As per the ratios which are computed, the profitability of the business is shown to have increased as shown by the net profit ratio of the business but the gross profit of the business has fallen. The fall in gross profit may be due to ineffective operation structure of the business. The performance of the business is at par with other businesses in the industry.
The inventory turnover ratio and average receivable ratio represent the activity ratios of the business and the same is shown to have mixed results. The inventory turnover has fallen in comparison to previous year while the debtors turnover is shown to have improved (Delen, Kuzey and Uyar 2013). This shows that the management need to incorporate better inventory management system.
The liquidity ratio of the business is also shown to have improved in comparison to previous year is shown to be favorable which suggest that the liquidity condition of the business is appropriate.
The management of the business needs to improve the operational structure of the business which can improve the gross profit ratios of the business. The activity ratios of the business is also shown to be affected in terms of inventory management which the business needs to improve. The management needs to incorporate better control in the business so that any lapses does not take place.
As per definition, an item is capitalized when the same is recorded as assets rather than expense. In such a case, the expense would appear in the balance sheet of the business. In order to capitalize an expense both criteria must be met which are:
Capitalization limit which is set by the business must be exceeded by such an expense
If the expense can help the business to generate revenue for a long term than the same can be capitalized.
The diagram which can be presented along with the financial statement which will further enhance the value of the annual reporting of the business are pie charts showing operating revenue sources, Line charts showing profitability comparison for a period of 5 years. This would enhance the reporting of the financial information of a business.
Data can be defined as raw set of facts which are processes further to get information. The data are basically plain representation of the facts. On the other hand, Knowledge refers to the processed information which is done in the mind of an individual. Knowledge can be gathered by experience or vigorous study.
Information system are used to capture and process data in order to derive information which can be used by the business. The importance of information system is to process information which can assist the management to take crucial decisions. The information system also improves the operational management and record keeping process of the business.
The accountant needs to check the invoice number for each of the invoices of the business. The accountant also needs to check whether the amount in the invoice matches the records which is made by the business. The accountants can also confirm the balances with external parties about the balances in the invoices.
Double entry system of accounting is popular method which is used in accounting process where in a transaction has double treatment and recorded twice in the books of accounts which brings about accuracy and reduces error in financial statements. It is due to double entry system, the debit and credit sides always tally in trial balance which checks the accuracy of the information.
In case if presenting the profit and loss of a business, the best approach is to adopt an approach which would compare the performance over previous years and also highlight the key areas of performance of the business.
In the case which is given in the question, necessary adjustments are to be made in the books of accounts and also the manager who has committed the mistake should be informed regarding the mistake committed by him.
The objectives of budgeting are listed below in details:
Budgeting is used to predict cash flows of the business
One of the main objective of Budgeting is to monitor the income and expenses of the business
Budgeting is also used to measure the performance of the business and make comparisons between the estimated results and actual results of the business.
Budgeting is considered to be an important practice in the business and the measuring and monitoring of the revenue and expenses of the business are done on the basis of the budgets prepared. The budget also acts as a target which different department needs to consider while performing their duties and therefore it is important to know the scope and nature of the budget.
As per the policy statement of the business, the annual budget should be approved by the board of directors or a management committee.
The activities which are involved in the budgeting process involve the process of setting the standards of performance which the business wants to achieve for all areas. The next step is to effective recognize the income and expenses of the business. Another main important step is to implement the budget in various departments of the business (Popesko and Socova 2016). After the budget is implemented, the management can adjust any changes in the budget and also control the performance of the business.
The benefits of budgeting in a business are listed below in details:
The budgets prepared by the business are used to predict the cash flows of the business and is used for forecasting of the business.
The budgeting process also allows the management to monitor and supervise the activities of the business.
The budgeting system allows the business to direct the activities and resources of the business towards achieving the goals of the business.
The limitations of the budget are listed below in point form:
The budgets are prepared on the basis of judgements and estimation and in many cases, such are not accurate and can mislead the business.
The process of budgeting is time consuming process
The budgeting process is highly vulnerable to manipulations and the figures shown in the budget can be manipulated.
The five cost reduction techniques which can be suggested to the business are given below:
Productivity: The productivity of the business has a big role to play in maintaining the cost. If the business is productive, the costs of the business would be low. This area should be given to the sales managers.
Efficiency: If an employee of the business is efficient than it would take less time for production and also reduce the labour costs of the business. This should be handled by human resource managers and quality control supervisor of the business
Outsourcing: This is another method to reduce the expenses of the business where labour is outsourced. This can be handled by operational manager of the business.
Quality Control: This is managed by the quality control supervisor and this improves the costs as it reduces unnecessary expenses and wastes.
Innovation: The innovation in a business can bring about reduction in cost if more efficient method is developed and the same is handled by the board and operational manager.
The cash flow budget of a business effectively shows the cash flows of the business and also predicts the cash expenses and revenue which the business can earn in the long run. On the basis of the cash flow budget, the liquidity of the business is also determined.
The principles of double entry system in accounting are given below in details:
There should be two parties in a transaction for double entry system to work which means that every debit must have a correspondent credit.
Every transaction must have a giver and a receiver.
The exchange amount in transaction should be of equal value.
This system treats the business to be a sperate entity from its owner
The system is highly accurate and thus effective in every manner.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Popesko, B. and Socova, V., 2016. Current trends in budgeting and planning
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