Class

ACCOUNTING 3

ACCOUNTING FOR MANAGERS

Question 1 Answer

As a management accountant, It’s my duty and responsibility to apply my professional skill set and knowledge in preparing and presenting of financial and any decision oriented information in a way that the information will be useful to assist in policies formulation, operation planning and control by the management. It is my role to keep track of the plants expenses and incomes in order to identify improvement opportunities and trends, organize and allocate funding and financing of the plants activities, identify and manage risks and monitoring and enforcing compliance. Therefore, it is my job as a management accountant to be concerned with the day-to-day operations of the plant (Sinn, 2012, 21).

Wayne Deng as a business owner should be concerned by the fact that his businesses statement of cash flows displays only net cash outflows from investing activities, this is because the net cash outflows indicates that the money going out to investment activities is more than the income of the business. This can result to debt where Wayne will be forced to look for additional financing from creditors. However, it is not necessarily a bad thing that the cash flow displays only the cash outflows, this is because the return on investment may not be immediate and with time it may increase leading to a more return from the investment activities (Sharma, 1996, 37).

The doctor should not contact the company in order to complain about the financial information and that it is not understandable, this is because the most important features of a good financial report or statement is that it should be understandable, comparable, relevant and reliable. A company with shareholders always ensures that their financial reports that they send to their shareholders is understandable (Horngren, Sundem, Stratton, Burgstahler and Schatzberg, 2002, 126). However, being understandable doesn’t mean that everyone can understand the information, an individual must have a fair knowledge of accounting and economic and business activities and be willing to review the information diligently (Ormiston and Fraser, 2013, 10). The doctor should therefore find an individual with accounting or business and economic activities knowledge to explain the information to him. In this case, I can assist the doctor in understanding the financial information.

Question 2 Answer

The economic decisions that Luigi and Gina Cicello must make include the following:

Investment decision

The main key economic decision facing Luigi and Gina Cicello is the amount of capital to invest in the business. As a start-up business, the sea food outlet is a business risk that Luigi and Gina Cicello are taking. They can invest a lot of capital in the business only for it fail or it can also become successful and provide a return on investment. In order to make this decision, Luigi and Gina Cicello requires to conduct a market analysis using decision tools and predicted future cash flows.

Pricing decision

Pricing can be explained as a process where a business sets its products and services selling price, it can be a part of the enterprises marketing plan. Luigi and Gina Cicello must make a decision on the selling price of the sea food products. In order to determine the price, they will take into account the type of market, product quality, market condition, competition and the cost of acquiring the sea food products. Pricing is important because it is an element that generates revenue. Pricing will based on factors such as the prevailing market price, fixed amount and quantity break.

Hiring of Employees

The next important economic decision Luigi and Gina Cicello will have to make is the number of employees to hire. Before deciding on hiring new employees, Luigi and Gina Cicello must first understand that hiring employees entails new liabilities, expenses, legal obligations and paperwork. They must also know that hiring and training of employees is expensive even for a sea food start-up business. On deciding on the number of employees to hire, Luigi and Gina Cicello must first analyse the market place in terms of the market size and the human labour required in the production process of the sea food products.

It is necessary for Luigi and Gina Cicello to require the services of an accountant, this is because as the business becomes operational it will become liable to taxation by the Government. The accountant will ensure that the business is not overtaxed by the government and maintain the businesses accounting records in compliance with the generally accepted accounting principles and assist in financial reporting (Beaver, 1981, 14).

Question 3 answer

Selling obsolete inventory at cost causes the profit margin ratio to increase, this is because company’s sell their obsolete inventory in order to increase their reported profits. This happens because upon the evaluation of inventory as obsolete, the balance sheet and the income state are both affected through the account for obsolete inventory allowance and the expense account. Because the inventory is obsolete, it represents an expense like the cost of goods sold and affects the current accounting period profits. This makes the management to have an incentive of manipulating the obsolete inventory allowances.

Issuing a share dividend on ordinary shares increases the earnings per share ratio. By issuing a share dividend on the common shares the average number of outstanding common shares decreased leading to an improvement in the company’s earnings per share. EPS= net income / average outstanding common shares

The Declaring of a cash dividend on ordinary shares increases the Dividend pay-out ratio. Dividend pay-out is the measure of a company’s tendency for paying dividends gained from income that is earned, therefore a cash dividend declaration on ordinary shares results to an increase in dividend pay-out. Dividend pay-out is calculated using the Dividends declared divided by the net income.

Paying the GST owing to the tax office has no effect on dividend yield ratio, this is to imply that the ratio remains unchanged. Dividend yield is a ratio that shows the amount of money the company pays out in the form of dividends every year pertinent to the price of its shares to its shareholders while the owed GST to the tax office concerns the annual tax paid by companies to the tax office.

Purchasing inventory on credit makes the quick ratio to decrease, this is because when calculating quick ratio, inventory is deducted from current assets because it may stay long before turning into cash. Therefore, an increase in inventory leads to a decrease of quick ratio.

Selling inventory for cash increases the current ratio, this is because cash is a current asset and therefore it increases the current assets of the company which in turn increases the company’s capability to pay long-term and short-term requirements.

Writing off a bad debt against allowance for doubtful debts increases the current ratio, this is because a bad debt is considered as an expense that has already occurred and the allowance for bad debts is a liability for debts that will occur in the future.

Collecting an account receivable increases the receivables turnover ratio. This ratio is obtained through dividing the net credit sales in a certain time period by the average accounts receivable. Therefore, the collected account receivable increases the average accounts receivables which in turn increases the receivables turnover ratio.

Selling inventory on credit increases the inventory turnover ratio. This is because the inventory turnover ratio evaluates the management’s efficiency in managing the inventory of the company and the frequency at which they produce sales from it.

Issuing additional ordinary shares for cash debt ratio increased the company’s debt ratio. Issuing additional ordinary shares for cash is a means for looking for finances by the company to support its operations, this increases its debt to its creditors who are shareholders.

References

Beaver, W.H., 1981.Financial reporting: an accounting revolution . Prentice Hall

Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D. and Schatzberg, J., 2002.

Ormiston, A. and Fraser, L.M., 2013. Understanding financial statements. Pearson Education

Sharma, D., 1996. Analysing the Statement of Cashflows. Australian Accounting Review , 6(12), pp.37-44

Sinn, H.W., 2012. Economic decisions under uncertainty . Springer Science & Business Media.
Introduction to Management Accounting: Chapters 1-17 . Prentice Hall.