Financial Accounting: The Preparation Of A Company's Financial Reports (Math Problem Sample)

Financial Accounting Student’s Name Institutional Affiliation Financial Accounting Question 1 Qualitative Characteristics Qualitative characteristics of the financial statements are imperative since they ensure that the information provided is of a higher quality and, thserefore, enabling the users to make financial decisions (IASB, 2010). One of the qualitative characteristics that apply in the case of Smart Computer is timeliness. According to IASB (2010), financial data requires timely presentation to enable the stakeholders to make resolutions. The accountant at Smart Computer prepared the annual reports in advance to enable the managers to determine whether the business is still viable. Notably, the stakeholders of Smart Company would lose their capacity to make resolutions if the information was not presented in a timely manner. Understandability is the other qualitative attribute that relates to the case of Smart Company. The management team and the accountants should classify the information in a manner that is easily understood by the users (Nobes and Stadler, 2015). It is critical to outline in the notes to the financial statements, the data regarding the number of days taken to collect the accounts receivable. Additionally, the accountant should categorize all the assets, liabilities, and capital in a model that the stakeholders of an entity can comprehend. Some of the stakeholders that would rely on the information to make decisions include the employees, suppliers, financial institutions, and the managers. The understandability of the financial reports also entails the way in which the various elements are organized. It is the role of the Smart Company’s accountant to prepare the balance sheet, cash flow statement, and the statement of earnings. Consequently, the use of graphical and tabular formats would play a significant role in enhancing the level of understandability (Hail, 2013). Charts and diagrams depicting the changes in revenues and profits over the last three years should accompany the annual reports of Smart Company to enhance the interpretation of information. Comparability is the other qualitative feature that applies to Smart Company’s annual reports. Hail (2013) posits that comparability enables the users to differentiate the financial information presented by companies. If the financial statements are comparable, then the users are capable of determining the company that records the highest profits and revenues. Notably, consistency in the standards used to prepare the annual reports is vital to the attainment of comparability (IASB, 2010). It is evident that Smart Company is not consistent in applying the accounting principles since the company’s management is planning to change the method used to record depreciation. Faithful representation is the other feature that is evident in the financial statements presented by Smart Company. The financial statements should portray neutrality, completeness, and contain least errors (Nobes and Stadler, 2015). The organization’s management can minimize the material errors by ensuring that financial reports are prepared in advance and by skilled accounting experts (Nobes and Stadler, 2013). If the reports presented by the accountant of Smart Company do not have an element of faithful representation, it is difficult for the managers to evaluate the firm’s sustainability in future. Neutrality is attained by ensuring that both the negative and positive events are clearly outlined (IASB, 2008). The financial statements of Smart Company should disclose the challenges hindering the achievement of the entity’s objectives. Relevance is the other attribute that must reflect in the financial statements prepared by the accountant of Smart Company. The information in the annual reports is considered relevant if it affects the decisions made by the users (IASB, 2010). Additionally, the data presented in the reports should enable the users to make predictive value based on the outlined historical information (Nobes and Stadler, 2013). Accounting Principles One of the principles that relate to the case of Smart Company is the revenue recognition. An organization should record the sales in the financial statements after they are earned or realized (Hermanson, Edwards, and Maher, 2011). Smart Company records the revenue when earned even if the customers have not yet paid. An organization can realize revenue by either receiving the cash or entering into a contract with the buyer to pay at a later date. Matching principle is the other concept that requires incorporation while preparing the annual reports of Smart Company. An enterprise should match its sales against the expenditures incurred in a particular financial year (Hermanson, Edwards, and Maher, 2011). The adoption of matching principle at Smart Company would enable the firm to accurately record the profitability making the information relevant for user’ decision making purpose. Depreciation is the major expense of Smart Company, and, hence, it is imperative for the accountant to ensure that it is precisely captured in the financial statements. The full-disclosure theory is the other element that should feature in the financial reports of Smart Company. The theory is based on the view that the management and the accountants should ensure that all the relevant information is presented in the annual statements (Hermanson, Edwards, and Maher, 2011). The accountant of Smart Company should disclose the data regarding the poor performance in the industry and the measures that the management has implemented to improve performance. Notably, the other information that the accountant of Smart Company should outline in the financial statements is the reason for changing the depreciation method from the declining approach to the straight-line basis. Assumptions One of the assumptions that should apply in the case of Smart Company is the going concern. According to Unegbu (2014), the going-concern is based on the view that an entity will continue its operations for an unforeseeable period. Most of the investors rely on the going-concern assumption since it depicts the firm’s ability to generate returns in future. One of the premises made when an enterprise adopts going-concern is that the business does not intend to dispose of its fixed assets (Unegbu, 2014). The long-term assets of an organization are considered imperative since they determine the ability to generate sales if they are efficiently utilized by the management (Hermanson, Edwards, and Maher, 2011). Additionally, when the financial statements are prepared on a going-concern basis, the presumption made is that the business is capable of meeting all the financial obligations. However, Smart Company is not a going-concern since the accountant has indicated that the entity might liquidate at any time. The other premise that applies to the case of Smart Company is the monetary unit. The monetary unit presumption outlines that organizations should have a standard unit for determining the value of all the items presented in the financial statements (Hermanson, Edwards, and Maher, 2011). Additionally, all the elements in the annual reports are assumed to have similar money value irrespective of the acquisition date. However, criticisms have been raised against the monetary unit assumption since it does not take into consideration certain economic factors such as inflation and the purchasing power (Unegbu, 2014). Constraints According to Hermanson, Edwards, and Maher (2011), the constraints refer to the factors that change the results that accrue from the use of the accounting principles. One of the modifying conventions that would apply to the case of Smart Company is materiality. The accountant of Smart Company must use judgment to determine the irrelevant items that should not feature in the financial statements. A case in point, the accountant might expense some assets such as calculators since they are insignificant and would not affects the investors’ decisions when capitalized. An item is considered material if its inclusion would alter an individual’s decision (Hermanson, Edwards, and Maher, 2011). Additionally, materialism is not only concerned with the value only, but also the nature of the item. The issuance of a computer to Hazran’s son, founder of Smart Company, is significant and, therefore, there is need to account for the items that are not business-related. Another constraint that relates to the case of Smart Company is conservatism. The accountant of Smart Company must exercise caution by ensuring that the net income and the assets are not overstated. The change from the declining method to the straight-line method might lead to the understatement of Smart Company’s recently acquired assets. Additionally, conservatism enables the accountant of an entity to anticipate the possible losses in case the dismal performance in the industry continues (Hermanson, Edwards, and Maher, 2011). Consequently, Smart Company sells some of its product on credit and, hence, it is imperative for the accountant to make the necessary adjustments for the amounts that are uncollectible. Cost-benefit is the other modifying convention that applies to Smart Company’s scenario. According to Hermanson, Edwards, and Maher (2011), the preparation involves the use of the company’s resources, and, therefore, it is imperative to compare the benefits and the cost incurred. However, the main challenge for the accountant of Smart Company is estimating the benefits that arise from the disclosure of the information since it is not quantifiable in monetary terms. Question 2 a) Journal Entries Optimus Trading Journal Entries Date Account Debit Credit RM RM 1st January Cash 60,000.00 Computer 3,000.00 Capital 63,000.00 (To record Investment of cash ...