1. Describe the purpose of each financial statement. Determine which one (1) is the most effective in communicating the financial health of an organization. Defend your position.
There are four main types of financial statement, each aiming to describe a different aspect of financial health. A Statement of Financial Position is a snapshot of the financial health of a company as it gives the financial position at a given date. It gives an overview of the assets, liabilities and equity that the company has on that date. It is useful in many cases because it gives a very simple overview of health as the company stands and does not project future earnings and losses which may not necessarily be accurate. An Income Statement gives the income and expense of a company over a set period of time, usually a quarter or a financial year (Eisen, 2000). By subtracting the expenses from the income over that period, a net profit (or loss) can be found, the aim of which is to show how well the business is managing its resources and pricing its products or services. Bearing this in mind, the income statement gives an overview of how well the business is doing in terms of balancing the books.
The purpose of the Cash Flow Statement is to show how company bank balances have changed over a period of time, and includes cash flow for operating activities, investing activities and financing activities (Eisen, 2000). This shows what area the company is spending the most money on and at what point. Finally, a Statement of Changes in Equity shows net profit or loss, share capital issued and repaid, dividend payments, effects of changes in accounting and gains or losses in equity (Eisen, 2000). Overall the Statement of Changes in Equity is the most important in understanding the financial health of a company as it details a lot of information, including the overall net profit and loss during a time period. It also is important for those who have shares in the business as it can be used to determine how much their shares are worth and how much stake they continue to have in the business. Overall it is a very thorough measure of financial health which incorporates many elements which may be overlooked in the simple Statement of Financial Position or Income Statement.
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"The Role of Accounting on Business and Our Society".
2. Compare the major functions of an accountant to that of a certified public accountant. Make an argument for and against the importance o
f accounting and accountants in our society from a U.S. or global perspective.
A certified public accountant is one that has completed rigorous licensing exams and continues to have to educate themselves about laws and accountancy to keep their qualification. For this reason, certified public accountants can provide more services to a business than a non-qualified accountant. For example, CPAs have to keep up with tax laws and therefore is able to represent the business for the IRS for auditing purposes (Eisen, 2000). Additionally, accountants themselves mainly just keep the books, inputting data and prepare balance sheets and other financial reports. A CPA is qualified to do a more thorough analysis on the financial position of a corporation and can also provide advice based on the information (Eisen, 2000).
Accountancy is one of the oldest professions in the world and continues to be important in global society. The world over, accountants are required to understand tax laws and financial information in a specialized manner which can be hugely beneficial to a business. Some small business owners may be able to do their own accounting, but having someone specialized in the field allows owners to keep focus on CEO duties and ensuring that the business is successful (Eisen, 2000). On the other hand, modern technology is increasing the likelihood that accountancy will become automated using online receipt systems and sophisticated software (Eisen, 2000), but these are not necessarily available to those living in developing nations who will continue to rely heavily on the services of a qualified accountant for some years to come.
3. Imagine that you have decided to create your own business venture. Determine whether the company will be a service or merchandising company. Describe the differences between the charts of accounts for both companies.
For the purpose of this assignment, I have chosen to create a service company. A service company usually has less up-front costs (aside from training) and there is less need for investing activity into warehouses and other such physical properties to store merchandise. The charts for a service company usually show items including revenues, cost of services, some forms of sales and marketing and usually some reorganization costs (Eisen, 2000). Service companies may also have charts including the cost of hiring trained personnel or providing training to new employees. Merchandising business charts usually have sales revenue, cost of goods, storage, shipping, product rebates and other information on their financial report (Eisen, 2000), and usually have to describe the difference between the cost of parts for manufacturing the product or the cost of buying the product wholesale and the final sale price to show profit. Service companies make profit from a non-physical “product” which eliminates the need for this item.
4. Based on the company that you selected in 3, make an argument for automating the accounting process, and implement at least three (3) types of internal controls to prevent or detect theft or fraud.
As a service company using the internet, it can be quite easy to become a multi-national provider almost instantly. One argument for automating the accounting process is that it allows income from different currencies to be immediately converted into USD based on real-time exchange rates. Services that can be sold online also translate quite well into automated accounting because all of the information is already in an electronic format, there is no physical input of handwritten data. Additionally, automating the accounting process speeds it up and makes it less prone to human error (Ostrowski, 2012).
The automation of accounting does leave a business at risk from internal theft and fraud, as 90% of fraud occurs in disbursements rather than stolen cash (Ostrowski, 2012). Internal controls such as ensuring that all bills are paid with proper documentation and all expenses claimed are genuine may have to be checked manually or some form of identification check input into the automated program. Another internal control is getting a forensic accountant to perform regular fraud assessments, which will not only put employees off committing fraud but can help detect mistakes early (Ostrowski, 2012). Surprise audits are also another deterrent to employees and can again may also catch fraud in the early stages and protect the organization.
- Eisen, P. J. (2000). Accounting. Barron’s Educational Series.
- Ostrowski, S. (2012, February 1). How to implement internal controls to prevent employee theft. Smart Business Magazine. Retrieved from http://www.sbnonline.com/
