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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.

In the Books of Salzer Graphics

Adjustment Journal Entries

     

Dr.

Cr.

Date

Particulars

Amount

Amount

30/06/2013

Supplies A/c.

Dr.

$1,300

To,

Supplies Expenses A/c.

$1,300

Interest Expenses A/c.

Dr.

$2,000

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

To,

Unearned Consulting Revenue A/c.

$1,100

Accounts Receivable A/c.

Dr.

$2,000

To,

Graphic Revenue A/c.

$2,000

Depreciation Expenses A/c.

Dr.

$1,500

To,

Accumulated Depreciation A/c.

$1,500

In the Books of Salzer Graphic

Adjustment Worksheet

as on 30/06/2013

Trial Balance

Adjustment

Adjusted Trial Balance

Particulars

Debit

Credit

Debit

Credit

Debit

Credit

Cash

$9,500

$9,500

Accounts Receivable

$14,000

$3,100

$17,100

Equipment

$45,000

$45,000

Insurance Expenses

$1,800

$1,200

$600

Salaries Expenses

$30,000

$30,000

Supplies Expenses

$3,700

$1,300

$2,400

Advertising Expenses

$1,900

$1,900

Rent Expenses

$1,500

$1,500

Utilities Expenses

$1,700

$1,700

Notes Payable

$20,000

$20,000

Accounts Payable

$9,000

$9,000

Jill Salzer, Capital

$22,000

$22,000

Graphic Revenue

$52,100

$2,000

$54,100

Consulting Revenue

$6,000

$6,000

Supplies  in hand

$1,300

$1,300

Interest Expenses

$2,000

$2,000

Interest Payable

$2,000

$2,000

Prepaid Insurance

$1,200

$1,200

Unearned Consulting Revenue

$1,100

$1,100

Depreciation Expenses

$1,500

$1,500

Accumulated Depreciation

$1,500

$1,500

TOTAL

$109,100

$109,100

$9,100

$9,100

$115,700

$115,700

In the books of Salzer Graphics

Income Statement

For the period ended 30/06/2013

Particulars

Amount

Amount

Revenue:

Graphic Revenue

$54,100

Consulting Revenue

$6,000

Total Revenue

$60,100

Expenses:

Insurance Expenses

($600)

Salaries Expenses

($30,000)

Supplies Expenses

($2,400)

Advertising Expenses

($1,900)

Rent Expenses

($1,500)

Utilities Expenses

($1,700)

Depreciation Expenses

($1,500)

Total Operating Expenses

($39,600)

Net Operating Profit before Interest

$20,500

Interest Expenses

($2,000)

Net Profit for the period

$18,500


In the books of Salzer Graphics

Statement of Change in Equity

For the period ended 30/06/2013

     

Particulars

Amount

Amount

Jill Salzer, Capital

$22,000

Add: Additional Capital

$0

Jill Salzer, Closing Capital

$22,000

Opening Retained Earnings

$0

Add: Net Profit for the period

$18,500

Less: Drawings

$0

Closing Retained Earnings

$18,500

 

In the books of Salzer Graphics

Balance Sheet

as on 30/06/2013

Particulars

Amount

Amount

Current Assets:

Cash

$9,500

Accounts Receivable

$17,100

Supplies in Hand

$1,300

Prepaid Insurance

$1,200

TOTAL CURRENT ASSETS

$29,100

Non-Current Assets:

Equipment

$45,000

Less: Accumulated Depreciation

($1,500)

$43,500

TOTAL NON-CURRENT ASSETS

$43,500

TOTAL ASSETS

$72,600

Current Liabilities:

Accounts Payable

$9,000

Interest Payable

$2,000

Unearned Consulting Revenue

$1,100

Notes Payable

$20,000

TOTAL CURRENT LIABILITIES

$32,100

TOTAL NON-CURRENT LIABILITIES

$0

TOTAL LIABILITIES

$32,100

Equity:

Jill Salzer, Capital

$22,000

Retained Earnings

$18,500

TOTAL EQUITY

$40,500

TOTAL LIABILITIES & EQUITY

$72,600

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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[Accessed 23 February 2024].

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