banking daily cash receipts, and making payment-using cheques. Vertical analysis of financial statements Vertical analysis of financial statements Peyton Approved Peyton Approved Balance Sheet Income Statement For The Period Ended 12/31/2014 For The Year Ending 12/31/2014 Assets   Liabilities And Owners Equity   Bakery Revenue 100% Current Assets   Current Liability   Merchandise Sales Revenue 0% Cash 92% Accounts Payable 13% Total Revenue 100% Baking Supplies 1% Interest Payable 0% Expenses   Misc. Supplies 0% Salary And Wage Payable 1% Cost Of Goods Sold Fifo 0% Prepaid Insurance 1% Total Current Liability 13% Total Expense 52% Prepaid Rent 2% Note Payable 10% Net Income 48% Merchandise Inventory Fifo 0% Common Stock 21% Total Expense 52% Total Current Asset 95% End Retained Earnings 55% Net Income 48% Baking Equipment 5% Equity 76%   Less Depreciation 0%   0%   Total Asset 100% Total Liabilities And Owners Equity 100%       Analysis of results of operations The gross income from operation is 48%. This implies that the cost of production is relatively low. This in turn indicates a high profits margin. Analysis of financial statements For proper and easy interpretation, I have done vertical analysis of financial statements i.e. balance sheet and income statements. I have expressed income as a percentage of net revenue and balance sheet items as percentage of either total asset and total liability and equity. This type of analysis makes these financial statements user-friendly and easy to compare these statements to other firms within the industry. The Percentages net profit in comparison to revenue is 48%. This is a good profit merging and it indicates that the firm is making profit and has future growth ability. The supernormal profits also indicate the extent of monopoly in the industry. Ratio analysis This is a very important tool in analyzing business performance. Some computed ratios are discussed as follows: a) Current Ratio indicates relationship between current asset and current liability 7.114366 is a good potation of the firm. It indicates that the firm has sufficient working capital. b) Quick Ratio indicates that current liability to quick asset is 7.024698 c) Net Working Capital Ratio is 0.818688. This indicates that the company can meet its current obligations. d) Cash Ratio indicates that the firm can pay for its current obligation even if it has stopped all operations. e) Inventory turnover this indicates that inventory was turned over 113.1409 times f) Fixed Assets Turnover Ration fixed assets are used 28.64849274 times to generate sales g) Total Assets Ratio total asset is used 1.358397936 times to generate sales h) Return on Equity Ratio the company generates 0.85608241 for each dollar invested in the firm i) Profit Margin Ratio this shows that 0.480035815 of net revenue are profits. This can be used to control cost of sales and related expenses. j) Basic Earnings Power Ratio this shows how total assets is utilized to generate gross income 0.703186209 k) Total Debt Ratio this ratio indicates the extent or level of financing total asset by debt 0.238298027 l) Interest Coverage Ratio; this ratio indicates that interest can cam be paid with ease from current operations i.e. 224.5119333 times m) Debt/Equity Ratio is 0.312849428 and this ratio is an indication that the firm is lowly geared Changes in operations  The firm should improve on its marketing strategies to increase revenues generated from operations. It should also explore other market with an objective of profit maximization. Improved assets should be installed to ensure that efficiency is improved. These changes will help to improve profitability of the firm thus maximizing shareholders’ wealth Financial strengths and weaknesses The company has a very low gearing ratio; this can be used to the firm’s advantage to acquire additional finance. One major financial weakness is cash and cash equivalent balance of the company. The balance is too high as compared to current liabilities. This results into idle cash that can be invested in other ventures to generate more profits or return to shareholders. The opportunities the company can explore because of its strengths The company can acquire external financing because of its low gearing ratio to venture in other markets and install improved plants property and equipment to improve efficiency of its operations. Read More