Accounting For Managers: Accounting Policies And Solutions

Problem 1

Describe about the Accounting for Managers for Accounting Policies and Solutions.

This study deals with analyzing four major problems in relation with management accounting. In this particular assignment, emphasis has been given on management accounting forming the core part of every business organization (Libby, Rennekamp and Seybert 2015). This particular business organization aims at taking several decisions based on results of management accounting. It gives detailed solutions to the four problems listed in the assignment and highlighting the major importance.

Part A

This question requires describing the differences in accounting policies that majorly affects financial statements of company for specified time. Company A uses straight-line depreciation method. On the other hand, Company B follows double declining method. There is huge difference in the process and it has wide impact on the given financial statements of business enterprise (Kaplan and Atkinson 2015). These figures will be reflecting in the book value of assets. It is known that Straight-Line methods make use of residual valuation of asset. As far as double declining method is concerned, it is calculated based on “(1/useful life*200)”.

Calculation has been provided in the Appendix 1 of the assignment. It depicts the depreciation calculation of Company A and Company B. Cost of assets is estimated at 100,000 and salvage value is 10000.

There is a difference of book valuation presented in the middle years for certain asset. For instance, if a particular company sells its asset for 80000 for six year time period, then Company A will record profit at 7000 (80000-73000). This has to be shown in the profit and loss statement. On the contrary, Company B profit will be recorded at 26856 (80000-53144). On analysis, it has been noticed that Company B has more profit generation in comparison with Company A (Horngren et al. 2013). Addition to that, Company A assets will be declining because of the book value as it reflects upon higher valuation in comparison with Company B.

Hence, it can be understood that this type of difference present in the depreciation treatment widely affects financial statements of Company A and Company B for specified period.

This particular question asks for the information regarding depreciation disclosures as mentioned in different types of financial statements (Healy and Palepu 2012). It requires proper understanding of adequate knowledge that has been transmitted to the reader by gaining depreciation information presented in the financial statements. Therefore, it is noted that depreciation treatment is based upon three financial statements such as cash flow statement, balance sheet as well as income statement. These three statements reveal the fact from business perspectives. As far as balance sheet is concerned, depreciation reflects upon total amount of accumulated depreciation as incurred by the fixed assets for ant business organization. It is therefore understood that accumulated depreciation is done for specified time. It is the amount of accumulated depreciation that is to be credited when a particular journal entry is passed (Hartley 2014).

Problem 2

For Instance, in case life of fixed assets is treated for 10 years as mentioned in the financial statements for preparing it for 3 years. In that case, accumulated depreciation will infer for total first years of double balancing method. As far as cash flow statement is concerned, it deals with total amount of depreciation that is added back to the net income for various non-cash transactions (Guo-liu and Sui 2013). In case of income statement, depreciation is shown as an expense as well as posses negative impact especially on net income. Addition to that, depreciation in the income statement considers as the amount that is debited at the time of passing the journal entry for a particular transactions.

The above-mentioned information is regarding the knowledge depicted by a reader for depreciation of financial statements for future analysis purpose (Drury 2013).

This particular problem is concerned with the medium-sized company named as Kangaroo Express. It requires description of three alternative types of financing for the company for Kangaroo Express. It further needs explanation on the risk as well as return implications for each of the alternatives for Marsupials (Droms and Wright 2015). In this case, Kangaroo Express can easily opt for various sources of financing for bringing improving in the capital structure. These types of sources of funds usually come from equity financing as well as debt financing.

“Equity Financing”	“Debt Financing”
“Venture capitalists”	“Bank Loans”
“Initial public offerings, ”	“Asset backed mortgage loans”
“Retained earnings”	“Government Bonds”

Table: Different types of equity as well as debt financing

(Source: Dhamija 2015)

The above table points out the various types of equity financing and debt financing in accordance with the medium-sized enterprise named as Kangaroo Express

“Venture Capitalists”

Venture capitalists are one type of equity financing that provides capital to business enterprise. It is in exchange with share ownership for given business organization. In case Kangaroo Express opts for venture capitalists, cost of return will be huge in nature (Collier 2015). Therefore, there is huge risk present in this case, as it will dilute the ownership. Kangaroo Express has shares of Marsupial family, and then it will be huge trouble for them in the near future.

“Initial public offerings”

Initial Public Offerings is another type of equity financing that means the process of selling shares to the public with the help of secondary market. Kangaroo Express thinks of expanding for demand of products on satisfactory terms. This particular organization can opt for IPO for raising capital from the public (Collier 2016). It is important to consider the fact that Kangaroo Express needs to be assured regarding demand of the products before launching initial public offerings. In this case, risk is high as well as returns percentages at the same time.

Problem 3

“Long term bank loans, Asset-backed mortgage loans and Government bonds”

Long-term bank loans, asset-backed mortgage loans as well as government bonds are types of debt financing. Kangaroo Express can opt for long-term loans, as it will help in raising funds in smoother terms. It is slightly less risky process as it increases total debt amount from inherent risk association (Warren, Reeve and Duchac 2013). This particular aspect affects the capital structure of the given business organization. It is advisable to the business firm for obtaining certain portion of capital especially from financial banks. Business organization should make use of retained earnings for paying off interest in association with bank loans. The case study company is medium-sized and it is expected that the business form will have considerable amount of retained earnings for making it a profitable organization (Chen, Tan and Wang 2013). In this case, risk will be less and more return for Kangaroo Express.

On the contrary, Kangaroo Express can even opt for government bonds. This is because government bonds are less risky as well as higher return on other side.

After analysis both equity and debt financing, it is recommended that kangaroo Express should opt for bank loans as well as government bonds for raising capital for expansion purpose (Anderson et al. 2015).

Ethical behavior is very important for managerial accounting. Ethical behavior in accounting largely affects relationship between company, employees and suppliers. Management accounting manages with the internal process of business firm so accountants need to abide with the norms of ethics in carrying out operations (Collier 2016). The major responsibility of an accountant is to present correct value in form of financial information on behalf of top-management of accounting firm. Ethical principles need to be followed by accountants based upon responsibility and objectivity. Management is liable to take strict actions on the accountants who present wrong or misleading information in the financial statements. At the time of external audit, if external auditors will find out some faults in the financial statement then top management will be questioned regarding any unethical decisions undertaken by them. There also occurs various legal consequences for given business accounting firm.

There is wide-impact of ethics on relation with company as well as its stakeholders. Collier (2016) argues the ethical behavior largely affects relationship of the company with its key stakeholders. Most of the business organization needs to be accountable on behalf of its stakeholders. Business organization will be legally punished if they produce any kind of wrong information especially in the financial statements. Wrong information produced by business organization lowers down the goodwill that hampers the relationship with internal as well as external stakeholders. This includes customers as well as suppliers and employees (Collier 2016). Hence, management accountants need to follow various ethical standards while working for given business organization.

Problem 4

This particular problem requires discussion on strengths as well as weakness of financial statements for determination of growth potential of suppliers. It is opined by Kaplan and Atkinson (2015) that financial statement analysis posses various strengths and weakness for determination of future prospects from supplier or any other business organization. Some of the major strength of financial statement is explained below with proper justification:

Profit and Revenue Identification- It is important to understand the fact that financial statement depicts total revenue and total profit as earned by business firm for specified time. It can be considered as growth prospective from the point of view of the supplier as judged by sales as well as profit figures generated by business organization (Warren, Reeve and Duchac 2013).

Cash flow statements and budgeted figures- It has been understood that financial statements helps in identification of total amount of cash inflows as well as cash outflow for determining the cash balance for any business accounting firm. Hence, it is easy to judge the supplier stability position by using financial statement analysis.

Some of the weakness of financial statements is listed below with proper justification:

Market condition- This is one of the weaknesses of financial statements as it fails in reflecting the probable market condition whereby accounting firm operates in given form. Supplier growth potential cannot be analyzed by using financial statements of a particular business organization.

Continuity in operations- Financial statements fails in reflects continuous analysis on the sales as well as profit figures (Warren, Reeve and Duchac 2013). These figures are not presented in the financial statements of any business organization. Financial statement fails in determining the stability of the firm in proper way.

It is important to consider the fact regarding the financial statements for acting as balanced scorecard for particular business firm for specified year (Libby, Rennekamp and Seybert 2015). It depicts on how much profit will be earned for given time. It helps in highlighting the cash position as well as total assets and liabilities for given business organization. Addition to that, financial statement reflects in rendering quantitative information that gives true as well as far valuation for particular business enterprise.

There are various limitations of financial statements that need to be addressed while preparation of the statement for particular business organization financial statement gives only quantitative information and completely ignores qualitative information (Warren, Reeve and Duchac 2013). Financial statement takes into consideration facts from historical costs. It fails to include market value of assets and liabilities in the financial statements (Libby, Rennekamp and Seybert 2015). Financial statements are majorly subjected towards fraudulent activities. Non-financial information are completely ignored by the financial statement users.

Supplier’s ability can be easily judged by cash flow statement as well as liquidity position of the concerned suppliers. Debt amount will give true picture regarding the suppliers for remaining in the business or not. In case debt amount of supplier is one the higher side, it will lead to weak capital structure (Warren, Reeve and Duchac 2013). This will lead to cash flow problems in the upcoming financial years.

It is easy to assess the capital structure by understanding the relationship between debt as well as equity. In case of stable relationship, company has the liability in opting for additional capital growth (Libby, Rennekamp and Seybert 2015). Business firm can attract additional capital for future growth in case there is positive relationship between cash flow position as well as liquidity ratio at the same time.

Conclusion

At the end of the study, it is concluded that there are major four problems highlighted in the assignment. It is in relation with finding out the importance as well as limitations of management accounting for given business enterprise. Organizations are liable in undertaking several decisions after analyzing financial statements. It is required for the accountants to follow the ethical standards of financial statements. It will increase the sustainability of business firm if every accountant follows the ethical standards while preparing the financial statements.

Reference List

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Chen, W., TAN, H.T. and Wang, E.Y., 2013. Fair value accounting and managers’ hedging decisions. Journal of Accounting Research, 51(1), pp.67-103.

Collier, P., 2016. Accounting For Managers Interpreting Accounting Information For Decision Making 0470845023.

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

Dhamija, S., 2015. Financial Accounting for Managers, 2/e. Pearson Education India.

Droms, W.G. and Wright, J.O., 2015. Finance and accounting for nonfinancial managers: All the basics you need to know. Basic Books.

DRURY, C.M., 2013. Management and cost accounting. Springer.

Guo-liu, H.U. and Sui, Z.H.O.U., 2013. Accounting conservatism, managers’ overconfidence and excessive investment [J]. Journal of Southeast University (Philosophy and Social Science), 2, p.015.

Hartley, W.C., 2014. An introduction to business accounting for managers. Elsevier.

Healy, P.M. and Palepu, K.G., 2012. Business Analysis Valuation: Using Financial Statements. Cengage Learning.

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Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Libby, R., Rennekamp, K.M. and Seybert, N., 2015. Regulation and the interdependent roles of managers, auditors, and directors in earnings management and accounting choice. Accounting, Organizations and Society, 47, pp.25-42.

Warren, C.S., Reeve, J.M. and Duchac, J., 2013. Financial & managerial accounting. Cengage Learning.