Financial reporting: Damas Company Pvt Ltd

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INDIVIDUAL ASSIGNMENT

SUBJECT TITLE: FINANCIAL ACCOUNTING

DUE DATE: 09th APRIL 2015

INTRODUCTION

In 1978, Mr. Mohamed Salih, the Chairman of the company set up Dimms Pvt. Ltd. in Male’ with his business partner, which became one of the most established business names in the country. The partners of Dimms decided to dissolve the company and split their business in 2000. Damas Company came into being in the same year.

Damas Company is one of the largest business companies in the Maldives. They offer a wide range of products and services for households and businesses. The Company serves a broad base of customers across different industries catering to their needs and demands and an expanding swath of consumers and corporate customers across the country ensuring availability and access to products and services that continue to enhance their lives.

CONTEXT AND PURPOSE OF FINANCIAL REPORTING

Financial reporting is a way of recording, analysing and summarising financial data. Damas Company and others uses the documents and records to put together to track and review how much profit their business is making or not. The primary purpose of this report is to provide relevant and useful information to the owners of a company where there is a division between the ownership and control of that company. This occurs mainly in public limited companies, where share capital is sold to the public through a stock market/exchange system. The diverse and potentially geographically dispersed shareholders do not get involved in the management of their company. They appoint directors to do this on their behalf. The owners receive an annual statement summarising the performance and position of the company so that they can measure and analyse how well their investment has performed during the reporting period.

Without this reporting system investors would be less motivated to part with their capital as they would have no way of monitoring how effectively the company is being run by the directors.

CHARACTERISTICS OF FINANCIAL INFORMATION

Relevance

The information must be relevant to the needs of the users, which is the case when the information influences the economic decisions of users. This may involve reporting particularly relevant information, or information whose omission or misstatement could influence the economic decisions of users. For instance Damas Company provides productive values and feedback for the users. Predictive value helps users in predicting or anticipating future outcomes. For Example;

After thebalance sheet date but before the date of issue a company wants to dispose of one of its subsidiaries and is in final stages of reaching a deal but the outcome is still uncertain. If the company waits they are expected to find more reliable information but that would cost them relevance. The information would be outdated and no longer very relevant (Jan, n.d.).

Faithful representation

The financial information in the financial reports should represent what it purports to represent. Meaning, it should show what really are present and what really happened, as the case may be. There are three characteristics of faithful representation:complete, neutral and free from error.

1. Completeness (adequate or full disclosure of all necessary information).

2. Neutrality (fairness and freedom from bias).

3. Free from error (no inaccuracies and omissions).

Example;

A machine is leased to Company A for the entire duration of its useful life. Although Company A is not the legal owner of the machine, it may be recognized as an asset in its balance sheet since the Company has control over the economic benefits that would be derived from the use of the asset. This is an application of the accountancy concept of substance over legal form, where economic substance of a transaction takes precedence over its legal aspects (‘Faithful Representation using Substance over Form. Explained with Examples’, n.d.).

Comparability

Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. The information must be comparable to the financial information presented for other accounting periods, so that users can identify trends in the performance and financial position of the reporting entity. For example; profit for the last five years of the company. For example;

If a company that retails leather jackets valued its inventory on the basis of FIFO method in the past, it must continue to do so in the future to preserve consistency in the reported inventory balance. A switch from FIFO to LIFO basis of inventory valuation may cause a shift in the value of inventory between the accounting periods largely due to seasonal fluctuations in price (‘Comparability of Financial Statements explained with example’, n.d.).

Verifiability

Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent. It means that different knowledgeable and independent observers could reach consensus that a particular depiction is a faithful representation.

Timeliness

Timeliness means providing information to decision-makers in time to be capable of influencing their decisions. It shouldn't be significantly delayed or else it will be of little or no value.

Understandability

The information must be readily understandable to users of the financial statements. This means to be understandable, information should be presented clearly and concisely, with additional information supplied in the supporting footnotes as needed to assist in clarification.

ACCOUNTING CYCLE AND DOUBLE ENTRY

The accounting cycle is performed during the accounting period, to analyse, record, classify, summarize, and report financial information.

There are eight steps in accounting cycle.

  1. Occurrence of transactions

Economic events requiring recognition according to the criteria are evidenced by source documents. For examples sale or return of a product, the purchase of supplies for business activities, or any other financial activity that involves the exchange of the company’s assets, the establishment or payoff of a debt, or the deposit from or pay out of money to the company’s owners.

  1. Analysis of transactions

Based upon the evidence available, the transaction or event is classified and measured in order to know which accounts are affected and by how much.

  1. Recording of transactions

Upon analysis, the transaction is recorded in a journal, which provides a chronological record of an entity’s activities. The journal entry includes the date, titles and numbers of accounts affected, and the specific debit or credit dollar amounts.

  1. Posting to ledger accounts

Each amount in the journal is transferred to the appropriate ledger account. The entire set of accounts is known as the general ledger.

  1. Preparation of trial balance

A list of all accounts and their balances is prepared to ensure the accuracy of the recording and posting processes by making sure the sum of debit balances equals the sum of credit balances.

  1. Adjustment of balances

All account balances must be examined prior to preparation of financial statements, and updated as needed through adjusting journal entries posted to the ledger.

  1. Preparation of financial statements

You prepare the balance sheet and income statement using the corrected account balances. For example balance sheet at the end of the year 2014.

  1. Closing of temporary accounts

All temporary account balances are transferred to retained earnings via closing entries, leaving all temporary account balances at zero. Closing entries must be journalized and posted to the ledger and a post-closing trial balance is prepared.

CONCLUSION

To conclude, I hope this report give you an idea and many information about Damas Company Pvt Ltd and accounting information about Damas Company Pvt Ltd. Moreover this report contains explanation about characteristics of accounting information and stages included in information cycle.

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REFERENCE

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