Accounting, Financial Reporting, And Risk Management In Business – A Case Study Of Avon Rubber Plc

Importance of Recording Transactions in Accounting

As per the requirement I would like to express my viewpoints on recording transactions with parties and also state the importance and requirements of such transaction recording. The maintenance of records is important so that the accountants can have an overall understanding of the financial reporting process. The global financial crisis of 2008 showed that the trust in the business can be a major concern for the business. During the time of the global financial crisis, banks were unwilling to invest or lend money even to other banks as they were unable to effectively estimate the risks which were involved and therefore the lending by banks were completely stopped. In an accounting process, the major elements or classification of items are assets, liabilities, revenues or incomes, expenses or losses and equity (Bentley, Omer & Sharp, 2013). These are the items on the basis of which the whole of accounting entries and posting of journal are done. In accountancy, book keeping techniques are used for the purpose of recording transactions. In addition to this, the items of the financial statements such as assets, liabilities and equity should be measured considering the currency of the country for which the financial statements are prepared (Lim, 2013).

As per my belief, the changes in the marketplace across the world is due to the changes in business activities which also results in changes in value of firm. A business has a dual nature which takes into account the interest of the shareholders of the company as per business view which are constantly changing. The current value of the firms and the current value of the interest of the shareholders are to be considered.

The study of accounting which takes place in a university does not provide us with enough exposure which practical application of the same can provide. I am of the opinion that we can further develop skills and knowledge in accounting with practical application and application of the theories effectively. In classroom we only learn the topic and mug up the definitions even though we might not be able to understand the same. Another thing which is clear to me is that a business can only plan to reduce the risks which the business faces, to completely avoid the risk is not possible. The main purpose of a business is to manufacture or provide services is to add value to the products and meet the expectation of the customers, stakeholders and society at large.

Avon Rubber Plc’s Recent Agreement with the UK Ministry of Defence

The company which I have chosen for this part is Avon Rubber Plc. Avon Rubber Plc is engaged in the manufacture and engineering of respiratory protection equipment for military, law enforcements and fire personnel. The company also makes milking equipment for Dairy farmers. The company operates in England and has its headquarter situated in England (Avon Rubber p.l.c.. 2018). The company is engaged in core innovative activities which can further develop the process of the company. The business model of the company is to maximize shareholder values.

The blog which contains information about Avon Rubber Plc (https:// edisoninvestmentresearch.com/…blog/…/avon-rubber-plc-avon-uk-mod-general)

Avon Rubber plc has entered into a 5 years agreement with the UK’s Ministry of Defence (MOD) for the resupply of general service respirator. The company is likely to incur certain amount of capital expenditure which is estimated to be around £ 3 million which will be incurred in between the financial years 2018 and 2019. In addition to this, the contract is expected to generate revenues which will be up to £ 16 million over the five years period of operations (Avon Rubber p.l.c.. 2018). The company wants to further innovate its products so that the company is able to earn more revenues and further develop the company.

Date	Amount ($)	Transaction Details	Category in Chart of Accounts
01-01-2018	7500	Payment to Metcalfe Life Insurance	6.1	Insurance Expenses
04-01-2018	1750	Payment to Howard Cars	6.3	Travelling Expenses
06-01-2018	8750	Payment to Tony Parker	6.2	Purchase
09-01-2018	5600	Payment to Bucky Stark	6.2	Purchase
12-01-2018	18600	Deposit from Steve Banner	4.1	Revenue from Sales
16-01-2018	3000	Payment to Highsky Real Estates	6.4	Lease Expenses
18-01-2018	25800	Deposit from Nick Rogers	4.1	Revenue from Sales
22-01-2018	9950	Payment to Bucky Stark	6.2	Purchase
31-01-2018	15	Bank Charges	6.5	Bank Fees
31-01-2018	10300	Deposit from Bruce Lane	4.2	Revenue from Service
31-01-2018	8000	Payment to Carole King	6.2	Purchase
31-01-2018	3150	Payment to Eve	6.6	Wages
31-01-2018	2800	Payment to Adams	6.6	Wages
31-01-2018	6400	Payment to Hydro Power	6.7	Power & Electricity
31-01-2018	2180	Payment to Dalton	6.8	Fuel Charges
31-01-2018	550	Payment to CBN Bank	6.9	Interest on Loan
31-01-2018	16400	Deposit from Henry Carter	4.2	Revenue from Services

Student Name:
Income Statement
for the month ended 31 January 2018
INCOME
Revenue from Sales	44400
Revenue from Service	26700
TOTAL INCOME	71100
EXPENSES
Insurance Expenses	1750
Purchase	32300
Wages	5950
Lease Expenses	3000
Bank Fees	15
Power & Electricity	6400
Fuel Charges	2180
Travelling Expenses	2180
Interest on Loan	550
Insurance Expenses	7500
TOTAL EXPENSES	61825
Profit/(Loss) for the period	9275

Avon Rubber Plc.
WORKSHEET
30-Sep-17
ACCOUNT	TRIAL BALANCE	INCOME STATEMENT	BALANCE SHEET
Debit (DR)	Credit (CR)	Debit (DR)	Credit (CR)	Debit (DR)	Credit (CR)
£’m	£’m	£’m	£’m	£’m	£’m
Assets
Intangible Assets	40.4				40.4
Property, Plant & equipment	26.3				26.3
Deferred Tax Assets	8.2				8.2
Inventories	21.8				21.8
Trade & Other Receivables	23.8				23.8
Derivative Financial Instruments	0.2				0.2
Cash & Cash equivalents	26.5				26.5
Liabilities
Borrowings		1.8				1.8
Trade & other Payables		30.1				30.1
Current Derivative Financial Instruments						0
Current Provisions for liabilities and charges		0.3				0.3
Current tax Liabilities		6.8				6.8
Deferred Tax Liabilities		6.8				6.8
Retirement benefit obligation		44.1				44.1
Non-Current Provisions for liabilities and charges		1.7				1.7
Equity
Ordinary Shares		31				31
Share Premium account		34.7				34.7
Capital redemption reserve		9.1		2.1	2.1	9.1
Accumulated Losses	32.8		19.4		32.8	19.4
Dividends paid	3.2				3.2
Movement in shares held by the employee benefit trust	1				1
Movement in respect of employee shares schemes		0.9				0.9
Deferred tax relating to employee share schemes	0.4				0.4
Revenue
Revenue		163.2		163.2
Finance Income		0.1		0.1
Expenses
Cost of Sales	101.5		101.5
Selling & Distribution Costs	20		20
General & Administration Expense	21.9		21.9
Finance Costs	0.3		0.3
Other finance expense	1		1
Taxation		2.9		2.9
Other Comprehensive Income
Actuarial loss recognised on retirement benefit scheme	3.8		3.8
Deferred Tax relating to retirement benefit scheme		0.6		0.6
Net Exchange differences offset in reserves	2.3		2.3
Cash Flow hedges		1.1		1.1
Tax relating to exchange differences offset in reserve		0.2		0.2
TOTAL	335.4	335.4	170.2	170.2	186.7	186.7

After the completion of the first five steps, the important aspect of the practical approach in accounting can be clearly understood. I would like to provide my feedback to students so that it can help them to under the practical aspect of accounting and grasp the concept (Chambers, 2014). The units which are taught in the university has importance in the practical life and also are significant at the same time. Therefore, it is important for students to pay proper attention to class room lectures and practical sum presentation in order to learn and develop practical skills necessary (Macve, 2015). In accountancy, it is an accepted fact that if a student has his basics of accountancy clear such as journal, ledgers and trail balance clear then his overall practical approach will be appropriate. I would like to provide feedbacks to three students about what I have learned. Accounting is one of those subjects which has a wide range application and it will be used by us when we are pursuing our career as an accounting professional. In addition to this, everyone should have a basic knowledge of accounting (Weygandt, Kimmel & Kieso, 2015). I would like the students to follow always practical approach when it comes to subjects like accounts as there is wide difference between what is taught in class and the real application of the knowledge which is taught in class. When applying for an accounting job profile, students will be asked questions related to accounts in interview rounds and also about our ability to handle different situations. In a classroom environment the course we need to complete is vast and therefore most of the students look at the vastness and not the learning aspect of the course or its application. However, in a working environment where practical application is necessary, both learning of the concepts and practical application can be achieved as it is basic requirement of the work (Adejare, 2014). In order to help other students, I would like to post my feedbacks in social networking sites which are popular among the students so that their common problems and approach towards accounting can be rectified.

Efforts to Innovate Products to Maximize Shareholder Value

I have examined the financial statements of Avon Rubber plc for the purpose of understanding the inventory practices of the company which forms a significant part of the business (Shen et al., 2013). The valuation of inventory is shown in the statement of financial position of the company and treatment of the same and full disclosure is provided in the notes to accounts of the company. It is also seen in the financial statement that the inventory is subdivided into raw materials, finished goods and work in progress which is clearly shown in the notes to accounts of the company. The inventory value of Avon Rubber plc is shown in the balance sheet as £ 21.8 million in 2017 and the same is shown as £ 20.6 million in 2016. The provision for write down of inventory is shown as £ 3.7 million in 2017. The provision has reduced from the previous year’s estimate which was £4.2 million. The value of inventory which is shown in the balance sheet of the country shows that the value of inventory has increased from previous year results (Reineking et al., 2013).

The company has not disclosed the method of inventory valuation in the notes to account in the financial statements. In addition to this, in the principle risks and risk management section which is shown in the financial statements of the company, shows that the company has poor inventory management system (Collier, 2015). Therefore, it is difficult for the users of the financial statement to understand in what method the valuation of inventory is used by the business. It can be suggested to the management of the company that improvement is necessary to be made in the inventory management system. Due to the omission of inventory valuation method, I cannot effective determine the management of inventory system.

Recording of journal entries is the first step towards preparation of financial statements of any company. As the transaction take place journal entries are recorded and thereafter the same are posted in respective ledger accounts (Beams, Brozovsky & Shoulders, 2017). The balances of such ledger accounts are posted in the financial statements. Therefore, it can be said that the whole process of accounting starts at journalizing the transactions of the business. Any manipulations in the journal or ledger balances can affect the whole of financial statements of the company. Any wrong entries which might be posted intentionally or by mistake will affect the financial statements and the results which are obtained by such statements would be misleading.

Risks Faced by Businesses and the Importance of Risk Management

As per the depreciation policy of the Avon Rubber ltd, the depreciation which is charged by the business has increased from previous year’s analysis. The depreciation of plant, property and equipment is bifurcated into two parts which are dairy products equipment and respiratory products equipment (Bahadir & Tolga, 2013). The amount of depreciation charged has increased from previous year which is £ 5.9 million in 2016 and this increase to £ 6 million in 2017. This signifies that the company has made certain additions to the assets.

The notes to accounts of the company contains all information which is related to depreciation which is charged on every category of assets of the company. I can deduce from the analysis of the financial statement of the company that the management charges straight line method of depreciation in the case of assets of the company (Bhasin, 2016). The notes to accounts section shows that the in case of property, plant and equipment, the useful life of the assets are considered after deducting the residual value from the cost of the assets in order to get equal depreciation amount.

In addition to this, I am of the opinion that the users of the financial statements should be provided with clear information about any change in the methods of charging depreciation if any and also whether the method of charging depreciation is consistent in relation to every year. The disclosure requirement of depreciation has been appropriately provided by the management of the company which the users of the financial statements can understand. The company has accumulated depreciation which is shown in the statement of profit and loss of the company. The accumulated depreciation for all the fixed asset is totaled and shown in the notes to accounts as £ 41.5 million.

The journal entries which are related to depreciation are affect the depreciation treatment of the business and also impact the value of assets if such amount is misrepresented. It will affect the whole of financial statements (Edwards, 2013). The impact will also be on the net profit of the business. Such journal entries can be manipulated if the management changes the method of charging depreciation suddenly with genuine reasons. This will misstate the financial statements.

As per the analysis of the financial report which was conducted by me on Avon Rubber ltd showed that there are certain problems which are associated with the disclosure requirements for inventory. The company needs to report the valuation technique which it has used for the purpose of valuation of inventory. In such a situation it is clear to me that the users of the financial statements of Avon Rubber plc will not have a clear understanding about the inventory management practices of the company. In addition to this I came across the software application MYOB which assisted me in preparing trial balance of the financial statements. I would like to advice students to have a clear understanding of MYOB application as it is a useful tool for overall development of accounting skills. The application allows financial statements to be automatically reconciled and also file GST returns without making a separate statement. The application software is also user friendly. I would also like to advise students to have a through knowledge of the accounting standards and principles which are used by businesses to prepare financial statements (Nobes & Stadler, 2015). In my opinion with appropriate knowledge of the relevant accounting standards students will not be able to interpret any financial information or recognize significant accounting treatments.

Reference

Adejare, A. T. (2014). The analysis of the impact of accounting records keeping on the performance of the small scale enterprises. International Journal of Academic Research in Business and Social Sciences, 4(1), 1.

Avon Rubber p.l.c.. (2018). Avon-rubber.com. Retrieved 28 April 2018, from https://www.avon-rubber.com

Bahadir, O., & Tolga, B. (2013). Accounting policy options under IFRS: Evidence from turkey. Accounting and Management Information Systems, 12(3), 388.

Beams, F. A., Brozovsky, J. A., & Shoulders, C. D. (2017). Advanced accounting. Pearson.

Bentley, K. A., Omer, T. C., & Sharp, N. Y. (2013). Business strategy, financial reporting irregularities, and audit effort. Contemporary Accounting Research, 30(2), 780-817.

Bhasin, M. L. (2016). Survey of Creative Accounting Practices: An Empirical Study. Wulfenia Journal KLAGENFURT, 23(1), 143-162.

Chambers, R. L. (Ed.). (2014). An accounting thesaurus: 500 years of accounting. Elsevier.

Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Edwards, J. R. (2013). A history of financial accounting (RLE Accounting) (Vol. 29). Routledge.

Lim, F. P. C. (2013). Impact of information technology on accounting systems. Asia-Pasific Jornal of Multimedia Services Convergent with Art, Humanities and Socialgy, 3(2), 93-106.

Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Nobes, C. W., & Stadler, C. (2015). The qualitative characteristics of financial information, and managers’ accounting decisions: evidence from IFRS policy changes. Accounting and Business Research, 45(5), 572-601.

Reineking, C., Chamberlain, D. H., Rudolph, H. R., & Smith, L. M. (2013). An examination of inventory costing convergence under generally accepted accounting principles and International Financial Reporting Standards. Journal of International Business Research, 12(2), 17.

Shen, L., Govindan, K., Borade, A. B., Diabat, A., & Kannan, D. (2013). An evaluation of vendor managed inventory practices from small and medium indian enterprises. Journal of Business Economics and Management, 14(sup1), S76-S95.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.