Following these methods constitutes an agreement as how to implement such concepts. Methods of accounting are an integral component for contracting between firms and other parities such as lenders, shareholders, customers, suppliers and managers and if there is any failure to specify and outline the accounting methods used before a certain type of transaction takes place will inherit the potential to create uncertainty in pay-offs for both contracting parties. For example; If there is no advanced agreement on whether or not commitment to unfunded he... ... middle of paper ... ...a reporting entity anywhere in the world so it would seem that standards are not the only method in solving this accounting problem. Under the ‘principal based’ accounting techniques where the use of general principles are used instead of strict accounting rules, are developed in advance and then applied to a given future state of an entity and then approved by an independent auditor, it is therefore not optimal for every accounting transaction to be recorded and reported under the same set of uniform standards. One other reason to expect less-than-uniform standards in a voluntary setting is that firms and or countries that use varied accounting methods do not fully incorporate the costs inherited on to others due to the lack of report comparability and therefore it seems that a mandatory uniformity in accounting practises such as the IFRS appears to be rationale.
To account for this, they create a returns allowance at the time of invoicing to account for the right of return as a percentage of the sale. This net revenue is then an accurate account of the realized and earned revenue. (Connors, 2011) Works Cited Connors, R. (2011, October 4). Corporate Controller. (P. Sems, Interviewer) FASB.
Introduction To account for profit, businesses have an option of choosing between two methods of record keeping; that is the accrual basis method and the accounting basis method. Using one method throughout accounting period and then changing it at the end while determining profit, might introduce a form of biasness and hence resulting in inaccurate figures. The two methods are completely different in terms of how revenue and expenses are recognized and recorded. As a result, the accounting for profit between the two is also poles apart. In the accrual based method, revenues and expenses are recorded once they are earned or incurred regardless of whether a cash transaction has been conducted or not (Mills, Call & Drew 2000).
These methods are specific identification, cost average, first in, first out (FIFO), and last in, first out (LIFO). Each method has its own advantages and disadvantages. Some of these methods are allowed under the generally accepted accounting principles (GAAP), while others are allowed by the international financial reporting standards (IFRS). This paper is going to highlight what each method means and the positive and negative impacts of using each method. Also, this paper will touch on why different companies prefer to use different methods when valuing inventory.
The move towards fair-value accounting should be continued for many reasons. When comparing fair value, or market value, to historical cost, fair value gives a more relevant and updated view of what a particular asset or liability is truly worth. This promotes transparency of a company’s operations and gives stakeholders and potential investors an accurate look at the company’s worth. If assets and liabilities are sitting on the company’s books at historical value, this information can quickly become out-of-date. Fair value method of accounting also limits a company’s ability to lie about their income and make it look better than it actually is by using gains or losses from sales to increase or decrease net income.
This means not only including the taxes and other liabilities in considering the net profit of the company but also being prepared in providing budgets for the employment of legal and financial experts for each region needed. Forecasting is also a vital role of the CFO. If there is an effective way of forecasting over a period of time, it would give better data analysis and comparisons between the annual reports and minimise the differences in the projections for each time period. Budgeting is subjected on in-country products that will reduce too much detailed data and repetitive budget revisions.
By applying the matching concepts, the bookkeeping is requiring to record the revenue and expense in the same period. The matching principle is to ensure the profits are accurately reported for each accounting period. For this reason, the accrual accounting method requires end-of-period adjustments to be made to the business revenues and expenses while the cash method does not. These end-of-period adjustments create accounting transactions known as accruals (Baskerville,
Entities can earn revenue if the firm has “substantially accomplished what it must do to be entitled to the benefits represented by the revenues” (605-10-25-1). For example, when companies substantially completed (a) provision of professional services, (b) delivery or production of goods, or (c) other activities that constitute its ongoing major or central operations, revenues is earned. Issue 2 (“Bill and Hold”) Question: One of the issues faced by TerraSure relates to revenue recognition of finished goods that have not yet been delivered to customers due to inadequate storage space in customer’s warehouses. TerraSure has engaged in two different methods to deal with this situation. With the first method, TerraSure segregates the inventory within its own finished goods warehouse.
1. Question 1: Proficient: Explain why proper inventory valuation is so important to the calculation of a company's "bottom line" net income. A merchandise company must be sure it has properly valued it inventory for three reasons. If the ending inventory is overstated, cost of goods are unstated which leads to an overstatement of the gross margin and net income. Overstating the ending inventories also affect the current assets, total assets and retained earnings because any changes to the ending inventory is calculated dollar for dollar (ignoring any, income tax effects), in net income, current assets and retained earnings.
This is the concept that, when you record revenue, you should record all related expenses at the same time. Thus, you charge inventory to the cost of goods sold at the same time that you record revenue from the sale of those inventory items. This is a cornerstone of the accrual basis of accounting. The cash basis of accounting does not use the matching the principle. Materiality principle.