- Accounting Financial Statement
Identifying problems in a financial statements and figuring out how to minimize it in the first place, is a vital role the accounting people should strive in. Occurrence of problems are inevitable although, by virtue, it is presumably that financial reporting process always works the way it should and that the resulting financial statements are accurate.
Not only small medium businesses, the same issues also happened in giant-fortune 100 companies, otherwise big scandal such as Enron, WorldCom, Xerox, Quest, Tyco, and many more, never existed.
Possible reason for those problems could endless—ranging from unintentional errors to intentional deception or fraud—resulting financial statements sometimes contain errors or omissions that can mislead investors, creditors, and other users. There are, however, some basic paths or patterns about where and what the problems commonly occurred that accounting people can identify and prevent from happening. Through this post I am going to discuss about types of problems in financial statements and how to prevent them from occurring. Financial statement problems, in general, are classified into three categories—from which then a controller is able to develop more preventive procedures, policies, systems and tools that the entire company should follow and use
Read more → - Accounting Financial Statement
Financial statements is main product of the accounting process. Understanding the logics behind a financial statements helps the management, share holders, investors, and other interested parties to know the company’s financial conditions easier. It is common (and understandable), however, that many of the parties do not quiet understand it for not all of them are accounting-savvy.
Believe it or not, in fact I have been seeing that—ironically—many of the accounting persons do not really understand the logic behind a financial statements either—mostly entry-level staffs.
No shame is necessary in this case, if you are one of them. The accounting schools simply have not enough time to complete their job. So it produces accounting graduates who are technically accounting-savvy, but lack of accounting and financial logic. What I mean is that they can make journal entries, adjustments, trial balances, even create financial statements with no mistakes, but they have no clues when the management asks them some important questions, such as:
Read more → - Accounting Management Accounting
Performance assessment is crucial to management of any companies who wants to make sure that its operation is under control. To be able to go into deeper and more details assessment, they would need to view the company in segments—divided into several unit of operations, in the form of responsibility centers.
Using financial and non-financial control system, each center is assessed to get insight how’s each unit (responsibility center) of the company going, or why plans were not achieved—in a worst case, and make the appropriate adjustment. Based on the result of the assessment, they then are able to take necessary decision for their operation going forward (in short or long-run.)
Financial control summarizes the financial results of operation (in each responsibility center) and compares them to planned results. When companies (or organizations) use a single index to provide a broad assessment of operations, they frequently use a financial number, such as revenue, cost, profit, or return on investment. That is why each responsibility center is called “revenue/cost/profit/investment center”. By dividing the whole operation into business units—in the form of responsibility centers, executives are capable of controlling every facet of the business more effectively. They can even analyze and decide which business units deserve for expansion—or closed in the worst situation. In this post, I am going to discuss about responsibility centers and how to coordinate the center in a light overview. Read on…
Read more → - Accounting Cost Accounting Management Accounting
In the past, manufacturing operations were mainly labor paced, and direct costs comprised the majority of product costs. Since the early 20th century, automation has been evolving which then gradually replaced labor cost. Those allow almost every staffs/workers to multi-tasking. The emerging trends increases the use of indirect costs in manufacturing which then increased the need for costing systems to deal adequately with indirect costs.
The first thing to do in classifying cost is to test if a cost is direct—a cost that is uniquely and unequivocally attributable to a single “cost object”. If the cost fails the test of being direct it is classified as indirect.
If a single cost object consumes a consumable resource, the cost of the consumable resource is a direct cost for that cost object. The cost of wood used to make a table in a furniture factory is a direct cost that would be assigned to the table. Any cost that fails the test of being a direct cost is an indirect cost. This may sound simple, but disputes in costing about whether a cost should be treated as direct or indirect, outnumber all other costing disputes. So, how to deal with indirect cost in a manufacturing environment? Before going to the topic, you would need to be familiar with some terms used in costing which I will introduce now. Following on, let’s also have a look how cost flows in manufacturing organization and how to differentiate direct and indirect cost. Read on…
Read more → - Accounting Fixed Asset Fixed/Plant Asset
There is always a chance, in any companies, that physical fixed assets is unmatched with its accounting book. And this, by the accounting principle and rules, isn’t okay. It should be resolved so that they’re matched. In technical words, the accounting department needs to reconcile its fixed asset record.
There are two possible causes of why fixed asset record is not match with its physical, in majority: (1) fixed assets that are on the books and cannot be located; or (2) fixed assets that are physically there, but not on the books. In most companies, both situations exist.
In the above first case, the fixed asset seemingly is missing but the dollar amount shown on the balance sheet has never been written off—therefore the net worth of the company is overstated. As in the second case, at least in theory, it is impossible for significant pieces of fixed assets to be physically present without a corresponding record on the books of account—after all, is it usual that vendors provide gifts in fixed assets to their customers? Of course, they don’t. So, how to resolve those situations? To come to certain solutions, one would need to understand how those situations could come in to their ways so that he/she can prevent such case from happening at the first place. Read on…
Read more → - Accounting Auditing
Due to its complexity and wide-range of risks inherent with the use of financial statement, developing an audit approach for financial instruments is crucial. Paradoxically; on one hand financial instruments are used (by entities) to reduce exposures to certain business risk, on the other hand the inherent complexities of some financial instruments also may result in increased risk—business and material misstatement risk—along with the increase of the financial instruments usage.
It has been long-known that financial instruments vary in complexity that come from various source: (a) volume of individual cash flows—where a lack of homogeneity requires analysis of each one or a large number of grouped cash flows to evaluate; (b) complex formulas for determining the cash flows; and (c) uncertainty or variability of future cash flows. In addition, sometimes financial instruments that ordinarily—which otherwise are relatively easy to value—could become complex to value because of particular circumstances.
The accounting for financial instruments under certain financial reporting frameworks or certain market conditions could be complex too. The definition of the financial instruments themselves could be vary in wide-range—from simple loans and deposits to complex derivatives, structured products, and some commodity contracts. Financial instruments could be cash; or the equity of another entity; or the contractual right or obligation to receive or deliver cash or exchange financial assets or liabilities; and so forth. So, how do you develop audit approach for financial instruments? Before going to the main topic, let’s have a look why an entity uses financial instruments and what are the risks inherent with the usage.
Read more → - Fixed Asset Fixed/Plant Asset
Reconciling physical fixed assets—into existing property records, is often the case of a company that has just established new policies for minimum capitalization going forward. To support the new policy, say, that its asset lives are based on realistic expected lives—not on tax requirements. Acquisition, transfer, and retirement policies will be followed so that the accounting records correspond to the physical assets, and vice versa.
At that point a fixed assets manager or a controller maybe satisfied that in the future fixed assets will be under control. But, what is missing here is the fact that the ‘existing-property-records’ and the ‘actual-physical-assets’ present in the company, are not in sync. So what to do?
That was a good question of my staff ever asked to me five or seven years ago—when I was an accounting manager. To that question, I answered her with “Nothing.” What she would need to make sure, on that time, was to follow the new policy (with new minimum capitalization) going forward—just let the old problems sorted themselves out overtime. I have a set of good and appealing reason of why I took the approach. Read on…
Read more → - Accounting IFRS-Learning
Following on the Financial Instruments Disclosures Part 1—where we have discussed about disclosures of financial instruments by categories, reclassifications disclosures, derecognition of financial assets disclosures, and collateral disclosure, I am going to complete the series through this post.
Before going to the part 2, please note that IFRS 7 (“Financial Instruments: Disclosures”) applies to those financial instruments to which IAS 32 applies, with the additional exclusion of equity instruments (including puttable instruments classified as equity).
As promised, Part 2—the final series, is going to discuss about: disclosures for impairment allowance disclosures, disclosures in the statement of comprehensive income, hedge accounting disclosures, fair value disclosures, disclosures in lieu of fair value disclosures, necessary notes to the fair value hierarchy-based disclosures, and three types of risks that must be shown in financial instruments—credit risk, market risk, and liquidity risk.
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