1.Discuss about the Risk and Return in Financial Statements.
2.Discuss about the Risk and Returns in Investment Decisions.
An accountant is a very important part of every business organization whether small or big. An accountant’s primary duty is to compile every financial transaction and present them in a concise manner which allows the stakeholders to understand the effect of financial transactions and they're after effects (Porter & Norton, 2014). In case the accountant is fully capable of understanding financial transactions and its effects, an organization shall never be left deprived of financial viability. However, an accountant should be technically sound and updated of the accounting updates and accounting standards applicable for the organization (Bodie et. al, 2014). An auditor’s role is half done if the accounting has been properly done and documented. In case the internal controls of the company are sound and properly placed, the auditor can rely on the internal controls also.
1.Risk and Return in Financial Statements
The accountant should properly understand the risk involved in the business and the effects of the nonidentification of risk. We would like to explain the above point with an example:
ABC Limited is a bank operating in Australia having thousands of customers having deposits, investments and loans disbursed simultaneously. The risk involved in the accounting of a bank is as follows:
- Confidential data of clients like KYC details, bank details, and their credit profile- in case these details are compromised, the bank may land up in a big problem.
- The risk of loans becoming irrecoverable due to non understanding of credit profile of a person at the time of granting loans.
- Dependency on IT infrastructure and database responsible for storing customers and its failure.
An accountant has to fully understand the risk involved in any business and properly place or recommend internal controls for detection and prevention of the risk involved. An accountant should properly get training and increase his skills to understand and make an attempt to minimize man-made errors or risk (Deegan, 2011). For example– thorough understanding of the accounting principles and the accounting standards, understanding of the IT software and infrastructure etc.
2.Risk and Returns in Investment Decisions
In case the accountant feels that the investment decisions made by the management are not financially viable, he may recommend some changes in the investment plans. This is only possible if the accountant has a profound knowledge about the risk and returns of investment decisions he should explore all possible and available investment options in the market (Davies & Crawford, 2012). He should also measure the opportunity cost involved with every investment option and should try to increase the return with minimum risk with a long-term investment vision as well. He can also use analytical skills and formula like ratio analysis, percentage calculations, last year trends, investment credit ratings and past profile of the investment options and only after this analysis, we should consider and recommend the investment to the top management through his reports (Graham & Smart, 2012). The ultimate goal of the investment decisions is to maximize return at minimum possible risk.
All this can be accomplished by an accountant when he has proper knowledge about the market returns and the risk factors included therein. Hence, the learning of risk and return is very vital for an accountant if he wants to fulfill his duties and responsibilities most efficiently.
For example, there are four investment options available in the market namely :
- Investment in equity shares having low return with higher risk attached.
- Investment in preference shares- less return with less risk.
- Investment in debentures- medium return with less risk.
- Investment in Bank Deposits- moderate return with least risk.
Now, the accountant should understand the concept of risk and return in these investments and further the investment needs of the company on whether and in which segment the company needs to invest and how much risk the company is able to bear. On the basis of the assessment made, an accountant should make the investment with available resources and should make his investment decision (Berk et. al, 2015). He may use the formula for lowest cost of capital and then accordingly invest in the market.
In case the company is well placed in the market and wants to take ownership in any company or subsidiary, it may directly purchase or invest in their equity share capital which shall give them ownership but on the other hand, it may be a riskier option as well. On the other hand in case the company does not want to take any risk it may invest in any company’s debentures or preference shares which ensure moderate returns but a safer option on the whole. Hence, it depends upon the risk-bearing capacity of the company (Petty et. al, 2012).
Of all the options above the least risky option are bank deposits.
Another example can be taken for the investments in shares of different companies. If a company generally invests in shares of other companies like construction companies, banking companies etc, it is very important that the credit rating of such companies should be checked first (Arnold, 2010). Also, the price trends of the company should be analyzed before investing to avoid probable losses. These recommendations can be given by an accountant only if he has known about the risks and returns associated with such investments
Hence, the learning about risk and returns is very important for an accountant if he wants to fulfill his job commitments and his job responsibilities. If we talk about the returns, the accountant is supposed to go through the incomes earned and the sources of income and also the expenses incurred during the compilation and summarizing of accounts. This is to be done so that the discrepancies can be found out in comparison to the projections made by the company in the previous year for the expected returns to the company. The perspective of returns is different for different kinds of companies. For example, the returns can be either in the form of dividends or the retained earnings. The accountant can assess the risks and returns in financial statements when he has proper accounting knowledge and about the different risks and returns.
Arnold, G 2010, The Financial Times Guide to Investing, Prentice Hall.
Berk, J, DeMarzo, P & Stangeland, D 2015, Corporate Finance, Canadian Toronto: Pearson Canada.
Bodie, Z, Kane, A. & Marcus, A. J 2014, Investments, McGraw Hill
Davies, T & Crawford, I 2012, Financial accounting, Harlow, England: Pearson.
Deegan, C. M 2011, In Financial accounting theory, North Ryde, N.S.W: McGraw-Hill
Graham, J & Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning.
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M & Nguyen, H 2012, Financial Management: Principles and Applications, 6th ed., Australia: Pearson Education Australia
Porter, G & Norton, C 2014, Financial Accounting: The Impact on Decision Maker, Texas: Cengage Learnin