The Five Regulatory Characteristics Of The Financial Statement Accounting Essay

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1.0 Introduction

Principle of Accounting is a service activity and it concerned with collecting, analysing and record the financial transactions of the business. Accounting can informed decision and make financially smart. Besides that, according to American Accounting Association mention that "the process of identifying, measuring and communicating economic information to permit informed judgments and decision by user of the information!" However, accounting information should be useful to anyone wishing to make decisions and plan about business, it including those who control and manage them.

In this Principle of Accounting assignment, it contains 4 tasks. In task 1, it is define the five different account users and their need for Continental Limited financial statements. Besides that, it also defines the five regulatory characteristics of these financial statements that will provide useful information to the users.

In task 2, the author need find out all the data and use the trial balance to calculate the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010.

However, in task 3 is 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.

At last, in task 4, it need use the task 2 and 3 income statement and balance sheet to calculate the appropriate accounting ratios for year ending 31 Dec 2010 and compare them with the industry averages provided to assess the profitability and liquidity of Continental Limited.

2.0 Accounting user

Accounting information is helps the users to make better financial decision. Besides that, in accounting user, it define into two categories, one is the internal users while another is external users. The internal user is mean that the people within the organization and it usually in the form of budgets, financial statement and management account. In the other side, the external users is means that the people outside the organization and it usually in the form of financial statement. All this is use account to derive financial information for their needs.

2.1 The five different users

The five different users and their need for the Continental limited financial statement is manager of the company, employees of the company, investors, suppliers or creditors and customers or debtors. Besides that, in these five different users, it has 2 type of user. One is external users while another is internal users. In these five different users, manager of the company and the employees of the company are classifying at internal users while supplier or creditors, customers or debtors and investors are classify at external users.

So, the author will describe these five different users and their need for Continental Limited financial statement. First, managers of the company is analyzes the feasibility of their investment and they need accounting information about the company's financial situation and determine any future course to enable them to manage the business efficiently. However, it also to help them to make decision and plans for the business and to help them to exercise control to try to ensure that plans come to fruition. Besides that, employee of the company is the people employed by the company to carry out the business activities. They need accounting information about stability of the company because their future careers and salary are depending on it.

Normally, investor is for analyzing the possibility of investing in that company. This means that they need accounting information to know whether it is worth for them to invest their money in the business or buying shares of the Continental Limited. However, customers or debtors are purchase goods or services provided by the company. They may be dependent on the business for certain product or service. They also need accounting information about the company financial stability to survive and prosper. The last user is suppliers or creditors. They are provided trading goods and services to the company on credit. Suppliers and creditors need accounting information that help them understand the company's ability to pay its debts and assess the short-term liquidity of the business.

2.2 The five regulatory characteristics of the financial statement

It has five regulatory characteristics of these financial statements that will provide useful information to the users. The five regulatory characteristics are relevance, understandability, accuracy, reliability and comparability. These are the characteristics of useful financial statement. Besides that, these criteria must be fulfilled to make the financial statement and account that are useful to the users. So, the author will define all these five regulatory characteristics.

First, relevance is the financial account prepare base on the accounting concept and it should impact to the decision making need of the users that peruses the information. However, to be relevant, information be suppose available in time and help in predict. Therefore, the information presented by the financial accounts should be relevant to the decision making of the users. The next characteristics is understandability, it is refer to the quality of the financial information which make it understood by the users who have reasonable knowledge of business, accounting and economic activities. Besides that, understandability is requires the information presented in financial report to be clear and complete.

Accuracy is one of the characteristic that provide accurate financial information to the users for decision making. This is because, the inaccurate financial information will lead to inaccurate decision make by the users. However, the other characteristic of this financial statement is reliability; it is present reliable information to the users for decision making. The information is reliable if it is free from error and faithfully represents what it seeks to represent. Besides that, it is complete of required account information and realistic where there any uncertainty. Therefore, if all this stated points are not fulfilled, the financial account information is not reliable for the decision making of the user. The last characteristic of this financial statement is comparability; it is base on the accounting concepts should be comparable with the previous year account and comparable with the account of the other company and it is very important.

3.0 Income statement and balance sheet of Continental Limited

In this task, the author needs to find out all the data and collect it to calculate the income statement and balance sheet of Continental Limited. So, the author need to the following workings before preparing income statement and balance sheet. This income statement and balance sheet is prepared for internal use.

Working for note (a)

Closing stock should be recorded at cost or not resale value which one is lower. Since cost RM 65000 < net resale value RM 70000, the cost RM 65000 should be closing stock value put in the trading account of income statement and under the current asset in the balance sheet.

Working for note (b)

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

Working for note (c)

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.

Working for note (d)

Debtor account

RM RM

Balance b/d (from TB) 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 difference 2000

(As expense put in P/L account)

7000 7000

1 Jan 2011 Balance b/d 7000

Working for note (e) and (f)

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

Provision for depreciation on vehicle account

RM RM

Vehicle disposal account 12500 1 Jan 2010 Opening balance b/d 60000

Depreciation as expense put in P/L 12500

Account

31 Dec 2010 Balance c/d 60000

72500 72500

1 Jan 2011 Balance b/d 60000

Vehicle disposal account

RM RM

Vehicle cost sold 50000 Provision for depreciation on vehicle 12500

sold

Proceeds from disposal 35000

of vehicle (TB)

Difference for Loss on disposal 2500

of vehicle

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 14000

in P/L account

54000 54000

Balance b/d 54000

Working for note (g)

Taxation charge RM 15300 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.

Working for note (h)

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 RM 10000 is recorded under current liability in balance sheet.

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

RM RM RM

Sales (RM 360000 + RM 5000) 365000

Less Return inwards (10000)

Net sales 355000

Less Cost of sales / Cost of goods sold:

Opening stock 1 Jan 2010 50000

+Purchase (RM 200,000 + RM 4,000) 204000

-Return outwards (15000)

+Carriage inwards 5000 194000

-Closing stock (65000) (179000)

Gross profit 176000

Add Incomes:

Dividend received 5000_

181000

Less Expenses:

Stationery 700

Office electricity & water (RM 7000 + 300) 7300

Office salaries (RM 28000 - RM2000) 26000

Sales commission (RM 18000 + RM 1500) 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

Vehicle expenses 12000

Interest charges 3000

(104500)

Net profit 76500

Less Taxation charge (15300)

Less Prepaid dividend (10000)

Retained profit for the year 51200

+Retained earnings brought forward 100000

Retained earnings carried forward 151200

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

RM RM RM

Fixed assets/Non-current assets

Office premises at costs 350000

-Provision for depreciation on premises (54000)

296000

Vehicles at cost 250000

-Provision for depreciation on vehicles (60000)

190000

Long-term investments 100000_

586000

Current assets:

Closing stock 65000

Trade debtors 70000

-Provision for bad debts (7000)

63000

Bank 42000

Prepaid office salary 2000

172000

758000

Issued share capital:

Share capital 500000

Reserves:

Retained earnings (carried down from income statement) 151200

651200

Long-term liabilities/Non-current liabilities:

Loan 55000

Current liabilities:

Trade creditors 25000

Sales commissions accrued 1500

Taxation accrued 15300

Proposed dividend 10000_

51800

758000

4.0 Income statement and balance sheet of Continental Limited in accepted format for external reporting or publication.

Income statement generally contains information about profits, operating cost and net income as that information has been gathered for a stated period of time. Net income occurs when profits exceed operating cost. A net loss happens when operating cost exceed profits. In addition, balance sheet is a statement of a company financial condition. Besides tha, this income statement and balance sheet is prepared for external reporting.

Distribution cost Administrative expense

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 vehicle 12500 -

Depreciation on premises - 14000

Vehicle expenses 12000 -

Total 53500 48000

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

RM RM

Net sales / Turnover 355000

Cost of sales (179000)

Gross profit 176000

Less Distribution cost 53500

Administrative expenses 48000

(101500)

Operating profit 74500

Dividend received 5000_

79500

Interest charges (3000)

Profit on Ordinary activities before taxation 76500

Taxation charges on profit (15300)

Profit on Ordinary activities after taxation 61200

Dividend Proposed (10000)

Retained profit for the year 51200

Retained earnings brought forward 100000

Retained earnings carried forward 151200

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

RM RM RM

Tangible Fixed Assets:

Premises 296000

Vehicles 190000

486000

Long term investment 100000

586000

Current Assets:

Stocks 65000

Debtors 63000

Prepaid office salary 2000

130000

Cash at bank 42000

172000

Creditors: Amount falling due within one year

Creditors 25000

Accrued sales commissions 1500

Accrued taxation 15300

Proposed dividend 10000

(51800)

Net current assets 120200

Total assets less current liabilities 706200

Creditors: Amount due after more than one year

Loan (55000)

651200

Capital and Reserves

Called up share capital 500000

Profit and loss account 151200

651200

5.0 The appropriate accounting ratios and compare them with the industry averages

Accounting ratios are the expressed and counted based on accounting figures derived from financial statements or final accounts of firm. Accounting ratios are used to interpret financial statements for assessing the business performance of the firm. Besides that, accounting ratio can be compared between companies, industries, different time periods for a company and a particular company and its industry average.

5.1 Table of ratio calculation

Ratio With Formula

Ratio Calculation for Year 2010

Industry Average

Percentage of Gross Profit on Sales:

= 49.58%

30%

Percentage of Operating Profit on Sales:

= 20.99%

18%

Return on Capital Employed (ROCE):

= 11.26%

9%

Current Ratio:

=3.32:1

2:1

Stock Turnover Period:

= 3.11 times

= 117.36 days

90 days

Debtors Collection Period:

=64.6 days

45 days

Creditors Payment Period:

=48.18 days

60 days

5.2 Profitability of Continental Limited

The Percentage of Gross Profit on Sales for the Continental Limited is 49.58% higher than the industry averages that is 30%. The higher gross profit on sales indicates the higher gross profit earned by the Continental Limited from the sales made. It shows that the Continental Limited is effective and efficient in controlling the purchase cost by making the purchase at lower cost from supplier and it is in controlling the production cost by the effective use of material and labor to reduce the production cost as well as to increase the gross profit. Besides that, the Percentage of Operating Profit on Sales for the Continental Limited is 20.99% higher than the industry averages that is 18%. The higher Operating profit on sales indicate higher net profit earned by the Continental Limited from the sales made for effective control on expenditure, incurring lower expenses to increase the net profit earning, evidenced by lower expenses to sales ratio. However, the Return on Capital Employed (ROCE) for the Continental Limited is 11.26% higher than the industry averages that is 9%. The higher return on capital employed indicates higher net profit generated from the capital employed for the effective use of capital employed in production selling activities to increase the production and sales volume as well as to increase the net profit earning.

5.3 Liquidity of Continental Limited

The Current Ratio for the Continental Limited is 3.32:1 higher than the industry averages is 2:1. It is larger current assets can be used to finance current liabilities, indicating that the Continental Limited is financially stable and able to finance its short-term debts. The Stock Turnover Period for the Continental Limited is 117.36 days higher than the industry average is 90 days. The higher stock turnover period indicate a fast stock turnover by the Continental Limited where the goods purchased are fast taken out from stock to sell so that the stock is not accumulated and money is not tied up with the stock.

Besides that, the Debtors Collection for the Continental Limited is 64.6 days higher than the industry averages is 45 days. The higher debtor's collection period indicate that Continental Limited has given longer credit time to allow debtor owes, and it will cause longer time taken by Continental Limited to collect money slowly from debtors so that larger debtor balance is accumulated to tie up money and facing short-term financial problem. In addition, The Creditors Payment Period for the Continental Limited is 48.18 days lower than the industry averages is 60 days. The lower the creditor's payment period indicate that Continental Limited has obtained shorter credit time for owing and paying to creditors so that Continental Limited needs to pay back the creditor very fast, and it will cause smaller creditor balance accumulated and short-term financial problem for shortage of money to pay back creditor.

6.0 Conclusion and Recommendation

When doing this assignment, I can learn how to prepare the income statement and the balance sheet. Besides that, I know the five different users and the five regulatory characteristics. However, I know how to calculate the appropriate ratios and compare them with the industry averages provided to assess the profitability and liquidity of Continental Limited. So, in my conclusion, accounting is a service activity and it is very important for all business. This is because, it concerned with collecting, analysing and record the financial transactions of the business.

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