Compliance with Accounting Regulations while Satisfying Stakeholders Information Needs - Assignment Example

FAR: Financial Reporting at a UK based Company: Compliance with Accounting Regulations while Satisfying Stakeholders’ Information Needs. Task 1 Q1.1 A range of different user groups have been identified by conceptual frameworks of accounting. These user groups, commonly known as stakeholders, include (Weygandt et al, pg. 5): i. Present and potential investors ii. Lenders iii. Employees iv. Customers v. Government agencies such as tax authorities vi. The public vii. Suppliers and other trade creditors The reasons why these stakeholders need different range of information through financial reporting include: i. They need this information because it informs on the financial performance and financial position together with changes in a firm’s financial position (Lewis and Roger, 539-541). ii. This information helps them to make various decisions for instance those relating to selling, holding and buying debt or equity instruments. This information helps them to provide loans or other types of credit (Weygandt et al, pg. 4). iii. This information assists them to know about the resources of a firm so that they can be able to assess the future prospects of the firm’s net cash inflows and also to identify if the firm is managed effectively and efficiently (Weygandt et al, pg. 4). Financial and non-financial information needed by different stakeholders Investors (Lewis and Roger, 539-541) Non-financial Financial Human right protection Anti-corruption or bribery Environmental issues Employee/social benefits Debt load Revenue and earnings growth Cash flow trends Employees (Weygandt et al, pg. 4) Financial information Employee benefits Profits, income and returns Remuneration Non-financial information Company’s reputation Human right protection Employee development programs Future growth potential of the firm Anti-corruption and bribery and fairness Lenders, suppliers and other trade creditors (Lewis and Roger, 539-541) Financial information Firm’s liquidity (financial position) Profitability (profits and earnings) Non-financial information Future growth prospects 9continuity of the firm) Credit rating (creditworthiness) Customers (Weygandt et al, pg. 4) Financial Growth in cash flow Low prices Liquidity Non-financial Quality and safe products Continuity of the organization (growth prospects) Fair pricing policies Programs regarding corporate social responsibility (sustainability reporting) The public (Weygandt et al, pg. 4) Financial Cash flow growth Profitability (profits) Liquidity Non-financial Welfare programs and social benefits Programs protecting the environment Employment opportunities Government agencies (Lewis and Roger, 539-541) Financial information Profits Tax paid Allowable expenses Profit proportion absorbed by taxation Taxable income Sales activity level Levels of liquidity, stock, dividend and investments Non-financial information Future investment plans Ability to comply with rules and regulations relating to preparation and reporting processes Ability to file tax returns at an appropriate time Q1.2. In a bid to address the needs of different users of financial statements, various regulatory bodies and agencies has been formed. They usually outline the requirements and procedures to be followed in the preparation and presentation of the financial statements. The needs of users are addressed using the following aspects: International Financial Reporting Standards, International accounting Standards and conceptual framework of financial accounting. These aspects ensure that information needs of various users are met. These regulatory agencies address needs of different users by ensuring that relevant data is provided, explains different accounting treatments of various items and ensuring that accounting rules are followed so that company accounts are easily comparable and understandable (Alexander & Archer, 2.20). Q1.3. Explain why financial reporting as a discipline needs to be regulated? Discuss major regulatory bodies and their influence on the UK, European and global financial reporting. Reasons why financial reporting should be regulated To ensure that the needs of stakeholders are met because they heavily rely upon it in making their decisions (Epstein and Eva, 1107). To protect it from accounting fraud by the management hence it reduces their opportunistic behaviors like reporting unrealistic earnings to fraudulently to attract investors (Alexander & Archer, 2.25). To ensure credible financial reporting hence high degree of reliability on them. To protect public interest so that economic efficiency can be achieved b y rectifying information asymmetry (Kieso et al, 125). To eliminate competitive advantage enjoyed by accountants so that they can be held accountable for mistakes they make. To eliminate free rider problem by disclosing efficient level of accounting information. There is also a need to achieve high degree of transparency and comparability (Alexander & Archer, 2.20). Major regulatory bodies Financial accounting and reporting standard adopted by a company influences its success to a great extent. Major regulatory bodies have been formed to set the needed standards. These bodies include; a) The Financial Accounting Standards Boards (FASB) This body advocates that uniform reporting standard be used so that the public and global investors are protected from accounting fraud by management (FASB, 2009). b) Internal Accounting Standards Board (IASB) This body develops universal accounting standards and ensures that global market is enhanced because one set of accounting standard is used worldwide (IASB, 2009). c) The Governmental Accounting Standards Board (GASB) This body aims at educating stakeholders by establishing guidelines and standards so that they can easily understand and interpret information provided in the financial reports (GASB, 2009). d) Security and Exchange Commission (SEC) This body ensures that there be truthful disclosures of securities and all information be provided both in the primary and secondary markets. Companies should comply with the GAAPs to (SEC, 2009). These bodies influences the UK, European and global financial reporting because they ensure that financial statements are reported using same standards hence easy comparability. Q 1.4 (a) Companies incorporated in the UK as per Companies Act 2006 are required to publish on their website, their annual reports and accounts. They should prepare and report their financial statements (annual accounts) in accordance with relevant financial reporting framework such as generally accepted accounting principles (GAAPs) and IAS, FASB, IFRS, US GAAP or GASP. (b) Financial statements prepared should give true and fair view and be subject to audit. However, it is not a requirement that they be prepared. (c) The provisions of the 8th European Directives More frequent rotation Quality assurance by the conducted audits Absence of conflict of interest by auditors An independent public oversight Q2.1 Income statement For the period ending December 31, 2013 £ £ Sales 480,000 Less returns and discount (12000+8000) 20,000 Net sales revenue 460,000 Less cost of sales 300,000 Gross profit 160,000 Less operating expenses Administrative expenses Utilities (17000+1000) 18,000 Insurance expense 2,000 Salaries (9000+3000) 12,000 Stores salaries 27,000 (57,000) Selling expenses Depreciation 8000 Bad debt provision 2950 Stores supplies (120000-100000) 20000 Advertising expense (16000-8000) 8000 Freight out 7000 Total operating expense (45950) Operating income 57050 Other incomes Interest revenue (3000+2000) 5000 Net income 62,050 Statement of financial position As at December 31, 2013 Assets cost (£) acc. Depreciation (£) net book value (£) Land 50,000 Stores equipment 50,000 16,000 34,000 Accounts receivable 59,000 2950 56,050 Cash 300,000 Inventories 416,000 Total assets 856050 Capital and liabilities Capital 800,000 Add income 62,050 Less drawings (10000) 852050 Accrues utilities expense 1000 Accrues salaries expense 3000 Total liabilities 856050 Q2.2 INDIRECT METHOD STATEMENT OF CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 2013 Cash flow from operating activities £ Net profit before taxation 2370 Add depreciation 880 3250 Adjustments Add decrease in receivables 280 Deduct increase in inventories 370 Decrease in payables 390 Net cash flow from operating activities 2770 Q2.3. WORKINGS       Income and Expense account (I&E) Sales OpeningInventory 3200 Purchases 44000 47200 Less damaged inventory written off -1000 Less stolen inventory -4000 42200 Less closing inventory -6200 Cost of sales 36000 Gross profit 24000 Sales 100% Gross profit 40% Cost 60%       cash book       Bal b/f 4310 trade accounts payable 39400 trade accounts receivable 57980 trade expenses 7360 agency commission 300 vehicle expenses 6720   drawings 4300   Bal c/f 4810 62590 62590     trade expenses account   prepayment 120 I&E accounts 7400 cash 7360 prepayment c/f 80 7480 7480   trade accounts receivable account   Bal b/f 6300 cash received 57980 sales 60000 discount allowed 1620   Bal c/f 6700 66300 66300     Vehicle expenses account   cash 6720 accrual b/f 230 accrual c/f 530 I&E a/c 7020 7250 7250     Accounts payable account     discount received 1200 Bal b/f 4200 Cash 39400 purchases 44000 closing balance c/f 7600   48200 48200 Income statement for the year ended 31 March 2011 £ £ Sales 60000 Opening inventory 3200 Purchases 44000 47200 Less inventory damaged -1000 Less inventory stolen -4000 42200 Less closing inventory 6200 Cost of sales 36000 Gross profit 24000 Expenses trade expenses 7400 inventory damaged 1000 Inventory stolen 4000 Vehicle expense 7020 Discount allowed 1620 Depreciation Buildings 500 M. vehicle 1500 1500 22540 Net profit 3100 statement of financial position as at 31 March 2011 Assets Cost Acc. depreciation NBV Buildings 10000 6500 3500 Motor vehicles 5000 3000 2000 Inventory 6200 Accounts receivable 6700 Prepayments 80 Balance at bank 4810 Total assets 23730 Liabilities Capital 16800 Add net profit 3100 Less drawings -4300 15600 Trade payables 7600 Accrued expenses 530 8130 23730 Q 2.4 1. Total acquisition amount paid 0.75*160000= £120,000 Control accounts Consideration 180000 Share capital (75%100000) 75000 Goodwill w/o 36000 Preacquisition profit 45000 Bal to cons. Bal sheet 24000 180000 180000 Goodwill=180000-120000= £60000 Goodwill written off= 3(60000/5) = £36000 Preacquisition profit 75%*60000= £45000 2. Accumulated profit computations         accumulated profit         Minority interest 32500 your company 240000 Cost of control 45000 Orset limited 130000 Goodwill w/o 36000 Bal to consolidated balance sheet 256500   370000 370000 Cost of control 75%*60000= £45000 3. Minority interest computations     minority interest         Bal to consolidated balance sheet 57500 share capital 25000   accumulated profit 32500 57500 57500 Share capital 25%*100000= £25000 Accumulated profit 25%*130000= £32500 Consolidated balance sheet As at March 31, 2011 Assets £ £ Sundry net assets 790000 Goodwill 60000 Less amortization 36000 24000 Total assets 814000 Liabilities Share capital 500000 Add accumulated profit 256500 756500 Minority interest 57500 Total 814000 Task 3a Q3.1 Different stakeholders have different objectives and goals to achieve with regards to financial statement information. Their information needs therefore varies depending on what they are interested in, for instance: Customers need the assurance of continued existence and financial position of the firm (Weygandt et al pg. 6). Government’s agencies require information relating to liquidity and profitability of the firm. They also require compliance with rules and regulation. (ZüLch & Hendler, pg. 7-8). The public needs information on the firm’s activities, prosperity and developments for it to contribute to the local community through its CSR programs. Employees on the other hand require information on employment opportunities, social and retirement benefits, financial performance and position. Lenders, suppliers and other trade creditors need information on the firm’s solvency (ZüLch & Hendler, 2011, pg. 7-8). Present and potential investors are interested on the financial position, cash generating ability and financial performance. Task 3B Q3.2 The following procedure is followed in publishing financial statements in the annual reports. First individual accounts are prepared followed by group accounts and notes to the account preparation. The accounts are then approved and signed by the directors and then they prepare their reports and then they are circulated. The accounts and reports are then filed. The defective reports and accounts are then revised. Finally the accounts are published. Q3.3 US use regulatory bodies such as FASB, GASB and US GAAP which specifies accounting standards and reporting regulations to be followed. Differential accounting treatments in the US includes LIFO for inventory costing, two-step method of write downs impairment unlike in the UK where single step is used. Q3.4 PARTNERSHIP INCOME STATEMENT FOR THE PERIOD ENDED MARCH 31, 2013 £ £ Sales revenue 448700 Less cost of sales Opening inventory 15600 Add: purchases 184600 Less closing inventory -21400 178800 Gross profit 269900 Less operating expenses Salaries 88000 Insurance (4000-1500) 2500 Rent (3000+ (1.10*10000) 41000 Sundry expenses 39400 Depreciation (48300-12800)*20% 7100 Bad and doubtful debt 2400 Adjustments (3800-3300) -500 1900 179900 Net profit 90000 Division of the profit Profit division Me Brador total Net profit 90,000 capital 2500 2500 -5000 85000 Share of profit Bal (85000*60, 40%) 51000 34000 -85000 total 53500 36500 0 Partner’s current account You Brador You Brador Opening balance 2600 Opening balance 3800 Drawings 48400 36900 Profit share 53500 36500 Bal cc/f 8900 Bal c/f 3000 57300 39500 57300 39500 4. A. Analysis of financial statements Market ratios 2012 2013 2014 Industry average P/E ratio 91.15 -14.46 83.48 14.2times M/b ratio 1.32 1.23 1.41 2.9times These ratios evaluate a company’s economic status in the wider market place. They show the company’s perception regarding its current and future performance as per the investors (Reilly and Keith, 499). M/B indicates that the firm has a lower market capitalization than the industry while P/E indicates that its stocks are undervalued. Profitability ratios 2012 2013 2014 Industry average Gross profit margin 6.09% -11.84% 7.14% 15% Net profit margin 2.56% -8.91% 3.60% 5% Return on assets 5.99% -18.14% 7.25% 9% Return on equity 12.25% -39.42% 16.34% 18% These rations highlight the overall performance and efficiency of a firm hence showing its returns to the investors (Kapil, 131-132). All the ratios under this category are less than the industry average indicating that the firm is less profitable than other companies in the industry. This is so because it is less efficient in its operations. Liquidity ratios 2012 2013 2014 Industry average Current ratio 2.33 1.10 1.85 2.7 Quick ratio 0.85 0.37 0.67 1 A firm’s liquidity ratios highlight its ability to meet short term obligations (Khan and Jain, 6.3). The firm’s quick and current ratios decreased in 2013. This indicates a reduction in its ability to meet short term obligations however, the 2014 forecast indicates an increase in this ability. The firm therefore believes that its ability to meet short term debt obligations will increase. In comparison to the industry average, these ratios are lower than that of the industry average, an indication that the firm is less liquid (Kapil, 121). Debt ratios 2012 2013 2014 Industry average Debt ratio 54.81% 95.37% 55.61% 50% Debt-equity ratio 1.21 20.58 1.25 1 Times interest earned 3.35 -3.92 6.28 6 Debt ratios show the level of leverage of a company hence measures its long term solvency (Brigham and Michael, 120). From the above values, it is evident that the firm is highly leveraged as it uses more debt than other industry firms. This therefore indicates that it has more business risks hence very risky. . Activity ratios 2012 2013 2014 Industry average Average collection period 37.35days 39.55days 45.55days 32days Accounts receivable ratio 9.77times 9.23times 8.01times 11.4times Total asset turnover 2.34 2.04 2.01 2.5 Fixed asset turnover 9.95 6.21 8.61 2.5 Inventory turnover 4.0 4.45 3.55 6.1 This group of ratios indicates the firm’s efficiency in terms of the use of its assets to generate cash or sales revenue (Sinha and Gokul, 133-134). A critical look at the above activity ratios indicate that the firm is below the industry efficiency. We can therefore conclude that the firm is relatively less efficient in its operation compared to the industry. 4. B comparison Profitability ratios Next 2011 2012 2013 Gross profit margin 29.3% 30.4% 31.6% Net profit margin 12.2% 13.8% 14.3% Return on assets ratio 22.4% 25.6% 26.9% Return on equity ratio 172.5% 213.2% 178.1% Burberry 2011 2012 2013 Gross profit margin 67.3% 69.9% 72.1% Net profit margin 13.7% 14.3% 13.0% Return on assets ratio 15.1% 16.5% 14.8% Return on equity ratio 28.1% 29.7% 24.6% Return ratios indicates that Next is more profitable than Burberry. It should therefore be considered as a future investment opportunity because it has less operating expenses to finance since the difference between the margin ratios is minimal unlike Burberry. Liquidity ratios Next 2011 2012 2013 Current ratio 1.28 1.54 1.48 Quick ratio 0.99 1.05 1.08 Burberry 2011 2012 2013 Current ratio 1.60 1.70 1.72 Quick ratio 1.66 1.82 1.42 Even though Next is less liquid than Burberry, it should be considered for future investment because it has enough cash to meet its current obligations because it has moderate cash in its disposal (Khan and Jain, 6.3). It manages its cash well unlike Burberry that has more idle cash which should be used in some productive investments to generate more cash. Market value ratios Next 2011 2012 2013 P/E ratio 9.35 9.6 13.02 M/B ratio 202.5 263.9 405.9 Burberry 2011 2012 2013 P/E ratio 1.56 2.92 3.01 M/B ratio 36.5 43.33 43.9 Next’ ratios have a higher value than Burberry’s. Further, these ratios indicate high earnings growth. Next should therefore be considered as a future investment potential because it has a relatively higher value than Burberry. In addition it has greater market capitalization and promises higher earnings to the investors. Debt management ratios Next 2011 2012 2013 Debt ratio 0.87 0.88 0.85 Debt-to-equity ratio 6.71 7.33 5.63 Times interest earned 23.33 20.82 23.97 Burberry 2011 2012 2013 Debt ratio 0.46 0.45 0.40 Debt-to-equity ratio 0.86 0.81 0.66 Times interest earned 59.24 104.69 93.46 Generally, the ratios show that Next uses more debt than Burberry hence has low cover for its interest expense. That it uses more debt does not mean that it is very risky and can still be considered as a future investment potential because it can still finance its finance cost. Activity ratios Next 2011 2012 2013 Average collection period 71.5days 74.14days 73.56days Accounts receivable ratio 5.10times 4.92times 4.96times Total asset turnover ratio 1.84 1.86 1.88 Fixed asset turnover ratio 4.55 4.82 5.20 Inventory turnover ratio 6.53 6.44 7.34 Burberry 2011 2012 2013 Average collection period 32.21days 28.54days 29.15days Accounts receivable ratio 11.33times 12.79 12.52 Total asset turnover ratio 1.10times 1.15 1.14 Fixed asset turnover ratio 3.04 3.17 2.56 Inventory turnover ratio 1.98 1.79 1.59 Next should be considered as future investment potential because it has higher turnover ratios than Burberry. It is therefore more efficient in using its assets to generate cash. However, it should improve on how it manages its accounts receivable so that it can generate more cash. References Alexander, David, & Archer, Simon. (2008). International Accounting/Financial Reporting Standards Guide 2009. Chicago, CCH. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. 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Noida, India: Pearson, 2011. Internet resource. Sinha, Gokul, and Gokul Sinha. Financial Statment Analysis. New Delhi: PHI Learning Pvt Ltd, 2009. Print. Brigham, Eugene F, and Michael C. Ehrhardt. Financial Management: Theory and Practice. Mason, Ohio: South-Western, 2013. Print. Reilly, Frank K, and Keith C. Brown. Investment Analysis & Portfolio Management. Mason, OH: South-Western Cengage Learning, 2012. Print. FASB (2009) retrieved March 23, 2009 from www.fasb.com GASB (2009) retrieved March 23, 2009 from www.GASB.com IASB (2009) retrieved March 23, 2009 from www.IASB.com SEC (2009) retrieved March 23, 2009 from www.sec.com Read More