Accounting

ACC506 Task 

Introduction

Accounting is a significant term of the business management that enables the organisation to manage accounts of the company. This report has an aim to develop the understating of the accounting process and analyse the economic performance of the company.

Importance of internal control

Internal control is a plan of company that guides the business activities to reduce the fraud. Internal control is helpful to prevent the fraud. It is one of the main advantages of the application of the internal control. Along with this, it is also effective to prevent the fraud opportunities in the organisation that enhance the efficiency of the overall organisation.

Internal control is also important in the error prevention (Ngamchom, 2015). Some internal helps the organisation to prevent the potential error before they happen. Internal control is also important to reduce the operational cost of the organisation in the context of the lawsuits and insurance claims.

Earning management

Earning management is an interesting topic in the current business environment. It is used in the accounting technique to prepare the final statement of the company. It is helpful to represent the effective and positive image of the company in the business environment. Many accounting principles are helpful to make the effective judgement of the financial.

In the business scenario, every organisation has one primary goal to make the profit. In the other words, earning management is a set of the strategies that is used to prevent fraud activities the financial statement of the company (Romney and Steinbart, 2012). The main purpose of the earning management is to smoothly conduct the financial activities.

Different option for accounting for inventory

Accounting for inventory allows the organisation to manage the inventory in the organisation. In the accounting system, there are different options to manage the cost of the inventory. In this, each option and method has different characteristics. The most used methods in the accounting to manage inventory are:

  • Last-in first-out (LIFO)
  • Highest in, first out (HIFO)
  • First-in first-out (FIFO)
  • Average cost or weighted average cost

The above methods of the inventory management represent the different result according to flow of cost. The rules and principle of the inventory management depends on the assumptions. In this, FIFO and LIFO are mostly used at the workplace common accounting methods (Drury, 2013) . The selection of the accounting method affects the balance sheet, income statement and cash flow statement.

The accounting standard and general guidelines

The International accounting standards (IAS) are the set of accounting standards that provides guidelines and advice on how different kinds of transactions and its related occurrences may indicate and can be maintained in the financial statements by the accountants. IAS standards are issued by the International

Accounting Standards Board (IASB), which is an independent body and involves the stakeholder’s worldwide, business leaders and analysts, investor’s regulators and the accountancy professionals for setting effective accounting standards.

In addition, the IAS aims in eliminating the variations in the accounting principles, which are used in the majority of capital markets across geographical areas for protecting and safeguarding the interest of associated people (Bebbington, et al. 2014).

Ration analysis

Current ratio current assets/ current assets 5.4201781
current assets 77308
current liabilities 14263
Gross profit gross profit/sales revenue 49.11
Gross profit 23610
Sales revenue 48080
days in inventory ratio (inventory/cost of sales)*365 154.10183
inventory 11070
cost of sales 26220

 Interpretation of the current ratio

 The current ratio is a significant part of the financial ratio that is helpful to analyse the liquidity position of the company. The current ratio is calculated for determining the ability of the company in accordance with the pay back of debts.

It is also calculated to measure the financial position as well as the efficiency level of the financial organization in the dynamic business environment (Lennox, et al. 2011). The ideal current ratio for the companies is 2:1. In addition, the increase in current ratio is due to increase in the shareholders funds by the company.

Current Ratio=

From current ratio, it is found that current has 5.42. It means that organisation is performing well in the context of the liquidity position. The of partnership of A Blake, C Dairy & E Ferguson is good compared to firm of G Henderson, I Johnson & K Lairy. It is because its current ratio is 1.60 only.

Interpretation of the gross profit percentage

The gross profit margin is also known as gross margin ratio and is used by the companies to determine the total sales revenue after deducting the total cost of goods sold. In addition, decrease in the gross profit margin is due to decline in the sales recorded for the company.

Gross Profit = Net Sales – Cost of Goods Sold

In the context of the gross profit margin, it is also analysed that the partnership of A Blake, C Dairy & E Ferguson has 49.11% gross profit margins. It is good compared to the firm of G Henderson, I Johnson & K Lairy. It is because its gross profit margin is 48% (Flamholtz, 2012).

Interpretation of the inventory ratio

The total number of days available in a financial year is divided by inventory turnover ratio in order to calculate the total days of sales in inventory. The formula is used for determining how fast a company is able to convert its inventory into sales.

Inventory Days =

In the reference of the inventory ratio, it can be interested that inventory ratio of A Blake, C Dairy & E Ferguson is 154 day. There, firm’s situation is looking bad compared to competitors G Henderson, I Johnson & K Lairy that has 40 days inventory turnover ratio (Johnson and Noguera, 2012).

Conclusion

From the above discussion, it can be concluded that A Blake, C Dairy & E Ferguson is not performing well because it is running under the loss. Event through, the company has good liquidity position and gross profit margin ratio.

References

Bebbington, J., Unerman, J. and O’Dwyer, B. (2014) Sustainability accounting and accountability. USA:  Routledge.

Drury, c.m. (2013) Management and cost accounting. Germany: Springer.

Flamholtz, E.G. (2012) Human resource accounting: Advances in concepts, methods and applications. Germany: Springer Science & Business Media.

Johnson, R.C. and Noguera, G. (2012) Accounting for intermediates: Production sharing and trade in value added. Journal of international Economics, 86(2), pp.224-236.

Lennox, C.S., Francis, J.R. and Wang, Z. (2011) Selection models in accounting research. The Accounting Review, 87(2), pp.589-616.

Ngamchom, W. (2015) Impact of Board Effectiveness and Shareholders Structure on Earnings Management in Thailand. Review of Integrative Business and Economics Research, 4(2), p.342.

Romney, M.B. and Steinbart, P.J. (2012) Accounting information systems. Boston: UK: Pearson.

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