Learning Business Accounting II

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Business Accounting 2

 

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Business Accounting 2

 

Rationale

Finance & Accounts 2

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International Accountancy Accountancy (profession) or accounting (methodology) is the measurement, disclosure or provision of assurance about information that helps managers and other decision makers make resource allocation decisions. Financial accounting is one branch of accounting and historically has involved processes by which financial information about a business is recorded, classified, summarized, interpreted, and communicated. Auditing, a related but separate discipline, is the process whereby an independent auditor examines an organization's financial statements in order to express an opinion - that conveys reasonable but not absolute assurance -- as to the fairness and adherence to generally accepted accounting principles, in all material respects.

 

Practitioners of accountancy are known as accountants. Accountants may be licensed by a variety of organisations, such as the UK's Institute of Chartered Accountants, and are recognized by titles such as Chartered Accountant and Certified Accountant (UK, New Zealand, Canada, India, Pakistan), Certified Public Accountant (US, New South Wales, Hong Kong), Certified Management Accountant (Canada), Certified General Accountant (Canada), or Certified Practicing Accountant (Australia). Some commonwealth countries (Australia and Canada) often recognise both the certified and chartered accounting bodies. The majority of "public" accountants in New Zealand and Canada are Chartered Accountants; however, Certified General Accountants are also authorized by legislation to practise public accounting and auditing in all Canadian provinces, except Ontario and Quebec, as of 2005. There is, however, no legal requirement for an accountant to be a paid-up member of one of the many Institutes and other bodies which are effectively a form of professional trade union. Unlike the Law Society, which can legally stop a solicitor from practising, accountancy institutes do not have such authority.

Accountancy attempts to create accurate financial reports that are useful to managers, regulators, and other stakeholders such as shareholders, creditors, or owners. The day-to-day record-keeping involved in this process is known as bookkeeping.

At the heart of modern financial accounting is the double-entry book-keeping system. This system involves making at least two entries for every transaction: a debit in one account, and a corresponding credit in another account. The sum of all debits should always equal the sum of all credits. This provides an easy way to check for errors. This system was first used in medieval Europe, although claims have been made that the system dates back to Ancient Greece.

According to critics of standard accounting practices, it has changed little since. Accounting reform measures of some kind have been taken in each generation to attempt to keep bookkeeping relevant to capital assets or production capacity. However, these have not changed the basic principles, which are supposed to be independent of economics as such.

 

 

Accounting Framework in China

 

 

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Learning Outcomes

Upon completion of this module students will

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Corporate Expansion and Accounting for Business Combinations. Reporting Intercorporate Investments in Common Stock

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Corporate Behaviour (or corporate behavior) is the behaviour of a corporation or corporations (or company or companies). The corporate behaviour of for-profit (capitalist) corporations and not-for-profit (non-capitalist) corporations differ due to the fundamental drive for profit in for-profit corporations, compared to the non-monetary goals often held by not-for-profit corporations.

 

Going Global: A New Set of Responsibilities for Chinese Companies

 

 

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Common Stock, also referred to as common or ordinary shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. The other type of shares that the public can hold in a corporation is known as preferred stock. Common stock that has been re-purchased by the corporation is known as treasury stock and is available for a variety of corporate uses.

 

Common Stock

Common stock typically has voting rights in corporate decision matters, though perhaps different rights from preferred stock. In order of priority in a liquidation of a corporation, the owners of common stock are near the last. Dividends paid to the stockholders must be paid to preferred shares before being paid to common stock shareholders.

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Strategic Corporate Expansion

Growing liberalization and internationalization has led the firms to a race for expansion. Firms are more enthusiastic to trap new market segments than ever before. Expansion is an unpredictable, high-stacks game. The paper puts forth a Corporate Expansion Strategy to deal with such a scenario . Case studies have also been used to understand the expansion phenomenon. Efforts have been made to take a generic view of expansion which is independent of line of business, market segment, or type of expansion.

Expansion and investment are compared to have a clear understanding of how expansion for a firm and investment for a individual are similar to each other and how they differ with each other.

Strategic Corporate Expansion

 

The Reporting Entity and Consolidated Financial Statements. Consolidation as of the Date of Acquisition. Consolidation Following Acquisition.

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Today, nearly all major corporations prepare consolidated financial statements. While people often think of the world's corporate giants as being single companies, closer examination reveals that each actually is composed of a number of separate companies.

For example, General Motors Corporation and Ford Motor Company both own dozens of other companies. The Walt Disney Company is famous for spectacular theme parks and immortal cartoon characters, but it also owns many subsidiaries that include the following businesses: Miramax Films, Touchstone Pictures, Buena Vista Home Video, Hollywood Records, the ABC Television Network and ABC Radio Networks, ESPN, many local television and radio stations, Disney Cruise Line, the Mighty Ducks of Anaheim (professional hockey), and the Anaheim Angels (professional baseball partnership). Similarly, Time Warner Inc. owns more than 1,500 subsidiaries, including America Online, MapQuest, Netscape, Moviefone, Time Warner Cable (which owns many subsidiaries), Turner Broadcasting (which owns many subsidiaries), Warner Bros. Pictures, Warner Bros. Television, New Line Cinema, Warner Home Video, DC Comics, Home Box Office, the Atlanta Braves (professional baseball), Time, and CNN (Cable News Network). General Motors, Ford, The Walt Disney Company, and Time Warner each present consolidated financial statements, as do nearly all corporations that are publicly held.

 

Consolidated Financial Statements

 

Consolidated financial statements present the financial position and results of operations for a parent (controlling entity) and one or more subsidiaries (controlled entities) as if the individual entities actually were a single company or entity. Consolidation is required when a corporation owns a majority of another corporation's outstanding common stock. As discussed later in the chapter, consolidation may also be appropriate in certain other situations, and not all units subject to consolidation need necessarily be corporations or even business (for profit) enterprises.

Two companies are considered to be related companies when one controls the other. Consolidated financial statements are generally considered to be more useful than the separate financial statements of the individual companies when the companies are related. The accounting principles applied in the preparation of consolidated financial statements are the same accounting principles applied in preparing separate-company financial statements. The process of preparing consolidated financial statements involves bringing together the separate financial statements of related companies as if the related companies were actually a single company.

Any business combination results in one of two situations: either (1) the net assets of one or both of the combining companies are transferred to a single company (a merger or statutory consolidation) or (2) the combining companies each remain as separate legal entities (a stock acquisition). In the first case, no consolidation questions arise because only a single corporation emerges from the business combination. The financial statements of the resulting reporting entity are those of a single corporation. The matter of consolidated financial statements arises in the second instance because of the existence of two or more legally separate but related companies. A similar situation also arises if a company creates rather than purchases a subsidiary. Whether the subsidiary is acquired or created, each individual company maintains its own accounting records, but consolidated statements are needed to present the companies together as a single economic entity for general-purpose financial reporting.

 

ABB

 

Debt to Income Ratio

 

The phrase Mergers and Acquisitions or M&A refers to the aspect of corporate finance strategy and management dealing with the merging and acquiring of different companies.

 

Merger Process

 

 

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Intercorporate Transfers: Noncurrent Assets. Intercompany Inventory Transactions. Intercompany Indebtedness

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Intercorporate Transfers

A parent company and its subsidiaries often engage in a variety of transactions among themselves. For example, manufacturing companies often have subsidiaries that develop raw materials or produce components to be included in the products of affiliated companies. Some companies sell consulting or other services to affiliated companies. A number of major retailers, such as J. C. Penney Company, transfer receivables to their credit subsidiaries in return for operating cash. United States Steel Corporation and its subsidiaries engage in numerous transactions with one another, including sales of raw materials, fabricated products, and transportation services. Such transactions often are critical to the operations of the overall consolidated entity. These transactions between related companies are referred to as intercorporate transfers.

 

Share Ownership Structure

 

The central idea of consolidated financial statements is that they report on the activities of the consolidating affiliates as if the separate affiliates actually constitute a single company. Because single companies are not permitted to reflect internal transactions in their financial statements, consolidated entities also must exclude from their financial statements the effects of transactions that are contained totally within the consolidated entity.

Building on the basic consolidation procedures presented in earlier chapters, this chapter and the next two deal with the effects of intercorporate transfers. This chapter deals with intercorporate services and sales of fixed assets, and Chapters 7 and 8 discuss intercorporate sales of inventory and intercorporate debt transfers.

 

Intercompany Inventory Transactions

Inventory transactions are the most common form of intercorporate exchange. Conceptually, the elimination of inventory transfers between related companies is no different than for other types of intercompany transactions. All revenue and expense items recorded by the participants must be eliminated fully in preparing the consolidated income statement, and all profits and losses recorded on the transfers are deferred until the items are sold to a nonaffiliate.

 

Direct Material Inventory Transactions

 

The record-keeping process for intercorporate transfers of inventory may be more complex than for other forms of transfers. There often are many different types of inventory items, and some may be transferred from affiliate to affiliate. Also, the problems of keeping tabs on which items have been resold and which items are still on hand are greater in the case of inventory transactions because part of a shipment may be sold immediately by the purchasing company and other units may remain on hand for several accounting periods. Nevertheless, the consolidation procedures relating to inventory transfers are quite similar to those discussed in Chapter 6 relating to fixed assets.

 

Intercompany Indebtedness

One advantage of having control over other companies is that management has the ability to transfer resources from one legal entity to another as needed by the individual companies. Companies often find it beneficial to lend excess funds to affiliates and to borrow from affiliates when cash shortages arise.

The borrower often benefits from lower borrowing rates, less restrictive credit terms, and the informality and lower debt issue costs of intercompany borrowing relative to public debt offerings.

The lending affiliate may benefit by being able to invest excess funds in a company about which it has considerable knowledge, perhaps allowing it to earn a given return on the funds invested while incurring less risk than if it invested in unrelated companies.

Also, the combined entity may find it advantageous for the parent company or another affiliate to borrow funds for the entire enterprise rather than having each affiliate going directly to the capital markets.
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Consolidation Ownership Issues. Additional Consolidation Reporting Issues

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There are many ways in which a business may be owned under the laws of England and Wales.

Different types of ownership are suitable for organisations depending on the degree of control the owners wish to have over the business. The choice of ownership methor also relates to the organisations ability to raise funds for the business activities. The ownership method also alters the rules under which the company must be administered.

Because ownership is key part of business planning it is essential to take into consideration:

 

Forms of Business Ownership in the Private Sector - Mind Map Forms of Business Ownership in the Private Sector

 

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The three main forms of ownership for starting business are: Sole-trader, Partnership and Limited company.

 

Consolidation is the act of merging many things into one. In business, it often refers to the mergers or acquisitions of many smaller companies into much larger ones. The financial accounting term of consolidation refers to the aggregated financial statements of a group company as consolidated account. The taxation term of consolidation refers to the treatment of a group of companies and other entities as one entity for tax purposes.

 

Mergers and Acquisitions Balanced Scorecard Metrics Template

 

 

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Multinational Accounting: Foreign Currency Transactions and Financial Instruments. Multinational Accounting: Translation of Foreign Entity Statements

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In finance, the Exchange Rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. For example an exchange rate of 120 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 120 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 2 trillion USD worth of currency changes hands every day.

 

The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.

 

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How Exchange Rates Work?

 

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Financial Instruments is either a real or virtual document representing a legal agreement involving some sort of monetary value.

Financial instruments can be categorised by form depending on whether they are cash instruments or derivative instruments.

Cash instruments are financial instruments whose value is determined directly by markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.

Derivative instruments are financial instruments which derive their value from some other financial instrument or variable. They can be divided into exchange traded derivatives and over-the-counter (OTC) derivatives.

Alternatively they can be categorised by "asset class" depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorised into short term (less than one year) or long term.

Foreign Exchange instruments and transactions are neither debt nor equity based and belong in their own category.

 

Combining the above methods for categorisation, the main instruments can be organized into a matrix as follows:

ASSET CLASS INSTRUMENT TYPE
Securities Other cash Exchange traded derivatives OTC derivatives
Debt (Long Term)
>1 year		 Bonds Loans Bond futures
Options on bond futures		 Interest rate swaps
Interest rate caps and floors
Interest rate options
Exotic instruments
Debt (Short Term)
<=1 year		 Bills, e.g. T-Bills
Commercial paper		 Deposits
Certificates of deposit		 Short term interest rate futures Forward rate agreements
Equity Stock N/A Stock options
Equity futures		 Stock options
Exotic instruments
Foreign Exchange N/A Spot foreign exchange Currency futures Foreign exchange options
Outright forwards
Foreign exchange swaps
Currency swaps

 

Some instruments defy categorisation into the above matrix, for example repurchase agreements.

The chart below shows how to measure a financial instrument's gain or losses

Categories Measurement Gains and losses
Assets Loans and receivables Amortized costs Net income when asset is derecognized or impaire (foreign exchange and impairment recognized in net income immediately)
Available for sale financial assets [[Deposit account|Fair value Other comprehensive income (impairment recognized in net income immediately)

 

 

Segment and Interim Reporting. SEC Reporting

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The United States Securities and Exchange Commission (commonly known as the SEC) is a United States government agency having primary responsibility for enforcing the federal securities laws and regulating the securities industry. The SEC was created by section 4 of the Securities Exchange Act of 1934 (now codified as 15 U.S.C. § 78d and commonly referred to as the 1934 Act). In addition to the 1934 Act that created it, the SEC enforces the Securities Act of 1933, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Sarbanes-Oxley Act of 2002 and other statutes.

Appointed by George W. Bush, Christopher Cox is the current chairman of the SEC.

President Franklin Delano Roosevelt appointed Joseph P. Kennedy, Sr., father of President John F. Kennedy, to serve as the first Chairman of the SEC. For a full list of SEC chairs and commissioners, see: Securities and Exchange Commission appointees.

 

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Partnerships: Formation, Operation and Changes in Membership. Partnerships: Liquidation

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Business Organisation

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A Partnership is a type of business entity in which partners share with each other the profits or losses of the business undertaking in which all have invested.

In most countries, a partnership is a nominate contract between individuals who, in a spirit of cooperation, agree to carry on an enterprise, contribute to it, by combining property, knowledge or activities and to share its profit. Partners may have a partnership agreement, or declaration of partnership and in some jurisdictions such agreements may be registered and available for public inspection. In many countries, a partnership is also considered to be a legal entity, although different legal systems reach different conclusions on this point.

Partnerships are often favored over corporations for taxation purposes, as a partnership structure eliminates the dividend tax levied upon profits realized by the owners of a corporation.

The most basic form of partnership is a general partnership, in which all partners manage the business and are personally liable for its debts. Two other forms which have developed in most countries are the limited partnership (LP), in which certain "limited partners" relinquish their ability to manage the business in exchange for limited liability for the partnership's debts, and the limited liability partnership (LLP), in which all partners have some degree of limited liability.

 

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Forming a Business Partnership – Steps to Developing a Business Partnership Plan

 

Governmental Entities: Introduction and General Fund Accounting. Governmental Entities: Special Funds and Account Groups

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Governmental Accounting is an umbrella term which refers to the various accounting systems used by various public sector entities. In the United States, for instance, there are three levels of government which follow different accounting standards set forth by independent, private sector boards. At the federal level, the Federal Accounting Standards Advisory Board (FASAB) sets forth the accounting standards to follow. Similarly, there is the Governmental Accounting Standards Board (GASB) for state level government and Financial Accounting Standards Board (FASB) for local level government.

 

Statement of financial performance for the Australian Government general government sector

 

Public vs. Private Accounting

There is an important difference between private sector accounting and governmental accounting. The main reasons for this difference is the environment of the accounting system. In the government environment, public sector entities have differing goals, as opposed to the private sector entities' one main goal of gaining profit. Also, in government accounting, the entity has the responsibility of fiscal accountability which is demonstration of compliance in the use of resources in a budgetary context. In the private sector, the budget is a tool in financial planning and it isn't mandatory to comply with it.

Governmental Accounting

The governmental accounting system uses the historic system of fund accounting. A set of separate, self-balancing accounts are responsible for managing resources that are assigned to specific purposes based on regulations and limitations.

The governmental accounting system has a different focus for measuring accounting than public sector accounting. Rather than measuring the flow of economic resources, governmental accounting measures the flow of financial resources. Instead of recognizing revenue when they are earned and expenses when they are incurred, revenue is recognized when there is money available to liquidate liabilities within the current accounting period, and expenses are recognized when there is a drain on current resources.

Governmental financial statements must be accompanied by required supplementary information (RSI). The RSI is a comparison of the actual expenses compared to the original budget created at the beginning of the fiscal year for the Government's General Fund and all major Special Revenue Funds.

 

Not-for-Profit Entities. Corporations in Financial Difficulty

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A Nonprofit Organization (abbreviated "NPO", or "non-profit" or "not-for-profit") is an organization whose primary objective is to support an issue or matter of private interest or public concern for non-commercial purposes. Nonprofits may be involved in an innumerable range of areas relating to the arts, charities, education, politics, religion, research, sports or some other endeavor.

 

What is a Nonprofit Organization?

 

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Financial Distress is a term in Corporate Finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty. Sometimes financial distress can lead to bankruptcy. Financial distress is usually associated with some costs to the company and these are known as Costs of Financial Distress. A common example of a cost of financial distress is bankrupty costs.

Insolvency is a financial condition experienced by a person or business entity when their assets no longer exceed their liabilities, commonly referred to as 'balance-sheet' insolvency, or when the person or entity can no longer meet its debt obligations when they come due, commonly referred to as 'cash-flow' insolvency. The term is often incorrectly used as a synonym for bankruptcy, which is a distinct concept, except in Germany.

 

Insovency Service

A state of insolvency generally leads to a legal finding of bankruptcy. However, because putting a person or entity into bankruptcy requires the payment of court fees, an insolvent person or entity may be insolvent and not legally bankrupt.

In some jurisdictions, it is an offence under the bankruptcy laws for a corporation to continue in business once it is insolvent, though in the United States even bankruptcy typically sees the corporation continue operations. It is also usually grounds for a civil action, or even an offence, to continue to pay some creditors in preference to other creditors once a state of insolvency is reached. When determining whether a gift or a payment to a creditor is an unlawful preference, the date of the insolvency, rather than the date of the bankruptcy, will usually be the primary consideration. However in the UK, both are relevant. For example, if a corporation pays a large bonus to its management several months before it actually files for bankruptcy protection, the court will not look at the date of the bankruptcy filing, but at the date where the corporation's debts exceeded its liabilities, and/or the date at which it was unable to pay its debt obligations when they became due, in determining whether the directors can be sued for the return of the bonuses.

In the United States, under the Uniform Commercial Code, a person is considered "insolvent" when the party has ceased to pay its debts in the ordinary course of business, or cannot pay its debts as they become due, or is insolvent within the meaning of the Bankruptcy Code. This is important because certain rights under the code may be invoked as against an insolvent party which are otherwise unavailable.

Although the terms bankrupt and insolvent are often used in reference to governments or government obligations, a government cannot be insolvent in the normal sense of the word. Generally, a government's debt is not secured by the assets of the government, but by its ability to levy taxes. By the standard definition, all governments would be in a state of insolvency unless they had assets equal to the debt they owed. If, for any reason, a government cannot meet its interest obligation, it is technically not insolvent but is "in default". As governments are sovereign entities, persons who hold debt of the government cannot seize the assets of the government to re-pay the debt. However, in most cases, debt in default is refinanced by further borrowing or monetized by issuing more currency.

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Corporate Recovery is the term given to the rescues undertaken by professional accountants, who are professionally trained, to assist the management of companies in nursing a company in financial and other difficulty back to health.

This work is usually undertaken at the behest of the directors of the company directors and is normally undertaken by licensed insolvency practitioners.

 Corporate recovery

 

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. Creditors may file bankruptcy for a debtor in an effort to recoup a portion of what they are owed. In the majority of cases, bankruptcy is initiated by the debtor (the bankrupt individual or organization).

 

Notice of closure stuck on the door of a computer store the day after its parent company, Granville Technology Group Ltd, declared 'bankruptcy' (strictly, put into administration - see text) in the UK.
Notice of closure stuck on the door of a computer store the day after its parent company, Granville Technology Group Ltd, declared 'bankruptcy' (strictly, put into administration - see text) in the UK.

 

 

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Recommended Texts

Advance Financial Accounting

Advance Financial Accounting

Richard Baker, Valdean Lembke, Thomas King

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Financial and Managerial Accounting: The Basis for Business Decisions

Financial and Managerial Accounting: The Basis for Business Decisions, 12/e
Jan R. Williams, University of Tennessee
Susan F. Haka, Michigan State University
Mark S. Bettner, Bucknell University
Robert F. Meigs

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Resources

Global Accounting/ERP

 

Financial Capacity

 

 

 

ACCA

The Association of Chartered Certified Accountants (ACCA) is a British chartered accountancy body with a global presence that offers the Chartered Certified Accountant (Designatory letters ACCA or FCCA) qualification worldwide. It is one of the world's largest and fastest-growing accountancy bodies with 110,000 members and 260,000 affiliates and students in 170 countries. The Institute's headquarters are in London with the principal administrative office being based in Glasgow. In addition the ACCA has a network of over 70 staffed offices and other centres around the world.

The ACCA is a founding member body of the Consultative Committee of Accountancy Bodies (CCAB) and the International Federation of Accountants (IFAC).

The term Chartered in ACCA qualification refers to the Royal Charter granted by Her Majesty the Queen in the United Kingdom.

Since Chartered Certified Accountant is a legally protected term, individuals who describe themselves as Chartered Certified Accountants must be the members of ACCA and, if they carry out public practice engagements, must comply with additional regulations such as holding a practising certificate, being insured against any possible liability claims and submitting to inspections.

The Association of Authorised Public Accountants (AAPA), one of British professional body for public accountants becomes a subsidiary of ACCA since 1996.

 

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