Importance of Accounting - Etisalat - Case Study Example

Financial Project

PART I

Company Details

Etisalat is a brand of Emirates Telecommunication Company based in UAE. It provides telecommunication services in more than 18 countries of Asia. It is the 13th largest mobile network provider in the world. . Its main products are mobile telephony, digital television, fixed line and internet services. It provides services to all but the main target customers of the company are people living in urban areas, cities, and remote areas.

Importance of Accounting

The accounting is essential for Etisalat to satisfy its stakeholders that have an interest in the profits and assets of the company. The company record business transactions regularly to prepare financial statements at the end of the period. The financial accounting is essential for Etisalat as it represents a true and fair view to its key stakeholders that can help in making decisions (Crosson & Needles, 2007).

Accounting Blocks

The accounting blocks of Etisalat are.

• Sales
• Expenses
• Costs
• Equity
• Assets
• Liabilities

Accounting Equation

Etisalat applies the following accounting equation.

Net Assets (Assets- Liabilities) = Equity

Transactions

Etisalat

S. No.

Date

Transactions (in £millions)

Amount

1

1/1/2015

Revenue from Services

60,000

2

1/12/2015

Purchase Inventory

500

3

2/22/2015

Purchased Equipment

6,000

4

3/30/2015

Purchase Property

6,000

5

3/12/2015

Prepaid Advertising

60

6

3/16/2015

Purchase of new Technology

550

7

3/30/2015

Paid Utilities

600

8

4/12/2015

Paid Income tax

1

9

4/27/2015

Purchase Office

6,500

10

4/30/2015

Purchase Building on Loan

2,500

11

5/5/2015

Purchase property on Cash

5,500

12

5/16/2015

Purchase Furniture

500

13

5/18/2015

Cash Sales of mobile phones

660

14

5/20/2015

Purchase Inventory

300

15

6/22/2015

Paid Utilities

540

16

6/30/2015

Paid Advertising Expense

450

17

7/16/2015

Paid General Administrative Expenses

650

18

8/1/2015

Issue 50000 shares of £10 each

50,000

19

8/15/2015

Purchase Equipment on account

540

20

9/10/2015

Purchase fixtures on account

650

21

10/3/2015

Purchase Inventory on account

20

22

10/6/2015

Sold goods on account

480

23

10/15/2015

Purchase Furniture on account

570

24

11/30/2015

Sold goods on account

540

25

12/11/2015

Sold furniture on account

50

26

12/13/2015

Prepaid Advertising

60

27

12/15/2015

Prepaid Insurance

1

28

12/18/2015

Sold inventory on account

50

29

12/22/2015

Purchase Inventory on account

20

30

12/27/2015

Sold goods on account

48

General Journal Entries

Etisalat

Journal Entries

For the year ended December 31, 2015

S. No.

Particulars

Debit

Credit

(in AED million)

(in AED million)

1

Cash

60,000

Sales

60,000

2

Purchases

500

Cash

500

3

Equipment

6,000

Cash

6,000

4

Property

6,000

Cash

6,000

5

Prepaid Advertising

60

Cash

60

6

Purchase

550

Cash

550

7

Utilities

600

Cash

600

8

Tax Expense

1

Cash

1

9

Office

6,500

Cash

6,500

10

Building

2,500

Loan

2,500

11

Property

5,500

Cash

5,500

12

Furniture

500

Cash

500

13

Cash

660

Sales

660

14

Purchase

300

Cash

300

15

Utilities

540

Cash

540

16

Advertising Expense

450

Cash

450

17

Admin Expense

650

Cash

650

18

Cash

500,000

Share Capital

500,000

19

Equipment

540

Account Payable

540

20

Fixtures

650

Account Payable

650

21

Purchases

20

Account Payable

20

22

Account Receivables

480

Sales

480

23

Furniture

570

Account Payables

570

24

Account Receivables

540

Sales

540

25

Account Receivables

50

Furniture

50

26

Prepaid advertising

60

Cash

60

27

Prepaid Insurance

1

Cash

1

28

Account Receivables

50

Sales

50

29

Purchase

20

Account Payable

20

30

Account Receivables

48

Sales

48

Trial Balance

Etisalat

Trial Balance

For the year ended December 31, 2015

Particulars

Debit

Credit

Cash

532,448

Purchase

1,390

Tax Expense

1

Equipment

6,540

Sales

61,778

Property

11,500

Prepaid advertising

120

Utilities

1,140

Office

6,500

Building

2,500

Loan

2,500

Furniture

1,020

Advertising Expense

450

Admin Expense

650

Share Capital

500,000

Fixture

650

Account payables

1,800

Account Receivables

1,168

Prepaid Insurance

1

Total

566,078

566,078

Financial Statements

Etisalat

Income Statement

For the year ended December 31, 2015 (in AED million)

Sales

61,778

COS

1,390

Gross Profit

60,388

Operating Expenses

Tax Expense

1

Utilities

1,140

Advertising Expense

450

Admin Expense

650

Total Expenses

2,241

Net Profit

58,147

Etisalat

Balance Sheet

For the year ended December 31, 2015 (in AED million)

Assets

Current Assets

Cash

532,448

Account receivables

1,168

Prepaid Insurance

1

Prepaid advertising

120

Total Current Assets

533,737

Non-Current Assets

Equipment

6,540

Office

6,500

Furniture

1,020

Fixture

650

Property

11,500

Building

2,500

Total Non-Current Assets

28,710

Total Assets

562,447

Liabilities

Current Liabilities

Account Payables

1,800

Non-Current Liabilities

Loan

2,500

Net Assets

558,147

Equity

Share Capital

500,000

Net Income

58,147

Total Equity

558,147

Accounting Cycle

The accounting cycle of Etisalat is similar to other multinational companies in which record keeping is done in a general journal, and then ledgers are prepared to identify the balancing amount of respective accounts. Then, the trial balance is prepared on those accounting balances. However, adjusting entries are also passed at the year end, and adjusted trial balance is prepared to tackle the exact balances of accounts. The financial statements (income statement, balance sheet, and cash flows) are prepared at the end, and closing entries are made to close the accounts. Opening entries are made to carry forward the account balances to the next year.

Importance of Budgeting

Budgeting is the plan that a company prepares to achieve its goals. It helps in comparing at the certain period with the actual amount. It identifies the weaknesses and strength of a company in achieving its target. However, it allows a company to focus on the weak areas identified in the comparison of actual figure of accounts with that of budget .

Financial Budget

Etisalat

Financial Budget

For the year ended December 31, 2015 (in AED million)

Particulars

Actual

Budget

Difference

Total Assets

562,447

590,569

28,122

Accounts Receivables

1,168

1,226

58

Total Liabilities

4,300

4,515

215

Total Revenue

61,778

64,867

3,089

Total Equity

558,147

586,054

27,907

Cost of Sales

1,390

1,460

70

Expenses

2,241

2,353

112

Net Income

58,147

61,054

2,907

Overview of Budget

The financial budget of Etisalat shows its effectiveness in achieving the target of annual revenues and total assets to a high extent. However, it was weak in managing its expenditures and costs that were too high due to the inflation and recession in the overall economy of the country. In short, the company tried to achieve its targeted budget at the year end.

Importance of Managerial Accounting

Managerial accounting has significant in the retailing and manufacturing businesses to manage and control the costs and expenditures. It is useful in analyzing, measuring, and identifying the information for the pursuit of an organization’s goals .

Cost-Volume-Profit Income Statement

Etisalat

CVP Income Statement

For the year ended December 31, 2015 (in AED million)

Sales

61,778

Variable Costs

2,531

Contribution Margin

59,247

Fixed Costs

1,100

Net Income

58,147

Cost-Volume-Profit Analysis

The cost-volume-profit analysis shows that Etisalat requires controlling its fixed costs that can be done by increasing sales of the company. Also, the variable costs of Etisalat can be controlled by controlling the utility expenses.

PART II

• Important of accounting for the organization

Etisalat is a public limited company that borrows money from public (shares) and from financial institutions (loan) to work efficiently. Also, it needs to satisfy the taxation authority that is why it requires recording transaction by following accounting rules and policies.

• Results from the income statement

The income statement of the company showed an outstanding profit in the year 2015. It indicates that Etisalat is efficient in generating revenue by applying marketing and pricing strategies to retain its position in the market.

• Results from the balance sheet

Etisalat purchased a variety of assets including furniture, equipment, and other immovable properties in 2015 that shows it is expected to strengthen its position by increasing non-current assets. Although the company borrowed huge amount of loan, the reason was to purchase non-current assets to generate high revenue for the year.

• Explanation of the sales budget

Etisalat did not achieve its budgeted or targeted sales in the year 2015, but it made efforts to reach the target. The sales budget is expected to increase in the coming period as the plan of the company is to ensure high cash collection from customers.

• Explanation of the finance requirements

The purchase of the building was financed by borrowing at low interest to expand the business. Further finance was generated through issuing shares that show Etisalat exercise both options (equity and debt) to finance its project.

• Explanation of BEP and CVP for the project

The BEP of Etisalat is where it has recovered its fixed costs. Etisalat has efficiently managed to achieve its break-even point in few months. The CVP for Etisalat indicates that the company is efficiently controlling its variable cost but requires making efforts to manage its fixed costs.