Popular in Course
verified elite notetaker
Popular in Department
This 10 page Study Guide was uploaded by an elite notetaker on Thursday November 5, 2015. The Study Guide belongs to a course at a university taught by a professor in Fall. Since its upload, it has received 30 views.
Reviews for ACC400_All_DQs_and_Responses
You can bet I'll be grabbing helper studyguide for finals. Couldn't have made it this week without your help!
-Ms. Brycen Rutherford
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 11/05/15
ACC/400 – DQs and Responses Week1 What is a current asset? What is a noncurrent asset? What is the difference between the two types of assets? In which financial statement would you find these assets? A balance sheet item which equals the sum of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that could be converted to cash in less than one year. These assets can be easily liquidated in case the company goes bankrupt. In addition, current assets are important to most companies as a source of funds for daytoday operations. Noncurrent assets are those which are not easily convertible to cash or not expected to become cash within the next year. Examples include fixed assets, leasehold improvements, and intangible assets A current asset is an asset that will be used or fully depreciated in 1 year or less. Noncurrent assets are anything above 1 year. Examples of the two: Examples of Current Assets: Cash Normally, cash is considered a current asset because it can be used within one year after the balance sheet date. However, in certain situations, cash may be classified as a noncurrent asset. For example, if a company has restricted cash in a bank account (i.e. cash that can’t be used), and restriction is for more than one year after the balance sheet date, then, this cash is considered noncurrent. Accounts Accounts receivable are amounts expected to be collected from customers. Usually, collection is within one year, and thus, accounts receivable are considered a current asset. Receivable Prepaid Prepaid expenses (e.g. prepaid insurance premiums) are usually used within a year after the balance sheet date and thus, are Expenses considered a current asset. However, if a company paid a premium for two years as of the balance sheet date, then, one half (one year) of the prepaid expenses balance will be current and the other half (another year) will be noncurrent. Examples of Noncurrent Assets: Fixed Assets Fixed assets are used (depreciated) by a company for more than a year, and thus, they are considered noncurrent. Intangible Similar to fixed assets, intangibles are used (amortized) by a company for more than a year, and thus, they are considered Assets noncurrent. Longterm Notes receivable that are not expected to be collected until after one year after the balance sheet date are considered long Notes term. Note, however, that there are some notes that have a maturity date within a Receivable Referred from Investopedia.com I like the details you've given about current assets. In addition to what you wrote, I believe that there is always a tradeoff in holding high levels of cash assets because they earn very little return. In general, managers can only reduce the risk of becoming less liquid by reducing the overall return on current assets, and on total assets. If a company is selling an asset but the agreement is to get 50% in 6 months and the next 50% in 18 months. making this agreement of 1 year long but with 6 months of grace. Now, does this transaction get recorded as current assets or half and half? I like the way you've analyzed the concepts behind current asset. In addition to what you wrote, I think that everything else remaining the same, higher levels of current assets mean lower risk and lower expected return – Lower Risk = Greater ability to meet shortrun obligations. Lower Return = Cash and marketable securities typically yield low returns. Furthermore, when current assets are increased, additional financing costs will be incurred thereby lowering returns. What is an example of a significant accounting estimate? What is the importance of these estimates? How do ethics play into the decisionmaking process? Which financial statements include significant accounting estimates? Why? Example: The recording of deferred tax assets requires an assessment under the accounting rules that the future realization of the associated tax benefits be "more likely than not." These estimates are considered to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. Also, they can have material impact on the company's consolidated financial statements and related disclosures and on the comparability of such information over different reporting periods. All such estimates and assumptions affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. Financial Decisionmaking is one of the most important things in the business world. In today’s diverse world, ethics in accounting and financial decision making is a process that many organizations have trouble dealing with. Implementing good ethical behavior in a business helps the business become very successful. In many organizations, bad ethical behavior can lead to many negative things within the company that affects every person tied into the company. Some business people do anything to earn money, even if it includes practicing unethical behavior. Ethics are important in accounting and financial decisionmaking because ethical beliefs and values provide the foundation on which a civilized society exists. Significant accounting estimates are a part of organization’s balance sheet as it is a permanent account which gives accurate position of an organization’s financial standing. Referred from Investopedia.com Great insight about accounting estimates. I think that many accounting decisions involve the use of estimates in situations where absolute certainty is not available. But I've a doubt, if any changes done in accounting estimates will they be accounted for in current and future periods? After reading your post I was just wondering if there can be any bias in accounting estimates? Because auditing financial statements are never questioned of a black and white, rulesbased approach. In particular, dealing with the potential for bias in accounting estimates takes the auditor into a grey area where the exercise of professional judgement is of critical importance. In my opinion, companies must be aware of the financial status and keep in mind any consequences that external factors may produce to any receivables. helping to maintain an adequate cash flow. It is essential for managers to allocate organizational resources and give them the best use possible. if the company finds itself in a position where selling assets (or increasing current assets) to cover operational costs, then it might loose these resources instead of taking the maximum advantage possible. What are internal controls? Why do companies need them? What are some examples of internal controls? Who is responsible for developing internal controls? Internal controls can be defined as a process affected by an organization's structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objectives Control activities include approvals, authorizations, verifications, reconciliation, reviews of performance, security of assets, segregation of duties, and controls over information systems. Understanding Internal Controls provides an additional reference tool for all employees to identify and assess operating controls, financial reporting, and legal/regulatory compliance processes and to take action to strengthen controls where needed. By developing effective systems of internal control, management can contribute to enhancing the organization’s ability to meet its objectives and reducing the potential liability from fines and penalties that could be imposed for violations. Managers are primarily responsible for identifying the financial and compliance risks for their operations, they also have line responsibility for designing, implementing and monitoring their internal control system. Responses: I have to agree with you, internal controls do not make employees ethical, they can only make it harder for an unethical person to be dishonest. The saying comes to mind though "where theres a will, theres a way." Ethics are learned throughout ones lifetime through teachings and life experience. I have worked in my profession for more than 20 years, and the work requires dealing with several hundred thousand dollars per employee, in Social Service funding. I have seen my share of unethical employees come and go. It always amazes me that they would take such a risk over what is a relatively small amount of money they can get. For instance, a client returned a $98 check and was given a receipt. The clerk mistakenly laid the check on her desk, procedure is to lock it in the safe, she walked away for about 5 minutes. An employee (manager) took the check off her desk. When the client received a bill for the $98 an investigation was opened, this manager had deposited the check in her own checking account (not the brightest tool in the shed). I like your optimism. Internal controls help strengthen processes. They don't guarantee results. Week2 What is a current liability? What is a noncurrent liability? What is the difference between the two types of liabilities? In which financial statement would you find these liabilities? Definitions and Differences between the two: Current liabilities are bills that are due to creditors and suppliers within a short period of time. Normally, companies withdraw or cash current assets in order to pay their current liabilities. Analysts and creditors will often use the current ratio, (which divides current assets by liabilities), or the quick ratio, (which divides current assets minus inventories by current liabilities), to determine whether a company has the ability to pay off its current liabilities. Noncurrent liabilities are the flip side of noncurrent assets. These liabilities represent money the company owes one year or more in the future. Although you'll see a variety of line items in this category, the most important one by far is longterm debt. Financial Statement: Company’s balance sheet contains current and noncurrent liabilities. Referenced from InvestoPedia.com In addition to the examples given by you, some of the distinguishable examples of current liabilities include accrued expenses as wages, taxes and due interest payments. Some other examples of current liabilities include cash dividends, shortterm notes and revenues collected in advance. I think for a company it is very important to manage current liabilities, because the failure to do so will result in working capital issues, which could lead to operating failures. Interesting question!.. I believe that in these days, large companies use some more sophisticated stock control systems such as Radio Frequency Identification (RFID) and computer software. But for small businesses, it is a systematic approach rather than technology that counts. Gaining a tighter grip on your inventory does not have to mean purchasing an expensive stock control system. Assess clearly what you really need and implement a manual or automated system that can track inventory across multiple warehouses, in different locations within one facility, and the unique serial or lot numbers of different inventory items. Even if it provides some near realtime information about your stock, it is better than having none. What are the types of equity accounts? What is the role of equity accounts in raising capital? Under what circumstances would you not pay a dividend? Under what circumstances would you pay a dividend? Equity and Equity accounting Equity is the difference between assets and liabilities as shown on a balance sheet. In other words, equity represents the portion of assets that are fully owned by the owners (stockholders, partners, or proprietor) of a business. Equity accounting is a method of accounting whereby a corporation will document a portion of the undistributed profits for an affiliated company in which they own a position. Types of Equity accounting There are two basic types of equity accounts that most people have to worry about. ∙ The first is share equity. This is the amount that you paid the company for your shares. If your business is not incorporated, or you are using cash for personal finances, you won't have this type of account. ∙ The second is retained earnings. This account accumulates your earnings and losses from prior years. For example, if you had a net income of $1,000 in 2002, and a net loss of $50 in 2003, your 2004 opening retained earnings would be $950 (1,000.00 50.00) Role of equity accounts in raising capital: Share equity can be used to raise capital by selling stocks, preferred shared, or bonds. Retained earnings can be used to raise capital by issuing load agreement or treasury stocks. When to pay dividends and when they don’t? Sometimes companies want to invest the earning back into their business. For examples, if companies will be trying to grow a new area of their business and they'll want to plow their cash back into the business because they think they could get a strong return on their investments. Or sometimes companies won't have new areas to invest in and they feel that by paying a dividend, their shareholders can earn a better return on that cash than they can earn for them. Some companies flat out hate paying dividends. One example is Microsoft. The company is sitting on about $30 billion in cash but hasn't found any suitable ways to put it to use. Responses: Dividends can be paid in cash or in stock. Why might a company pay a stock dividend rather than a cash dividend In addition to what you wrote, I believe answer to the questions that why do companies continue to pay dividends? is a simple one Investors still demand them. Investors who need current cash flow purchase dividend paying stocks to meet liquidity demands. But they could easily achieve the same effect by selling an amount of stock equivalent to the income needed and have the same cash flow impact as long as dividend and capital gains tax rates are equal. Plus, they would determine the cash flow payment schedule. Talking about "retained earnings", it is important to note that retained earnings appears on company's balance sheet under "stockholders equity" and most commonly are influenced by income earned by the company and dividends paid out. The retained earnings account on the balance sheet is said to represent an "accumulation" because of the fact that the figure usually grows from one year to the next. Week3 What are examples of irregular items? How does a change in accounting principles affect the financial statements? Who in the organization is responsible for the application of a change in an accounting principle? Why? Irregular Items are of two types: 1) Discontinued operations refer to the disposal of a significant component of a business, such as the elimination of a major class of customers or an entire activity. 2) Extraordinary items are events and transactions that meet two conditions: They are unusual in nature and infrequent in occurrence. To be considered unusual, the item should be abnormal and only incidentally related to the customary activities of the entity. To be regarded as infrequent, the event or transaction should not be reasonably expected to recur in the foreseeable future. Changes in accounting principle are reported as irregular items on the income statement. The cumulative effect of the change is reported net of tax and is shown after extraordinary items and immediately preceding net income. The accelerated depreciation method should be used in reporting the operating results for the current year. If the change is material, the auditor should reference the change in accounting in an explanatory paragraph to the audit report. This is important because a change in accounting principles could significantly influence the financial statements of the company leading to a misleading analysis if such changes are not disclosed Responses: I like the info you've given on reporting to irregular items using income statement. From a managerial perspective, it is also important to note that in an income statement accountants report on the results of operations of an entity for a period of time. The income statement helps stakeholders such as investors and creditors predict future cash flows or the possibility of not achieving given goals setting by management. Analysts find limitation on the income statement because it does not include items that contribute to financial growth, the figures are affected by methods used, and its measures are subject to estimates. I believe that liquidity ratios demonstrate a company's ability to pay its current obligations. In other words, they relate to the availability of cash and other assets to cover accounts payable, shortterm debt, and other liabilities. All small businesses require a certain degree of liquidity in order to pay their bills on time, though startup and very young companies are often not very liquid. In mature companies, low levels of liquidity can indicate poor management or a need for additional capital. Any company's liquidity may vary due to seasonality, the timing of sales, and the state of the economy. But liquidity ratios can provide small business owners with useful limits to help them regulate borrowing and spending. Ratios are indeed important to analyze the financial health of a company. Financial ratios are calculated from one or more pieces of information from a company's financial statements. For example, the "gross margin" is the gross profit from operations divided by the total sales or revenues of a company, expressed in percentage terms. In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio can give a financial analyst an excellent picture of a company's situation and the trends that are developing. What is horizontal analysis? What is the value in using horizontal analysis? Why would a company use this analysis? What can this analysis tell me? Please explain. Horizontal analysis (also called trend analysis) measures the dollar and percentage Increase or decrease of an item over a period of time. In this approach, the amount of the item on one statement is compared with the amount of that same item on one or more earlier statements. This helps the analyst to compare the performance of the company and decide if there is a significant change in the company performance over different periods and then analyze such changes to see if an action needs to be taken. Responses: I like your insights about measurement of percentage variance by horizontal analysis. Just to add to your point, horizontal financial statement analysis compares the percentage difference in certain items over a period of time. The dollar amount of the change is converted to a percentage change. For example, a change in operating expenses from $1,000 in period one to $1,050 in period two would be reported as a 5% increase. This method is particularly useful when comparing small companies to large companies. I like the information you've given in this DQ. I believe horizontal analysis inspite of its numerous advantages, have some critical limitations like it is highly dependent on the selection of base year and the period under examination in the financial model. Also, this analysis provides little insight into why the trend occurred in a financial model. What do you think? Let's say that you do a horizontal analysis and sales are up! This is good news. You continue down the income statement and see that certain expenses are also up is that bad news? What are the three most common types of ratios? Why are they important? Which ratios would you use to determine the longterm viability of an organization? Why? The Broad Categories of ratios Broadly speaking, basic ratios can be grouped into three categories ∙ Liquidity ratios, ∙ Solvency ratios, and ∙ Profitability ratios. Importance of ratios: ∙ Importance of ratios depends on the user. ∙ Liquidity ratios are useful for short term creditors ∙ Efficiency (turnover ratios) are more important for management then other users ∙ Long term solvency and stability ratios are more useful for lenders who provides finance on long term basis ∙ Profitability and return ratios are important for investors and internal users ∙ Shareholder equity ratios are more useful for investors as investors are always interested to know what they will get from their investments. Apart from financial information the performance of the company may be evaluated by the following three indicators according to balance scorecard approach are: ∙ Customer satisfaction ∙ Process ∙ Growth/learning Financial ratios are equally important to assess the long term viability of a company in terms of its earning power or managing operational expenses. For example, Leverage ratio will indicate that the company has reasonable proportion of various sources of finance. Similarly, various profitability ratios will indicate whether or not the company is able to adequate returns to its owners consistent with the risk involved. Responses: I like your insights about use of financial ration. When talking about solvency ratio for determining company's long term viability, I would like to add that longterm solvency focuses on a firm’s ability to pay the interest and principal on its longterm debt. There are two commonly used ratios relating to servicing longterm debt. One measures ability to pay interest, the other the ability to repay the principal. The ratio for interest compares the amount of income available for paying interest with the amount of the interest expense. This ratio is called Interest Coverage or Times Interest Earned. The amount of income available for paying interest is simply earnings before interest and before income taxes. Nice DQ David. Just to take your point further, Financial ratio helps to track the long term viability of a company with the following metrics: Stockholders’ Equity Ratio: Stockholders’ Equity / Total Assets = Stockholders’ Equity RatioTotal Debt to Net Worth: Current +Deferred Debt / Tangible Net Worth = Total Debt to Net Worth RatioStockholders’ equity that is less than one to one means the company will have a hard time meeting long term debt. It doesn’t bode well for the future. Total debt to net worth of one or more means that the company has too much debt that it will not be able to pay in the long term. Companies in this position should make plans to reduce debt immediately. Ratios also help competitors compare themselves to each other. As much as we in accounting often like the transparent and full disclosures, we have to remember that not everyone who looks at a company's financial information is a friend. Also, it is important to understand that a ratio gains utility by comparison to other data and standards. Taking our example, a gross profit margin for a company of 25% is meaningless by itself. If we know that this company's competitors have profit margins of 10%, we know that it is more profitable than its industry peers which is quite favourable. If we also know that the historical trend is upwards, for example has been increasing steadily for the last few years, this would also be a favourable sign that management is implementing effective business policies and strategies. I believe that If you are a small business owner, you know that business planning in an economic downturn is difficult, particularly if you need to get a bank loan. If you need financing during a recession, you have to present a realistic business plan to your financial institution. This means adjusting your business plan to reflect the current economic conditions and looking ahead to forecast future economic events. Your financial institution will be more likely to grant you the funds you need if you indicate your understanding of the economic environment. Also, in such cases along with revenues and expenses, banks like for your business plan to include cash flow statements. Cash is the life blood of your business. You can make a profit and still not have enough cash to operate your business. You need to focus on maximizing your operating cash flows, particularly during a recession. Convert your revenues to cash flows, develop your statements of cash flow for five years, and present these to your lending institution along with your income statements and balance sheets. Week4 What are some of the various lease options? When would you use one option over the others? What could be the financial influence of this decision? There are basically two types of lease options: Operating lease and Finance lease. The basic difference between these two is there is often a call option in the financial lease but there is an option to buy in the operating lease. One advantage of the financial lease is that it has a shorter maturity terms loans. It never appears as a liability on the balance sheet, and it eliminates the need to make periodic payments as it indirectly provides a way to depreciated land. The decision of choosing lease options will impact company’s balance sheet. For example, if a lease option can eliminate the need for making periodic payment, it will increase company’s current operating income. Responses: I like your analysis of financial influence of the decision to buy or lease. An example which I could thing of is of buying a car or lease it. Now, the decision to lease a car should be based on the financial attractiveness of the lease compared to borrowing the funds to buy the same car. With a lease, ownership of the car rests with the leasing company, the lessor, which enters into a contract with the person leasing the car, the lessee, for use of the car over the term of the lease. Financially, the size of a lease payment results from the interest rate of the lease and the principal to be repaid over the lease term. Evaluation of the attractiveness of a lease is much more than a simple assessment of the proposed payment. Leases vary dramatically in their assumptions, conditions and buyout privileges, which determine economic benefits at the end of the lease term. The key difference between a finance lease and an operating lease is whether the lessor (the legal owner who rents out the assets) or lessee (who uses the asset) takes on the risks of ownership of the leased assets. The classification of a lease (as an operating or finance lease) also affects how it is reported in the accounts. In a sense I think that rent to own is somewhat predatory because in some informal circumstances this often is not spelled out in a true legal document and is more of a gentleman’s agreement. Granted that in circumstances where a legal contract is made and the terms of the agreement are spelled out and both parties agree in a legal sense I think is a proper way to do this. I have heard of agreements where a specific amount of the rent due each month goes towards the principle towards the mortgage. Now this can be very true in personal situations, but in business leases the situation can be very different. Every term of the lease might be heavily negotiated. Each side may employ lawyers to read the lease contract. There can be a much greater equality of power than in consumer leases. Under which circumstances would you lease versus purchase? What are the criteria that you would use to make this decision? What is the financial influence of this decision? A lease versus buy analysis can be performed once the decision is made to acquire an asset. While the process of analyzing the economics of buying an asset has been discussed in this document, the analysis behind the decision is slightly different. For a lease versus buy analysis, various tradeoffs need to be examined. Following criteria will be considered before making a decision: ∙ Asset tracking ∙ Asset disposal ∙ Political considerations ∙ Shortened product life cycle ∙ Technology refresh ∙ Convenience ∙ Ease of contracting Traditionally factors such as asset tracking and asset redeployment are considered to be advantageous for leasing, however, circumstances could exist which would make these factors a disadvantage. Similarly, these types of benefits could be provided through certain procurement vehicles. It is critical to be aware of all competing purchase alternatives to leasing as well as being aware of the legislative and policies directives guiding leasing. Responses: I think your example can be compared with business outsourcing. Companies like Dell, Microsoft, and Google outsource a major part of their backoffice work (e.g.. accounting, BPO, and even HR) to software and consulting companies in lowcost countries like India, China, Singapore, and Philippines, and direct their focus on activities in which they enjoy a competitive advantage. This not only helps in drastic cost cutting, but also improves overall quality of work. I agree with your point that it depends on company's financial position to choose whether to buy or lease. I thin that the lease versus buy decision is based on a comparison between the net present value of the buy alternative with the net present value of the cash flows associated with leasing. I like the insights you've given in your DQ. One circumstance which I could think of when one leases instead of purchase is availing tax benefits. Lease payments are deductible as operating expenses if the arrangement is a true lease. Ownership, however, usually has greater tax advantages through depreciation. Naturally, you need to have enough income and resulting tax liability to take advantage of those two benefits. If you were a highly paid CFO (as I hope you will be some day), would you look at the impact of leasing versus buying on your ratios? How might that influence your decision? If I may answer that. Your question point towards a common business dilemma faced by CFO of most organizations. Ratio analysis plays an important role in choosing one of the possible alternatives (lease vs. buy). For example, companies acquiring equipment must base lease vs. purchase decisions upon a capital budgeting analysis that examines financing alternatives in light of the financial impact of tax rules and accounting principles, the effect on debt structure, and corporate financial policies. Financial calculations based on four alternatives for acquiring equipment are presented, including cash purchase, purchase with 80% financing, fiveyear true lease, and fiveyear conditional sales. Companies that decide to lease equipment should base their capital budget analysis on an evaluation of the impact of leasing alternatives on financial statements, financial ratios, financial flexibility, and risk management. Issues to be considered by a company contemplating leasing include: flexibility at the end of the lease, exposure of rates to interest rate changes, and responsibility for taxes and maintenance. What are the components of the capital structure? What are the differences of these components? How do you determine the optimal mix of the components of the capital structure? The main components of a company’s capital structure are: ordinary shares, preference shares, debentures and loan stock. Ordinary shares, preference shares, debentures and loan stock. Common stock is issued to investors who have a wide range of investment goals, whether it is to be a bit more conservative or to watch it (hopefully) grow. Those who hold common stock in a company have what is known as a voting ownership in the company, whereas Preferred stock is another option. Usually, those who own preferred stock in a company are officers of the actual company, board members and wealthy investors. When you buy stocks, you become one of the owners of the company. Your fortunes rise and fall with that of the company. If the stocks of the company soar in value, your investment pays off high dividends, but if the stocks decrease in value, the investments are low paying. Higher the risk you take, higher the rewards you get. The financial impact of capital structure is on company’s profit and loss account. A balanced capital structure is in accordance with company’s long term growth strategies. Responses: Primary EPS is calculated using the number of shares that have been issued and held by investors. These are the shares that are currently in the market and can be traded. Whereas, Diluted EPS entails a complex calculation that determines how many shares would be outstanding if all exercisable warrants, options, etc. were converted into shares at a point in time, generally the end of a quarter. Companies report both primary and diluted EPS, and the focus is generally on diluted EPS, but investors should not assume this is always the case. Sometimes, diluted and primary EPS are the same because the company does not have any "inthemoney" options, warrants or convertible bonds outstanding. Simon, It is good for managers to note the mix of debt and equity, because it gives a firm picture of the financial health of the company. The higher the company's debttoequity ratio the greater the risk of a potential investment. When you mention taking risk, this is true, managers should take risks that lead to future gains for the company. One example would be to try to take out debt that is tax deductible. I believe that ensuring an optimal capital structure and securing the financing sources with the least cost of capital is as important, if not more, for corporate entities as it is for individuals. The ability of an organization to perform well in the market depends on the efficiency of its capital structure. In simple terms, the composition of the total capital of a company constitutes its capital structure. Here, total capital is the net funds available to the company after it fulfils its current liabilities. Week5 What are the components of a budget? Are the components the same for every organization? Why or why not? Should every organization forecast its operating budget? Why or why not? Basic components of a budget: ∙ A statement of the organization's goals, objectives and priorities (What do we want to accomplish? How will we accomplish this? How much will the program cost? How will the program be funded?) ∙ A specified time period to which the budget applies, e.g., July 1June 30. ∙ A method of reviewing budget plans and procedures. ∙ Budgeted financial statements: An estimated detailed income breakdown and an estimated detail expense breakdown. The basic budgetary components remain same for all the organizations, but in large companies there components are well defined, largely because of their large scale of business operations. Accurate forecasts will obviously make it easier for management to plan and execute a large number of operating activities in their company. Such activities include sustaining appropriate staffing levels, purchasing raw materials and supplies, maintaining inventory levels, properly adjusting employee incentive plans, and more. Just imagine the advantages over the competition if a company had accurate projections of how much they were going to earn and spend in the next year or two, which in turn would determine what cash flows they could expect, how many people they would need to hire, and in which markets they should focus their energy. Responses: These are some very good points you've given. I agree that budget planning is necessary, but is the importance of planning a budget is same for small and big an organization? Also, in addition to what you wrote. I would like to add that, properly forecasting the financial needs of a company is of paramount importance to effective management. To lessen the chance of financial problems, it is imperative that the manager arranges for the required financing before it is needed. Such planning will smooth the growth of the company by eliminating delays that might otherwise ensue from cash shortages. You brought up a great point reviewing the budget. Budgets are only good if they are dynamic processes. When actual results vary from the budget the reasons must be investigated and adjustments to the budget must be considered. I agree with your point that organizations need budget forecasting for achieving monetary and also nonmonetary goals. I also believe that Budgets and forecasts provide a feasibility analysis. They can help develop a business model, review your key assumptions, and identify resource and capital needs. Budgets and forecasts can be used to find funding. They demonstrate the potential of your business to investors and lenders. Budgets and forecasts can also be used as a management tool. They can help you establish milestones and require accountability for accomplishing the milestones. They can help identify risks and show benchmarks. Who are the users of financial statements? How would users differ in their views of the financial statements? Why would users rely on financial statements? What is an example of a financial measure that an external user might use? What is an example of a financial measure that an internal user might use? Here is a brief list of who uses financial statements and why. ∙ Existing equity investors and lenders, to monitor their investments and to evaluate the performance of management. ∙ Prospective equity investors and lenders, to decide whether or not to invest. ∙ Investment analysts, money managers, and stockbrokers, to make buy/sell/hold recommendations to their clients. ∙ Rating agencies (such as Moody’s, Standard & Poor’s, and Dun & Bradstreet), to assign credit ratings. ∙ Major customers and suppliers, to evaluate the financial strength and staying power of the company as a dependable resource for their business. ∙ Labor unions, to gauge how much of a pay increase a company is able to afford in upcoming labor negotiations. ∙ 7. Boards of directors, to review the performance of management. ∙ Management, to assess its own performance. ∙ Corporate raiders, to seek hidden value in companies with underpriced stock. ∙ Competitors, to benchmark their own financial results. ∙ Potential competitors, to assess how profitable it may be to enter an industry. ∙ Government agencies responsible for taxing, regulating, or investigating the company. ∙ Politicians, lobbyists, issue groups, consumer advocates, environmentalists, think tanks, foundations, media reporters, and others who are supporting or opposing any particular public issue the company’s actions affect. ∙ Actual or potential joint venture partners, franchisors or franchisees, and other business interests who need to know about the company and its financial situation. Internal users would be managers so that they can make decisions about how to manage and also see how effectively they have managed. They will use financial planning documents, company’s profit and loss accounts. External users would be potential investors, the Government, lenders, the public, unions. They will analyze financial ratios, liquidity, solvency, and profitability etc. Responses: This is nice information!.. In addition to what you have written, I think that that the purpose of a financial statement is to enable a business to establish the result of its operations over a period of time and to determine its worth at a specific date. Financial statements are often prepared by business people to assist them in evaluating their financial condition. Sometimes it is necessary to provide specific financial statements at the request of a banker or supplier. Tax returns require a financial statement when a business is involved. Inhouse monthly financial statements can be in any form that is convenient or acceptable to management. When financial statements are provided to outside parties, however, they are required to be in a standard format and follow specific rules of preparation. I like your point about critical assumption in analyzing financial statement being that past will predict future. I would also like to say that financial statements cannot be useful if they are based on unreliable and inaccurate recordings of transactions. The two main sources of financial statement inaccuracy are deliberate dishonesty and incompetence. There are two principle ways to combat these problems. The first method is to regularly hire an outside accounting firm to audit the financial statements. In an audit, the outside accountant tests reported account balances for accuracy. As importantly, the auditor tests to see that the accounting principles used in recording transactions are in conformity with GAAP and applied on a consistent basis. Putting the company's information out their publicly is always risky. Someone could get a hold of personal information of the company and used it negatively against them. I feel if it is not a "necessity" for an external user, then they should not be permitted to view such statements. Also, there is always the risk of putting everything on the internet for convenience. I would fear of hackers.
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'