Tag: accounting

The Changing Nature of Management Accounting and the Emergence of ‘Hybrid’ Accountants

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The Changing Nature of Management Accounting and the Emergence of ‘Hybrid’ Accountants

by John Burns, Lecturer in Accounting
and Robert Scapens, Professor of Accounting University of Manchester, UK 

CIMA Publishing – November 2000

Brief Synopsis

The paper presents evidence from a study of management accounting change in UK companies. Motivated by claims that management accounting had lost its relevance in informing managers’ decisions, our research investigated whether management accounting has been too slow to change despite the rapidly changing technological and organisational environment in recent years. We conclude that management accounting is changing. However, rather than change being necessarily in the type of management accounting techniques adopted, it seems to be more about the manner through which management accounting, including many traditional accounting techniques, is being used. Furthermore, our research also highlights the emergence of new, more proactive management accountants who increasingly become part of the management team within a business process. The paper highlights the roles and expectations of these so-called hybrid accountants and projects implications for the professional accounting bodies and its members.

Biographical Details

John Burns, Lecturer in Accounting since 1996, at the University of Manchester, UK. Main research interests in: all areas of management accounting; organisational change; institutional theories of organisational change; industrial policy.

Robert Scapens, Professor of Accounting since 1983, at the University of Manchester, UK. Editor-in-Chief of CIMA’s academic publication, Management Accounting Research. Main research interests in: all areas of management accounting; enterprise resource planning (ERP) systems; case study research methods; institutional theories of organisational change.

Introduction

In recent years there has been considerable debate over the extent to which management accounting is changing. Johnson and Kaplan (1987) argued that management accounting had not changed since the early part of the twentieth century and, as such, had lost its relevance for the purpose of informing managers’ decisions. Although, it has also been argued that the environment in which management accounting is practiced has changed considerably – with advances in information technology, more competitive markets, different organisational structures and new management practices (see, for example, Ezzamel et al., 1993).

Since the publication of Johnson and Kaplan’s work, various new accounting techniques have been developed such as activity-based costing (ABC) and strategic management accounting. However, such so-called modern techniques are not being used as widely as their advocates might have expected. For example, various surveys indicate that ABC is only used by between 20% and 30% of companies (eg., Innes and Mitchell, 1995). Whereas traditional management accounting techniques continue to be used widely (see Drury et al., 1993). These surveys, therefore, appear to support the relevance lost thesis.

This leads us to question whether management accounting has been too slow to change despite the rapidly changing technological and organisational environment in recent years – the focus of a research project based at Manchester University (UK) . The project was generously funded by the Chartered Institute of Management Accountants and the Economic and Social Research Council; it comprised a questionnaire survey, a field study of 12 companies, and 8 longitudinal case studies (all UK-based and lasting between 3 and 5 years).

Broadly speaking, our research findings suggest that management accounting is changing. However, rather than change being necessarily in the type of management accounting techniques adopted, it seems to be more about the manner through which management accounting, including many traditional techniques, is being used. Whilst it is difficult to disagree with the findings of surveys that, at a superficial level, traditional management accounting techniques continue to be used, these surveys fail to identify changes in the way that traditional accounting techniques are now used in practice.

Furthermore, our research also highlighted the emergence of new, more proactive management accountants. As will be developed in the paper, rather than there being a change in management accounting (eg., Bromwich and Bhimani, 1989), the profession faces exciting challenges ahead. Although, as we shall explain, individuals must be prepared to accept, and have organisational backing to, change traditional ways of doing accounting.

Factors Shaping Management Accounting Change

However, before describing our observations on the changing nature of management accounting and the changing roles of an accountant, we should briefly outline some of the external factors which seem to be shaping such change. No attempt was made to assess the extent of the impact of each of these external factors, they are simply the factors which managers and accountants claim to be having an impact on their management accounting.

Various factors were mentioned by different people, but probably the most frequently cited was the competitive economic situation of the 1990s, and especially global competition. The extent to which the claims of increased competition are rhetorical, rather than actual economic effects, does not really matter. It is the perception of managers and accountants which is important, and how they perceive the economic climate in which they operate. If there is a perception of greater competition, then an increased focus is likely to be given to markets and the customer. And, though much of this customer focus may simply be rhetoric, in the companies we studied there did appear to be a greater emphasis on the service given to customers, and to providing that service in a market-orientated way.

Another fundamental change, and far more than rhetoric, is the advance in information technology which has taken place in recent years. The speed of technological change over the last 30 years or so, and especially the advent of the PC, has had a profound affect on organisational life. Particularly significant over the last 5-10 years has been the extent of the dispersion of computers and computing capacity around the organisation. The increased use of the computer has had major effects on the nature of work, especially clerical work, and on information flows around the organisation.

In addition, there have been other substantial changes in organisational structure, although again whether they are generated by rhetorical or real economic factors is not clear. For example, whereas in the UK in the 1970s, there was a wave of acquisitions and mergers, with the creation of conglomerates, by the 1990s organisations were moving in the opposite direction. The trend was then for de-mergers, with companies focusing on core competencies, and outsourcing non-core activities.

These various changes – in competition, technology and organisational structure – all have important implications for the nature of management accounting – particularly the manner in which traditional accounting techniques are now being used. In the next section we discuss such implications.

The Changing Nature of Management Accounting

As described above, there have been considerable advances in information technology in recent years. One of the most important, apart from the speed and capacity of modern systems, has been the development of data-base technologies which provide the ability to store vast amounts of information in easily accessible ways. These technologies permit various users simultaneously to access the information stored on the database and to use it in different ways. 

When Johnson and Kaplan were proclaiming their relevance lost thesis, one of the reasons they advanced was that management accounting is dominated by financial reporting. They argued that as financial reporting is a legal requirement, it has to be done. So if a company has only one information system, it is the needs of financial reporting which will take precedence. Thus, information for other purposes has to be accommodated within that system, so far as it is practical. In this sense, management accounting is second place to financial reporting. 

Database systems

But with modern databases, information can be analysed in a number of different ways. This makes it possible to design an information system that meets the needs of the various users, and in effect to have different information for different purposes. There need only be one database, but which is used to produce the information needed for different accounting systems, and these systems are then integrated through the information systems as a whole.

Another significant effect of IT development is the way in which information is more widely dispersed around the organisation. All managers and many other people at all levels within the organisational hierarchy have PCs on their desks, which can be used to access the information they need. Traditionally, managers would ask accountants for the information, especially the financial information, they needed. Although some managers would maintain their own, often informal, records, the formal information was maintained in the accounting system. If managers wanted to access that information or they need particular analyses, they would ask the accountants. 

But now, as information systems become more integrated and access to them is dispersed around the organisation, the information flow has, to some extent, been reversed. Individual managers have greater responsibility for information concerning their areas of activity, and instead of asking accountants for information, they can obtain the information directly from their PC. Thus, rather than managers seeking information from the accountants, the accountants use the information stored in the information system to produce both financial and management accounting reports. So, as it were, the accounting reports are extracted from the information system, rather than being the basis on which information is provided to the rest of the organisation. This implies a change in the role of accountants, from one of information provider to, at least to some extent, the “customer” of the broader integrated information system. Accountants, however, are often directly involved in the design and maintenance of the information system.

Decentring accounting knowledge

A particular management accounting consequence of these technological developments is what we have called elsewhere, the decentring of accounting knowledge (see Scapens et al., 1996). Information such as budgets, variances, and actuals are all now available at various levels in many organisations. Even in companies that have not implemented one of the new integrated information systems, we have found that such accounting information is often available, for instance, in the production information system, and is designed and maintained by production personnel, rather than by accountants. Furthermore, it is the managers who now have the responsibility for cost management, whereas previously it was the accountants responsibility to monitor costs. Cost management is now more generally accepted to be a managerial function, and managers increasingly think and talk about their activities in cost terms. 

This means that, within the various areas of a business, there is a need for individuals who understand costs, variances, accounting reports and so on. Such individuals may be accountants (part or fully-qualified), or more likely people from other functions who are financially literate. In some of the organisations we studied, such people were described as “pseudo-accountants” or something equivalent. These are the increasing number of people who have accounting knowledge, and although not trained as accountants, can access, analyse and use accounting information without the intervention of an accountant.

In part, this decentring of accounting knowledge is the result of accountants educating other people in the organisation, but it has been made possible by the availability of financial information at all levels in the organisation. Furthermore, it has implications for the role of a management accountant, as was illustrated in several of our case studies. Many managers, although not trained as accountants, displayed a very high level of understanding of accounting systems and accounting information. Nevertheless, most still claimed the need for an accountant. In several companies we visited, the management accountant would be notionally a member of the centralised accounting function, but assigned out in the field where he/she works most of the time. In general, these accountants were regarded as important because of their links to the centralised accounting function which means that he/she has knowledge of the interactions with other parts of the business. So, the accountant is able to provide a much broader understanding of the business, and able to advise on the impacts and implications which actions within the particular function would have on the other parts of the business. In essence, management accountants were seen as people who could look outwards from a particular area of activity, to the business more generally.

Forecasts

A further issue that emerged in most of the companies we have studied relates to the role of the budgets. Increasingly, budgets are being seen as backward looking and out of date before the start of the year. There now appears to be much greater emphasis given to forecasts – either rolling forecasts for, say the next 3, 6 or 12 months (depending on the nature of the business); or, forecasts to the year end. This is particularly important because, whereas budgets are usually associated with the accountants, forecasts are more closely identified with individual managers.

Budgets are usually produced as part of a business-wide exercise, co-ordinated by the accounting function. Frequently, budgets are perceived as imposed from outside, even where there is some input from individual departments and functions. Forecasts, however, whether they are rolling forecast, or forecasts to the year end, require considerable inputs from these individual departments and functions themselves, as they are the only people with the necessary detailed knowledge, and this greater personal involvement can create a feeling of ownership of the forecast. Consequently, there is a shift of emphasis from budgeting, which has essentially been backward looking and is to a great extent imposed, to forecasts which are forward-looking and locally-owned.

Commercial orientation

A further general finding from our project is the change from what might be termed a financial accounting mentality, to a more commercial orientation. More emphasis on commercial orientation does not mean that profit is unimportant, profit remains crucial. The vast majority of businesses need to earn profits to survive – but profit can be conceptualised rather differently. A commercial orientation recognises that it is the business ability to continue to earn profits in future periods which is important, rather than just seeking to earn a profit in the current period. This implies a more strategic view, and an emphasis on managing the capacity to generate profits. This does not necessarily imply less quantification ñ indeed, it may involve more quantification and a wider range of performance indicators. Furthermore there is likely to continue to be an ongoing comparison of actual performance against targets, as expressed in terms of these indicators. But this may be over a longer time period than traditional short-term accounting cycles. 

However, a word of caution needs adding about what might happen in an economic downturn. It may have been relatively easy in the early part of the 1990s, with stock market growth and buoyant economies, to focus on a broader conception of profitability. But with declining stock markets and, say, a global recession, there could well be a return to more bottom-line focus.

Strategic Focus

This commercial orientation appears in many of the companies we visited to have a more strategic focus, leading to the use of a range of performance indicators – including a significant increase in the use of non-financial measures of performance (eg., customer satisfaction and quality indicators). Key performance indicators, which may be financial or non-financial, attempt to assess the factors which impinge on a company’s ability to earn profits, both in the short and long term. 

Given that broader based performance indicators are increasingly becoming more important, what is the role of the management accounts which are produced month by month? In one of our case studies, management accounts are prepared for the monthly Management Board meetings, which generally last one whole day and offer the opportunity to discuss current issues and problems in the company. Referring to the management accounts, the Managing Director explained that they are presented by the management accountant, and “it takes 20 minutes – including the jokes!”. As such, the management accounts are the starting point for the day’s discussions, but the Managing Director did not expect to find anything contained within them which he did not already know.

However, the month-by-month figures in the management accounts have to be understood in the context of broader performance indicators, linking the financial outcomes with the strategic consequences of the activities which have been undertaken. One of the roles of the management accountant is to bring together the broad view of the business expressed in the key performance indicators, with the narrower financial view shown in the management accounts. For this purpose the management accountant needs a broad understanding of the business and it operations. Such ideas will be developed in the section below.

The Changing Role of Management Accountants

Having briefly outlined the changing nature of the use of management accounting, we will now explore possible implications for accountants and the professional accounting bodies. As a starting point, it can be said that there are both opportunities and threats. In one case study, a UK-based manufacturer of healthcare products, the number of people in the accounting function declined in the period 1990-97 from 120 to 60. Similar high-percentage reductions were observed elsewhere. Such reductions are largely a result of advances in information technology, particularly the computerisation of recording and processing transactions.

But during the same period in this company, there was also an emergence of hybrid accountants – as they were called by some managers. The company had changed from a functionally organised business (with separate business units and service functions to support them) to a process-based form of organisation. Whereby, each unit, and if possible each site, was responsible for all its activities from the receipt of an order to delivery of the final product. Under this new structure there is now a process leader who is responsible for all these activities, together with the associated support functions which are an integral part of the process. In this particular case, the only functions which are now separate are finance, IT and quality. But even the finance function, although notionally separate, became increasingly integrated into the individual processes.

Supporting each individual process is a small group of accountants – the hybrids. A hybrid accountant is someone who has both accounting knowledge and an in depth understanding of the operating functions or commercial processes of the business. Throughout most of the company, hybrids are physically located in the process steams, where they work alongside the process managers. They have offices next to the process leaders, where they work at least three days a week. They then spend the other day or two in the accounting function, where they have an additional desk and are able liaise with their accounting colleagues. But, in most instances, it appeared that the hybrids regarded the process as being their “home”, and that they regard themselves as part of the process management team.

There is clearly an opportunity to extend the role of management accountants within such process teams. Although, if accountants are to be involved in the management process in this way, they need to understand the complexities of the business and to have the capability of interacting with people in all parts of the organisation.

We have seen various examples in our case studies. At one extreme there was an accountant who was excellent at producing and analysing the numbers but he could not relate them to the business, and consequently he was not retained in the organisation. At the other extreme, someone complimented an accountant saying: “He’s not like normal accountants. He can see the real business through the numbers”. While intended as a compliment to this particular individual, the comment was a criticism of accountants more generally. There does appear to be a need for more management accountants to understand their business, but this requires broader forms of training and experience, not simply training in accounting numbers. In particular, management accountants need to relate the accounting and financial information to the wider information flows within the organisation, including strategic information, and to recognise the limitations as well as the potential of management accounting.

As was mentioned at the start of this paper, our research project was motivated by concerns over claims that management accounting had lost its relevance for managerial decision-making. Our findings, however, indicate that professional bodies should not be unduly concerned about the relevance lost thesis. Management accounting is still very much alive, though in many companies its use is undergoing change. Nevertheless, there is an important issue which the professional accounting bodies do have to address. They must ensure that their members are capable of taking a broader role within the management team. Some accountants clearly are ñ as we have seen in our case studies. But the issue for the professional bodies is whether both their student training programmes and their continuing education activities are preparing their future and current members for this broader role and, in general, helping them to cope with the changing nature of management accounting.

References

Bromwich, M. and Bhimani, A. (1989) Management Accounting: Evolution not Revolution, The Chartered Institute of Management Accountants: London. 
Drury, C., Braund, S., Osbourne, P. and Tayles, M. (1993) A Survey of Management Accounting Practices in UK Manufacturing Companies, Chartered Association of Certified Accountants: London.
Ezzamel, M., Lilley, S. and Willmott, H. (1993) Changes in Management Practices in UK Companies, The Chartered Institute of Management Accountants: London.
Innes, J. and Mitchell, F. (1995) A survey of activity-based costing in the UK’s largest companies, Management Accounting Research, June, pp. 137-54.
Johnson, H. T. and Kaplan, R. S. (1987) Relevance Lost: The Rise and Fall of Management Accounting, Harvard Business School Press: Boston, Mass.
Scapens, R., Turley, S., Burns, J., Joseph, N., Lewis, L. and Southworth, A. (1996) External Reporting and Management Decisions: A Study of their Interrelationship in UK Firms, The Chartered Institute of Management Accountants: London.

 

 

 

REQUIRED:

 

With reference to the above article discuss how you believe the role of the management accountant has changed since this article was published in 2000 and, in hindsight, if there is evidence to support the arguments put forward by John Burns and Robert Scapens.

 

 

The above is the question and below is information to assist you in this task.

 

This is a research piece and will therefore require you to investigate, in some detail, the changes which have taken place in accounting in general (but with a focus on management accounting), global and national economic conditions, technology and accounting education since the article was published.

 

The course work is to be written in the “style” of an academic article and must be referenced accordingly.

 

One of the main aims of the course work is to develop your research skills. I expect to see evidence of extensive reading about and around the subject, from sources including ALL of the following:

  • Text books;
  • Academic articles; and
  • Internet sources.

 

The course work will constitute 60% of the overall mark for the module, BAF-4-IM2 Intermediate Management Accounting, and marks will be awarded for content, evidence of research, presentation and insight into the area under investigation. For such a substantial percentage of the module I expect effort to be in evidence. 

 

The word count is 2,000 words +/- 10%. This is to be strictly adhered to and marks will be deducted accordingly if you go under or over the limit stated.

 

Presentation is important when undertaking academic writing. While I understand this is a first year module and do not expect anything new to emerge (although I would welcome original thought), I do expect you to write and present this work in a professional manner. If you are unsure of how to write in the style of an academic article then look on the library website in any recognised accounting journal and see for your selves.

 

 One of the skills you must learn is that of referencing your work to a very high standard. You are all aware of the fact sheet offered by the library regarding the Harvard System of referencing. I expect you all to follow that style and if you choose not to do so marks will be severely deducted and you run the risk of failure. The help sheet can be found at:

 

http://www.lsbu.ac.uk/library/html/documents/HS30_000.pdf

 

Your work must also be submitted to the module “Turn-it-In” site, which will be made available on the Blackboard site for Intermediate Management Accounting.

 

Turn-it-In is a Web-based service that can find and highlight matching or unoriginal text in a written assignment. Although it can be used to detect plagiarism I want you to utilise the software as a way of self-checking your final submission.

You must include a print out of the summary page(s) of your individual turn-it-in report as appendices to your final submission. I will check each submission to see if it matches your summary pages – YOU HAVE BEEN WARNED.

 

I will run through the Turn-it-In system prior to you having to submit your course work.

 

I will allow multiple submissions to the module turn-it-in site but be aware that while your first submission normally takes around 24 hours before you get the report back, subsequent submissions may take considerable longer. I therefore suggest that your final submission is put through the site at least 2/3 days prior to the deadline I have set.

 

This is an individual piece of work and you will be severely penalised if you are found to have copied/plagiarised a fellow students work or any other work submitted both to LSBU and/or in the public domain. I have had cases in the past where students have innocently shared their work with others only to find that their work has been copied and used. In a scenario like this both parties will be penalised. That is not to say you cannot discuss the work with both your fellow students and your lecturers and I will assist any student who needs help. I will not look at any work sent to me via e-mail but I do understand that from time to time (and I mean occasionally, not on a weekly basis) you may wish to seek guidance.

 

Part of the university experience is to learn to think independently. I expect you all to embrace this culture and have the confidence to work on your own without constantly seeking reassurance.

 

The all-important hand-in date is as follows:

 

HAND IN DATE: TUESDAY 16TH APRIL 2013.

 

This is week 9 of the semester and also allows you 3 weeks over the Easter break to finalise your submission (this gives you 10 weeks in total which includes the Easter break). Your exams will not start until at least 4 weeks after submission and I have chosen this date so as not to affect any revision you may have leading up to your end of year exams. The course work is to be submitted to LR105 (The Faculty Office in London Road) no later than 4pm on the date specified above.

 

It is not within my power, or the power of any academic/administrative member of staff, to extend this deadline in any way. Please familiarise yourselves with the course guide/student handbook for clarification in this area.

 

 

 

 

 

 

 

 

 

 

 

 

 

For your guidance the course work will be assessed against the 4 general criteria below:

 

Communication                                                                                                          15%

Writing ability – power of expression; clarity of language and analytical logic; adherence to an appropriate structure and presentation.

 

Knowledge & Understanding                                                                             50%

Depth of analysis and extent of understanding of the subject; breadth of knowledge demonstrated; the relevance and practicability of the conclusions made and the extent to which they relate theory to practice.

 

 

Research                                                                                                                         30%

The extent of research as evidenced by a bibliography, reflection, informed critical discussion and analysis. 

 

Turn-It-In                                                                                                       5%

This mark is to be awarded if the student has followed the brief and submitted their summary turn-it-in report as part of the appendices.

 

The above is for your guidance and a more substantive break down of grade marks will be utilised when marking your work. This will incorporate the learning outcomes as stated in the module guide, especially those related to intellectual, practical and tr

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Accounting Service Product Market Business and Marketing

Posted on | by Simon KN

I. Product

A. Rationale for selection

Global e-commerce services is the solution to the increasing demand for accounting problems poised to various companies. It is against this background that E-Commerce Accounting Service is selected to provide accounting solutions for all year round accounting services to our clients. The business will assist small scale and home based business and individual clients in finding accounting solutions.

B. Tangible component

The product will be highly significant as it would provide; 

  • General accounting and book keeping services: – management of accounts payable and receivable, employee payroll accounts, designing of flexible internal control and working capital management. 
  •  Business Consulting & Advisory Services:- business and market plans development, training employees on use of accounting packages,  and consultancy on payment systems to adopt
  •  Financial Controller/CFO Services:- end year Financial Statement Analysis, budgetary and budgeting control, preparation of stakeholders reports , and filing of tax returns

C. Intangible component

The product will inherently;  

  • Offer professional and  competitive accounting  services to the satisfaction of our clients 
  • Assist clients to comply with various regulatory and administration accountancy regulation and rules and,
  • Act as referring agent of other accounting firms

D. Intellectual property

Our brand will be protected under intellectual property rights an initiative that will serve to protect our brand of services.  This will involve protection of the copyrights and the trademarks such as the brand name protection. The unfair competition law will also be applied to the shapeup our brand so as to hinder unfair protection that would result to the closure o the business. Intellectual property rights of the E-Commerce Accounting Service will also be protected by security systems on the internet that are highly technological. The patent licensing and the product licensing will also be done to ensure that the company trades effectively. 

E. Involvement

In view of the fact that customers can must have a complete confidence with global e-commerce accounting services  due to the sensitivity involved in the field, high involvement will be required at all levels. There is high in the management team as well as in the research team as they all engage to learn about the customers and also to identify the niche market. The high involvement also arises as the team reaches out to find about the possible online and offline competition that arises and acts as a threat to the company.

F. Theory-based characteristics/considerations
1.) Product life cycle

The current industry trend indicates that the services to be provided by the firm stand a good chance to successfully generate revenue. This positive trend is reinforced by relatively recent, May 22,  2009, survey by PaySimple and Market Platform Dynamics (MPD) that was released through the PRLog Press Release  indicating  that ‘over the next two years, small businesses believe more of their commerce will be done using electronic payments’ up from the current 50% users 

a.) Affect on price

Our pricing will be affected by the relatively complexity of our product as it will aim at covering all the costs involved in; remunerations, running departments, taxation. It is however imperative to note that there would be lower overhead cost since being a service oriented company, there would be minimal manufacturing constraints. 

b.) Affect on promotion

This analysis shows that there is potential growth in the adoption of modern payment methods that would necessitate professional and technical assistance to implement. The product life cycle will also affect the choice of how to promote our product. Creation of awareness is key to a successful entry into the market hence considerable finances will be attached to that effect. 
II. Market 

A. Market

Though not the first entrant in the market, market   analysis and surveys   show existence of unrecognized yet potential clients as that can sustain the business. The Venture also bases the analysis on its unique products and plans to offer flexible consultancy service and also to incorporate expert information system to aid clients in decision making. 
1.) Business to Consumer

Retail segment: this segment represents the small scale traders who mainly handle consumer goods. Given their number in United States, it is projected that a careful and aggressive marketing would ensure that the largest sales volumes are realized from this segment.

2.) Business to business

Service based business: this represents businesses which offer different services to their clients at a fee such car tracking companies. These companies use automated payment systems and would require set up as well as advisory services of the same. 

B. Market segmentation

The potential clientele base has been segmented into three groups based on data from the established similar entities (Division of clients into groups). It is estimated that it will take 3 months to find customers and get established.
1.) Demographic(s)

As noted above, the firm’s demographic profile will mainly be inclusive of; individuals in need of accounting services, small scale businesses and corporate clients. The three groups will have varying accounting needs, for example corporate clients may require check deposit and acceptance, tax advisory and end year accounting advisory services some of which may not be applicable to individual clients. 
2.) Psychographic(s)

Our clients will be seeking highly qualified professionals with extensive theoretical knowledge with competent workforces who have undergone institutionalized training. We therefore indent to employ extremely well trained and competent individuals so as to enable us serve our clients with prestige and dignity. 
3.) Geodemographic(s) 

Geodemographics will be applicable as our firm will classify clients into different categories since geodemographic profile functions will help the firm make a number of choices. The location of our clients in addition to the clientele type; whether individual or corporate will be put into consideration since in our line of business, differences within these groups will be instrumental in proper service delivery thereby guaranteeing ultimate customer satisfaction. 
4.) Diffusion of innovation

  • The company will develop and implement an Enterprise Resource Planning. This will ensure effective and efficient management of the organization and its customers as well as other stakeholders. 
  • Website

The company will develop and implement a website which will serve the purpose of marketing as well online service requests.

  • Hardware

The company will utilize PCs and laptops. Printers for the necessary work will also be utilized although the company intends to be as paperless as possible. The scanners will be part of the hardware among other computer related accessories.

  • Recovery system

The company will acquire software which can assist in data recovery as well as use of Linux to ensure data security.

C. Place

a) Own-Web Based

By borrowing the latest technology our business will be web based, hence the business will construct interactive website, and have a 24 hour reliable online support to provide fast and efficient services as a tool for attracting and retaining customers. Seasoned ICT experts and experienced outsiders will be consulted before major decisions are made. Latest Computers with high speed and resolution will be bought to ensure fast and efficient Internet connectivity.   Specifically, the various technical aspects that will enable the company to realize its goals effectively and efficiently.
b.) Outsourced

The marketing and PR services will be outsourced. Each departmental head will be qualified and experienced so as to ensure competency in management and service delivery. The possible weaknesses like ineffectiveness of the management team will be addressed through regular trainings, succession management, change management and external consultancy. Conflicts will be addressed through arbitration, courts system, and enforcement of disciplinary
2.) Telephone access

The company will control all its telephone access with all telephone networks handled by qualified technicians. The technicians will be able to respond from the branches where they will be managed from the main office through the development of the virtual office.
3.) E-mail access

The company will utilize the use of emails in order to ensure that it reaches the largest number of clients within its area of operation. The area of operation is not restricted as the company intends to expand in future but for the start it will start with Connecticut.

D. Distribution

Both direct and indirect (though relatively shorter chains) will be employed. 

Our business could use direct distribution system, where the services are directly offered by our employees such as tax returns and tax payment advisory services.

Indirect distribution system can be employed in the setting up of the electronic payment system where we would contract a thirds party to supply the soft wares to be installed. 
1.) Logistics

A number of Service Delivery Procedures will be implemented once an engagement has been agreed. These would include; 

  1. drafting and delivery to the clients a formal business engagement letter detailing:-
  •  Type and terms of engagement 
  •  Proposals of the  initial plan for performing the contract 
  • Outline of our expectations from the client during the contract period
  • Highlights the client’s responsibilities during implementation 
  • Estimated project time line and normal cost on completion
  • Underlying legal and professional requirements from each party
  1. The engagement letter represents a proposal of the contracts’ terms and can still be amended before commencement of the project.
  2. The actual services are delivered according to the agreed on schedule. 
  3. Modes of  Delivery

A number of delivery channels will be used after the completion of client’s accounting needs. These would include; Online delivery which will enable the materials to be delivered via the internet and CD-ROMs. E-mails, bulletins and online chats will be applied when communicating with the clients. 

The company will also deliver products in form of parcels since over the recent years; parcel and express delivery have gained great significance in the global B2C eCommerce market as the medium has been embraced by both businesses and consumers. 
b.) Storage

The business will run as departmental functions, two departments, though matrix reporting relationship will be encouraged based on its mission statement. It is in the two departments that any accounting need specifications of the client will be stored furthermore; the functions will be divided into finance and administration, and research and development and resources management.
c.) Shipment tracking capability

The engagement is reviewed periodically by AMS and the client to ensure that the goals are being met, deviations are recognized, and corrective controls and measures taken

Billing for the services rendered will be done upon completion of the engagement though notional recognition of revenue may be done when a significant portion of the work has been approved by client.

Follow ups will be made as after sales services for up to three months while upgrades will be done request under new terms.
III. Promotion

A. Media/medium

To create awareness, a specified sum will be spent on promotional strategies. There will be discounts for frequenting clients during inception periods.  Space will be bought on magazines and newspapers to market the entity. Aggressive marketing will also be carried out in social and business functions. 

Paid ads will also feature in the local print and mass media, posters and brochures. Calendars promoting our business will also be published and distributed freely.

B. Appeals
1.) Price/thrift-based

In order to promote our products and meet our sales goals, the enterprise will mainly apply a number of price based methods. Key among them will be price matching guarantees; hence we will analyze the pricing of our rivals and offer significant price cuts while maintaining our high level of services thereby not only attracting new customers but also creating customer loyalty. The enterprise also aims at implementing modern day price slashing strategy to reduce the ultimate prices to our customers thereby eliminating competition. 
2.) Emotional, sentimental (affective) promotion strategies

The enterprise will attract customers by giving them ‘more than they expect.’ Bonuses will be a key strategy furthermore; personalization and follow-ups, especially calling them to ask whether they are satisfied by our services will be a key promotion strategy. 
IV. Price

Pricing of our services will be very competitive relative to the competitors’ rates and the prevailing industrial averages. The fees charged are based on professional projection of the expected returns. A benchmark rate will be a return of 10% on the service offered. Any support work not related to new implementations that is requested outside of normal hours will be charged at a 50% premium to the normal rate for that service or client.

A.) Discounts

The firm will also offer discounts especially to corporate clients with multiple accounting services needs.  
V. Strategic Plan
A. Purpose
1.) Vision statement

E-Commerce Accounting Service has the vision of providing quality solution and quality results to our esteemed customers by applying informed expertise to respond to our customer with precise specialized and thorough accounting services.
2.) Mission statement

Our mission is to offer competitive and affordable accountancy, tax and auditing services, with the help of the latest technology and customer friendly-competent staff to the maximum satisfaction of all our clients and develop strategic plans to expand to other foreign markets.

B. Product value creation

1.) Competitive advantage

The provision of these service though remain very competitive and require personalized approach to marketing, the industry analysis shows that new players can still create innovative products and services and be able to survive competitively. The Operating Competitive Advantages for E-Commerce Accounting Service include;

  • Techniques

The operations described above are proven techniques similar to those used while performing similar consulting work during the course of my employment with a local accounting firm, an experience which extends to four decades. However, adjustments have been factored in a bid to reflect the current market situation, the technological changes, new customer requirements, the legal and professional accounting bodies’ rules and regulations.

  • Experience

Based on this analysis, both direct and indirect rivals posses similar experience as E-Commerce Accounting Service management’s as well as ability to pool more resources and human capital for their ventures. Advantageously, Economics of scale and direct costs of production do not exist for this industry thereby enabling us to compete effectively through;

Possible referral networks of clients (power of verbal communication)

Adoption and regular up grade of new versions of accounting software at affordable costs

However, extreme caution will be taken especially in both the use of several vendors’ products due to potential existence of business rivalry   and open source software as well as trial versions because of lack of reliability and accountability. 
2.) Customer satisfaction

The site is very strategic due to its close proximity to the target customers, accessibility and affordability of utilities and rental premises.

V. Tactical Plan

A. Strategy implementation

The three areas of market segmentation have been arrived at based on market research which identified existing gaps to be filled competitively. The study revealed that the small scale accountancy and related services clients are normally overlooked by large and established firms. These clients however have potential and capability to generate revenue in return for the services offered. 
1.) Deployment
a.) Product

E-Commerce Accounting Service aims to offer  accounting solution for all entries including taxation services, preparation of ledger accounts, accounts receivable and accounts payable, consistence evaluation of balance sheets as well as preparation of employees payrolls and companies billings and  accounting, consulting & CFO services. 

B. Product and Service description

Systems audit: the Company carries out regular and random systems audit for clients to verify and authenticate the integrity of their systems and the susceptibility to the internal control system to fraud. The areas checked include routine recording maintenance, invoicing, payroll updates among others

End of financial year consultancy services: in the process of making their end year financial reports, the firm acts as a one-off consultant to assist in making technical and legislative subjective decisions like treatment and estimation of depreciation, valuation of end year inventory, treatment of suspense accounts and adjustments of ledger entries.

In summary, we aim to offer all year round Accounting Services to our clients including; 

  1. General Accounting and Bookkeeping services:-
  2. management of accounts payable and receivable
  3.  employee payroll accounts,
  4. Designing of flexible internal control and.
  5.  Working capital management. 
  6.  Business Consulting & Advisory Services:-
  • business and market plans development, 
  • training employees on use of accounting packages,  and
  • consultancy on payment systems to adopt
  1.  Financial Controller/CFO Services:- 
  • end year Financial Statement Analysis, 
  • budgetary and budgeting control,
  •  preparation of stakeholders reports , and
  •  Filing of tax returns
    b.) Promotion

The establishment of the marketing department will not only offer competitive advantage bit also ensure that the target group is aware of our services. This shall be achieved through; 

  • Personal visits to potential clients to   create awareness 
  • Secondly, we shall use posters, media, flyers and social networking sites like face book to create awareness on  our services
  • To create awareness, a specified amount will be spent on promotional strategies. There will be discounts for frequenting clients during inception periods. 
  • Space will be bought on magazines and newspapers to market the entity. Aggressive marketing will also be carried out in social and business functions

c.) Place

Operations for Accounting Management Systems are based in home office in CT. Most of the actual consulting services and meetings with clients will be performed at the client’s place of business.

The Equipment and materials required include the printing machines, photocopiers, computers, stationery, physical space, office suppliers, and internet access. Most of the materials will be purchased while the space will be rented before the launch of the business.
C.) Goals and Objectives

Our working clientele based objectives to make E-Commerce Accounting Service a successful and competitive entity are:

  • To offer professional and  competitive accounting  services to the satisfaction of our clients 
  • To assist clients to comply with various regulatory and administration accountancy regulation and rules
  • To act as referring agent of other accounting firms 

 

References

Ahlstedt, M. (2007). Implementation of an IT based Marketing information system in a 

High tech company. Hogskolan, Economics Department

Barone, L. (2009). Webinar: State of small Businesses in the United States. Retrieved 

June 14, 2009, from http://smallbiztrends.com/2009/05/state-of-small-businesses.html

Edward G, Malison, (1999).Writing up a Business Plan, London, McGraw Hill 

Companies.

Horton, J.L., (2008). The Secret of service marketing. Accessed April 6, 2009, from 

http://www.online-pr.com/Holding/ServiceMarketingSecret.pdf.

Joyce P, Jennet, (2005).Creating Outlines for Small Business Plan. New York, University 

Press

PRLog. (2008). Survey Finds Major Trend of US Small Businesses Looking to Adopt 

            Electronic Payments. Retrieved June 14, 2009, from

http://www.prlog.org/10074252-survey-finds-major-trend-of-us-small-businesses-looking-to-adopt-electronic-payments.html

 

 

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In a brief but comprehensive response, define the role of accounting

Posted on | by Simon KN

1 In a brief but comprehensive response, define the role of accounting. (You are required, amongst others, to address accounting information, users of financial information, the accounting process and the role of financial accounting vs. management accounting.) 

 

Accounting is one of the fastest growing fields in the UAE.  In today’s society, the demand for good accountants for exceeds the supply.  As our country has expanded, business and industry have become more and more complex, so control here is very important.  And control depends on a great deal of the bookkeepers and accountants who can analyze figues and advise management on what should be done.  They are using more scientific ways changing money, figuring change, and collecting sales taxes.  Moreover, department stores and other companies now have plants and offices widely scattered throughout the country.  A new set of bookkeepers and accountants, is needed at each branch.  I know there are many managements supervisory, and junior or senior executive positions are bing filled by people who started as accountants because accountants have the knowledge of methods and finance and comprehension of the fundamentals of business, and accounting is the foundation of sound business.

           The two kinds of accountants, public accountants and private accountants serve different important functions in business organization.  Business enterprises, government agencies, and nonprofit institutions, such as universities and churches more are more likely use public accountant.  They offer their services to the general public on a fee basis in much the same way as do lawyers, doctors, and dentists.  In addition, the larger firms have professional accountants on their staff who work for a salary, but are also considered public accountants.  The two important areas, auditing and tax services are also the job for public accountants.

           In a single business enterprise or nonprofit organization, the main job for private accounts in to handle the finanacial records.  Manufacturing or other concerns are also need accountants, in that situation, they are often called industrial accountants.  In addition, accountants are employeed by all branches of federal state, and local government, including government-owned corporations.  Accountants in private and government work customarily specialize in the performance of a single type of accounting service, they may do any of the types of accounting service just described above.  They also tend to become specialists in a narrow field of employment such as a particular branch of manufacturing, public utilities, or transportation.

2. In general, explain what the statement of comprehensive income (income statement) and statement of financial position (balance sheet) portray about a business entity and briefly discuss what is contained in each statement. 

 

The balance sheet and income statements are used in financial accounting because they are regarded as the most important financial statements. The Balance sheet lists assets and liabilities of the organization in a given financial period or fiscal year. An income statement was also known as Profit and loss statement and it’s a report for income and expenses over a specific period of time maybe quartile year.

In regard to performance an income statement shows how a company has performed by listing sales and expenses and the resulting profit or loss. A balance sheet summarizes the company’s assets liabilities and shareholders’ equity at a specific point in time to analyze how a company pays for things (Weygandt, Kieso, 2008). Income statements report operating results such as, sales and expenses. This allows investors to evaluate company’s performance and gives a prospect on the way forward. The balance sheet on the other hand presents the strengths of a company which enables investors to factually calculate days of working capital. Balance sheets can also identify trends of how net profit is used, receivables and the payables.

Balance sheets

Balance sheet in organizations helps the managers to know what is in the business (assets) also to know what is not in the business (liabilities). The balance sheet, on the other hand, provides information to the managers on how debts should be paid, and to assess the operations to finance the business.

The balance sheet assists many managers of the business how to make right decisions in the business regarding equipment purchasing in the organization. Business managers also need the balance sheet for deciding on the best credit sources for business by showing accounting equations representations in a physical way.

For the investors, balance sheet is a document which is necessary for review learning to the company to know the total cash amount in hand, and how much does the company owes plus when the payments are to be done. Many investors tends to compare the company’s present balance sheet to find out whether that it has any increased debts, by building up the inventory, and depleting cash which might raise concern. Balance sheets helps government agencies in making sure that businesses are complying to the set laws. It provides information for all the potential lenders in businesses on credit worthiness in the business.

 

3. Briefly discuss the difference between the cash basis and accrual basis of accounting using the example of rent of 24000AED being paid in advance by Company A for 12 months from 1 September 2014. Company A has a December year end. 

 

The major variance between cash and accrual basis accounting is the timing when revenue and expenses are to be recognized. The cash method of accounting is used revenue only when the money is received and for expenses only when money is paid out. The accrual method records the revenue when it is earned and expenses goods and services when they are incurred. The revenue is recorded even if money has not been received or if expenses have been incurred but no cash has been paid. 

For the accrual method 24000AED is recorded even if it has not been paid while for the cash method, 24000AED will not be recorded till the amount is paid. 

4.The CEO has described an item in the financial statements of Brave Brands Marketing as “…a present obligation, arising from a past event, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.” Describe using accounting terms the above statements.

In finance, a liability can be explained as an obligation of an entity coming from past events or transactions, the settlement of which may come from transfer or use of assets, service provision or other economic future yielding. 

A liability has the following characteristics;

A liability is any borrowing type that a person takes from another person or bank for the aim of bettering his project and is always payable within a set period of time. It is also the responsibility to other people that comprise settlement by future transfer or assets use, service provision, and other transaction yielding an economic advantage. Assets = Liabilities + Owner’s Equity. 

5. You received the following chart:

You need to: 

  1. Arrange these costs in a table that lists factory overhead costs for the year. 

 

 

Advertising expense85000
Amortization expense16000
Bad debt expense28000
Depreciation expense-office equipment37000
Depreciation expense-factory building133000
Depreciation expense-factory equipment78000
Factory insurance expired62000
Factory supplies used21000
Factory utilities115000
Income taxes53400
Property taxes on factory equipment14000
Finished goods inventory Dec 3115000
Finished goods inventory, Dec 31 201112500
Goods in progress inventory Dec 31, 20108000
Goods in progress inventory Dec 31, 20119000
Repair expense- Factory equipment31000

 

2- Analyze the remaining costs and select those related to production activity for the year; selected costs should include the materials and goods in process inventories and direct labour 

 

Factory supervision74000
Factory supplies used21000
Interest expense25000
Miscellaneous expense55000
Raw material inventory, Dec 31, 201060000
Raw material inventory, Dec 31, 201178000
Raw material purchases313000
Salaries expense150,000
Sales1,630,000

 

Part 2: 

Instructions: 

This is a group assignments. Students should form groups of 2- 4 members 

Please note that groups of more than 4 people can’t be accepted and their work will not be graded 

All students in a group can produce the same answers 

Each student should provide a reflective paragraph on the challenges and problems they faced in the report and how they overcame it. (This shouldn’t be more than 100 words per student) 

Answer the following three cases: 

 

Case 1: 

A Dubai factory manufactures garden huts. The production process is classified into two production departments, Assembly and Joinery. There is one service department, the canteen. The relevant forecast information for the year ahead is as follows: 

Indirect costs for all three departments in total as well as the apportionment methods are as follows:

 

The following information is available for each department: REQUIRED

 

 

REQUIRED 

1. Allocate production overhead costs to the Assembly, Joinery and Canteen departments using the apportionment methods provided. Use the format below to answer the question. 

 

 Total (R)Assembly (R)Joinery (R)Canteen (R)
Indirect labor90 00048000360006000
Indirect material81 0004374037260 
Heating and lightening25 00010000120003000
Rent and rates30 00012000144003600
Depreciation56 00030000240002000
Supervision45 00024000180003000
Power36 00018000160002000
total363 00018574015766019600

 

2. For each production department, calculate an overhead cost rate, based on labour hours, which may be used to absorb production overhead cost to jobs (correct to two decimal places). 

 

 Total (R)Assembly (R)Joinery (R)Canteen (R)
Indirect labor90 00048000360006000
Cost rates 53.33%40%6.67%

 

 

3. Find the overhead cost of a job which spends three labour hours in the Assembly department and four labour hours in the Joinery department (correct to two decimal places). 

 

 Total (R)Assembly (R)Joinery (R)Canteen (R)
Per hour 4800036000 
3 hours   144000108000252000

 

 

 

Case 2: 

The following planned results are available for ABC Company with a single product:

REQUIRED 

1 Calculate the break-even point in units. 

 

Break-even Sales Units =FC
p − v

p is the price per unit,
v is variable cost per unit and
FC is total fixed cost.

 

 

 

Break-even Sales Units =7200
201600-120960

 

Break-even point = 0.803

 

 

2 Calculate the margin of safety in units. 

 

MOS = 72000 – 0.8*224000
72000

 

Margin of safety is 2.49

 

3 What would be the required sales volume to earn a profit of 10 000? 

 

Profit = total sales – variable costs

10,000 = Sales – 120960

Sales = 130,960

 

 

Case 3: 

XYZ Company has a single product and the following information for the period has been provided:

1 – What sales revenue is required to break even (rounded to the nearest whole cent) using the contribution margin %?

 

Breakeven is at this stage 0. 

 

Break-even =FC
p − v

 

0 =FC
p − v

 

p-v=FC

600 00*S – 442,500*60000 = 262,500*600000

S – 442,500 = 262, 500

S = 180000

 

 

  1. Briefly explain what happens to the breakeven point and the margin of safety in the following circumstances: 
  2. An increase in the selling price of a product 

An increase in sales increases the break-even point and increases margin of safety 

 

 

  1. A decrease in variable costs per unit 

 

A decrease in variable costs decreases the break-even point and decreases margin of safety 

  1. An increase in fixed costs

Increases break-even point and decreases margin of safety. 

 

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Accounting auditing and fraud

Posted on | by Simon KN

Madoff was a successiful entrepreneur who made use of computer technology in making trading systems more secure, efficient and cheap. Madoff used to visit Wall Street during early stages of life and wished he would become a leading player in the finance sector. In collaboration with other friends, Madoff organized the NASDAQ exchange, which ended up becoming the world’s largest electronic stock market. Other security agencies, like NYSE were forced to switch to electronic securities trading. Madoff fame came to an end after the federal authorities realized he was operating a 50-65 million U.S. dollars Ponzi scheme. Prior to his confession to the family in 2008, Madoff used the investments made by new clients in pay fictitious returns to fellow clients. This made both Madoff and his independent auditor face fraud charges. The following discussion relates to Madoff Securities International Limited fraud case and its implications on the nation’s financial reporting system (Knapp, 2013; 161-163). 

The ineffectiveness of Friehling made Madoff securities sustain the financial fraud for so long.  In addition, Madoff’s independent auditor, David Friehling, played a vital role in ignoring fraud checkups for decades. The results of poor audit management by Friehling have made the business fall under heavy scrutiny and face more challenges from the public. Friehling is liable for arrest by the federal prosecutors for flouting the accounting profession’s auditor independence rules. Moreover, Madoff’s independent auditor failed to subscribe to the AICPA code of conduct making him ignore most rules. Freihling failed in correcting the entity’s financial statements that were false when he had the authority to record the entity. In addition, the company violated the rules of performance and profession service by disclosure of confidential client information (International Federation of Accountants, 2013).

Madoff had had issue with Securities and Exchange Commission (SEC) since the financial statements that introduced fraud were stamped. In addition, Madoff had provided false information regarding his employees since the body came to realize that he had only one active accountant. Moreover, the failure by Freihling to disclose the financial audits to AICPA made SEC angrier with Madoff.  After December 2008 situation, the Securities and Exchange Commission (SEC) took decisive and comprehensive steps in reducing chances for such frauds as seen at Madiff Securities Limited to occur again. Financial fraud plays a key role in stabilizing a nation’s economy requiring the associate bodies, like SEC, to develop strategies for minimizing or preventing such case in the future.  On the other hand, Madoff auditor operated in a tiny CPA firm that brought many questions by the SEC professions as to how such a big company could be operated by one auditor in a small office. 

From the following discussing, Madoff’s conduct should not be allowed in the present society since it portrays how selfish a person could be. According to the NASBA (2010), entrepreneurs should portray high degree of ethics towards their clients and avoid misusing their funds for their own benefiters. The SEC in collaboration with AICPA should develop strong systems and rules that govern the actions of auditors to capture the like of Freihling. In addition, firm leaders should stress on the importance of ethical behaviors and encourage members to act towards the public interest. Moreover, Freihling conduct demonstrated employee ignorance of the rules and regulations governing their profession. Freihling should be jailed in order to serve as an example to others. 

 

 

 

 

References

International Federal of Accountants. (2013). Code of Ethics for Professional Accountants.

            Retrieved from:

            http://www.ifac.org/

Knapp, M. C. (2013). Contemporary auditing: Real issues and cases. Australia: South-Western

            Cengage Learning.

NASBA. (2010). Audit Fees and Engagement Profitability: A Threats and Safeguards Approach

            to Strengthen Compliance with Standards of Ethical Behavior. Retrieved from:

            http://www.nasba.org/files/2011/03/Ethics_and_Strategic_Issues_Disc

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Accounting Theories and Practice

Posted on | by Simon KN

Accounting Theories and Practice

Introduction

            Corporate social responsibility is one of the core aspects in a business; however, it has multiple definitions with many businesses and firms framing dissimilar definitions based on their understanding. Basically, corporate social responsibility is about how a company manages the business processes to produce an overall positive impact on the society; furthermore, it is through this that organizations are able to establish the quality of their management (both in terms of people and processes), and the nature of, and their impact on their society in the various areas.

            Today, most stakeholders and shareholders take an increasing interest in the activity of a company. Generally, the CSR field is all about profits, political performance, social demands and ethical values; additionally, it covers a wide scope of theories and approaches that are used to guide companies and organizations in enforcing or performing its social responsibility. 

Part One: Shareholders and Stakeholders Theories 

            There a number of stakeholders and shareholders theories that relate to corporate social responsibility; mainly these theories affect the relationship between a company and its shareholders and stakeholders (Mahoney et. al, 2013, 352). 

  1. Legitimacy theory – emphasizes that firms and organizations continually seek out to make sure that they operate within the bounds and norms of their respective societies which explains why they try to ensure that their activities are perceived by parties from outside hence maintaining legitimacy. However, the bounds and norms are known to change frequently hence requiring the organization to be responsive to the environment in which they partake their activities.

            This theory relies on the aspect that there is a social contract between a particular organization and its society; concurrently, the contract is the concept used to represent the multitude of implicit and explicit expectation that the society has on how the organization should conduct its operations. 

  1. Stakeholder normative theory – The ethical and normative perspective of this theory puts much attention on the notion that its every stakeholder’s right to be treated fairly and viewed equally by an organization, and that matters of stakeholder power are not directly pertinent. 
  2. Universal Rights- Over the years, human rights have been taken as a basis of corporate social responsibility especially in the international market and recently, a number of human rights based approaches have been brought forward on the same. Basically, this theory defends the existence of natural human rights; however, many people do not take them seriously but they have a theoretical grounding with some moral philosophy giving them support.
  3. Sustainable Development – This has become popular and necessarily because it is an approach that evolved at macro level and not the corporate level; typically it demands for corporate contribution requiring the integration of social, environmental and economic considerations to make balanced judgements and decisions for the long term. 

         Significantly, achieving corporate sustainability is a custom – made process/ task and each corporation should select personal ambitions and approaches to do the same; moreover, these approaches should meet its aims and be in line with the strategy for the sake of the organization’s operations.

  1. The Common Good Approach – This is a less combined approach if compared to the stakeholder approach though it hold the regular good of society as the referential value for corporate social responsibility with its stress of the business together with any other social group or individual should contribute to it. This theory can be enhanced by creating wealth, providing goods and services in an effectual manner and respecting the dignity and right of every individual; additionally, it campaigns for the social well being and a harmonic way of living together in just peaceful and friendly conditions today and there after.

 

Part Two: Positive Accounting Theories

            The positive accounting theories include: instrumental theories, political theories and integrative theories.

Instrumental Theories 

            There are three main groups identified in the instrumental theories and these include:

Maximizing Shareholder Value – This approach takes the straightforward contribution to maximizing the shareholder value as the supreme criterion to evaluate specific corporate social activities where it is used in decision making. Today not many shareholders are interest in value maximization alone and it is through this concept that a firm sets the objective of long term value maximization or value-seeking (Elisabeth &Domenec, 2004, 53). 

Strategies for Achieving Competitive Advantages

  1. Social investments in competitive context- This theory entails spending on humanitarian activities as the only way to develop the framework of competitive advantage of a corporation and mostly forms bigger social value than most individual sponsors or the government can. 
  2. Natural resource based view of the firm and dynamic capabilities- Maintains an organizations ability to be ahead of its competitors; moreover, this is facilitated by other factors like the unique interaction of human, organization and physical resources over time. 
  3. Strategies for the bottom of the economic pyramid- In the past, most business line of attacks concentrated on aiming products at upper and middle-class people in contrast to the biggest portion of the world’s population is poor or lower-middle class and it is from this that it has been decided that disruptive innovations can improve the social and economic conditions at the base of the pyramid (Brennan and Merkl-Davis, . 

Cause Related Marketing 

            Basically, this is the procedure of formulating and implementing activities involving marketing, and these activities are characterized by an offer from an organization to offer a particular amount to selected cause when consumers are involved in revenue providing exchanges that meet the needs and aims of both the organization and individuals.

 

Political Theories 

            Significantly, this is a group of theories and approaches that put most of the attention on interactions and connections between the comprehensive business and the society characterizing the dissimilar responsibilities. They include: 

 

Corporate Constitutionalism – entails two principles of social power equation and the iron law of responsibility that are used to run a business given the different limitations and its impact on the society. 

Integrative Social Contract Theory – It has been assumed that there is a sort of contract between a business/ organization and the society that implies some indirect obligations of business towards society; considerably, this approach is based at overcoming some limitations of deontological and teleological theories applied in any business environment.

Corporate Citizenship – This is simply a new understanding of the duties of a business in society and depending on which way it is defined, the idea is also widely expressed in conjunction with other theories that also cover the businesses responsibilities. 

Integrative Theories 

            This is a group of theories that evaluate on how business incorporates social demands, elaborating on the fact that a business depends on the society for its existence, continuity and growth; generally, these demands are regarded to be the way in which society interacts with the business giving it a certain legitimacy and prestige. Groups of integrative theories include:

 

Issue Management – In any business, social responsiveness is required when there are social issues, and also the processes to manage them; therefore, this approach comprises the processes by which an organization can identify, evaluate and respond to those social and political issues which may impact significantly upon it. 

The Principle of Public Responsibility– is about the scope of managerial responsibility when it comes to its involvement in its social environment; which entails primary involvement i.e. locating and establishing its facilities, procuring suppliers, engaging employees, carrying out production functions etc and secondary involvement: offering career and earning opportunities for some individuals and advancement of employees (there result from primary involvement).

Stakeholder Management – involves achieving maximum overall cooperation between the complete stakeholder groups’ system and objectives of the organization; moreover, it also states the most efficient strategy for managing stakeholder relations putting on a lot of effort when dealing with issues affecting multiple stakeholders (Elisabeth &Domenec, 2004, 58). 

Corporate Social Performance (CSP) – Significantly, includes a search for social authority, with processes for giving suitable comebacks. The main beliefs of CSR are known to be methodical forms to be filled with value content that has been put into operations; all the same they include: principles of CSR, expressed on institutional, organizational and individual levels, processes of corporate social responsiveness, such as environmental assessment, stakeholder management and issues management, and outcomes of corporate behavior including social impacts, social programs and social policies (Elisabeth &Domenec, 2004, 56).

 

Part Three: Environmental Performance 

            The legitimacy theory explains the relationship between the quantity of environmental information and the environmental performance in non-environmentally sensitive industries; moreover, the quality of environmental disclosures increases whether the firm is better environmental performer (Janet, 2005, 507). For instance, according to green peace, there is a negative correlation between the mandatory disclosure of environmental legal sanctions and the subsequent regulatory violations between firms working with the Chinese conglomerate in regard to discharging hormone distributing chemicals.

Conclusion 

            Currently, most of the theories associated with corporate social responsibility concentrate more on establishing a good relationship between the organization and its society, using the power in a business responsibly and in the best possible way. Moreover, most of these theories also lean more on helping organizations and firms to achieve their objectives and aims so that they can have long term profits as a reward; all the same, the core principles of these theories are all about integrating demands of the society and make sensible contributions to it by acting in the best possible way. 

 

Bibliography

Janet, L. 2005 Mandatory environmental disclosures in a legitimacy theory context: Accounting, Auditing & Accountability Journal. Vol.18 (4), pp.492 – 517

Brennan, N. &Merkl-Davies, D 2013, Accounting Narratives and Impression management, In: Jackson, L., Davison, J., and Craig, R. (eds.): Routledge Companion to Communication in Accounting. Routledge, Vol.1 (2), p. 109-132

Deegan, C. and Rankin, M. 1996. An analysis of environmental disclosures by firms prosecuted successfully by the Environmental Protection Authority: Accounting, Auditing, and Accountability Journal. Vol. 9 No. 2, p. 50-67

Hooghiemstra, R, 2000, Corporate communication and impression management; New perspectives why companies engage in corporate social reporting: Journal of Business Ethics. Vol.27 (2), p. 55-68

Mahoney, L.S., Thorne, L., Cecil, L., &LaGore, W. 2013, A research note on standalone corporate social responsibility reports: Signalling or green washing: Critical Perspectives on Accounting. Vol. 24 (5), p. 350-359

Merkl-Davies, D. &Brennan, M, 2011, A Conceptual Framework of Impression Management: New insights from psychology, sociology, and critical perspectives”, Accounting and Business Research. Vol. 41 (5), p. 415-437

Moir, L. 2001. What do we mean by corporate social responsibility? Corporate Governance. Vol.1 (2), p. 16-22.

 

Elisabeth, G &Domenec, M. 2004. Corporate Social Responsibility Theories: Journalism of Business Ethics. Vol.53, p.51-71

 

 

 

 

 

 

 

 

 

 

 

 

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Accounting assignment. Total assets are $1000, fixed assets are $700, long-term debt is $250, and short-term debt

Posted on | by Simon KN

Student

Institution

1Total assets are $1000, fixed assets are $700, long-term debt is $250, and short-term debt is  $300. What is the amount of net working capital?    Current Assets – Current Liabilities = Working Capital Therefore 1000-700-300= $ 0
3)Your parents are giving you $100 a month for four years while you are in college. At a 6% discount rate, what are these payments worth to you when you first start college?

(100% – 6%) of regular earnings = 94% at this point we fill the details as follows:

0.94 X $100 = $ 94 therefore at 6% discount the earning will be $94.

$94 X 48 months = $4512

.4)(4)The great, great grandparents of one of your classmates sold their factory to the government 104 years ago for $150,000. If these proceeds had been invested at 6%, how much would this legacy be worth today? Assume annual compounding.   When we assume compounding interest formula to calculate the worthiness of the factory after 104 years :                         nt                     A= P 1+ r/n

where P=principal amount, r = annual rate of interest, t = the number of years,  A = amount accumulated after n n years and n= the number of times the interest is compounded per year.

A= 4150000(1+6/1) 104

= $ 1,086,000

4 An investment project has the cash flow stream of $ -3250, $80, $200, $75, and $90. The cost of capital is 12%. What is the discounted payback period?

Discounted Payback Period = A + B
C

Where,
   A = Last period with a negative discounted cumulative cash flow;
   B = Absolute value of discounted cumulative cash flow at the end of the period A;
   C = Discounted cash flow during the period after A.

Therefore the discounted payback period is 3 years

5- An investment cost $12,000 with expected cash flows of $4,000 for 4 years. The discount rate is 15.2382%. The NPV is ___$634.89___ and the IRR is __12.60%____ for the project. 

https://www0.gsb.columbia.edu/premba/finance/images/s5/1635951525.gif
https://www0.gsb.columbia.edu/premba/finance/images/s5/2364444131.gif

=-$634.89; 12.60%

7)  Thornley Machines is considering a 3-year project with an initial cost of $618,000. The project will not directly produce any sales but will reduce operating costs by $265,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $60,000. The tax rate is 34%. The project will require $23,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley’s requires a 9% rate of return? Why or why not? 

https://www0.gsb.columbia.edu/premba/finance/images/s5/1635951525.gif=No; The NPV is -$2,646.00. if a project has a negative NPV, then the project is not viable and an investor is not advised to undertake the project.

8)

A project will produce operating cash flows of $45,000 a year for four years. During the life of the project, inventory will be lowered by $30,000 and accounts receivable will increase by $15,000. Accounts payable will decrease by $10,000. The project requires the purchase of equipment at an initial cost of $120,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $25,000 after-tax cash flow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 14%?

https://www0.gsb.columbia.edu/premba/finance/images/s5/1635951525.gif
=$27,958.66

9) What are the arithmetic and geometric average returns for a stock with annual returns of 5%, 8%, -3%, and 16%? 

An arithmetic average is the sum of a series of numbers divided by the count of that series of numbers.

(0.05+0.08+-0.03+0.16)/4 =0.065

=6.5%; 9.21%


10) A year ago, you purchased 300 shares of IXC Technologies, Inc. stock at a price of $10.05 per share. The stock pays an annual dividend of $.10 per share. Today, you sold all of your shares for $29.32 per share. What is your total dollar return on this investment? 

300 shares X $ 10.05 = $ 3015, the total amount he purchased the shares.

The dividend received = 300 shares X $ 10 = $ 3000

If I sell the shares today at 300 X $ 29.32 = $8792

The total dollar return will be $ 8792 – $3015 + $3000 =$ 8777

=$8,781

11) 

What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if the economy is normal?

Portfolio Return =n
∑
k=1		Dollar Amount of Asset k Dollar Amount of Portfolio×Return on Asset k

= 5.88 %

12) You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free asset. $400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7. How much needs to be invested in stock B if you want a portfolio beta of .90? 

Portfolio Return =n
∑
k=1		Dollar Amount of Asset k Dollar Amount of Portfolio×Return on Asset k
=$268

13) Gail’s Dance Studio is currently an all equity firm that has 80,000 shares of stock outstanding with a market price of $42 a share. The current cost of equity is 12% and the tax rate is 34%. Gail is considering adding $1 million of debt with a coupon rate of 8% to her capital structure. The debt will be sold at par value. What is the levered value of the equity? 

First: unlever the beta:
unlevered beta = levered Beta / 1+ [(D/E) * (1 – t) + (P/E)
where: D = market value “MV” of existing debt, E = MV of existing equity, P = MV of existing preferred stock

=$2.4 million

14) The Winter Wear Company has expected earnings before interest and taxes of $2,100, an unlevered cost of capital of 14% and a tax rate of 34%. The company also has $2,800 of debt that carries a 7% coupon. The debt is selling at par value. What is the value of this firm? 

First: unlever the beta:
unlevered beta = levered Beta / 1+ [(D/E) * (1 – t) + (P/E)
where: D = market value “MV” of existing debt, E = MV of existing equity, P = MV of existing preferred stock

Second: relever the Beta using the target capital structure, i.e. the targeted debt-to-equity, etc., as follows:
Levered Beta = Unlevered β * [1 + [(D/E) × (1−t) + P/E]]
where the D, E & P now represent the TARGET capital structure (NOT the market values)

Third: You then use this new levered Beta in the CAPM formula to determine cost of equity…

the CAPM formula: Re = Risk Free Rate “RFR” + Beta(Rmarket – RFR)

The value of the firm is

$12,054

16) Your firm has a debt-equity ratio of .75. Your pre-tax cost of debt is 8.5% and your required return on assets is 15%. What is your cost of equity if you ignore taxes? 

Cost of Equity = (Next Year‘s Annual Dividend / Current Stock Price) + Dividend Growth Rate

Or

ra = rf + Ba (rm-rf)

where:
rf = the rate of return on risk-free securities (typically Treasuries)
Ba = the beta of the investment in question
rm = the market‘s overall expected rate of return

=21.38%

17) A _____ is an alternative method to cash dividends which is used to pay out a firm’s earnings to shareholders. 

=payment-in-kind

18) Regional Power wants to raise $10 million in new equity. The subscription price is $20. There are currently 3 million shares outstanding, each with 1 right. How many rights are needed to purchase 1 share? 

Theoretical Ex-Rights Price=Market Value of shares prior to rights issue + Cash raised from rights issue
Number of shares after rights issue

= 3

19) For a particular stock the old stock price is $20, the ex-rights price is $15, and the number of rights needed to buy a new share is 2. Assuming everything else constant, the subscription price is ___$1___. 

($20-$15)/ (4+1) = $1

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Accounting fraud

Posted on | by Simon KN

Accounting fraud

Introduction

Accounting fraud is one of the most serious issues confronted by organizations and associations. Most organizations experience the ill effects of accounting fraud which harm their financial position and notoriety and lead these organizations to insolvency. There are a few approaches to confer accounting fraud. Case in point control in the financial proclamations and changing a percentage of the figures in the resources records for add esteem is not true to delude financial specialists. Yet in trading, lending, and funding every issue that harms the economy, masters may discover answers for keeping these practices. In these instances of accounting, fraud starts to find by the reviewer. Evaluating is utilized to discover any record accounting fraud (Velikonja, 2010). Moreover, Auditor must have a decent understanding of control frameworks, which the administration has fabricated to guarantee to discover and keep any accounting fraud because when outlining and actualizing a control framework by the organization, they reflect the nature and degree of the control that the administration chooses to execute.  

This impact of accounting fraud have become a burden to various organizations worldwide and a cause of multiple failures in many organizations worldwide.

Definitions

 This segment will incorporate imperative definitions identified with this subject to comprehend accounting fraud. Accounting is an estimation of social matters in profit making that process and introduces all budgetary data of a corporate. This data is focused on financial occasions. Accounting is utilized as a part of distinctive zones of a corporate, including fiscal accounting, evaluating, and assessment accounting. Accounting has inner profit, which measures and breaks down all the corporate exercises that the administration can utilize to decide. Moreover, stakeholders and other outside clients can profit from accounting reports, such as money-related proclamations (Business Dictionary). The other word that must be characterized is accounting fraud. Accounting fraud is any illicit or unjustifiably exercise for financial or individual addition. The motivation behind accounting fraud is to add over-the-top sums, for instance, cash or stock. Changing the accounting records, including budgetary deals, incomes, and costs, is considered accounting fraud. In addition, concealing misfortune, accounting fraud of receipts, and staying away from obligation commitments, which prompted a benefit, are accounting fraud cases. The law has subjected all accounting fraud to a criminal indictment if found, and representatives will be rebuffed regardless of the possibility that coordinated by their boss (Business Dictionary).

When looking at accounting fraud rings a bell; who they are included in accounting fraud, and the answer is senior administration of organizations. Participate in accounting fraud because they have admittance and force to change the transactions and proposals and also the power to change any figures in the financial explanations with the collaboration of a few accountants in the organization. Accounting fraud generally happens while setting up the organization’s budgetary report by controlling in embedding financial records to show distortion of the organization’s position in the business sector. This fraud could take two structures. The primary includes embedding false costs of incredible and stocks into the organization’s budgetary proclamation, while the second includes demonstrating stunning expenses for the organization’s advantages (Ngai, Wong, Chen & Sun, 2011). The motivation behind conferring accounting fraud is to increase its great position in the business sector and keep the money stream at a decent rate. Bhasin has arranged the organization’s accounting fraud at the senior administration level into three sorts: copy submitted by the Chief money-related officials, manager, and the organization itself (Bhasin, 2013). To locate accounting fraud exercises and prevent it from happening, corporates need to have an experienced examiner with expert aptitudes and information about fraud. Additionally, reviewers need to keep up their skills by including in preparing and staying up with the latest data. An auditor is in control of rdetermineon on whether an organization’s budgetary proclamations are free from materimisquotesote that could be because of fraud. Consequently, the International Standards on Auditing set out the reviewer’s obligation regarding copying through the Isa240, which will make a note of assessing the dangers of material error and will likewise include discovering the affectability of the financial proclamations to material misquotes

brought on by accounting fraud (Yu, 2013).

Accounting fraud is a statement that is regularly used to cover a wide variety of illicit acts. As per Bhasin (2013), Fraud is the purposeful and criminal demonstration of trickiness or controlling records. It can be worked for the profit or to the impairment of the corporate and by persons inside or outside the association. It’s likewise vital to say that accounting fraud is an intentional tricking for the fulfillment of an individual or gathering. However, in this paper, we might be concerned by fraud that examiners may distinguish. We will characterize accounting fraud through two measurements:e whether the sustained fraud is for or against the association and also to discover the class of the blamable or culprit. There are a few approaches to locating fraud, including contrasting costs available and deals and financial articulation with capital are a percentage of the systems for catching accounting fraud. For instance, when the Purchasing Management buys a few instruments, for example, autos or supplies for the organization, then writes bills much higher than the first cost in the business by concurrence with the supplier to be incorporated in the money-related proclamations then the dependable profits from the diverse price for him. Besides, discovering fraud is possible by contrasting costs in the business sector and deal benefits (Bhasin, 2013). It is possible by going into the actual market and seeing the prices of the organization’s products and contrasting these costs and deals benefit the organization’s financial articulation. An economic explanation is generally the source that gives banks, speculators, and other institutional financial specialists an organization’s money-related undertakings (Yu, 2013). An alternate strategy for identifying accounting fraud is reviewing a money-related articulation with capital and economic explanation (Yu, 2013).

Also, having a great interior examining office can distinguish and dispose of fraud exercises and give organizations strategies and conventions that can be taken after accounting fraud exercises have been found. Reviews are possible either quarterly or every year. Likewise, the inspector must be able to lead reviews whenever for any office in the organization. Be that as it may, the external review is the best alternative for organizations since outside examiners don’t know anybody in the organization, and nobody can compel them to ignore the controls in the financial articulations while doing their review. Administrators have the alternative of picking a suitable system to identify accounting fraud exercises and get a genuine picture of the execution of their organizations.

Counteracting accounting fraud likely help in developing organizations. Internal control is the most vital mainstay of control in accounting fraud, which empowers the organization to do its obligation minus all potential limitations. Interior control gives the foundation to the president and governing body through the procurement of effective administration to safeguard the trustworthiness of the association and ensure their advantages by utilizing the most recent engineering. In organizations, decision-making, arranging, and assessing are carried out by internal control, which aids and aids in the ideal utilization and usage of accessible assets. (Bhasin, 2013). The uprightness of the administration by utilizing innovation could help internal control to commit criminal acts (Farber, 2005). Moreover, the force of the power of the corporate prompts manages the assets and resources of the corporate’s budgetary accounting. Catching fraud quickly reflects internal control quality (Bhasin, 2013).

Accounting analysis may guarantee the financial specialist that the supervisor and staff cannot submit fraud because accounting analysis demonstrates all the variables that happen at all times and confers the team to do their accounting obligations. Accounting analysis controls may minimize the chance for supervisors and staff to grant accounting fraud as restricted access to representatives. Additionally, records showing the time and staff ID of the individuals who entered or modified data can be accomplished. The senior administration component framework can control the director to guarantee that he doesn’t veer off from his mission (Bhasin, 2013The point of these directions and strategies that are intended to forestall fraud is to elucidate the transactions and financial reality of organizations to ensure organizations and associations from the impacts of the accounting fraud and control of money related articulations, and it must be proper way and conservative (Bhasin, 2013).

Conclusion

Taking everything into account, accounting fraud is viewed as the most hazardous in the accounting field. Two techniques have been tended to identify and control accounting fraud, for example, contrasting costs and looking into resources with capital. The principal reason for distinguishing and preventing accounting fraud is to help organizations develop and secure stakeholders’ investments and rights. A percentage of the ways that have been tended to in this article to locate and dispense with accounting fraud is leading either inward or outside review and allude into the actual market to get and know the true costs of the organization’s products and afterward contrast it with the deal’s benefit. Additionally, accounting analysis ought to minimize the chance of accounting fraud since the product controls everything.

References

Accounting fraud. (N.d). In Business Dictionary. (2014) Retrieved from    http://www.businessdictionary.com/definition/accounting-fraud.html

Bhasin, M.L. (2013). Corporate Accounting Fraud: A Case Study of Satyam Computers  Limited. Open Journal of Accounting. 2, 26-38. http://dx.doi.org/10.4236/ojacct.2013.22006

Farber, D, B. (2005). Restoring Trust After Fraud: Does Corporate Governance Matter? The Accounting Review, 80 (2), 539-561. Retrieved from http://www.jstor.org/discover/10.2307/4093068?uid=3737536&uid=2&uid=4&sid=21104063244771

Fraud.(N.d.) In the free dictionary. Retrieved April 13, 2014, from http://www.thefreedictionary.com/fraud

Ngai, E.W.T., Hu, Y., Wong, Y.H., Chen, Y, & Sun, X. (2010). The application of data mining techniques in financial fraud detection: A classification framework and an academic literature review. Decision Support Systems, 50, 559-569.

DOI: 10.1016/j.dss.2010.08.006

Yu, X. (2013). Securities Fraud and Corporate Finance: Recent Developments. Managerial  Decision and Economics, Forthcoming, 34, 439-450. DOI: 10.1002/mde.2621.

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ACCT499 Morgan State University Contemporary Issues in Accounting Questions

Posted on | by Simon KN

ACCT 499

Midterm Exam (Take-home)

Due on Sat 10/12/19 BY 6:00 pm

Instructions: Answer five (5) questions only. Each is worth 20 points. The maximum length for each question is one and a half pages and the minimum is ½ page typed 12 font double spaced. You must use references to support your points, please.

FAIR VALUE ACCOUNTING AND ACCOUNTING THEORY

  1. Does accountancy have a natural body of theory just like other disciplines such as physics, economics, biology, etc.? If yes or no, how does accounting operate to come up with accounting principles?
  1. Discuss three leading challenges to fair value accounting as well as the proposed solutions to them.
  1. Explain the role (i.e. how, why, where, when, etc.) European governments have played in influencing fair valuing accounting standards.
  1. Discuss three major limitations of historical cost accounting.

SOCIAL ROLE OF ACCOUNTANCY

  1. Discuss three major social roles of accountancy.

ACCOUNTING PRACTICE

CONTROLERSHIP

  1. Discuss the evolution of controllership from the 1920s to the 2020s.

MANAGEMENT REPORTS

  1. As a management accountant, how and when will you use flash reports?

CLOSING THE BOOKS

  1. What are the major steps involved in the closing process?

 

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Field Business Finance – Accounting

Posted on | by Simon KN

How would the transfer from the permanent fund to the special revenue fund be reported in the government-wide statements?

Option #1: Government and Not-For-Profit Accounting Portfolio #1

Your portfolio project will provide specific answers to questions that follow. Apply what you have learned in this course to your answers to these questions in a microsoft word document.

P. 2-6: The nature of a transaction gives a clue as to the type of fund in which it should be recorded. (80 points)

Scenario 1:
Kendal County engaged in the following transactions:

It levied and collected $1million in taxes dedicated to the repayment of outstanding general obligation bonds.
It billed sponsors of a charity bicycle ride $5,000 for providing police patrols during the ride.
It recognized $60,000 of cash dividends on investments dedicated to the support of a county arts center.
It recognized $70,000 of cash dividends on investments dedicated to scholarships for needy county residents.
It incurred $6 million in construction costs to complete a new county jail. The new jail was funded entirely with the proceeds of long-term bonds.
It transferred $400,000 of unrestricted funds to an appropriate fund to be invested and eventually used to repay the principal on the long-term jail bonds (entries in two funds required).
It recognized depreciation of $100,000 on equipment in a vehicle repair center that services all county departments that have motor vehicles.
It collected $30,000 in parking fees at the county-owned garage.
It issued $8 million in bonds to improve the city-owned electric utility.
It distributed $3 million in taxes collected on behalf of school districts located within the country.
Instructions:

Prepare appropriate journal entries.
Indicate the type of funds in which these transactions would most likely be recorded.
P. 5-4: Generally accepted modified accrual accounting practices pertaining to inventories may not fulfill the objectives of financial reporting. (80 points)

Scenario 2:
The following is an excerpt from a note to the financial statements of the city of Dallas (dates changed):

The city prepares its annual appropriated general fund, debt service fund, and proprietary operating funds budgets on a basis (budget basis) which differs from generally accepted accounting principles (GAAP basis). The major differences between the budget and GAAP bases are that encumbrances are recorded as the equivalent of expenditures (budget) rather than a commitment of fund balance (GAAP) in the governmental funds.

The city accounts for inventories on the purchases basis. One of the city’s departments, which is accounted for in the general fund, budgeted $195,000 in supplies expenditures for fiscal 2015. It began the 2015 fiscal year with $30,000 of supplies on hand. It also had $12,000 of supplies on order. During the year it ordered an additional $180,000 of supplies, received (and paid for in cash) $185,000 of supplies, and consumed $178,000 of supplies.

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Demand supply accounting theories market excuses

Posted on | by Simon KN

1. Introduction

Ross L. Watts and Jerold L. Zimmerman are two of the most influential and controversial contributors to accounting literature of the past decades based on their substantial individual and cooperative contributions. As pioneers, they devoted themselves to creating a positive accounting theory, and further described accounting theories as supplying excuses in their paper of 1979, which provided a chance to reflect on the significant growth in the accounting research and broadened the view ‘‘towards a more formal and deductive concern with hypothesis testing and quantitative methods’’ (Whitley, 1988). The aim of this paper is to critically review the paper by Watts and Zimmerman (1979) based on some selected criteria.

The remainder of this paper is organised as follows. Next section provides a summary of the 1979 paper. Section three evaluates the paper based on the selected criteria. Section four gives the conclusion.

2. Summary of the Original Paper

Recognising the conclusion that ‘‘financial accounting theory has had little substantive and direct impact on accounting practice or policy formulation’’, Watts and Zimmerman (1979) tried to build a positive theory of determinants of accounting theory. To demonstrate their positive theory of the determinant role that governments played in the development of accounting theory, they analysed accounting theories using an economic framework of demand and supply.

The basic structure of the paper is shown in the below diagram.

Introduction

Section I:

The demand for accounting theories

Section II:

In a regulated economy

In an unregulated economy

The supply of accounting theories

Section III:

The empirical examples

Section IV:

Conclusion

Section V:

Section II analysed the demand side in two different situations, namely the unregulated economy, which is without government intervention and the regulated economy, which includes government intervention. In the unregulated economy, based on the assumption of the existence of the agency cost and of the close relationship between agency costs and accounting procedures, three main functions of accounting theories were identified, namely pedagogic demand, information demand and justification demand. In the regulated economy, after analysing both the direct and indirect impact that political process had on the contents of financial statements, the paper argued that the justification demand from government, who needed to justify that their political action was in the public interest, was hugely increased based on the core assumption of the self-interest individuals and high political cost.

Section III analysed the supply side. It was suggested that, based on the existence of substitute suppliers of theories and the powerful incentive provided by the consumer (Vested Group), the accounting theory mainly served as excuses for different policies.

Section IV examined three empirical examples to prove the close relationship between government intervention and accounting theory.

3. Evaluation

3.1 The Criteria Used In Evaluation

The critical review of a paper involves making a judgement about whether or not it reaches some selected criteria. In evaluating the article of Watts and Zimmerman in 1979, six criteria are considered to be the most significant and relevant. Firstly, the framework on which the whole paper is based should be valid and applied appropriately. Secondly, under the framework, certain assumptions are established. As the basis of the logical reasoning of the propositions, they are expected to be valid and stated clearly and completely. Thirdly, to defend the theory of the paper, evidence presented should be convincing. Fourthly, an objective view of the author towards both their theory and their competing theories is also considered to be indispensable. Fifthly, a valuable paper is supposed to make innovative contribution to its research area. Finally, the degree of originality should also be taken into account in evaluating the paper as a whole. The above six criteria are used to judge the value of this paper as follows.

3.2 The Aspects Which Fail the Criteria

3.2.1 The Validity of Framework

The theoretical framework is a structure under which a collection of interrelated concepts and variables are systematically organised to support a theory of a research problem. The framework used in the paper by Watts and Zimmerman (1979) was based on the economic model of demand and supply. The validity of this economic framework is questionable, since the centre of the paper was to discuss the accounting policy-making processes, which concerned the discipline of politics. As Lowe et al. (1983) stated, using framework from a different discipline needs justification, since different frameworks have different assumptions and limitations, which might lead to the exclusivity of valid explanations for the same phenomena from another framework with more explanatory power. Booth and Cocks (1990) also justified the inappropriateness of the use of the economic framework for explaining political process by pointing out its inadequacy in addressing the key issue of power and conflicts involved in policy-making process, and provided a richer framework, namely power framework, which included important non-economic factors such as ‘‘interaction of social action, modes of rationality and hegemonic domination’’.

3.2.2 The Validity of Assumptions

The theory was demonstrated in Watts and Zimmerman’s study in 1979 as follows:

‘‘The government regulation creates incentives for individuals to lobby on proposed accounting procedures, and accounting theories are useful justifications in the political lobbying.’’

This theory was accomplished by the critical assumption that individuals are driven merely by their own interests and the attribution of their interests depends on their specific position in a social structure. However, this assumption is not necessarily valid. In the view of Rokeach(1973), instead of being driven only by self-interests, people have values and beliefs which come first. According to Meyer (1986), the assertion that individuals’ actions are based on their membership in a certain social group overlooks their knowledge and assessments, and this renders their choices redundant, which is a form of structural determinism. Moreover, as Robson (1993) stated, there is another problem in the assumption, which concerns the circular relationship between individuals’ self-interest and their actions. As indicated in the paper of Watts and Zimmerman (1979), individuals’ self-interest is the driving force of their lobbying actions, and their interests can only be revealed by their lobbying of accounting standards. However, according to Hindess(1982,1986), in such a way, the possibility of any mistaken calculations of interests and unintended results is ignored.

3.2.3 The Appropriateness of Evidence

In order to examine and support their study, Watts and Zimmerman selected three types of legislation which they believed impose a remarkable influence on the demand for and supply of accounting theories: the railroads legislation, income tax acts and securities acts. There are at least two problems with their evidence. Firstly, in the three examples, the authors focused their attention on either the U.S or the U.K rather than on a more general basis. Therefore, a suspect reasonably arises that their theory could be held only in a limited domain, not applicable universally. Secondly, in the first piece of evidence-the railroads legislation, Watts and Zimmerman stated that the accounting research articles on the nature of the depreciation started to appear from 1841 in the U.K. and from 1850 in the U.S. at latest. Meanwhile, when the authors elaborated the researchers’ relation to the vested interests’ demand of accounting theories, they implied that researchers were motivated by the rewarding system of universities to supply theories to meet vested interests’ needs. However, the accounting researchers were only seen in universities of the U.K and the U.S from the end of the nineteenth century, which rendered the authors’ first piece of evidence highly invalid (Lowe, 1983).

3.2.4 The Objectivity of Author’s View

The objectivity of author’s view towards their own theory and the competing theory influences the degree of the paper’s openness to discussion. Watts and Zimmerman (1979) showed a strongly biased view against competing theories, namely normative theory, and conservative attitude to the possible refutation of their theory. The following passages are proof of this:

‘‘The literature we commonly call financial accounting theory is predominantly prescriptive…Often the lack of impact is attributed to basic methodological weakness in the research.’’

‘‘One or two papers discussing a topic prior to the time the topic becomes politically active is not sufficient to reject our theory’’.

‘‘No other theory, no normative theory currently in the current accounting literature, can explain or will be used to justify all accounting standards’’.

As Whittington (1987) stated, the main controversy about the work of Watts and Zimmerman is their strident advocacy of the methodology of positive accounting. They should have been more objective and not as biased towards their own theory, since many research papers (Tinker et.al, 1982; Christenson, 1983; and Lowe et.al., 1983) are indeed seen to discuss the topic about normative and positive accounting theory, with the main conclusion that the positive theory, which originates from normative theory, has very limited predictive ability and is scientifically dubious.

3.3 The Aspects Which Reach the Criteria

Apart from the aforementioned weakness, the paper has its strengths. To some extent, it is one of the most typical accounting literatures for positive accounting research and has a great innovation on the development of accounting theory (Whittington, 1987). It is also considered to make a high degree of original contribution.

3.3.1 The Degree of Innovation

Watts and Zimmerman won the Notable Contribution to the Accounting Theory Award according to this 1979 paper (Tinker et. al, 1995). They innovatively used economic angle to investigate deeply the demand for and supply of accounting theories, especially under government intervention, which greatly broadened the views and adjusted the directions for the academic professionals. Furthermore, it closely linked theory with the empirical tests, which emphasised the importance of agency cost (Watts and Zimmerman, 1990). In their paper, Watts and Zimmerman (1979) investigated and analysed the different levels of influence in terms of the law regulating railroads, the income tax laws, and the securities acts between the UK and U.S. to verify their hypothesis, which further showed the pronounced and notable contribution they made to open another view in contrast with previous theories.

3.3.2 The Degree of Original Contribution

Watts and Zimmerman have introduced a revolutionary idea of positive accounting theory. For decades, accounting research was always based on the normative accounting theory, which prescribed “What accounting practices should be” and described “what”-type problems. Whereas, positive accounting theory predicted “what are accounting practices” and explained “why”-type questions (Zimmerman, 1980; Sterling, 1990; Sinha, 2008). Consequently, positive accounting theory has promoted the translation of accounting objectives from idealistic to reality.

Because of its predictability, positive accounting theories have offered novelty and vigour. The prediction function led explanations to unobserved accounting phenomenon and practices as well as observed ones which haven’t been certified by systematic figures and evidence. As Demski (1988) stated, comparing the prediction with empirical instances provides further verification or denegation of positive accounting theories.

In general, positive accounting theory has made a high degree of original contribution to both the theoretical development of accounting and the practice. For instance, in China, the restrictions and waste of accounting resources led to a negative impact on the development of accounting theory before the 1990s. However, with further understanding of international accounting theory by Chinese scholars and under the advantage of the development of domestic Stock Exchanges, positive accounting theory has made a substantial breakthrough in the accounting field of research in China since 1997. It was highly advantageous to improve the Chinese accounting theoretical system and strengthen international academic communication, which has served better for China’s reform and opening up policy (Chen, 2004).

4. Conclusion

This paper evaluated the paper by Watts and Zimmerman (1979) based on the criteria selected such as the validity of framework and assumption, the appropriateness of evidence, the objectivity of author’s view, and the degree of innovation and original contribution. It is found that, out of the six criteria selected, their paper failed four of them and only reached the other two. Based on this finding, although there’s no denying that the paper is widely cited as a pioneer work to initiate positive accounting research, it is considered to have serious weak points, which significantly reduce its value. Thus, the paper should be used with a high degree of caution.

Reference:

Booth, P. and Cocks, N. (1990) ‘Critical Research Issues in Accounting Standard Setting’, Journal of Business Finance & Accounting, 17 / 4: 511-528

Christenson, C. (1983) ‘The Methodology of Positive Accounting’, The Accounting Review, 58/1:1-22

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Tinker, T., T. Puxty. and A.G. Puxty. (1995) ‘Politicing Accounting Knowledge: the Market for Excuses Affair’. SAGE Publications

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