College Accounting Coach

WHAT ARE THE UNDERLYING ASSUMPTIONS AND CONSTRAINTS IN THE PREPARATION OF THE FINANCIAL STATEMENT. ALSO EXPLAIN WHAT ARE THE DIFFERENCE BETWEEN ACCOUNTING POLICIES AND ACCOUNTING PRINCIPLES.

slang — Sun, 08 Nov 2009 12:52:31 +0000

When preparing and presenting the financial statements, there is a common understanding of the underlying assumptions and constraints.
Underlying assumptions are those principles, concepts or practice that entities are assumed to apply when preparing the company’s financial statement which are as follows:

Accrual basis which requires transactions and events to be recognized when they occur. The revenue for the year is matched with the expenses incurred in earning that revenue
Going concern assuming that the entity will continue to be in operation for the foreseeable future. It has no intention to liquidate or reduce the size of its operations.

In the case of constraints which are trade-off between relevance and reliability which are affected by factors like timeliness, cost benefits, balance between qualitative characteristics and true and fair view.

Accounting Principles definition:-

Are conventions that have evolved over time
Conventions which include Entity concept, going concern, materiality, prudence, accruals and consistency concept

Accounting Policies definition:-

Which are methods, procedures or bases chosen by the company to record and present events and transactions
Management need to choose the most acceptable accounting policies to represent or account for the various transactions and to present information in the company’s financial statement. One typical example is on inventory which can be valued based on various alternatives like FIFO, LIFO, Weighted average basis
The Accounting policies of a company is shown under the section of Notes to the financial statement.

ABOUT MALAYSIAN FINANCIAL REPORTING STANDARDS(FRS)

slang — Sun, 08 Nov 2009 05:47:35 +0000

In line with the objectives of converging to International Accounting Standards Board(IASB) the Malaysia Financial Reporting Standards(FRS) was incepted in 2006 which is applicable to all entities except for private entities.

Compared to other counterparts like USA, China, India and others, Malaysia can be considered to have an early start. Malaysia, by ensuring the full compliance with IFRS vide the adoption of the following Malaysia financial reporting standards(FRS) should then be able to ensure the comparability and uniformity of the financial statements with other global multinational companies:-

SUMMARY OF MALAYSIAN FINANCIAL REPORTING STANDARDS(FRS)

FRS
	Framework For Preparation and Presentation of Financial Statements
1	First-time Adoption of Financial Reporting Standards
2	Share-based Payments
3	Business Combinations
5	Non-current Assets “Held for Sale” and Discontinued Operations
6	Exploration for and Evaluation of Mineral Resources
101	Presentation of Financial Statements
102	Inventories
107	Cash Flow Statements
108	Accounting Policies, Changes in Accounting Estimates and Errors
110	Events After the Balance Sheet Date
111	Construction Contracts
112	Income Taxes
114	Segment Reporting
116	Property, Plant and Equipment
117	Leases
118	Revenue
119	Employee Benefits
120	Accounting for Government Grants ad Disclosure Of Government Assistance
121	The Effects Of Changes in Foreign Exchange Rates
123	Borrowing Costs
124	Related Party Disclosures
126	Accounting and Reporting By Retirement Plans
127	Consolidated and Separate Financial Statements
128	Investments in Associates
129	Financial Reporting in Hyperinflationary Economies
131	Interests in Joint Ventures
132/(ED56) 139	Financial Instruments: Presentation, Disclosure, Recognition and Measurement
133	Earnings Per Share
134	Interim Financial Reporting
136	Impairment of Assets
137	Provisions, Contingent Liabilities and Contingent Assets
138	Intangible Assets
140	Investment Property

WHAT IS THE DIFFERENCE BETWEEN THE TERM AMORTIZE AND DEPRECIATE

slang — Sat, 07 Nov 2009 23:36:08 +0000

Question:

Sometimes, we are confused by the term amortize and depreciate. Some even say that they are the same as both terms are used in depreciation accounting.

Answer:

Similarities of amortization and depreciation:

Both amortization and depreciation are alike in the sense that the non-current assets are been expensed/write off systematically to the Income Statement following the matching concept.
The accounting entries for both amortization and depreciation are the same:

Debit: Income Statement(Amortization or Depreciation Account)

Credit: Non-current assets ( Goodwill, leases, Plant & Machinery,office equipments)

Difference:

However, amortization is related to the write off of INTANGIBLE assets like goodwill and leases

whereas:

Depreciation is toward the process of writing off TANGIBLE assets like plant and machinery, motor vehicles, furniture & fittings, office equipments

Balance Sheet Example,What is The Horizontal and What is the Vertical Presentation Method Of Preparing A Balance Sheet

slang — Fri, 06 Nov 2009 13:32:15 +0000

Earlier article we have describe what is a balance sheet re:a Balance Sheet is called the Statement of Financial Position what is a snapshot of a company’s financial position at a particular point in time. The Accounting equation which is Assets= Liabilities+ Stockholder’s Equity is closely link to the Balance Sheet. Because of this accounting equation and the double entry system, the Balance sheet will always agree or tally.

This article descibes the two ways/formats of preparing the balance sheet.

Balance sheet example using the horizontal presentation method:

Horizontal Presentation

Note that the horizontal presentation uses a format that present assets on the left and liabilities and equity on the right

ABC Company

Balance Sheet As at July 31st 2008

Assets		Liabilities & Stockholders’ Equity
	$		$
Current Assets		Current Liabilities
Cash	10,000	Accounts payable	15,000
Accounts Receivable	20,000	Salaries Payable	9,000
Inventories	30,000	Total Current Liabilities	24,000
Deposits, prepayments	5,000	Bonds payable	20,000
Total Current Assets	65,000	Mortgages	35,000
		Total Liabilities	79,000
		Stockholders’ equity
Property, plant and equipment, net	55,000	Common stock	50,000
Intangible assets	10,000	Retained earnings	1,000
Total Assets	130,000	Total Liabilities and Stockholders’ equity	130,000

Balance sheet example using the Vertical presentation method:

The vertical presentation show the assets followed by liabilities and equity directly below the assets.

ABC Company

Balance Sheet As At 31st July 2008

Assets
Current Assets
Cash	10,000
Accounts Receivable	20,000
Inventories	30,000
Deposits, prepayments	5,000
Total Current Assets	65,000

Non Current Assets
Property, plant and equipment, net	55,000
Intangible assets	10,000
Total Non Current Assets	65,000
Total Assets	130,000
Liabilities & Stockholders’ Equity
	$
Current Liabilities
Accounts payable	15,000
Salaries Payable	9,000
Total Current Liabilities	24,000

Non Current Liabilities
Long Term Bonds payable	20,000
Mortgages	35,000
Total Non Current Liabilities	55,000
Total Liabilities	79,000
Stockholders’ equity
Common stock	50,000
Retained earnings	1,000
Total Liabilities and Stockholders’ equity

Income Statement Example And The Single Step & Multiple Step Income Statement

slang — Fri, 06 Nov 2009 13:18:13 +0000

Question:

What is Single Step Income Statement and Multiple Income Statement, and what are the advantages and disadvantages of using them.

Answer:

Basically, there are two format namely the Single Step Format and Multiple-Step Income Statement.

Single Step Income Statement Example is as follows:

Single Step Income Statement

	$
Revenues
Net Sales	180,000
Gains	10,000
Total revenues	190,000
Expenses
Cost of goods sold	55,000
Selling and administrative expenses	24,000
Interest expenses	10,000
Losses	8,000
Income tax expenses	15,000
Total expenses	112,000
Net Income	78,000

Multiple Step Income Statement Example is as follows:

Multiple Step Income Statement

	$
Net Sales	180,000
Cost of goods sold	55,000
Gross Profit	125,000
Selling and administrative expenses	24,000
Operating Profit	101,000
Other revenues and gains	10,000
Other expense and losses	18,000
Pretax income from continuing operations	93,000
Income tax expenses	15,000
Net Income	78,000

Salient points to note:

Whether you use the Single Format Income Statement or Multiple Step Income Statement, you will still get the end result/bottom line re: same net income.

The advantages of using the multiple step income statement format are:

It clearly display important financial and managerial information
the four measures of profitability are revealed at four critical areas of a company’s operation namely gross profit, operating profit/operating income, pretax income and after tax net income

The advantage of the single step format of Income Statement, is that is relatively simple to prepared and understand however, the gross and operating income figures are not stated which need to be computed.

WHAT IS CONTRIBUTION ACCOUNTING AND THE DIFFERENCE BETWEEN CONTRIBUTION AND NET PROFIT. EXPLAIN WHAT IS CONTRIBUTION, CONTRIBUTION COSTING, AND CONTRIBUTION GRAPH.

slang — Tue, 03 Nov 2009 13:42:23 +0000

Contribution is:

The difference between selling price and variable costs.
Can also be called “contribution towards fixed costs and profits”
This is because contribution is available to pay the fixed costs of a business and once the fixed costs are covered the contribution becomes the profit of the entity
Often seen in profit statement under marginal costing method.

Contributing accounting:

focuses on identifying fixed and variable costs and calculates the total contribution generated by a business. The total fixed costs are then deducted to give the net profit.

See below for the difference between Contribution and Net profit

Income Statement of Company XYZ

	$	$
Sales		100,000
Less: Variable costs-direct wages	20,000
Variable costs-direct materials	10,000	30,000
Contribution		70,000
Less:
Fixed costs-factory overheads	50,000
Fixed costs-administrative overheads	10,000	60,000
Net Profit		10,000

Contribution costing:-

Values a product using only the variable costs incurred in its production

Contribution pricing:

Sets the selling price of a product at a value below total unit cost but one that will cover variable costs.
Used in short-term decision-making so that the pricing is able to give a positive contribution that is able to cover variable cost to contribute towards fixed costs and profits

Contribution Graph:

An alternative presentation of a break-even chart. Sales revenue is graphed from the origin as in a traditional break-even chart. Variable costs are also graphed from the origin and then fixed costs are built onto the variable costs.

WHAT IS FAIR VALUE ACCOUNTING, ITS USEFULNESS AND LIMITATION

slang — Tue, 20 Oct 2009 10:40:24 +0000

Question:

I understood historical cost accounting but what is fair value accounting. How useful or how is fair value accounting been justified and are there any limitations when accounting experts use such accounting basis?

Answer:

(a) What is fair value accounting:-

Fair value accounting is a financial measurement methodology permitted by accounting standards which allows companies to measure certain assets and liabilities at fair value or market value.
Please note that under fair value accounting, when the fair value of the company’s assets decrease or liabilities increase, the company will treat and report such gains or losses directly into the Income statements or sometimes in the Statement of Equity changes.

(b) How useful is fair value accounting:-

To understand how useful is fair value accounting, we first need to understand the limitation of applying the historical cost accounting concept/principle.
Applying historical cost accounting enables the company’s balance sheet to be reliable and not subjective as it is based on verifiable historical costs. However, it mean that the financial statements might not useful for decision making as assets acquired years ago and newly acquired assets do not have the same costs and hence have different carrying values even though their respective current values may be the same. Historical cost information for assets has no economic relevance to the buy, sell, hold decisions hence is not useful to managements for making the relevant decision making.

© Why fair value accounting:-

The main support for fair value accounting is mainly based on relevancy.{ note that the four attributes of a financial statement are able to be understand, relevance, reliable and comparable} as the assets or liabilities are based on market valuation.
It is interesting to note that during periods of growth and downturns, fair value account accentuates the volatility of the financial statements. {rising and falling prices of assets or liabilities}. However, accounting experts felt that Balance sheet using fair value as a basis of measurement gives a better reflection of actual worth of the company.

(d) Limitations of fair value accounting:

Fair value accounting is drastically limited when the assets and liabilities are not quoted in an active market or when there are infrequent or no transactions for the kind of assets or liabilities held by the entity.

In such situations, financial reporting standards suggests the use of acceptable valuation models to estimate fair value(mark-to-model measurement).

(e) Salient point when an entity uses fair value accounting:-

It is important that when companies using fair value accounting basis of measurement need to make adequate and robust disclosures in their financial statements as to the valuation processes and methods used in determining the fair values, what the significant estimates are and the assumptions used as inputs.

No related posts.

Explain What Are Stock Reorder Level, Maximum, Minimum and Safety or Buffer Stock Level, Their Purpose And Formula.

slang — Wed, 14 Oct 2009 15:16:51 +0000

Question:

Explain what is stock reorder level, what is it for and the formula to compute this stock reorder level.

Also explain what is Maximum, Minimum and Safety Stock level

Suggested Answer:

Stock Reorder Level, Purpose & Formula:

Stock reorder level indicates to the stock controller when it is necessary to reorder certain raw materials or components.

The purpose of using this stock reorder level is to enable management to ensure there is sufficient stocks to meet demands from the production department.

Formula=Maximum usage x Maximum lead time

Illustrated Example on how to compute Reorder Stock Level

Company X which is a manufacturer has a maximum usage of 5,000 units of component TX1 per week. The supplier of this component has a maximum lead time of 5 weeks.

Required: Compute the reorder level for component TX1.

What Is Moving Average And Is It Used And Applied?

slang — Wed, 14 Oct 2009 12:24:28 +0000

Question:

I was asked by management to use moving average method to do the cash collection forecast.

Can you tell me:

(a) What is moving average

(b) How is it use and applied and who commonly uses it.

Suggested Answer:

(a) What is Moving Average:

A moving average is an average that is being revised as new information is received.
Accountants normally use the moving average to compute forecast as it represent the most recent observations.

Illustrated Example on how to compute Moving Average:-

Simply take the most recent observations to compute an average and update these observations continually as new data becomes available

Mr. A, the accountant has the following cash inflow data:

Month	Cash collection $’000
March	30
April	40
May	50
Jun	20
July	30
August	60

Using the FIVE-month moving average, cash collection forecast in September is computed as follows:

(40+50+20+30+60)/5=40 = $40,000

(b) Hence, the moving average is a prediction model used commonly by forecasters. The forecasters can select the number of periods to use on the basis of the relative importance attached to old data versus current data.

Explain What Are Stock Reorder Level, Maximum, Minimum and Safety or Buffer Stock Level, Their Purpose And Formula.

What Are the Usual Features, Advantages or Benefits And Examples Of Management Reporting Obtained From A Computerized Accounting System.

slang — Wed, 14 Oct 2009 09:59:43 +0000

Question:

I just joined a small company where it is in the midst of acquiring a computerized accounting system. May I know:-

(a) What are the usual features that are available in such system

(b) Advantages of a computerized accounting system

(c ) Give examples of some management reports which are automatically generated.

Answer:

(a) Some of the features that are available in a computerized accounting system includes the following:

On-screen input and printout of sales invoices
Automatic updating of customer accounts in the sales ledger
Recording of suppliers’ invoices
Automatic updating of suppliers’ accounts in the purchases ledger
Recording of bank receipts
Making payments to suppliers and for expenses
Automatic updating of the general ledger
Automatic adjustment of stock records
Integration of a business database with the accounting program
Automatic calculation of payroll and associated entries
Ability to import and export data ( e.g. import from excel spreadsheet to computerized system or vice-versa)
Able to allow direct emailing and faxing of accounting documents such as invoices and receipts to people directly from the program.
Ability to deal with multiple currencies

(b) Main advantages or benefits obtained from having a computerized accounting system:

Accuracy – there is less room for errors as only one accounting entry is needed for each transaction rather than two (or three) for a manual system.
Up-to-date information – the accounting records are automatically updated and so account balances (e.g. customer accounts) will always be up-to-date.
Speed – data entry onto the computer with its formatted screens and built-in databases of customers and supplier details and stock records can be carried out far more quickly than any manual processing.
Cost savings – computerized accounting programs reduce staff time doing accounts and reduce audit expenses as records are neat, up-to-date and accurate.
Management information – reports can be produced which will help management monitor and control the business, for example the aged debtors analysis will show which customer accounts are overdue, trial balance, trading and profit and loss account and balance sheet.
Automatic document production – fast and accurate invoices, credit notes, purchase orders, printing statements and payroll documents are all done automatically.
Availability of information – the data is instantly available and can be made available to different users in different locations at the same time.
GST/VAT return – the automatic creation of figures for the regular GST/VAT returns.
Legibility – the onscreen and printed data should always be legible and so will avoid errors caused by poor figures.
Efficiency – better use is made of resources and time; cash flow should improve through better debt collection and inventory control.
Staff motivation – the system will require staff to be trained to use new skills, which can make them feel more motivated. Further to this with many ‘off-the-shelf’ packages the training can be outsourced and thus making a particular staff member less critical of business operations.
Reduce frustration – management can be on top of their accounts and thus reduce stress levels associated with what is not known.
The ability to deal in multiple currencies easily – many computerized accounting packages now allow a business to trade in multiple currencies with ease. Problems associated with exchange rate changes are minimized.

(c ) Some major management reports generated from the computerized accounting system include the following:

Aged debtors’ summary – a summary of customer accounts showing overdue amounts
Account payables’ summary- a summary of creditors showing amount owing at due dates
Trial balance, trading and profit and loss account and balance sheet
Stock valuation
Sales analysis
Budget analysis and variance analysis
GST/VAT returns
Payroll analysis

Click below to see other useful articles on computerized accounting system:

What are the advantages and disadvantages of computerized accounting systems

Comparison of the steps of an accounting cycle under the Manual system and under the Computerized system.

Internal Control in a Manual and Computerized Accounting Environment

Characteristic and difference between Batch And Online Processing.

Factors To Consider when buying a small business accounting software.

Question On Computerized Accounts.