Decision Making for Financial Reporting and Accounting

Describe about the Decision Making for Financial Reporting and Accounting.

Solution: 1

Income Statement of Cararat Ltd.

1. Income Statement Declaring rebate before 30th June 2016
Income	Amount $
Rental Income	100000
Rebates	750000
Gross Income		850000
Salaries	100000
Rebates Payable	300000
Other Expenses	210000
Total Expenses Before Interest		610000
Earnings Before Interest and Tax (EBIT)		240000
Interest Expenses		45000
Earning Before Tax (EBT)		195000
Tax Expenses @ 30%		58500
Net Earning After Tax		136500
Dividends		200000
Net Earning After Tax and Dividends			-63500
Net Profit Margin	EBIT/Gross Income
	240000/850000*100       = 28.24%

 

2. Income Statement Declaring rebate after 30th June 2016
Income	Amount $
Rental Income	100000
Rebates	750000
Gross Income		850000
Salaries	100000
Other Expenses	210000
Total Expenses Before Interest		310000
Earning Before Interest and Tax (EBIT)		540000
Interest Expenses		45000
Earning Before Tax (EBT)		495000
Tax Expenses @ 30%		148500
Net Earning After Tax		346500
Dividends		200000
Net Earning After Tax and Dividends			146500
Net Profit Margin	EBIT/Gross Income
	540000/850000*100       = 64.52%
Bank requires minimum net profit margin of 30% for funding the Building Cost.

 

Before declaring the Rebate
Balance sheet of Carart Ltd.
Liabilities		Amount $	Assets	Amount $
Current Liabilities			Current Assets
Staff Superannuation		25000	Cash at Bank	250000
Dividend Payable		200000	Rebates Receivable	750000
Total Current Liabilities		225000	Total Current Assets	1000000
Non- Current Liabilities			Non- Current Assets
Bank Loan		650000	Land & Building	1000000
Total Non- Current Liabilities		650000	Total Non- Current Assets	1000000
Equity
Share Capital		40000
Retained earnings		1085000
Total Equity		1125000
Total Liabilities		2000000	Total Assets	2000000

Earnings of the company after allowing rebate are 28.24% and before allowing rebate is 64.52%. The Company is required fund to fulfil the requirement of working capital. The Bank is required minimum profit margin of 30%. Hence the company shall make balance between profit margin and funding. The Company shall maintain the profit margin of 30% or more. The Company shall not allow rebate before funding. (Accounting Tools, n.d.)

Solution: 2

Earning Management

Earning Management is the use of the accounting techniques. Accounting techniques are used by the management to present financial statement and reports in the positive view. In preparation of the financial statement, accounting rules and principal require the management decision. They select the appropriate accounting rules in the preparation and presentation of the financial statement. Earning management take the advantage of how the accounting rules applied and create the financial statement that inflated the earnings and profits. Companies use the earning management to smooth out the increase/decrease in the profits to show the consistent profits. (Hitt R, n.d.) A change in the accounting policy is to be disclosed in the footnote of the financial statement to explain the changes to the reader of the financial statement. A reader of the financial statement can compare the company’s financial statement if the company follow consistent accounting policies. Above case is representing the earning management that means decision of the management for rewarding the rebate before 30th June or after 30th June. If the company declares the rebate before the 30th June than the company's net earnings before interest and tax current is only $240000 and net profit margin is 28.24% which is lower the bank's minimum margin requirement. The decision of declaring the dividend affects the banks decision for funding to the company for acquiring the building. If the company declare the rebate after 30th June than company's Net earnings before interest and tax is $540000 and net profit margin is 63.52%. This decision fulfils the bank’s condition of minimum net margin requirement. Hence the decision of declaring the dividend after 30th June is Earning Management which is good for the company. This decision of the company helps in getting the funding from the bank. (Investopedia, 2015)

Solution: 3

Recommendation with a letter to Board:

Advise Letter to the Carart Board

To

The Board of Director,

Carart Limited

Sub: Impact of the Rebate declaration before or after 30th June 2016.

Board members of the carart Limited, as per the projected financial statement for the year Ended 30th June 2016. it Show that the carart limited have earning from two sources one of the is  Rebates received from its supplier, another earning of the company is from Rent. Commercial rental building is acquired by the company with the bank funding of the $650000 for which bank impose the Condition that company should earn at least 30% net profit margin (Earning Before Tax and interest/ Gross Income).In the rebate earning all the shareholder contributes. However half of the rebate income is contributed by only one share holder. The Board is considering for rewarding this shareholder by paying out a rebate to them of $ 300000. As per the above Calculation, considering both the cases (1) declaring the rebate before the 30th June and (2) declaring the rebate after 30th June. (AEE, n.d.)

If the company rewarding the rebate to the shareholder of $300000 before 30th June than the company have earnings before interest and tax $240000 and net profit margin is 28.24% which less than the Bank minimum net profit margin requirement. Similarly the net earnings after tax are only $136500 which is also less than the dividend declared by company of $ 200000. (Sharma A, 2016)

With the above analysis, we are advising to the board that the rebate would be declared after 30th June 2016. Declaration of the rebate after 30th June would result in the net earnings before interest and tax is $540000 and net profit margin is 63.52% that fulfils the bank minimum net margin requirement. Shareholders also rewarded with the Dividend if the profits are high. More return will result into increase in net worth of shareholders and finally fulfil the goal of the Organisation. Also the satisfaction of the stakeholders is improve the efficiency of the company to raise the loan. (Investopedia, n.d.)

Conclusion:

After considering the all the facts we can conclude that rebate should be declared after 30th June. This rebate expenses will be the part of next year expenses and debited to the profit and loss account in the next year. Bank imposes the minimum net margin condition only for the current year. If the company not meet the bank net margin requirement in the next year then it has no effect on the bank decision for funding. The Company can make the note in notes to accounts of the financial statement of the current year for the rebate expenses. (Singhal D K, 2015)

The Company shall comply with the accounting standard as for the purpose of financing from Bank, company cannot ignore the accounting requirement. Hence the Company shall disclose in the notes to account that due to condition of the bank, rebate expenses are charged in the next year. (Coursera, n.d.)

References:

Singhal  Dharmendra  Kumar, 2015, Financial Reporting, Jaipur, Uttkarsh Publication

Sharma Anil, 2016, Accounting, Jaipur, Uttkarsh Publication

Investopedia, 2015, How does financial accounting help decision making?,

Investopedia, n.d., Earning Management,

Hitt R, n.d., Earnings Management: Definition, Techniques & Examples,

Accounting Tools, n.d., The Income Statement,  

AEE, n.d., Financial Decision Making,

Coursera, n.d., Corporate Financial Decision-Making for Value Creation, ,

 

To get the best coursework help in the UK, students should go for MyAssignmenthelp.co.uk. Students from some of the most renowned universities have chosen us including those from Edinburg University, University of Leeds and more. We have completed over 60,000 assignments providing high quality coursework writing help services to thousands of students.