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Importance Of International Accounting Standards Accounting Essay

The Committee on Accounting Procedure (CAP) was the first accounting standard board that issued the Accounting Research Bulletins (ARBs) which started what the Committee on Accounting Procedure believed generally accepted accounting principle should be. Nonetheless, the Accounting Research Bulletins only made recommendations and preparers of accounting information along with auditors did not have to hold to them. Though the Committee on Accounting Procedure played an important part in the development of accounting standards, it was only part time and really could not devote the necessary time required to formulate accounting standards. As a result the committee became dormant. Consequently, during the year 1959 the American Institute of Certified Public Accountant (AICPA) put in place the Accounting Principles Board (APB) to develop statement of accounting concepts and issue pronouncement on existing accounting problems. The Accounting Principles Board delegated its pronouncements to an Accounting Principles Board Opinions and 31 were issued.
At first the Opinions and the Accounting Research Bulletins mainly depended on general acceptance by the accounting users and preparers. The Opinions and the Accounting Research Bulletins tried to get preparers of accounting information and Certified Public Accountants to accept the recommendations by persuading them that it was the best way to solve accounting problems. But by 1964, the accountants and auditors were convinced that persuasion only could not reduce the many different methods people and business worldwide use to prepare the accounts.
During the 1960s to the early 1970s, a lot of complaints were made about the process used for the development of accounting standards. Because of that, in the early 1970s the American Institute of Certified Public Accountant and other interested parties saw it fit to create the Study Group on Establishment of Accounting Principles to find out if there is any possibility of improving the accounting standard-setting process. The Study Group on Establishment of Accounting Principles gave the idea that there should be a new and more independent standard setting organisation to replace the Accounting Principles Board and it was approved. Hence, in 1973 the International Accounting Standards Board/Committee was created. Since then the International Accounting Standards Board/Committee for the most part has been responsible for establishing the accounting standards that is comprised of the generally accepted accounting principles.
In today’s global market, with company investing in company and country investing in country, accounting information has to have the characteristics of being comparable, reliable and transparent for the smooth operating in the capital market. If businesses do not prepare and report their accounting information according to the international accounting standards, there will be negative repercussion for that business.
At some point in the 1960s, businesses worldwide were using a variety of methods in the reporting and preparation of their business financial statements. As a result of this, investors and prospective buyers were blindsided about the actual financial position of the organisation. For instance, in the UK, the company GEC Ltd took over the company AEI Ltd because the financial statements were overstated and they thought the business was profitable when it really was not. As such, company financial statements would give different figures for different method of accounting, in consequence the international accounting standards had to come in place.
Accounting is used worldwide by all type and form of businesses and organisation. International accounting standards along with other accounting standards bodies regulate guidelines and rules to provide a single set of high quality global accounting principles. This creates uniformity among accounting users and the accounting principles that are used by companies, as financial statements of companies are either identical in format or close to it. Companies do not have to prepare different financial statements for the different countries their business are established in.
Another importance of the financial accounting standards is that it will aid in the elimination of barriers to cross border trading in securities by ensuring that company accounts are more reliable and understandable as well as more easily interpreted and compared. As a result, there would be an increase in market efficiency and a reduction in the cost of raising capital for companies, eventually improving competitiveness and assisting in the growth of the economy.
An additional importance is that the international accounting standards lend protection to companies against malpractice. Therefore, investors along with the various stakeholders will be able to interpret and compare financial statements of other companies. This helps companies to compete effectively on equal terms. And also enable investors and others to make more strategical decisions.
It is important for businesses to prepare and report financial statements under the international accounting standards as it makes investment decisions more compatible for foreign investors. Financial statements would be easier to interpret and analyse, and this may result in an increase in foreign investment for the business and country.
Furthermore, companies that prepare and report financial statements under the international accounting standard, tend to have less or no discrepancies in their financial statements and accounting information. In return this result in companies having more reliable and valid financial statement. As a result, there is a reduction in the likelihood of the users of financial information misinterpreting published financial statements and reducing opportunities for bias, ambiguity and inexactness. As well as reducing uncertainty of both local and international investment.
Moreover, companies should follow the guidelines of the international accounting standards as it helps them in the preparation of the financial statements in a given time period and give guidelines as to what information the business or organisation are liable to publish. This means that companies should publish their financial statements on a timely basis; this usually depends on the type of business being operated. Large companies tend to publish their financial statements on a yearly period while small companies may publish their information quarterly. And stakeholders cannot demand or expect certain information of the business or organisation to be publicly published. If a company prepare and report its information too early or late, then the company’s statements would either show that the business is highly profitable or not profitable at all. So timing is very important when publishing financial statements of an organisation or business.
Moreover, with businesses preparing and reporting financial information under the international accounting standards, managers are better able to analyse the performance of their business. This is so because businesses are using standardize accounting procedures and they are able to compare and contrast their growth with that of their competitors. Comparison of competitors’ financial statements enables managers and investors to recognize the strengths and weaknesses of the business. Also, using the international accounting standards as a guideline for the preparation and reporting of financial information allow managers to compare past and present performance of the business. This will in turn, aid managers with the evaluation of their business growth and measure the achievement of their business.
Overall, businesses that use the international accounting standards as a basis of preparing and reporting financial information tend to have a lot more benefits than consequences.

Cadbury Company An Analysis of Financial Statements

This analysis is to examine the performance of Cadbury in 2007 and 2008 from their financial statements which are shown below.
There is a significant improvement in Cadbury’s confection revenues which increased 15% to £5.4bn. Cadbury increased their price in their selling in 2008 for balancing the rise of their input cost and besides increased the price of their product, Cadbury also sleek their cost base, by decreasing in sales, to save their cost from labours, raw materials, and electricity, also Cadbury reduced their general and administration cost and in central overhead.
Because of this movement, from the table of income statement and balance sheet, there is a significant change in their operating margin which is 278 million pounds in 2007 and it increased to 388 million pounds in 2008. There is also a big increase in discontinued operation from 2007 to 2008, which Cadbury made profit 258 million pounds in 2007 but loss 4 million pounds in 2008, this was happened because in 2008, Cadbury got a transaction cost of separation of the Americas Beverages business, in this year, Cadbury completed the demerger of its American Beverages business and sell the Australia Beverages business.
From the table data that we had from Cadbury website, here are calculations to know about performance of Cadbury that each calculation has its own purpose. Mainly ratios have three important functions which are:
From ratios, it is easier for us to make a conclusion than from a financial statement itself, because sometimes financial statement is very complex, and it is hard for us to draw a conclusion from that.
Ratios provide a good benchmark that makes us easier to compare from one company to another.
Here are some ratios about performance of Cadbury which all calculation is in million pounds. From this ratio, we compare 3 years financial statements and the ratios are:
Investment ratios
PROFITABILITY Return on ordinary shareholders’ funds (ROSF) In 2007
Average shareholders’ fund = (3696 4173):2 = 3934.5
ROSF = (407 : 3934.5) x 100 = 10.344%
In 2008
Average shareholders’ fund = (4173 3534):2= 3853.5
ROSF = (366 : 3853.5 ) x 100 = 9.5%
Return on Capital employed (ROCE) In 2007
Average total assets less current liabilities = ( 6855 6724 ) : 2 = 6789.5
ROCE = (278 : 6789.5) x 100 = 4.095%
In 2008
Average total assets less current liabilities = (6724 5507) : 2 = 6115.5
ROCE = (388 : 6115.5) x 100 = 6.345%
Operating Profit Margin In 2007
Operating profit = 278
Operating profit margin = 278 : 4699 x 100 = 5.92%
In 2008
Operating profit = 388
Operating profit margin = 388 : 5384 x 100 = 7.21%
Gross Profit Margin In 2007
Gross profit margin = (2195 : 4669) x 100 = 47.01%
In 2008
Gross profit margin = (2514 : 5384) x 100 = 46.69%
EFFICIENCY Inventory days In 2007
Ratio = (821 : 2504) x 365 = 119.67 days (120 days)
In 2008
Ratio = (767 : 2870) x 365 = 97.54 days (98 days)
Total asset turnover In 2007
2006 = Fixed assets current asset = 7815 2396 22 = 10233
2007 = Fixed assets current asset = 8667 2600 71 = 11338
Average = (10233 11338) : 2 = 10785.5
Ratio = 4699 : 10785.5 = 0.448
In 2008
2007 = Fixed assets current asset = 8667 2600 71 = 11338
2008 = Fixed assets current asset = 5990 2635 270 = 8895
Average = (11338 8895) : 2 = 10116.5
Ratio = 5384 : 10116.5 = 0.532
Net asset turnover In 2007
Average total assets less current liabilities = ( 6855 6724 ) : 2 = 6789.5
Ratio = 4699 : 6789.5 = 0.688
In 2008
Average total assets less current liabilities = (6724 5507) : 2 = 6115.5
Ratio = 5384 : 6115.5 = 0.88
INVESTMENT RATIOS Dividend cover In 2007
Profit available for dividend = 149 258 = 407
Ratio = 407 : 311 = 1.31
In 2008
Profit available for dividend = 370 (-4) = 366
Ratio = (366 : 295) = 1.24
Dividend Payment Ratio In 2007
Profit available for dividend = 149 258 = 407
Ratio = (311 : 407) x 100% = 76%
In 2008
Profit available for dividend = 370 (-4) = 366
Ratio = (295 : 366) x 100% = 81%
Summary Based on calculation above, we can summarise a few things. There is a relation between profitability and efficiency, which is ROCE = operating profit margin x asset turnover
In 2007
( 278 : 6789.5 ) = ( 278 : 4699 ) x ( 4699 : 6789.5 )
In 2008
( 388 : 6115.5 ) = ( 388 : 5384 ) x ( 5384 : 6115.5 )
It means that to improve ROCE, Cadbury has to improve their operating margins, from this Cadbury has increased their sales (increase their price of their product and reduce their cost), this method is effective, that we can see from their turn over which had increased from 4.7 billion pounds to 5.4 billion pounds in 2008.
Return on ordinary shareholders’ funds (ROSF) ROSF means to compares the profit that available for shareholders with their investment in business. ROSF uses average investment in the business, from the calculation of ROSF, we can see that the profit for shareholders had decreased from 2007 to 2008 which was 10.344% in 2007 and 9.5% in 2008, this was happened because in 2008 there was loss because discontinued operation which has explained from above.
Gross Profit Margin and Operating Profit Margin Gross profit margin calculates about the difference between cost of manufacturing and the selling price, from that we have calculated on above, there is a slightly decrease from 2007 to 2008 which was 47.01% in 2007 and it was decreased to 46.69%. for operating margin, it calculates about operating profit that Cadbury received in every 100 pounds of sales, in Cadbury’s financial statement, we can see that there is an increase from 5.92 in 2007 to 7.21 in 2008, which means that in 2007 Cadbury received 5.92% as operating profit and 94.08% going in cost, and also in 2008.
Inventory days From this calculation, it calculated about planning how much inventory level that can cover for the sales, it means to calculate how many days that left before you run out your inventory and there will be nothing for your customers to buy. from the calculation, we can see that there was a decrease from 2007 to 2008 in inventory days, which was 120 days in 2007 and 98 days in 2008, it means that Cadbury in 2007 Cadbury had 120 days left to cover their selling so in that time if Cadbury did not produce their product, then they had 120 days to cover before they run out, and it had decreased in 2008 to 98 days.
Total asset turnover and Net asset turnover Total asset turnover of Cadbury PLC in 2007 and 2008 were 0.448 and 0.532, whereas their net asset turnover in 2007 and 2008 were 0.688 and 0.88. Total asset turnover is based on total assets while net asset turnover is based on total assets less current liabilities. According to data in 2008, it showed that Cadbury got £ 0.532 for every £ 1 of their assets and got £ 0.88 for every £ 1 of their net assets. This situation indicated that Cadbury had loss £ 0.468 per £ 1 of their assets and had loss £ 0.12 per £ 1 of their net assets.
Dividend cover and Dividend payment ratio Both of those ratios have same purpose which is to know how much money that the shareholders received from the profit of the company. In 2007, the dividend cover and dividend payment ratio were 1.31 and 76% while the dividend cover and dividend payment ratio in 2008 were 1.24 and 81%. It expressed that Cadbury got some profit which is £ 1.31 per £ 1 that Cadbury paid out as dividend in 2007 and they got £ 1.24 in 2008. Those percentages expressed the amount of profit that is allocated to pay the shareholders as dividend, so 76% and 81% of their profit has been paid out as dividend.
The Analysis of Financial Statements of Cadbury Competitor Cadbury has several competitors in confectionary business which are Nestle, Mars, etc. In this case, we would like to compare Cadbury with Nestle because Nestle is the largest food and beverage company in the world. Nestle also produces chocolate, gum, and candy same as Cadbury. The tables of financial statements of Nestle are shown below.
According to table that is shown above, we can analyze the financial statements of Nestle. There are several ratios that we can calculate which are:
Return on ordinary shareholders’ funds (ROSF) In 2007
= 20.79%
In 2008
= 37.92%
Return on capital employed (ROCE) In 2007
= 20.08%
In 2008
= 34.58%
Operating profit margin In 2007
= 13.42%
In 2008
= 20.91%
Gross profit margin In 2007
= 58.13%
In 2008
= 56.93%
Inventory days In 2007
= 75.14 days
In 2008
= 72.03 days
Total assets turnover In 2007
= 0.98
In 2008
= 1.09
Net assets turnover In 2007
= 1.50
In 2008
= 1.65
Acid test ratio In 2007
= 0.61
In 2008
= 0.71
Investment ratios
Dividend cover In 2007
= 2.49 times
In 2008
= 3.72 times
In 2008, turnover of Cadbury and Nestle were £ 5,384 millions and £ 55,174.6988 millions, whereas the net profit of Cadbury and Nestle were £366 millions and £ 9,563.75502 millions. From those data, we can compare both of their performance in 2008.
= = 0.068 = 6.8%
= = 0.173 = 17.3%
Based on those results, it looks Nestle has a better performance than Cadbury. Nestle has a lot of variety of products that they have sold and Nestle company is also has wider market than Cadbury. The categories of Nestle products are baby foods, breakfast cereals, chocolate and confectionery, beverages, bottled water, dairy products, ice cream, prepared foods, foodservice, and pet care. (ANSWERS.COM
That reason is the one of many reasons that is causing Nestle performance is better than Cadbury.
However, if we observe in one category such as chocolate and confectionary, Cadbury has a good market rather than Nestle. Cadbury is the second largest candy factory in the world after Mars and the second largest gum factory in the world after Wrigley.