Accounting Users And Characteristics Of Financial Statement Accounting Essay

1.0 IntroductionSai Kim, T. et al. , 2001, pg 1, said that â€Å" accounting is the procedure of recording, coverage, and construing fiscal information pertaining to an organisation. Accounting is frequently baffled with book-keeping, which involves merely the recording of economic events and is hence merely one portion of the accounting procedure † . Undertaking 1 is about the different users and their demands for Continental Limited fiscal statements. Accounting users divided into two users, it is internal users ( people within the organisation ) and besides external users ( people outside the organisation ) who use history to deduce fiscal information for their demands. Besides that, the features of these fiscal statements will supply utile information to the users. Continental Limited has an authorized portion capital of 1 million ordinary portions RM1 each. It operates sweeping and retail concern of selling a consumers merchandise. In undertaking 2, prepare the income statement and balance sheet of Continental Limited for twelvemonth stoping 31 Dec 2010 for the internal usage by company manager or publication. Income statement it is made by company at the terminal of each twelvemonth to cipher the net income and loss incurred in concern during the twelvemonth. While, balance sheet it is made by company at the terminal of each twelvemonth to enter the capital, assets, and liabilities of company at the terminal of the twelvemonth. In undertaking 3, prepare the income statement and balance sheet of Continental Limited for twelvemonth stoping 31 Dec 2010 in the recognized format for external coverage or publication. Distribution cost normally defined as the costs incurred to present the merchandise from the production unit to the terminal user. Besides that, administrative disbursals is refer to the costs of runing a concern that are non straight attributable to the production of goods or services. In undertaking 4, must establish on the income statement and balance sheet made in undertaking 2 and 3. Then, cipher the appropriate accounting rations for twelvemonth stoping 31 Dec 2010 and besides necessitate to compare them with the industry norms provided to measure the profitableness and liquidness of Continental Limited.2.0 Accounting users and Features of fiscal statementAccounting information helps users to do better fiscal determinations in the organisation. There have two different types of users in the fiscal information, there are internal users ( people within the organisation such as direction, employees, and proprietors ) and besides external users ( people outside the organisation such as creditor, revenue enhancement governments, investors, and clients ) who use history to deduce fiscal information for their demands. There besides have five regulative features of fiscal statement that will supply utile information to the users. These standards must be fulfilled to do the fiscal statements and histories that are utile to the users. Therefore, company should seek to fulfill the undermentioned standards when choosing and following the accounting constructs in fixing concern fiscal histories.2.1 Accounting usersThere have five different users and their demand for Continental Limited fiscal statements. The fiscal histories supply a wealth of information that is utile to assorted users of fiscal information. Investor is worried about hazard and return in relation to their investings. They need accounting information to cognize whether it is deserving for them to put in a concern or purchasing portions of the company. In add-on, client and debitor are the people who purchase goods and services provided by the company. They need accounting information about the company ‘s fiscal stableness to guarantee that the company is a unafraid beginning of supply and no danger of holding to shut down. As a clients of the company ‘s merchandises, they have a long-run concentration in the company ‘s scope of the merchandises and services. They may even hold to depend on the concern for certain merchandises and services. Besides that, a director is the individual appointed by the company proprietors to responsible for planning and directing the work of a group of persons, supervising the daily work of the company. They need accounting information about the company ‘s fiscal state of affairs as it is presently and as it is expected to be the hereafter to enable them to pull off the concern expeditiously and to do effectual control and planning determinations. Another accounting user is providers or creditor, the people who provide merchandising goods and services to the company on recognition. So, they need accounting information about the company ‘s ability to pay its debts for guaranting their aggregation from the company. The creditors include providers every bit good as loaners of the finance such as Bankss. Furthermore, employee of the company is people employed by the company to transport out concern activities. Therefore, they need accounting information about the company ‘s fiscal state of affairs. This is because, their future callings and the size of their rewards and wages depend on it. Therefore, employees need information refering the stableness and go oning profitableness of the organisation. In the decision, accounting users is of import to the organisation. This is because, the fiscal histories supply information that is utile to assorted users of fiscal information.2.2 Features of fiscal statementFirst is understandability, it means that the fiscal statements must easy to comprehensible. Users of fiscal statements are assumed to hold adequate cognition of concern, economic activities and accounting to analyze the information decently. Harmonizing to Helium.com ( 2010 ) , said that â€Å" understandability ensures that a user equipped with the basic cognition can spot information refering to the public presentation and fiscal place of an endeavor † . Besides that, the feature of the fiscal statement is comparison. The fiscal histories made based on accounting constructs should be comparable within the entity and across entities. Comparability within the entity is means that the fiscal statements can be compared with the old twelvemonth fiscal statements of the same company. While, comparison across entities is means the fiscal statement can be comparable with the history of other company. Another feature of the fiscal statement is relevancy. The fiscal histories prepared based on accounting constructs and policies should show relevant fiscal information which is capable of act uponing the economic determination of the users. Therefore, fiscal statements are for users to do economic determinations, the information must be relevant to the determinations that those users have to do. In add-on, relevant fiscal statements are seasonably, if the histories are prepared to supply required information in clip, it is relevant to the determination devising of the user. Contrary, if the histories are no prepared to supply information in clip, it is non relevant to the determination devising of the user. Furthermore, the feature of fiscal statement is dependability. Fiscal history must show dependable information to the users for determination devising. Harmonizing to SpiffyD ( 2012 ) , reference that â€Å" harmonizing to ACCA, â€Å" dependable † information does non incorporate mistakes that affect the economic determinations of users, nor is it biased or partial. This property is linked to faithful representation, since users should be able to handle with it as such. Users have assurance in dependable fiscal statements. Such statements are non misdirecting or intentionally constructed in a mode that could skew determinations or perceptual experience of the fiscal place or public presentation of an entity. It is deserving observing that the importance of auditing is increasing because it reinforces dependability † . In add-on, the feature of the fiscal statement is accuracy. The fiscal history must supply accurate fiscal information to the users for determination devising. The ground is, the inaccurate history information will take to inaccurate determination made by the user.3.0 Income Statement and Balance SheetIncome statement it is made by company at the terminal of each twelvemonth to cipher the net income and loss incurred in concern during the twelvemonth. Harmonizing to Steven Mark, L. , 2003, pg 25, he said that â€Å" the income statement besides referred to as a profit-and-loss statement, summarizes the company ‘s grosss, disbursals, additions, and losingss for a period of clip, such as three months or one twelvemonth † . While balance sheet it is made by company at the terminal of each twelvemonth to enter the capital, assets, and liabilities of company at the terminal of the twelvemonth.3.1 Working for note inquiry a to hClosing stock should be recorded at cost or net r esale value which one is lower. Since cost RM65000 & lt ; net resale value RM70000, the cost RM65000 should be shuting stock value put in the trading history of income statement and under the current plus in balance sheet. Cash Account RM RM Gross saless 5000 Purchase 4000 Stationery 700 Electricity 300 5000 5000 Gross saless in trading history of income statement = RM360000 from TB + RM5000 = RM365000 Purchase in merchandising history of income statement = RM200000 from TB + RM 4000 = RM 204000 Stationery as disbursal put in P/L history of income statement = RM7000 from TB + RM300 = RM7300 Gross saless committee as disbursal put in P/L history of income statement = RM18000 paid from TB + RM1500 accrued at terminal of twelvemonth = RM 19500 Then, accrued gross revenues committee RM1500 is recorded under the current liability in balance sheet Office wages as disbursal put in P/L history of income statement = RM28000 paid from TB – RM 2000 prepaid at terminal of twelvemonth = RM26000 Then, prepaid office wage RM2000 is recorded under the current plus in balance sheet Debtor Account RM RM Balance b/d 75000 ( – ) Bad debts 5000 Balance c/d 70000 75000 75000 Balance b/d 70000 Bad Debts Account RM RM Debtor 5000 P/L history 5000 ( Bad debts as disbursal put in P/L history ) Provision for bad debts shuting balance = 10 % ten Debtor shutting 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 different 2000 ( As disbursal put in P/L history ) 7000 7000 1 Jan 2010 Balance b/d 7000 and degree Fahrenheit ) Vehicles Account RM RM Balance b/d 300000 Vehicles Account 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 history 12500 1 Jan 2010 Opening balance b/d 60000 ( Cost sold RM50000 x 5 % x 5 twelvemonth from 1 Jan 2005 to 1 Jan 2010 ) 31 Dec 2010 Balance c/d 60000 Depreciation as disbursal put in P/L 12500 history ( Vehicles shuting balance RM250000 x 5 % ) 72500 72500 1 Jan 2011 Balance b/d 60000 Vehicle Disposal Account RM RM Vehicle cost sold 50000 Provision for depreciation on 12500 vehicle sold Returns from disposal of vehicle 35000 Difference for Loss on disposal of 2500 vehicle ( As disbursal put in P/L history ) 50000 50000 Provision for Depreciation on Premises Account RM RM Balance c/d 5400 1 Jan 2010 Opening balance b/d 40000 Depreciation as disbursal put in 14000 P/L history ( Premisess cost from TB RM350000 x 4 % ) 54000 54000 Balance b/d 54000 g ) Taxation charge RM15300 is deducted from net net income at the underside of income statement. It is besides recorded as accumulated revenue enhancement RM15300 under current liability in balance sheet H ) Proposed divided to be deducted from net net income at the underside of income statement = 2 % x RM500000 Share capital from TB = RM 10000 Then, the proposed divided RM10000 is recorded under current liability in balance sheet.3.2 Income statement of Continental Limited for twelvemonth stoping 31 Dec 2010 for internal usageIncome Statement of Continental Limited for Year Ending 31 Dec 2010 for Internal Use RM RM RM Gross saless 365000 Less Return inwards 10000 Net gross revenues 355000 Less Cost of gross revenues: Opening stock 50000 + Purchases 204000 – Tax return outwards 15000 + Carriage inwards 5000 194000 Less Closing stock 65000 179000 Gross net income 176000 Add Income: Dividend received 5000 181000 Less Expense: Stationery 700 Office electricity & A ; H2O 7300 Office salaries 26000 Gross saless committee 19500 Bad debts 5000 Addition in proviso for bad debts 2000 Loss on disposal of vehicle 2500 Depreciation on vehicles 12500 Depreciation on premises 14000 Vehicle expense 12000 Interest charges 3000 104500 Net net income 76500 Less Taxation charge 15300 Less Proposed dividend 10000 Net income for the twelvemonth 51200 Add Retained net incomes brought frontward 100000 Retained net incomes carried frontward 1512003.3 Balance sheet of Continental Limited as at 31 Dec 2010 for internal usageBalance Sheet of Continental Limited as at 31 Dec 2010 for Internal Use RM RM Fixed assets / Non-current assets Office premises at cost 350000 ( – ) Provision for depreciation on premises 54000 296000 Vehicle at cost 250000 ( – ) Provision for depreciation on vehicle 60000 190000 Long-run investings 100000 586000 Current assets Closing stock 65000 Debtors 70000 ( – ) Provision for bad debts 7000 63000 Bank 42000 Prepaid office wage 2000 172000 758000 Issued portion capital Share capital 500000 Add Reserve Retained net incomes carried frontward 151200 Stockholders ‘ equity 6512000 Add Long-term liabilities / Non-current liability Loan 55000 Add Current liabilities Creditors 25000 Accrued gross revenues committee 1500 Accrued revenue enhancement 15300 Proposed divided 10000 51800 7580004.0 Distribution costs and Administrative disbursalsDistribution costs besides known as distribution disbursals. Distribution cost normally defined as the costs incurred to present the merchandise from the production unit to the terminal user. The distribution cost is points such as gross revenues staff ‘s wages and committee, passenger car outwards, depreciation of bringing new waves, advertisement and show disbursals. Harmonizing to Readyratios.com ( 2011 ) , reference that â€Å" administrative disbursals refer to the costs of runing a concern that are non straight attributable to the production of goods or services. Administrative disbursals are related to the organisation as a whole as opposed to the single sections † . Administrative disbursals consist of such points as wages, legal and accounting charges, the depreciation of accounting machinery, public-service corporations, rent, and housework charges.4.1 Classify the disbursals into distribution cost and administrative disbursalsDistribution costs Administrative disbursals RM RM Stationery – 700 Office electricity – 7300 Office salaries – 26000 Gross saless committee 19500 – Bad debts 5000 – Addition in proviso for bad debts 2000 – Loss on disposal of vehicle 2500 – Depreciation on vehicle 12500 – Depreciation on premises – 14000 Vehicle disbursals 12000 – Entire 53500 480004.2 Income statement of Continental Limited for twelvemonth stoping 31 Dec 2010 for external coverageIncome Statement of Continental Limited for Year Ending 31 Dec 2010 for External Reporting RM RM Employee turnover 355000 Cost of gross revenues 179000 Gross net income 176000 Distribution cost 53500 Administrative disbursals 48000 101500 Operating net income 74500 Dividend received 5000 79500 Interest charges 3000 Net income on ordinary activities before revenue enhancement 76500 Taxation charge 15300 Net income on ordinary activities after revenue enhancement for the twelvemonth 61200 Proposed dividend 10000 Retained net income for the twelvemonth 51200 Retained net income bought frontward 100000 Retained net income carried frontward 1512004.3 Balance sheet of Continental Limited for the twelvemonth stoping 31 Dec 2010 for external coverageBalance Sheet of Continental Limited for the Year Ending 31 Dec 2010 for External Reporting RM RM RM Fixed Assetss Tangible Assetss: Premisess 296000 Vehicle 190000 486000 Investing: Long term investing 100000 586000 Current Assetss Stock 65000 Debtors 63000 Prepaid office wage 2000 130000 Cash at bank 42000 172000 Less Creditors: Sums Falling Due Within One Year Creditor 25000 Accrued gross revenues committee 1500 Accrued revenue enhancement 15300 Proposed dividend 10000 ( 51800 ) Net current Assetss 120200 Entire Assets Less Current Liabilities 706200 Less Creditor: Sums Falling Due After More Than One Year Loan ( 55000 ) 651200 Capital and Reserve Called up portion capital 500000 Net income and Loss history 151200 6512005.0 Accounting ratiosAccounting ratios is used to specify of import relationship between the figures shown on a balance sheet, in a net income and loss history or in any other portion of accounting organisation. Therefore, accounting ratios shows the relationship between accounting informations.5.1 Table of ratio computationRatio with expression Ratio computation for twelvemonth 2010 Industry norm Percentage of gross net income on gross revenues = Gross net income x 100 176000 ten 100 = 49.58 % 30 % Net gross revenues 355000 Percentage of operating net income on gross revenues = Operating net income x 100 74500 ten 100 = 20.99 % 18 % Net gross revenues 355000 Capital employed = Closing capital + Long-term liabilities = ( Fixed assets + Current assets ) -Current liabilities = ( RM586000+RM172000 ) -RM51800 = RM758000-RM51800 = RM706200 Tax return on capital employed ( ROCE ) = ( Net net income + Interest charges ) x 100 76500 + 3000 x 100 9 % Entire assets – Current liabilities 758000 – 51800 = 79500 tens 100 706200 = 11.26 % Current ratio = Current assets = 172000 2: 1 Current liabilities 51800 = 3.32: 1 Stock turnover = Cost of gross revenues Average stock value = Cost of gross revenues = 179000 ( Opening stock + Closing stock ) / 2 ( 50000 + 65000 ) / 2 = 179000 57500 =3.11times Stock turnover period 365 yearss = 365 yearss 90 yearss Stock turnover 3.11 times = 117.36 yearss Debtor aggregation period = Debtor = RM63000 Net recognition gross revenues RM365000 – RM 10000 = Debtor = RM63000 Gross saless – return inwards RM355000 = 0.1777: 1 Debtors collection period = Debtor ratio x 365 yearss =0.177 x 365 yearss 45 yearss =64.6 yearss Creditor ratio = Creditor = 25000 Net recognition purchase 204000 – 15000 = Credit = 25000 Purchase – Tax return outwards 189000 = 0.132: 1 Creditors payment period = Creditor ratio x 365 yearss = 0.132 ten 365 yearss 60 yearss = 48.18 yearss5.2 Profitableness of Continental LimitedThe per centums of gross net income on gross revenues is 49.58 % is higher than industry norm is 30 % because the company is uneffective and inefficient in buying goods and services from the providers doing higher purchase cost and besides uneffective usage of stuff and labor causation higher production cost to diminish gross net income. In add-on, per centum of operating net income on gross revenues is 20.99 % and industry norm is 18 % . Higher per centum of operating net income on gross revenues indicates that company is uneffective in its outgo control. Besides that, ROCE besides higher than industry norm is 20.99 % and 18 % . This is because, it is bespeaking the lower net net income generated in relation to the capital employed.5.3 Liquid of Continental LimitedCurrent ratio of company is higher than industry norm is 3.32: 1 and 2: 1which is much that the thought ratio of 2: 1, the current ratio is higher or equal to 2: 1, th e larger sum of current assets can be used to finance current liabilities, bespeaking that company is financially stable and able to finance its short-run debts. Furthermore, the stock turnover period is higher than the industry norm is 117.36 yearss and 90 yearss. The higher stock turnover period indicate fast stock turnover in concern where the goods and services purchased are kept in stock for a short clip and the fast stock for short clip and so fast taken out from stock for resale. In add-on, debitor aggregation period is higher than industry norm is 64.6 yearss and 45 yearss. Higher of debitor aggregation period indicate that company has given longer recognition clip to let debitor ‘s owing, causation, longer clip taken by company to roll up money. While, the creditor payment period is lower than industry norm is 48.18 yearss and 60 yearss. The lower creditor payment period show that company has obtained shorter recognition clip for having and paying creditors.6.0 Conclu sion and RecommendationIn the decision, making this rule of accounting assignment I have learnt a batch of cognition about the rule of history. I already know the different types of accounting users and besides the features of the fiscal statement. Besides that, making this assignment besides has larn how to fix the income statement and balance sheet. The benefit I get from this assignment is larning accounting will assist us to makes concern or personal fiscal determinations. Another benefit is accounting cognition will assist us to understand the significance of the fiscal information.