Discuss about the Accounting Concept & Practices for Financial Performances.
The stakeholders often use the financial statements of various companies to compare and evaluate the financial performances and positions of the business firm. However, they often face several issues to compare the performances of the different companies on the basis of the financial statements. The main issues, which affect the evaluation processes, are the differences in the accounting methods and principles, adopted by the different companies. Such differences lead to different outcomes for same type of transactions or events. In such cases, the users of the financial statements cannot compare the outcomes effectively and take proper investment-related or other financial decision in accordance to the outcomes (Armstrong et al., 2015).
Nestle is a popular Swiss company, which deal with producing and marketing food items. It has extended its business operation in all over the world. The financial statements of Nestle Ltd. are compared with those of Patties Foods and Kraft Foods, based in Australia and America respectively to evaluate the financial performance of Nestle Ltd. However, it should be noted that the three companies belong to three different countries. The accounting rules and methods, followed by each company might be different from each other in many aspects. Therefore, it is very necessary to consider the aspects, which can cause discrepancies in the outcomes of the financial statements, before commencing the comparison amongst the companies (Nobes, 2014). The major factors, which should be considered carefully, are discussed below:
Nestle Ltd. uses to prepare the consolidated financial statements in compliance with International Financial Reporting Standard (IFRS), as stated by International Accounting Standard Boards (IASB) and the guidelines of Swiss Law. The statements are prepared on the basis of accrual method and historical cost convention concept. The financial year for the company ends on 31st December.
Patties Foods is based on Australia and hence, apart from complying with IFRS, it also follows the rules of Australian Accounting Standard Board, (AASB), Urgent Issues Group Interpretations (UIGI) and Corporation Act, 2001. As the financial statements of the company are prepared in accordance to IFRS, the company also follows historical cost convention method. The accounting year of the company closed at 30th June.
On the other hand, Kraft Foods is an American food company, which considers the US GAAP standard as issued by Financial Accounting Standard Board (FASB), which is very popular amongst the American companies. The company closes all its accounts on 31st December. The company uses to record some assets as per historical costs and some at the lower of cost or market price.
Consolidated Companies
Now, as the accounting standards, and related guidelines, followed by the companies, are not same, the process of recording and disclosing any transaction or event become different also. Moreover, the closing dates of each company are also not identical. Therefore, the present value of the financial outcome of each company cannot be compared with each other due to different closing period (Pratt,2013). Moreover, every country has its own accounting culture, which reflects in the related corporate laws. The corporate laws influence the financial reporting of the companies, which causes discrepancies in the corporate reporting of different companies from different countries (Frias?Aceituno et al., 2014).
Nestle Ltd. and Patties Foods both use to consolidate the financial report with all its subsidiaries and associates, even if the subsidiaries and associate are not fully owned by the companies.
Kraft Foods includes the subsidiaries, which are wholly-owned only, for consolidated financial reporting. It does not incorporate the companies as associates, where the company does not have full voting right.
It implies that the financial statements of Nestle and Patties Food reflect the financial performances of its associates and subsidiaries also, which are not fully controlled by the respective companies. Kraft Foods exhibits the performances of the associates, which are under full control of the company only (Leuz & Wysocki, 2015).
Nestle uses to convert its foreign currencies in various forms. Non-Monetary assets and liabilities are recorded at historical exchange rate. On the other hand, there are many events, which are recorded at the exchange rate either on the date of the event or as per the forward contract.
Kraft Food record the foreign transactions mostly at forward foreign exchange rate, whereas, Patties Food follows same method as Nestle.
The difference is recording the foreign transactions causes problem in comparing the value of various foreign currency related financial items. Moreover, the home currencies of the three companies are also different. Hence, the currency exchange rates, applied for conversions, use to be different also with each other (Balakrishnan et al., 2014).
Conclusion:-
From the above discussion, it can be stated that if the stakeholders have to evaluate Nestle Ltd. by comparing its performance with Patties Food and Kraft Food, then they should minimize the discrepancies, explained above. Otherwise, the comparison would not be proper. The stakeholders should measure all the financial items of each company under any single method, which can be applicable and appropriate for all the companies.
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In the Books of Salzer Graphics |
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Adjustment Journal Entries |
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Dr. |
Cr. |
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Date |
Particulars |
Amount |
Amount |
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|
30/06/2013 |
Supplies A/c. |
Dr. |
$1,300 |
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|
To, |
Supplies Expenses A/c. |
$1,300 |
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|
Interest Expenses A/c. |
Dr. |
$2,000 |
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|
To, |
Interest Payable A/c. |
$2,000 |
||
|
Prepaid Insurance A/c. |
Dr. |
$1,200 |
||
|
To, |
Insurance Expenses A/c. |
$1,200 |
||
|
Accounts Receivable A/c. |
Dr. |
$1,100 |
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|
To, |
Unearned Consulting Revenue A/c. |
$1,100 |
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Accounts Receivable A/c. |
Dr. |
$2,000 |
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To, |
Graphic Revenue A/c. |
$2,000 |
||
|
Depreciation Expenses A/c. |
Dr. |
$1,500 |
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|
To, |
Accumulated Depreciation A/c. |
$1,500 |
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In the Books of Salzer Graphic |
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Adjustment Worksheet |
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as on 30/06/2013 |
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Trial Balance |
Adjustment |
Adjusted Trial Balance |
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Particulars |
Debit |
Credit |
Debit |
Credit |
Debit |
Credit |
|
Cash |
$9,500 |
$9,500 |
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Accounts Receivable |
$14,000 |
$3,100 |
$17,100 |
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Equipment |
$45,000 |
$45,000 |
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Insurance Expenses |
$1,800 |
$1,200 |
$600 |
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Salaries Expenses |
$30,000 |
$30,000 |
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Supplies Expenses |
$3,700 |
$1,300 |
$2,400 |
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|
Advertising Expenses |
$1,900 |
$1,900 |
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Rent Expenses |
$1,500 |
$1,500 |
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Utilities Expenses |
$1,700 |
$1,700 |
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Notes Payable |
$20,000 |
$20,000 |
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Accounts Payable |
$9,000 |
$9,000 |
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Jill Salzer, Capital |
$22,000 |
$22,000 |
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Graphic Revenue |
$52,100 |
$2,000 |
$54,100 |
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Consulting Revenue |
$6,000 |
$6,000 |
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Supplies in hand |
$1,300 |
$1,300 |
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Interest Expenses |
$2,000 |
$2,000 |
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Interest Payable |
$2,000 |
$2,000 |
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Prepaid Insurance |
$1,200 |
$1,200 |
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Unearned Consulting Revenue |
$1,100 |
$1,100 |
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Depreciation Expenses |
$1,500 |
$1,500 |
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Accumulated Depreciation |
$1,500 |
$1,500 |
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TOTAL |
$109,100 |
$109,100 |
$9,100 |
$9,100 |
$115,700 |
$115,700 |
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In the books of Salzer Graphics |
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Income Statement |
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For the period ended 30/06/2013 |
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Particulars |
Amount |
Amount |
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Revenue: |
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Graphic Revenue |
$54,100 |
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Consulting Revenue |
$6,000 |
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Total Revenue |
$60,100 |
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Expenses: |
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Insurance Expenses |
($600) |
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Salaries Expenses |
($30,000) |
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Supplies Expenses |
($2,400) |
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Advertising Expenses |
($1,900) |
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Rent Expenses |
($1,500) |
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Utilities Expenses |
($1,700) |
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Depreciation Expenses |
($1,500) |
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Total Operating Expenses |
($39,600) |
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Net Operating Profit before Interest |
$20,500 |
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Interest Expenses |
($2,000) |
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Net Profit for the period |
$18,500 |
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In the books of Salzer Graphics |
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|
Statement of Change in Equity |
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For the period ended 30/06/2013 |
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Particulars |
Amount |
Amount |
|
Jill Salzer, Capital |
$22,000 |
|
|
Add: Additional Capital |
$0 |
|
|
Jill Salzer, Closing Capital |
$22,000 |
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Opening Retained Earnings |
$0 |
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Add: Net Profit for the period |
$18,500 |
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Less: Drawings |
$0 |
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Closing Retained Earnings |
$18,500 |
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In the books of Salzer Graphics |
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Balance Sheet |
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as on 30/06/2013 |
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Particulars |
Amount |
Amount |
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Current Assets: |
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Cash |
$9,500 |
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|
Accounts Receivable |
$17,100 |
|
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Supplies in Hand |
$1,300 |
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Prepaid Insurance |
$1,200 |
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TOTAL CURRENT ASSETS |
$29,100 |
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Non-Current Assets: |
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Equipment |
$45,000 |
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Less: Accumulated Depreciation |
($1,500) |
$43,500 |
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TOTAL NON-CURRENT ASSETS |
$43,500 |
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TOTAL ASSETS |
$72,600 |
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Current Liabilities: |
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Accounts Payable |
$9,000 |
|
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Interest Payable |
$2,000 |
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Unearned Consulting Revenue |
$1,100 |
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Notes Payable |
$20,000 |
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TOTAL CURRENT LIABILITIES |
$32,100 |
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|
TOTAL NON-CURRENT LIABILITIES |
$0 |
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TOTAL LIABILITIES |
$32,100 |
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Equity: |
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|
Jill Salzer, Capital |
$22,000 |
|
|
Retained Earnings |
$18,500 |
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TOTAL EQUITY |
$40,500 |
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TOTAL LIABILITIES & EQUITY |
$72,600 |
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References & Bibliography:-
Armstrong, C., Guay, W. R., Mehran, H., & Weber, J. (2015). The role of information and financial reporting in corporate governance: A review of the evidence and the implications for banking firms and the financial services industry
Balakrishnan, K., Li, X., & Yang, H. (2014). Mandatory financial reporting and voluntary disclosure: evidence from mandatory IFRS adoption. Wharton School of Business, 1-53
Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia
Frias?Aceituno, J. V., Rodríguez?Ariza, L., & Garcia?Sánchez, I. M. (2014). Explanatory factors of integrated sustainability and financial reporting. Business strategy and the environment, 23(1), 56-72
Leuz, C., & Wysocki, P. (2015). The economics of disclosure and financial reporting regulation: Evidence and suggestions. Unpublished Results
Nobes, C. (2014). International Classification of Financial Reporting 3e. Routledge
Pratt, J. (2013). Financial accounting in an economic context. Wiley Global Education
Saunders, A., & Cornett, M. M. (2014). Financial institutions management. McGraw-Hill Education
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
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