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Accounting for Managers for Depreciate the Value

Question:

Discuss about the Accounting for Managers for Depreciate the Value.

Answer:

1:

(a) Straight- line depreciation method is used to depreciate the value of assets uniformly over the expected usage life of such assets. The method is used by reducing the cost of asset by salvage value and dividing the difference by number of useful life, which represents equal amount of depreciation over the useful period (Qian et al. 2016). On the contrary, double- declining balance depreciation method is used to depreciate the assets with long useful life at a rate double than the normal rate. This method is generally used by public companies that acquire expensive assets to be used for many years.

Company A

 

Cost of the Asset

$40,000.00

Residual Value

$5,500.00

Useful life

20 years

Depreciation as per Straight line method:

 

(Cost - residual value)/ Useful life

(40,000-5,500)/20

Depreciation amount =

$1,725.00

Table 1: Straight-line depreciation

(Source: Created by author)

Company B

 

Cost of the Asset

$40,000.00

Residual Value

$5,500.00

Useful life

20 years

Depreciation under double declining balance method:

 

Rate under straight-line depreciation for the first year (%)

1/20 years*100= 5%

Rate under double declining balance method (%)

5%*2= 10%

Depreciation amount

$40,000*10%

 

=$4,000.00

Table 2: double declining balance depreciation 

(Source: Created by author)

In the given problem, four-year-old Company A used straight- line depreciation in the financial statements which reflects the value of asset depreciated at uniform rate and amount in each accounting year. It represents the fair value of the asset that is essential to determine the financial position of the company. On the other hand, Company B used double- declining balance method to depreciate the asset having 20 years of useful life. Under this method, more amount of depreciation is charged at the beginning years while less at the later years. Considering the above calculation, it has been observed that the first year depreciation amounted to $1725 in company A that is lesser than that of company B amounted to $4000. It is due to the difference in using the depreciation method, company’s net profit will affect with the amount $2275 (4000-1725). It reflects the reduced income statement due to double amount of depreciation charge and low value of assets in the balance sheet. In case of straight- line method, company’s profit is reduced by the same amount each year while in case of double- declining balance method the income statement shows fluctuating reduction every year (Wiehler, Cotter and Miller 2015).

(b) Depreciation reflects a significant in preparation and presentation of the financial statements of the company. It is charged on the fixed depreciable assets in each accounting year that measures the financial performance and position of the company. Information and effect of depreciation is disclosed on three parts of financial statements i.e. statement of income, statement of financial position and statement of cash flows (Quan et al. 2015).

Income statement of the company discloses the amount of depreciation charged on the fixed assets as an operational expenditure to arrive at the net profit or loss at the end of the accounting year. It represents the amount by which the value of asset has been declined each year to determine the fair value. Although the charge is non cash transaction, it is considered as an expense for the purpose of accounting as well as taxation. Statement of financial position or balance sheet reflects the depreciation charge deducted on the opening balance of the asset to arrive at the carrying value or closing value of the asset (Ryan 2016). Information of depreciation if charged by using the methods other than the straight- line, then the charge of depreciation on each accounting year reflects the fluctuating value. Further, the information of depreciation in the statement of cash flow reflects the actual cash generation from operating activities. Cash flow statement is prepared to determine the liquid cash and cash equivalent lying with the organization at the end of accounting year. Since depreciation is non-cash charge, it is eliminated from the statement to measure the actual cash flow from business operations (Du, Guariglia and Newman 2015).

2:

Effective finance of company represents a noteworthy contribution to the growth of economy and overall performance. As small and medium sized companies consists key part of the economy, it is essential to have optimum finance structure for the benefit of the company and its members. Most common means of financing the medium sized company is using internal funds, bank loans, equities on stock market, venture capital or trade finance (Cowling et al. 2015).

In the given problem Kangaroo Express, a medium- sized company currently finances its business through 60% of non- current notes. Additionally, 20% of the amount is financed through current liabilities and balance 20% is financed through shares held by the Marsupial family members. There are other alternatives of finance that the company can consider in its business by examining the associated risk and return.

First alternative that the company can consider for finance is overdrafts and bank loans for a fixed period. Bank loan is an external source of funding that includes bank overdraft, short term or long-term loans or term loans. It is a common source of financing that most of the small and medium sized companies use to finance the capital and business fund. Kangaroo express can obtain term loans for a fixed period as an alternative to finance its business that has certain risks and returns. Term- loans are financed by the banks at fixed rate of interest as well as for fixed period to pay back the principal amount (Verbano, Crema and Venturini 2015). Under this loan facility, Kangaroo express is required to pay the interest amount at each accounting year, which the company can claim as deduction for expense. However, the risk involved in this financing is providing the security to obtain the loan and paying back the amount at the expiry of the loan period.

Another Alternative that Kangaroo express can avail for financing is venture capital that is provided by investors or by venture capital firms to the startup companies or medium sized companies. The investors provide venture financing with the expectation of growth of the companies as seed funding with the expectation to earn return on investment (Lee, Sameen and Cowling 2015). Kangaroo express can finance either 60% of its capital or even 80% of the capital to operate the business activities. However, the major risk involved in venture capital is market trend and efficient management system of business. Since, the investors invest in the company with the growth perspective to earn fair returns, it is essential to conduct the business operations effectively and efficiently. Additionally, the return implication the Kangaroo express would have through venture capital financing is the smooth flow of funds to meet the requirements of business operation.

Third alternative that Kangaroo express can obtain for financing is trade finance, which means financing of several activities with respect to trade and commerce. Such activities include issue of letter of credit, lending activities, factoring, credit and insurance activities. Trade financing is generally for short-term period used for completion of specific financial transaction (Lee, Sameen and Cowling 2015). Kangaroo express can obtain 40% of financing through this option that assist the company in obtaining funds to perform the business functions in a smoother way as well as at lower rate of interest charges. However, the risk factors that Kangaroo express can experience through trade finance are unfair prices of goods and services and regulatory framework imposed by the governing bodies.  

3: Importance of ethical behavior for managerial accounting

Ethics is an essential part of managerial accounting that the companies are required to develop while preparing and presenting the financial or accounting information. It is important to maintain the ethical behavior to recognize the financial information in true and fair view. Managerial accounting is prepared to make business decisions with respect to the production cost, sales budget, profitability forecast and other specific business decisions. Hence, unethical behavior in preparation of management accounting would lead to incorrect business decisions (Ng, Ibrahim and Mirakhor 2015).

Effect of ethical behavior in accounting

Accounting information of company reflects the performance and position of the business activities to the members and stakeholders. Ethical behavior in accounting represents transparent and fair financial information about sales revenue, costs and profits of the company. The value of assets should be ethically and fairly presented in the financial statement that assist the customers to ascertain the performance of the company (Wu et al. 2015). On the other hand, ethical behavior in accounting is important for the employees to measure the production activities and sales activities of the business. Similarly, ethical behavior in accounting provides relevant information to the suppliers with respect to account payables, transactions on requirement of materials for production. Suppliers accounting information should reflect correct balance to be paid and settled along with the discounts amount received by the company (Lehnert, Park and Singh 2015).

4: Strengths and weakness of financial statement

Financial statements of the organizations provide business and financial information to the investors and stakeholders on the performance of the company. It provides the profitability, cash flows and financial position of the business in accounting year. However, there are certain strengths and weakness of the financial statements to determine the stability and growth of the organizations.      

Considering the strengths of the financial statements, it presents the relevant information of company’s earnings, profitability, assets, liabilities and capital to make several business and investment decisions. The statement of income, balance sheet and cash flow represents the liquidity of the company, valuation and accounting policies of the company. It also presents the capital returns, earnings on shares, dividend payment and debts obtained by the company that helps the investors to make investment decisions (Ball, Li and Shivakumar 2015). On the contrary, as a weakness of the financial statements, it does not reflect the relevant changes in financial position of the business. Sometimes the reported value of assets and liabilities are not directly obtained or related to the company. Therefore, the balance sheet statement does not reflect the true and relevant financial position of the organization. However, in general case most the company’s financial statements are audited to reflect the true and fair financial information to determine the sustainable growth of the business.

Analysis from standard set of financial statements

The statement of financial statements comprises of statement of income, balance sheet and cash flow. Company’s earnings in the accounting year including profitability, direct, indirect expenses and other business operation activities is recognized in the income statement. From the analysis of the company’s financial statement, its profitability percentage, liquidity, cash flows from operations, finance and investment can be judged (Amiram, Bozanic and Rouen 2015).

Limitations of financial statement

There are certain major limitations of the financial statements of the company that includes representation of approximate value instead of inaccurate values. Although the statements are presented for each accounting year, yet there are certain transactions that take place after the preparation of financial statements, which may sometimes remain unrecorded.  Another limitation is presenting the financial statements at historical cost in case of assets valuation that does not reflect the fair valuation. Financial statements also ignore the impact of non- monetary aspects that reflects essential part of the company’s performance and financial position (Sridharan 2015).

Supplier’s ability to remain in business

Ability to remain in business to a great extent can be examined by the financial information. In case of supplier’s ability to avoid cash flow problems and financial stability can be obtained by examining the current profitability and capital employment. Further, several financial ratios and return of capital can be determined from the information of financial statements to judge the liquidity. In order to analyze the company’s ability to employ additional capital for growth amount of retained earnings and payment ratio to shareholders should be examined. In case the company has low dividend payout ratio then there is probability to employ additional capital (Ryan 2016).

Reference List

Amiram, D., Bozanic, Z. and Rouen, E., 2015. Financial statement errors: evidence from the distributional properties of financial statement numbers.Review of Accounting Studies, 20(4), pp.1540-1593.

Ball, R., Li, X. and Shivakumar, L., 2015. Contractibility and transparency of financial statement information prepared under IFRS: Evidence from debt contracts around IFRS adoption. Journal of Accounting Research, 53(5), pp.915-963.

Cowling, M., Liu, W., Ledger, A. and Zhang, N., 2015. What really happens to small and medium-sized enterprises in a global economic recession? UK evidence on sales and job dynamics. International Small Business Journal,33(5), pp.488-513.

Du, J., Guariglia, A. and Newman, A., 2015. Do Social Capital Building Strategies Influence the Financing Behavior of Chinese Private Small and Medium‐Sized Enterprises?. Entrepreneurship Theory and Practice, 39(3), pp.601-631.

Lee, N., Sameen, H. and Cowling, M., 2015. Access to finance for innovative SMEs since the financial crisis. Research policy, 44(2), pp.370-380.

Lehnert, K., Park, Y.H. and Singh, N., 2015. Research note and review of the empirical ethical decision-making literature: Boundary conditions and extensions. Journal of Business Ethics, 129(1), pp.195-219.

Ng, A., Ibrahim, M.H. and Mirakhor, A., 2015. Ethical behavior and trustworthiness in the stock market-growth nexus. Research in International Business and Finance, 33, pp.44-58.

Qian, C., Fan, X.J., Fan, J.J., Yuan, C.A. and Zhang, G.Q., 2016. An accelerated test method of luminous flux depreciation for LED luminaires and lamps. Reliability Engineering & System Safety, 147, pp.84-92.

Quan, C., Xiaobing, L., Qi, C., Kai, W., Sheng, L. and Jingyan, L., 2015. Research on lumen depreciation related to LED packages by in-situ measurement method. Microelectronics Reliability, 55(11), pp.2269-2275.

Ryan, S.G., 2016. Discussion of “Were Information Intermediaries Sensitive to the Financial Statement‐Based Leading Indicators of Bank Distress Prior to the Financial Crisis?”. Contemporary Accounting Research, 33(2), pp.607-615.

Sridharan, S.A., 2015. Volatility forecasting using financial statement information. The Accounting Review, 90(5), pp.2079-2106.

Verbano, C., Crema, M. and Venturini, K., 2015. The Identification and Characterization of Open Innovation Profiles in Italian Small and Medium‐sized Enterprises. Journal of Small Business Management, 53(4), pp.1052-1075.

Wiehler, D., Cotter, C.M. and Miller, G.S., 2015. Method and apparatus preventing waste of us federal low income housing tax credits available for a mixed-income real estate projects having low-income units and market-income units. U.S. Patent Application 14/833,625.

Wu, L.Z., Kwan, H.K., Yim, F.H.K., Chiu, R.K. and He, X., 2015. CEO ethical leadership and corporate social responsibility: A moderated mediation model. Journal of Business Ethics, 130(4), pp.819-831.

 

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