Analysis of about Corporate Finance, Financial Accounting I and Financial Accounting II - Literature review Example

Task 2 Literature Review of Task 2 Literature Review Introduction The section of the report discusses past writings related to the capital structure, revenue recognition, and treatments of the current assets by companies. The books and articles are helpful in highlighting the importance, treatments, and difficulties while analysing the selected three topics that are related to Corporate Finance, Financial Accounting I and Financial Accounting II. Financial Accounting I Treatment of Current Assets Stickney, Weil, Schipper, & Francis (2009) have highlighted that current assets are recorded in the balance sheet of the company. They represent those assets that are used to generate income for the business. Life of current assets is short i.e. less than one year. The values of these assets change frequently with the business operations. Current assets are easily convertible to cash as compared to noncurrent assets. A company could utilize its current assets for meeting the requirements of the business that is to be handled or controlled on an urgent basis. Stickney, Weil, Schipper, & Francis, (2009) reflect that currents assets include raw materials and cash and cash equivalents that are directly used in the day-today operations of a business. Current assets are easily convertible to cash and they appear on the balance sheet separately in the section that provides complete information of current assets of the company (Stickney, Weil, Schipper, & Francis, 2009). Current assets of the company are used for the operations of the business. Account receivables of the company must reflect the amount that is recoverable by the company (Alexander & Britton, 2004). Stickney, Weil, Schipper, & Francis, (2009) also indicated that there is a sequence for the list of current assets in the financial statement that reflects the liquidity status of these assets. The company should record cash and cash equivalents first and then the bank balance of the company. Account receivables of the company should appear in the third row and inventory held by the company should appear on the fourth row. Other prepaid expenses including supplies, utilities and taxes should appear in the other rows of the list. The sequence is a standard form of recording current assets in the financial statements of the company (Stickney, Weil, Schipper, & Francis, 2009). Alexander & Britton (2004) have represented the view that it is essential that the financial statements of the company should reflect a true and fair view of the company’s financial position. The company must mention provides details and values of the company’s assets, liabilities, and equity in a complete and accurate manner or with reasonable assurance of the value.. Bad debts are to be considered by the company and the company makes estimates for that purpose. Alexander & Britton (2004) have examined that some receivable could not be easily recoverable by the company and that should be separated from the amount of account receivable. It has been observed in the past that the an amount of account receivable include those amounts that are not recoverable at that time because of some conditions observed by the company regarding the financial position of its customer (Alexander & Britton, 2004) Alexander & Britton (2004) state that estimations should be considered regarding bad debts and they have to be less from the amount of account receivable that is obtained by the list of debtors after deducting confirmed bad debts. The estimation could be 5 to 10 percent of the total amount. The amount of estimation should be deducted from the figure of account receivable to represents true and fair view of the current assets in financial statements. If account receivables figure represents the view without deducting the amount of bad debts it will affect the decision of shareholder and the shareholders are entitled to have true and fair picture of the company’s financial reports (Alexander & Britton, 2004). Mackler (2010) has highlighted the point in the article that amount of Current Assets are also useful in calculating current ratio that reflect that the liquidity strength of the company. The amount of total current assets are divided by the amount of total current liabilities to obtain the value of the current ratio that is useful in analysing the strength of the company in case of liquidity. It is important the amount of total assets and total liabilities should reflect true and fair view so that the ratio analysis could be made with relevant to its importance to the stakeholders of the company. Total current assets appear in the financial statements of the company as a separate head so that the amount could be analysed by the users of financial statements. The liquidity strength of the company could be analysed with the concept that how much the company has total current assets to meet its current liabilities in case of liquidity of the business. The author has describe in the article that the liquidity strengths are also considered by shareholders to check whether the company has the ability to pay off its current liabilities while utilizing current assets (Mackler, 2010). Stakeholders need to calculate current ratio for the analysing the strengths of the company and make effective decisions. By the concept, it is cleared that current assets not only appear in the financial statement but also are helpful in making effective decisions to emphasize any changes that are required for the future. The company also mentions its intention to acquire different current assets in notes to the financial statement to ensure that the decisions are made by the company to increase or decrease the value of current assets in future (Mackler, 2010). Corporate Finance Capital structure Baker & Martin (2011) has defined the capital structure of the company is defined as the sources of financing adopted by the firm. The sources are debt, equity and hybrid securities. The company to utilize them in the purchase of assets, operations and future growth adopts the sources. The sources that are employed by the company should reflect the usage of those sources in generating profits or for the acquisition of non-current assets. The modern theory of Modigliani and Miller have analysed through the research relating to the capital structure and the value of the firm as expressed by the authors in the book. Risk in the capital structure is referred as cost of the capital. The theory suggests that the value of the firm could be analysed by the capitalized value of net income before taxation and interest (Baker & Martin, 2011). It is important to analyse the capital structure of the firm to acknowledge that how the company is generating profits while utilizing the sources that are invested in the company by the owner or borrowed from outsiders. The authors of the book have mentioned in the book that the borrowings should generate the profits to the company to meet the cost of the capital employed in the company. Long-term debts will be beneficial to the company if they are utilized in a manner that they could increase the operating profits of the company (Baker & Martin, 2011). Koller, Goedhart, & Wessels (2010) have mentioned the importance of Capital structure in the book that it should be analysed by the company on comparing the data of last years. It is also valuable in comparing the capital structure of the company with its competitors. The strategies and methods adopted by the competitors that how they are generating profits from the effective utilization of debts and equity. Effectiveness is necessary in the capital structure of the company and they should be utilized in a manner that they could contribute in generating more revenues and net profits to the company Debts are recorded as the liability in the financial statements of the company. The companies to utilize the resources in generating more revenues to the company borrow long-term liabilities. The authors of the book have highlighted the importance and mentioned that it is necessary that long term Debts borrowed by the company should be fully utilized by them so that the profit generation could be possible through these debts. The company has to pay off the debts along with the interest so the company should have strength to pay off the interest or cost of the debt and the actual amount borrowed (Koller, Goedhart, & Wessels, 2010). If the company does not efficiently utilize debt and equity then the company would not be able to retain an effective position in the market. Stakeholders should focus on the capital structure and needs to identify the changes to be made so the concept could be fully applied by the company (Koller, Goedhart, & Wessels, 2010). Patra (2006) have mentioned that every business needs funds from starting till their liquidity. Borrowings in the shape of equity and debt are practiced by the company to run the operations of the smoothly. The argument arises that how the company managed these types of borrowings and utilizes them in an effective manner so that the shareholders could attract to the company. Managing the resources of the company by the managers will lead the company to change its capital structure and manage the resources available to generate effective revenues for the company. It is essential for the managers to manage the funds of the company in a manner that increases its effectiveness to increase the revenues to the company. Debts and equity are two financing resources that are used by the company manage and control its operational and investing activities. Patra (2006) has highlighted the importance of decisions related to the capital structure for the managers of the company. The role of managers is more important in this case because managing resources is the duty of managers (Patra, 2006). Managers of companies should utilize loans, bonds, and equity effectively. They have to make strategies regarding how frequently these resources are managed to benefit the company and satisfy the needs of its stakeholders (Patra, 2006). Financial Accounting II Revenue Recognition Paunescu (2015) have mentioned in the article that revenue recognition has significant importance in the financial statements of the company. It has been observed that the revenue recognition by the company is opposite to that of the tax authorities. It could be realized that the company always recognized the revenue when it is earned. The company follows accounting standards to recognize the revenue. There are two standards that are followed by the company named IFRS and GAAP. The companies maintain and prepare their financial statements according to the standards. The tax system followed by the taxation officers is also important. They have to follow the law and the revenue recognition is done in a different manner. Paunsescu (2015) has identified that tax officers in some cases recognize the revenue that seems to be opposite with the company that is following accounting principles for that purpose. There seems to be a conflict of revenue recognition between the company and taxation officers (Paunescu, 2015). The company has to prepare financial statements according to the accounting standards adopted by it but the tax is liable on different amount. The study of Paunescu (2015) highlights the reason of the conflict because of revenue recognition and his research on the revenue recognition have emphasized the point that revenue recognition is different for taxation officers and the company (Paunescu, 2015). Sondhi & Taub (2008) describe that ability to generate revenues is most important for a successful business. Financial position of the company could be determined by ascertaining the revenues of the company. The recognition of revenues is crucial for the users of financial statements. Financial statement users including auditors, regulators, and management need the details of revenues of the company. The argument regarding revenue recognition is related to the timing and amount of revenues to be recognized and recorded by the company. Accountants of the company have an importance in the revenue recognition because initially they have to recognize the revenue. Sondhi & Taub (2008) highlights all difficulties in recognizing the revenues for the company. They also discussed the treatment and recording revenues to be recognized by the company in the financial statements (Sondhi & Taub, 2008). Sometimes the revenue contains a series in which some revenue is considered to be earned at the time of preparing financial statements for the period. The situation could be challenging for accountants, and they need to follow accounting standards and guidelines to know the revenue recognition importance and their treatments while preparing final reports for the company financial year ended (Sondhi & Taub, 2008). Bragg (2010) mentioned the rules and scenarios for the revenue recognition in the book. All the revenues of the company are not treated in the same manner because all the incomes and revenues should be recognized according to their types. Revenue recognition is different for all the types of revenues. Situation must be analysed before the recognition of revenues for the company. The principles of accounting are different for all types of incomes generated by the company. Accounting treatments regarding different types of revenues for the business could be different while recording them in the accounts. Specific revenue recognition will help the stakeholders of the company to have a clear picture with reference to the financial statements (Bragg, 2010). The book is effective for the accountants to deal with different types of revenues and their recording in the financial statements of the company. Reasons are also mentioned in the books with specific treatments of different types of revenues such as received payments for future services and fees received before the services. Time is an important factor in the revenue recognition and it is important that when the revenue is to be recognized and what amount should be considered as the revenue earned by the company (Bragg, 2010). Mooney (2007) has identified the rules for the recognition of the revenues in the book. The rules that are specifies by the principles of revenue recognition in the current financial statements. The rules that eliminate the chances of fraud or misrepresentation in the financial statements for the year ended. The author has related the revenue recognition with the law and the author expresses some logics. The author has identifies the current rules for the revenue recognition in the book. According to the author revenue is recognized when the payment is likely to be occurred in the future or goods are delivered. The concept is easily understandable and acceptable by law but accounting principles might have conflict with the sale return factor when the goods delivered might be return by the customer due to various reasons. Accounting principles have also consider the situation and contains an element of the sale return to be deducted from the total sales to obtain net sales that appear in the last column of the financial statement. The rules are to be considered for the revenue recognition so to avoid any fraudulent information in the financial statements (Mooney, 2007). Conclusion It is clear through the existing literature that there is much important to analyse the capital structure of the company to assess that the company is utilizing the sources efficiently. The treatment of current assets in the financial statement reflects the strength of the company. The revenue recognition for different types of income in the records of the company and their time of recognition are separate according to the specific types of revenues. Past writings have provided all the necessary information regarding the topics. References Alexander, D., & Britton, A. (2004). Financial Reporting. Mason: Cengage Learning. Baker, H. K., & Martin, G. S. (2011). Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice. Hoboken: John Wiley & Sons. Bragg, S. M. (2010). Wiley Revenue Recognition: Rules and Scenarios. Hoboken: John Wiley & Sons. Koller, T., Goedhart, M., & Wessels, D. (2010). Valuation: Measuring and Managing the Value of Companies. Hoboken: John Wiley & Sons. Mackler, I. M. (2010). A Suggestion For the Measurement of Solvency. Accounting Review. , 17 (4), 348. Mooney, K. (2007). Sound Investing, Chapter 4 - Revenue Recognition. New York: McGraw Hill Professional. Patra, k. (2006). Accounting and Finance for Managers. New Delhi: Sarup & Sons. Paunescu, M. (2015). Revenue Recognition and Measurement. Accounting Principles vs. Tax Rules for Romanian Entities. Audit Financier, 13 (121), 81-90. Sondhi, A. C., & Taub, S. (2008). Revenue Recognition Guide 2009. New York: CCH. Stickney, C., Weil, R., Schipper, K., & Francis, J. (2009). Financial Accounting: An Introduction to Concepts, Methods and Uses. Mason: Cengage Learning. Read More