This assignment has helped a company to build up a goal to increase their performance and achieve efficiency and effectiveness.
Accountancy encompasses the recording, categorizing and summarizing of transactions and events in a manner. It can help company’s users to review the financial performance and position of entity. It starts by identifying transactions that will affect the financial position and perform of company. After that, they are recorded, classified and summarized to help accounting user in determining nature and effect of transactions and events.
For task 1, I had write out the five different users and their needs for Continental Limited financial statements which are employees, managers, shareholders, creditors and tax authorities. The five regulatory characteristics of useful financial statements are relevance, timely, reliability, comparability and understandability.
In task 2, I had prepared the income statement and balance sheet of Continental limited for year ending 31 Dec 2010 for internal use by company managements and directors. In task 3, I had prepared the income statement and balance sheet of Continental Limited for year ending 31 Dec 2010 in accepted format for external publication and reporting.
Lastly, I had defined about accountancy ratio for task 4 and calculate the appropriate accounting ratios for year ending 31 Dec 2010. After that, I compare them with industry averages provided to assess the profitability and liquidity of Continental Limited.
According to account simplified.com (2012), introduction to accounting, accountancy is the process of communicating financial information about business entity to accounting users. The examples of accounting users are bank, government, customers and managers. Accounting can be define as the art of recording, summarizing and classifying in terms of money and significant manner and events which are, in part at least, of financial character and interpreting the results there of AICPA. Therefore it encompasses the recording, categorizing and summarizing of transactions and events in a manner. It can help its users to review the financial performance and position of entity. It starts by identifying transactions that will affect the financial position and perform of company. After that, they are recorded, classified and summarized to help accounting user in determining nature and effect of transactions and events.
There are internal users and external users who use accounts to derive financial information for their needs. These can help on making better financial decisions.
The internal users are includes with management, employees and owners. It is usually presented in the form of management accounts, forecasts, budgets, forecasts and financial statements. Management is the internal user for analyzing the organization’s performance and position and obtaining suitable measures to improve the company results. In the other hand, employees are for assessing the profitability of company and its consequence on future remuneration and also job security. Owners are for analyzing the feasibility and profitability for their investment and determine the future course of action.
The external users are includes with creditor, tax authorities, investors, customers and regulatory authorities. Creditor determines the credit worthiness within an organization. Terms of credit are according to assessment of customer’s financial health. Suppliers are creditors and banks are lenders. Investors analyze the probability of investing in company. This can make sure that they can earn a reasonable return on their investment before they entrust any financial resources to company. Customers assess the financial position of its supplier which is necessary supply in a long term and regulatory authorities ensure the company’s disclosure of accounting information with rules to protect the interests of stakeholders.
2.1 Five Different Users and Needs for Continental Limited financial statements
2.1.1 Managers of the company
According to Demand Media, Inc (2012), Primary Users of Accounting Information, Osmond Vitez states that, manager of the company are the people who appointed by company’s owners to supervise day-to-day activities of company. Management accounting is a process that use to determine and reporting information about economic activity within an organization. It is used by managers in planning, operating control and performance evaluation. Besides that, it usually feeds into financial accounting system. The product costing system can help to determine inventory balance sheet amounts and also cost of sales for income statement. Management accounting information is usually financial in nature; management accounting systems collect and report nonfinancial information as well although increasingly. Management accounting is also used by non-for-profit organizations, government, businesses and individuals. All of them use management accounting extensively. Individual also use on their personal lives, home and automobile purchases, planning for retirement and splitting cost of vacation rental with friends.
2.1.2 Employee of the company
Employee of the company transforms economic resources into consumer product and services. They can be interested in company financial information for many reasons. Company may offer gifts to an employee retirement account; the income statement frequently lists the total of these contributions in expense accounts. Besides that, employees will receive commissions and bonuses based on their amount sales a company has created during a certain time period. The owners of business also can treat their employees like partners. In this way, they would often receive a lot of net income as their pay.
2.1.3 Creditors or suppliers
Creditor is the person who provided goods, services and monetary loan to debtor. The relationship of debtor-creditor is complimentary to relationship customer-supplier. Creditor is a supplier. They sell products and services as their business. Creditor normally used as an accounting term where there is a long term customer/supplier relationship. For example, creditor/debtor relationship is when you take out a loan to buy your house, then homeowner is a debtor and bank who holds your mortgage is creditor. In general, the person who loaned money is a creditor. Each creditor has precise agreement with their debtors about the terms of payment, discounts and offering.
In E-conomic Accounting System, we can keep track of our creditors in supplier list. It used to manage our company’s creditor bookkeeping, view existing creditor accounts and also booked or unbooked entries. Besides that, there had lists a detailed account on which of your creditors you owe their money, the amount you owe them, and the date you supposed to complete your payment from the aged creditor report. Please refer to appendix (a) for more details on creditor.
2.1.4 Shareholder or owner of the company
According to Demand Media, Inc (2012), "Accounting Information that Shareholder needs", investment and business accountant, 2010, Company’s shareholder is the owner of a business and needs information from those manage their business on their behalf. They provide the economic lifeblood that would be allow companies to raise funds in stock exchanges, run thriving businesses in short and long terms and operate finance activities. According to regulators, U.S. Securities and Exchange Commission, require that company provide real-time and accurate accounting data to shareholders. So that they can access corporate accounting information such like annual reports and financial statements on a company’s website, normally on "shareholder relations" page.
2.1.5 Tax authorities
A study by final report conducted by "European Commission and expert in the field of accounting" (2008, pg 15) argue that tax accounting is based on external accounting system. There are differences between profit for tax purposes and profits per accounts. It often asks for additional adjustments to be made to the profits per accounts. These are captures in "tax computation". Depreciation differences, accruals and non-taxable income are the examples of adjustments which are common between profits per accounts and also tax profits.
2.2 Five Regulatory Characteristics of Continental Limited Financial Statements
Comparability means that the financial accounts exists when users of that information able to evaluate the similarities in and the differences between, effects and nature of transactions and events, at once or many time, either when assessing aspects of a single reporting entity. Reliability and relevance of financial statement improvement may be required by the change of accounting policies of an entity. It may also be imposed by changes in accountancy standards. In these situations, nature and circumstances leading to change must disclosed in financial statements.
It needs to be relevance to users for the information in financial statements to be of any value. According to the study of "the relevance in annual reports", 2010, Toblias Klingberg and Anders Nilsson states that defines relevance as if the information has effect on decision of user and facilitates assessment of past, current or future events. Information about the financial position and past performance is used as future forecast of financial position and results used by users. It can determine dividend, share price development salary and also ability of company to fulfill their commitments.
A quality and necessary for information in financial reports have to be relevant and understood by users. Users must have required with necessary knowledge in accounting, business and economics that be able to understand the information given. Information is relevant for user however it cannot be left out because it might hard to be understood for some user.
Reliability is needed for useful financial statements. Information is reliable if it doesn’t contain any significant errors and it is not biased. Users have to be able rely on information to be correct. Information could be relevant but uncertain that the financial statement risk being misleading if using on financial reports. It might be better in some cases to explain to some users of certain circumstances. Besides that financial account information is reliable if it reflects the substance of transaction to present faithfully what has happened and complete of required account information.
Timely are the most important components of relevancy. Both of them are features of useful information. Therefore, financial statements should be published on time when users are needed for decision making. The concept of timely in financial reporting has two dimensions that are frequency of financial reporting and lag between end of reporting period and date the financial statements are issued. Many factors are affected by timely reporting on financial statement such like regulations, sectors and firm-specifics. Company-specific has been examined in prior studies as particularly important. Company-specific factors enable management of firm to produce more timely financial statements or reduce costs of delay in reporting. Factors are including with company size, financial condition, type of industry, gearing and ownership structure.
In conclusion, accounting information was considered. It is used as common term to include with both financial and management accounting. Accounting information had provided a useful for decision making. This implies that accounting system should flexible that can adapt to changing user’s demand. The five different users that I describe in here are involved with managers, employees, creditors, shareholders and tax authorities. The characteristics of useful financial statements are relevance, timely, reliability, comparability and understandability. These criteria must fulfilled so that it is useful to users.
2.3 Income statement and balance sheet for the internal use
According to Hearst Communications, Inc, (2012), "what is an internal income statement?", the internal income statement is a document that measuring any financial aspect of business that its leadership chooses. It does not follow the guidelines and rules recognized by Financial Accounting Standard Board of American Institute of Certified Public Accountants. This allows a business to craft an internal income statement to measure a lot of revenue figures. The document should still have semblance of order even though the statement does not follow a legal formula. This can allow owner and management to review document easily. Internal balance sheets contain more detail than external balance sheets for reporting financial condition within your business. It is either in body of financial statement itself or in supporting schedules. The detail of balance sheets and supporting schedules should be provided for making a better business decisions. Please refer to appendix (a) for the example of balance sheet.
2.3.1 Working for Task 2
Closing stock will be recorded the amount which is lower RM 65000
Sales (Different) 5000 Purchase 4000
The receipt has no recorded from cash sales. Therefore Sales, Purchase and Office electricity & Water from Trial Balance will be making some adjustment and record at income statement. The adjustment working is at below:
Stationary: RM 700
Office electricity & water: RM 7000+RM 300=RM7300
Accrued for Sales commission: RM 18000 current amount from TB + RM1500 accrued at the end of the years (recorded as Current liability in balance sheet) = RM 19500 (recorded as expense in P/L account of income statement).
Prepaid office salary: RM 28000 current amount from TB – RM 2000 prepaid at the end of the years (recorded as current asset in balance sheet) = RM 26000 (recorded as expense in P/L account of income statement).
2010 RM RM
Dec 31 Balance b/d 75000 (-) Bad debts 5000
Balance c/d 70000
Jan 1 Balance b/d 70000
Bad debt account
Debtor 5000 P/L account 5000
Provision for bad debt closing balance =10 % x Debtor closing balance RM 70000 = RM 7000
Provision for bad debt account
2010 RM 2010 RM
Dec 31 Closing balance c/d 7000 Jan 1 Opening balance b/d 5000
Increase different 2000
Jan 1 Balance b/d 7000
e & f. Vehicles account
Balance b/d 300000 Vehicle disposal a/c (cost sold ) 50000
Balance c/d 250000
Balance c/d 250000
Provision for depreciation on vehicle account
RM 2010 RM
Vehicle disposal account 12500 Jan 1 Opening balance b/d 60000
(cost sold RM 50000x5%x5 years Depreciation as expense record 12500
From 1 Jan 2005 to 1 Jan 2010) in P/L account
(Vehicle closing balance
Dec 31 Balance c/d 60000
Jan 1 Balance b/d 60000
Vehicle disposal account
Vehicle cost sold 50000 Provision for depreciation 12500
on vehicle sold
Proceeds from disposal of 35000
Different for loss on disposal 2500
Of vehicle (As expense)
Provision for depreciation on premises account
RM 2010 RM
Balance c/d 54000 Jan 1 Opening balance b/d 40000
Depreciation as expense record 14000
in P/L account (Premises cost from TB
Balance b/d 54000
(As fixed asset in balance sheet)
Taxation charge RM 15300 is deducted from the net profit at the bottom of income statement and will be recorded as accrued taxation RM 15300 as the current liability in balance sheet.
Proposed divided which will be deducted from net profit at the bottom of income statement = 2%x RM 500000 Share capital from TB = RM10000 (recorded as current liability in balance sheet)
2.3.2 Income statement:
Income statement of Continental Limited for year ending 31 Dec 2010 for internal use
RM RM RM
Sales (refer to working for note (b)) 365000
Less return inwards 10000
Net sales 355000
Less Cost of sales:
Opening stock 50000
+Purchase (refer to working for note (b)) 204000
-Return outwards (15000)
+Carriage inwards 5000 194000
Less closing stock (refer to working for note (a)) 65000 179000
Gross profit 176000
Divided received 5000
Stationery (refer to working for note (b)) 700
Office electricity & water (refer to working for note (b)) 7300
Office salaries (refer to working for note (c)) 26000
Sales commission (refer to working for note (c)) 19500
Bad debt (refer to working for note (d)) 5000
Increase in provision for bad debts (refer to working note (d)) 2000
Loss on disposal of vehicle (refer to working for note (e & f)) 2500
Depreciation on vehicle (refer to working for note (e & f)) 12500
Depreciation on premises (refer to working for note (e & f)) 14000
Vehicle expenses 12000
Interest charges 3000 104500
Net profit 76500
Less taxation charge (refer to working for note (g)) 15300
Less proposed divided (refer to working for note (h)) 10000
Profit for the year 51200
Add retained earnings brought forward 100000
Retained earnings carried forward 151200
(Put under reserve added to share capital in balance sheet)
2.3.3 Balance sheet:
Balance sheet of Continental Limited as at 31 Dec 2010 for internal use
Fixed assets/ Non-current assets
Office premises at cost 350000
(-) Provision for depreciation on premises 54000 296000
Vehicle at cost (refer to working for note (e & f)) 250000
(-) Provision for depreciation on vehicles 60000 190000
Long-term investments 100000
Closing stock (refer to working for note (a)) 65000
Debtors (refer to working for note (d)) 70000
(-) Provision for bad debt 7000 63000
Prepaid office salary (refer to working for note (c)) 2000 172000
Issued share capital
Share capital 500000
Retained earnings carried forward 151200
Shareholder’s equity 651200
Add Long-term liabilities/ Non-current liabilities
Add Current liabilities
Accrued sales commission 1500
Accrued taxation 15300
Proposed dividend 10000 51800
Balance sheet is the statement of financial position. It is important for a shareholder of a company to understand how balance sheet is structured, analyzed and read. Income statement for internal users does not follow the guidelines and rules recognized by Financial Accounting Standard Board of American Institute of Certified Public Accountants. This allows a business to craft an internal income statement to measure a lot of revenue figures. The document should still have semblance of order even though the statement does not follow a legal formula. This can allow owner and management to review document easily.
2.4 Income statement and balance sheet for external use
Income statement that produces for external use (financial institutions and investors) is different from the one that produce for in-house use by managers. Mostly, business owners like to provide minimum amount of detail necessary to satisfy the external users of financial statements. Managers are able to make accurate decisions with more detail. Most of them develop detailed reports based on data collected to develop income statement. There does not include a whole lot detail for balance sheets presented in external financial reports. The reports are which go out to investors and lenders.
2.4.1 Answer for Task 3:
(The working below is taking from task 2)
Distribution costs Administrative expenses
Stationery - 700
Office electricity & water - 7300
Office salaries - 26000
Sales 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 - 14000
Vehicle expenses 12000 -
Total 53500 48000
2.4.2 Income statement
Income statement of Continental Limited for year ending
31 Dec 2010 for external reporting
Turnover (Net sales from income statement of task 2) 355000
Cost of sales (179000)
Gross profit 176000
Distribution costs 53500
Administrative expenses 48000 101500
Operating profit 74500
Dividend received 5000
Interest charges (3000)
Profit on ordinary activities before taxation 76500
Taxation charge (153000)
Profit on ordinary activities after taxation for the year 61200
Proposed dividend (10000)
Retained profit for the year 51200
Retained profit brought forward 100000
Retained profit carried forward 151200
2.4.3 Balance sheet
Balance sheet of Continental Limited for the year ending
31 Dec 2010 for external reporting
RM RM RM
Premises (after deducted provision for depreciation 296000
from balance sheet of task 2)
Vehicle (after deducted provision for depreciation 190000 486000
from balance sheet of task 2)
Long term investment 100000
586000 Current Assets
Debtors (RM70000-RM 7000) 63000
Prepaid office salary 2000
Cash at bank 42000
Less Creditors: Amounts Falling Due Within One Year
Accrued sales commission 1500
Accrued taxation 15300
Proposed dividend 10000
Net current Assets 120200
Total Assets Less Current Liabilities 706200
Less Creditors: Amounts Falling Due After More Than One Year
Capital and Reserves
Called up share capital 500000
Profit and Loss account 151200
Mostly, business owners like to provide minimum amount of detail necessary to satisfy the external users of financial statements. Managers are able to make accurate decisions with more detail. There does not include a whole lot detail for balance sheets presented in external financial reports. The reports are which go out to investors and lenders.
2.5 Accounting ratio
According to Investopedia US, A Division of ValueClick, Inc. (2012), "Accounting Ratio" states that accounting ratio also know as financial ratio. It is the way to express the relationship between one accounting result and another. Accounting ratio provides a useful comparison. It is assist in measuring profitability and efficiency of company based on their financial reports. Basis fundamental analysis is formed by accounting ratios.
2.5.1 Answer for Task 4:
Table of ratio calculation
Ratio with formula
Ratio calculation of year 2010
Percentage of gross profit on sales:
Net of sales X 100
355000 X 100
Percentage of operating profit on sales:
Net sales X 100
355000 X 100
Return on capital employed (ROCE):
Net profit before interest and taxation
Capital employed X 100
758000-51800 X 100
Current liabilities X 100
51800 = 3.32:1
Stock turnover period:
365days/12 weeks/12 months
Stock turnover in number times
Stock turnover period in days:
365 days/3.11 times= 117.36 days
Debtors collection period:
Debtor ratio x 365 days/ 52 weeks/ 12 months
63000 = 0.117 :1
Debtor collection period in days:
= 0.117 x 365 = 64.6 days
Creditor payment period:
Creditor ratio x 365 days/ 52 weeks/ 12 months
25000 = 0.132: 1
Creditor payments periods in days:
= 0.132 x 365 =48.18 days
2.5.2 Profitability of Continental Limited
The gross profit margin of Continental Limited decrease from 49.58% to 30% and decrease of operating profit margin from 20.99% to 18 % compare with the industry average, signifying that Continental Limited has lower gross profit earned from sale made and hold a higher cost of purchase by making the purchase from suppliers. It’s showing that company is ineffective and inefficient in purchasing from suppliers and ineffective use of material and labor to reduce its production cost causing to reduce the gross profit. As a result, ineffective and inefficient controlling in use of material and labor during the production, indicating the lower net profit generated from capital employed for ineffective use of capital employed in production and business activities to reduce production and sales volume to reduce the net profit earning as well. This is facts decrease return on capital employed from 11.26% to 9% compare to industry average.
2.5.3 Liquidity of Continental Limited
The current ratio of Continental Limited decrease from 3.32:1 to 2:1which is equal to the ideal ration 2:1 compare to industry average, indicating that Continental Limited is neutral of financially stable. It is because they have the larger amounts of current assets that are able to finance current liabilities and also finance its short-term debts. The creditor payment period increase from 48.18 days to 60 days, indicating that Continental Limited has obtained longer credit time for paying and owing to creditor. As a result, the creditor is accumulated to be bigger amount and not payable in short term for keep away from the problem of short-term financial.
Stock turnover period of Continental Limited decrease from 117.36 days to 90 days compare to industry average, indicating that slow stock turnover in business where goods purchased are keeping for a long time and after that taken out slowly for resale. As a result, the stock is accumulated to tie up money and also causing short-term financial problem. The decrease in stock turnover period was due to decrease debtor collection period indicating that Continental Limited gave shorter credit time to allow debtor owe money. Therefore, Continental Limited able to collect money from debtor in shorter time taken and the debtor balance is not gathered at the same time money is not joined with debtor. This is proof that the debtor collection period had decrease from 64.6 days to 45 days.
Accounting ratio is an arithmetical expression. For example, relationship of one number to another. It can define as an indicated quotient of mathematical expression. It is expressed as a proportion, percentage, fraction, or terms of number of times. It is the relationship between two accounting figures expressed mathematically. Basis fundamental analysis is formed by accounting ratios.
3.0 Conclusion and recommendation
In a conclusion, accounting has given such it benefits management in many ways. It can record transactions and compiling them in reports. An important advantage of accounting information over other types of information is that it is based on numbers and measurable data. It is black and white and it contains the profit that you earn and loss. Most company use accounting to achieve their effectiveness and efficiency on working.
In my recommendation, there are a lot of users in external and internal and I have learned about their job in a company. A company can fulfill their needs by using account on financial information. Besides that, every company run their business activities by recording the income statement and balance sheets for internal and external use. Accounting ratios are counted and grouped into three categories to assess the business performance which are effectiveness, efficiency and profitability of firm, liquidity and ability of firm to pay back in short term debts and long term debts of firms.