Tag Archives: auditing textbook



Apple Inc. Verses Microsoft Inc Financial analysis – 2014 & 2015

  1. Will Apple be able to meet its obligations as they become due? How does Apples liquidity compare with that of Microsoft? 

Liquidity ratios are used to measure a company’s ability to pay off its short-term debt obligations. This is achieved by comparing a company’s most liquid assets (or, those that can be easily converted to cash), and its short-term liabilities.

  CURRENT RATIO   QUICK RATIO
  APPLE MICROSOFT   APPLE MICROSOFT
2014 1.08 2.5 0.67:1 0.6777:1
2015 1.11 2.5 0.725:1 0.53:1

 

A current ratio below 1 suggests that the company is unable to pay off its obligations if they came due at that point. This situation does not necessarily mean that it will go bankrupt. On the other hand, a current ratio (over 3) does not necessarily indicate that a company is in a state of financial well-being either. This depends on how its assets are allocated. A high cash ratio could also indicate that company is not using its current assets efficiently, is not securing financing well or is not managing its working capital well. Using Current ration Apple will be able to meet its short term obligations.


The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. This ratio measures the dollar amount of liquid assets equivalent for each dollar of current liabilities. Thus, a quick ratio of 1.5 means that a company has $1.50 of liquid assets available to cover each $1 of current liabilities. The higher the quick ratio, the better the company’s liquidity position. As per this ratio both companies do not show strength however as discussed under current ratio this should not raise an alarm. Apples liquidity seems to be becoming stronger as compared to Microsoft which is diminishing.

==> Top 5 of The Best Accounting and Finance Textbooks 

  1. What is the capital structure of Apple (i.e., what percentage of the total assets of the company are financed through liabilities and what percentage through stockholders’ equity)?

A capital structure is a mix of a company’s long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.
As at 2015 41% of Apples assets were financed by shareholders equity while 59% was funded through liabilities.

  1. 3. Is the capital structure of Microsoft significantly different from that of Apple?  Explain your answer.

As per the above, Applesuse of shareholders equity to total assets has been on a downward trend. That of Microsoft has also been on the same path but not drastic as that of Apple. To drive deeper into this lets see how their debt to income ratios look like.


DTI is a measure that compares an individual’s/business debt payment to its overall income. A low debt-to-income ratio demonstrates a good balance between debt and income. Conversely, a high DTI can signal that an individual/business has too much debt for the amount of income he or she has.

DEBT-INCOME RATIO
  APPLE MICROSOFT
2014 1.08 0.92
2015 1.43 1.2

DTI ratio also paints the same picture as shown by the above percentages. Both companies seem to have borrowed a lot as they move to 2015. This has led to decrease in shareholders equity in both. Both companies have a similar capital structur

READ MORE

Accounting Issues Raised After Financial Analysis

Dear Sir/Madam,

RE: Accounting Issues –  Year Ending 30th June 2016.

This is in reply to your email sent on 18th April 2016 in regard to accounting issues we had previously discussed over the phone. Below is our feedback on all the issues that you had raised:

  1. In regards to the issue of the court decision to reward damages to your client held on 26th March 2016 we would advise that you set aside funds amounting to $1 million in your general reserves account for use upon the verdict expected on 30th September 2016. Below are the journal entries to record this transaction. The same also needs to reflect on the statement of financial position.
ITEM DR CR
PROFIT and LOSS A/C 1,000,000
GENERAL RESERVE 1,000,000

==> Top 5 of The Best Accounting and Finance Textbooks

  1. In the case of Ipad sales we would advise that you treat the sales as debtors less the discounted amount. This is to reflect in the financial reports. You also said that the total amount owed is $ 250,000. This is to treated as accounts receivables less the discounted amount. Below are the journal entries to be recorded in your books.
ITEM  DR  CR
Account receivables            232,500.00
Discount allowed               17,500.00
Stock        250,000.00
TOTAL            250,000.00        250,000.00

 

Plant A/c
 ITEM  DR  CR
 Cash      76,000.00
 Accumulated depreciation      25,000.00
 Plant      85,000.00
 Gain on sale of plant      16,000.00
   101,000.00    101,000.00

 

Your adjusted statements are as below.

 

A statement of cash flow is prepared to show cash flow from operation and cash flow activities. This report shows changes in financial positions leading from operational activities, investing activities and financial activities. This information can then be used by an analyst to make a conclusion.



A statement of cash flow also assists in making cash forecasts. This is then used in internal management to determine management policies especially those touching in finances. The report is also credited for resulting in cash planning.

Through the preparation of cash flow statements, a business can compare the performance of projects. By comparing the actual cash flows against expected cash flow, a business can know how the project is fairing. An income statement measures a company`s performance financially eg by expenses, revenue, profits or losses over a specified period of time. This therefore means that both financial reports have their importance.

 

References

AASB, A. S. (2004). Financial Instruments: Disclosure and Presentation.Disclosure51, 52.

 

Bushman, R. M., & Smith, A. J. (2001). Financial accounting information and corporate governance. Journal of accounting and Economics32(1), 237-333.

 

Lev, B., & Zarowin, P. (1999). The Boundaries of Financial Reporting and How to Extend Them (Digest Summary). Journal of Accounting research,37(2), 353-385.

 

Yours Faithfully

 

 

READ MORE

Outsourcing and Migrating from GAAP to IFRS

Outsourcing

Outsourcing is the practice of using other companies to reduce your costs and transfer portions or the whole job to another supplier rather than doing it yourself. When used properly, outsourcing can be a good cost-cutting strategy. It is sometimes cheaper and more affordable to purchase a product from a company than having to produce it yourself. This is because the company producing it has acquired the important economies of scale in production.

Outsourcing comes with both pros and cons. The major disadvantage of outsourcing especially when outsourcing payroll is data confidentiality. A small leak by an employee of the outsourcing company could lead to court battles, negative reputation to your business. Some key corporate secret, salary, will be shared with a third party. This if not well handled could result in a disaster.

Outsourcing payroll could be cheaper to handle it internally. Most corporates which offer these services could be expensive since they use very complicated software that is expensive to acquire. Another complication of outsourcing payroll is that you could be using the same company with your competitors. This would lead to a conflict of interest. You could have a competitor requiring the information of your staffs and get it because the company does not want to lose business to the competitor. Dealing with employee complaints on salary-related issues would also be a concern. A staff that has been under or over paid will have to go through their supervisor who then lodges a complaint with the personnel department, then to the outsourced company. This would take time, which is not good especially considering that we are dealing with salaries, which is a very emotional issue. Staff currently handling the payroll function might have to be let go. This portrays an image of a possibly a struggling company.

 

To fully outsource a several payroll issues need to be addressed. If not well dealt with the whole process could be flawed with complaints and other issues. One of the issues to be dealt with is the choice of company. Competitive bidding needs to be done. The best company not only in pricing but also in controls and efficiency is to be chosen for the job.

Data confidentiality needs to be well addressed. The company given the contracts needs to demonstrate without reasonable doubt that its able to keep the company`s information securely. Performance agreements need to be signed in consultation with the legal team. Information should not be stored in transferable discs, e.g. Flash disk, CDs, etc. Consequences of a proven leak need to be agreed on at the beginning.

The process flows of how the transfer will need to be laid out. A direct injection plan or a piloting plan needs to be agreed on. This will ensure an easy transition from the previous system to the new system.

 Migrating from GAAP to IFRS

            IFRS is a principle based system while GAAP is a rule-based system. A principle-based system is favorable to businesses as it is flexible when compared with a rule-based system that is rigid. IFRS also offers more disclosures due to its flexibility. More disclosures are important to readers of financial analysis reports. Getting International Standards approval requires you to implement IFRS. ISO certification is crucial for businesses as it increases their credibility.



IFRS recognizes loss immediately unlike what happens with GAAP. Loss being reported immediately is advantageous to not the investors but also lenders and other stakeholders like suppliers. The sooner they can get this information the better.  This reveals the transparency that is in IFRS and not in GAAP. Contracting between companies and their management becomes easy, this also ensures effective corporate governance.

The convergence of IFRS has also made it easy to compare financial statements in many parts of the world. In the EU for example many companies adopted IFRS the same year it was introduced. With this kind of adoption businesses need to all now ensure they are on IFRS. The key reason for the preparation of key financial reports is for comparison purposes. It doesn’t make any sense to prepare statements that only you can compare with yourself.

Do you know that debt has some advantages?

==> Learn more HERE on advantages of debt

Users of IFRS need to understand the methodology used to generate reports. Under GAAP emphasis is on literature provided. Documentation is the key issue. IFRS is more flexible and even where documentation does not tally facts pattern are analyzed, and a decision is made. To implement IFRS is short and precise. It takes a minimum of one year to be fully setup. To use IFRS we would use direct key as the implementation plan.

 

References

Du, N., Alford, R. M., & Smith, P. L. (2016). Do GAAP And IFRS Differ In Collectiblity Judgments Related To Revenue Recognition?. Journal of Applied Business Research (JABR), 32(6), 1675-1686.

Giloz-Ran, E., Gavious, I., & Lev, B. (2014). The Positive Externalities of IFRS: Enhanced R&D Disclosure.

READ MORE

Accounting Lessons Day 1 Experience

My first week in college was just a nightmare. It all started after admission to college. I had just completed my High School education and was on a high gear to keep the momentum of working hard in school.

Having performed well in High School, I knew accounting was my course since I always dreamed of being an accountant or an auditor since my lower grade classes. I was convinced that accounting was for focused and dedicated individuals from the examples of the bankers in our local town. And hence, I had to follow suit and pursue my dreams.

On my first day at school, I had a timetable for my first accounting class, Introduction to accounting, indicating the scheduled class was in AH 1 from 9 a.m- 11 a.m. By 8;30 a.m, I embarked on moving to the indicated venue to attend my first class. Upon arrival, I could see fresh faces of students, who looked new from their faces, books and uniform.

==> Get Accounting For dummies textbook here

I had to confirm from a few friends if I was in the right class, and there I was. After a couple of minutes, a tall, dark and slim man entered the class and greeted us. From the look of things, he appeared to be the tutor as he put his books on the teacher’s locker.

He welcomed us in a polite way, briefing us on some few tips of surviving in accounting classes and life around the campus. The tall man introduced himself as Mr. Jones, and was to take us through most of the units in accounting in the course of our study.

Mr. Jones appeared composed and even took us through some few tips of excelling in our accounting lessons. I was so much excited being in my dream class for my dream course. Abruptly, the teacher shouted, “Stop! Has anyone seen my car?” The whole class went silent since no one could comprehend what was going on and it was just our first class.

Mr. Jones perused through his books as he searched for something, though no one was sure what he was looking for. All of a sudden, he called the class off as he said he had forgotten his car at the restaurant, about twenty miles away.

There was a loud thunder as the class laughed at how our tutor had forgotten his car and had to rush back to collect it. We later learnt that Mr. Jones was mentally unstable and experienced such moments on many instances in the middle of his classes.

However, he was highly regarded by the rest of the school for his deep knowledge in accounting concepts and skills. That was how our first accounting class ended as the classed laughed off at Mr. Jones, our newest joke in campus.

 

READ MORE