I’ve uploaded file named “My Work” read it and reduce the similarities. Now it’s 23%.Also, I’ve uploaded the Turnitin file to know the areas which the similarities are.*** Two Attachment has been uploaded named “My Work” and “Turnitin file”.FACULTY OF BUSINESS AND MANAGEMENT STUDIES
Module Title: Financial Accounting
Module Code: GAC408
Student Name: Bushra Marhoon AL gabri
Student ID: 1810041
1|Page
Table of Contents
Introduction: ……………………………………………………………………………………………………………………………………………………………… 3
Accounting Standards & Objectives: …………………………………………………………………………………………………………………….. 3
Accounting Standards:……………………………………………………………………………………………………………………………………… 3
Objectives: ……………………………………………………………………………………………………………………………………………………….. 3
Difference between Financial Accounting and Management Accounting: ………………………………………………………………….. 4
Accounting conventions, concept of matching and dual aspect principle: ………………………………………………………………….. 5
Matching Concept: ……………………………………………………………………………………………………………………………………………….. 5
Dual Concept: ………………………………………………………………………………………………………………………………………………………. 6
Objectives of Income Statement and Balance Sheet: ……………………………………………………………………………………………….. 7
Comprehensive Income Statement: ……………………………………………………………………………………………………………………… 7
Statement of Financial position: ……………………………………………………………………………………………………………………………. 7
The Income statement & Balance sheet of Al Rahim: ……………………………………………………………………………………………….. 8
Income Statement: ……………………………………………………………………………………………………………………………………………….. 8
Balance Sheet: …………………………………………………………………………………………………………………………………………………….. 8
Pro-forma Trial Balance: …………………………………………………………………………………………………………………………………………… 9
Report of the Income Statement & Balance Sheet: …………………………………………………………………………………………………. 10
Income Statement of Al Rahim Clothing Company: …………………………………………………………………………………………….. 10
Balance Sheet of Al Rahim Clothing Company: ………………………………………………………………………………………………….. 10
Difference between Straight line & Diminishing Balance method of depreciation: ……………………………………………………. 12
Straight Line Method Example: …………………………………………………………………………………………………………………………… 12
Diminishing Balance Method Example:……………………………………………………………………………………………………………….. 13
Financial Ratios Profitability and Liquidity: ………………………………………………………………………………………………………………. 14
Profitability Ratios: ……………………………………………………………………………………………………………………………………………… 14
Gross Profit Margin: ……………………………………………………………………………………………………………………………………….. 14
Net Profit Margin:……………………………………………………………………………………………………………………………………………. 14
Operating Profit Margin: …………………………………………………………………………………………………………………………………. 14
Return on Assets: …………………………………………………………………………………………………………………………………………… 14
Return on Equity: ……………………………………………………………………………………………………………………………………………. 15
Liquidity Ratios: ………………………………………………………………………………………………………………………………………………….. 15
Current ratio: ………………………………………………………………………………………………………………………………………………….. 15
Quick ratio: …………………………………………………………………………………………………………………………………………………….. 15
Analysis and Interpretation: ………………………………………………………………………………………………………………………………… 16
References ……………………………………………………………………………………………………………………………………………………………….. 17
2|Page
Introduction:
Accounting Standards & Objectives:
Accounting Standards:
Accounting standards are the written set of rules and guidelines issued by the
accounting institutions. The purpose of accounting standards is to ensure transparency,
regularity, reliability, consistency, uniformity, and comparability of the core financial
statements of the organizations.
Through means of rules, instructions and amendments, accounting standards set down
the terms and conditions of accounting policies and procedures to promote the analysis
of the products appearing in the financial statements and even their treatment in the
books of accounts. GAAP (Generally Accepted Accounting Principles) and IFRS
(International Financial Reporting System) are the two main accounting standards that
widely followed around the world.
Objectives:
Accounting is considered to be the language of business because the financial
statements are the medium of communication between the stakeholders, investors, and
management of the organizations. On the basis these financial statements crucial
decisions are taken that reflects in the overall operations of the organization. However,
the preparation process of these financial reports is based on accounting principles,
rules and laws. Following are the main objectives of accounting standards.
•
The foremost objective of using accounting standards is to ensure the reliability
of the essential financial reports on which users can rely. Moreover, if the
organization does not comply with the accounting standards then it may have
adverse consequences in the business.
•
It allows the organization to compare its financial strength and progress over the
period of time by comparing previous and present ratios.
•
It also aims to include a collection of accounting policies that provide the required
criteria for disclosure and the methods of estimating of different financial
transactions. (Education, 2020)
3|Page
Difference between Financial Accounting and Management
Accounting:
Financial Accounting
Management Accounting
1. The main purpose of financial accounting is 1. Managerial accounting aims to provide
to provide financial strength and position of
information that encourages the strategic
the company to both internal management
planning and improve the management
and external stakeholders but it main
efficiency in the decision making process
concern is to provide information about
towards
financial health of the company to those
organization.
achieving
the
goals
of
the
outside the organization.
2. The financial reports are produced by 2. The information obtain from managerial
using
financial
accounting
tools
&
accounting is only intended to be used
techniques aims to be published publicly
internally or to assess the company’s
to attract potential investors, creditors,
management,
and financial institution.
goals, and to assist in the strategic
performance
towards
planning.
3. The
information
collected
through 3. Managerial accounting uses information
financial accounting is based on the
by evaluating the past performance and
organization’s performance in specific
prepares business forecast and future
period of time.
action plans accordingly.
4. Financial accounting adheres to use 4. In managerial accounting organization is
rules and
laws prescribed by the
not bound to use any rules and
accounting standards while preparing
regulations in the reporting system.
income statement, balance sheet, and
Organization is free to use their own
statement of cash flows. Since this
reporting system according to their ease
information published publicly for the
because the purpose of reports created
use of investors, therefore, ensuring the
through managerial accounting is to
accuracy
circulate in the organization only. (Ross,
mandatory.
4|Page
of
these
statements
is
2020)
Accounting conventions, concept of matching and dual aspect
principle:
Matching Concept:
Matching concept states all the expenses incurred to earn revenue must be recorded in
the same accounting period and this can be done using accrual concept. By applying
matching concept accountant are able to estimate profit and loss organization made
during the accounting period. If the revenues are more than the expenses the income
statement will indicate profit but in case if the expenses are more than the revenues it
will show loss. Therefore, all cost incurred whether it is paid and unpaid should be
recorded in the same period while making profit and loss statements.
The purpose of matching concept is to guide how expenses should be matched with
revenue to get exact profit and loss for the specific period. (SIBAR, n.d.)
Let’s take a look on the example provided below for the better understanding of
matching concept.
Expenses (Debit)
Amount
(OMR)
Amount
Revenue (Credit)
(OMR)
Salaries
1,000
Sales
Commission
2,500
Cash
9,000
Rent Paid
3,000
Credit
5,500
Postage charges
200
Interest Received
Supplies Purchased
400
Depreciation
500
Insurance Expense
250
Utilities Expense
150
Total
8,000
Total
14,500
1,500
16,000
The above example represents that expenses have been matched with revenues i.e
(Revenues 16,000 – Expenses 8,000) as a result of which company has made a profit
5|Page
of OMR 8,000. Moreover, if the expenses had been more than the revenues then the
company would have suffer loss.
Dual Concept:
In accounting, dual concept refers that every transaction to be passed in the books
accounts will have dual effect which means if the amount for particular item is being
debited then it will also be credited with the same amount to avoid variations in the final
balances. The concept of duality is the foundation of accounting principles. Therefore, it
states that every transaction will be recorded in two places. For examples: the
organization has paid cash for receiving particular goods from this example we can see
that the organization’s cash is decreasing and its inventory is increasing. Therefore, we
will express it as cash credit and inventory debit in the books of accounts.
Hence, the concept of duality is based on fundamental accounting equation which
states assets will always be equal to Liabilities plus owner’s equity.
Assets = Liability + Owner’s Equity
In the essence of above equation we can see that the assets of an organization will
equal to the claim of owner (which is capital) and the claim outsiders (which are
liabilities).
The dual-aspect principle means that each transaction has an equal effect on assets
and liabilities in such a way that total assets are often equal to total liabilities. (SIBAR,
n.d.)
6|Page
Objectives of Income Statement and Balance Sheet:
Comprehensive Income Statement:
The purpose of preparing income statement is to evaluate that how much Al Rahim
Clothing Company has generated profit or loss in the accounting period. The income
statement becomes more important when the data of different fiscal years is grouped
together. By doing so, the owner of Al Rahim Clothing company will be evaluate the
performance of the company during the different reporting period.
However, the purpose of income statement may vary according to user. For example
investor’s will be interested to know that how much Al Rahim Clothing Company is
generating profit or loss. Likewise, financial institutions may consider the ability of
company to generate adequate profit to pay interest and liabilities.
Moreover, there are two types of income statements single step & multi steps. In single
step it follows simple approach by totaling revenues generated and subtracting all
expenses to get net income. However, multi-steps is more complex in nature it includes
several steps starting from identifying gross profit. (Accountingtools, 2019)
Statement of Financial position:
The purpose of statement of financial position is to reveal the financial position of the Al
Rahim Clothing Company for a specific period of time. The statement shows what is of
the total (assets) own by the company and how much it owes (liabilities), as well as the
amount invested by owner (Equity).
The statement of financial position gives an opportunity to investors to examine how
much cash company own to pay the dividends. It is also an essential statement for the
owners of Al Rahim Clothing Company to evaluate the performance of the organization
during financial reporting period. This statement also helps business owners to take
decision by analyzing whether they will be able to run business or should they shut it
down.
7|Page
In nutshell, the purpose of statement of financial position is to represent the financial
strength of the company. However, the users may focus on different information
according to their needs. (Accountingtools, 2019)
The Income statement & Balance sheet of Al Rahim:
Income Statement:
The income statement of Al Rahim Clothing Company contains several sub-totals that
will assist in evaluating the profit made by the Al Rahim Clothing Company. The gross
profit has been obtained by netting revenues and cost of goods sold. The other key subtotals include operating expense such as salaries paid, utilities, depreciation, rent,
insurance, office supplies and income tax.
Balance Sheet:
The balance sheet of Al Rahim Clothing Company contains current, non-current assets,
liabilities, and owner’s equity. The assets side of the balance is classified into current &
non-current assets. All those assets which will be utilized within a year are reported in
current assets such as cash, cash & cash equivalent, accounts receivable, merchandise
inventory, prepaid rent, and office supplies. In contrast, at the non-current assets all
those assets are recorded which have a life of more than one year. These assets
usually include fixtures & equipment.
Furthermore, on liabilities side we have accounts payable and sales tax payable.
Moreover, it also has capital stock, retained earnings and net income in the owner’s
equity section.
8|Page
Pro-forma Trial Balance:
AL RAHIM CLOTHING COMPNAY
TRIAL BALANCE
FOR THE YEAR ENDED 30TH NOVEMBER 2020
Account Title
Unadjusted Trial
Balance
Adjustment
Entries
Adjusted Trial
Balance
Debit
Debit
Debit
Credit
Credit
Cash
39,270
39,270
Accounts Receivable
4,400
4,400
Merchandise Inventory
29,700
29,700
Prepaid Insurance
4,600
1,500
3,100
Office supplies
3,400
1,900
1,500
Office Equipment
70,000
Credit
70,000
Accumulated Depreciation: Office
Equipment
15,300
Accounts Payable
24,000
Salaries Payable
0
Sales Tax Payable
5,900
5,900
Capital Stock
31,000
31,000
Retained Earnings
36,100
36,100
Sales
380,000
380,000
4,700
20,000
24,000
7,500
7,500
Sales Return & Allowances
4,000
4,000
Cost of Goods sold
153,630
153,630
Purchase discounts lost
400
400
Utilities expense
9,000
9,000
Office supply expense
0
1,900
1,900
Depreciation expense: office
equipment
0
4,700
4,700
Rent expense
10,000
Insurance expense
0
1,500
1,500
Salaries expense
150,000
7,500
157,500
Income tax expense
13,900
492,300
9|Page
10,000
13,900
492,300
15,600
15,600
504,500
504,500
Report of the Income Statement & Balance Sheet:
Income Statement of Al Rahim Clothing Company:
AL RAHIM CLOTHING COMPNAY
INCOME STATEMENT
FOR THE YEAR ENDED 30TH NOVEMBER 2020
Revenues
Sales
Less: Sales Return & Allowances
Net Sales
COGS
Beginning Inventory
Purchases
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
Gross profit
Expenses
Purchase discount lost
Utilities expense
Office supply expense
Depreciation expense
Rent expense
Insurance expense
Salaries expense
Earnings before income tax
Less: Income tax
Net income after tax
Balance Sheet of Al Rahim Clothing Company:
10 | P a g e
380,000
(4,000)
376,000
144,330
29,700
174,030
(20,400)
153,630
222,370
400
9,000
1,900
4,700
10,000
1,500
157,500
(185,000)
37,770
13,900
23,470
AL RAHIM CLOTHING COMPNAY
BALANCE SHEET
FOR THE YEAR ENDED 30TH NOVEMBER 2020
Liabilities & Owner’s Equity
Liabilities:
Accounts Payable
Sales Tax Payable
Salaries Payable
OMR
77,970
Total Liabilities
37,400
Non-Current Assets:
Office Equipment
Less: Acc Depreciation
70,000
(20,000)
Owner’s Equity:
Capital Stock
Add: Retained Earnings
Net Income
Total Non-current Assets
50,000
Total Assets
127,970
Assets
Current Assets:
Cash
Accounts Receivable
Merchandise Inventory
Prepaid Rent
Office Supplies
OMR
Total Current Assets
11 | P a g e
39,270
4,400
29,700
3,100
1,500
24,000
5,900
7,500
31,000
36,100
23,470
90,570
Total Liabilities & Owner’s Equity
127,970
Difference between Straight line & Diminishing Balance method of
depreciation:
There are many ways for calculating depreciation of an asset but straight line and
diminishing balance method of depreciation is commonly used.
The main difference between two is the straight line method calculate the depreciation
as expenses for the accounting period. Over each cycle, the value of an asset is
decreased uniformly until its salvage value is reached. The most widely used and
simple depreciation strategy for allocating the cost of a capital asset is straight line
depreciation. Whereas diminishing balance charges as the percentage of an asset’s
book value.
The diminishing balance method is more useful for those assets which have higher
utility or productivity in their early years of acquirement. It reflects the asset ability to
generate revenue by evaluating its functionality and productivity.
On the other hand, Straight-line depreciation leads to similar depreciation costs and
therefore, does not account for higher efficiency and functionality levels at the beginning
of the useful life of an asset. Moreover, the straight-line approach is much simpler to
evaluate, and may therefore be a more acceptable alternative for freelancers or small
business owners who handle their own finances. (Accountancy, n.d.)
Straight Line Method Example:
The company has acquired machinery worth OMR 100,000 and its estimated salvage
value is OMR 20,000 each with a useful life of 5 years.
•
The cost of the assets is OMR 100,000
•
Cost of the asset – estimated salvage value: 100,000 – 20,000 = 80,000
depreciable cost.
•
The useful life of the asset is 5 years
•
Now, depreciable cost of 80,000 will be divided by number of years we get.
80,000/5 = OMR 16,000 each year depreciation.
12 | P a g e
•
Therefore, the company will depreciate it assets by the amount of OMR 16,000
year for the period of 5 years to reach salvage value.
Diminishing Balance Method Example:
The company has purchased a vehicle for OMR 105,000, the expected life of the
vehicle is 10 years and an expected residual value is expected to be OMR 5,000 each
year at the depreciation rate of 60% percent each year.
The following formula will be used,
Depreciation expense = (Net book value – Residual value) x depreciation rate.
Year
1
2
3
4
5
6
7
8
9
10
13 | P a g e
NBV
Residual
Rate
105,000.00
(5,000)
60%
45,000.00
(5,000)
60%
21,000.00
(5,000)
60%
11,400.00
(5,000)
60%
7,560.00
(5,000)
60%
6,024.00
(5,000)
60%
5,409.60
(5,000)
60%
5,163.84
(5,000)
60%
5,065.54
(5,000)
60%
5,026.21
(5,000)
60%
Charged
60,000.00
24,000.00
9,600.00
3,840.00
1,536.00
614.40
245.76
98.30
39.32
26.21
Financial Ratios Profitability and Liquidity:
Profitability Ratios:
Profitability Ratios are the measure of estimating company’s ability to generate profit
after deducting all the cost and expenses that incurred in the generation of revenues.
Following are the key profitability ratios.
Gross Profit Margin:
=
× 100
=
222,370
× 100
380,000
= 58.51%
Net Profit Margin:
=
× 100
=
23,470
× 100
380,000
= 6.17%
Operating Profit Margin:
=
× 100
=
37,770
× 100
380,000
= 9.93%
Return on Assets:
=
× 100
=
14 | P a g e
23,470
× 100
127,970
= 18.34%
Return on Equity:
=
× 100
′
=
23,470
× 100
90,570
= 25.91%
Liquidity Ratios:
Liquidity ratios determine company’s ability to set off its short term liabilities. The
following are the important liquidity ratios.
Current ratio:
=
=
77,970
37,400
= 2.08
Quick ratio:
=
−
=
77,970 − 29,700
37,400
= 1.29
15 | P a g e
Analysis and Interpretation:
Al Rahim Clothing Company has been able to obtained high gross profit margin around
58.51% it shows that this percentage has become the profit from total revenue which a
good indication for the company. Net profit margin indicates that every 1 OMR of the
company is contributing approximate 6.17% to the net profit. Company has received
9.93% in operating profit. This substantial operating profit shows that the operations of
the company are running smoothly. Al Rahim Clothing Company has also been able to
achieve well returns on returns on assets and returns on equity which are approximately
18% and 26% respectively. This indicates that company is contributing this percentage
against the utilization of assets and capitals.
On the other hand, current ratio is at 2.08% which means company has the ability to set
off its short term debts about twice. Quick ratio indicates that company will be able to
pay its short liabilities more than one time without selling inventories and getting
additional funds.
Word Count 2,620 excluding table of content & References
16 | P a g e
References
Accountingtools (2019) The purpose of the balance sheet, 08Jul, [Online], Available:
www.accountingtools.com [08 Jul 2019 ].
Education, S. (2020) Principles/Objectives of Accounting Standards, 31Jan, [Online], Available:
www.simandhareducation.com [31 Jan 2020].
Liberto, D. (2020) Accounting Convetion, 22Aug, [Online], Available: www.investopedia.com [22 Aug
2020].
Mason, M. (2017) Difference between financial accounting and management accounting, 28Jun,
[Online], Available: www.bentley.edu [28 Jun 2017].
Ross, S. (2020) How financial accounting differs from managerial accounting, 18Nov, [Online], Available:
www.investopedia.com [18 Nov 2020].
17 | P a g e
1810041
by Bushra Marhoon Bashran 1810041
Submission date: 18-Dec-2020 05:47PM (UTC+0400)
Submission ID: 1478562249
File name: REVISED_GAC4008_FA_WRIT2_L4B1_V1_JAN_2021-M.docx (172.63K)
Word count: 2888
Character count: 16429
1810041
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