Introduction to Business Accounting - Essay Example

? Introduction to Business Accounting Question Dainty Ltd. Financial ments Dainty Ltd Income Statement for the year ended 31st March’2013 Sales Revenue 2,880,000 Cost of Goods Sold(105000+1500000-120000) (1,485,000) Gross Profit 1,395,000 Operating Expenses (165,000) Administration Expenses(189000+8000) (197,000) Utilities Expense(27000-6000) (21,000) Depreciation Expense (666,000) Bad Debt Expense (30,000) Provision for Bad Debt (78,000) Net Profit for the year 238,000 Dainty Ltd Statement of Financial Position as at the 31st of March’2013 Fixed Assets Property Plant and Equipment (600000-270000-90000) 240,000 Company Limo (2400000-1440000-576000) 384,000 624,000 624,000 Current Assets Cash (27000+30000) 57,000 Other Receivables 3,000 Inventory 120,000 Trade Receivables (810000-30000-78000) 702,000 Prepaid Utilities 6,000 888,000 888,000 Total Assets 1,512,000 Non-Current Liabilities Debenture 30,000 30,000 30,000 Current Liabilities Bank Overdraft 24,000 Trade Payables 510,000 Administrative Accruals 8,000 542,000 542,000 Total Liabilities 572,000 Equity Share Capital 756,000 Drawings (54,000) Profit for the year 238,000 940,000 940,000 Net Total 1,512,000 Question 2: Financial Statements as Relevant to the Annual Report of a Company: Introduction: The Financial Statements normally are presented in an entity’s annual report and provide a broad overview of where the company stands in terms of financial performance. Two integral components of these Financial Statements, crucial for the purpose of decision making and strategy formulation of the company, are the Statement of Financial Position and the Income Statement. While the ‘as at’ financial position is presented in the Balance Sheet (Statement of Financial Position), a detailed presentation in terms of Revenue generated against the expenditures incurred in that accounting period is depicted by the Income Statement (Statement of Comprehensive Income) (Vickerstaff & Johal, 2012). The Statement of Financial Position: Also commonly known as the Balance Sheet, the Statement of Financial Position reflects as to what is owned by the entity as ‘Assets’ or ‘Resource’ as opposed to what it owes to third parties as ‘Liabilities’ or ‘Payables’ at that point in time. It also represents Shareholders’ equity, which is sometimes referred to as Capital, which represents the resources that would remain if a company disposes all of its assets and settles all of its liabilities (Wood & Sangster, 2005). Some liabilities are to be settled within the near future (next 12 months) hence, are classified as ‘Current Liabilities’ while others with longer period of settlement are known as Non-current or ‘Long term Debts’. Similarly, some Assets have a life shorter than of 12 months and are likely to be fully utilized in the company’s operations during this time so are classified as ‘Current Assets’; whilst ‘Non-Current’ or ‘Fixed Assets’ are those that have longer lives and are thus utilized partly in one particular tenure. This utilization is charged as a periodic ‘Expense’ known as ‘Depreciation’ which later adds as a component to the Income Statement (Ferraino, 2011). The Income Statement: Also known as the Statement of Comprehensive Income, the Income Statement in broader terms is a portrayal of how much a company has earned against how much costs it has incurred in order to generate those earnings, eventually formulating the company’s profitability for that particular accounting period. While direct operational costs are incorporated as Cost of Sales, other incurred expenses such as Depreciation, Interest, Administration, Taxation, Distribution or Marketing are charged in individual ‘heads’, finally leading to the net Profit For the Year. (Wood & Sangster, 2008) Any other unusual or non-operational income can be classified separately under ‘Other Comprehensive Income’, for example income from a Litigation or Gain (or Loss) on disposal of Non-Current assets (ACCA, 2010). Financial Statements: Importance to Users and Stakeholders: Coming to the main purpose as to why Financial Statements are developed in the first place, why a stringent set of accounting standards and policies regulate company accounting (Wilson & Adler, 2012) and why a detailed analysis of a listed company’s financial performance is a legal requirement under company jurisdiction in most countries. (Rutherford, 2013) Any entity that generates revenue, incurs expenses, owns and owes resources directly or indirectly affects a number of third parties by its operations. These parties, therefore, have direct or indirect stake in the company and are referred to as Stakeholders. Stakeholders may vary from the company’s current or prospective Investors, its Employees, its Customers, its Suppliers, the Government, as well as the society and the natural environment it is operating in. Additionally, disclosures like the Going Concern Assumption (the assumption that the enterprise is expected to operate in the foreseeable future) if impaired, is also adequately disclosed in the Annual Report, along with probable future expected losses, Litigations filed against the company, and any resulting Contingent Liabilities (ACCA, 2010) and so on. Supporting information of such disclosures is related to the information provided in the relevant Financial Statements. Such factors are integral determinants for the company’s performance and expected future. Shareholders hold a direct stake in the company. Any Limited Company is liable to its shareholders up to the extent of their investment in the company, whereas Managers or Directors act at ‘Agents’ to the shareholders. They practice Strategic Management to control and manage shareholder funds and act in their best interest; all in all agreeing to the fiduciary responsibilities they have toward the shareholders (Kemp, et al., 2012). The company management is therefore answerable to the shareholders for any operational, non-operational or strategic decision that is carried, such as investment, divestment, merger, acquisition or fund raising, which would either involve shareholder funds or affect future anticipated performance. Such decisions, therefore, are of direct relevance to investors whether they are a large number of small scale investors, a small number of institutional investors or venture capitalists. Prospective investors would need to analyze viability and expected returns from investing their funds in the company (Davidson & Tippett, 2012). Existing investors would require the same information in decision making for continuing investment or portfolio management based on risks and returns from existing investment(Meckin, 2007). A Creditor with existing loan to the company would need to asses its position to pay off that liability or for credibility analysis for future debt issuance. The company’s supplier would want to assess the credit worthiness of the company in order to extend credit sales. The customer on the other hand would wish to know whether the company has adequate resources to continue a steady supply of its product or service. Similarly the general public would expect to know how the operational performance of the company is effecting the over-all economy, considering how share price fluctuations are a direct result of market expectations which are mainly determined by the financial performance of entities (along with certain external factors) (Brown, 2013). Government regulated authorities (such as Financial Services Authority, UK) would need appropriate disclosures for relevant accounting policies used by the company as well as asses the company’s compliance with existing or new policies and regulations set by company jurisdiction in the country. Tax disclosures made on the basis of net income for the year have to be verified by Government Tax Authorities for accuracy and legitimacy. All this information will be obtained via the financial statements presented in the Annual Accounting Report. Based on recent history, certain Non-Government Organizations are now a substantial influence for enterprises as well, becoming an important factor in determining company operations such that they are not antagonistic to the society as well as the natural environment (Corporate Social Responsibility being a product of this social change) (Osborne & Ball, 2012). Hence such third parties would wish to know that the company operations are designed in such a way that they do not at least act as hindrances to these causes if not contribute positively (Biondi & Zambon, 2013). Any user of financial statements, with reasonable accounting knowledge would rely on this representation of a company’s financial components in order to determine performance and profitability.(O'Hare, 2012). Subsequently, it can be noted that how this form of Financial Information is used in determining profitability and attractiveness for investment of an enterprise is of great significance too. With a vast number liquidity, investment and profitability ratios available, relevant stake holders can assess the company with their respective criteria. While already computed Financial Ratios may not always be a part of the disclosures in the Annual Report, they can still be performed by the users if necessary. This greatly assists in the decision making of the user hence fulfilling the primary purpose of the information presented in the Financial Statements. Therefore, it can be concluded that to attain know-how of the company, a user relies on the disclosed information in the Annual Accounting report. And the Statement of Financial Position and the Income Statement are of utmost importance in determining as to not only where the company currently stands in financial terms but also where it is anticipated to head in the near future. Reference ACCA, 2010. Financial Reporting (FR). 1 ed. Workingham, Berkshire: Kaplan Publishing UK. Biondi, Y. & Zambon, S., 2013. Accounting and Business Economics: Insights from National Traditions. 2 ed. London: Routledge. Brown, P., 2013. Financial Accounting and Equity Markets. 1 ed. London: Taylor & Francis Group. Davidson, I. & Tippett, M., 2012. Principles of Equity Valuation. 1 ed. London: Routledge. Ferraino, C., 2011. The Complete Dictionary of Accounting and Bookkeeping Terms Explained Simply. 1 ed. s.l.:ATLANTIC Publishing Company. Kemp, J., Schotter, A. & Witzel, M., 2012. Management Frameworks: Aligning Strategic Thinking and Execution. 1 ed. London: Routledge. Meckin, D., 2007. Naked Finance: Business Finance Pure and Simple. 1 ed. London: Nicholas Brealey Publishing. O'Hare, J., 2012. Analysing Financial Statements for Non-Specialists. 1 ed. London: Routledge. Osborne, S. P. & Ball, A., 2012. Social Accounting and Public Management: Accountability for the Public Good. 2 ed. London: Routledge. Rutherford, B., 2013. Financial Reporting in the UK. 1 ed. London: Routledge. Vickerstaff, B. & Johal, P., 2012. Financial Accounting. 1 ed. London: Taylor & Francis. Wilson, R. M. S. & Adler, R. W., 2012. Teaching IFRS. 1 ed. London: Taylor & Francis Group. Wood, F. & Sangster, A., 2005. Business Accounting: one. 10 ed. New Jersey: Financial Times/Prentice Hall. Wood, F. & Sangster, A. H., 2008. Business Accounting One. 11 ed. New Jersey: Financial Times/Prentice Hall. Read More