Explain why accounting information is generally considered to be useful, and why you need to know the basics of accounting.
Every business concern deals with financial transactions, which includes a lot of quantitative information. These quantitative information of financial transactions need to be recorded in a systematic manner to make the financial information useful in making management decisions. In this case, Accounting fits the detailed principles, methods and procedures to calculate and find different financial reports and recordings. As finance is regarded as the most sensitive factor for an organization, it is needed to take care the financial transactions with utmost care. Accounting produces different types of statements and reports which includes: profit & loss account or income statement, balance sheet or statement of financial position, cash flow statements, funds flow statements, cost sheet and different financial ratios to make a thorough analysis of the quantitative records of financial transactions of a business to judge the financial capability. (Kwak, 2009)
In this 21st century the business is going to more complex and dynamic to handle it comfortable. But thanks to Accounting that made the recording of quantitative information of all types of financial transactions easy and comfortable for the business. By using it I can obtain various necessary information to grow the business as well as to know the strength and weakness of my business. It also helps in easy cash flow due to the systematic recording of all types of cash transactions happen in my business. I can compute and analyse the growth rate whenever I wish to, that may be monthly, quarterly or yearly. The use of accounting not only enabled me to be more comfortable but also I am quite sure about the security of my business. In this way it is clear that it is an essential thing for me to know the basic of accounting. (Importance business accounting, 2015)
Sonumatics in New South Wales, Australia, is a computer firm run by Max Brenner and his family. Max intends to sell the shares of this firm to investors on the Australian Securities Exchange (ASX). This would mean that the firm would ‘go public’ which will result in investors having a say in the management of the firm. Max is worried about losing control of the business, which his family has owned for generations. He did not have to provide a lot of accounting information to outsiders and doesn’t like the prospect of interference with a business that he believes he knows better than anyone else.
As a close friend of Max, you have been asked to advise him on the implications of being listed on the ASX for the management of his firm. Refer to the ASX’s principles of good corporate governance on their website at http://www.axs,cin,ay/regulation/corporate-governance-council.htm in providing your answer to Max’s question. How do you think these principles might help firms to be run ethically?
As per the guidelines and principles of good corporate governance produced by Australian Stock Exchange in their website (ACX, 2014) Max should follow and structure his organization Sonumatics to get a good hand in the control of the company affairs. As Max has decided to make available the shares of the company to sell it in the public, so he should be aware about the future out comings of this decision. Max should accommodate himself to follow the principles and guidelines mentioned in the corporate governance. The only way it can manage the interference of the shareholders in the company’s internal affairs is to produce a satisfactory performance which would keep the voice shut of the shareholders.
As per the principles explained by ACX, Max should obey certain guidelines. Max should establish a good network and disclose the roles and responsibilities of its board members as well as the management to the shareholders to attain a good understanding with them. The board should not contain inappropriate number of members as well as who are lack of skill, commitment and experience. The board of directors and the managerial people of Sonumatics should not involve themselves in unethical or fraudulent activities. Which may tarnish the image of the company. The strategical process shouldn’t be complex to understand, as it may make confusion in the mind of the shareholders about the financial status of the company and may allow them to ask different types of questions to the management. The company should produce timely reports, statements and balanced disclosures to the public to show a growth rate and good performance. It would satisfy the shareholders and will keep their voice down. The management of the company should aware about the timely information needed to provide to the shareholders, failure to which may create the unnecessary questions on the performance of the company. Sonumatics should manage the business risk effectively and efficiently by the use of appropriate business strategies. The company shouldn’t make any type of negligence in supplying appropriate dividend to its shareholders and a good pay structure to the company employees, it will help in increasing the company image in the public. In this way Max can utilize these guidelines to manage the future happenings when the company starts selling its shares in public.
Consider the following statement of financial position of a manufacturing business:
Turner manufacturing Co.
Statement of financial position as at 30 April 2016
Particulars
$
$
Current assets
Cash at bank
12,000
Accounts receivable
44,000
Inventory
48,000
104,000
Non-current assets
Fixtures and fittings
14,000
Motor vehicles
13,000
Plant and machinery
46,000
Freehold premises
88,000
161,000
Total assets
265,000
Current liabilities
Accounts payable
24,000
Bank overdraft
18,000
42,000
Non-current liabilities
Loan
160,000
Total liabilities
202,000
Owners’ equity
Opening balance
42,000
Add profit
32,000
74,000
Less drawings
11,000
63,000
Total liabilities and owners’ equity
265,000
What does this statement tell you about the financial position of the business?
From the above balance sheet or statement of financial position of Turner manufacturing company the current ratio is 2.47, which means the current asset is more than the twice of the current liability of the business concern and shows a satisfactory performance. The quick ratio stays at 1.33, which is also a satisfactory record for Turner manufacturing company. The current cash debt coverage ratio of Turner manufacturing company is only .29, which can be a headache for the company in meeting the current liability in practical sense. There are capital of 42000 in the balance sheet and the organization is running on a loan of 160000. The loan is around three times of owner’s equity, which is not a good point for an organization. It should minimize the loan and show a strong capital in the balance sheet. The debt ratio is 0.67, which is not a bad figure for an organization. The debt-to-equity ratio is more than 3 times, which signs a negative figure as the company may face trouble in satisfying the liabilities in emergency situations. Overall the Turner manufacturing company shows an average performance in the competitive market. To overcome the situation, Turner manufacturing company should focus to increase the profit by giving a good figure of sales revenue. It should aim to maintain a less amount of liability which can enhance the equity position of the company.
However a business is organised, it must meet the needs or demands of various stakeholders.
What are the different types of business structure?
A business concern can be of many types including sole proprietorship, general partnership, limited partnership, private limited company, public limited company, joint venture, co-operative society, Non-profit organization, trust and corporation. (Business structure, 2017)
What is meant by the term ‘stakeholder’?
A stakeholder is a party who keeps his interest in the internal as well external happenings of a business organization. He also may get affected for the growth or failure of a business. A stakeholder may get reward or may loose due to the fluctuation in the financial as well as nonfinancial transactions of a business concern. (Techtarget, n.d.)
Who are the stakeholders for each type of business?
The stakeholders can be of two types, namely primary and secondary stakeholders. The managers, board members, employees, customer, supplier and investors are the primary stake holders of a business concern. In the other hand government, trade associations and communities are the secondary stakeholders of a company. (Stakeholder, n.d.)
What are their needs or demands, and why should they be met?
Stakeholders are the important entities of a business concern. Without which a business can’t grow. So it is essential to meet their needs to achieve the business goal easily. Their needs could be a qualitative product & service, true information about the company, regular communication, project evaluation reports, a well defined mission, vision & value and regular growth status of the business concern. (Understanding the needs, n.d.)
Will stakeholder demands affect the choice of business structure?
Yes, the stakeholders affects the choice of business structure greatly. As stakeholders are directly related to the business concern, so the structure associated with the business impacts the present and future of a business and the results derived from it affects the stakeholders both financially and non-financially. The business structure derives the style of business transactions, which may influence the stakeholders’ interest both positively or negatively. (How stakeholders are, n.d.)
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References
ASX website. (2014, July 1). Corporate governance Council. Retrieved from http://www.asx.com.au/regulation/corporate-governance-council.htm.
Business website. (2017, February 8). Business structure. Retrieved from https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure.
Businessknowledgesource.com website. (n.d.). How stakeholders are going to affect your business. Retrieved from http://businessknowledgesource.com/finance/how_stakeholders_are_going_to_affect_your_business_026447.html.
Change-management-consultant.com website. (n.d.). Understanding the needs of stakeholders. Retrieved from http://www.change-management-consultant.com/needs-of-stakeholders.html.
Edupristine website. (2014, September 15). Importance of Business Accounting for enterprises. Retrieved from http://www.edupristine.com/blog/importance-of-accounting-for-businesses.
Investopediawebsite. (n.d.). Stakeholder. Retrieved from http://www.investopedia.com/terms/s/stakeholder.asp.
Kwak, J. (2009, January 3). The importance of accounting. Retrieved from https://baselinescenario.com/2009/01/03/sec-report-mark-to-market-accounting/.
Techtarget website. (n.d.). Stakeholder. Retrieved from http://searchcio.techtarget.com/definition/stakeholder.