Fundamental issues in financial accounting - Myassignmenthelp.Com

Question: Discuss about the Fundamental issues in financial accounting. Answer: Introduction: This case study has been prepared regarding a company that is Sunshine Ltd in which the General Manager named Kam Sunshine considered approaching Maria Mars which is the accountant of the company. The objective was to ensure certain advancements within the companys incoming profit discretely. This has increased certain dilemma for the accountant for the reason that she is focussed on her contract renewal in the company. Other than being aware of the fact that certain actions remain unethical, Maria has altered the depreciation method from applying straight line method to using the sum-of-years digits technique (Bazley et al. 2013). For this reason, the stakeholders has recognised that in this case study is focussed on shareholders, governments, communities, partners, suppliers, consumers, accountant, general manager and the creditors. Certain ethical concerns recognised by Maria in altering the depreciation methods that is explained in accordance with the requirements of the company along with AASB 116 effect. Governance and Ethics: It is explained that governance and ethics is concerned about mortality and it is not imposed on anyone. In contrast, ethics is considered to be highly efficient as the confidence of the users might get boosted with maintaining the necessary level and quality of work. Certain concerns associated with ethics of Sunshine Ltd are explained below: Objectivity Violation- General Manager of Sunshine Ltd is observed to misbehave with the companys senior management for certain personal gain and the accountant has also supported the person in attaining such objective. The company has employed several depreciation techniques on the fixed assets in order to indicate the devaluation effect along with depreciation method. This might indicate a situation within which the future advantages associated with assets are anticipated to be caused. Maria has altered the method of depreciation that has resulted in certain difference within the timing of the overall depreciation (Aasb.gov.au. 2017). This has resulted on the decisions of the shareholders to get impacted from the real decisions by certain anticipations regarding error. The accountant was held responsible to indicate accounting information in a better manner and the changes within financial reports should be reported. This is deemed to be against the working ethics of the accountant that has interrupted the necessary objectivity principle. Integrity and Transparency Defect- the Companys shareholders are deemed to have the responsibility to realise about the profitability associated with its investments. Relied on such variation associated with their investment profitability, they have the right to make sure that the shares are kept within the company. For addressing the needs of the shareholders within Sunshine Limited, Kam Sunshine has explained the fact that altering the deprecation method for developing an illusion of constant high profit. This indicates absence of integrity and transparency on the behalf of Sunshine Ltd in order to signify proper information to the financial statement users (Beatty and Liao 2014). Role of Accountants in Depreciation Method Change Relied on the information explained within the case study, Maria Mars has considered altering the depreciation method to be used from being straight line method to sum-of-years digits method (Bevis 2013). The major objective of employing the sun-of-years digits method is to decrease the necessary profit level in the future two years in order to transfer the same to 2018 and 2019 in order to deal with the expected economic depression. This might be explained with the support of the below mentioned illustration: Asset cost = $500,000 Useful life = 5 years Salvage value = $50,000 In addition, the comparison between profits through employing the two depreciation methods is indicated in the below section: Straight-line depreciation method: Straight-line depreciation = (Cost of asset Salvage value)/ Useful life Straight-line depreciation = ($500,000 - $50,000)/5 = $90,000 Sum-of-years-digits method of depreciation: Sum-of-years-digits method = Depreciable base x (Left over useful life/ Sum-of-years-digits) Sum-of-years-digits = n (n + 1)/2 Sum-of-years-digits = 5 (5 + 1)/2 Sum-of-years-digits (SYD) = 15 Years Depreciable base Left over useful life SYD Applicable percent Yearly depreciation 1 $450,000 5 5/15 33.33% $150,000 2 $450,000 4 4/15 26.67% $120,000 3 $450,000 3 3/15 20.00% $90,000 4 $450,000 2 2/15 13.33% $60,000 5 $450,000 1 1/15 6.67% $30,000 Statement indicating changes in deprecation: Years Straight-line depreciation Yearly depreciation (SYD) Difference 1 $90,000 $150,000 ($60,000) 2 $90,000 $120,000 ($30,000) 3 $90,000 $90,000 Nil 4 $90,000 $60,000 $30,000 5 $90,000 $30,000 $60,000 After altering the depreciation method, the necessary depreciation amount can increase in the initial years. Moreover, it might result in decline in the future years. This might facilitate in maintaining the profits to be constant over the future years because of the decrease on the depreciation charges with the passage of years (Callen 2015). Therefore, Maria Mars has a major role in altering the depreciation method from straight line method to sum-of-years digits technique in addressing the objectives of Kam Sunshine that is the general manager of the company. Stakeholders It is gathered from the Sunshine Ltd case study that a stakeholder is an individual, company or a group that has interest or concern in other companies. In this case study, the major shareholders those are recognised are explained under: Government and Communities- Communities and the government are considered as eternal shareholders for they are linked closely with Sunshine Ltd (Christensen, Cottrell and Baker 2013). As companies has their operation within the community, their conducts has an impact beyond consumers. The company experience taxes and in certain cases it is the informal expectations of the residents to have business operation in an ethical manner and sustain environmental sustainability. Moreover, the communities anticipate the companies to be linked with events along with domestic charitable giving. The government entities take certain decisions that might have an impact on Sunshine Limited Companys operations (Crawley and Wahlen 2014). For this reason, it is deemed to be considerable for the business managers of the company in sustaining strong link with the domestic officials for anticipating regulatory changes or community development impacting the companys operations. Consumers- The consumers are observed as vital external shareholders and these are required to be considered. In the retailers case, the consumers are deemed to be customers. For this reason, retaining, drawing and generating loyalty from the major consumers make sure of extended term financial progress of the company (Dutta and Patatoukas 2016). Considering the business-to-business companies, the business companies are the consumers those acquire goods for commercial purposes. The trade resellers are associated in direct selling from retailers or wholesalers and in certain scenario end consumers must be considered to be an aspect of the stakeholders. In a scenario where the consumers do not acquire the manufactured goods for instance, the distribution channel failure is inevitable. Suppliers and Partners- The business partners and suppliers are observed as major shareholders within the recent competitive environment (Henderson et al. 2015). The companies generally tend to maintain loyal relationship with the suppliers and the associates. This might support Sunshine Ltd in maintaining common goals, shared vision and strategies. The buyers and the trade sellers might efficiently collaborate in offering maximum value to the end consumers that is beneficial to the partners. Moreover, the trade partners are anticipated to have its operation in an ethical way for avoiding hampering consumer reputation of the company related with Sunshine Ltd. Accountant- As per the Sunshine Ltd case study, Maria Mars the accountant that supported in developing the financial statements along with altering the profit from the tear 2016 to 2017 along with 2018 to 2019. Creditors- It is explained that the companies often employ lenders in order to fund their purchases, business ventures, asset purchases as well as the supply purchases (Weil, Schipper and Francis 2013). The banks are involved in offering loans for vital purchases that includes new building. The suppliers can offer product inventory on account that is paid by the company at some other time in future. The current creditors of Sunshine Ltd might anticipate that the payment deadlines are addressed regularly along with accordingly. In such scenario, the company might be able to enhance relationships with its creditors that might increase the profitability of attaining effective funding in upcoming years. Shareholders- The individuals those invest in Sunshine Ltd for attaining advantages through attaining a share of the business profit is recognised as the vital shareholders of the company (May 2013). General Manager- In alignment with the given case study, Kam Sunshine is recognised to be Sunshine Ltd Companys general manager. The individual is likely to undertake certain decisions for enhancing total organizational performance (Van Mourik 2014). AASB 116 Standard Effect After the end of the period 30th June, 2015, Kam Sunshine has manipulated Maria Mars in recognising a manner for decreasing the profits in the future two years that initiates from 2016 and continues. Hence, this might offer regular profits over the future two years in order to address the interests of the shareholders. The accountant has altered the depreciation method fro being the straight line method to sum-of-digits technique (Narayanaswamy 2014). Moreover, Maria Mars has not disclosed any alterations made within the financial statements of the company. AASB 116 that is an Australian Accounting Standards Board associated with plant, property and equipment is a complied standard that is applicable to the annual reporting periods that initiated on or after 1st July, 2009. This standard has an objective to stipulate the accounting treatment associated with property, plant and equipment for providing necessary information to the financial statement users in accordance with the compan ys investment on certain assets along with required advancements in that investment. Certain vital concerns associated with accounting of plant, property and equipment are within the asset realization, the ascertainment of the carrying amounts along with advancements within depreciation along with impairment losses that is realised along with the same (McLaney and Atrill 2014). Within this case study, Maria Mars has advanced the method of depreciation from the straight line method to the sum-of-years digits method. Such concept associated with depreciation technique is segmenting the cost of tangible asset aver useful life of any good. It is also gathered that the business firms are getting highly associated within depreciating fixed or the non-current assets for attaining purposes of accounting and tax reasons. Accounting aspects is deemed to have an effect on the prepared net income statement of the company and tax based factors is observed to have an effect on the balance sheet statement of the company. Majorly, certain cost is apportioned in the depreciation expense form in time duration where the asset is anticipated to be used. The business companies realise their expenses for tax financial reporting and tax factors (May 2013). The techniques of computing depreciation along with the years over which certain assets are depreciated might diverge among t he type of assets in the similar business along with difference in tax purposes. The accounting standards along with laws can specify the same as it varies in several countries. The techniques of calculating depreciation expense are numerous that includes straight line method, decreasing balance along with sum-of-years-digits methods. Certain emergence of depreciation expense is present at the time the assets are utilised within the service. It is also gathered that the sum-of-years-digits method serves as an accelerated process for calculating the asset depreciation. The formula that is employed in calculating the value of depreciation under this process is explained under: SYD depreciation = Depreciable base x (Left over useful life/ Sum-of-years-digits method) This technique is developed in order to signify the consumption pattern of an important asset. Moreover, it is also employed in the absence of any particular pattern in the process where the asset must be used over the future years (May 2013). The straight line depreciation technique charges uniform costs over the non-current assets useful life. Such depreciation method is efficient within which the economic realisation from an asset is deemed to be realised in a better manner over their useful lives. Depreciation per year = (Cost Residual value)/ Useful life Sunshine Ltd is a huge departmental store along with having a group of members that undertakes decisions developed on rules at the time of the companys emergence. For this reason, Kam Sunshine has not followed the organizational policy through undertaking certain personal decisions that has direct effect on the companys financial statement. In addition, from the case study it is observed that certain advancements those were made in the company is focussed in taking the final decision that is required to e disclosed to all the stakeholders related with the company (May 2013). For this reason, it might be elucidated that the conducts of Maria Mars was not in accordance with AASB 116. Conclusion: The objective was to ensure certain advancements within the companys incoming profit discretely. This has increased certain dilemma for the accountant for the reason that she is focussed on her contract renewal in the company. From the above discussion, it could be stated that the company has employed several depreciation techniques on the fixed assets in order to indicate the devaluation effect along with depreciation method. 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