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The Implication For Users Of Financial Statements Accounting Essay

Financial statements should be well understood by those who read it especially those individuals who have considerable knowledge of business and economic world and those ones willing to learn the information carefully. There are various users of financial statements. These users are classified into two broad categories. These users have different purposes for using these statements. The first category of these users is the internal users. The internal users refer to those individuals who have direct interest to the activities of the organization. They include: 1) Managers and owners need financial statements so as to make business decisions. They analyze the information provided by financial statements so as to obtain a clear position of the organization. Variable elements of financial reports such as the ratio of current debt to equity ratio is vital in making a decision on the amount of long run capital that needs to be available;2)employees form the second group of internal users of financial statements. Employees require this information especially when making joint collective bargains (Dyson, 1996). Such statements are of significant importance when discussing issues concerning promotion, salary increase and rankings. External users include: 1) institutional investors who use the financial reports to evaluate the financial capability of the business so as to make reasonable investment decisions; 2) Various financial institutions like banks and other loan bodies need to evaluate financial reports of businesses before lending them money; 3) the government also analyzes financial statement of different companies so as to prove if they paying taxes accurately ;4) the general public as well as the mass media may be interested in analyzing the statements of certain businesses.
1.2-What are the different aspects of legal and regulatory framework that relates to financial statements? There are different methods which can be followed when presenting financial statements. Rules-based accounting is made up of precise rules that must be observed during preparation of financial statements. Many accountants prefer the use of this method so that they reduce their liability in the event misjudgments. In situation whereby the management decides not to use rule-base accounting, it can choose to employ other accounting policies in preparing their financial statement (Guilding, 2002). However, this can be challenging because there are some policies which do conflict. Companies which need to included in stock exchange in more than a single country need to prepare their statements in accordance with GAAP. There are several reasons why it is necessary to have regulatory framework guiding financial reporting within countries and on international level. One of the reasons regard to irregular information (Moncarz and Portocarrero, 1986). Assume a scenario whereby the manager of the company is the one responsible for preparation of financial reports. This responsibility gives the manager the opportunity to access financial information which other members of the organization do not. Managers can take advantage of this privilege to exploit the statements so as to favor their own personal interest. Therefore, there must be regulation on reporting to stop insiders from exploiting financial statements. Another important factor to be considered is reliability and relevance of financial statements.
Access the implication for users of financial statements? The different aspects of legal and regulatory framework have significant implication for users of financial statements. Some of the users of financial statements have complained that some of the regulations add unimportant complexities. The basis behind their argument is that there are some rules which are extremely detailed, with standards extending to more than hundred pages. Others have argued that these rules provide loopholes for financial engineering and fail to provide a ‘true and fair’ image of the business. It has also been noted that sometimes these rules fail to capture the details of targeted cases. Another negative phase of these rules is that they fail to provide solutions in the event of ‘gaps’ (Kotas, 1999). Management can also choose to observe all those accounting treatments that favor their interests and avoid those that will define real position of the business. However, it is worth to acknowledge the fact that these rules play a major role in ensuring a fair competition of international businesses which operate in more than one national market. However, it is fairer to say that observance of these legal and regulatory frameworks significantly contribute to preparation of statements which portray a company’s real performance. The different legal and regulatory frameworks should be flexible enough to accommodate new situations in the business. A relevant and reliable makes it easier for users of financial information to analyze those statements.
Describe how different laws and regulations relate with accounting and reporting standards? (Pass P4) Provide the regulatory framework of any country other than UK and compare it with UK regulatory framework (Distinction 1) There are several accounting bodies which guide the accounting environment and significantly determine the success of a business. Security and exchange commission aimed at eliminating abusive stock market collision that had accumulated and resulted to instability in stock markets. Security and exchange commission ensures that publicly reporting business adhere with the generally agreed accounting principles. Financial accounting standards board (FASB) provides a plane set of standards to be observed when presenting financial statements to the public (Atkinson et al,1995). It aims at shielding the investors from fraud of business owners. Internal accounting standards board was founded to come up with comprehensible financial accounting reports (Messenger and Shaw, 1993). There is also the government accounting standards board (GASB) which aimed at establishing standards of helpful information that will aid users of reports to understand the reports in a much better way. On the second part of this question, the country of my choice is Kenya. In 1998, the council of Institute of Certified Public Accountants of Kenya set IFRS (International financial reporting standards) as the accounting standard in Kenya. From then henceforth, all the companies were requested to prepare their financial statements in accordance with IFRS. However, in Kenya there is a significant gap that has been observed between applicable accounting standards and the real practice by companies. In 1969, the UK ICAEW issued the statement of intent on accounting standard. This statement made it clear that standards will be generated in future with four main goals. The first goal was to reduce the dissimilarities and diversity in accounting principles. Second, was to disclose the accounting foundations. Third, disclose the diversion from established standards and eventually explain the broad exposure for main new accounting proposals. There have been a number of committees which have been formed since then all with the aim of improving accounting disclosure.
Requirement 2.1 The following is a trial balance from auto electrical ltd as at 31 March 2005
£ £ Ordinary shares of 50 p each
400,000
10% Redeemable Preference shares of £1 each
200,000
Retained profits as at 1 April 2004
42,475
Office block (Land £40,000)
170,000
Plant and machinery
730,000
Office equipment
110,000
Motor vehicles
200,000
Provision for depreciation – Plant and Machinery
224,500
– Office equipment
24,500
– Motor vehicles
80,000
Accounts receivables/Payables
500,000
356,226
Provision for doubtful debts
1,000
Manufacturing wages
501,400
Inventory as at 1 April 2004 – raw materials
70,000
– Work in progress
126,000
– Finished goods
250,000
Transport expenses
85,013
Returns inwards
15,106
Purchases of raw materials
518,600
Sales
2,600,147
Bank balance
60,020
Directors salaries
60,114
Maintenance of plan t
30,102
Rent
40,063
Advertising
190,048
Rates
50,171
Insurance
20,116
Office salaries
166,013
Light and heat
46,027
Factory power
30,014
Bank interest
7,070
Interim dividends on preference shares
10,000
General administration expenses
63,011
_________ 3,988,868
3,988,868
Further information is as follows:
Depreciation is to be provided as follows:
Plant and machinery 15% on cost. (Production expense)
Office equipment 10% on cost (administration expense)
Motor vehicles 25% on WDV (distribution cost)
New office blocks 2% on cost (Administration expense).
As at 31 March 2005 rates were prepaid by £3,140 .
Outstanding light and heat as at 31 march 05 is £1,214 and rent is £2,321
Rent, rates, light and heat and insurance are to be apportioned in the ratio of 5:1 in relation to factory and office expenses.
The company makes a provision of 1% for doubtful debts on all accounts receivables.
The production director is paid £20,000. £64,237 is included Office salaries
£100,000 is to be provided for corporation tax
During the year 1,500 electrical equipments were transferred from the factory to the warehouse. Only 100 equipments were in hand at the end of the year.
At 31 March 2005 Inventory was:
Raw materials
£56,200.
Work in progress
£47,190.
Finished goods
? Classifying expenses by function
Auto transmission Income Statement for the year ended 31/03/2005
£ £ Revenue
2,585,041
Cost of sales
(1,586,692)
Gross profit
998,349
Expenses Distribution expenses
373,298
Administration expenses
244,489
Finance costs
27,070
(644,857)
Profit before tax
353,492
Income tax expense
(100,000)
Profit for the period
253,492
Classifying expenses by nature
Auto Transmission
£ £ Revenue
2,585,041
Expenses Raw materials consumed
532,40
Changes in finished goods and work in progress
233,332
Depreciation
153,100
Employee benefits
727,527
Other expenses
558,120
Finance costs
27,070
2,231,549
Profit before tax
353,492
Income tax expense
(100,000)
Profit for the period
253,492
Auto Transmission
Balance sheet as at 31/03/2005
£ £ NON-CURRENT ASSETS Property, Plant and Equipment
727,900
CURRENT ASSETS Inventory
198,868
Accounts receivables
495,000
Prepayments
3,980
697,848
TOTAL ASSETS
1,425,748
EQUITY AND LIABILITIES Ordinary share capital
400,000
RESERVES Retained profits
295,967
Shareholders’ funds
695,967
NON-CURRENT LIABILITIES 10% Redeemable preference shares
200,000
CURRENT LIABILITIES Bank overdraft
60,020
Trade payables
356,226
Accruals
13,535
Current tax
100,000
529,781
Total Equity and Liabilities
1,425,748
Workings
£ Revenue
2,600,147
Less return inwards
(15,106)
2,585,041
Cost of sales Opening inventory : Finished goods
Cost of finished goods
250,000
1,682,170
Less: closing inventory of finished goods
(95,478)
1,586,692
Factory cost of finished goods
Manufacturing account £ £ Opening inventory : raw materials
70,000
Purchases of raw materials
518,600
588,600
Less: Closing stock inventory raw materials
(56,200)
Raw materials consumed
532,400
Direct labour: Manufacturing wages
501,400
PRIME COSTS
1,033,800
Factory overheads Directors’ salaries : Factory manager
20,000
Maintenance of plant
30,102
Rent
35,320
Rates
39,192.50
Insurance
16,063
Light and hear
39,376.50
Factory power
30,014
Depreciation on plant
109,500
319,560
Total cost of production
1,353,369
Add: Opening WIP
126,000
1,479,360
Less: Closing W.I.P
47,190
Factory cost of finished goods
1,42,170
Value of closing stock/finished goods: 1,432,170 x 100 = 95,478 =95,478
1500
Expenses
Distribution
Administration
Finance costs
Transport
85,013
Directors’ salaries
40,114
Rent
7,064
Advertising
190,048
Rates
7,838
Insurance
3,213
Office salaries
101,776
Light and heat
7,873
Bank interest
7,070
Preference dividends (redeemable)
20,000
Salesmen salaries
64,237
Increase in provision for bad debts
4,000
Depreciation on – new office block
2,600
– office equipment
11,00
– motor vehicles
30,000
General administration expense
______ 63,011
_____ 373,298
244,489
27,070
Workings for classification by nature Changes in finished goods and W .I. P
Finished goods
Work in progress
TOTAL
£ £ £ Closing inventory
95,478
47,190
142,668
Opening inventory
(250,000)
(126,000)
(376,000)
Increase (decrease)
(154,522)
(78,810)
(233,332)
An increase is treated as a saving while a decrease is an expense .
Depreciation
Plant and machinery
109,500
New office block
2,600
Office equipment
11,000
Motor vehicles
30,000
153,100
Employee benefits
Manufacturing wages
501,400
Factory manger salary
20,000
Director salaries
40,114
Office salaries
101,776
Salesman salaries
64,237
727,527
Other expenses
Transport
85,013
Rent
42,384
Advertising
190,048
Rates
47,031
Insurance
19,276
Ling and heat
47,241
Plant maintenance
30,102
Factor power
30,014
Provision for bad debts
4,000
Bank interest
7,070
General administration
63,011
558,120
Property, Plant and Equipment
Cost Depreciation to date
Net Book value
Office block
170,000
2,600
167,400
Plant and machinery
730,000
334,000
396,000
Office equipment
110,000
35,500
74,500
Motor vehicles
200,000
110,000
90,000
727,900
Prepayments and Accruals
Prepayments
Accruals
Rates
3,140
Light and heat
1,214
Insurance
840
Rent
2,321
____ Dividend on redeemable preference shares
10,000
3,980
13,535
Retained profits
Balance c/d 42,475
42,475
Profit for the period 253,492
Retained earnings 295,967
Gross profit margin profit/sales= 998,349/2585041=38.62%
Net profit margin profit/sales= 295,967/2,585,041=11%
Differential 38.62-11= 27.62
Requirement 2.2 Utah textile
Incomes statement for the year ending 31 December 2009
Sh. Sh. revenue 476000
Expenses
Advertising expense 14500
Supplies Expenses 31500
Rent expense 12000
Miscellaneous expense 5100
Salaries expense 78000
Utilities expense 2500 (143600)
Profit before tax 332400
Net income 109450
Total income 441850
Income tax expense (132555)
Profit for the period 309295
Distribution to owners (48100)
retained earnings 261195
Balance sheet as at 31 december 2009 Non Current Assets Sh. Sh.
buildings 512000
land 90000
Current assets
supplies 4250
account Receivables 95000
Cash 63000 162250
TOTAL ASSETS 764250
Ordinary Share Capital 310300
Retained Profits 261195
Shareholders’ funds 571495
Non-Current Liabilities
mortgage payable 423400
Current Liabilities
Trade payables 74300
Current tax 132555
Proposed dividends 48100 265400
TOTAL EQUITY

Analysis of Institutional theory and Stakeholder theory to ASES

The increase in the environmental degradation caused by carbon emission and climate change has necessitated the governments to pass several laws to ensure that business organisations integrate the environmental issues in the management policy. To satisfy the stakeholders, many large and medium organisations have integrated the environmental issues in the management policy in order to enhance overall corporate image. (Kumar, Chandra, Bhagaban, 2007). However, the issue is different with related to accounting profession. There is heated debate in the accounting literatures on the efficacy of integrating environmental accounting in the organisational practices. While there are camps that argued that accountants cannot close their eyes on environmental issues given the importance accorded to environmental issues. There are supporting camps that argued that there is need to integrate the environmental accounting in the management control in order to achieve the organisational change. (Environmental Protection Agency, 1996). The supporting camp argued that integrating the environmental accounting in the traditional accounting is a process that can result to organisational change. This could also result in effectiveness of organisational performances and in increase in the efficiencies of management operations. However, the opposing camp revealed that there cannot be organisational changes with the response of environmental demand. (Larrinaga-Gonealel, Bebbington, 2001).
The objective of this paper is to analyses the issues whether environmental accounting should be integrated in the organisational policy in order to achieve organisational changes.
To enhance greater understanding of this study, the paper is structured in two-fold. The part A analyses the issues whether environmental accounting should be integrated in the organisational policy in order to achieve organisational changes.
The second part of the paper outlines four theoretical paradigms studied in Organizational Context of Management Accounting
Outline of the issues in the case study with management control and management accountability.
To provide greater understanding of the environmental accounting with relation to management control and management accountability, it is essential to outline the issues in the case study.
From the case study, it was identified that the intention of Spanish government was to reduce environmental emission after joining the European Union (EU) in 1986. Thus, ASES, which was a large company that generates electricity utilities in Spain tried to integrate environmental concern in the management issues. However, there was conflicting issues on the spectrum of the efficacy of management application of accounting techniques to the environmental issues. Typically, the supporting camp was the Director of Environmental Affair (DEA), who believed that ASES could achieve management accountability with the ability to control costs and increase performances if environmental accounting could be integrated in the accounting system of the organisation.
The DEA believed that the integration of environmental accounting in the environmental issues could achieve management control that will make ASES to enhance efficient in organisational resources. Contrary to DEA initiations the ASES’s accounting department was not convinced that there should be inclusion of environmental aspect in accounting statement of ASES.
The two theoretical perspectives, the institutional theory and stakeholder theory could illustrate these opposing views between Department of Environmental Management, and ASES’s Accounting department. (Larrinaga-Gonealel, Bebbington, 2001).
The paper compares and contrasts the two theoretical perspectives to enhance greater understanding of the issues in case study.
Compare and Contrast of the Institutional theory and Stakeholder theory
Management accountability is essential in order to ensure transparency of information. The measures to ensure quantitative performance are true test of management accountability. To achieve management performances, the institutional theory beliefs that effective management performances need to integrate environmental accounting report in the financial statements of organisation in order to conform to institutional practices. Similar with Stakeholder theory that beliefs that organisation needs to satisfy the stakeholders in complying with legal framework with reporting the financial data to the stakeholders. With increase in the intensification of environmental sustainability, some stakeholders are demanding organisations to supply environmental accounting in the accounting report. Typically, shareholders, and other stakeholders believe that it is their right to receive information on the conduct of organisation with regard environment accounting. (Rowe, Wehrmeyer, 2001).
Despite the common perceptions of institutional theory and stakeholders theory with relation to environmental accounting. The two theoretical paradigms separate themselves from the point that institutional theory believes that organisation could only gain legitimacy and be shaped by the institutional environment. On the other hand, stakeholder theory only beliefs that the interests of the stakeholders are the ultimate important of organisation, and outcome of an organisation depends on the firms satisfy its stakeholders. (Husillos,Alvarez-Gil, 2008, AFAANZ 2010).
Thus, the two theoretical perspectives provide greater understanding in analysing the issues in the case study.
Analysis of the institutional theory and stakeholder theory with relation to interpret the issues in the Case study.
The Conventional approach has been generally criticised as being insufficient in explaining the rational behind the organisational motive with regard to organisational environmental values. With increase in the needs for environmental accounting, the Institutional Theory has been argued to provide greater understanding on the environmental value of an organisation. (Qian, Burritt, 2008). The institutional theory draws a greater understanding on how organisation reacts to the needs of environmental accounting. Typically, the institutional theory refers to the habits, norms and customs that guide the organisations. In the contemporary business environment, organisations act in accordance with set out norms and rules in order to survive in an environment an organisation is operating. With the intensification of environment sustainability, organisations need to relate to the routing methods of environmental policy in order to secure legitimacy. The institutional theory explains the process by which organisations could secure legitimacy through conforming to the norms and rules lay down by the institutional environment. (Rowe, Wehrmeyer, 2001).
On the other hand, “stakeholder theory suggests that organisations have a variety of stakeholders and that a moral, social and legal obligation is owed to these stakeholders to satisfy their interests” (AFAANZ 2010, p.3). The stakeholder theory reveals that managers need to take into legitimate interests of the groups or individuals who can affect the activities of an organisation. These groups or individuals are being termed as stakeholders. With intensification of climate change and carbon emission, stakeholders are increasingly holding management responsible for the management decision with relevant to environmental decision. Stakeholder theory further explains that stakeholders are increasingly demanding that organisations need to inculcate environmental accounting in the management control. Typically, stakeholders shape the management control in order to enhance performance systems.
Likewise other functions in an organisation, the institutional theory argued that accounting roles in an organisation need to contribute to the environmental management through the application of environmental accounting. (AFAANZ, 2010, Rowe, Wehrmeyer, 2001).
It is essential to realise one of the norm and values that ASES organisation recognised was to abide by the environmental conformity by implementing “green”. Although, the ASES tried to satisfy the stakeholders by implementing the green initiatives, however, there were divergences of interests among the stakeholders of the ASES organisation that make the argument of stakeholder theory not to be valid within ASES because ASES failed to satisfy the interest of all stakeholders. Although, ASES attempted to implement norm and values as being discussed by institutional theory, however, there are certain cases where ASES did not implement environmental sound behaviour. This was revealed with the disinterest of some stakeholders within the organisation who did not belief in integrating environmental accounting policy in the accounting systems of the organisation.
To enhance greater understanding of the interpretation of the Case, it is essential to examine the method the interpretation of the Case differs between each theoretical perspective.
How does interpretation of the Case differ between each theoretical perspective
The interpretation of each of the theoretical perspective in the case is different. The method the Director of Environmental Affairs and Director of Accounting Affair interpreted the institutional theory are different. For instance, Director of Environmental Affairs believed that ASES should implement organisational changes because there was poor management practice with relation to the environmental management. The major reason was the inability of ASES to provide non-financial data of generating plant that provides the electricity. A Director of Environmental Affairs believed that there was need to identify environmental costs and investments, and the creation of environmental accounting was essential to enhance operational improvement. However, Director of Accounting Affair believed that implementation of institutional theory was not important in the accounting system, and environmental accounting could not be integrated in the accounting system.
In the interpretation of the Stakeholder theory, the interest of two important stakeholders in the case (Director of Accounting Affair and Director of Environmental Affairs) was not satisfied equally.
The Director of Environmental Affairs believed that “accounting was deemed to play an important role generally in management’s control of the organization; the role of accounting in the “greening” process was seen as being crucial for achieving some progress on strategic environmental goals”. ( Larrinaga-Gonealel,

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