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Importance of Accounting, Principles and Concepts

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Question :

Questions- This assessment will cover the following questions:

  • Geopetro is oil and natural gas Company. What is the general purpose in Geopetro’s auditors’ report?
  • Dividends, you have learned, are a distribution of income, not an expense. What is the difference? Why can’t the corporation list them as an expense, since dividends are just another amount of money paid out to somebody?
  • Are losses, restructuring, and the disposal of segments necessarily precursors to the demise of the company?
Answer :

MAIN BODY

Part A

Question 1.

(A) If you were a banker, why would you need information from PepsiCo’s financial statements?

Bankers need the financial statements for multiple purposes. Basically, bankers ask for financial statements for companies at the end of a financial year. Generally, banks want to check balance sheets, profit & loss account statements etc. Herein, below are reasons for why bankers can see the financial statement:

  • Balance sheet- The Balance Sheet shows the assets, debt and net value (equity) of a business at a particular time period (Ahadiat and Martin, 2015). Taking the time to analyse the balance sheet of a business enables bankers to get a clear understanding of the company's plan. The Bank must aim for good net worth and the liabilities-to-equity ratio. Analysing the balance sheet lets the bank decide whether its existing and/or potential debt obligations can be met by the company.
  • Income statement- The Income Statement or Profit and Loss Statement shows how much money the corporation received over a number of years and how much was left after payment of costs (net income). Analysing this argument will enable companies as an owners to assess whether there are possible areas for controlling costs or areas that seem out of line. With the help of it, bankers can become able to analyse whether they should make credit transactions with a company or not.

So these are the reasons for which bankers will be interested in assessing the financial information of PepsiCO's company.

(B) If you were a potential investor in PepsiCo stock, what information would you want from their financial statements?

Investors are those who make investments in the company’s practices and securities. They need to analyse the financial position of companies so that they can make decisions on whether they should make an investment or not. Herein, below list of information is mentioned which is needed by investors:

  • Net profit- Financial reports will show the net income of a corporation, net profit is the cash left over by a corporation after all costs have been paid. "Does the company make money?" is often the first question asked, but it's just a point of departure (Ragland and Ramachandran 2014). By analysing the information about net profitability, investors make decisions about making investment.
  • Sales- It is also key information which is assessed by investors in order to take suitable actions for investment. This is so because if PepsiCo's company's sales revenue is higher then it may lead to higher payment of dividends to shareholders. Hence, investors evaluate information about sales.
  • Cash flow Statement- For business entities, cash is the king. Investors interpret the bank's cash as a symbol of being able to deal with unexpected issues and focus on new possibilities. Free cash flow is a sign of successful operations and in accordance with the information on cash flow, investors analyse the efficiency of companies.
(C) If you were a labor negotiator for a union that represents a group of PepsiCo’s employees, which financial statement would provide you with the most useful information?

For labour unions, an income statement will be suitable. This is so because under it, detailed information regarding companies' operations, revenues, cost of sales etc. is provided (Stone and Lightbody, 2012). Such as in the aspect of the above company, there are income statements for two years 2013 and 2014. The labour union can analyse key information about how much salary and wage expenditures are done by the company during these years.

Question 2

*Melissa is the owner of Missy’s Tea Shop, a sole proprietorship. She purchases a new computer for her personal use at home. Melissa records the computer as an asset of Missy’s Tea Shop.
  • Overview- In accordance with the given case, this is stated that Melissa who is a sole proprietor of a tea shop buys a computer for personal use but records it as an asset of a tea shop. The concept that she is applying is wrong. Under this case, below mentioned accounting principle needs to be applied:

Economic entity assumption principle- The accountant holds all of a sole proprietorship's business transactions apart from the private transactions of the company owner (Daly, Hoy, Islam and Mak, 2015). A sole proprietorship and its holder are deemed to be one party for legal purposes, but they are treated as two different entities for billing purposes. Thus, in the context of the above case, the owner of the tea shop should keep its personal financial transactions separate from business transactions.

*Houston Electronics purchased an office building several years ago for $500,000. The office building could be sold today for $850,000. The accountant will now show the building as an asset on the books for $850,000.
  • Overview of case- As per the given information, this can be that Houston electronic company purchased of building some years ago whose value was of $500000. In the current time period, the value of assets is $850000. The accountant is presenting the value of assets as $850000 in books of accounting. In this context, they should apply an appropriate accounting principle which is as follows:

Historical cost accounting principle- In accounting, the historical expense of a financial item is that item's initial estimated economic value. Historical cost accounting includes recording assets and liabilities at their historical values that are not adjusted for adjustments in the prices of the products (Pan and Perera, 2012). In the aspect of the above case, this is important for their accountants to record their financial transactions in accordance with the historical cost accounting principle.

*Henry is a new accountant for Acme Foods. He is extremely busy and has decided that he can prepare the financial statements every two years.
  • Overview of the case – In accordance with the given data, this can be found that Henry is a new accountant and is busy. That is why he is planning to prepare financial statements every two years. This policy is wrong, he should make financial statements at the end of each year. For this purpose, there is an accounting principle which is needed to be applied:

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Time period principle- The concept of time period is a financial accounting principle which implies that all companies and organizations should divide operations into periods of time. Such intervals are often referred to as time periods for accounting and reporting and may be weekly, quarterly, semi-annual, annual, or any other time span. Such as in the above case, it is essential for an accountant to prepare income statements at the end of each year in accordance of this accounting principle.

*The Candle Store is having financial problems. It has no plans to liquidate but decided to use market value to report its assets since it plans on moving to a smaller store.
  • Overview of case- The given company is facing monetary issues and recording assets as per the market value though they are planning to move to a smaller store. It shows that they are using the wrong concept to record their assets. In this aspect, it is important for them to follow below mentioned accounting principle which is as follows:

Going concern principle- This accounting theory implies that a business will continue to remain long enough to meet its goals and obligations and in the future will not be liquidated. If the financial position of the business is such that the accountant concludes that the business will not be able to continue, this determination must be reported to the accountant (McLeod and Harun, 2014). In the above company, they should apply this accounting concept so that financial statements can be prepared in an effective manner.

Question 4

Dividends, you have learned, are a distribution of income, not an expense. What is the difference? Why can’t the corporation list them as an expense, since dividends are just another amount of money paid out to somebody?

Dividend- The term dividend can be defined as a reward which a company pays to their shareholders. This can be paid to companies in different forms such as cash payment, stock or any other way. Basically, the corporation's dividend is determined by the board of directors and this needs approval from shareholders. However, this is not a liability for companies to pay the dividend. It is a part of the profit which is being shared by business entities with its shareholders. This dividend is not recorded as an expense. There is a difference as the dividend is not an expense. It is so because dividends of a business are not an expenditure and therefore will not show on its statement of profits. Cash dividends are a payment of part of the earnings of a company paid to its shareholders. When a company has preferred shares, the dividends on preferred shares are excluded from the net income of a company in order to arrive at common stock earnings. As well as money or stock dividends paid to stakeholders are not reported in the income statement of a corporation as an expenditure. This is because securities and even money dividends do not impact the net income of a business.

Why it is not recorded as an expense:

Dividends are not an expenditure. Therefore, dividends never show as an expenditure on the financial statements of an issuing company (Siriwardane, Low and Blietz, 2015). Alternatively, dividends are viewed as a transfer of a company's equity. As such, dividends are deducted from the balance sheet equity portion and are also deducted from the balance sheet cash line item, resulting in an overall decrease in the balance sheet size. When dividends are reported but not yet paid, they will be listed on the balance sheet as current liability. Dividends paid during the fiscal quarter are also classified as capital outflows in the funding portion of the cash flow statement.

Apart from that, the dividend is shared with the shareholders of companies not with other parties so it can not be considered as an expense (Osmani, Al-Esmail and Weerakkody, 2017). As well as this is distributed from the net income of companies. For this, no additional cost is paid by companies. So these above-mentioned reasons show that dividend is not an expense. It is just a sharing of profits among shareholders of companies who make investments in a company with an expectation of gaining a higher amount of return. By comparison to costs, dividends are not a component of a business profit measurement: they are not a cost of business. They are essentially a process through which businesses allocate to their investors the profits they have made.

So in accordance with above mentioned discussion, this can be stated that the payment of dividend is not an expense. The main reason for it is that payment of dividends does not impact to balance sheet and profit & loss account of companies (Mitrić, Stanković and Lakićević, 2012).

Question 5.

(a) Purpose of auditors' report.

Auditors' report- Basically, an auditor's report is designed to provide assurance that the financial reports of an entity do not contain material errors (Liu, 2012). It is assumed that the auditor will provide the organization and its financial statements with a complete picture. They also have to state their relation to the financial statements in the report, and whether they operate externally or directly for the business. Herein, below purpose of the auditors' report is mentioned which are as follows:

  • The report allows financial statement clients to ensure the financial information is accurate or not.
  • The most crucial thing is that the government wants the company to comply with the rules and regulations, so the audit report says it follows the rules and laws (Jones, 2014).
  • An audit report benefits the investor as the investor can think the business is booming and there is no concern.
(b) What is the going concern concept?

Going concern- The current accounting principle means that the corporation will continue its activities in the potential and will not be forced to sell or suspend operations for any reason whatsoever (Elijido-Ten and Kloot, 2015). A business is an ongoing concern if there is no evidence to say that in the near future it will or will have to interrupt its activities. In other words, the going concern is a basic accounting concept. This assumes that a corporation can execute its current plans, use its existing assets and continue to meet its obligations during and after the next fiscal year. Basically, it is an expectation that the company will remain profitable and also that the value of its assets will last. The fundamental theory is also referred to as the idea of continuing concern.

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(c) Are losses, restructuring, and the disposal of segments necessarily precursors to the demise of the company?

No, the losses, restructuring, and the disposal of segments are necessarily precursors to the demise of the company (Anis, 2017). This is so because in business, the loss can occur at any time which does not mean that business will close. Companies can make effective policies and plans to overcome losses. As well as restructuring the business is also a necessary process for companies in order to grow in a competitive market. Thus, above mentioned statement is not accurate.

(d) What are auditors saying about the above company?

The auditors are stating that the company has a limited amount of cash and working capital to fund its upcoming operations. As well as in accordance with a consolidated financial statement of the company, this can be found that they had a net loss which resulted in an accumulated deficit of $49.7 million. Along with this financial statement does not consist of any modifications which may result from the outcome of the uncertainties.

Also read:- Management Accounting Assignment Unit 2 HND Business Level 4

Question 7.

Is Unique Factory considered a business or non-business company?

In accordance with the given data, this can be found out there are two financial statements which are the balance sheet and the income statement. The information included in both statements states that the above company is to be considered a business entity. It is so because of the following reasons:

  • Net sales- In the income statement, it is stated that there are sales of $174206 and $209203 for the years 2014 and 2015. This indicates that they are making sales transactions with customers and it is being done in a business entity. A non-business entity does not make any sales transactions or if it makes transactions then does not record them in its accounting books.
  • Selling, general and administrative expenses- Under the financial statement of the company, this is stated that they are making expenses on selling and administration in both years. The company which is involved in the process of business makes these expenses and records in their accounting books. This shows that the company is considered a business entity.
  • Income tax expenses- This can be defined as a type of expenditure which is paid by companies to the government on the occurred amount of income during a particular time period (Pernsteiner, 2015). It is essential to business entities that conduct specific operations and activities. Such as in the income statement of the above company, this can be found that they are making payments of income tax expenses which are $2388 and $3534 for the years 2014 & 2015. It shows that the company is considered to be a business entity.
  • Stockholder equity- In the above company, there are different numbers of stockholders who are making investments. Basically, the stakeholders make investments in business entities not in non-business entities. Such as the total value of stakeholder equity is $86919 and $90908 for the years 2014 and 2015. This indicates that the above company is a business entity.
  • Long-term debts- The company is taking huge amounts of debts from different sources and recording it in their balance sheet. As well as they are recording this amount, in their balance sheet. The amount is $25676 and $20491 for the years 2014- 2015. This huge amount of debt shows that the company is operating their business activities in large numbers.
  • Investment- In the aspect of the current liabilities of this company, it can be found that there is an investment amount in both of years 2014 and 2015. It shows that the company is involved in the context of business operations. Such as in the year 2014, the amount of investment was $1061 which was reduced in the next year 2015 and became $303.

So in accordance with the above discussion, this can be found that the company is considered to be a business entity because they are conducting all those activities which are performed by businesses.

Part B

Exercise 1.

Total liabilities- Total liabilities are the net debt and financial commitments accrued at any particular time by a business to people and organizations. Total liabilities are listed on the financial statements of a company and are part of the overall accounting equation: assets = liabilities + equity. There are mainly two types of liabilities which are current and non-current (Abayadeera and Watty, 2016). In the below-mentioned statement, this can be found that there are non-current liabilities of $41000 and current liabilities of $24000. Eventually, it is essential for companies to keep their overall liabilities lower as much as possible. If companies liabilities are lower than the assets then it is considered a suitable condition. Such as in the below-mentioned company, their total liabilities are $65000 and total assets are of $173000. This shows that their financial position is in an effective manner.

 

A balance sheet of Brock Corporation for year ending:

EQUITY:

Capital stock – 100000

Retained earnings- 8000

108000

LIABILITIES:

Non current liabilities-

Long term debt- 41000

 

41000

Current liabilities-

Accounts payable- 24000

24000

TOTAL LIABILITIES AND EQUITIES

173000

ASSETS:

Current assets-

Cash- 25000

Accounts receivable- 46000

Inventory - 33000

 

104000

Non current assets-

Property, plant & equipment- 69000

 

69000

TOTAL ASSETS

173000

Analysis- The total liabilities of the above company are $65000. As well as the value of equities is $108000.

Exercise 2.

Income statement- The statement of profits and loss shows a business ' financial results for a set period of time. The statement quantifies the amount of revenue earned and costs incurred during a fiscal quarter by a company as well as any net profit or loss arising from it. The income statement is an essential component of an institution's financial statements (Yap, Ryan and Yong, 2014). The other aspects of the accounts are the balance sheet and cash flow statement.

Net income- Net income equals for a company is the amount left after all costs and expenditures have been subtracted from sales. Net income is used by listed companies to help measure their earnings per share (EPS). Also, shareholders assess the information about the net income of companies before making decisions regarding investment in companies. This is so because if net income is higher then there will be more change the return on investment will be higher.

Income statement for the year ending 31 December 2018:

Particulars

Amount (IN $)

Sales

560000

Less: cost of goods sold

400000

Gross profit

160000

Less: Salary expenses

40000

Operating profit (Profit before interest and tax)

120000

Less- Interest expenses

30000

Less- Income tax expenses

25000

Profit after interest and tax

65000

Less- Dividend

20000

Net income

45000

Analysis- On the basis of the above-presented income statement of this company, it can be found that net income is $45000. As well as sales revenue is of $560000 and gross profit is $160000. The operating profit is $120000 for the company. The value of interest and tax expenses is of $55000. This is showing that the company's financial position is in an effective manner.

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Exercise 3.

(A) Calculation of the net income or loss for 2014.

Particulars

Amount (IN $)

Sales

190000

Less: cost of goods sold

80000

Gross profit

110000

Less: Operating expenses

45000

Operating profit (Profit before interest and tax)

65000

Less- Income expenses

30000

Profit after income tax

35000

Less- Dividend

12000

Net income

23000

Analysis- On the basis of the above presented income statement of the company, this can be found that there is a net profit of amount $23000 at the end of year. The company is able to generate this higher amount of net income because there are less number of expenses in comparison to revenues. Such as the sales revenue of the company is of $190000.

(B) Explanation of how the amount from part “A” will affect the financial position of Micco’s Gift Store.

In accordance with the above measured net profit of this company, it can be found out that there is a net profit of $23000. This shows that the company is in good condition and their financial position will be affected in a positive manner. The company's expenses are also lower in compare to the overall amount of profitability.

(C) Is the company profitable? Explain your answer.

As per the calculated amount of net profit of this company, it can be found that their financial position is in a profitable manner. This is so because their amount of expense is lower and generated revenues are higher. It shows that the company's financial position is better and profitable at they can attract more stakeholders to make investments in their company.

Exercise 4.

Name of item

Appears on Which Statement?

Type of Account

Retained earnings

Balance sheet

Equities

Buildings

Balance sheet

Fixed assets

Common stock

Balance sheet

Equities

Accounts payable

Balance sheet

Current liability

Football ticket sales

Income statement

Revenue

Salaries expenses

Income statement

Operating expense

Accounts receivable

Balance sheet

Current assets

Analysis- On the basis of the above presented table this can be found that there are different types of items which are categorised into various statements and types of accounts. Such as the retained earnings appear in the balance sheet as the account of equities. While the building is also entered in the balance sheet in the account of fixed assets.

The common stock appears in the balance sheet in the account of equities. In addition, accounts payable and receivables are also entered in the statement of balance in the account of current liabilities and assets. There are only two items which are included in the income statements which are football ticket sales and salaries expenses. The ticket sales are considered in the revenue account and salary expenses in the operating expenses.

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Exercise 5.

(a) Total assets at the end of 2016:

Total assets- Total assets means a person or entity's total amount of assets. Assets are items of added value that are invested over time to provide the owner with a profit (Nicholls, Wegener, Bay and Cook, 2012). If the owner is a company, the company records actually record these assets and show them in the company balance sheet. There are mainly two types of assets which are current and non-current assets.

Current assets- It can be defined as a type of asset which can be converted into cash in less than one year (Goh and Scerri, 2016). This type of asset is being used for making payments for day-to-day activities. Such as in the below-mentioned company's balance sheet it can be found that there are current assets of $68000.

Non-current assets- It can be defined as a type of asset which can not be converted into cash in less than one year. This type of asset is being used for completing large business operations and activities in an effective manner. Such as in the below mentioned company's balance sheet it can be out that there are non-current assets of $42000.

Income statement of Galaxy Corporation for the year ended December 31, 2016:

Particulars

Amount (IN $)

Sales

165000

Less: cost of goods sold

51000

Gross profit

114000

Less: Salary and wages expenses

40000

Less- Selling expenses

44000

Less- Income tax expenses

18000

Add- Interest income

3000

Net income

15000

Balance sheet of Galaxy Corporation for the year ended December 31, 2016:

EQUITY:

Capital stock (41000+15000) = 56000

Retained earnings- 17000

73000

 

LIABILITIES:

Non current liabilities-

 

Current liabilities-

Accounts payable- 12000

Notes payable- 20000

Income tax payable- 5000

37000

TOTAL LIABILITIES AND EQUITIES

110000

ASSETS:

Current assets-

Cash- 30000

Accounts receivable- 14000

Inventory – 22000

Prepaid expenses- 2000

 

68000

Non current assets-

Equipment- 42000

 

42000

TOTAL ASSETS

110000

Analysis- The above presented balance sheet shows that they have total assets of $110000 at the end of the year 2016

(b) Total liabilities at the end of year 2016

As per the prepared balance sheet of a company, this can be found that there is total liabilities are of $37000. This is a current liability. There is no any specific information about non-current liabilities.

(c) What parties have a claim on Galaxy Corporation’s assets? Explain your answer in terms of the accounting equation.

Accounting equation- The double-entry accounting system is likely to be based on the accounting equation. The accounting equation indicates on the balance sheet of a business in which the average of all the company's assets is the amount of the liabilities of the company and the equity of the investors. The parties have to claim on the company's current assets because its value is too high in comparison to current liabilities.

CONCLUSION

On the basis of the above project report, it has been concluded that accounting skills are essential for companies in order to manage entire business transactions. The report concludes with the role of financial information for bankers and investors as well as in the next part of the report some accounting concepts are concluded such as the going concern principle, time period principle etc. In addition, a further part of the report concludes about, the role of auditors' reports and about dividends. In the end part of the report, some practical questions are solved in accordance with the given data in brief.

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