Financial Reporting Mechanisms - Essay Example

Financial Reporting Importance of International Accounting Standards The dawn of the new millennium has seen increasing competition at the global level and the shrinking business environment has revolutionized the way in which businesses were operated. A shift from the traditional trend of commerce has also been greatly affected by the increasing number of market-based economies. With activities becoming increasingly global, organizations were striving for financial reporting methods that would be globally acceptable. Such requirements led to the development of the International Accounting Standards Board by the joint efforts of IASC (International Accounting Standards Committee) and IFAC (International Federation of Accountants). This board was agreed to have full sovereignty in setting International Accounting Standards and to address current accounting issues for the European nations. Later it joined hands with the FABS and the US GAAP to tackle global accounting issues and to develop uniform accounting standards worldwide. IASB, at both domestic and international level, consistently has been trying to develop ways of providing investors and stakeholders accounting information that is comparable, transparent and reliable. Financial markets and investors, despite of geographic location, depend on high quality information in order to operate efficiently. IASB is hence making concerted efforts in this regard and is developing principles that would enable the merger of latest and traditional business conducts and at the same time is consistent with current accounting trends. Task 4 Journal Entries DR CR (1) Inventories 33000 Purchases 33000 (2) Interim Dividend 2500000 Retained Earnings 2500000 (3) Corporation Tax 15000 Bank 15000 (4) Depreciation Expense 51750 Provision for Depreciation 51750 (5) Interest on Loan 10000 Loan Interest Payable 10000 PLC Ltd. Income Statement for the year ended 31st December 20X0 Particulars Revenue 1095000 Cost of goods sold (537000) Gross Profit 558000 Add: Trade Receivables 89000 647000 Less: Expenses and Losses Administrative Expense 237000 Distribution Expense 156000 Depreciation Expense 51750 Loan Interest Payable 10000 (454750) Net Income 192250 Task 5 Report on Cash flow The Cash flow statement of Y limited for the year ended 31st September 20XO showed that that was a decrease in total Cash with the Company and the year end balance reflected a cash outflow of 17000. Moreover company's income statement figures have shown that the organizations operational performance has been good for the year and revenues have been on the high side. Despite the favorable trend in revenue and profit a decrease in the cash can be explained by taking a look at the investing and financing activities for the company during the year. Y limited Cash inflow from operational activities is 737000, which is a good show. But at the same time the cash outflow from investing activities is 855000. This figure reflects that Y limited had adopted a investment policy for the year 20X0 and according to which they planned to expand the scale of operations and hence an investment was undertaken in the purchase of Fixed Asset to achieve the objective. Moreover the payment of Cash dividend was also on the higher side and the company gave away 600000 as cash dividend resorting to the policy of retaining investors and to enhance the interest of Shareholders in the company. This policy bore fruit and the company was able to attract investors to the company and it was able to issue Debentures worth 500000. Task 6 Statement of Goodwill Particulars Ordinary Shares 3000000 Add: Share Premium 500000 Retained Earnings 495000 Total Equity 3995000 Less: Total Tangible Assets (3833000) Add: Total Liabilities 1038000 Goodwill and Intangible Assets 1200000 Task 7 Profit and Loss Account for AB Partnership for the year ended 31st December 20X0 Particulars Sales 110500 Cost of goods Sold Opening Stock 9600 Purchases 45665 Less: Closing Stock 7455 Cost of goods sold (47810) Gross Profit 62690 Add prepayments 755 Less: Expenses and Losses Drawings A 5609 Drawings B 7862 Accruals 723 Wages 7873 Bank charges and Interest 977 General Expenses 13768 Depreciation 4065 (40887) Net Income 22568 Profit and Loss Appropriation Account Particulars Partner A Partner B Total Salary Allowance 3000 5000 8000 Interest Allowance on Partners Capital A (9427 5%) 471.35 B (9052 5%) 452.6 924 Total Salaries and Interest 3471.4 5452.6 8924 Remaining Income (22568 - 8924) A (13644 60%) 8186.4 B (13644 40%) 5457.6 8533.8 10910.2 22568 What happens when there is no Partnership agreement in place In the absence of a partnership agreement a partnership may not be able to succeed as in matters of profit and loss problems between partners can occur that may lead to liquidation of partnership. Thus agreement helps in retaining partnership and avoids problems between partners. What terminology is used in club and society accounts instead of Profits, Losses and Capital account Revenue and Expenditure account in the term used in society accounts. Task 8 Report on financial statements of B and C Limited Accounting Ratios Operating Profit Margin B Limited Profit/ Sales = 685/3465 = 0.19 C Limited Profit/ Sales = 630/4210= 0.15 Current Ratio B Limited Current Assets/Current Liabilities = 3465/2990 = 1.16 C Limited Current Assets/Current Liabilities = 4764/3850 = 1.24 Gearing Ratio B Limited Long-term Liabilities/ (Equity + Long-term Liabilities) 100 = 1500/ (1500 + 3938) 100 = 27.6% C Limited Long-term Liabilities/ (Equity + Long-term Liabilities) 100 = 2000/ (2000 + 5389) 100 = 27.1% EPS B Limited Net Income/ Common shares Outstanding = 685000/1000000 = $0.685 C Limited Net Income/ Common shares Outstanding = 630000/1000000 = $0.630 Analysis The above ratios have been calculated in order to compare the financial positions of the two companies and then to make recommendations for investment. Company B's financial position looks much better despite the fact that it has a greater dependency on borrowing but it has a greater profitability as compared to Company C. As reflected by the current ratio, its ability to pay current liabilities is low but as it is greater than 1 the prospects are good. Despite a partly greater dependency on borrowing B limited is offering a greater Earning per Share and would be the recommended choice to invest in. Limitations of Ratio Analysis Ratio analysis is useful, but analysts should be aware of these problems and make adjustments as necessary. Ratios analysis conducted in a mechanical, unthinking manner is dangerous, but if used intelligently and with good judgment, it can provide useful insights into the firm's operations.1 Ratio analysis has a number of limitations as highlighted by various researchers it fails to offer comparison in inter company relationships as the risk profile of the two companies are not reflected by the financial statement components. Moreover historical data is of importance in order to account for rise in prices that may undermine or overestimate the ratio. Furthermore the differences in accounting policies and the issues of creative accounting where accounts are manipulated in such a way as to mislead the public are factors that limit the effectiveness of Ratio Analysis. Bibliography 1. 12manage, (2007). Gearing Ratio. Retrieved July 10, 2007, from 12manage rigor and relevance in management Web site: http://www.12manage.com/description_gearing_ratio.html 2. TAYLOR, S (1987) International Accounting Standards: An Alternative Rationale Abacus 23 (2), 157-170. 3. Katz, J G (1998). International Acounting Standards. Retrieved July 10, 2007, from US Securities and Exchange Commision Web site: http://www.sec.gov/rules/concept/34-42430.htm Read More