Finance and Accounting Homework Analysis - Essay Example

? Finance and Accounting Lecturer 13th April Cost principle is usually used in acquisitions, plant assets that include lump sum purchases. A firm is usually allocated resources in terms of fair value of all its existing assets (Net of all the liabilities) that are used in the whole transaction. In scenarios whereby, the cost is relatively larger than the actual value of assets costing a residue amount is realized or used to handle the problems (Tsuji & Fujibayashi, 2011). Cost principle usually requires that all plant assets be graded in a unique way when reporting at amounts that are relatively higher than the actual cost. Cost is a crucial aspect, and it facilitates realization of defined results in verifiable and objective amount. The matching of this accounting concept is usually facilitated in order to ensure that there is an accomplishment of radical goals within the depreciation expense parameters. Lump sum purchases should be treated in a way that plant’s asset useful life is well analyzed in a way that reflects all the revenues imperatively in the income statement (Tsuji & Fujibayashi, 2011). Purchases that the organization exercises should be subjected in going concern assumption. This is in order to ensure that there is attainment and realization of integral goals as per the laid down accounting and finance principles and policies in the organization. Revenue recognition principle in many scenarios usually limits an organization from reflecting on mechanisms of holding any asset from the plant. Cost principle should be differentiated in various ways in accordance to the equipments in the organization (Tsuji & Fujibayashi, 2011). 2 Factoring is an important approach in every organization cash flow spheres. Company management can opt to sell all its accounts receivable to the third party at a discounted manner for the sake of exchanging money. The third party in this case is usually any financial institution or bank. The third party which purchases all accounts receivable has to remain significant and resourceful in order for all the transactions to be viable and beneficial. Receivable factoring has been posited as a simple commercial financing (Khazeh & Winder, 2006). When a company chooses a given option the management needs to articulate on analysis of the important factor. There are various factors that should be reviewed routinely accounts receivables. Accounts receivable needs to articulate on measures on how a company can convert cash on hand. Most business entrepreneurs have business ideas that turn accounts receivables into cash (Khazeh & Winder, 2006). There are various types of reasons through which company implements receivables in its accounting books. Therefore, it is usually looked as an effective asset to investors and investors. Organizations articulate on ways through which accounts receivables can be converted into cash without causing problems to business progress. Organizations have been articulating on various types of conversion that are used for implemented balance sheet. Managers in these organizations always analyze receivables in comparison with small business owners (Khazeh & Winder, 2006). 3 A contingent liability has been a potential liability, and it wholly depends on a future event that occurs. In accounting and finance, a contingent liability and loss are usually recorded through the use of journal entry approach especially where contingency is estimated and probable. There are three examples of contingent liabilities known as the lawsuits that are filed against a company, warranty of the organization and guarantee of another party’s loan (Colquitt, McCullough & Sommer, 2011). Circumstances whereby a liability and also related contingency are possible (not probable) a journal entry for the event is usually not required. Disclosure is not required in this case scenario. In approaches whereby a contingent liability has been proved to be remote, both the disclosure and the journal are not required in the accounting activity. A product warranty which is often cited as a contingent liability has two edges, which are estimation and probable. Liabilities are obligations of an organization whereby all amounts that are owed by creditors in a past transaction activity are treated as payables. In the owner’s equity, all liabilities are treated as company’s assets. In this regard, they are treated as a claim against the business owner assets (Colquitt, McCullough & Sommer, 2011). Contingent liabilities are scenarios whereby the likelihood adverse outcome has been assessed and detected as a medium. The likelihood cannot be determined in a potential liability, in a disclosed, in financial statements. Contingent liabilities, which are assessed, as unlikely can result in an adverse outcome can only be provided without any accounting treatment. In all financial and accounting, estimate of contingent liability is treated in a manner that it largely affects contingent liabilities. For all cases that are treated to be lost, any absence of the estimate is usually regarded as an allowance that cannot be recorded in financial statement. The fair presentation involved in the financial statement can be used whereby large volumes of cases involved lacks estimates. Disclosure of contingent liabilities is usually based on the estimate of a possible liability (Colquitt, McCullough & Sommer, 2011). 4 Bonds are extensively used by business individuals in production of a steady stream of income for a relatively long time in organizations. However in this approach of producing a stream of income, they have been discovered to be less aggressive compared to stocks. This approach tends to disfavor them because it can be a poorer overall performance in the long term period. Bonds are usually also highly associated with risks incurred in investment strategies. Bonds have the following advantages and disadvantages: Income advantage Bonds have a greater investing advantage in investing schemes compared to stocks because they are usually secure. Bonds are essentially money owing securities. In this scenario, when an individual buys a bond, that person is lending money to another party. That party guarantees to pay back with a given level of interest within a specified date. Bonds are commonly issued by government, and in this case, they are termed to be government entities. However, bonds can be private or a business issuer and in the same approach traded in a resourceful manner by the owner. Bonds have also advantaged in that they can be traded in the same way as the other securities in the market thereby facilitating change of the purchase price. The many income advantage associated with bonds is their tendency to fluctuate less in terms of price as compared to stock that are volatile (Hugo, 2006). Rating advantage Bonds have high element of advantage because they posit high rating systems. This rating system usually allows all concerned investors to gauge and measure reliability of each and every bond is expected to fetch in income terms (Hugo, 2006). Many organizations and companies usually assign letter grades to all their bonds in relation to the value of credit worthiness. Grading of bonds is much important because it tends to facilitate easier management of these financing tools. Bonds with the highest value in accordance to the grading system by the concerned organization helps in guaranteeing potential investors that the bonds they are being availed have the tendency to perform well in the market place (Hugo, 2006). Tax exempt bonds Income that is produced by bonds is a highly considered income, and because of its advantage it is usually reported in the investor tax return. All taxes must be paid on the existing bond proceeds. However, if this approach is not well monitored the activity or trend can hugely cut into all profits resulting from the bonds especially from those investors that are higher earners. Many municipal bonds are substantially free of state taxes. Tax exempt disadvantage results from the fact that they have low value compared to the ordinary bonds. In some circumstances, this can totally negate the entire tax savings (Hugo, 2006). Risk disadvantage One of the common disadvantages associated with the bonds is the fact that an individual cannot entirely trust the rating systems. Risk disadvantage associated with bonds can be explained through the famous mortgage crisis of 2008. However, for years that were preceding this approach of crisis were bonds and also mutual bonds funds that contained mortgage loan debt and in this case they were hugely rated and in the same approach considered safe. At that, they were showing excellent results, and they rarely lost income. Unfortunately, when it was evident that, in the future, there was a tendency of experiencing mortgage defaults, many agencies such as federal national mortgage Association were in the verge of breaking. This shows the other side of high extent of risk associated with bonds (Hugo, 2006). 5 A corporation is a form of business organization that is chartered by the government or state. This is done through enactment of various defined legal rights that separate it from its owners. It is a business which is described by restricted accountability of its proprietors through the issuance of shares that are simply convenient stock and subsistence as a going-concern (Chiung-Hui, 2007). Corporations are usually incorporated in a way that gives them unique and separate legal standing, from its owners. Moreover, in the same case it separates owners from being directly affected in scenarios whereby the corporation is sued. Advantages of Corporations There are various types of advantages that are associated with owner’s limited liability. A corporation in this case is highly considered by a law as a distinct and separate entity. This largely explains the benefit associated with it given the fact that shareholders or corporations are indebted only to the extent of their direct interest to the corporation. In addition, an advantage of corporations is the fact that they have limited liability (Chiung-Hui, 2007). Corporations have an advantage in that they have the space to exist with continuity to enforceable future. Unlike other forms of businesses corporations have the degree of continued expansion in all sectors and parameters. Shares of ownership in the corporation are structured in a way that can be transferred from one owner to the other. Shares of corporations because of their tendency to be traded publicly can enable the owners to reap high volume of gains (Chiung-Hui, 2007). Corporations attract large volume of investors because the stock structure has a perpetual existence. This aspect makes the shares an important to the general public which in result invests in the organization. Attraction of high volume of investors enables the corporation to raise high level of cash flow or capital from all the interested investors. Disadvantages of corporations The running of a corporation is usually costly and a measure that proves to be a hard task to undertake. Incorporation of a business requires close attention in order to ensure that the organization continues to be viable to unenforceable future. It requires complying with legal aspects such as all existing bylaws and articles of incorporating the business. It also requires structuring an affidavit and board resolution in a way that is all necessary (Chiung-Hui, 2007). Corporations have also posited disadvantages in that they are highly regulated. There is a wide range of issues and aspects that managements of corporations are required to put in place in order to achieve radical results in all spheres. Restricted accountability may put off creditors. This has been one of the most factors that have been discouraging creditors from working with corporations managements. It is a vice that needs to be reviewed in a way that will ensure that imperative results have been achieved accordingly (Chiung-Hui, 2007). 6 Stockholders in an organization determine the progress of that organization that they are involved with in the process of running a business. However in many organizations or companies individuals have different rights depending on the level and range of stocks that they own in that organization. Common stock shareholders have different rights that they have been granted compared to other range of stakeholders in that organization. Common stock shareholders have shares that have been granted an opportunity for capital appreciation in the organization concerned. In circumstances whereby the organization or company becomes highly valuable, the same results in the stocks held by the common stock shareholders (Curran, 2009). Common stockholders also have voting rights that they have been granted in the company especially in scenarios of accomplishing company objectives or stock splitting activities. In addition to this, common stock holders usually benefit from preemptive rights, which allow them, to maintain a substantial ownership in their organization especially whereby the company undertakes to issue another totally different offering of stock. This means that shareholders are endowed with preemptive rights but limited to buy new shares offered that can enable them to maintain a relatively substantial ownership in the company (Curran, 2009). References Curran, P., (2009). Stakeholder inclusion and shareholder protection: New governance and the changing landscape of American securities regulation. Fordham Urban Law Journal, 36(2), 112-115. Chiung-Hui, T. (2007). Exploring location-specific assets and exploiting firm specific advantages: an integrative perspective on foreign ownership decisions. Canadian journal of administrative sciences, 24(1), 127-134. Colquitt, L., McCullough, K. & Sommer,D. (2011). An analysis of contingent commission use by property-liability insurers. Risk management and insurance review, 14(2), 112-123. Hugo, D., (2006). Planning and financing. New York, Author House. Khazeh, K & Winder,R. (2006). Hedging transaction exposure through options and money markets: Empirical findings. Multinational Business review, 14(1), 107-113. Tsuji,M & Fujibayashi,M(2011).The impact of Accounting for asset retirement obligation on smaller and medium size entities. Journal of international business research, 10(2), 78-105. Read More