The Financial Activities In The Business Accounting Essay

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1.0 Introduction

Financial statement is to calculate and record the financial activities in the business. Financial statement also use to see what should the company do in the future like invest more, extend business, cut cost or cut budget. In this assignment, Continental Limited will need a financial statement to provide useful information to the users. Beside, question is also requiring including the five different users and regulatory characteristic which is management, owner as investor, employees, lender and customers.

Balance sheet will come after income statement. Balance sheet is we use end of the year. The function of balance sheet is to do a final check and also to know the business is in loss or profit. So the company will do the final decision based on the balance sheet result.

2.0 Content

2.1 Definition

Every business organization will need a financial statement to continue the business. The important of financial statement beside to know profit and loss, will also give others important information to the management officer. The important information included business plan work well or invested in the right way? The management of an organisation is a group of people who need and use financial statement. They are 5 types of people in the management of an organisation which is management, employees, customers, suppliers and investors. Every different type of people will get the information that they want from financial statement.

2.2 Answer for task 1

2.2.1 Management

The financial statement is the most important tools for this group of people. Management will collect the information from financial statement after that from the information management will make judgement and final decision. To make a big decision and judgement management need as much as possible of information to support their plan and decision to present to the owner.Financial statement will also give information to support on how the plan goes well and how it works better than the previous. Financial statement will lead the company to the right way beside it will also help the management people perform better plan than without any information.

2.2.2 Owner of investor

If the owner is the one who make decision like CEO, manager or else upper higher occupation officer than they no need to worry about barrier to blocking them to get the further or deeper information. Owner can give the financial statement to the investor or customer. Because financial statement will show how well is the company running now. Profitable or loss will show in the financial statement so the investor can know is the company potential to invest or not. Usually the sole proprietorship and partnership will be the CEO and the decision position, so if the high positioning worker also as an owner it got an advantage. Example like owner know well the company situation and how they company running, so when they do any investment or expanding they will know how much is the risk taking and also how much the return they will gain. For others like limited company, they got a lot of shares besides they got over 100 of worker so the company will more complicated than the small company. In this situation, income statement will help the owner invest or not to invest. It also helps the investor to pull the business selling the shares or buy more shares.

2.2.3 Employee

Employee will also concern about the result of the financial statement. Because if the business go well, the employee will be gain, Company goes well employee will get extra bonus, incentive, leave or even retirement benefit. Even the retired workers also will pay concentrate to them because if the company gain more the retired worker will also get extra pension in particular month.If the income statement result is good, employee will benefit by depending on what the level position, amount of salary, occupation or working position. Beside this maybe the company will also employ more worker or more facilities in the company to let the worker to enjoy, like more security guard, locker to store personal things, better working condition and others benefits. So the employ are also a group of people who care financial statement.

2.2.4 Supplier

Supplier will be another group to concern about the financial statement result. If a company are earning they will save and confirm they can get back the money they have been supplied. Supplier will put more effort to financial statement because suppliers are the most dangerous group if the company get bad return. If financial statement in bad result, the issue that they have to face like the company can't afford to pay them back, the company will stop ordering any raw material or order any goods from the company and others risk. So before the supplier do any business to the dialler, they will do much research like checking the financial statement to confirm to company will able to pay back the fund.

2.2.5 Customer

Customer also will play a role in concerning financial statement. The customer will also want to know, some of them will buy the public shares from the public shares market. The financial report result will influence the shares price increase or decrease. Besides than consumer will hope the company offer or celebrate they got the good result in the past year. Some of them will hope the company to grow bigger, so mass production will decrease the producing price at the same time the selling price will also decrease.

2.3 The 5 characteristic

2.3.1 Relevance

The financial account is creating according to accounting concept and policies. And beside is how we relate to financial information. This could be influence the economic decision of the users,

2.3.2 Timely

Before we relevant the financial information to the decision making of users, we should also depend on timing. If timing shows in time to let the people get information it will be perform well. Oppositely if the financial information is providing after the decision make, it will be useless for people. If the accounts are prepared to provide require information in time, it is not relevant to the decision making of the user.

2.3.3 Accuracy

Accuracy will be important for the financial information. Accurate information will lead the company make good decision and will lead the business into a good way. Oppositely if the financial information is not accurate, it will lead the decision into the wrong way and make will make the company goes to the bad way.

2.3.4 Comparability

The financial account should be able to compare with the other competitor or others company. Besides that the financial account should also be compare with the previous year financial account.

2.3.5 Understability

The financial accounts should be always be understand by everyone. And also have to reasonable, knowledgeable, and can be explainable.

2.4 Short summary

The 5 characteristic relevance, timely, accuracy, Comparability and understability and the 5 users management, employees, customers, suppliers and investors who use the financial statement and balance sheet

2.5 Definition

In task 2, income statement and balance sheet are requiring for continental Limited for end of the year 31 Dec 2010. And it's for internal use by the company higher level employee or owner. It will never for external use, so the income statement and balance sheet will not record any for external.

2.6 Answer for Task 2

Working

Closing stock should be recorded at cost or net resale value which one is lower.

Since cost RM65000< net resale value RM70000, the cost RM65000 should be closing stock value record in the trading account of income statement and will be under the current asset in the balance sheet.

Cash

account

RM

RM

Sales(Difference)

5000

Purchase

4000

Stationery

700

Electricity

300

5000

5000

Sales in trading account of income statement = Rm360000 from TB + RM5000 = RM365000

Purchase in trading account of income statement = RM200000 from TB +RM4000 = RM204000

Stationery as expense put in P/L account of income statement = RM700

Electricity & water in P/L account of income statement = RM7000 from TB +RM300 = RM7300

Sales commission as expense put in P/L account of income statement

=RM18000 paid from TB + RM1500 accrued at end of year = RM19500

Then, accrued sales commission RM1500 is recorded under the current liability in balance sheet

Office salaries as expense put in P/L account of income statement

=RM28000 paid from TB- RM2000 prepaid at end of year = RM26000

Then, prepaid office salary RM2000 is recorded under the current asset in balance sheet

Debtor

Account

RM

RM

Balance b/d(from TB)

75000

(-) Bad debts

5000

Balance c/d

70000

75000

75000

Balance b/d

(debtor put under current asset in balance sheet)

70000

Bad debt

Account

RM

RM

Debtor

5000

P/L account

5000

(Bad debts as expense put in P/L account)

Provision for bad debts closing balance= 10% x Debtor closing balance RM70000=RM7000

Provision for Bad debt account

RM

RM

31 Dec 2010

Closing balance c/d (from calculation)

7000

1 Jan 2010

Opening balance b/d(From TB)

5000

Increase in difference(as expense put in P/L account)

2000

7000

7000

1 Jan 2011

Balance b/d

7000

Deducted from debtor under current asset in balance sheet

Vehicles

Account

RM

RM

Balance b/d (from TB)

300000

Vehicle disposal a/c (cost sold)

50000

Balance c/d

250000

300000

300000

Balance b/d

250000

(vehicles at cost put under fixed asset in balance sheet)

Provision for

Depreciation

On vehicle

Account

RM

RM

Vehicle disposal account (cost sold RM50000 x 5% x 5 years from 1 Jan 2005 to 1 Jan 2010)

12500

1 Jan 2010

Opening balance b/d (from TB)

60000

31 Dec 2010

Balance c/d

60000

Depreciation as expense put in P/Laccount(Vehicles closing balanceRM250000x5%)

12500

72500

72500

1 Jan 2011

Balance b/d

60000

(Deducted from vehicle cost under fixed asset in balance sheet)

Vehicle disposal

account

RM

RM

Vehicle cost sold

50000

Provision for depreciation on vehicle sold

12500

Proceeds from disposal of vehicle (TB)

35000

Difference for Loss on disposal of vehicle( as expense put in P/L account)

2500

50000

50000

Provision for

Depreciation

On premises

Account

RM

RM

Balance c/d

54000

1 Jan 2010

Opening balance b/d (from TB)

40000

Depreciation as expense put in P/L account ( premises cost from TB RM35000 x 4%)

14000

54000

54000

Balance b/d

54000

(Deducted from premises cost under fixed asset in balance sheet)

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 in balance sheet.

Proposed dividend to be deducted from net profit at the bottom of income statement

=2% x RM500000 Share capital from TB=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 (refer to working)

365000

Less return inwards (from TB)

(10000)

Net sales

355000

Less Cost of sales:

Opening stock (from TB)

50000

+Purchases (refer to working)

204000

-Return outwards (from TB)

(15000)

+Carriage inwards (from TB)

5000

194000

Less Closing stock (refer to working)

(65000)

(179000)

Gross profit

176000

Add income:

5000

Dividend received (from TB)

181000

Less Expenses:

Stationery (refer to working)

700

Office electricity&water (refer to working)

7300

Office salaries (refer to working)

26000

Sales commission (refer to working)

19500

Bad debts (refer to working)

5000

Increase in provision for bad debts( refer to working)

2000

Loss on disposal of vehicle (refer to working)

2500

Depreciation on vehicle (refer to working)

12500

Depreciation on premises (refer to working)

14000

Vehicle expenses (from TB)

12000

Interest charge (from TB)

3000

(104500)

Net profit

76500

Less taxation charge (refer to working)

(15300)

Less proposed dividend (refer to working)

(10000)

Profit for the year

51200

Add Retained earnings brought forward (from TB)

100000

Retained earnings carried forward

151200

(put under reserve added to share capital in balance sheet)

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

RM

RM

Fixed assets / Non-current assets

Office premises at cost (from TB)

350000

(-) provision for depreciation on premises (refer to working)

(54000)

296000

Vehicles at cost (refer to working)

250000

(-)Provision for depreciation on vehicles (refer to working)

(60000)

190000

Long-term investment (from TB)

100000

586000

Current assets

Closing stock (refer to working)

65000

Debtors (refer to working)

70000

(-) Provision for bad debts (refer to working)

(7000)

63000

Bank (from TB)

42000

Prepaid office salary (refer to working)

2000

172000

758000

Issued share capital

Share capital (from TB)

500000

Add reserve

Retained earnings carried forward (from the bottom of income statement)

151200

Shareholders' equity

651200

Add long-term liabilities/ Non-current liabilities

Loan (from TB)

55000

Add current liabilities

Creditors (from TB)

25000

Accrued sales commission (refer to working)

1500

Accrued taxation (refer to working)

15300

Proposed dividend (refer to working)

10000

21800

758000

2.7 Short summary

In this Task 2, working is required and the working will only work for internal. In another word, this task is only for internal use.

2.8 Define Task 3

The coming will be the balance sheet of Continental Limited for the end of the year 31 Dec 2010 for external use. This income statement and balance sheet are do according Task 2 and included the expenses like stationary, office electricity and water and others. In this part it will be oppositely with the previous one, this will be only for external use and not for internet use.

2.9 Answer for Task 3

From Income Statement of Task 2

Stationery

Office electricity & water

Office salaries

Sales commission

Bad debts

Increase in provision for bad debts

Loss on disposal of vehicle

Depreciation on vehicle

Depreciation on premises

Vehicle expenses

Total

Distribution costs

RM

-

-

-

19500

5000

2000

2500

12500

-

12000

53500

Administrative expenses

RM

700

7300

26000

-

-

-

-

-

14000

-

48000

Income statement of Continental Limited for year ending 31 Dec 2010 for external reporting

Turnover (Net sales from income statement of task 2)

Cost of sales (from income statement of task 2)

Gross profit (as in the income statement of task 2)

Distribution costs (from the above working)

Administrative expenses (from the above working)

Operating profit

Divided received (from income statement of task 2 of from TB)

Interest charges (from income statement of task 2 of from TB)

Profit on ordinary activities before taxation

Taxation charge (from income statement of task 2)

Profit on ordinary activities after taxation for the year

Proposed divided (from income statement of task 2)

Retained profit for the year

Retained profit brought forward(from income statement of task 2 of from TB)

Retained profit carried forward (as in the income statement of task 2)

RM

53500

48000

RM

355000

(179000)

176000

(101500)

74500

35000

79500

(3000)

76500

(15300)

61200

(10000)

51200

100000

151200

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

Fixed Assets

Tangible Assets:

Premises (after deducted provision for depreciation from

from balance sheet of task 2)

Vehicles (after deducted provision for depreciation from

from balance sheet of task 2)

Investment:

Long term investment (from balance sheet of task 2 or from TB)

Current Assets

Stock (from balance sheet of task 2)

Debtors (after deducted provision for bad debts from balance

Sheet of task 2)

Prepaid office salary (from balance sheet of task 2)

Cash at bank (from balance sheet of task 2 or from TB)

Less Creditors: Amounts Falling Due Within One Year

Creditors (from current liability in balance sheet of task 2)

Accrued sales commission (from balance sheet of task 2)

Accrued taxation (from balance sheet of task 2)

Proposed divided (from balance sheet of task 2)

Net Current Assets

Total Assets Less Current Liabilities

Less Creditors: Amount Falling Due After More Than One Year

Loan(from long-term liability in balance sheet of task 2 or from TB)

Capital and Reserves

Called up share capital (from balance sheet of task 2 or from TB)

RM

296000

190000

6500

6300

2000

25000

1500

15300

10000

RM

486000

100000

130000

42000

172000

(51800)

RM

586000

120200

706200

(55000)

651200

500000

Profit and Loss account (retained earnings carried forward from balance sheet of task 2) 151200

651200

2.10 Short summary

Task 3 will working require same as Task 2, but the different with Task 2 is Task 3 are use for external use instead of internal use.

2.11 Define Task 4

The last part is the calculation based on income statement and balance sheets that where did at Task 2 and Task 3.And the ratio for the Continental Limited Company compared with average industrial ratios. The ratio should be based on the work that done on Task 2 and Task 3 income statement and balance sheet. The appropriate accounting ratio for year ending 31 Dec 2010 to assess the profitability and liquidity of Continental Limited.

Answer for Task 4

Ratio with formula

Ratio calculated for year 2010

Industry average

:Percentage of gross profit on sales

= gross profit x 100

Net sales

176000 x 100

355000

30%

:Percentage of operating profit on sales

= Operating profit x 100

Net sales

74541 x 100

355000

18%

:Return on capital employed (ROCE)

=Net profit x 100

Capital employed

9%

:Current ratio

=Current asset : Current liability

2 : 1

:Stock turnover period

90 days

:Debtors collection period

45 days

:Credits collection period

60 days

Profitability of Continental Limited

Percentage of gross profit on sales = 49.58%

Percentage of operating profit on sale = 20.99%

Return capital employed = 11.26%

Liquidity of Continental Limited

Current ratio = 3.32 : 1

Stock turnover period = 117.36 days

Debtor collection period = 64.6 days

Credit payment period = 48.18 days

2.12 Short summary

Task 4 is also the last Task of the assignment. Task are working required and is working for calculate ratio of the company based on the Task 2 & Task 3 that we done.

3.0 Conclusion

In this assignment, statement and balance sheet will be the main question and answer for the entire assignment. Research will be important and helpful because there got a lot information need to write in and explain further. Especially Task 1, The 5 characteristic and the 5 users are needed to be explaining with clearly. Besides clear, it should be also explained or it's function. Task 2, are calculation and how to calculate the financial statement and balance sheet and it's use for internal. Task 3 is similar to Task 2 but Task 2 is use for internal use and the Task 3 is use for external use. And the last part Task 4 is half theory and half calculation needed.

4.0 Harvard Referencing

1. Dummies.com (n.d.) Connecting the Income Statement and Balance Sheet - For Dummies. [online] Available at: http://www.dummies.com/how-to/content/connecting-the-income-statement-and-balance-sheet.html [Accessed: 1 Nov 2012].

2. EISEN, P. J. (2000). Accounting. Hauppauge, N.Y., Barron's Educational Series.[Accessed 3 Nov 2012]

3. Investopedia.com (2011) Income Statement Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/i/incomestatement.asp [Accessed: 2 Nov 2012].

4. Investopedia.com (2012) Understanding The Income Statement. [online] Available at: http://www.investopedia.com/articles/04/022504.asp [Accessed: 1 Nov 2012].

5. J. Eisen, P. (2007) Accounting. [e-book] Hauppauge, New York, USA: Barron's Educational Series, Inc. http://books.google.com.my/books?id=xWit8qTbbQ4C&printsec=frontcover&dq=Accounting&hl=en&sa=X&ei=iXKqUJrTMJHRrQee34GIDg&ved=0CDgQ6AEwAA#v=onepage&q=Accounting&f=false [Accessed: 1 Nov 2012].

6. Sinha, G. (2009) Financial Statement Analysis. [e-book] New Delhi, Delhi: PHI Learning Private Limited. http://books.google.com.my/books?id=F8zgHQN0GccC&printsec=frontcover&dq=income+statement&hl=en&sa=X&ei=ZXCqUKXEEcXwrQfprIHoDQ&sqi=2&redir_esc=y#v=onepage&q=income%20statement&f=false [Accessed: 28 Oct 2012].

7. Smith and Barry. (2010) Introductory Financial Accounting. [e-book] USA : Open University Press. p.1. Available through: E-brary http://library.olympia.edu.my:2051/lib/olympia/docDetail.action?docID=10441933&p00=introductory%20financial%20accounting [Accessed: 20 Nov 2012].

8. Taparia, J. and Mayer, L. (2004) Understanding Financial Statements. [e-book] United State of America: Marion Street Press, Inc.

http://books.google.com.my/books?id=weBOsakCBbUC&printsec=frontcover&dq=income+statement&hl=en&sa=X&ei=ZXCqUKXEEcXwrQfprIHoDQ&sqi=2&redir_esc=y#v=onepage&q=income%20statement&f=false [Accessed: 3 Nov 2012].

9. Temte and Andrew (2005) Financial Statement Analysis. [e-book] USA: Dearborn Trade, A Kaplan Professional Company . p.74. Available through: E-brary http://library.olympia.edu.my:2051/lib/olympia/docDetail.action?docID=10096107&p00=income+statement [Accessed: 20 Nov 2012].

10. Tracy and John (2008) Accounting (4th Edition). [e-book] Hoboken, NJ, USA : For Dummies . p.294. Available through: E-brary http://library.olympia.edu.my:2051/lib/olympia/docDetail.action?docID=10296724&p00=income+statement [Accessed: 20 Nov 2012].

5.0 Appendix

Appendix 1

Source: http://www.boscia.com/mwboscia/a260/IncomeStmt/incstmt.html

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