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ACT507 Financial Accounting Proof Reading Services
a. The basic difference between Straight line depreciation method and double-declining balance depreciation method is that the rate used in double declining depreciation method is double that of the rate used under straight line depreciation method for the same asset. Since the two companies Company A and Company B are same in all respect except the method of depreciation which is the difference in accounting policy, therefore assuming that the assets of the two companies are also same the impact on the financial statements due to the difference in accounting policy over the period will be understatement of profit for that period of Company B as compared to the profit stated by Company A. Due to charging of depreciation at double rate, Company B will report its depreciation expenses at an amount which is twice the amount reported by Company A. As a result the profits of Company A will be higher as compared to that of Company B. Thus the effect on the financial statements will be reporting of lesser profits then actual. Also the useful life of assets of both companies is 20 years but the assets of Company B will be fully depreciated by the end of 10 years only due to double rate of deprecation. In this way the difference in accounting policy will result in difference of reporting profits in the financial statements of the two companies for that period where the actual profits might be same during the period of comparison (Drew, 2015).
b. The three financial statements and the information which is transmitted to the reader or users of financial statements about depreciation from reported depreciation information in these statements is as follows:
1. Income Statement – Under the income statement the reported depreciation indicates the amount of depreciation expense which is appropriated against the profit for the period to which the income statement relates. It transmits the user’s information about the depreciation charged by the company on its assets for that specific period which is an expense for the company during that period.
2. Balance Sheet – The information about depreciation included in the balance sheet of a company is the total amount of accumulated depreciation on a specific asset which is deducted from the original cost of that asset to arrive at the written down value or depreciated value. This amount is reported to inform the readers about the total accumulated depreciation of every specific asset charged against the asset from the date of purchased of asset till present in order to justify the actual depreciated value of asset that exists with the company in context of fair reporting.
3. Notes to financial statements – The depreciation information contained in this report include the disclosure of accounting policy which relates to the disclosure of method such as straight line method, double declining method, written down value method etc. and rate used for calculation of amount of depreciation on the assets applying these methods. The knowledge of the accounting policy of company related to the method and rate of calculation of depreciation on assets is transmitted to the users (Wong, 2015).
The three types of financing which may be considered by Kangaroo Express and the risk and return implications of each of the alternative for Marsupials is as follows:
Issue of Equity shares
At present the capital structure of the company consists of 20% equity capital which is completely owned by the Marsupial family. Equity financing is an available source for company to raise capital by issue of equity shares to others and increase its equity in the capital structure. The risk with this type of source will be the share of ownership due to which the profits from the business will be distributed. However no interest cost or other expense is associated with this source of finance. Thus this is the less risky source of finance as compared to the debt financing source of capital as debt is the most risky source of finance for a company.
This can be used as the source of finance for the business as by using this method the company can acquire its assets without cash payments which can be used for other purposes or activities. The assets taken on lease will require the payment of proportionate amount on periodical basis mostly on annual basis due to which savings in the working capital can be made by the company which can be employed in other activities of operating cycle. The return from such finance is the savings of working capital and the risk associated with this source of finance is that the lease payment has to be made at the beginning of the year when the business may be short of funds as compared to debt payments which arise at the end of year due to which business gets time to arrange for funds.
Another alternative source of financing available with the company is the method of retaining its earnings rather than distributing it to the shareholders and owners. Since the shareholders of the company are all the members of Marsupial family therefore the company will not have the risk of losing its shareholders by retaining its earnings. Thus the risk will be minimised by the company by using this method of financing as no other cost is involved.
Hence it can be concluded that Kangaroo Express can modify its capital structure by alternative sources of financing available through selecting the best source if finance with limited risks and good returns for the company.
Managerial accounting is an activity which relates to the management of financial information of a business which is the most crucial element of information for every business or company. The ethical behaviour in accordance with the ethical standards and managerial guidelines ensures that appropriate and relevant financial information is reported to the owners and the stakeholders of the business. Ethical behaviour is important since the internal financial information manipulated by the managerial accountants for personal gain may give rise to legal consequences both for the mangers as well as the company or business. It directly affects the relationship of the company with its stakeholders and harms the image of the company. The customers of the business develop loyalty and faith for the business when they are ensured about the application of ethical behaviour by accountants. The employees of the company feel safe to work with the company and remain loyal due to ethical behaviour of the accounting manager. The employees feel motivated to follow Code of Ethics in practicing their activities and performing their job. Ethical behaviour also helps in gaining the trust and confidence of suppliers in the business as they believe that the ethical practices will prevent them from being cheated and the fraud will not be committed by the staff of the company in the transactions of purchases and payments. Thus the company will be able to develop healthy relations with its stakeholders due to the application of ethical standards in financial reporting by accounting managers (Duh, 2010).
Strengths and Weaknesses of financial statements
In order to determine the stability and growth potential of the proposed suppliers of the company the financial statements can be used as they provide details of all the relevant information and figures which can be used to depict and analyse the financial performance of the company and on the basis of this financial information the future growth potential could be forecasted. The cash flows and other related information also helps in determining the investment potential of the business of the company. The information in the financial statements contains the facts and figures for two years which helps in comparison and analytical review of the performance of company. Thus financial statements and the figures can be used as an important tool to evaluate the profit and growth potential of the business to support business decision making for the stakeholders and users of financial information (Cheung, 2016).
However there are also some limitations and weaknesses of the financial statements. The information provided in the financial statements is general and therefore the objectives of use of such information by various types of users cannot be achieved as the interpretation of information may be different for different types of users in making economic and effective decisions. Sometimes the financial statements are difficult to understand and interpret. The information may not be reliable, relevant and comparable as it is transformed to be reported in compliance of applicable regulatory framework such as GAAP, AAS, AASB guidelines etc. When financial statements are poorly reported the readers are not able to obtain the required knowledge about business activities and operations.
Information used to judge the ability of business of supplier
The liquidity, efficiency, profitability and gearing of a business are some of the aspects which help in judging the ability of business of supplier and the extent up to which he can avoid cash flow problems of his business. The cash flow statement describes the details of cash inflows and cash outflows from the activities of operation, investment and financing. This helps in identifying the areas of negative cash flows and their impact which can create cash flow problems for the business. In order to assess the ability of company to attract additional capital for growth purpose the capital structure of the company and gearing ratio can be used. The equity to assets ratio and debt to equity ratio can be used to analyse the potential of business to attract capital from debt and equity sources of finance. The return which is earned by the company on the capital employed in the business is also an important measure to determine the profitability and growth potential (Carey, 2014).
Caglayan, M. & Demir, F. 2014, "Firm Productivity, Exchange Rate Movements, Sources of Finance, and Export Orientation", World Development, vol. 54, pp. 204-219.
Carey, P., Potter, B. & Tanewski, G. 2014, "Application of the Reporting Entity Concept in Australia", Abacus, vol. 50, no. 4, pp. 460-489.
Cheung, E. & Lau, J. 2016, "Readability of Notes to the Financial Statements and the Adoption of IFRS", Australian Accounting Review, vol. 26, no. 2, pp. 162-176.
Drew, J. & Dollery, B. 2015, "Inconsistent Depreciation Practice and Public Policymaking: Local Government Reform in New South Wales", Australian Accounting Review, vol. 25, no. 1, pp. 28-37.
Duh, M., Belak, J. & Milfelner, B. 2010, "Core Values, Culture and Ethical Climate as Constitutional Elements of Ethical Behaviour: Exploring Differences Between Family and Non-Family Enterprises", Journal of Business Ethics, vol. 97, no. 3, pp. 473-489.
Wong, K. & Joshi, M. 2015, "The Impact of Lease Capitalisation on Financial Statements and Key Ratios: Evidence from Australia", Australasian Accounting Business & Finance Journal, vol. 9, no. 3, pp. 27-44.