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Published Profit and Loss and Cash Flow Statements
Introduction
According to the American Accounting Association (AAA) it states that accounting refers to the process of identifying, measuring and communicating the economic information so that it can allow the making of informed decisions and judgment that they can be used by the users of the accounting information. The accounting activity can be carried out by the accounting entities such as the organizations that are referred to as the individuals, clubs, charities, hospitals, local authorities, central government or the private sector companies. The set of account records and reports are prepared on the basis of the accounting events that are referred to as the financial transactions such as the receipt of cash, the borrowing of money from a bank, lending of money or the payment of taxes.
The purpose of preparing and using accounting information is to communicate, control, account and make decision for the organization to ensure it operates effectively. The accounting information is used by the following people these are the: owners of the organization management, investors, creditors government departments and the employees. The accountant records all transactions within an organization and ensures that proper analyses of an organization are made according to the Companys Act since failure to do this may amount to disqualification of a company due to failing to comply according to the rules and regulations that govern the accounting the profession. The recording of accounting transactions enables a manager to compare the organizations results with those of other organization so that, if there are any deviations then corrective measures can be put in place. The Generally Accepted Accounting Principles are used by the taxation authorities to verify whether the books of accounts have been kept properly so that they can determine the amount of money that should be subjected to tax, if any organization undergoes a loss the taxation authority exempts those organization, until the time they derive profits that can be subjected to tax. The accounting practices are prepared using concepts and principles such as materiality principle, accrual basis principle, matching principle, for example the closing stock of a business may be valued using the following methods F.I.F.O. (First-In First-Out), LIFO (Last In First Out) ,average price, standard price, but a company can only apply one method into its system because of the principle of consistency states that only one method of accounting should be applied throughout the financial period so that varying results from one financial year to another are not recorded which may give a false picture of the companys performance. The business entity principle states that the company and the individuals who run the affairs are separate entities thus they can sue and be sued in a court of law. The financial accounting is used to supply information in form of statements such as the balance sheet and the profit and loss account for a given financial year of a company (Kieso & Weygandt. 1992).
The accounting activities are measured in the following ways. Financial accounting refers to the production of information about the actions and activities by the accounting entity to their external users. The information is presented in financial statements such as the balance sheet, profit and loss account and the cash flow statements. The financial accounting information is used to help the external users to know how a company is performing so that they determine where it is appropriate to invest in the company or not. The management accounting refers to the financial analysis of an accounting entity that is used to facilitate the making of sound financial decision of an organization and it is usually dealt with in the areas such as cost behavior, breakeven analysis and breakeven analysis. The management accounting information is used by the internal users of a company so that they can make decisions about how to carry out the activities of an organization effectively.
The format and content description of the financial statement are regulated by the companies Act 1985 but the accounts of the financial statements must also be prepared according to the accounting standards. The financial statements are prepared according to a number of accounting concepts or principles that are stipulated in the companies Act 1985. The financial and economic activities that are carried out within a business thus managers to keeps track of how it carries out its activities by recording its transactions through a process known as accounting. The accounting process involves identifying, measuring and communicating information to the users of the financial statements so that they can make informed judgments and decisions about how they would like to manage their finances. The accounting information is measured through making judgment about the value of assets owned by a business or the liabilities owed by a business and it also involves measuring the profits or loss that are made to a business in a given financial period of a company. The accounting information can be communicated through processes such as the annual reports, accounts and the management accounting reports so that it can be used to the users to determine the performance of a company.
The accounting information is useful to the users of the financial information because it provides a record of all assets owned, amounts owed to others and monies invested in it; it also provides reports showing the financial position of an organization and the profits of an organization so as to determine whether the company can continue in the foreseeable future. The accounting information helps the management of the organization to manage its resources efficiently and also enables the management of those companies to measure the organizations effectiveness so that if there are issues that hinder the performance of a company then corrective measures can be taken to curb the in convinces. The accounting information helps the stakeholders to monitor a companys activities and performance so as to gauge whether it is appropriate to invest in the company; if the company is viable then the shareholders can invest in the company. The users of accounting information are shareholders, lenders, customers, suppliers, government departments, employees and their organization at large. The stakeholder is a person who has an interest in the performance and the activities of an organization. There are different types of groups that use the financial statements these are managers of companies whose objective is to determine the number of creditors in the organization so as to clear their debts, the shareholders also need information to the amount of dividends that are paid to the shareholder and how much goes to the development of the projects of then organization, and the tax authorities use the financial information so as to determine the amount of tax that is owed by the company that is subject able to tax hence increase the revenue of the company so as to facilitate the development of the country ( Kieso & Weygandt. 1992).
The financial statements are usually prepared according to the needs of the users. There different types of users of the financial statements these are equity investors, loan creditors, employees, analyst-advisers, business contacts, the government and the general public. The equity investor groups require the financial statements so that they can make sensible decisions. It assesses the companys overall performance by performing the financial analysis, the group also determines whether the companys objectives are achieved, assesses the companys ability to raise finance if required, and estimates its growth prospect in terms of share prices and dividend payment and the investor group also determines whether the companys activities are carried out effectively. The loan creditor group is concerned with the short and long term liability position of the companies. The loan creditors may need information that concerns debt or the equity ratios that are within the agreed time limits the dividends that are paid out from capital or from profit and the future prospect of the company to generate sufficient cash to cover up its debts (Donaldson, T. J., and L. E. Preston. 1995).
The employee group requires the financial information so as to assess the companys profitability, liquidity and its growth prospect. The analyst advisor group uses the financial data so as to perform their own analysis of their client. The business contract group is group that consists of customers, suppliers and competitors. The customers may require information so as to assess whether the company overcharges them or not and they also assesses the companys ability to provide its services effectively. The government requires the financial information so as to assess whether the companies comply with the relevant legislation, so as to determine the kind of taxation liabilities that are appropriate for each company and so that it can generate the statistical measures of the company that can be used to evaluate the performance of the company.
The general public involves the tax payers, the consumer in general, environmental societies and the pressure groups. The groups require the financial information for their own particular interests.
The type of information in each financial statements are the balance sheet which is also referred to as the statement of financial position of condition that is used to report on the companys assets, liabilities and not equity as of a given period of time. The income statement which is also referred to as the profit and loss statements is used to report on the companys results of operations over a given period of time, while the statement of the retained earnings is used to explain the changes in the retained earnings over the financial reporting period of a company. The retained earnings also refers to the portion of net income that is retained by a corporation that is not distributed to the shareholder or to the companys owners but it is used to ensure that the activities of a company are carried out effectively. The statement of cash flow is a statement that is used to report on the companys flow of cash particularly its operating, investing and its financing activities within a financial period of the company.
The non-financial statements
The directors reports it is a report that provides information in respect of the company and its operations. It is usually applied in companys principal activities, its future development, health and safety of the employees and the employment of the disabled persons.
The auditors report is a report that states the financial position of a company. The report covers the following areas such as the assessment of the years results, an examination of the factors that influences those results such as economic and political climate as well as the effects of the strikes and the reference for the major developments such as takeovers of the new products, capital expenditure plans and the assessment of the future prospects.
Valued added statements
The value added is the extra wealth that is created by a business entity. The business entity consists of employees, fixed assets and machinery and the providers of capital such as the shareholders and the long term creditors. It usually presents the accounting data that is relatively simple that is more understood than the profit and loss account. The value-based management is a framework that is strategic oriented that aligns management action with an organization activity with organizational objectives that create the shareholders value. In the past companies were facing challenges of managing its finances, hence it developed approaches that would enable the companies to fit in the economic environment and to correct inefficiencies in the controlling structure. The value-based management is an approach that is designed to maximize the shareholder value by producing returns that are more than the cost used to produce those returns. The purpose of this approach is to generate as much network for a company as much as possible and to distribute the given resources in the most valuable investments. There have been reports that managers are confronted by the challenge of optimizing the allocation of scarce resources due to economic and political challenges thus for them to achieve their objective they must incorporate strategies into its organization in order to overcome the challenges (Donaldson, T. J., and L. E. Preston. 1995).
Employee reports
It is a report that shows an analysis of the aggregate employee remuneration between the wages and salaries that is paid to the employees, the social security costs that are incurred by a company on the employees behalf and the other pension costs that a company incurs on the employees behalf. The report also consists of the average number of employee within a certain category that is selected by the directors of the company in light to the companys business.
The goal of financial reporting is to provide the users of the financial statements with financial information that is to ensure that the economic, political and social decisions are carried out and it is also used for demonstrating the accountability and the stewardship of the employees of the organization. It also provides the information that is useful for evaluating the managerial and the organizational performance of a given company over a given period of time.
The business is a commercial or an industrial organization that deals with the manufacture, re-sale or the supply of goods and services. It also refers to an organization that invests money in form of resources such as the buildings and machinery that ensures the company generates money for the owners so as to enhance its growth into the future.
The limitations of financial statement
The financial statement only reflect the financial transactions and are usually in the past tense, thus they do not show the important issues that are happening within a company, industry and the market place. The financial statements are usually outdated this is because they use the historical cost basis to evaluate the performance of the company and they are used as the factors for carrying out the comparisons of various financial statements.
The companies in a company use different accounting standards for evaluating the assets and liabilities of a company thus using them to compare the performance of a company can be misleading since it also presents a small view of the performance of the business but not the whole picture of the business. It is also difficult to analyze the financial position of a company on the basis of the financial ratios since they dont represent a true picture of the financial position of a company.
The ways of cost calculation
The cost calculation refers to the process of calculating the total costs of making and selling a product or of providing a service to the customers. The costing process helps the managers to set prices, control and reduce costs, plan for the future, make better decision and it also helps the managers of business to write a business plan to obtain credit that can be used to expand the operations of a business ( Spadaro L. M. 2008).
The major components of costs are classified according to the departments of an organization these are production, management departments and the selling and finance departments. The production department consists of cost such as the manpower raw materials costs, electricity, machinery and electricity, the management departments cost components are stationery, telephone, rent, electricity, insurance and equipment. The selling and finance departments costs are publicity, promotion, commissions and interests costs. The costs are classified into fixed costs, variable costs and total costs. The fixed costs consist of the sum of all costs that are required to produce any product. They dont change as the volume of production or service is changed with time it include the facilities cost, certain general and administrative costs and the interest and the depreciation expense. The variable costs are the costs that are associated with the production of the additional units. The costs do change with the volume of production or service. They include direct material and the labor cost transportation and the sales commission expense. The total costs are the fixed and the variable costs. The fixed costs can be reduced only for a certain period of time.
The costs are classified according to the type of production for example some of the components can be both fixed and variable in the same enterprise for example electricity for the office building is a fixed cost. There are some rules of thumb that states that the raw materials usually cause variable costs, the productive work that is directly related to product or service it causes direct labor costs that are variable while the administrative cost are usually the fixed costs of an enterprise.
The Assumption of making profits
The profits of a company are derived by subtracting the total receipts of a company most cash outflows plus an allowance for the depreciation of capital. It is also derived when all the costs have been paid to the different expenses of an organization.
The regulation for the company law of UK
The regulations of the United States company law on its online services is designed so as to help the users with an easy to use and to complete the one-stop resources for all the companys raw materials such as they compute up to date test for all the companies act and its associated legislation. In the United Kingdom the main accounting concepts laid down that are utilized in the organization are going concern, accruals or matching concepts, consistency and prudence concept. The other concepts are objectivity, duality, cost, monetary, measurement, materiality, realization, and the stable money concept.The going concern concept is fundamental counting concept that views an organization as continuing in the future without going into receivership. The prudence concept states that the alternative procedures are made when the business finds it important so as to give a good presentation of the business financial position or results for example when a loss is seen it should be taken into account so as it doesnt have adverse effects on the company. The difference between the cash accounting and the accrual accounting are that in the accrual accounting income and capital measurement are recorded with the timing of the receipts and payments while the cash accounting systems provide essential information in an objective way and at a low cost neither of capital nor about the cost of operating the organization during the year. The consistency concept states that similar items should be accorded similar accounting treatment and the same treatment should be applied from one period of time to another in accounting for similar items and this enables the companies to make valid comparisons from one financial period to another. The entity concept states that the accountants regards the business as a separate entity that is distinct fro its owners or mangers. The concept applies to all limited companies; sole proprietorship or the partnership business thus the business can sue and be sued in a court of law (Everingham, G.K. and Watson, A 2002).
Agency Theory
It is a theory that shows the relationship that exists between a principal that is a shareholder and the agent of the principal that is the companys managers. It shows the costs that are related to resolving conflicts between the interests of the agent and the principal. The theorys attempts to resolve that exist between the principals and agents concerning their goals and the methods that are used so as to resolve the problem that exists between the two parties such as reconciling the principal and agent tolerance for risk. The various ways of solving the conflicts that exists between these parties is by imposing strategies such as piece rates or commissions, profit sharing, offering of efficiency wages, carrying out the performance measurements such as the financial statements, the agent post of a bond and the fear of firing.
The agency costs arise because of the problem that are associated with imposing the perfectly contracts of an agent decisions that affects both his own welfare and the welfare of the principals. The agency cost also involves the sum of monitoring costs, bonding costs and the residual loss. The monitoring costs are the costs that are paid by the principals so as to measure, observe and to control the agents behavior. They involve the cost of audits, the writing of the executive compensation contracts and the costs of firing managers. In order for the management to accomplish their tasks they can monitor their employees by having the necessary expertise and incentive so as to fully monitor their management so that it can bring about credibility about whether to avoid the conflicts from occurring into the future in the organization.
The residual losses are costs that arise because of fully enforcing the principal agent contracts that would outweigh the benefits that would be derived from the contracts.
The various ways in which the management can manage their finances are through implementing the credit management decisions in the organizations so as to avoid deficits they can implement saving accounts so as to cater for the emergent situations that may arise in the organization and they can also set and reach out for the specific saving goals so as to avoid financial pitfalls and scams from occurring into the future.
Conclusion
The management of companies should therefore ensure that they prepare the financial transactions according to the accounting standards so that their businesses are not shut down by the government due to failing to comply with the law. The management of companies should also ensure that come into a consensus on what should be consistently followed in the organization so that the accountants do not present varying information amongst themselves that can lead to wrong presentation of the financial statements of the companies.
References
Barnet, Richard J., and John Cavanagh. (1995) Global Dreams: Imperial Corporations And the New World Order. New York: Simon & Schuster.
Donaldson, T. J., and L. E. Preston. (1995) The Stakeholder Theory and the Corporation: Concepts, Evidence, and Implications. Academy of Management R.Everingham, G.K. and Watson, A (2002). Generally Accepted Accounting Practice 2nd edition, Juta & Co., Kenwyn, pp.20:120:35. Review 20.
Hackel, Kenneth S., and Joshua Livnat (1996). Cash Flow and Security Analysis. 2ndEd Chicago: Irwin Professional Publishing.
Kieso & Weygandt. Intermediate Accounting. 7th ed. New York: Wiley, Livingstone, John Leslie (1992). The Portable MBA in Finance and Accounting. New York: Wiley.
Ethiopian Business Development Services Network (EBDSN). Cost Calculation Manual. 2008. Web.
The Present State of Profit Theory: Asset or Liability? Louis M. Spadaro. 2008. Web.
The UKs E-commerce Regulations. This guide is based on UK law. 2006. Web.
How people on low incomes manage their finances. (2002). Web.
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