Financial Accounting Assignment Sample

Introduction

Financial accounting is one of the keys to business activity. The accounting process is responsible for showing or reflecting all the finance-related aspects of a company. This project shows three parts. The first part reflects the basics of the accounting process. The second part reflects the cash flow statements usage and its analysis process. The third part of the project reflects the credit regulations and policies.

Task 1

Role of accounting

Accounting is the process where financial aspects of a business are recorded in a systematic manner. The accounting process has different objectives when it comes to business management. This section discusses some of the basic roles as follows.

Basic data collection

The basic or primary role of the accounting process is to note or record all business activities that have a certain amount of financial value. This includes the input of cash or cash equivalent and output of cash and cash equivalent (Deng, 2019, p:111). This recording process helps to maintain the business integrity and business controlling process.

Managerial accounting

Managerial accounting is another part of the higher-level accounting process. In this accounting process, data’s that are being collected from the basic accounting are sorted and analysed. This analysis process helps to understand whether the financial situation of the company is in an adequate situation or it needs to be improved. This helps managers to create different improvement strategies for the company which is implemented in the operating process.

Controlling

Controlling a business operation is a very important task for managers. It helps them to make sure that the business is operating on the right track. The accounting process helps managers to understand whether the controlling process is working as per their expectations or not. For this purpose, managers usually use different financial tools such as costing methods including absorption costing, activity costing, budgeting etc.

Predicting future

Another important task of the accounting process is to predict the future of the business organization. Managers use historical accounting data’s to find similarities and trends among them (Zhou, 2019, p:18). This helps to predict the amount of profit they should expect in future. It also helps them to create precautionary measures if there is a negative sign for the future. The tools that are generally used to predict the future in the accounting process are trend analysis, horizontal analysis, horizontal analysis etc.

Creating budget

The financial accounting process helps to predict the future of the company. Manager’s analysis companies internal financial health and external market situation. With the obtained analysis manager creates future business activity. After creating the financial budget management of the company can create the business goal and objective. Determining the particular business goals helps the business to maintain a proper business path. It also helps its employees to be motivated. This also leads to improved teamwork.

Conceptual framework

The accounting process can be completed in multiple processes which can differ from each other at a large amount. However, this unregulated process is very difficult to be controlled and it can be manipulated. To maintain the integrity of the accounting process there are multiple largely accepted frameworks that are being followed by different countries. To regulate a standard accounting process IFRS plates the largest part of the globe.

IFRS or “International financial reporting standards are issued by IFRS foundation”. All public limited companies that are conducting their business in the international market are liable to follow the IFRS rules. Individual countries can also implement the IFRS rule as their standard accounting rule (Ozili, 2020, p:46). The major purpose of IFRS is to maintain “clarity, relevance, reliability and comparability”.  Another objective of IFRS is to maintain standardization in the accounting process. Maintaining the standardization helps investors to understand the financial process of a business without having an in-depth knowledge of the accounting process. IFRS is an integrated part of IASB or the “International accounting standard board”. The roles and accounting principles of IFRS are regulated, created and modified by this body. It was created in April 2001 to ensure the efficiency of the international accounting process.

Accounting concept and principal

Accounting principles are the set of rules that are maintained to ensure the integrity of the accounting process. There are multiple rules that are being followed while constructing an accounting datasheet. Some of these rules are as follows.

The golden rule of accounting

The most important rule of accounting is the “golden rule of accounting” which is followed by every accounting system.  According to this rule Asset side of a balance sheet is equal to the liability plus equity side. This balance signifies that if the asset side increases then the same amount of “liability plus equity” side increases.

Identification of assets

According to the accounting rule, cash or cash equivalents that bring value to the business is considered an asset. There are also others that need to be met before considering an item as an asset. For example, an item needs to be controllable by its owner (Vollmer, 2019, p:59). The second criteria are that items should be transferable from one owner to another owner. The third criteria that need to be met are that it should be measurable in the term or cash or cash equivalent. If these criteria’s are met then the item is called an asset.

Identification of liability

The liabilities are those items that have the capacity to take away value or cash equivalent from the organization. Other criteria’s that need to be met are as follows. Items should be measurable in the term or cash or cash equivalent. The second criteria are that the item should be transferable from one owner to another owner. The item also needs to be controllable by its owner.

Going concern concept

Going concern concept is another accounting theory which states that a company operates as long as it has enough resources to continue its operation. According to this concept, one business can run infinitely. However, if a business asset becomes zero or in other words, the business fails to continue its operation then it is considered as dead business.

Money measurement concept

The money measurement concept is another important concept that is used in the accounting process. According to this process, the transactions, which can only be measured in the term of money can only be noted or recorded in accounting data sheets (Nguyen et al. 2021, p:12). If a particular event or asset does have any monetary value then it cannot be recorded in the accounting process. For example, the brand value of a company or workers efficiencies cannot be determined in the terms of value. For these reasons these factors are not recorded in the financial statements of a company, although they have a significant role while improving the overall organizational efficiency and value.

Prudence concept

Prudence concept ensures that cash inflows or earnings and cash outflow or expenses are not overstated. This ensures that one particular type of cost or income is calculated or measured a single time for a particular type of financial statement. To ensure this accounting integrity, accounting principles created by IFRS identifies all possible cash flows. This helps to maintain the integrity of the business organisation.

Matching principles

The matching principle states that all the costs that have happened, should be recorded in the financial statement only when relevant revenue from the expenses took place. The matching principle ensures to maintain the integrity of the financial statement of the business. However, in reality, companies do not follow this principle. The main reason for this is that the operating process is an integrated process. It is simply not possible to identify all the relative revenues for every expense. The revenue or profit from a single expense can also change over time due to the market situation. This process creates confusion in the accounting process.

Realisation concept

According to the realisation concept revenue can only be recognized when the service or goods has been delivered to the customer against the cash inflow. This principle ensures that the business recognises the revenue only when the sales process has ended.

Task 2

Purpose of cash flow statement

A financial statement is the data table that reflects a “company’s financial position” from a different perspective. There are mainly three types of financial statements such as “balance sheet, income statement and cash flow statement”. The income statement reflects companies profits over the year. It shows revenues and different costs in the business process. The balance sheet reflects the company’s asset and liability possession in a particular financial year. It needs to be said that these financial statements are created with the help of the previous year’s annual reports and the current year’s journal entries.

A cash flow statement is one of the important financial statements of an annual report. The cash flow statements show companies cash inflows and outflows from different business activities. It helps to understand the company is making a positive cash inflow to the company or a negative cash inflow.

There are mainly two types of cash flow constructing processes such as direct method and indirect method. One of two “financial accounting for generating a statement of cash flows is the direct approach”. Instead of “converting the operational section from accrual to cash basis”, the statement with “cash flows direct method employs real revenue and expenses from the firm’s management” (Ofori et al., 2019 p:13). The indirect cash flow method begins with net earnings and adds or subtracts from that number for “non-cash revenue” and expenditure elements, producing a statement of cash flows. Both of these processes helps to identify the cash inflows and outflows of cash and cash equivalent from the business operation.

Preparation of cash flow statement

Table: Indirect method cash flow statement of XXX Company

(Source: Excel file)

The above table reflects the cash flow statement of XXX Company. The cash flow statement has been computed in an indirect method. In the cash flow, it can be seen that at the first stage the cash flow in operating activity has been calculated. After this, the cash flow from investing activities has been calculated. In the last, the cash flow from financing activity has been calculated. After this, all major cash flows were added to get the “net increase or decrease in the cash flow” (Alayemi et al., 2019, p:50). After this, the net increase or decrease of this year’s cash flow was adjusted with beginning years or last years ending cash flow value.

The calculation of the net income of the company has been shown in Note 1. Note section referred to the side calculations that are being done to input data’s in the cash flow statement.

Table: Net income

(Source: Excel file)

The above note shows the net income calculation. In the above, it can be seen that the first gross profit has been calculated by subtracting “cost of goods sold” from the revenue. After this, the operating costs have been subtracted from the gross profit to get operating profit. Interest has been subtracted from it to get profit before tax. The tax has been deducted in further steps to get the net income.

Analysis of cash flow

From the cash flow statement, it can be seen that the company has a positive cash flow at the end of the year. The positive cash flow shows that the company is performing well as a whole. The cash flow statement shows that the company invested a large amount of cash. The investment activity represents that company is expanding their business. The expansion of the business is a good sign for the company (Jarrett, 2017, p:10). With the help of new investment, it is expected that companies will be able to increase their revenue in the upcoming year’s hence increasing net income.

The accounts payable of the company has increased in this year. An increase in accounts payable shows that companies’ current liability has increased. An increase in current liability is not a good sign for a company. It should try to decrease the current liability side. For decreasing the current liability company can increase their revenue at a further level and from this, they can decrease payable accounts value.

The company’s inventory has also decreased this year compared to last year. This shows that the company was able to improve its production rate. This also indicates that their revenue or sales have increased, which is a good sign for the company. From an investor’s point of view, it can be said that positive cash flow reflects a positive financial image of the company. With the positive cash flow statement, the company will be able to attract investors towards the company. This will help the company to bring new capital. This will help them to expand their business activity to a further degree.

Task 3

Legislation impact on credit control

Credit control is a process where credit providing organisations and businesses control their credit providing activity. In this process, they access the credit takers capacity to return the loan. Banks provide loans only to those persons who have the capacity to earn enough to repay the credit amount in a routine manner. On the other hand, if it is found that a person does not have a secure or stable source of income then banks do not provide credit to their customer.

Legislation is the law that decides credit providing rules and requirements.  Legislation regarding credit changes over time depending on the overall stability of the market country’s financial system. If the overall economical growth of a country is high, then the credit legislation allows a higher level of risk while providing credit to customers.

On the other hand, if the economical situation of a country is facing difficulties then credit rules become more conservatives while providing credits. Restricting the legislation helps to decrease the bad debt in the economy. On the other hand, it ensures the development of the economy at a stable rate.

Development of credit control policy

The basic requirement or need of a credit policy is to ensure the financial safety of the organisation. For example, if an organisation provides credit to the wrong entities then it can face the problem of bad debt. To solve this problem it is essential to construct a proper credit control policy. This section tries to construct an exemplary credit control policy.

The first step of providing credit should be analysis. According to the consumer credit act 1974, company needs to analyses internal and external data before deciding whether to provide credit or loan (Sari, 2020, p:58). For this company can search its past history of the customer. This will help them to identify whether customers’ credit history is good or bad. If a customer’s credit history is not good then the credit rate can be increased to compensate for the increased risk. However, the policy to increase the interest rate to compensate for risk should have a limit. If the risk level is higher than a certain level then the company should deny the credit request altogether. On the other hand, if the credit rating of the customer is high then the company should provide credit at a lower rate. This will encourage the customers to take more credits hence increasing the revenue of the company in the long run.

Companies can also further investigate the external sources before providing credit. For example, companies should analyze market situations before providing large amounts of credit. If it is found that the market situation is not in a good state then it is more likely that customers won’t be able to repay the loan smoothly. This will increase the risk of bad debt for the company. On the other hand, if it is found that the external market is in a good situation then the probability of a customer returning the credit smoothly increases drastically (Jaafar et al. 2021, p:25). In this case, the company should provide credit to the customer even if he or she carries a higher risk.

After providing the credit, the company is also liable to collect the credit within time. To ensure a secured credit collection company should ensure that the customer has a permanent income source. Having a permanent income source ensures that customers will be able to return their borrowed money within due time.

Companies can also take out mortgages before providing the credit to their customers. This will act as a security against the credit or loan they have provided to their customers. If the customer fails to provide a loan within the previously determined time then the company will be able to sell the mortgaged asset to collect the repayable fund.

Conclusion

The project shows that financing accounting is an integrated p[art of a business. It has been observed that there are multiple processes or sets of rules through which an accounting process can be created. However, IFRS is a largely accepted accounting policy. It helps to maintain the integrity of accounting on a worldwide scale. The project only concentrates on cash flow statement analysis. However, to understand companies with a broader perspective, it is very important to construct other accounting statement analyses such as “balance sheet analysis or income statement analysis”. In the last conclusion, it can be suggested that to understand a business from the investor’s perspective, non-financial aspects also need to be analysed properly. This will help investors to understand whether the business maintained a good moral value or not, which is a very important factor before investing.

Reference List

Journals

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Deng, L., 2019. Changes and Development of Financial Accounting Theory and Practice in the Era of Electronic Commerce.

Jaafar, S.B., Hassan, H. and Ismail, S., 2021. Cash flow statement as a tool to predict financial distress. Available at SSRN 3838158.

Jarrett, J.E., 2017. Intellectual property and the role of estimation in financial accounting and mergers and acquisitions. SF J Intel P, 1.

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