The Characteristics Of Financial Statement Accounting Essay

The Characteristics Of Financial Statement Accounting Essay The main purpose of this assignment is to determine the five types of accounting users, their needs for Continental Limited financial statement, prepared an income statement and balance sheet with necessary working for Continental Limited for year ending 31 Dec 2010 for the internal use, prepared the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 in accepted format for external reporting or publication and, an appropriate accounting ratios for year ending 31 Dec 2010 will be prepared base on income statement and balance sheet which done on task 2 and task 3. Last, industry averages provided to access profitability and liquidity of Continental Limited will be compared. Firstly, the accounting users can be categories into internal users and external users. Internal users includes of creditors, suppliers, investors, tax authorities, government agencies, customers, and financial analysts or adviser. Internal users are the users that inside or within an organization, it is usually includes of managers, employees, and shareholders. Next, the 5 characteristics of financial statement is comparability, reliability, timely, relevance, and accuracy. Table of Content Pages Introduction 3 Introduction to task 1 4 The 5 types of accounting users and their needs. 4-5 The 5Characteristics of Financial Statement 6-7 Conclusion for task 1 7 3.0 Introduction for task 2 8 3.1 The process of preparing income statement and balance sheet for 8-16 Continental Limited 3.2 Conclusion for task 2 16 4.0 Introduction to Task 3 17 4.1 Classify expenses into contribution cost and Administrative expenses. 17-20 4.2 Conclusion for task 3 20 5.0 Introduction for Task 4 21 5.1 Calculation of accounting ratio 22-23 5.2 Comparison between Continental Limited and Industry Averages to Assess 24 Profitability 5.3 Comparison between Continental Limited and Industry Averages to Assess 25 Liquidity 5.4 Conclusion for task 4 26 6.0 Conclusion and recommendation 27 7.0 Reference 28-29 Introduction Accounting is a system where an organization uses to record all the business transaction. It can help organization to analysis their business performance or make any business decision. According to Michael Russell, he demonstrates that account is a recording of financial or money transactions. In task 1, the five types of accounting users and their needs for Continental Limited financial statement will be defined. Besides, the five regulatory characteristics of the financial statements that help to provide useful information to those accounting users will be explain too. Accounting users is the people who need accounting information to make decisions, invest, planning and budgeting. In task 2, an income statement and balance sheet with necessary working for Continental Limited for year ending 31 Dec 2010 for the internal use by company directors and management will be prepared. Income statement can help organization to note down the expenses and profit and it usually prepared for 1 time in years. In task 3, the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 in accepted format for external reporting or publication will be prepared. Which is means that after the income statement and balance sheet of Continental Limited prepared, it will be shown to the public or outsiders for external reporting. In task 4, an appropriate accounting ratios for year ending 31 Dec 2010 will be prepared base on income statement and balance sheet which done on task 2 and task 3. Next, the industry averages provided to access profitability and liquidity of Continental Limited will be compared. 2.0 Introduction for Task 1 In task 1, 5 types of accounting users and their needs for the financial statement of Continental Limited will be discussed. Next, the 5 regulatory characteristics of these financial statements that will provide useful information to the users will also be defined in this task. 2.1 The 5 types of accounting users and their needs. Users of accounting can be categories into external users and internal users. External users are the users outside of the organization which includes of creditors, suppliers, investors, tax authorities, government agencies, customers, and financial analysts or adviser. Internal users are the users that inside or within an organization, it is usually includes of managers, employees, and shareholders. The first type of accounting users is managers of the company. Manager is a person who in charge in overseeing and manage all the activities of others working which includes of planning, organizing, leading and controlling. Accounting information is needed to a manager to know that whether the organization are earning or losing. Accounting information also helps managers in making business decision because it can let manager know that the current financial situation of an organization. Besides, it also helps managers to know how much their customers owe and how much they owe to their suppliers. Accounting information also helps managers in organization budgeting process by know the financial situation of the organization and allocate the money to each department wisely. Accounting information are important to managers to ensure their business are managed efficiently and effectively. The second type of accounting users is suppliers or creditors. Suppliers are the person who provide or supply products or services and in return get an agreed payment. But usually suppliers didnt have proper communication and less interact among each others. Suppliers need to know an organization accounting information to know the current financial situation of an organization whether the organization able to pay the debts that the organization owe. Supplier also includes of money lenders such as bank or landlord. So, if they want to lend money to the organization, they had to check the current financial situation to make sure they will be able to pay back in future. The third type of accounting users is investors. The people who wish to invest to an organization with expectation to get back reasonable profit in return are known as investors. So, they need to know about the organization account information to measure the performance of the organization and see whether it is worth to invest or might bring loss to the investors The forth type is the employees of the organization. Employees is the people who are recruit by the organization and use to provide products and services and get salary in return. They must know the account information of an organization to insure employees benefits or pension funding is able to pay to them. The fifth type is the shareholders or owners of the company. They are the boss of the company, so they were needed to know the performance of the organization and determine the future plan. Besides, they also need to know the accounting information to know how much they can withdraw as dividend payment. So, these are the five types of accounting users that use financial information to fulfill their different types of needs. 2.2 The Characteristics of Financial Statement Financial statement is a document that use to record down all the business transaction or the organization financial activities. Financial statement are includes of trial balance sheet and income statement. The first characteristic of financial statement is relevance. Relevance is use to generate more information to helps all accounting users in decision making. It can help accounting users to predict future outcome such as profit or loss. To ensure the accounting information are accurate, so those financial account prepare based on accounting concepts and policies present must be relevant which is capable of influencing the economic decision of the users. The second characteristic of financial statement is timely. Timely is referring to the information which is present or past. So that the accounting information that accounting users received are trustworthy and useful in helping them make any decision. If the account information not prepared to provide information in time, it will affect the decision making of accounting users which might cause loss. The third characteristic of financial statement is accuracy. Accuracy is about how preciseness of the financial statement of an organization that provides many important information to all accounting users. If the financial statement are not accurate or made in past time, it may cause many problem to an organization in planning their future activities and affect the decision making of accounting users. The next characteristic is reliability. Financial statement must be reliability to make sure that it can fulfill accounting users needs. A financial statement is reliability when it able to reflects the substance of transaction to present faithfully and truly what has already happened. Next is the financial statement are done free from bias and it is neutral. Last, the financial statement must in prudent and realistic where there is any uncertainty. The last characteristic of financial statement is understandability. A financial account should be prepare in a condition which easy to understand by others that have knowledge or experiences in business, accounting and those economics activities. So, these are the five characteristic of a financial statement that an organization should revise when preparing the company business financial accounts. 2.3Conclusion for task 1 In my conclusion, there are many types of accounting users that use account to fulfill their need. Their needs includes of making decision, invest, giving loan and know the situations of the organization. Besides, there are also 5 types of criteria of financial statement that an organization should revise when they preparing financial statement. 3.0 Introduction for task 2 In task 2, the income statement and the balance sheet of Continental Limited for the end of 31 December 2010 will be prepared. It will be prepared in an accepted format for the needs of external reporting and publication. 3.1 The process of preparing income statement and balance sheet for Continental Limited (A)Closing stock should be recorded at cost or net resale value which one is lower. Since cost RM65000 (B) Cash Account RM RM Sales 5000 Purchase 4000 Stationery 700 Electricity 300 5000 5000 Sales in trading account of income statement =RM360000 + RM5000=RM365000 Purchase in trading account of income statement =RM200000+RM4000=RM204000 Stationery as expense put in profit loss account of income statement=RM700 Electricity water in profit loss account of income statement= RM7000+RM300=RM7300 (C) Sales commission as expense put in profit loss account of income statement =RM18000 (paid from trial balance) +RM1500 (accrued at end of year) =RM19500 Then, the accrued sales commission RM1500 is recorded under current liability in balance sheet. Office salaries as expense put in profit loss account if income statement. =RM28000 (paid from trial balance) -RM2000 (prepaid at the end of year)=RM26000 Then, prepaid office salary RM2000 is recorded under the current asset in balance sheet. (D) Debtor Account RM RM Balance B/D 75000 (-) Bad debts 5000 Balance C/D 70000 75000 75000 Balance B/D 70000 Bad debts account RM RM Debtor 5000 P/L account 5000 Provision for bad debts closing balance =10% x Debtor closing balance RM70000= RM7000 Provision for bad debts account RM RM 31 Dec 2010 Closing Balance C/D 7000 1 Jan 2010 Opening Balance B/D 5000 Increase different 2000 7000 7000 1 Jan2011 Balance B/D 7000 (E.F) Vehicles account RM RM Balance B/D 300000 Vehicles disposal a/c 50000 Balance C/D 250000 300000 300000 Balance B/D 250000 Provision for depreciation on vehicle account RM RM Vehicle disposal account 12500 1 Jan 2010 Opening Balance B/D 60000 31 Dec 2010 Balance C/D 60000 Depreciation as expense put in P/L account 12500 72500 72500 1 Jan 2011 Balance B/D 60000 Vehicle disposal account RM RM Vehicle cost sold 50000 Provision for depreciation on vehicle sold 12500 Proceed from disposal of vehicle 35000 Difference for loss on disposal of vehicle 2500 50000 50000 Provision for depreciation on premises account RM RM Balance C/D 54000 1 Jan 2010 Opening Balance B/D 40000 Depreciation as expense put in P/L account 14000 54000 54000 Balance B/D 54000 (g) Taxation charge RM15300 is deducted from net profit at the bottom of income statement. It is also recorded as accrued taxation RM15300 under current liability in balance sheet. h) Proposed dividend to be deducted from net profit at the bottom of income statement =2% x RM500000 (share capital from trial balance) = RM10000 Then, the proposed dividend RM10000 is recorded under current liability in balance sheet. Income statement of Continental Limited for year ending 31 Dec 2010 for internal use RM RM RM Sales 365000 Less Return Inwards 10000 Net Sales 355000 Opening Stock 50000 + Purchase 204000 Return outwards 15000 + Carriage inwards 5000 244000 Less Closing Stock 65000 179000 Gross Profit 176000 Add Income: 5000 Dividend received 181000 Less Expenses: Stationery 700 Office electricity water 7300 Office salaries 26000 Sales commission 19500 Bad Debts 5000 Increase in provision for bad debts 2000 Loss on disposal of vehicle 2500 Depreciation on vehicles 12500 Depreciation on premises 14000 Vehicle expenses 12000 Interest charge 3000 104500 Net profit 76500 Less Taxation charge 15300 Less proposed dividend 10000 Profit for the year 51200 Add Retained earnings brought forwards 100000 Retained earnings carried forward 151200 Balance Sheet of Continental Limited as at 31 Dec 2010 for internal use Fixed assets/ Non-current assets RM RM Office premises at cost 350000 (-) Provision for depreciation on premises (54000) Vehicles at cost 29600 (-) Provision for depreciation on vehicles 250000 Long-term investments (60000) Current assets 190000 Closing stock 65000 Trade debtors 70000 -Provision for bad debts (7000) 63000 Bank 42000 Prepaid office salary 2000_ 172000 758000 Issues share capital Share capital 500000 Add Reserve Retained earnings carried forward 151200 Shareholders equity 651200 Add Long-term liabilities/ Non-current liabilities Loan 55000 Add Current Liabilities Creditors 25000 Accrued sales commission 1500 Accrued Taxation 15300 Proposed dividend 10000 51800 758000 Conclusion for task 2 In my conclusion, income statement and balance sheet of an organization is very important to know that organization are now in profit or loss. 4.0 Introduction for task 3 In task 3, the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 in accepted format for external reporting or publication will be prepared. Which is means that after the income statement and balance sheet of Continental Limited prepared, it will be shown to the public or outsiders for external reporting. 4.1 Classify expenses into contribution cost and Administrative expenses. Distribution costs Administrative expenses RM RM Stationery 700 Office electricity water 7300 Office salaries 26000 Sales commission 19500 Bad debts 5000 Increase in provision for bad debts 2000 Loss on disposal of vehicle 2500 Depreciation on vehicles 12500 Depreciation on premises 14000 Vehicles expenses 12000 Total 53500 48000 Income statement of Continental Limited for year ending 31 Dec 2010 for external reporting RM RM Turnover 355000 Cost of sales 179000 Gross profit 176000 Distribution costs 53500 Administrative expenses 48000 101500 Operating profit 74500 Dividend received 5000 79500 Interest charges 3000 Profit on ordinary activities before taxation 76500 Taxation charge 15300 Profit on ordinary activities after taxation of the year 61200 Proposed dividend 10000 Retain profit for the year 51200 Retained profit brought forward 100000 Retained profit carried forward 151200 Balance sheet of Continental Limited for the year ending 31 Dec 2010 for external reporting Fixed Assets RM RM RM Tangible assets: Premises 296000 Vehicles 190000 486000 Investment: Long term investment 100000 586000 Current Assets Stock 65000 Debtors 63000 Prepaid office salary 2000 130000 Cash at bank 42000 172000 Less Creditors: Amount Falling Due Within One Year Creditor 25000 Accrued sales commission 1500 Accrued taxation 15300 Proposed dividend 10000 (51800) Net current assets 120200 Total Assets Less current Liabilities 706200 Less Creditors: Amount Falling Due After More Than One Year Loan (55000) 651200 Capital and Reserves Called up share capital 500000 Profit and loss account 151200 651200 3.2 Conclusion for task 3 In my conclusion, income statement and balance sheet for external reporting or publication must be prepared neatly and precisely. Because it might affect the image and the business of the organization, Introduction for task 4 Accounting ratio is one of the ways to define the relationship among result and the others, such as balance sheet, and profit loss account. Accounting ratio can use to measure the efficiency, effectiveness and profitability of the organization according to its financial reports. 5.1 Calculation of accounting ratio The table below is the calculation of the accounting ratio between Continental Limited and the industry averages for year ending 31 Dec 2010. Ratio with formula Ratio calculation Industry for year 2010 averages Percentage of gross profit on sales 17600 x 100 30% = Gross profit x 100 355000 Net sales = 49.58% Percentage on operating profit on sales 74500 x 100 18% = Operating profit x 100 355000 Net sales = 20.99% Return on capital employed 9% = Net profit before interest x 100 (76500 + 3000) x 100 and taxation 158000-51800 Total assets-current liability =11.26% Current ratio 2:1 = Current assets 172000 Current liabilities 51800 = 3.32 : 1 Stock turnover period 90 days = 365 days 365 days/3.11 times Stock turnover in Times = 117.36 days Stock turnover = Cost of sales Average stock value Average stock = (Opening stock value + Closing stock value) / 2 = (50000 + 65000) /2 = 57500 Stock turnover = 179000 57500 =3.11 Times Debtor collection period 0.177 x 365 days 45days = Debtor ratio x 365 days = 64.6 days Debtor ratio = Debtor Net credit sales = 63000 355000 = 0.177 : 1 Creditor payments period 0.132 x 365 days 60 days = Creditor ratio x 365 days = 48.18 days Creditor ratio = Creditor Net credit purchase = 25000 (204000-15000) =0.132 : 1 Comparison between Continental Limited and Industry Averages to Assess Profitability According to the table above, it has state that the gross profit margin of Continental Limited is 49.58% while the gross profit margin of industry average is 30%. In this situation, when the gross profit margin are higher, it means that the organization are controlling their purchasing cost effective and efficient Besides, it also show that the organization perform good in allocating their raw materials and labor force to helps in reduce production cost and increase their gross profit. Next, the operating profit margin of Continental Limited ratio calculation for year 2010 is 20.99% while the industry average is 18%. When the operating profit margin is high, its means that the organization profits are still high even finish paying those variables cost. Operating profit margin can show whether an organization are effectively in their expenses and variable cost. Lastly, the return on capital employed (ROCE) of Continental Limited in 2010 is 11.26% while it is 9% in industry average. ROCE are usually used to measure all the resources that available in the organization and demonstrate the efficiency and revenue of an organization. So, when the percentage of ROCE becomes higher, the performances of the organization are better. The percentages of Continental Limited is higher than the industry average, Comparison between Continental Limited and Industry Averages to Assess Liquidity According to the table above, it has show that the current ratio of Continental Limited is 3.32:1 and the current ratio of industry average is 2:1. Current ratio is use to measure the financial status and the ability of the organization in using their current assets to finance its current liabilities. In this situation, it shows that the finance of the organization is stable and did not face any short-term financial problems. Secondly, is the stock turnover period of Continental Limited which is 117.36 days and the industry average is about 90 days. Stock turnover period is the time that the goods keep before purchased by customers. In this situation, Continental Limited had longer stock turnover period compare to the industry average, it might cause short-term financial problem because of keeping stock for long time and slowly taken out for resale. Next is the debtor collection period. The debtor collection period of Continental Limited is 64.6 days and 45 days for industry average. Based on this period we can know that Continental Limited is taking longer time than industry average to collect debts from the debtors. It might cause organization having shortage of pay back those liabilities and face short-term finance problem. In last, the creditor payment period of Continental Limited is 48.18 days and the industry average is 60days. Which shows that Continental Limited has the shorter time to pay the creditors compare to industry average and it might cause lack of many to pay back the creditors Conclusion for task 4 In my conclusion, accounting ratio can enable an organization or accounting users understand the liquidity and profitability of an organization. So, it make easier when an organization plan for future of budgeting. 6.0 Conclusion and Recommendation In my conclusion, this assignment enables me to understand the usefulness and the function of the account which can helps to know well an organization easily. In task 1, the most common accounting users are defined and let me understand of the 5 basic characteristics of financial statement. So, it helps a lot in preparing an organization financial statement. While in task 2, it let me know that income statement and balance sheet of an organization is very important to know that organization are now in profit or loss. It also let me let the proper way in preparing balance sheet and income statement for an organization. In task 3, income statement and balance sheet for external reporting or publication must be prepared neatly and precisely. Because it might affect the image and the business of the organization, In task 4, accounting ratio can enable an organization or accounting users understand the liquidity and profitability of an organization. So, it make easier when an organization plan for future of budgeting.