ACCOUNTING FOR CORPORATE DECISIONS AND

EVALUATION
DAC5013/DAC5013MCS

SEMESTER: SEPTEMBER 2024

ASSIGNMENT 1

NAME: DARRSHINI PRIYA D/O CHANDRA SELEN

MATRIC NO: 012021071025

INSTRUCTIONS
1. Mode: Individual
2. Answer all FOUR questions.
3. Submission in Week 4 (12th October 2024)
4. The assessment will be based on the answer scheme (100 marks-15%)
5. YELLOW Cover

COURSE LEARNING OUTCOMES(S)

CLO1 Analyzing the accounting environment and financial statement.

(C4, PLO2).

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1) Bookkeeping and Accounting from the Perspective of a Business Entity

Modern business environment of environmental shift and market globalization put

much focus on the concept of following functions of bookkeeping and accounting
though being at the same time more complex and are of prime importance for any
business firm. In this study, accounting, which is offered as a major accounting
degree with two broad classifications; namely; accountancy and accounting was
observed to involve journalizing. This includes activities such as taking of sales,
purchases, payments, and receipts. On the other hand, accounting is a broader
term in circumstances that transforms this basic information into valuable financial
information through processes such as consolidation, analysis, and reporting.

The first fundamental distinction can be explained by referring to the scope and the
aim of bookkeeping and accounting. Accounting plays a role with the process of
recording the financial activities that take place in a business organization in an
orderly and as they happen. Such a position is crucial in recording several activities
that make up the basis for any further analysis of cash flows. However, accounting
is different from recording; it involves using this information to make useful
presentations. For instance, while a bookkeeper may journal all the daily
transactions, an accountant shall leverage such data to compile the firm’s reports,
and in addition to assessing profitability, but also the trend of such transactions.

Thus, decreasing costs and increasing effectiveness, technology has influenced

bookkeeping and accounting enormously. These are activities that take a lot of time
and have been managed through several technological methods as witnessed in
Cloud based accounting software solutions where people can do entries in real
time, and at the same time prepare financial statements at first instance. That being
the case, the above automation deems the former too beneficial, and a superior
improvement on the latter, which is time conservation. In this paper, KPMG was
adopted (2017) based on which it was realized that manufacturers and retailers

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who had implemented cloud accounting showed an improvement in efficiency as
well as accuracy and more time was shifted to strategic financial activities than
spending time on reports.

Nonetheless, integration of technology in accounting which has been facilitated by

the adoption of big data analytics as well as Artificial Intelligence in recording and
computation has brought new sets of challenges into the field. They enable the
provision of complex assessment and strategies to advance the fiscal tactics of
institutions. For example, firms can now analyze data of customer buying habits
and this assists in anticipating sales, this is vital when it comes to setting budgets
and resources.

Thus, one can say that bookkeeping is the basic level of financial data processing
since, at the same time, recording, accounting brings this information to a higher
level of value that will be considered as the strategy for decision making. These two
functions are interrelated when addressing the actualities of the current business
enterprise environment where technology and market climate corresponds to
financial accuracy and elasticity. In this regard, businesses are gradually shifting
their attention, and the accounting professions’ tasks will shift from offering only
historical figures.

2) Key Accounting Principles and Their Impact on Financial Reporting

Accounting standards have been defined historically as the fundamental concepts

of accounting which provide the patterns within which business transactions should
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be recorded, reported, and evaluated. They include the principles that provide the
framework for preparing and presenting the financial statements; the principles that
increase comparability and reliability when preparing the statements. In this paper
ten accounting assumptions are outlined with a focus on how each of them is
essential and the implication if applied in placing financial reports.

1. Revenue Recognition Principle: The accruals concept simply means that any
revenue generated should be taken to the statement of profit and loss when it is
realized, whether the money has been collected or not. This means that the
financial statements are going to depict the position of a firm at a certain period. For
example, if a firm sold a product in December and received the money at the start
of the next year, it will have to report that revenue in December. This principle also
increases the speed of reporting frequency comparison where people can compare
performance figures.

2. Matching Principle: Therefore, expenses should be recorded at the period that

the revenues were generated with the help of those expenses. This alignment
provides a clearer perspective of how profitable a firm is. For instance, the expense
for an advertisement made in June, used in a promotional campaign of a product,
should be expensed off in July to correspond to the sales revenue. It helps the
different parties involved to differentiate the actual performance of the business at
any given time.

3. Historical Cost Principle: Valuation: It holds that the company should record the
assets at the cost that was incurred while purchasing other than the current cost
when the asset is traded in the market. Now therefore the application of this
approach provides reliability and objectivity while preparing the financial reports.
For instance, if a Company was able to acquire machinery with fifty thousand
dollars, the company will still record that machinery at fifty thousand dollars even if
the market value decreases. This consistency is desirable for users of financial
statements, especially those that rely on asset values.

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4. Full Disclosure Principle: This principle indicates that any financial aspect of the
company should be reported in the financial statements. More specifically, there
needs to be increased transparency as the individuals using financial statements
need to go for the right decision based on the data available. For instance, if a
company receives a legal claim for litigation this is a contingent liability that must be
factored in the company’s balance sheet. Such aspects delay the determination of
the right information to provide to various stakeholders, and thus, incorrect
information is provided to stakeholders who rely on such reports to make their
decisions.

5. Consistency Principle: This principle implies that the procedures applied in the
preparation of financial periods must be uniform unless a variation is required and if
the change is to be implemented, it must be stated. Consistency enhances
relevancy so that the various trends of financial statements of the organization may
be compared conveniently between the periods. For instance, if a business
organization desires to change its method of inventory valuation, the change, and
its statement implications to the public are to be reported and publicized.

6. Accrual Basis of Accounting: Therefore, accounts are stated when any

operations occur as distinct from the making of cash. A far more realistic picture of
the corporative financial state is offered by this method. For instance, if services
were delivered in March, and payments were received in April, the revenue should
be recognition in March. This can be done where income and expenses are
received for different accounting periods.

7. Going Concern Principle: Thus, this principle assumes that a business will be
ongoing – that it will carry on indefinitely into the future unless disclosing
information indicates the contrary. This assumption has potential on the
recognition, measurement, presentation, and disclosure of assets and liabilities. For
example, if, in the going concern, some of the assets are on the verge of closing
down then they will be required to be reclassified. This principle implies that the
financier carries out his transactions if the business will carry on operating as usual,
and thus the financier does not consider the likelihood of the business ceasing to
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operate shortly.

8. Economic Entity Assumption: On this principle, it is mandatory that all the

operation of a business in its financial transactions must be separated from any
other person, business entity or any other party. There should be no mix-ups to
maintain excellent quality output and achieve clear reports to meet the tax
responsibilities. For instance, the financial statements should not capture expenses
that an owner makes saying that making the financial position to signify business
transactions only.

9. Materiality Principle: In doing so, it is possible to achieve a more precise result

obtaining an image without some detail which will not be noticed by a user. These
can be left out from financial statements so that they are made precise, though they
may not have any nominal value. For Instance, a particular company may decide
not to include an insignificant office supply in its balance sheet because it has no
effect on the company’s financial performance.

10. Prudence Principle: Still known as conservatism or the pessimism principle, this
rule presupposes that expenditure and loss costs should be recognized as soon as
they are expected whereas revenues should only be recorded as soon as they are
predictable with a fair degree of accuracy. Because of such conservatism,
stakeholders never take a fall for fraud numbers for the financial aspect. For
example, where a firm will be able to afford to lose a given amount because of a
lawsuit, it should be able to show that loss in its account by provision. All these
principles incorporated ensure that the company’s financial statements are reliable
and contain useful information to help other interest parties in the organization to
decide as well as to have confidence in the financial reporting framework.

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3) Key Users of Accounting Information and Their Decision-Making Needs

Accounting information is so important to a wide variety of people and each of

these individuals utilizes this information in one fashion or another when making
their choice. For the business, it becomes necessary that it identifies its users and
their needs so that they get the needed financial information at the right time.

1. Investors: It means that the users of the accounting information primarily depend
on such performance and forgery capability of the company to adjust their
perception about it. Accounts data is relied on to assess the return in equity
investments and decide whether to gain, maintain or divest from an equity interest.
For example, an investor employs the EPS or GNP to determine the profitability of
a given business and the growth that the firm is likely to experience in each period
with regards the P/E ratio.

2. Managers: Many business organizations use accounting information for

operational activities, budgeting, and control of inventories with the help of
corporate internal managers. They incorporate numerical information, identify
trends, identify the way to allocate funds, and identify reserve estimates. For
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instance, the manager can prepare a variance analysis report with the following
view of noting the budgeted cost and the actual cost with the intention of rectifying
the difference noted.

3. Creditors: To establish the credit position of the business firm, the amount of
credit offered by the creditors such as banks and suppliers is established from the
financial statements. The information is useful to banks and other lending
institutions to determine the risk that characterizes extension of credit to a person
or business. For example, while assessing the repayment capacity of the
Company, a creditor may investigate the company’s debt equity ratio alongside the
Company’s cash flow statements.

4. Employees: In one way or another, working people have a stake in the financial
condition of your employees, particularly in employment security and your salary.
Wages earned by the employees and the other terms of employment may be
negotiated using accounting information. For instance, if a company announcing
their earnings says they have posted better profits, employees then want an
increase in wages or other incredible rewards.

5. Regulatory Authorities: Accounting standard setters should provide basic

information to beginners because legal authorities require reliable financial
statements necessary for compliance with laws and regulations. Some of them use
accounting information to manage business affairs and justify public needs. For
instance, the SEC reviews the balance sheet of business entities that have offered
stocks in the market, to ascertain law compliance.

6. Customers: The customers may wish to check their financial health before
entering long-term agreed contracts or trading partnerships with the firm in
question. For instance, a supplier may wish to know the financial performance of a
particular partner in a project in matters concerning balance sheets and income
statements to ensure that the partner company would be sustainable during
contract implementation.
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7. Government Agencies: The following are some of the end users; Governments
use accounting information in setting taxes and to also evaluate the feasibility of
business. It is in financial reporting that a company is assured that it complies with
tax laws and policies. For example, the IRS requires comprehensive reports of the
companies’ conditions regarding where correct amounts of taxes are to be paid.

8. Analysts: Accounting information is used for decision making by analysts who

then make presentations to their clients, the investors, or the fund managers. They
work at the actual rate and scale of the figures arrived at from the financial
statements while making investment decisions. For example, the firm’s profitability
ratios can be useful by the financial analysts in advising investors who are
intending to buy or sell the stock.

9. Shareholders: Managers need information to justify for shareholders payment of

dividends, share repurchase or high new investment. They attend annual general
meetings to either voice their displeasure or satisfaction through the financial
statements about certain decisions made by the management. For instance,
shareholders may prepare the cash flow statements to know how suited a firm is to
issuing dividends.

10. Business Partners: The kind of accounting information required by managers in

joint ventures or collaborations is information for accountability and identifying the
effect of the business venture. For instance, in partnership business, partners may
produce financial statements to understand the result of partnership business and
then decide on the ways to invest in the partnership business in the future.

In general, accounting information benefits many clients as these need it for

specific operations and decision-making. This is because financial information
helps the businesspeople to make good decisions as well as strengthening the
confidence of the users with the firm.

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4) The Need for Accounting Standards in Financial Reporting

Accounting standards play a role in credibility, reliability, and relevance of financial

information for an organization. These standards act as a roadmap to the
recording, reporting, and analysis of business transactions to provide relevant and
comparable financial information to the users. Accounting standards are therefore
important because of the increasing complexity of financial reporting that is
occasioned by globalization.

Another objective of accounting standards is to improve the quality of reporting

through an increase in transparency. Due to the adoption of such standards, the
subject businesses can present and explain their financial performance and state
widely in the same manner. In the same resource, transparency always ensures
that investors, creditors, and every other stakeholder can gauge the stand of the
company as far as its financial position is concerned. For instance, where the
company handles its book in accordance with the IFRS or GAAP, the given
financial statements reveal all the material about the accounting policies, vital
estimates and risks that can be potentially faced by the company.

Also, accounting standards allow comparison, which is so essential when analyzing

financial reports of different organizations. This way, unlike when different
companies using different standards present varying information, stakeholders can
compare companies working within the same sector easier. This comparability is of
particular importance to investors and analysts who consider several firms, while
selecting the firm they will invest in. For instance, different corporations conform to
the policy of preparing accounting statements from the same accounting policies; it
becomes easier for investors to compare the various aspects of profitability,
solvency, and financial strength given the same such dimensions.

That is the case because accounting standards help to increase the reliability of

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financial reporting. Through the provision of procedures on how particular financial
transactions should be accounted and presented, these standards reduce the
chances of inflating or exaggerating certain financial information. This reliability is
especially important for investors and creditors because they relied on financial
information to plan. For instance, the revenue recognition principle as used
throughout IFRS does not allow the company to record revenue at an early date,
which protects stakeholders from high profit figures.

In addition, having the accounting standards in place increases confidence within

the capital markets. This is because when investors feel there is reliability and
relevancy of financial statements they will be inclined to invest or loan money. It is
presumable that such trust is crucial to the development of the capital markets
because they in their turn orchestrate the flow of investments into the economy. For
instance, any listed business must observe certain accounting rules to satisfy its
investors and safeguard the market.

Therefore, there is a great need for accounting standards in the current demanding
financial environment. These standards facilitate accurate financial statements that
help the various stakeholder’s users, such as investors, creditors, regulators, and
the economy in general. In supporting the regular or GAAP, organizations can
create credibility and promote understanding, to improve the stability of the
business community.

REFERENCES

1. KPMG. (2017). Cloud Accounting: The Future of Financial Management.

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2. Horngren, C. T., Sundem, G. L., & Stratton, W. O. (2013). Introduction to
Management Accounting. Pearson.

3. Warren, C. S., & Reeve, J. M. (2016). Financial and Managerial Accounting.

Cengage Learning.

4. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate

Accounting. Wiley.

5. Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial

Accounting. McGraw-Hill Education.

6. Weygandt, J. J., Kieso, D. E., & Warfield, T. D. (2016). Financial Accounting.

Wiley.

7. International Financial Reporting Standards (IFRS). (2020). IFRS

Foundation.

8. Financial Accounting Standards Board (FASB). (2021). Statements of

Financial Accounting Standards.

9. Schipper, K. (2007). The introduction of International Financial Reporting

Standards in Europe: Implications for the United States. Accounting
Horizons, 21(4), 529-539.

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