Capital Investments And Financial Ratios Essay

Question:

Diacuss about the Capital Investments and Financial Ratios.

Answer:

Introduction:

A stakeholder can be specified as an individual or group which affects the actions of business. They might be internal or external, but they have a stake in the company. They might also include people who have the strongest interest in the effort of academic, political or philosophical reasons even if their families and friends are not directly affected by the same (Nezlobin, Rajan and Reichelstein, 2014).

In the present case the major stakeholder in the debate of health warnings on cigarette packs are:

  • Shareholders: They are part of primary stakeholders as they are usually engaged in economic transactions with business. Primary Stakeholders are a group of people which affects directly to the organisation either positively or negatively through their actions in the organisation (Butterfield, 2013).
  • Managing Director (Randall Hedges): Managing director is a part of secondary stakeholders. This group affects the organisation indirectly whether positive or negative. It comprises individuals and organisations which live closer to the organisation and offer service directly to them (Delen, Kuzey and Uyar, 2013).
  • The marketing manager (Mary Blender): He is part of key stakeholders group. These stakeholders do not comprise in both above groups, but the same are important for the organisation. The major reason behind assessing and ascertaining stakeholder is to allow the management to recruit them as a part of the effort (Chambers and Dean, 2013).

Main ethical issues involved:

Professional management accountant has established a professional ethical standard as the same develop trust in the relationship between employer and employee. As per the views of Fullerton, Kennedy and Widener (2013), this standard provides assistance in facing ethical dilemmas and provide a guarantee to users that they have been provided qualitative information. In the present case, the ethical issue which has faced by the organisation is that whether the heat warning should be printed on cigarette packs or not, as the same is not compulsory as per the Asian law. The marketing manager of BBT is of view that in case the warning is printed the same will affect the profit and in business profit making is the bottom line. But the manager of the company is of view that if we want to see long term profit than all the relative facts must be made known to the customer as it is company’s corporate responsibility (Nezlobin, Rajan and Reichelstein, 2014).

Thus it can be concluded that the ethical issues which are being debated by the management are whether to go for profit making objective and not to display health warning on cigarette pack or to consider the corporate responsibility and provide same details even if it is not compulsory as per law applicable in Asia.

The Institute Management of Accounts has developed “Standards of Ethical Conduct for Management Accountants” which are to be followed by complying four basic principles which are integrity, competence, confidentiality and integrity (Gibbons and Kaplan, 2015). It is true that profit and sustainability can be achieved only if you be loyal to the customer and provides all essential information relating to your products. In the present situation, if I had been at Randall Hedges place, even I would have decided to give priority to long-term benefits and to proceed further with acting in accordance with corporate responsibility. I would have presented concern towards customers and display health warning on the cigarette packs.

Thus in the present case, the decision should be taken in order to maintain a high level of professional competence as management accountants have an obligation to ensure the same on a continuous basis. As per the views of Weiss (2014) the objectivity which is being expected from management accountants is that they should provide and communicate correct information even in the case the same information is not in favour of those who requested it. It can be said that ethical issues which are faced by the management can be resolved by applying integrity, creditability and objectivity. It is because; the decision regarding this is taken after application of these factors is always beneficial for the organisation. Management is also obliged to avoid conflicts of interest and do not accept those benefits which might influence their current or future actions (Nezlobin, Rajan and Reichelstein, 2014). Hence, the decision made by Randall Hedges is correct, and even I would have taken the same decision if I had been at his place.

Accounting provides a range of financial information to users and with the application of same they make appropriate judgments and decisions concerning with business. It can be said that accounting has two major strands: management accounting and financial accounting. Management accounting accomplishes the requirement of business managers, and financial accounting accomplishes requirement of another group of users like investors, etc. Financial reporting includes financial statements (statement of financial position; profit and loss account, statement of owner’s equity and statement of cash flows) which are periodically presented to users and parties outside management. The main purpose of the statement of financial position is the present financial position of a business at a particular point in time. The data which is being made available on financial reports is often approximate rather than being accurate or exact in measures. As the measures generally involve estimates, approximation, judgments and allocation an approximation of figures are available in financial statements (Haustein, Luther and Schuster, 2014). The main objective of general financial accounting information is to provide data to different users in accordance with their unique circumstances and requirements. However, the specified objective provides much of interest and controversy in accounting and the same is resolved by standard established by FASB.

The basic essential characteristics which are present in a financial statement through which the available information is a judge are comparability, verifiability, timeliness and understandability. Due to the above-specified characteristics, financial statements are being able to help the user to make a decision about future actions; as the same is predicted on the basis of present performance. For example income statement provides details regarding the earnings of the company and the fact that whether it is performing up to the mark or not. Through assessing the same investors makes a decision regarding the future value of amount which they have invested in the organisation. As per the views of Horngren and et..al. (2013), information available in financial statements is material and the same is related to both nature and size of the particular item. Immaterial items are not evaluated for the purpose of economic decisions. The materiality is determined relating to dollar element available in financial statements. According to the rule, transactions worth more than five percent of net income are treated as material. But there are some exceptional cases to it such as a small theft need to be assessed in deep even if the same is a small amount. Financial statements provide all the information which is required for understanding them. The management also provides details relating to significant events which arise after the date of balance sheet such as the purchase of a piece of land for future subdivision (Kaplan and Atkinson, 2015). But the same could not be continued as Environment Protection Agency asserted that the same land was once a toxic waste dump. This information might change the present point of view of investors towards the company (Zadek, Evans and Pruzan, 2013). Thus in above-specified ways, financial statement assists for future actions.


‘No “bean counter” knows more about my responsibilities than myself, I know that accountants are required to maintain records for shareholders, but I don’t want them to stick their nose in my day to day work.’ The attitude of plant manager towards his responsibility is not correct; it seems that he knows about his responsibilities, but he does not like interference while performing the same obligations. Management accounting is a profession that comprises partnering in a management decision, devising planning and analysing management system, providing a suggestion in financial reporting and controlling and supporting the management in the application of organisation strategy (Nezlobin, Rajan and Reichelstein, 2014).

According to the study of Krishnan (2015), the manager is responsible for evaluating the shareholder value by appropriately assessing the information of the internal business process, management planning and increasing the same by effective application of resources. Management of an organisation is responsible for ensuring that all the assets and liabilities of the company are appropriately recorded, and the information relating to profits are adequately provided to shareholders as well as other interested parties (Lim and Perrin, 2014). Shareholders make a financial investment in the organisations which provides them power to vote and to elect a director. They do not have any right to interrupt directly in management, and the connection is made through Board of Directors. In case the shareholders are not satisfied with the performance of directors, that they have right not to re-elect them or remove them (Rechberg and Syed, 2013).

Thus it can be concluded that the manager is correct in saying that daily interruption of the shareholder is not bearable as they do not have any such right. Management owes a duty to the corporation and not to its individual shareholders. The distinction is not significant as the decision which is beneficial for shareholders is beneficial for corporation too (Loyeung, Matolcsy and Wells, 2016). Though, it is not necessary that the short term gains on investments objective of shareholders remain consistent with long-term goals of the company. The present interpretation of management accountant is to consider the interest of corporation through their future actions. There might be instances in which the interest of corporation might diverge with interest of a particular group of shareholders; thus the decision in taken in accordance with particular available circumstances (Maas and Van Rinsum, 2013). Thus in the present case, it could be said that the manager should take a decision in the best interest of the corporation and did not required to consider individual profit of each shareholder and neither their interference in his day to day operations.


I agree with the specified statement that knowledge of technical issues such as computer technology is essential but not a sufficient condition for being a successful management accountant. It is because; other basic fundamental qualifications are also necessary for being successful. The basic fundamental skill in order to be a successful management accountant is an aptitude and interest in numbers, business, production process and helping the management in their daily operations. As per the views of Mazhambe (2014), a solid foundation of accounting skills comprising knowledge of basic accounting, GAAP and knowledge relating to taxation and finance is required by a management accountant so that he could accomplish his obligations. Knowledge of technical issues as computer technology might provide in resolving some part of obligations as the evaluation of data available on computers, but all the obligations cannot be accomplished with the same. As a management accountant, one requires a strong foundation in economics and other skills such as presentation and communication skills, writing, interpersonal skills, etc. (Otley and Emmanuel, 2013). It is because; the main duty of management accounting is to help users and management in making the best decision possible from the available information and the same cannot be made just by having knowledge of technical issues.

Particulars

2010

2011

2012

2013

2014

2015

Cash

5200

7399

5800

4200

1700

3000

Accounts receivable

1600

100

9134

4200

7600

2200

Inventory

2800

7300

8400

9900

3964

8700

Prepayments

300

2000

8500

9860

8100

2600

Total current assets

9900

16799

31834

28160

21364

16500

Accounts payable

1800

8500

5800

4700

8900

8100

Accrued liabilities

2000

2000

3400

5700

1600

4000

Wages payable

1500

5200

2200

5600

9100

7900

Total current liabilities

5300

15700

11400

16000

19600

20000

Current ratio

1.87

1.07

2.79

1.76

1.09

0.825

Quick ratio

1.28

0.48

1.31

0.525

0.47449

0.26

Current ratio = Current assets / current liabilities (Sunarni, 2013)

$9900 / $5300

= 1.86

Quick ratio = Current assets - inventory – prepaid payments / current liabilities

($9900 - $300 - $2800) / $5300

=1.2


Current ratio = Current assets / current liabilities

1.07= ($9400 + cash) / $15700

Cash = $7399

Current assets= Cash + accounts receivable inventory + prepaid payments

=$16799

Quick ratio = Cash + account receivable / current liabilities

1.31= ($5800 + account receivable) / $11400

Account receivable = $9134

Current assets= Cash+ accounts receivable + inventory +prepaid payments

=$31834

Current ratio = Current assets / current liabilities

= $31834 /$11400

=2.79

Current ratio = Current assets / current liabilities

1.76= ($18300 + Prepayments)/$16000

Prepayments = $9860

Current assets= Cash+ accounts receivable + inventory +prepaid payments

= $28160

Quick ratio = Current assets - inventory – prepaid payments / current liabilities

($28160 - $9900 - $9860)/$16000

=.525

Current ratio = Current assets / current liabilities

1.09= ($17400 + Inventory) / $19600

Inventory = $3964

Current assets= Cash+ accounts receivable + inventory + prepaid payments

= $21364

Quick ratio = Current assets - inventory – prepaid payments / current liabilities

($21364 - $3964 - $8100) / $19600

=.47

Quick ratio = Current assets - inventory – prepaid payments / current liabilities

.26 = ($16500 - $8700 - $2600) / $11900+accounts payable

$11900 + accounts payable = ($16500 - $8700 - $2600)/.26

Accounts payable = $8100

Current liabilities= Accounts payable + Accrued liabilities + Wages payable

= $20000

Current ratio = Current assets / current liabilities

=$16500 / $20000

.825

References:

Chambers, R.J. and Dean, G.W.2013. Chambers on Accounting: Logic, Law and Ethics (Vol. 6). Routledge.

Delen, D., Kuzey, C. and Uyar, A.. 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications. 40(10). Pp.3970-3983.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K.. 2013. Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society, 38(1). Pp.50-71.

Gibbons, R. and Kaplan, R.S. 2015. Formal Measures in Informal Management: Can a Balanced Scorecard Change a Culture.

Haustein, E., Luther, R. and Schuster, P. 2014. Management control systems in innovation companies: a literature based framework. Journal of Management Control. 24(4). Pp.343-382.

Horngren, C.T. and et.al. 2013. Introduction to management accounting. Pearson Higher Ed.

Kaplan, R.S. and Atkinson, A.A. 2015. Advanced management accounting. PHI Learning.

Krishnan, R., 2015. Management accountant—What ails thee?. Journal of Management Accounting Research, 27(1),.Pp.177-191.

Lim, N. and Perrin, B. 2014. Standard Business Reporting in Australia: Past, Present, and Future. Australasian Journal of Information Systems. 18(3).

Loyeung, A., Matolcsy, Z. and Wells, P., 2016. The cost of implementing new accounting standards: The case of IFRS adoption in Australia. Australian Journal of Management. 41(4). Pp.611-632.

Maas, V.S. and Van Rinsum, M. 2013. How control system design influences performance misreporting. Journal of Accounting Research. 51(5). Pp.1159-1186.

Mazhambe, Z. 2014. Review of International Accounting Standards Board (IASB) Proposed New Conceptual Framework: Discussion Paper (DP/2013/1). Journal of Modern Accounting and Auditing. 10(8).

Nezlobin, A., Rajan, M.V. and Reichelstein, S., 2014. Capital Investments and Financial Ratios (No. 3052).

Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer.

Sunarni, C.W., 2013. Management accounting practices and the role of management accountant: Evidence from manufacturing companies throughout Yogyakarta, Indonesia. Review of Integrative Business and Economics Research, 2(2).P.616.

Zadek, S., Evans, R. and Pruzan, P., 2013. Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.

Weiss, J.W., 2014. Business ethics: A stakeholder and issues management approach. Berrett-Koehler Publishers.

Rechberg, I. and Syed, J., 2013. Ethical issues in knowledge management: conflict of knowledge ownership. Journal of Knowledge Management.17(6). Pp.828-847.

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