Accounting and Financial Management - Assignment Example

Name Instructor Course/Class Date Accounting and Financial Management 1. a. Why should short-term prepaid expenses be classified as current assets? Short term prepaid expenses are one of the sure expenses to be paid in the near future or in advance and are therefore recorded as assets even before they are used or consumed (Horngren p 90). In addition, they are also termed as short term assets since they are consumed within a year or less especially after the balance sheet day, and are thus represented in the current assets section of the balanced sheet. Example: consider company Y that pays $1,000 for insurance coverage which will run from April 1, 2000 to July 31, 2001 (one year). The company has its accounting year end on December 31. On December 31, 2000 the unused prepaid insurance expense of $3,000 (3 months: January 1, 2001 – March 31, 2001) will be considered short-term and shown in the current section of the balance sheet because the balance will be liquidated (amortized to expense) within a year after December 31, 2000. b. Criticize the following ‘‘Depreciation is the loss in value of a fixed asset over a given span of time’’ Fixed assets such as machineries wears out with time and become less efficient. Depreciation rate spread over the cost of the asset over the period of its useful life. Based on the ideology of depreciation, some facts are not logical assuming the value of an asset based on the arrival of new assets. The valuation of an asset and the aggregations of the consumption rate of a fixed asset in most cases do not reflect the return and the economic importance of the asset over its useful life. The loss of value of an asset should be equated with its return values. c. Study appendix 16A. ‘‘Purchases of inventory at the end of a fiscal period can have a direct effect on income under LIFO’’. Do you agree? Explain Yes it is true. Inventories consist of layers under LIFO, layers which are independent and separate identity to new inventories. Therefore when a company purchases inventories at the end of a fiscal period, the old LIFO layers are added to the cost of the goods sold, which may be below the current values of replacement and as a result leading to the overstatement of the income (Horngren p 90). The rising prices make the LIFO method to reflect lower net income since it uses the most recent values of inventories. Therefore, it is true that purchase of inventory at the end of a fiscal period may poise a direct effect on the income under LIFO. 2. The Reigle Company Balance Sheet For the period ending December 31, 20X0 ASSETS LIABILITIES Current Assets Cash and Equivalents 60,000 Notes Payables 51,000 Accounts Receivable, net 48,000 Long-Term debt, Excluding current Portion 210,000 Inventories 36,000 Retained Earnings 204,000 Prepaid Expenses 15,000 Income Taxes Payable 37,000 other current asset Provision for income taxes 60,000 Total Current Assets 159,000 Accounts payable 43,000 Non-Current Assets Current portion of long-term debt 16,000 Good will, Patents, and Trademarks 75,000 common stock(50,000 shares outstanding) 25,000 Property, Plant, and equipment, at cost 580,000 Deferred income tax Liability-Long Term 44,000 Less: Accumulated Depreciation 170,000 Additional Paid-In capital 64,000 other long-term asset 110,000 Total Non-Current Assets 595,000 TOTAL ASSETS 754,000 TOTAL LIABILITIES 754,000 The Reigle Company Income Statement For the period ending December 31, 20X0 Revenue 790,000 Cost of Sales 470,000 Gross Profit 320,000 Expenses selling and administrative expenses 150,000 interest expense 55,000 total expense 205,000 Net Profit 115,000 Income Interest Income 15,000 Net Income 130,000 Suppose the following changes are made, the balance sheet will change as stated below and the additional paid-in capital as stated as well: Cash and equivalents $325,000 Revenues $1,200,000 Notes Payable $172,655 Long term debt, excluding current portion $500,000 The Reigle Company Balance Sheet For the period ending December 31, 20X0 ASSETS LIABILITIES Current Assets Cash and Equivalents 320,000 Notes Payables 172,655 Accounts Receivable, net 48,000 Long-Term debt, Excluding current Portion 500,000 Inventories 36,000 Retained Earnings 204,000 Prepaid Expenses 15,000 Income Taxes Payable 37,000 other current asset Provision for income taxes 60,000 Total Current Assets 419,000 Accounts payable 43,000 Non-Current Assets Current portion of long-term debt 16,000 Good will, Patents, and Trademarks 75,000 common stock(50,000 shares outstanding) 25,000 Property, Plant, and equipment, at cost 580,000 Deferred income tax Liability-Long Term 44,000 Less: Accumulated Depreciation 170,000 Less: Paid-In capital 89,655 other long-term asset 110,000 Total Non-Current Assets 595,000 TOTAL ASSETS 1,014,000 TOTAL LIABILITIES 1,014,000 The Reigle Company Income Statement For the period ending December 31, 20X0 Revenue 1,200,000 Cost of Sales 470,000 Gross Profit 730,000 Expenses selling and administrative expenses 150,000 interest expense 55,000 total expense 205,000 Net Profit 525,000 Income Interest Income 15,000 Net Income 540,000 3. Considering Appendix 16A, the inventory of the West Virginia Coal Company on June 30th shows 500 tons at $62 per ton. A physical inventory on July 31 shows a total of 600 tons on hand. Revenue from sales of coal for July totals $ 105,000. The following Purchases were made during July: July 5, 1,000 tons at $64 per ton; July 15, 250 tons at $66 per ton; July 25, 300 tons at $69 per ton. Compute the inventory value as of July 31 using (a) FIFO and (b) LIFO Compute the gross profit using each method a) FIFO (First-in, first-out) Assumes that a vendor (or company) sells or uses up first the stock acquired earliest. Sales 105,000 The cans are acquired first on July 5 for 1,000 tons at $64 per ton Therefore, cost of goods sold: Beginning inventory 37,200 Purchases 64,000 Cost of goods available for sale 101,200 Ending inventory 20,700 Cost of goods sold 80,500 Gross profit 24,500 In this case therefore, the inventory value as at July 31 was $20,500 b) LIFO (Last-in, first-out) Assumes that a vendor (or a company) sells or uses up the stock acquired most recently first. Sales 105,000 The cans are acquired last on July 25 for 300 tons at $69 per ton Therefore, cost of goods sold: Beginning inventory 20,700 Purchases 64,000 Cost of goods available for sale 84,700 Cost of goods sold 20,300 Gross profit 84,700 4. What went wrong at ABC Learning? There was a remarkable fall of the ABC learning because it had forgone its basic business and decision making, as well as spending of costs without reasonable management, which were the fundamentals of sound accounting. In their pursuit of profit, they ignored the key financial realities in Australia and thus under looked its fundamental truths. After 2000 the federal government introduces child care benefits rebates thereby allowing families to apply for subsidies childcares and increased the demand for childcare. The company underwent through a massive and steady financial growth with its shares starting a share price at The Australian Stock Exchange from $2 in 2001 to $8.60 in 2006. However, in 2007, the shares started to fall and finally fell to $0.54 in 2008 due to unrealistic financial strategies which proved really unsustainable for the company. What are the major financial reports? What is the purpose of each? A balance sheet was on of the financial reports that showed the assets valuations of the company. Income statement position reported the company’s staked astronomical debts Financial performance of the company reported the financial status of the company and indicated a looming crisis of liquidity. And cash flows of the company were very crucial in reporting the inflated asset values of the company. Why are profits important? Why is cash flow important? The company’s profits very important in sustaining the growth and financial aspirations of the company. The cash flow enables the company to strategize on its cash flows. Through application of critical accounting ideologies and financial reports like the cash flow systems, accountant and financial professionals can play a critical role in a company’s success. What are the characteristics of a good internal control system? Control environment; a properly sound control environment by communication, proper attitude, and management example focusing on integrity, commitment, and diligences in assigning responsibilities. Risk assessment; involves identifying risky areas and directing efficient efforts to such areas in the management. Information and communication; communicating information and responsibilities and expectations is one of the characteristics of a good internal control systems. Monitoring; the internal control system should remain efficient all the time and thus the need to be monitored and reviewed. Control activities; the numerous policies and procedures that take place in an internal control system in daily circumstances e.g. documentations, security, separation of duties, authorization, etc. Use the Internet as a resource for this part of the question. Reference your sources 5. a. goodwill is the excess of purchase price over the book value of the individual assets acquired. Do you agree? Explain. It is true that the goodwill of an asset is the excess of purchase price over the book value of the individual assets acquired. When determining the goodwill, the purchase price is normally deducted from the market value (or the book value) of the assets and liabilities of the individual assets. b. when will the goodwill on the balanced sheet be reduced? Through the test of impairment, the carrying value of the goodwill of an asset must be tested on yearly basis. When it is found impaired, the goodwill ids reduced by a write-down considering the yearly charge against the income. c. why is it useful to analyze income statements and balance sheets by component percentages? It is very important to analyze inco9me statements and balance sheets by components percentages and relevant financial information like percentage changes, trends and dollar because they make an easy comparisons of information between different successive accounting periods. d. what two ratios are multiplied together to give the pretax operating rate of return on average total assets? The two ratios are the Pre-tax Income and the average total assets 6. Financial Ratios Annual Income 20X2 20X1 20X0 Net Income £90 £60 £25 Gross margin on Sales 520 380 200 Cost of goods sold 980 620 300 Operating expenses 380 295 165 income tax expense 50 25 10 Dividends declared and paid 35 15 5 End of Year Amounts: Long-term assets £240 £220 £180 Long-term Debts 85 65 40 Current Liabilities 65 55 35 Cash 20 5 10 Account Receivables 85 70 40 Merchandise inventory 120 85 60 Paid-in Capital 205 205 205 Retained Income 110 55 10 a). Rate of return on sales Net income/Sales 90/520 = 0.173 for 20X2 60/380 =0.1579 for 20X1 25/300 = 0.0833 for 20X0 b). Rate of return on stockholders’ equity RRSE =Net Income/ shareholders’ equity (90/205)100% =43.9% for year 20X2 (60/205)100%= 29.27% And (25/205)100%=12.2% b). Current ratio CR= Current Assets/ Current Liabilities 225/65= 3.46 for 20X2 160/55 = 2.91 for 20X1 110/35= 3.14 for 20X0 d). Ratio of the total debt to Stockholders’ equity Total Liabilities/Stockholders’ equity 465/205 = 2.27 for 20X2 380/205 = 1.46 for 20X1 290/205 = 1.41 for 20X0 e). Ratio of current debt to stockholders’ equity Current Liabilities/ Stockholders equity 65/205 =0.37 for 20X2 55/205 =0.27 for 20X1 35/205 =0.17 for 20X0 f). Gross profit rate Gross profit/ Sales 460/520 = 0.884 for 20X2 240/380 =0.632 for 20X1 100/300 = 0.333 for 20X0 Graph of Annual Income against Time (year) 7. Social and environmental accounting; Modern accountancy and research have grown to great lengths in tries to solve the complex issues in the accounting and finance fields. These financial and accounting issues are well used to explain some social and environmental factors that affect people in different dimensions. Through innovation, experience, social and environmental accountings have gained essentialities and attention to encourage further ideological development. Triple bottom line reporting; The triple bottom line comprises a social equity, economic, and environmental factors which are very effective in enhancing sustainable goals and business practices. In reporting the triple bottom line, the three piece ideology is applied and an expanded framework of social and environmental performance is taken into account. History of accounting; The development of writing and the use of money necessitated accounting over thousands of years back where there are evidences of the ancient man employing the bookkeeping and early auditing in Egypt for instance. The double entry bookkeeping system can be traced back in Europe after which the accounting principles divided into financial accounting and management accounting considering the upward development of the joint-stock companies in the 19th century world. Lean accounting; The development of accounting systems has undergone through major transformation from the traditional accounting methods to lean accounting system that measures as well as motivates excellent business practices in the lean enterprise. Lean accounting provides accurate, timely, and understandable accounting information that conversely provides lean information for decision making process. In the end, an organization increases the customer value, growth, profit sustainability as well as cash flows. Ethics and corporate failure Financial and accounting reports must go through the required ethical standards according to the stipulated corporate accounting ethical responsibilities. Based on this, involvement in fraudulent financial reporting, whereby the financial statements are marred with errors and defects have made many corporate to fail the financial ethical tests in many countries. Corporate firms should be keen to avoid flawed accounting operations and reports thereby avoiding the ethical lapses that contribute to the failure of the corporate responsibilities when reporting the financial statements for the investors and the stakeholders. Business report writing Business report writing is one of the key areas in the field of finance which articulates the strategic movement of the corporate firm. The report writing should clearly indicate the financial growth patterns of the business and indicate the possibilities as well as the sustainable standards of the business profits. In addition, business report is very critical in stating the financial position of a firm thereby alerting the investors and the relevant stakeholders on the progress of the firm. US reaction to proposed IFRS Upon the recommendation and the adoption of the International Financial Reporting Standards in the United States by the US public companies, there were numerous disapprovals, starting from the professional accountants and the SEC bodies. There were much uncertainties of the use of the IFRS by 2015. Accounting and Impression Management Accounting and Impression management entails the development of the public impression by an organization in terms of the audiences appeal, for instance the media, the stakeholders and stockholders as well as the general public. In most cases, it may undermine the financial report quality and may go long way misallocating capital based on its socio-political, economic, psychological, and sociological impacts to these audiences. Work Cited Financial management. 3rd ed. London: BPP Learning Media, 2011. Horngren, C. T., & Harrison, W. T. Internal control and cash. Accounting . Prentice Hall. pp. 387-388 (2012). Horngren, et al.. Introduction to management accounting (16th ed., p. 90). Pearson . 2014. Paramasivan, C., and T. Subramanian. Financial management. New Delhi: New Age International (P) Ltd., Publishers, 2009. Print. YouTube http://www.youtube.com/watch?v=YYF6JW9vJKo Read More