Case Study1

[pic] Question 1: What information will Fuller need to manage the business? Classify thus information in two categories: accounting information and non-accounting information. The content of financial reports can be divided to accounting and non accounting information. According to Ahmed Belkaoui and Alain Cousineau (1977), accounting information is defined as quantitative, formal, structured, audited, numerical and past oriented material. While non accounting information is defined as qualitative, unaudited, narrative and it is future oriented prose.

For accounting information, it can further categorized into 4 different categories: 1. Operating information 2. Financial accounting 3. Management accounting 4. Tax accounting 1. ) Operating information This is the information needed on day-to day basis for the organization to conduct their business. In addition, operating information constitutes to the greatest amount of accounting information and it can serve as basic for financial and management accounting. Example of operating information: employees’ payroll, sales, outstanding balance from customers, inventory and so on.

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In the Kim Fuller’s case study, operating information that needed to be recorded is: i. Employee’s payroll (2 grinding workers and 1 driver), ii. Invoice and delivery order to customer or former employer, chemical firms. iii. Operating expenses (Electricity, petrol and transport maintenance). iv. Inventory of bottles. 2. ) Financial accounting Information like this is geared toward the external users whom have no control towards the preparation of reports or access to the underlying details, for example: the government, creditors, banks, shareholders, public and etc.

To ensure uniformity, the information reported is subjected to a set of ground rules and prepared under generally accepted accounting principles (GAAP). As for the case study, the information needs to be recorded under financial accounting as below: i. Amount owed to the sources of these bottles (creditors) ii. Checkbook records iii. Record of the costs of the items of plant and equipment owned by the business iv. Record of the business’s mortgage and balance v. Record of owners’ equities 3. ) Management accounting

In sharp contrast to financial accounting, this information is intended to serve the specific needs of management. This is because company’s managers are required to conduct strategic planning/ budgeting, controlling and implementation. As such, specialized reports, customized data, budgets and other data are needed which generally not reported for external users. In short, management accounting is prepared based on the management prerogative. 4. ) Tax accounting Tax accounting focuses on tax issues which include all activities related to filling for tax returns and planning for future tax obligation.

As such, Kim Fuller is accountable to provide accurate calculation of profit and loss on yearly basis by using the financial accounting technique as a point of reference. Non Accounting Information From the case study, the non accounting information as below: • Operation for plastic bottle grinding business begins in Nov 2006 • Mandatory deposits for all beverage bottles • Readily supply of material • Acquired 1 used truck & 3 trailers • 2 grinding machines ( 1 new & 1 used) • For maintenance: Supplies & parts were purchased Personal Computer • Contracts were secured with 2 local bottling companies • Employees were hired for the operation • Regular deliveries of pulverized plastic to Fuller’s former employer by Feb 2007. Question 2: See what you can do to draw up a beginning-of-business list of the assets and liabilities of Fuller’s company making assumptions you consider useful. How should Fuller go about putting a value on the company’s assets? Using you values, what is the company’s opening owners’ equity?

Assets are economic resources that are controlled by an entity and whose cost/fair value at the time of acquisition could be objectively measured. Assets must be acquired in a transaction. It must be an economic resource and controlled by the entity. The cost of assets at eh time of acquisition must be objectively measurable. Assets also serve as the purpose of provides future benefits to the entity. They are cash or can be converted to cash, or goods that are expected to be sold and cash received from them. They are items expected to be used in future activities that will generate cash inflows to the entity.

Liabilities are obligations to transfer assets or provide services to outside parties arising from events that have already happened. In this case, it involved liabilities that are expected to be satisfied or extinguished during the normal operating cycle or within one year, which is call current liabilities. Owners’ equity is the amount the owners have invested in the entity. Paid-in capital is the amount the owners have invested directly in the business by purchasing shares if stock as these shares were issued by the corporation.

Owners’ equity = Total assets – total liabilities The assets in Kim Fuller’s company are 1 used truck, 3 trailers, 1 used grinding machine, 1 new grinding machine, supplies and parts 1 PC, warehouse and cash in hand. The mortgage is his liability. The total value of the assets is $277,000. The owners’ equity = $277,000 – $112,000 = $165,000. Question 3: Now that Fuller has started to make sales, what information is needed to determine “profit and loss”? What should be the general construction of a profit and loss analysis for Fuller’s business? How frequently should Fuller do such an analysis?

Profit and loss statement can also be referred as Income Statement. According to Hongren (2009), income statement presents a summary of a company’s revenues and expenses for a period of time, such as a month, quarter or year. It is important because it shows the profitability of a company by providing critical information about a company’s net income (or net loss). Thus Fuller needs the information in the income statement to determine the “profit and loss” of his bottle grinding business. In an income statement, it shows Fuller the information on revenues, expenses, gains and losses.

Gross Margin along with net income is a measure of business success or business profitability. Gross Margin (Gross profit) = Net Sales – Cost of goods sold Gross Margin percentage = Net Sales – Cost of goods sold Net Sales Revenue Net income = Gross Revenue – Expenses Fuller needs to take keep track of his revenues and expenses to determine the profit and loss of his company. When revenues exceed expenses, Fuller business is making a profit or Net Income. When expenses exceed revenues, the result is Fuller business making a loss or Net Loss.

The difference between net income and gross margin is gross margin reveals how much the company earns taking into consideration the cost that incur for producing the products (or services) whereas net income is measure of excess of total revenues over total expenses. For the consideration on the frequency of the analysis, Fuller should do such analysis of income statement on a monthly basis; to measure the monthly performance of the company. The income statement provides information about profitability for a period of time: monthly profitability of a business.

It records all revenues for a business during this given period, as well as the operating expenses for the business. By tracking the revenues and expenses, Fuller can determine the operating performance of his business over a period of time. With the income statement, Fuller is able to find out what areas of his business are over budget or under budget. Specific items that are causing unexpected expenditures can be pinpointed. Sample of an Income Statement for Kim Fuller’s Bottle Grinding Business for month ended 28 February 200 [pic]

Question 4: What other kinds of changes in assets, liabilities, and owners’ claims will need careful recording and reporting if Fuller is to keep in control of the business of the business? Although Kim Fuller’s business is rather small in size and annual financial statements are prepared generally for tax purposes, family owners and to the bank, Kim Fuller needs to have well maintained financial accounting trackers including balance sheets and income statements and cash flow statements prepared on a consistent and periodic basis (monthly/ quarterly/ bi-yearly) to help ensure that the business is not slipping into any financial holes.

Changes in assets, liabilities, and owners’ claims that needs careful recording and reporting includes, [pic] There are many other considerations that should be taken into account including Liquidity of asset of the daily business running, especially cash flow, stocks, Inventory of the bottles, and finish good (pulverized plastic), Supplies and parts necessary to run and maintain the machines, etc. These would facilitate proper management accounting reports for business feedback, performance monitoring and control including critical info for sharing with investors.

Poor management of accounting records, particularly inadequate records of product/production costs could lead to major failures for the business. Nevertheless, Kim Fuller will have to be wary not to be excessive and track parameters that are not consistent and does not related to business performance that would only add on additional redundant unwanted cost and confusion. Overly complex tracking would on the other hand causes much confusion and loss of focus that may also be one of the factor to lose control of the business.

Summary To ensure good accounting information, there are 6 characteristic to be satisfied which are the general agreement from various parties: 1. Understandability: It implies that the information needs o be understandable by users. 2. Relevance: Information provided has to be useful which must assist the users to make critical decision. 3. Consistency: This implies consistent treatment of similar items and application of accounting policies. 4.

Comparability: The information has the ability to serve as benchmark or indicator for users to compare to similar companies in the same industry group and to make comparison of performance over time. 5. Reliability: The information is accurate, truthful, complete and able to be validated. 6. Objectivity: The information is prepared and reported in a neutral way which is free from bias. ———————– * Khoo Khay Hooi S-GSM0071/09 * Foo Yung Chau S-GSM0051/09 * Wayne S-GSM0094/09 * Ho Eng Ling S-GSM0061/09 CASE 1-2: Kim Fuller AGW 610 Finance and Accounting for Management

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