Five Regulatory Characteristics Of Financial Statements Accounting Essay

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1.0 Introduction

The principles of accounting assignment consisted of 4 tasks. The task 1 is about the descriptions of five different users which are employees, managers, investors, suppliers, and also customers. Other than that, the task 1 also consisted of the explanation for five regulatory characteristics of financial statements.

Task 2 is about the necessary workings of the other information that has been provided in the assignment question which is note from (a) until (h) in order to complete the task 2 by complete prepare the income statement and the balance sheet of Continental Limited for year ending 31 Dec 2010.

Task 3 is the working that done by the author to prepare the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 in the accepted format for external reporting or publication.

Task 4 is the calculation of the appropriate accounting ratios for year ending 31 Dec 2010 based on the income statement and balance sheet that has been made in task 2 and 3. Besides that, task 4 also consisted of the comparison with the industry averages provided to access the profitability and liquidity of Continental Limited.

2.0 Presentation and analysis of findings

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The findings consisted of the explanations, workings and calculation for the task 1, 2, 3, and 4 in order to complete the whole assignment.

2.1 Definition of Task 1

The definition of task 1 is about the five different users, their need for Continental Limited financial statements and the explanation of financial statements with five regulatory characteristics that will provide useful information to the users.

2.1.1 Five types of accounting users

Investors: In the website of helium.com, it stated that the "shareholders, partners or institutional investors base their investment decisions on the financial position and profitability of a business". It explained that the investors need the financial statements to know whether it's worth or not for them to invest their money inside the business or buying the shares of the company.

Suppliers: The research for suppliers in the website of helium.com, it shows that the "suppliers are concerned with whether they should supply an organization on credit and might want to deal with the company as a going concern". It means that the suppliers need the company's financial statements to ensure whether there's no bad debts happen from their collection from the company.

Employees: In earlier research, accounting-simplified.com stated that the "employees need the financial statements to accessing the company's profitability and the consequences on their future remuneration and their job security".

Managers: These are the people who appointed by the company's owners to supervise day-to-day activities of the company. They need financial statements to know about the company's financial statements and for them to make decision effectively when managing the company so it will lead them to be more efficient. Other than that, they're able compared the profit that made in this month and last month with the financial statements.

Customers: Customers are the people who're buying goods and services from the company. They need financial statements to ensure the company is secure because they will take the risk if the business close down.

2.1.2 Five regulatory characteristics of financial statements

Understandability: Although the financial statements can be quite complicated for the uninitiated to understand, users must be able to understand the information. This applies to the format or layout of the statement, and using the term policy to provide the methodology and assumptions used in the statement. Users of financial statements are assumed to have sufficient knowledge to learn the correct information. Understandability, ensuring that users are equipped with the basic knowledge to be able to identify information related to corporate performance and financial condition.

Relevance: Financial statement users to make economic decisions, information must be relevant to the decision, the consumer needs to do. Once all the items in the financial statements, to help the user to evaluate historical events or the future, information about the user in a statement. Information will affect the results of the consumer economy, related to the nature of the information, and the impact (of the substance). Materials, contributing to one of the assumptions used in financial reporting.

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Reliability: In the accounting context, "reliable" information is free from mistakes will affect the results of the consumer economy, material error and bias. In other words, the financial statements can be trusted to be fair, there is always the results and financial position of an entity. Consumers must have confidence in the financial statements misleading or deliberately build an entity that is presented in a good light. Core functions of the audit are used to strengthen the reliability of information in the financial statements.

Comparability: Imagine that you see providing different from other companies in the same industry, different from the previous release, although preparing the financial statements of the company. It is likely that the user will not be able to be used to compare between companies, as time goes by reality. Over time, a certain degree of transparency, the financial statements for comparison and comparability between entities. Comparability by the consistent presentation and disclosure of accounting policies, especially in the project to be a comparison, can use a different entity but equally effective methods such as linear / declining balance depreciation or the average cost method. This shows that the financial statements are not necessarily comparable uniform, but only accurate comparison.

Timeliness: In the website of Accounting-simplified.com, it stated that the definition for timeliness is "Timeliness principle in accounting refers to the needs for accounting information to be presented to the users in time to fulfill their decision making needs". Timeliness of accounting information is highly desirable, since they are generally more user-relevant information, presented in a manner contrary to timeliness and the delay in providing information that is often presented is not related to the decision-making needs of users. Therefore, the principles of timeliness are closely related to the relevant principles. Punctuality is very important to protect the users of accounting information based on their results, and out-of-date information. Imagine, problems may occur, if the company is after 12 months of financial accounting statements issued to the public. Financial statements, such as potential investors, consumers may find it difficult to assess whether the company's current financial situation has completely changed, as shown in the financial statements.

2.2 Definition of Task 2

The author defined task 2 as the working of notes (a) until (h) in order to complete the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 for the internal use by the company directors and management.

2.2.1 The workings of task 2

The necessary workings of note (a) until (h) shown below.

Working for note (a) of the assignment question:

The closing stock is recorded at the cost or net resale value and it should be the lower amount in between the cost and net resale value. Since cost RM65000 < net resale value RM70000, The lower amount which is in the cost should be the closing stock value that will put into the trading account of income statement and under the current asset in balance sheet.

Working for note (b) of the assignment question:

Cash account

Sales (Difference) RM5000 Purchases RM4000

Stationery RM700

Electricity RM300

RM5000 RM5000

The amount that recorded in sales from trial balance is RM360000. Hence, the RM360000 which recorded in sales from trial balance will be put into the sales in trading account of income statement. RM360000 from trial balance + RM5000 = RM365000. The purchases that recorded in trial balance are RM200000 + RM4000 = RM204000 and the total up of RM204000 will be put into the purchase in trading account of income statement. Stationery as expense will put into Profit & Loss account of income statement = RM700. The electricity & water in Profit & Loss account of income statement = RM7000 from trial balance + RM300 = RM7300.

Working for note (c) of the assignment question:

Sales commission as expenses put into profit & loss account of income statement, it means that RM18000 that paid from trial balance + RM1500 accrued at the end of the year and it equal to RM19500. After that, the accrued sales commission RM1500 is recorded under the category of current liability in the balance sheet.

Office salaries consider as the category of expenses that will put into the profit & lost account of the income statement. Therefore, RM28000 from the trial balance minus (-) RM2000 prepaid at end of year and it equal to RM26000. RM2000 which is prepaid office salary is recorded under the category of current asset in the balance sheet.

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Working for note (d) of the assignment question:

Debtor account

Balance b/d RM75000 (-) Bad debts RM5000

Balance c/d RM70000

RM75000 RM75000

Balance b/d RM70000

Bad debts account

Debtor RM5000 P/L account RM5000

Provision for bad debts account

31 Dec 2010 Balance c/d RM7000 1 Jan 2010 Balance b/d RM5000

P/L account RM2000

RM7000 RM7000

1 Jan 2011 Balance b/d RM7000

Working for note (e) and (f) of the assignment question:

Vehicles account

Balance b/d RM300000 Vehicle disposal account RM50000

Balance c/d RM250000

RM300000 RM300000

Balance b/d RM250000

Provision for depreciation on vehicle account

Vehicle disposal account RM12500 1 Jan 2010 Balance b/d RM60000

31 Dec 2010 Balance c/d RM60000 P/L account RM12500

RM72500 RM72500

1 Jan 2011 Balance b/d RM60000

Vehicle disposal account

Vehicle cost sold RM50000 Provision for depreciation RM12500

Proceeds from disposal of vehicle RM35000

P/L account RM2500

RM50000 RM50000

Provision for depreciation on premises account

Balance c/d RM54000 1 Jan 2010 Balance b/d RM40000

P/L account RM14000

RM54000 RM54000

Working for note (g) of the assignment question:

Taxation charge RM15300 is deducted from net profit at the bottom of income statement. It is also recorded as accrued taxation RM15300 under the current liability inside the balance sheet.

Working for note (h) of the assignment question:

Proposed dividend to be deducted from net profit at the bottom of income statement is equal to 2% x RM500000 and share capital from Trial balance equal to RM10000. After that, the proposed dividend RM10000 is recorded under current liability in balance sheet.

2.2.2 Income statement of Continental Limited

Income Statement of Continental Limited for year ending 31 Dec 2010 for internal use

RM RM RM

Sales 365000

(-) Return inwards (10000)

Net sales 355000

(-) Cost of sales:

Opening stock 50000

(+) Purchases 204000

(-) Return outwards (15000)

(+) Carriage inwards 5000 194000

(-) Closing stock (65000) 179000

Gross profit 176000

(+) Income:

Dividend received 5000

181000

(-) 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 vehicles 2500

Depreciation on vehicles 12500

Depreciation on premises 14000

Vehicles expenses 12000

Interest charge 3000 104500

Net profit 76500

(-) Taxation charge (15300)

(-) Proposes dividend (10000)

Profit for the year 51200

(+) Retained earnings brought forward 100000

Retained earnings carried forward 151200

2.2.3 Balance sheet of Continental Limited

Balance sheet of Continental Limited as at 31 Dec 2010 for internal use

RM RM RM

Fixed assets/ Non-current assets

Office premises at cost 350000

(-) Provision for depreciation on premises (54000) 296000

Vehicles at cost 250000

(-) Provision for depreciation on vehicles (60000) 190000

Long-term investment 100000

586000

Current assets

Closing stock 65000

Debtors 70000

(-) Provision for bad debts (7000) 63000

Bank 42000

Prepaid office salary 2000 172000

758000

Issued share capital

Share capital 500000

(+) Reserve

Retained earnings carried forward 151200

Shareholders' equity 651200

(+) Long-term liabilities/ Non-current liabilities

Loan 55000

(+) Current liabilities

Creditors 25000

Accrued sales commission 1500

Accrued taxation 15300

Proposed dividend 10000 51800

758000

2.3 Definition of Task 3

Task 3 defined as the workings of the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 in the accepted format for external reporting or publication.

2.3.1 Distribution Costs 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 vehicles 2500 --

Depreciation on vehicles 12500 --

Depreciation one premises -- 14000

Vehicles expenses 12000 --

Total 53500 48000

2.3.2 Income statement in accepted format

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 for the year 61200

Proposed dividend (10000)

Retained profit for the year 51200

Retained profit brought forward 100000

Retained profit carried forward 151200

2.3.3 Balance sheet in accepted format

Balance sheet of Continental Limited for the year ending 31 Dec 2010 for external reporting

RM RM RM

Fixed Asset

Tangible Asset:

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

(-) Creditors: Amounts Falling Due Within One Year

Creditors 25000

Accrued sales commission 1500

Accrued taxation 15300

Proposed dividend 10000

(51800)

Net Current Assets 120200

Total Assets Less Current Liabilities 706200

(-) Creditors: Amounts Falling Due After More Than One Year

Loan (55000)

651200

Capital and Reserves

Called up share capital 500000

Profit and Loss account 151200

651200

2.4 Definition for task 4

The author defined task 4 as the calculation of the appropriate accounting ratios for year ending 31 Dec 2010 and the comparison.

2.4.1 Table of ration calculation

Ratios with formula

Ratios calculation for year 2010

Industry average

Percentage of gross profit on sales

= Gross profit / Net profit x 100

176000 / 355000 x 100 = 49.57%

>

30%

Percentage of operating profit on sales

= Operating / Net profit x 100

74500 / 355000 x 100 = 20.99%

>

18%

Return on capital employed

(76500+3000)/706200 x 100% = 11.26%

>

9%

Current ratio

= Current asset / current liabilities

172000 / 51800 = 3.32:1

>

2:1

Stock turnover period

= 365 days / stock turnover

365days/stock turnover in times

= 365/3.11=117.36days

>

90 days

Debtors collection period

= Debtor ratio x 365days

63000 / 355000 x 365 days = 64.7 days

>

45 days

Creditor payment period

= creditor ratio x 365 days

25000 / 189000 x 365 days = 48.28 days

<

60 days

Working for (e)

Stock turnover = cost of sales / average stock value

= cost of sales / (opening stock + closing stock) / 2

= 179000 / (50000 + 65000) / 2

= 179000 / (115000/2)

= 179000/ 57500

= 3.11times

Working for (f) = (debtor / net credit sales) x 365 days

= [63000 / (365000-10000)] x 365 days

= (63000 / 355000) x 365 days

= 64.7 days

Working for (g) = (creditor / net credit purchase) x 365 days

= (25000 / 189000) x 365 days

= 48.28 days

2.4.2 Profitability of Continental Limited

The percentage with gross profit on sales for year 2010 after the ratios calculation which is 49.57% and it's greater than the industry average which is 30%. The comparison between the gross profit on sales and the industry is the percentage increased by 19.57% due to some reason such as controlling over its purchase cost in lower cost from the supplier and the efficiency in controlling its input cost by the effectiveness of using the materials or labour to reduce its input cost. Controlling over the input cost by the reason stated above is better than go on the industry average.

The percentage of operating cost after the ratios calculation is 20.99% and the percentage for industry average is 18%. The percentage of operating cost shows that it's greater than the industry average cost. Operating cost is the cost that spent for running business such as rent, salaries, insurance, electricity and water but excluding loan interest and overdraft interest. The percentage of operating cost is greater than the industry average cost because of the company is effecting on controlling in expenditure causing lower expenses incurred to increase its net profit earning.

Return on capital employed which given short form as ROCE was given definition by readyratios.com as "the measurement of the returns that a business is achieving from the capital employed, usually expressed in percentage terms." The percentage for return on capital employed is 11.26% and it's greater than the industry average which is 9%. The reason of the percentage of return on capital employed is higher than the industry average is because of the effectiveness of using capital employed in production and business activities to reduce production and sales volume as well as to increase the net profit earning.

2.4.3 Liquidity of Continental Limited

The current ratio is used to measure the financial status and ability of firm in using current assets to finance its current liabilities. The current ratios for Continental Limited after the ratios calculation for 2010 are 3.32:1 and the industry average is 2:1. If the current ratios calculation is lower than 2:1, it means that the current assets of the company facing financially unstable or some financial problem such as short term financial problems.

The stock turnover of Continental Limited after ratios calculation is 117.36days and the industry average is 90 days. The lower stock turnover and the longer stock turnover period indicate slow stock turnover in business where the goods purchased are kept in stock for a long time and then slowly taken out for resale so that the stock is accumulated to tie up money, causing short-term financial problem.

The calculation ratios of debtor collection period for the year ended 31 December 2010 is 64.7 days which is more than the industry average which is 45 days. The debtor collection period are used to measure the size or amount of debtor accumulated from credit sales made and how long is the time to collects back the debts from the debtors. The shorter time to collect back the money is the better for the company because the money that owed by the debtors will not be tied up.

The calculation ratios of creditor payment period for the year ended 31 December 2010 which is 48.28 days and it's shorter than the industry average which is 60 days. The shorter days for the creditor payment period are not good because the company need money to turnover from avoiding the short term financial problems.

3.0 Conclusion & Recommendation

From the task 1, the author learnt about the five regulatory characteristics of financial statements, account users and their needs for the financial statements. Then come with task 2, the author has learnt how to do the adjustments in the financial statements. After that, the things that the author had learnt about in the assignment tasks 3 are the way how to do the financial statements in accepted format. Other than that, the author also learnt how to calculate, comment, compare and contrast about the accounting ratios.

In conclusion, the author think of doing the principles of accounting assignments really helps a lot because of the efforts that have put on the research to be more understanding about the accounting assignment and more clear about the topics in the assignment.