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Accounting and Finance Essay Example

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Accounting and Finance

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This therefore enables them to boost their assets in order to avoid take-over which may result due to bad performance. Companies that make losses therefore seek to maximize the loss reported in that year so that their future years may appear better (Griffiths, 1987, pg.The desire for tax benefits necessitates companies to use creative accounting particularly when the taxable income is measured through accounting numbers. Further, the companies desire to meet external expectations such as long term survival demanded by customers and employees, assurance about payment demanded by suppliers and dividend payout pattern to the analysts, and internal targets such as sales targets and profitability. Both of these require the company to cook their books through creative accounting (Epstein & Lee, 2010, pg.Companies use different methods to manipulate the values in their financials. The most common methods include pre-acquisition write down, extraordinary and exceptional items, deferred consideration on acquisition, changes in depreciation method, off balance sheet finance, brand accounting like capitalization of assets, contingent liabilities, capitalization of costs (R&D and interest), currency mismatching between deposition and borrowing and use of pension funds to reduce annual charge among others (Aneirin, 2007, pg.b) Companies basically would wish to succeed in their business endeavors as well as possible. Generally Acceptable Accounting Principles of creative accounting outlines various accounting methods to be selected by companies specifically those that may make their financial statements better. The method provides for legitimate techniques to be employed especially when certain items in the accounts are being computed (Picker, 2013, pg. However, a wide range of accounting methods provided by the GAAPS of creative accounting poses a difficulty in drawing an ethical line. Technically, the estimates employed by the companies are not illegal but gross misrepresentation and inflation of the performance of the true values may be unethical. Creative accounting is therefore legalized impliedly especially when it achieves the ultimate goals of the company of increasing the value of the stock and also within the ramifications of the law. It should therefore not mislead other users or stakeholders and should also benefit the company

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References

Alexander, D Britton, A and Jorissen, A (2011) ‘International Financial Reporting and Analysis’ (5th Edition), Cengage Learning.

Alexander, David, & Archer, Simon. (2008). International Accounting/Financial Reporting Standards Guide 2009. Chicago, CCH.

Aneirin, O. (2007). Accounting for Business Studies. Routledge

Bragg, S. M., & Bragg, S. M. (2007). Wiley GAAP policies and procedures. Hoboken, N.J., John Wiley & Sons.

Duchac, J. E., Reeve, J. M., & Warren, C. S. (2007). Financial accounting: an integrated statements approach. Mason, OH, Thomson/South-Western.

Elliot, B; Elliott, J (2013) ‘Financial Accounting and Reporting’, (15th Edition) Prentice Hall

Epstein, M. J., & Lee, J. Y. (2010). Advances in management accounting. Volume 18 Volume 18. Bingley, Emerald.

Geoffrey, W. (2014). Profitability, Accounting Theory and Methodology: The Selected Essays of Geoffrey Whittington. Routledge

Greuning, H. V., & Koen, M. (2001). International accounting standards: a practical guide. Washington, DC, World Bank.

Griffiths, I. (1987). Creative accounting: how to make your profits what you want them to be. London, Unwin Paperbacks.

Hussey, R., & Ong, A. (2005). International financial reporting standards desk reference: overview, guide and dictionary. Hoboken, NJ, Wiley.

International Accounting Standards Committee. (2001). International accounting standards explained. New York, Wiley.

Jones, M. (2010). Creative accounting, fraud and international accounting scandals. Chichester, John Wiley & Sons.

Mulford, C. W. (2002). The Financial Numbers Game Detecting Creative Accounting Practices. New York, John Wiley & Sons

Needles, B. E., & Powers, M. (2010). International financial reporting standards: an introduction. Mason, Ohio, South-Western Cengage Learning.

Peterson Drake, P., & Fabozzi, F. J. (2012). Analysis of financial statements.

Peterson, R. H. (2002). Accounting for Fixed Assets. New York, John Wiley & Sons.

Picker, R. (2013). Applying international financial reporting standards. Milton, Qld, Wiley.

Spurga, R. C. (2004). Balance sheet basics: financial management for non-financial managers. New York, Portfolio.

Appendix

Ratio

2012

2013

2014

Gross profit margin

=GP/net sales

286/841

=34.01%

336/991

=33.91%

327/925

= 35.35%

Net profit margin

=NP/net sales

79/841

= 9.39%

101/991

= 10.19%

92/925

=9.95%

Return on assets

=net income/total assets

79/604

= 13.08%

101/746

= 13.54%

92/768

= 11.98%

Return on equity

=Net income/equity

79/299

=26.42

101/300

= 33.67%

92/292

= 31.51%

Revenue ratio

=sales/receivables

841/103=8.1650

=8.2times

991/139= 7.1295 =7.1times

925/168= 5.5060 =5.5 times

Interest cover ratio

= EBIT/interest expense

113/8

=14.125times

143/8

=17.875times

132/9

= 14.67times

Debt to equity=total liabilities/ total shareholder’s equity

305/299

= 1.02

446/300

= 1.487

476/292

= 1.63

Long term debt to total capitalization

= long term debt/ (long term debt + total equity).

75/374

= 19.79%

97/397

= 24.43%

91/383

= 23.76%

Current ratio= current assets/current liabilities

392/230

= 1,704

500/273

= 1.832

504/272

= 1.853

Quick ratio= (current assets-inventory)/current liabilities

157/230

= 0.6826

192/273

= 0.7033

212/272

= 0.7794

Total asset turnover = net sales/total assets

841/604

= 1.392times

991/746 =1.328times

925/768

= 1.204times

Fixed asset turnover = net sales/fixed assets

841/212

= 3.967times

991/246

= 4.028times

925/264

= 3.504times

Average collection period= Accounts Receivable/ (Sales/365)

103/(841/365)= 44.70

= 45days

139/(991/365)

=51.2

= 52days

168/(925/365)

=66.3

= 67days

Dividend Pay-out Ratio = Dividend / Net Income

100/79

= 1.266

100/101

= 0.990

100/92

= 1.087

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