The Characteristics Of Financial Statement Accounting Essay

The Characteristics Of Financial Statement banknoteing EssayThe main purpose of this appellative is to determine the five theatrical roles of storying habituaters, their gather ins for Continental exceptional pecuniary line of reasoning, inclined(p) an income mastery and correspondence main woodworking plane with necessary working for Continental curb for yr ending 31 declivity 2010 for the upcountry intent, prep argond the income disputation and equalizer sheet of Continental express for grade ending 31 Dec 2010 in accepted format for remote reporting or publication and, an appropriate covering ratios for social class ending 31 Dec 2010 testament be prepargond base on income statement and remainder sheet which done on occupation 2 and chore 3. Last, industry averages provided to access geltability and runniness of Continental Limited depart be compared.Firstly, the business relationship users crowd out be categories into internal users and extran eous users. interior(a) users includes of opinionors, suppliers, investors, tax authorities, government agencies, customers, and pecuniary analysts or adviser. Internal users are the users that inside or inwardly an institution, it is normally includes of managers, employees, and shareholders. Next, the 5 traits of financial statement is comparability, re liability, periodly, relevance, and accuracy.Table of Content Pages entrance 3Introduction to confinement 1 4The 5 types of accounting users and their require. 4-5The 5Characteristics of Financial Statement 6-7 shutdown for task 1 73.0 Introduction for task 2 83.1 The process of preparing income statement and equilibrium sheet for 8-16Continental Limited3.2 Conclusion for task 2 164.0 Introduction to Task 3 174.1 Classify expenses into contribution greet and Administrative expenses. 17-204.2 Conclusion for task 3 205.0 Introduction for Task 4 215.1 figuring of accounting ratio 22-235.2 Comparison between Continental Li mited and constancy Averages to Assess 24 positiveness5.3 Comparison between Continental Limited and Industry Averages to Assess 25Liquidity5.4 Conclusion for task 4 266.0 Conclusion and recommendation 277.0 Reference 28-29IntroductionAccounting is a body where an physical composition uses to criminal record all the business transaction. It can help face to analysis their business military operation or strain any business end. harmonize to Michael Russell, he demonstrates that account is a recording of financial or money transactions.In task 1, the five types of accounting users and their needs for ContinentalLimited financial statement will be defined. Besides, the five regulatory characteristics of the financial statements that help to provide serviceable learning to those accounting users will be explain too. Accounting users is the people who need accounting schooling to make decisions, invest, planning and bud paying.In task 2, an income statement and balance sheet w ith necessary working for Continental Limited for division ending 31 Dec 2010 for the internal use by company directors and management will be prepared. Income statement can help formation to note down the expenses and service and it usually prepared for 1 time in course of instructions.In task 3, the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 in accepted format for orthogonal reporting or publication will be prepared. Which is subject matter that after the income statement and balance sheet of Continental Limited prepared, it will be shown to the public or alfrescors for external reporting.In task 4, an appropriate accounting ratios for year ending 31 Dec 2010 will be prepared base on income statement and balance sheet which done on task 2 and task 3. Next, the industry averages provided to access clamsability and liquidity of Continental Limited will be compared.2.0 Introduction for Task 1In task 1, 5 types of accounting users an d their needs for the financial statement of Continental Limited will be discussed. Next, the 5 regulatory characteristics of these financial statements that will provide useful culture to the users will also be defined in this task.2.1 The 5 types of accounting users and their needs.Users of accounting can be categories into external users and internal users. External users are the users outside of the brass instrument which includes of creditors, suppliers, investors, tax authorities, government agencies, customers, and financial analysts or adviser. Internal users are the users that inside or within an governing, it is usually includes of managers, employees, and shareholders.The first type of accounting users is managers of the company. Manager is a person who in charge in overseeing and manage all the activities of others working which includes of planning, organizing, leading and controlling. Accounting tuition is needed to a manager to hump that whether the organization are earning or losing. Accounting nurture also helps managers in making business decision because it can let manager have sex that the authorized financial situation of an organization. Besides, it also helps managers to chouse how ofttimes their customers owe and how much they owe to their suppliers. Accounting information also helps managers in organization budgeting process by know the financial situation of the organization and allocate the money to each department wisely. Accounting information are grievous to managers to ensure their business are managed efficiently and effectively.The second type of accounting users is suppliers or creditors. Suppliers are the person who provide or supply products or services and in return get an agreed payment. But usually suppliers didnt have proper communication and less interact among each others. Suppliers need to know an organization accounting information to know the on-line(prenominal) financial situation of an organization whe ther the organization able to pay the debts that the organization owe. Supplier also includes of money lenders such as bank or landlord. So, if they want to lend money to the organization, they had to check the current financial situation to make sure they will be able to pay underpin in future(a).The third type of accounting users is investors. The people who bid to invest to an organization with expectation to get back reasonable internet in return are known as investors. So, they need to know about the organization account information to measure the carrying out of the organization and see whether it is worth to invest or might bring freeing to the investorsThe forth type is the employees of the organization. Employees is the people who are recruit by the organization and use to provide products and services and get payment in return. They must know the account information of an organization to insure employees benefits or pension living is able to pay to them. The fifth type is the shareholders or owners of the company. They are the boss of the company, so they were needed to know the performance of the organization and determine the future plan. Besides, they also need to know the accounting information to know how much they can withdraw as dividend payment.So, these are the five types of accounting users that use financial information to fulfill their different types of needs.2.2 The Characteristics of Financial StatementFinancial statement is a document that use to record down all the business transaction or the organization financial activities. Financial statement are includes of trial balance sheet and income statement.The first characteristic of financial statement is relevance. Relevance is use to make more information to helps all accounting users in decision making. It can help accounting users to name future outcome such as profit or loss. To ensure the accounting information are accurate, so those financial account prepare based on ac counting concepts and policies present must be relevant which is capable of influencing the economic decision of the users.The second characteristic of financial statement is timely. Timely is referring to the information which is present or past. So that the accounting information that accounting users received are trustworthy and useful in helping them make any decision. If the account information not prepared to provide information in time, it will affect the decision making of accounting users which might cause loss.The third characteristic of financial statement is accuracy. Accuracy is about how preciseness of the financial statement of an organization that provides many important information to all accounting users. If the financial statement are not accurate or make in past time, it may cause many problem to an organization in planning their future activities and affect the decision making of accounting users.The next characteristic is reliability. Financial statement must b e reliability to make sure that it can fulfill accounting users needs. A financial statement is reliability when it able to reflects the substance of transaction to present faithfully and truly what has already happened. Next is the financial statement are done free from bias and it is neutral. Last, the financial statement must in prudent and graphic where on that point is any uncertainty.The last characteristic of financial statement is understandability. A financial account should be prepare in a condition which easy to understand by others that have knowledge or experiences in business, accounting and those economics activities.So, these are the five characteristic of a financial statement that an organization should revise when preparing the company business financial accounts.2.3Conclusion for task 1In my conclusion, there are many types of accounting users that use account to fulfill their need. Their needs includes of making decision, invest, giving loan and know the situa tions of the organization. Besides, there are also 5 types of criteria of financial statement that an organization should revise when they preparing financial statement.3.0 Introduction for task 2In task 2, the income statement and the balance sheet of Continental Limited for the end of 31 December 2010 will be prepared. It will be prepared in an accepted format for the needs of external reporting and publication.3.1 The process of preparing income statement and balance sheet for Continental Limited(A)Closing shoot should be recorded at court or net resale quantify which one is lower. Since apostrophize RM65000 (B)Cash AccountRM RM sales 5000 Purchase 4000 stationery 700Electricity 3005000 5000Sales in trading account of income statement=RM360000 + RM5000=RM365000Purchase in trading account of income statement=RM200000+RM4000=RM204000Stationery as expense put in profit loss account of income statement=RM700Electricity water in profit loss account of income statement= RM7000+RM3 00=RM7300(C)Sales commission as expense put in profit loss account of income statement=RM18000 (paid from trial balance) +RM1500 (accrued at end of year) =RM19500Then, the accrued sales commission RM1500 is recorded under current liability in balance sheet.Office salaries as expense put in profit loss account if income statement.=RM28000 (paid from trial balance) -RM2000 (prepaid at the end of year)=RM26000Then, prepaid office salary RM2000 is recorded under the current asset in balance sheet.(D)Debtor AccountRM RM equaliser B/D 75000 (-) Bad debts 5000Balance C/D 7000075000 75000Balance B/D 70000Bad debts accountRM RMDebtor 5000 P/L account 5000 formulation for unfavorable debts closing balance =10% x Debtor closing balance RM70000= RM7000Provision for bad debts accountRM RM31 Dec 2010 Closing Balance C/D 7000 1 Jan 2010 Opening Balance B/D 5000Increase different 20007000 70001 Jan2011 Balance B/D 7000(E.F)Vehicles accountRM RMBalance B/D 300000 Vehicles tendency a/c 50000Balanc e C/D 250000300000 300000Balance B/D 250000Provision for depreciation on fomite accountRM RMVehicle disposal account 12500 1 Jan 2010 Opening Balance B/D 6000031 Dec 2010 Balance C/D 60000 Depreciation as expense put inP/L account 1250072500 72500 1 Jan 2011 Balance B/D 60000Vehicle disposal accountRM RMVehicle cost sold 50000 Provision for depreciation on vehicle sold 12500Proceed from disposal of vehicle 35000Difference for loss on disposal of vehicle 250050000 50000Provision for depreciation on premise accountRM RMBalance C/D 54000 1 Jan 2010 Opening Balance B/D 40000Depreciation as expense put in P/Laccount 1400054000 54000Balance B/D 54000(g)Taxation charge RM15300 is deducted from net profit at the bottom of income statement. It is also recorded as accrued taxation RM15300 under current liability in balance sheet.h)Proposed dividend to be deducted from net profit at the bottom of income statement=2% x RM500000 (share outstanding from trial balance) = RMmyriadThen, the propose d dividend RMmyriad is recorded under current liability in balance sheet.Income statement of Continental Limited for year ending 31 Dec 2010 for internal useRM RM RMSales 365000Less open Inwards vitamin C00Net Sales 355000Opening Stock 50000+ Purchase 204000 Return outwards 15000+ walker inwards 5000 244000Less Closing Stock 65000 179000Gross make head way 176000Add Income 5000Dividend received 18 hundred0Less ExpensesStationery 700Office electricity water 7300Office salaries 26000Sales commission 19500Bad Debts 5000Increase in planning for bad debts 2000Loss on disposal of vehicle 2500Depreciation on vehicles 12500Depreciation on premises 14000Vehicle expenses 12000Interest charge 3000 104500Net profit 76500Less Taxation charge 15300Less proposed dividend degree centigrade00Profit for the year 51200Add Retained earnings brought precedings 100000Retained earnings carried forward 151200Balance Sheet of Continental Limited as at 31 Dec 2010 for internal useFixed assets/ Non-cur rent assets RM RMOffice premises at cost 350000(-) Provision for depreciation on premises (54000)Vehicles at cost 29600(-) Provision for depreciation on vehicles 250000Long-term investments (60000) new assets 190000Closing stock 65000Trade debtors 70000-Provision for bad debts (7000)63000Bank 42000Prepaid office salary 2000_172000758000Issues share capitalShare capital 500000Add taciturnityRetained earnings carried forward 151200Shareholders equity 651200Add Long-term liabilities/ Non-current liabilitiesLoan 55000Add Current LiabilitiesCreditors 25000accrued sales commission 1500Accrued Taxation 15300Proposed dividend 10000 51800758000Conclusion for task 2In my conclusion, income statement and balance sheet of an organization is very important to know that organization are now in profit or loss.4.0 Introduction for task 3In task 3, the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 in accepted format for external reporting or publication will be prepared. Which is means that after the income statement and balance sheet of Continental Limited prepared, it will be shown to the public or outsiders for external reporting.4.1 Classify expenses into contribution cost and Administrative expenses.Distribution costs Administrative expensesRM RMStationery 700Office electricity water 7300Office salaries 26000Sales commission 19500 Bad debts 5000 Increase in provision for bad debts 2000 Loss on disposal of vehicle 2500 Depreciation on vehicles 12500 Depreciation on premises 14000Vehicles expenses 12000 Total 53500 48000Income statement of Continental Limited for year ending 31 Dec 2010 for external reportingRM RMTurnover 355000Cost of sales 179000Gross profit 176000Distribution costs 53500Administrative expenses 48000101500Operating profit 74500Dividend received 500079500Interest charges 3000Profit on routine activities before taxation 76500Taxation charge 15300Profit on ordinary activities after taxation of the year 61200Propo sed dividend 10000Retain profit for the year 51200Retained profit brought forward 100000Retained profit carried forward 151200Balance sheet of Continental Limited for the year ending 31 Dec 2010 for external reportingFixed Assets RM RM RMTangible assetsPremises 296000Vehicles 190000486000InvestmentLong term investment 100000586000Current AssetsStock 65000Debtors 63000Prepaid office salary 2000130000Cash at bank 42000172000Less Creditors Amount move DueWithin One YearCreditor 25000Accrued sales commission 1500Accrued taxation 15300Proposed dividend 10000(51800)Net current assets 120200Total Assets Less current Liabilities 706200Less Creditors Amount Falling Due afterward MoreThan One YearLoan (55000)651200Capital and ReservesCalled up share capital 500000Profit and loss account 1512006512003.2 Conclusion for task 3In my conclusion, income statement and balance sheet for external reporting or publication must be prepared neatly and precisely. Because it might affect the ambit and t he business of the organization,Introduction for task 4Accounting ratio is one of the ways to define the affinity among result and the others, such as balance sheet, and profit loss account. Accounting ratio can use to measure the efficiency, effectiveness and profitability of the organization according to its financial reports.5.1 Calculation of accounting ratioThe plug-in below is the calculation of the accounting ratio between Continental Limited and the industry averages for year ending 31 Dec 2010.Ratio with formula Ratio calculation Industryfor year 2010 averagesPercentage of glaring profit on sales 17600 x 100 30%= Gross profit x 100 355000Net sales = 49.58%Percentage on operating profit on sales 74500 x 100 18%= Operating profit x 100 355000Net sales = 20.99%Return on capital use 9%= Net profit before interest x 100 (76500 + 3000) x 100and taxation 158000-51800Total assets-current liability =11.26%Current ratio 21= Current assets 172000Current liabilities 51800= 3.32 1S tock overthrow plosive 90 geezerhood= 365 days 365 days/3.11 timesStock swage inTimes = 117.36 daysStock turnover = Cost of salesAverage stock valueAverage stock = (Opening stock value + Closing stock value) / 2= (50000 + 65000) /2= 57500Stock turnover = 17900057500=3.11 TimesDebtor prayer design 0.177 x 365 days 45days= Debtor ratio x 365 days = 64.6 daysDebtor ratio = DebtorNet credit sales= 63000355000= 0.177 1Creditor payments distributor point 0.132 x 365 days 60 days= Creditor ratio x 365 days = 48.18 daysCreditor ratio = CreditorNet credit purchase= 25000(204000-15000)=0.132 1Comparison between Continental Limited and Industry Averages to Assess ProfitabilityAccording to the table above, it has state that the gross profit margin of Continental Limited is 49.58% while the gross profit margin of industry average is 30%. In this situation, when the gross profit margin are higher, it means that the organization are controlling their purchasing cost effective and efficien t Besides, it also show that the organization perform good in allocating their raw materials and labor force to helps in reduce production cost and increase their gross profit.Next, the operating profit margin of Continental Limited ratio calculation for year 2010 is 20.99% while the industry average is 18%. When the operating profit margin is high, its means that the organization scratch are still high even finish paying those variables cost. Operating profit margin can show whether an organization are effectively in their expenses and variable cost.Lastly, the return on capital employed (ROCE) of Continental Limited in 2010 is 11.26% while it is 9% in industry average. ROCE are usually utilise to measure all the resources that available in the organization and demonstrate the efficiency and revenue of an organization. So, when the percentage of ROCE becomes higher, the performances of the organization are better. The percentages of Continental Limited is higher than the industry average,Comparison between Continental Limited and Industry Averages to Assess LiquidityAccording to the table above, it has show that the current ratio of Continental Limited is 3.321 and the current ratio of industry average is 21. Current ratio is use to measure the financial status and the ability of the organization in using their current assets to pay its current liabilities. In this situation, it shows that the finance of the organization is stable and did not face any short-term financial problems.Secondly, is the stock turnover period of Continental Limited which is 117.36 days and the industry average is about 90 days. Stock turnover period is the time that the goods keep before purchased by customers. In this situation, Continental Limited had longer stock turnover period compare to the industry average, it might cause short-term financial problem because of keeping stock for long time and slowly taken out for resale.Next is the debtor collection period. The debtor coll ection period of Continental Limited is 64.6 days and 45 days for industry average. Based on this period we can know that Continental Limited is taking longer time than industry average to collect debts from the debtors. It might cause organization having shortage of pay back those liabilities and face short-term finance problem.In last, the creditor payment period of Continental Limited is 48.18 days and the industry average is 60days. Which shows that Continental Limited has the shorter time to pay the creditors compare to industry average and it might cause lack of many to pay back the creditorsConclusion for task 4In my conclusion, accounting ratio can enable an organization or accounting users understand the liquidity and profitability of an organization. So, it make easier when an organization plan for future of budgeting.6.0 Conclusion and testimonialIn my conclusion, this assignment enables me to understand the usefulness and the function of the account which can helps to k now well an organization easily. In task 1, the most common accounting users are defined and let me understand of the 5 basic characteristics of financial statement. So, it helps a lot in preparing an organization financial statement.While in task 2, it let me know that income statement and balance sheet of an organization is very important to know that organization are now in profit or loss. It also let me let the proper way in preparing balance sheet and income statement for an organization.In task 3, income statement and balance sheet for external reporting or publication must be prepared neatly and precisely. Because it might affect the date and the business of the organization,In task 4, accounting ratio can enable an organization or accounting users understand the liquidity and profitability of an organization. So, it make easier when an organization plan for future of budgeting.