The Implication For Users Of Financial Statements Accounting Essay

The Implication For Users Of pecuniary Statements Accounting EssayFinancial statements should be well understood by those who read it especially those individuals who devote considerable knowledge of business and economic world and those ones leave behinding to learn the data carefully. at that place are various users of fiscal statements. These users are classified into cardinal broad categories. These users arrest 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 raise to the activities of the organization. They include 1) Managers and owners need pecuniary statements so as to make business decisions. They analyze the information endured by financial statements so as to obtain a clear lieu of the organization. versatile elements of financial reports such as the ratio of current debt to equity ratio is vital in making a decision on the amount of prospicient run with child(p) that needs to be available2)employees form the second group of internal users of financial statements. Employees require this information especially when making give voice 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 power of the business so as to make reasonable investment decisions 2) Various financial institutions like banks and new(prenominal) loan bodies need to evaluate financial reports of businesses preliminary lending them money 3) the government also analyzes financial statement of different companies so as to prove if they paying appraisees 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 matchs to financial statements?There are different methods which can be followed when presenting financial statements. Rules-based report is made up of precise rules that must be observed during preparation of financial statements. many another(prenominal) 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 explanation, it can demand to employ other accounting policies in preparing their financial statement (Guilding, two hundred2). However, this can be challenging because there are some policies which do conflict. Companies which need to include in stock exchange in much than a single country need to prepare their statements in accordance with GAAP. There are some(prenominal) 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 the 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 ass behind their argument is that there are some rules which are extremely detailed, with standards extending to more than hundred pages. former(a)s have argued that these rules add 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 competition 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 acc ommodate 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 impact 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 busi ness 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 macrocosm 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 i n 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 since then all with the aim of improving accounting disclosure.Requirement 2.1The following is a trial balance from car electrical ltd as at 31 abut 2005Ordinary shares of 50 p each400,00010% Redeemable Preference shares of 1 each200,000 carry lucres as at 1 April 200442,475 section block (Land 40,000)170,000Plant and machinery730,000Office equipment110,000Motor vehicles200,000 purvey for depreciation Plant and Machinery224,500 Office equipment24,500 Motor vehicles80,000Accounts receivables/Payables500,000356,226Provision for doubtful debts1,000Manufacturing wages501,400Inventory as at 1 April 2004 raw materials70,00 0 Work in progress126,000 Finished goods250,000Transport expenses85,013Returns inwards15,106Purchases of raw materials518,600gross revenue2,600,147 curse balance60,020 holdors salaries60,114Maintenance of plan t30,102Rent40,063Advertising190,048 order50,171Insurance20,116Office salaries166,013Light and heat46,027manufacturing plant power30,014Bank interest7,070Interim dividends on preference shares10,000General administration expenses63,011_________3,988,8683,988,868Further information is as followsDepreciation is to be provided as followsPlant and machinery 15% on cost. (Production expense)Office equipment 10% on cost (administration expense)Motor vehicles 25% on WDV (distribution cost)New stance 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 2,321Rent, rates, light and heat and policy are to be apportioned in the ratio of 51 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 salaries100,000 is to be provided for corporation taxDuring the year 1,500 electrical equipments were transferred from the factory to the warehouse. exactly 100 equipments were in hand at the end of the year.At 31 March 2005 Inventory wasRaw materials56,200.Work in progress47,190.Finished goods?Classifying expenses by functionAuto transmissionIncome Statement for the year ended 31/03/2005Revenue2,585,041Cost of sales(1,586,692)Gross profit998,349ExpensesDistribution expenses373,298Administration expenses244,489finance costs27,070(644,857)Profit before tax353,492Income tax expense(100,000)Profit for the decimal point253,492Classifying expenses by natureAuto TransmissionRevenue2,585,041ExpensesRaw materials consumed532,40Changes in end goods and work in progress233,332Depreciation153,100Employee benefits727,527Other expenses558,120Finance costs27,0702,231,549Profit before tax353,492Income tax expense(100,000)Profit for the period253,492Auto TransmissionBalance sheet as at 31/03/2005NON-CURRENT ASSETSProperty, Plant and Equipment727,900CURRENT ASSETSInventory198,868Accounts receivables495,000Prepayments3,980697,848TOTAL ASSETS1,425,748EQUITY AND LIABILITIESOrdinary share capital400,000RESERVES carry profits295,967Shareholders silver695,967NON-CURRENT LIABILITIES10% Redeemable preference shares200,000CURRENT LIABILITIESBank overdraft60,020Trade payables356,226Accruals13,535 up-to-date tax100,000529,781Total Equity and Liabilities1,425,748 kit and caboodleRevenue2,600,147Less return inwards(15,106)2,585,041Cost of salesOpening inventory Finished goodsCost of finished goods250,0001,682,170Less closing inventory of finished goods(95,478)1,586,692Factory cost of finished goodsManufacturing accountOpening inventory raw materials70,000Purchases of raw materials518,600588,600Less Closing stock inventory raw materials(56,2 00)Raw materials consumed532,400Direct labour Manufacturing wages501,400PRIME COSTS1,033,800Factory overheadsDirectors salaries Factory manager20,000Maintenance of plant30,102Rent35,320Rates39,192.50Insurance16,063Light and hear39,376.50Factory power30,014Depreciation on plant109,500319,560Total cost of production1,353,369Add Opening WIP126,0001,479,360Less Closing W.I.P47,190Factory cost of finished goods1,42,170 evaluate of closing stock/finished goods 1,432,170 x 100 = 95,478 =95,4781500ExpensesDistributionAdministrationFinance costsTransport85,013Directors salaries40,114Rent7,064Advertising190,048Rates7,838Insurance3,213Office salaries101,776Light and heat7,873Bank interest7,070Preference dividends (redeemable)20,000Salesmen salaries64,237Increase in provision for bad debts4,000Depreciation on new office block2,600 office equipment11,00 motor vehicles30,000General administration expense______63,011_____373,298244,48927,070Workings for classification by natureChanges in finishe d goods and W .I. PFinished goodsWork in progressTOTALClosing inventory95,47847,190142,668Opening inventory(250,000)(126,000)(376,000)Increase ( lower)(154,522)(78,810)(233,332)An increase is treated as a saving while a decrease is an expense .DepreciationPlant and machinery109,500New office block2,600Office equipment11,000Motor vehicles30,000153,100Employee benefitsManufacturing wages501,400Factory manger salary20,000Director salaries40,114Office salaries101,776Salesman salaries64,237727,527Other expensesTransport85,013Rent42,384Advertising190,048Rates47,031Insurance19,276Ling and heat47,241Plant maintenance30,102Factor power30,014Provision for bad debts4,000Bank interest7,070General administration63,011558,120Property, Plant and EquipmentCostDepreciation to dateNet Book valueOffice block170,0002,600167,400Plant and machinery730,000334,000396,000Office equipment110,00035,50074,500Motor vehicles200,000110,00090,000727,900Prepayments and AccrualsPrepaymentsAccrualsRates3,140Light and heat1,214Insurance840Rent2,321____Dividend on redeemable preference shares10,0003,98013,535 contain profitsBalance c/d 42,47542,475Profit for the period 253,492Retained earnings 295,967Gross profit margin profit/sales= 998,349/2585041=38.62%Net profit margin profit/sales= 295,967/2,585,041=11%Differential 38.62-11= 27.62Requirement 2.2doh textileIncomes statement for the year ending 31 December 2009Sh. Sh.revenue 476000ExpensesAdvertising expense 14500Supplies Expenses 31500Rent expense 12000Miscellaneous expense 5100Salaries expense 78000Utilities expense 2500 (143600)Profit before tax 332400Net income 109450Total income 441850Income tax expense (132555)Profit for the period 309295Distribution to owners (48100) retain earnings 261195Balance sheet as at 31 december 2009Non Current Assets Sh. Sh.buildings 512000land 90000Current assetssupplies 4250account dues 95000Cash 63000 162250TOTAL ASSETS 764250Ordinary Share keen 310300Retained Profits 261195Shareholders funds 571495Non-Cur rent Liabilitiesmortgage payable 423400Current LiabilitiesTrade payables 74300Current tax 132555Proposed dividends 48100 265400TOTAL EQUITY LIABILITIES 764250Requirement 2.3Below 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 UUIncome statements for the year ended 31 March 2000 forAlbar Ltd Nguo Ltd Kipi LtdSh.m Sh.m Sh.mRevenue 1,368 774 685Cost of sales (810) (407) (355)Gross profit 558 367 330Distribution costs (196) (64) (78)Administration expenses (112) (73) (72)Finance cost (50) (20) 0Profit before tax 200 210 180Income tax expense (60) (60) (50)Profit aft(prenominal) tax 140 150 130Proposed dividends (150) (100) (100)Retained profits for the year (10) 50 30Retained profits brought forward 713 610 420Retained profit carried forward 703 660 450Balance sheet as at 31 March 2000 Albar Ltd Nguo Ltd Kipi LtdNoncurrent assets sh.m sh.m sh.mProperty, plant and equipm ent 853 415 495Investment in Nguo 702Investment in kipi 4051555 820 495Current assetsInventory 368 200 190Trade receivables 380 230 240Cash at bank 120 115 91Total assets 2,423 1,365 1,016Ordinary share capital 900 200 100Retained profits 703 660 450Shareholders funds 1,603 860 550Noncurrent liabilities10% loan stock 500 200 0Current liabilitiesTrade and other payables 140 175 346Current tax 30 30 20Proposed Dividends 150 100 100Total equity and liabilities 2,423 1,365 1,016Albar and Its subsidiariesConsolidated Income statement for the year ended 31 March 2000Sh. Sh.Revenue 2,507.00Cost of Sales (1,322.00)Gross Profit 1,185.00ExpensesDistribution Costs 338.00Administration Expenses 261.00Goodwill impaired 55.00Finance costs 60.00 (714.00)Profit before tax 471.00Income tax expense (170.00)Profit for the period 301.00Profit attributable to Holding Company 228.60Minority interest 72.40301.00Consolidated Balance sheet as at 31 March 2000Non Current Assets Sh. Sh.Property, plant and eq uipment 1,755.00Goodwill 55.001,810.00Current assetsInventory 728.00Trade Receivables 808.00Cash at bank 326.00 1,862.00TOTAL ASSETS 3,672.00Ordinary Share Capital 900.00Retained Profits 957.201,857.20Minority matter to 330.80Shareholders funds 2,188.00Non-Current Liabilities10% Loanstock 600.00Current LiabilitiesTrade Other payables 609.00Current tax 80.00Proposed dividends 195.00 884.00TOTAL EQUITY LIABILITIES 3,672.00Statement of retained profits b/f Yr C/fAlbar 713.00 (25.00) 688.00Share in Nguo 96.00 100.00 196.00Share in kipi 69.60 3.60 73.20878.60 78.60 957.20WorkingsAlbarAs per the accounts 713.00 (10.00) 703.00Add Divs receivable 80.00 80.00Interest receivable 10.00 10.00Less UPPPE (50.00) (50.00)Less Goodwill Impaired (55.00) (55.00)713.00 (25.00) 688.00Share in NguoAs per the accounts 610.00 50.00 660.00Less preacquisition (490.00) ____- (490.00)120.00 50.00 170.00Less UPCS (10.00) (10.00)Add excess depreciation 10.00 10.00Add Divs Receivable _____- 75.00 75.00