Transcript
Accounting Short Note-2015 Prepared By: Md. Abul Khairat (Tushar), fb id:
[email protected] Deferred expense : A deferred expense is a cost that has already been incurred, but which has not yet been consumed. The cost is recorded as an asset until such time as the underlying goods or services are consumed; at that point, the cost is charged to expense A deferred expense is a cost that has already been incurred, but which has not yet been consumed. The cost is recorded as an asset until such time as the underlying goods or services are consumed; at that point, the cost is charged to expense.A deferred expense is initially recorded as an asset, so that it appears on the balance sheet (usually as a current asset, since it will probably be consumed within one year). From a practical perspective, it makes little sense to defer the expenses associated with smaller amounts of unconsumed goods and services, since the accountant must manually enter the deferral in the accounting software (rather than to the pre-set expense account), as well as remember to charge these items to expense at a later date. Instead, charge these items to expense immediately, as long as there is no material effect on the financial statements. This reserves only larger transactions for deferral treatment. A good example of items that are not necessarily consumed at once, but which are charged to expense immediately are office supplies. As an example of a deferred expense, ABC International pays $10,000 in April for its May rent. It defers this cost at the point of payment (in April) in the prepaid rent asset account. In May, ABC has now consumed the prepaid asset, so it credits the prepaid rent asset account and debits the rent expense account. Other examples of deferred expenses are: Interest costs that are capitalized as part of a fixed asset for which the costs were incurred Insurance paid in advance for coverage in future months The cost of a fixed asset that is charged to expense over its useful life in the form of depreciation The cost incurred to register the issuance of a debt instrument The cost of an intangible asset that is charged to expense over its useful life as amortization You should defer expenses when generally accepted accounting principles or international financial reporting standards require that they be included in the cost of a long-term asset, and then charged to expense over a long period of time. For example, you may have to include the cost of interest in the cost of a constructed asset, such as a building, and then charge the cost of the building to expense over the useful life of the entire asset in the form of depreciation. In this case, the cost of the interest is a deferred expense. Accounting Policies: Accounting policies are the specific policies and procedures used by a company to prepare its financial statements. These include any methods, measurement systems and procedures for presenting disclosures. Accounting policies differ from accounting principles in that the principles are the rules and the policies are a company's way of adhering to the rules. Accounting principles are lenient at times, so the policies of a company can be very important. Looking into a specific company's accounting policies can signal whether management is conservative or aggressive when reporting earnings. This should be taken into account by investors when reviewing earnings reports. Also, outside accountants that are hired to review a company's financial statements should check the company's policies to ensure they conform to accounting principles Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial information. [3] Where an IFRS specifically applies to a transaction, event or condition, the accounting policy applied to that item should be determined by reference to that standard. When no standard applies specifically to a transaction, event or condition, management should use its judgement to develop a policy that results in information that is relevant to the Accounting Short Note-2015 Prepared By: Md. Abul Khairat (Tushar), fb id:
[email protected] economic decision-making needs of users and reliable, such that the financial statements faithfully represent the financial position, performance and cashflows of the entity, reflect the economic substance of transactions, events and conditions, are free from bias, prudent, and complete in all material respects In making judgement, management should take into account (in the following order) the requirements in IFRSs dealing with similar and related issues, and the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework . Management may also consider recent pronouncements of other standard-setting bodies, accounting literature and accepted industry practices, to the extent that these do not conflict with IFRSs and the Framework . Accounting policies should be applied consistently for similar transactions, events or conditions, unless an IFRS requires or permits different accounting policies to be applied to different categories of items An entity can change an accounting policy only if it is required by an IFRS or results in the financial statements providing reliable and more relevant information. If the change is due to requirement by an IFRS, an entity shall account for the change from the initial application of the IFRS in accordance with the specific transitional provisions (i.e. the standard may specify retrospective application or only prospective application), if any. Where there are no specific transitional provisions in the IFRS requiring the change in accounting policy, or an entity changes an accounting policy voluntarily, it should apply the change retrospectively. Where a change in accounting policy is applied retrospectively, an entity should adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts for each prior period presented as if the new accounting policy had always been applied. The standard permits exemption from this requirement when it is impracticable to determine either the period-specific effects or cumulative effect of the change Trend Analysis : A trend analysis is a method of analysis that allows traders to predict what will happen with a stock in the future. Trend analysis is based on historical data about the stock's performance given the overall trends of the market and particular indicators within the market. Method of time series data (information in sequence over time) analysis involving comparison of the same item (such as monthly sales revenue figures) over a significantly long period to (1) detect general patter of a relationship between associated factors or variables, and (2) project the future direction of this pattern. A trend analysis is a method of analysis that allows traders to predict what will happen with a stock in the future. Trend analysis is based on historical data about the stock's performance given the overall trends of the market and particular indicators within the market. Trend analysis takes into account historical data points for a stock and, controlling for other factorslike the general changes in the sector, market conditions, competition for similar stocks, it allows traders to forecast short, intermediate, and long term possibilities for the stock. By watching the general trends of the markets, a trader may be able to match purchases and salesof particular stocks, maximizing his or her potential for profits. At the same time, it is important to look at historical data in a larger context of conditions for the underlying company to understand if there are factors that may affect a stock's value irrespective of general market conditions or past performance. For example, a trader should look inside the financial conditions of the company, understand the market and technologies, and anticipate competitive pressures on the company within its sector. All of these tolls, as well as trend analysis, benefit a trader. Trend analysis means Accounting Short Note-2015 Prepared By: Md. Abul Khairat (Tushar), fb id:
[email protected] looking at how a potential driver of change has developed over time, and how it is likely to develop in the future. Rational analysis of development patterns provides a far more reliable basis for speculation and prediction than reliance on mere intuition. Several trends can be combined to picture a possible future for the sector of interest, such as schooling. Trend analysis does not predict what the future will look like; it becomes a powerful tool for strategic planning by creating plausible, detailed pictures of what the future might look like . he large range of possibilities opened by trend analysis makes it key for developing robust scenarios that meet essential criteria: Plausible: Logical, consistent and believable Relevant: Highlighting key challenges and dynamics of the future Divergent: Different from each other in strategically significant ways Challenging: Questioning fundamental beliefs and assumption Balance of payments: The balance of payments, also known as balance of international payments and abbreviated BoP, of a country is the record of all economic transactions between the residents of the country and the rest of the world in a particular period (over a quarter of a year or more commonly over a year). These transactions are made by individuals, firms and government bodies. Thus the balance of payments includes all external visible and non-visible transactions of a country . It represents a summation of country's current demand and supply of the claims on foreign currencies and of foreign claims on its currency [1] . [2] These transactions include payments for the country's exports and imports ofgoods, services, financial capital, and financial transfers. It is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items. When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries. While the overall BOP accounts will always balance when all types of payments are included, imbalances are possible on individual elements of the BOP, such as the current account, the capital account excluding the central bank's reserve account, or the sum of the two. Imbalances in the latter sum can result in surplus countries accumulating wealth, while deficit nations become increasingly indebted. The term balance of payments often refers to this sum: a country's balance of payments is said to be in surplus (equivalently, the balance of payments is positive) by a specific amount if sources of funds (such as export goods sold and bonds sold) exceed uses of funds (such as paying for imported goods and paying for foreign bonds purchased) by that amount. There is said to be a balance of payments deficit (the balance of payments is said to be negative) if the former are less than the latter. A BOP surplus (or deficit) is accompanied by an accumulation (or decumulation) of foreign exchange reserves by the central bank. Under a fixed exchange rate system, the central bank accommodates those flows by buying up any net inflow of funds into the country or by providing foreign currency funds to the foreign exchange market to match any international outflow of funds, thus preventing the funds flows from affecting the exchange rate between the country's currency and other currencies. Then the net change per year in the central bank's foreign exchange reserves Accounting Short Note-2015 Prepared By: Md. Abul Khairat (Tushar), fb id:
[email protected] is sometimes called the balance of payments surplus or deficit. Alternatives to a fixed exchange rate system include a managed float where some changes of exchange rates are allowed, or at the other extreme a purely floating exchange rate (also known as a purely flexible exchange rate). With a pure float the central bank does not intervene at all to protect or devalue its currency, allowing the rate to be set by the market, and thecentral bank's foreign exchange reserves do not change, and the balance of payments is always zero . Working capital : Working capital (abbreviated WC ) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Gross working capital equals to current assets. Working capital is calculated as current assets minus current liabilitiesIf current assets are less than current liabilities, an entity has a working capital deficiency , also called a working capital deficit . A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. Working capital is the difference between the current assets (except cash) and the current liabilities. The basic calculation of the working capital is done on the basis of the gross current assets of the firm. Decisions relating to working capital and short-term financing are referred to as working capital management . These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. management will use a combination of policies and techniques for the management of working capital. The policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short-term financing, such that cash flows and returns are acceptable. Cash management . Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. Inventory management . Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials — and minimizes reordering costs — and hence increases cash flow. Besides this, the lead times in production should be lowered to reduce Work in Process (WIP) and similarly, the Finished Goods should be kept on as low level as possible to avoid over production — see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic quantity
