Contact Us
Sign In / Sign Up for FREE
Go to advanced search...

Financial Accounting Concepts - Essay Example

Comments (0) Cite this document
As a condition for the loan, the bank has required that the company maintain a Current Ratio (current assets divided by total current liabilities) of at least 1.50. On December 15th, the company comptroller…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER94.3% of users find it useful
Financial Accounting Concepts
Read TextPreview

Extract of sample "Financial Accounting Concepts"

A company has borrowed $3,000,000 to expand its production plant. As a condition for the loan, the bank has required that the company maintain a Current Ratio (current assets divided by total current liabilities) of at least 1.50. On December 15th, the company comptroller reports that the costs of expansion have brought the current ratio down to 1.40. The Board is considering what might happen if the business reports this ratio to the bank. One solution is to report revenue from a new sales contract that is scheduled to take effect in January.
How would recording this revenue in December affect the current ratio?
Is it ethical to record the revenue transaction in December?
What accounting principle is relevant to this situation?
What course of action should the company take?
Current ratio helps assess a company’s ability to meet short-term liabilities. The higher the current ratio the greater is the company’s ability to pay its bills. It is also a tool which also helps make rational decisions in keeping with a company’s objectives. This is the reason why the bank insisted that they maintain a current ratio of 1.5. This would also enable the bank to keep a track on the company’s functioning.
The accounting principle relevant here is conservatism. Conservative accounting can only cause temporary increase in the company’s earnings. The effect is temporary and the actual may differ and hence not considered a good indicator of subsequent earnings. Conservative accounting would raise questions about not only the balance sheet but also about the income statement. Accounting conservatism only helps to reduce disclosure.
According to me it would he unethical to record the revenue of the new sales contract in December. It is always advisable to be honest with the bank because the relation with a bank is a long-term one. If the bank found out on its own it would reflect badly on the company and then the bank would be very cautious in all future transactions also. Manipulation may not be intended by the company but banks would be cautious in all future reporting by the company incase they found out.
If the company records this revenue in December the current ration would increase. They could complete the contract in December itself and raise the bill. Once the bill is raised, whether they receive cash for it or it remains as current receivables, the current ratio goes up. In this case there is nothing wrong. But as can be seen it is already the 15th December. Would it be possible to complete the contract within this period? Besides, credit has to be given to the party so cash payments cannot be expected.
But in the event that the contract is executed in January and considered in December just for the sake of reporting, it would be a false statement. It is after all an estimated sales and receivables. Receivables are assets only in so far as they can be collected in a reasonable period of time. It is not sure when the realization would take place and whether the complete realization would be possible.
In my opinion the company, under the circumstances, should report the actual to the bank and with a note on the sales contract which is to be executed in January. The report should also highlight the expected earnings, giving details of the value of the contract, the realization period and with a projection how the current ratio would immediately rise up. The bank would understand that it is a temporary phase and would give due consideration to the company which is very essential to maintain a healthy relationship with the bank. Information to the bank should neither be negative nor should there be suppressed reporting. Read More
Cite this document
  • APA
  • MLA
(“Financial Accounting Concepts Essay Example | Topics and Well Written Essays - 500 words - 5”, n.d.)
Retrieved from
(Financial Accounting Concepts Essay Example | Topics and Well Written Essays - 500 Words - 5)
“Financial Accounting Concepts Essay Example | Topics and Well Written Essays - 500 Words - 5”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Financial Accounting Concepts

Accounting & Financial Management

AWB’s operations can be categorized into areas ranging from ‘pool management services’ to ‘harvest financing’, and ‘International commodity management’. Only a company with such a big range of activities and financial outlays can become the benchmark for an equally big company like ‘Woolworth Limited’.

The performance of an entity can be better analyzed through its profitability analyses. The profitability ratios like Gross Profit ratio, Net Profit Margins, Return on assets (ROA), and Return on Equity (ROE). The calculations of such ratios are shown in the attached annexure. The Gross Profit ratio measures the percentage of each pound or dollar of sales remaining aft...
10 Pages(2500 words)Assignment

Law of Financial Services

For instance, the European Commission’s Regulation No. 1049/2001 which very specifically details rules and regulations governing the public access to European Parliament, Council and Commission documents. Article 8 of the regulation states that “personal data shall only be transferred to recipients … (b) if the recipient establishes the necessity of having the data transferred …” (Regulation 1049/2001). Although this law is not at all related to the data protection of banks and their customers, it does give us an impression of how serious the EC is in protecting the integrity of data.
In saying that the laws that we have on data protection have adequately addressed the needs of banks and custom...
6 Pages(1500 words)Article

Cloning Challenges Concepts of Societal Norms

This results in the creation of embryonic growth of another organism that contains the complete genetic code of the original organism. Through this process, the cloning of mammals has resulted in, to date, hundreds of cloned organisms born.
Those who oppose human cloning argue that this unnatural style of reproduction has an overwhelming potential for decisions being made based on reasons of vanity in regard to children. Their concern is that the very nature of the traditional family is in danger of evolving in a strange, unknown and undesirable direction. Advocates of cloning practices say that it may, among other things, serve society as an effective alternative treatment for infertility. The cloning of animals has stirred...
7 Pages(1750 words)Assignment

Accounting for Leases

The classification needs to be made at the inception of the lease itself. Risk, with respect to leasing, refers to the possibility of loss arising on account of under-utilization or technological obsolescence of the asset. Reward means the incremental net cash flows that are generated from the usage of the asset over its economic life and the realization of the anticipated residual value on expiry of the economic life. A lease which cannot be classified as a finance lease is known as an operating lease. In the following situations a lease is classified as Finance lease:
The lower of the present value of minimum lease payments and the fair value of the asset is recognized as an asset and liability. The minimum lease payments a...
6 Pages(1500 words)Assignment

The Effects of Financial Crisis on Supplier Selection Criteria of the Oil and Gas Industry Equipment Market

It is a difficult task to find those vendors who not only have the adequate quality and quantity of the needed raw materials but who also have an attitude of efficiency and display commitment to customer service (Sonmat, 2006). Further, organizations also strive to locate and select vendors who can be depended upon for long term relationship.

The number of factors or attributes desired from the vendor is vast, and different organizations and different industries place different importance on the attributes (Sonmat, 2006). Some of the vendor attributes may gain importance owing to the nature of the industry, for example, in the case of consumer perishables suppliers, like fresh vegetables or fruits, the buying firm would...
20 Pages(5000 words)Literature review

Accounting systems and Assurance

The allocation of resources is dependent on the information regarding the financial condition of the firm. Here comes the role of accounting, which provides all the required financial information to the investors through several financial reports. There There are two classifications of accounting 1) financial accounting and 2) management accounting. Financial accounting is the one which furnishes all the financial information to the investors and management accounting is used at the micro-level where the internal allocation of the funds takes place. Accounting is one of the most crucial components of any organization as it provides all those financial information that is used to make the economic and financing decision making.&nbs...
9 Pages(2250 words)Coursework

Evaluation of Performance of a Bank Using Published Accounting Data

...Table of Content Introduction: 2 Background 3 Thesis ment 4 Main Body 4 Conclusion 6 Limitations 7 Recommendations 7 Bibliography 8 Evaluation of Performance of a Bank Using Published Accounting Data Introduction: Banks are the global industrial powerhouses1 and they have introduced very complex and risky products and services. During its operation, every bank is exposed to credit risk, liquidity problems, interest risk, market risk, operational and management risk.2 The collapse of banking industry severely influences the world financial system, which means that it is very important to evaluate the performance of the banks. There are different parameters based on which performance of a bank can be evaluated such as financial management...
7 Pages(1750 words)Case Study

Progress on G20 Summit on Accounting Standards

The said declaration contains the results of the discussions of the G20 leaders related to the current financial crisis. It contains what the G20 believes are the causes of the financial crisis and the actions to be taken.

The said declaration contained the short-term (classified as immediate actions) and medium-term actions that the G20 members think should be done to achieve true financial reforms. As part of the medium-term actions, the declaration states that “the key global accounting standard bodies should work intensively toward the objective of creating a single set of high-quality global standard”. It also stated that “regulators, supervisors, and accounting standard setters, as appropriate, s...
9 Pages(2250 words)Lab Report

Accounting for Managers

ii) In the audit report, the external auditors express their opinion about the fairness of the financial statements of the company and whether they have been presented as per the generally accepted accounting principles (GAAP) in the USA. The opinion can be unqualified opinion when no financial misstatements are discovered, Qualified opinion when there are one or two instances of non-compliance, Adverse Opinion when financial statements are found to be wrongly stated and Disclaimer when there are hindrances in performing audit (Credit Research Foundation, n.d.; The University of Michigan-Flint, 2003).

iii) The audit of external reports helps in evaluating the risk management policy and control procedures of an organizat...
6 Pages(1500 words)Assignment

Alternative Methods of Accounting

Accounting has always been a self-regulated profession. After the 2nd half of the 20th-century changes in accounting occurred due to the influence of private organizations such as the FASB.  In the United States, accountants followed the generally accepted accounting principles (GAAP) to guide their everyday work. Accounting is a discipline that is very strict in its ways and does not welcome change well. In the aftermath of the Enron and WorldCom scandal, the government had to force change with the creation of the Sarbanes Oxley Act of 2002 due to a lack of trust in financial information. 

The efficient market hypothesis states that securities are typically in equilibrium and that they are fairly priced in th...
8 Pages(2000 words)Article
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Financial Accounting Concepts for FREE!

Contact Us