The Implication For Users Of Financial Statements Accounting Essay

The Implication For Users Of Financial Statements Accounting Essay Financial statements should be well understood by those who read it especially those individuals who have considerable knowledge of business and economic world and those ones willing to learn the information carefully. There are various users of financial statements. These users are classified into two broad categories. These users have different purposes for using these statements. The first category of these users is the internal users. The internal users refer to those individuals who have direct interest to the activities of the organization. They include: 1) Managers and owners need financial statements so as to make business decisions. They analyze the information provided by financial statements so as to obtain a clear position of the organization. Variable elements of financial reports such as the ratio of current debt to equity ratio is vital in making a decision on the amount of long run capital that needs to be available;2)employees form the second group of internal users of financial statements. Employees require this information especially when making joint collective bargains (Dyson, 1996). Such statements are of significant importance when discussing issues concerning promotion, salary increase and rankings. External users include: 1) institutional investors who use the financial reports to evaluate the financial capability of the business so as to make reasonable investment decisions; 2) Various financial institutions like banks and other loan bodies need to evaluate financial reports of businesses before lending them money; 3) the government also analyzes financial statement of different companies so as to prove if they paying taxes accurately ;4) the general public as well as the mass media may be interested in analyzing the statements of certain businesses. 1.2-What are the different aspects of legal and regulatory framework that relates to financial statements? There are different methods which can be followed when presenting financial statements. Rules-based accounting is made up of precise rules that must be observed during preparation of financial statements. Many accountants prefer the use of this method so that they reduce their liability in the event misjudgments. In situation whereby the management decides not to use rule-base accounting, it can choose to employ other accounting policies in preparing their financial statement (Guilding, 2002). However, this can be challenging because there are some policies which do conflict. Companies which need to included in stock exchange in more than a single country need to prepare their statements in accordance with GAAP. There are several reasons why it is necessary to have regulatory framework guiding financial reporting within countries and on international level. One of the reasons regard to irregular information (Moncarz and Portocarrero, 1986). Assume a scenario whereby the manager of th e company is the one responsible for preparation of financial reports. This responsibility gives the manager the opportunity to access financial information which other members of the organization do not. Managers can take advantage of this privilege to exploit the statements so as to favor their own personal interest. Therefore, there must be regulation on reporting to stop insiders from exploiting financial statements. Another important factor to be considered is reliability and relevance of financial statements. Access the implication for users of financial statements? The different aspects of legal and regulatory framework have significant implication for users of financial statements. Some of the users of financial statements have complained that some of the regulations add unimportant complexities. The basis behind their argument is that there are some rules which are extremely detailed, with standards extending to more than hundred pages. Others have argued that these rules provide loopholes for financial engineering and fail to provide a true and fair image of the business. It has also been noted that sometimes these rules fail to capture the details of targeted cases. Another negative phase of these rules is that they fail to provide solutions in the event of gaps (Kotas, 1999). Management can also choose to observe all those accounting treatments that favor their interests and avoid those that will define real position of the business. However, it is worth to acknowledge the fact that these rules play a major role in ensuring a fair competit ion of international businesses which operate in more than one national market. However, it is fairer to say that observance of these legal and regulatory frameworks significantly contribute to preparation of statements which portray a companys real performance. The different legal and regulatory frameworks should be flexible enough to accommodate new situations in the business. A relevant and reliable makes it easier for users of financial information to analyze those statements. Describe how different laws and regulations relate with accounting and reporting standards? (Pass P4) Provide the regulatory framework of any country other than UK and compare it with UK regulatory framework (Distinction 1) There are several accounting bodies which guide the accounting environment and significantly determine the success of a business. Security and exchange commission aimed at eliminating abusive stock market collision that had accumulated and resulted to instability in stock markets. Security and exchange commission ensures that publicly reporting business adhere with the generally agreed accounting principles. Financial accounting standards board (FASB) provides a plane set of standards to be observed when presenting financial statements to the public (Atkinson et al,1995). It aims at shielding the investors from fraud of business owners. Internal accounting standards board was founded to come up with comprehensible financial accounting reports (Messenger and Shaw, 1993). There is also the government accounting standards board (GASB) which aimed at establishing standards of helpful information that will aid users of reports to understand the reports in a much better way. On the second part of this question, the country of my choice is Kenya. In 1998, the council of Institute of Certified Public Accountants of Kenya set IFRS (International financial reporting standards) as the accounting standard in Kenya. From then henceforth, all the companies were requested to prepare their financial statements in accordance with IFRS. However, in Kenya there is a significant gap that has been observed between applicable accounting standards and the real practice by companies. In 1969, the UK ICAEW issued the statement of intent on accounting standard. This statement made it clear that standards will be generated in future with four main goals. The first goal was to reduce the dissimilarities and diversity in accounting principles. Second, was to disclose the accounting foundations. Third, disclose the diversion from established standards and eventually explain the broad exposure for main new accounting proposals. There have been a number of committees which have been formed si nce then all with the aim of improving accounting disclosure. Requirement 2.1 The following is a trial balance from auto electrical ltd as at 31 March 2005  £  £ Ordinary shares of 50 p each 400,000 10% Redeemable Preference shares of  £1 each 200,000 Retained profits as at 1 April 2004 42,475 Office block (Land  £40,000) 170,000 Plant and machinery 730,000 Office equipment 110,000 Motor vehicles 200,000 Provision for depreciation Plant and Machinery 224,500 Office equipment 24,500 Motor vehicles 80,000 Accounts receivables/Payables 500,000 356,226 Provision for doubtful debts 1,000 Manufacturing wages 501,400 Inventory as at 1 April 2004 raw materials 70,000 Work in progress 126,000 Finished goods 250,000 Transport expenses 85,013 Returns inwards 15,106 Purchases of raw materials 518,600 Sales 2,600,147 Bank balance 60,020 Directors salaries 60,114 Maintenance of plan t 30,102 Rent 40,063 Advertising 190,048 Rates 50,171 Insurance 20,116 Office salaries 166,013 Light and heat 46,027 Factory power 30,014 Bank interest 7,070 Interim dividends on preference shares 10,000 General administration expenses 63,011 _________ 3,988,868 3,988,868 Further information is as follows: Depreciation is to be provided as follows: Plant and machinery 15% on cost. (Production expense) Office equipment 10% on cost (administration expense) Motor vehicles 25% on WDV (distribution cost) New office blocks 2% on cost (Administration expense). As at 31 March 2005 rates were prepaid by  £3,140 . Outstanding light and heat as at 31 march 05 is  £1,214 and rent is  £2,321 Rent, rates, light and heat and insurance are to be apportioned in the ratio of 5:1 in relation to factory and office expenses. The company makes a provision of 1% for doubtful debts on all accounts receivables. The production director is paid  £20,000.  £64,237 is included Office salaries  £100,000 is to be provided for corporation tax During the year 1,500 electrical equipments were transferred from the factory to the warehouse. Only 100 equipments were in hand at the end of the year. At 31 March 2005 Inventory was: Raw materials  £56,200. Work in progress  £47,190. Finished goods ? Classifying expenses by function Auto transmission Income Statement for the year ended 31/03/2005  £  £ Revenue 2,585,041 Cost of sales (1,586,692) Gross profit 998,349 Expenses Distribution expenses 373,298 Administration expenses 244,489 Finance costs 27,070 (644,857) Profit before tax 353,492 Income tax expense (100,000) Profit for the period 253,492 Classifying expenses by nature Auto Transmission  £  £ Revenue 2,585,041 Expenses Raw materials consumed 532,40 Changes in finished goods and work in progress 233,332 Depreciation 153,100 Employee benefits 727,527 Other expenses 558,120 Finance costs 27,070 2,231,549 Profit before tax 353,492 Income tax expense (100,000) Profit for the period 253,492 Auto Transmission Balance sheet as at 31/03/2005  £  £ NON-CURRENT ASSETS Property, Plant and Equipment 727,900 CURRENT ASSETS Inventory 198,868 Accounts receivables 495,000 Prepayments 3,980 697,848 TOTAL ASSETS 1,425,748 EQUITY AND LIABILITIES Ordinary share capital 400,000 RESERVES Retained profits 295,967 Shareholders funds 695,967 NON-CURRENT LIABILITIES 10% Redeemable preference shares 200,000 CURRENT LIABILITIES Bank overdraft 60,020 Trade payables 356,226 Accruals 13,535 Current tax 100,000 529,781 Total Equity and Liabilities 1,425,748 Workings  £ Revenue 2,600,147 Less return inwards (15,106) 2,585,041 Cost of sales Opening inventory : Finished goods Cost of finished goods 250,000 1,682,170 Less: closing inventory of finished goods (95,478) 1,586,692 Factory cost of finished goods Manufacturing account  £  £ Opening inventory : raw materials 70,000 Purchases of raw materials 518,600 588,600 Less: Closing stock inventory raw materials (56,200) Raw materials consumed 532,400 Direct labour: Manufacturing wages 501,400 PRIME COSTS 1,033,800 Factory overheads Directors salaries : Factory manager 20,000 Maintenance of plant 30,102 Rent 35,320 Rates 39,192.50 Insurance 16,063 Light and hear 39,376.50 Factory power 30,014 Depreciation on plant 109,500 319,560 Total cost of production 1,353,369 Add: Opening WIP 126,000 1,479,360 Less: Closing W.I.P 47,190 Factory cost of finished goods 1,42,170 Value of closing stock/finished goods: 1,432,170 x 100 = 95,478 =95,478 1500 Expenses Distribution Administration Finance costs Transport 85,013 Directors salaries 40,114 Rent 7,064 Advertising 190,048 Rates 7,838 Insurance 3,213 Office salaries 101,776 Light and heat 7,873 Bank interest 7,070 Preference dividends (redeemable) 20,000 Salesmen salaries 64,237 Increase in provision for bad debts 4,000 Depreciation on new office block 2,600 office equipment 11,00 motor vehicles 30,000 General administration expense ______ 63,011 _____ 373,298 244,489 27,070 Workings for classification by nature Changes in finished goods and W .I. P Finished goods Work in progress TOTAL  £  £  £ Closing inventory 95,478 47,190 142,668 Opening inventory (250,000) (126,000) (376,000) Increase (decrease) (154,522) (78,810) (233,332) An increase is treated as a saving while a decrease is an expense . Depreciation Plant and machinery 109,500 New office block 2,600 Office equipment 11,000 Motor vehicles 30,000 153,100 Employee benefits Manufacturing wages 501,400 Factory manger salary 20,000 Director salaries 40,114 Office salaries 101,776 Salesman salaries 64,237 727,527 Other expenses Transport 85,013 Rent 42,384 Advertising 190,048 Rates 47,031 Insurance 19,276 Ling and heat 47,241 Plant maintenance 30,102 Factor power 30,014 Provision for bad debts 4,000 Bank interest 7,070 General administration 63,011 558,120 Property, Plant and Equipment Cost Depreciation to date Net Book value Office block 170,000 2,600 167,400 Plant and machinery 730,000 334,000 396,000 Office equipment 110,000 35,500 74,500 Motor vehicles 200,000 110,000 90,000 727,900 Prepayments and Accruals Prepayments Accruals Rates 3,140 Light and heat 1,214 Insurance 840 Rent 2,321 ____ Dividend on redeemable preference shares 10,000 3,980 13,535 Retained profits Balance c/d 42,475 42,475 Profit for the period 253,492 Retained earnings 295,967 Gross profit margin profit/sales= 998,349/2585041=38.62% Net profit margin profit/sales= 295,967/2,585,041=11% Differential 38.62-11= 27.62 Requirement 2.2 Utah textile Incomes statement for the year ending 31 December 2009 Sh. Sh. revenue 476000 Expenses Advertising expense 14500 Supplies Expenses 31500 Rent expense 12000 Miscellaneous expense 5100 Salaries expense 78000 Utilities expense 2500 (143600) Profit before tax 332400 Net income 109450 Total income 441850 Income tax expense (132555) Profit for the period 309295 Distribution to owners (48100) retained earnings 261195 Balance sheet as at 31 december 2009 Non Current Assets Sh. Sh. buildings 512000 land 90000 Current assets supplies 4250 account Receivables 95000 Cash 63000 162250 TOTAL ASSETS 764250 Ordinary Share Capital 310300 Retained Profits 261195 Shareholders funds 571495 Non-Current Liabilities mortgage payable 423400 Current Liabilities Trade payables 74300 Current tax 132555 Proposed dividends 48100 265400 TOTAL EQUITY LIABILITIES 764250 Requirement 2.3 Below is the group financial statement for Albar machinery distributors ltd. On October 1997 Albar purchased stake in Nguo. Later this group bought stake in kipi. BELOW UU Income statements for the year ended 31 March 2000 for: Albar Ltd Nguo Ltd Kipi Ltd Sh.m Sh.m Sh.m Revenue 1,368 774 685 Cost of sales (810) (407) (355) Gross profit 558 367 330 Distribution costs (196) (64) (78) Administration expenses (112) (73) (72) Finance cost (50) (20) 0 Profit before tax 200 210 180 Income tax expense (60) (60) (50) Profit after tax 140 150 130 Proposed dividends (150) (100) (100) Retained profits for the year (10) 50 30 Retained profits brought forward 713 610 420 Retained profit carried forward 703 660 450 Balance sheet as at 31 March 2000 Albar Ltd Nguo Ltd Kipi Ltd Noncurrent assets sh.m sh.m sh.m Property, plant and equipment 853 415 495 Investment in Nguo 702 Investment in kipi 405 1555 820 495 Current assets Inventory 368 200 190 Trade receivables 380 230 240 Cash at bank 120 115 91 Total assets 2,423 1,365 1,016 Ordinary share capital 900 200 100 Retained profits 703 660 450 Shareholders funds 1,603 860 550 Noncurrent liabilities 10% loan stock 500 200 0 Current liabilities Trade and other payables 140 175 346 Current tax 30 30 20 Proposed Dividends 150 100 100 Total equity and liabilities 2,423 1,365 1,016 Albar and Its subsidiaries Consolidated Income statement for the year ended 31 March 2000 Sh. Sh. Revenue 2,507.00 Cost of Sales (1,322.00) Gross Profit 1,185.00 Expenses Distribution Costs 338.00 Administration Expenses 261.00 Goodwill impaired 55.00 Finance costs 60.00 (714.00) Profit before tax 471.00 Income tax expense (170.00) Profit for the period 301.00 Profit attributable to: Holding Company 228.60 Minority interest 72.40 301.00 Consolidated Balance sheet as at 31 March 2000 Non Current Assets Sh. Sh. Property, plant and equipment 1,755.00 Goodwill 55.00 1,810.00 Current assets Inventory 728.00 Trade Receivables 808.00 Cash at bank 326.00 1,862.00 TOTAL ASSETS 3,672.00 Ordinary Share Capital 900.00 Retained Profits 957.20 1,857.20 Minority Interest 330.80 Shareholders funds 2,188.00 Non-Current Liabilities 10% Loanstock 600.00 Current Liabilities Trade Other payables 609.00 Current tax 80.00 Proposed dividends 195.00 884.00 TOTAL EQUITY LIABILITIES 3,672.00 Statement of retained profits b/f Yr C/f Albar 713.00 (25.00) 688.00 Share in Nguo 96.00 100.00 196.00 Share in kipi 69.60 3.60 73.20 878.60 78.60 957.20 Workings Albar As per the accounts 713.00 (10.00) 703.00 Add Divs receivable 80.00 80.00 Interest receivable 10.00 10.00 Less UPPPE (50.00) (50.00) Less Goodwill Impaired (55.00) (55.00) 713.00 (25.00) 688.00 Share in Nguo As per the accounts 610.00 50.00 660.00 Less preacquisition (490.00) ____- (490.00) 120.00 50.00 170.00 Less UPCS (10.00) (10.00) Add excess depreciation 10.00 10.00 Add Divs Receivable _____- 75.00 75.00