The Implication For Users Of Financial Statements Accounting Essay

Financial statements should be well understood by those who read it especially those individuals who have considerable knowledge of business and economic world and those ones willing to learn the information carefully. There are various users of financial statements. These users are classified into two broad categories. These users have different purposes for using these statements. The first category of these users is the internal users. The internal users refer to those individuals who have direct interest to the activities of the organization. They include: 1) Managers and owners need financial statements so as to make business decisions. They analyze the information provided by financial statements so as to obtain a clear position of the organization. Variable elements of financial reports such as the ratio of current debt to equity ratio is vital in making a decision on the amount of long run capital that needs to be available;2)employees form the second group of internal users of financial statements. Employees require this information especially when making joint collective bargains (Dyson, 1996). Such statements are of significant importance when discussing issues concerning promotion, salary increase and rankings. External users include: 1) institutional investors who use the financial reports to evaluate the financial capability of the business so as to make reasonable investment decisions; 2) Various financial institutions like banks and other loan bodies need to evaluate financial reports of businesses before lending them money; 3) the government also analyzes financial statement of different companies so as to prove if they paying taxes accurately ;4) the general public as well as the mass media may be interested in analyzing the statements of certain businesses.

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1.2-What are the different aspects of legal and regulatory framework that relates to financial statements?
There are different methods which can be followed when presenting financial statements. Rules-based accounting is made up of precise rules that must be observed during preparation of financial statements. Many accountants prefer the use of this method so that they reduce their liability in the event misjudgments. In situation whereby the management decides not to use rule-base accounting, it can choose to employ other accounting policies in preparing their financial statement (Guilding, 2002). However, this can be challenging because there are some policies which do conflict. Companies which need to included in stock exchange in more than a single country need to prepare their statements in accordance with GAAP. There are several reasons why it is necessary to have regulatory framework guiding financial reporting within countries and on international level. One of the reasons regard to irregular information (Moncarz and Portocarrero, 1986). Assume a scenario whereby the manager of the company is the one responsible for preparation of financial reports. This responsibility gives the manager the opportunity to access financial information which other members of the organization do not. Managers can take advantage of this privilege to exploit the statements so as to favor their own personal interest. Therefore, there must be regulation on reporting to stop insiders from exploiting financial statements. Another important factor to be considered is reliability and relevance of financial statements.
Access the implication for users of financial statements?
The different aspects of legal and regulatory framework have significant implication for users of financial statements. Some of the users of financial statements have complained that some of the regulations add unimportant complexities. The basis behind their argument is that there are some rules which are extremely detailed, with standards extending to more than hundred pages. Others have argued that these rules provide loopholes for financial engineering and fail to provide a ‘true and fair’ image of the business. It has also been noted that sometimes these rules fail to capture the details of targeted cases. Another negative phase of these rules is that they fail to provide solutions in the event of ‘gaps’ (Kotas, 1999). Management can also choose to observe all those accounting treatments that favor their interests and avoid those that will define real position of the business. However, it is worth to acknowledge the fact that these rules play a major role in ensuring a fair competition of international businesses which operate in more than one national market. However, it is fairer to say that observance of these legal and regulatory frameworks significantly contribute to preparation of statements which portray a company’s real performance. The different legal and regulatory frameworks should be flexible enough to accommodate new situations in the business. A relevant and reliable makes it easier for users of financial information to analyze those statements.
Describe how different laws and regulations relate with accounting and reporting standards? (Pass P4) Provide the regulatory framework of any country other than UK and compare it with UK regulatory framework (Distinction 1)
There are several accounting bodies which guide the accounting environment and significantly determine the success of a business. Security and exchange commission aimed at eliminating abusive stock market collision that had accumulated and resulted to instability in stock markets. Security and exchange commission ensures that publicly reporting business adhere with the generally agreed accounting principles. Financial accounting standards board (FASB) provides a plane set of standards to be observed when presenting financial statements to the public (Atkinson et al,1995). It aims at shielding the investors from fraud of business owners. Internal accounting standards board was founded to come up with comprehensible financial accounting reports (Messenger and Shaw, 1993). There is also the government accounting standards board (GASB) which aimed at establishing standards of helpful information that will aid users of reports to understand the reports in a much better way. On the second part of this question, the country of my choice is Kenya. In 1998, the council of Institute of Certified Public Accountants of Kenya set IFRS (International financial reporting standards) as the accounting standard in Kenya. From then henceforth, all the companies were requested to prepare their financial statements in accordance with IFRS. However, in Kenya there is a significant gap that has been observed between applicable accounting standards and the real practice by companies. In 1969, the UK ICAEW issued the statement of intent on accounting standard. This statement made it clear that standards will be generated in future with four main goals. The first goal was to reduce the dissimilarities and diversity in accounting principles. Second, was to disclose the accounting foundations. Third, disclose the diversion from established standards and eventually explain the broad exposure for main new accounting proposals. There have been a number of committees which have been formed since then all with the aim of improving accounting disclosure.
Requirement 2.1
The following is a trial balance from auto electrical ltd as at 31 March 2005
£
£
Ordinary shares of 50 p each
400,000
10% Redeemable Preference shares of £1 each
200,000
Retained profits as at 1 April 2004
42,475
Office block (Land £40,000)
170,000
Plant and machinery
730,000
Office equipment
110,000
Motor vehicles
200,000
Provision for depreciation – Plant and Machinery
224,500
– Office equipment
24,500
– Motor vehicles
80,000
Accounts receivables/Payables
500,000
356,226
Provision for doubtful debts
1,000
Manufacturing wages
501,400
Inventory as at 1 April 2004 – raw materials
70,000
– Work in progress
126,000
– Finished goods
250,000
Transport expenses
85,013
Returns inwards
15,106
Purchases of raw materials
518,600
Sales
2,600,147
Bank balance
60,020
Directors salaries
60,114
Maintenance of plan t
30,102
Rent
40,063
Advertising
190,048
Rates
50,171
Insurance
20,116
Office salaries
166,013
Light and heat
46,027
Factory power
30,014
Bank interest
7,070
Interim dividends on preference shares
10,000
General administration expenses
63,011
_________
3,988,868
3,988,868
Further information is as follows:
Depreciation is to be provided as follows:
Plant and machinery 15% on cost. (Production expense)
Office equipment 10% on cost (administration expense)
Motor vehicles 25% on WDV (distribution cost)
New office blocks 2% on cost (Administration expense).
As at 31 March 2005 rates were prepaid by £3,140 .
Outstanding light and heat as at 31 march 05 is £1,214 and rent is £2,321
Rent, rates, light and heat and insurance are to be apportioned in the ratio of 5:1 in relation to factory and office expenses.
The company makes a provision of 1% for doubtful debts on all accounts receivables.
The production director is paid £20,000. £64,237 is included Office salaries
£100,000 is to be provided for corporation tax
During the year 1,500 electrical equipments were transferred from the factory to the warehouse. Only 100 equipments were in hand at the end of the year.
At 31 March 2005 Inventory was:
Raw materials
£56,200.
Work in progress
£47,190.
Finished goods
?
Classifying expenses by function
Auto transmission
Income Statement for the year ended 31/03/2005
£
£
Revenue
2,585,041
Cost of sales
(1,586,692)
Gross profit
998,349
Expenses
Distribution expenses
373,298
Administration expenses
244,489
Finance costs
27,070
(644,857)
Profit before tax
353,492
Income tax expense
(100,000)
Profit for the period
253,492
Classifying expenses by nature
Auto Transmission
£
£
Revenue
2,585,041
Expenses
Raw materials consumed
532,40
Changes in finished goods and work in progress
233,332
Depreciation
153,100
Employee benefits
727,527
Other expenses
558,120
Finance costs
27,070
2,231,549
Profit before tax
353,492
Income tax expense
(100,000)
Profit for the period
253,492
Auto Transmission
Balance sheet as at 31/03/2005
£
£
NON-CURRENT ASSETS
Property, Plant and Equipment
727,900
CURRENT ASSETS
Inventory
198,868
Accounts receivables
495,000
Prepayments
3,980
697,848
TOTAL ASSETS
1,425,748
EQUITY AND LIABILITIES
Ordinary share capital
400,000
RESERVES
Retained profits
295,967
Shareholders’ funds
695,967
NON-CURRENT LIABILITIES
10% Redeemable preference shares
200,000
CURRENT LIABILITIES
Bank overdraft
60,020
Trade payables
356,226
Accruals
13,535
Current tax
100,000
529,781
Total Equity and Liabilities
1,425,748
Workings
£
Revenue
2,600,147
Less return inwards
(15,106)
2,585,041
Cost of sales
Opening inventory : Finished goods
Cost of finished goods
250,000
1,682,170
Less: closing inventory of finished goods
(95,478)
1,586,692
Factory cost of finished goods
Manufacturing account
£
£
Opening inventory : raw materials
70,000
Purchases of raw materials
518,600
588,600
Less: Closing stock inventory raw materials
(56,200)
Raw materials consumed
532,400
Direct labour: Manufacturing wages
501,400
PRIME COSTS
1,033,800
Factory overheads
Directors’ salaries : Factory manager
20,000
Maintenance of plant
30,102
Rent
35,320
Rates
39,192.50
Insurance
16,063
Light and hear
39,376.50
Factory power
30,014
Depreciation on plant
109,500
319,560
Total cost of production
1,353,369
Add: Opening WIP
126,000
1,479,360
Less: Closing W.I.P
47,190
Factory cost of finished goods
1,42,170
Value of closing stock/finished goods: 1,432,170 x 100 = 95,478 =95,478
1500
Expenses
Distribution
Administration
Finance costs
Transport
85,013
Directors’ salaries
40,114
Rent
7,064
Advertising
190,048
Rates
7,838
Insurance
3,213
Office salaries
101,776
Light and heat
7,873
Bank interest
7,070
Preference dividends (redeemable)
20,000
Salesmen salaries
64,237
Increase in provision for bad debts
4,000
Depreciation on – new office block
2,600
– office equipment
11,00
– motor vehicles
30,000
General administration expense
______
63,011
_____
373,298
244,489
27,070
Workings for classification by nature
Changes in finished goods and W .I. P
Finished goods
Work in progress
TOTAL
£
£
£
Closing inventory
95,478
47,190
142,668
Opening inventory
(250,000)
(126,000)
(376,000)
Increase (decrease)
(154,522)
(78,810)
(233,332)
An increase is treated as a saving while a decrease is an expense .
Depreciation
Plant and machinery
109,500
New office block
2,600
Office equipment
11,000
Motor vehicles
30,000
153,100
Employee benefits
Manufacturing wages
501,400
Factory manger salary
20,000
Director salaries
40,114
Office salaries
101,776
Salesman salaries
64,237
727,527
Other expenses
Transport
85,013
Rent
42,384
Advertising
190,048
Rates
47,031
Insurance
19,276
Ling and heat
47,241
Plant maintenance
30,102
Factor power
30,014
Provision for bad debts
4,000
Bank interest
7,070
General administration
63,011
558,120
Property, Plant and Equipment
Cost
Depreciation to date
Net Book value
Office block
170,000
2,600
167,400
Plant and machinery
730,000
334,000
396,000
Office equipment
110,000
35,500
74,500
Motor vehicles
200,000
110,000
90,000
727,900
Prepayments and Accruals
Prepayments
Accruals
Rates
3,140
Light and heat
1,214
Insurance
840
Rent
2,321
____
Dividend on redeemable preference shares
10,000
3,980
13,535
Retained profits
Balance c/d 42,475
42,475
Profit for the period 253,492
Retained earnings 295,967
Gross profit margin profit/sales= 998,349/2585041=38.62%
Net profit margin profit/sales= 295,967/2,585,041=11%
Differential 38.62-11= 27.62
Requirement 2.2
Utah textile
Incomes statement for the year ending 31 December 2009
Sh. Sh.
revenue 476000
Expenses
Advertising expense 14500
Supplies Expenses 31500
Rent expense 12000
Miscellaneous expense 5100
Salaries expense 78000
Utilities expense 2500 (143600)
Profit before tax 332400
Net income 109450
Total income 441850
Income tax expense (132555)
Profit for the period 309295
Distribution to owners (48100)
retained earnings 261195
Balance sheet as at 31 december 2009
Non Current Assets Sh. Sh.
buildings 512000
land 90000
Current assets
supplies 4250
account Receivables 95000
Cash 63000 162250
TOTAL ASSETS 764250
Ordinary Share Capital 310300
Retained Profits 261195
Shareholders’ funds 571495
Non-Current Liabilities
mortgage payable 423400
Current Liabilities
Trade payables 74300
Current tax 132555
Proposed dividends 48100 265400
TOTAL EQUITY & LIABILITIES 764250
Requirement 2.3
Below is the group financial statement for Albar machinery distributors’ ltd. On October 1997 Albar purchased stake in Nguo. Later this group bought stake in kipi. BELOW UU
Income statements for the year ended 31 March 2000 for:
Albar Ltd Nguo Ltd Kipi Ltd
Sh.m Sh.m Sh.m
Revenue 1,368 774 685
Cost of sales (810) (407) (355)
Gross profit 558 367 330
Distribution costs (196) (64) (78)
Administration expenses (112) (73) (72)
Finance cost (50) (20) 0
Profit before tax 200 210 180
Income tax expense (60) (60) (50)
Profit after tax 140 150 130
Proposed dividends (150) (100) (100)
Retained profits for the year (10) 50 30
Retained profits brought forward 713 610 420
Retained profit carried forward 703 660 450
Balance sheet as at 31 March 2000 Albar Ltd Nguo Ltd Kipi Ltd
Noncurrent assets sh.m sh.m sh.m
Property, plant and equipment 853 415 495
Investment in Nguo 702
Investment in kipi 405
1555 820 495
Current assets
Inventory 368 200 190
Trade receivables 380 230 240
Cash at bank 120 115 91
Total assets 2,423 1,365 1,016
Ordinary share capital 900 200 100
Retained profits 703 660 450
Shareholders’ funds 1,603 860 550
Noncurrent liabilities
10% loan stock 500 200 0
Current liabilities
Trade and other payables 140 175 346
Current tax 30 30 20
Proposed Dividends 150 100 100
Total equity and liabilities 2,423 1,365 1,016
Albar and Its subsidiaries
Consolidated Income statement for the year ended 31 March 2000
Sh. Sh.
Revenue 2,507.00
Cost of Sales (1,322.00)
Gross Profit 1,185.00
Expenses
Distribution Costs 338.00
Administration Expenses 261.00
Goodwill impaired 55.00
Finance costs 60.00 (714.00)
Profit before tax 471.00
Income tax expense (170.00)
Profit for the period 301.00
Profit attributable to: Holding Company 228.60
Minority interest 72.40
301.00
Consolidated Balance sheet as at 31 March 2000
Non Current Assets Sh. Sh.
Property, plant and equipment 1,755.00
Goodwill 55.00
1,810.00
Current assets
Inventory 728.00
Trade Receivables 808.00
Cash at bank 326.00 1,862.00
TOTAL ASSETS 3,672.00
Ordinary Share Capital 900.00
Retained Profits 957.20
1,857.20
Minority Interest 330.80
Shareholders’ funds 2,188.00
Non-Current Liabilities
10% Loanstock 600.00
Current Liabilities
Trade & Other payables 609.00
Current tax 80.00
Proposed dividends 195.00 884.00
TOTAL EQUITY & LIABILITIES 3,672.00
Statement of retained profits b/f Yr C/f
Albar 713.00 (25.00) 688.00
Share in Nguo 96.00 100.00 196.00
Share in kipi 69.60 3.60 73.20
878.60 78.60 957.20
Workings
Albar
As per the accounts 713.00 (10.00) 703.00
Add Divs receivable 80.00 80.00
Interest receivable 10.00 10.00
Less UPPPE (50.00) (50.00)
Less Goodwill Impaired (55.00) (55.00)
713.00 (25.00) 688.00
Share in Nguo
As per the accounts 610.00 50.00 660.00
Less preacquisition (490.00) ____- (490.00)
120.00 50.00 170.00
Less UPCS – (10.00) (10.00)
Add excess depreciation 10.00 10.00
Add Divs Receivable _____- – 75.00 75.00