Theory and Current Issues in Accounting Business Profitability

Question: Describe about the Theory and Current Issues in Accounting for Business Profitability. Answer: Introduction International Financial Reporting provides guidelines and basic principle that helps the organizations to prepare their financial report for the accounting year. It ensures that the financial report shows appropriate value of the company and transparency of the financial statement all across the globe. The IFRS set accounting standard for the companies that should be followed (Berk and DeMarzo, 2007). Financial statement is considered to be one of the major sources to provide a great deal of financial information which eventually helps to analyse the financial position and health of the company by providing the platform to calculate the financial ratios. Financial ratio helps to focus on the key aspects of the company such as profitability ratio, liquidity ratio, and efficiency ratio and leverage ratio. Three major element of financial statement are balance sheet, income statement and cash flows statement (Choi, 2003). Balance sheet of the company helps to provide a clear and precise idea about the company key facts and figure regarding asset and liability which eventually help to provide the platform to estimate the key financial ratio such as current ratio and quick ratio and thus help to determine the business risk such as liquidity risk and solvency risk. The objective of the general purpose of the financial reporting is to get the status of the financial position of the company. Five elements of theFinancial statement mentioned inn International Financial Reporting Standard Financial statement helps to provide the key information about the reporting of the entity monetary resources and overall claim along with their respective changes. What to report Where to report Economic resource and claims Statement of the financial position Changes in the ERC resulting from financial performance Statement of the comprehensive income Changes in the cash flows Statement of the cash flows Changes in the ERC not resulting from financial performance Statement of the changes in Equity Element of financial statement The elements of the financial statements are classes of items included in the financial statements. The elements of financial statements include liabilities, assets, revenues, equity, losses, gains and expenses. The five elements are briefly mentioned in the table format to provide a clear and precise picture of the five elements (Elliott and Elliott, 2008). Related to Financial position (Balance Sheet, Cash flow statement) Financial Performance (Income Statement, Cash flow Statement) Assets Income ( Revenue and Gains) Liabilities Expenses (from ordinary activities and losses) Equity (Residual, Asset-Liabilities) Recognition of the asset reflects the asset in the balance sheet. IFRS helps to provide and discuss when to signify or recognize the item in the financial statement. The two basic assumption of the recognition of the item helps to provide the probability where any future economic advantages will be related with the increase in the value of the company (Fifield and Power, 2011). The cost of the item or the overall value can be analyzed and determine with accuracy. Recognition signifies whether or when to identify or recognize, determination indicate in what level to recognize equity, asset, income or expense, liability. There are various way used to analyses and estimate the item in the financial statement such as historical cost, present value or current cost net realizable value (Gowthorpe, 2008). The most basic one is the historical cost. There are plenty of ways to determine and measure the financial statement such as historical, current cost but the most common method is the hist orical cost. US GAAP versus IFRS The standard for financial reporting is different for different countries. The IFRS standard helps to provide guidelines and rules for preparing the financial reporting but one the other hand US general accepted accounting principle is slightly different from IFRS. The company of different nation follows different accounting standard which are prevalent in their respective countries (Hillier, 2010). The county US follows US GAAP accounting standard to prepare the financial reporting while the Australia follows IFRS, China has his own Chinese national accounting standard similarlydifferent nation follows different accounting standard which create a chaotic situation for the users of financial statement. Therefore in order to end this confusion a universal accounting standard was established to abolish the risk and cost related to analyses the financial position of the company operating in different countries(Holton, 2012).There are several key similarities between the US GAAP and IFRS presentation. Both the standards, the component of the finished set of the financial statement consist of the income statement, cash flow statement and balance sheet. Both the standard needs the changes in shareholders equity to be reflected and represented. US GAAP permit the overall requires in the shareholders equity o be reflected in the overall notes to the financial statement whereas the IFRS needs the changes in the shareholders equity to be reflected in the separate statement(Moles, 2011). Both the financial statement need to be prepared in accrual basis. Differences Financial periods - US GAAP comparative financial statement are presented, it is seen that a single year is reflected in key situation whereas comparative information is essentially revealed with respect to the past financial year for all the key reported amounts in the present fiscal year. The preparation of the balance sheet and income statement - In US GAAP no such essential requirement is there to prepare a balance sheet and income statement(Moretto, 2008). On the other hand in IFRS does not provide a standard framework but consist of a minimum list of line items. Measurement methodologies from company annual statement of US GAAP and IFRS US companies utilizes the GAAP and predominantly do not use IFRS for their SEC filing whereas the IFRS nevertheless impact them. For instance, in global mergers and acquisition where they have non US subsidiaries or non US Stakeholders such as investors, customer or vendors, in such situations companies needs to provide financial information on the basis of the IFRS standards(Peterson, 2002). The transition from GAAP to IFRS will considered to be challenging for several US companies. In the given section of the report comparison between the two measurements methodologies will be discussed which will helps to provide a clear idea about the company annual report preparation and presentation done in US GAAP and IFRS. For describing the two measurement methodologies the two companies selected are Wal-Mart from USA and Woolworth Limited from Australia. Both the countries follow different accounting standard for the preparation and presentation of the annual report(Spiceland, Sepe and Nels on, 2011). A company can use different measurement techniques such as direct measurement method, indirect measurement method, fundamental measurement method, comparison measurement method and substitution measurement method. Effective Interest rate for Woolworth limited IFRS follows the effective interest rate method to prepare and publish the annual report. For providing a clear and precise idea about the measurement methodologies, company annual report along with their format is taken which helps the user of the financial statement to get a clear idea about the financial performance of the company in the market (Stittle and Wearing, 2008). The effective interest method is considered to be one of the primary techniques for calculation of the interest rate for the given fiscal year which is based on the overall amount of the financial instrument book values at the beginning of the fiscal period. Thus if the overall book values of the company increases the amount of the related interest will also increase on the hand if the book values of the financial instrument decrease the interest rate will also decreases (Wild, 2005). In February 2008, IFRICS received a request for the overall guidance on the key application of the effective interest rate method to the financial instrument whose cash flows are interlinked with the overall key changes inaninflation index. Profitability 2014-06 2015-06 2016-06 Tax Rate % 30.06 30.33 38.21 The effective tax rate of the company has been shown for the year 2014, 2015 and 2016. The tax rate has been increased from 30.6% in the year 2014 to 38.21% in the year 2016. The effective tax rate shows the average rate of tax at which the company is taxed. The effective tax refers to the income taxes that is incurred by the tax payer during a period of time(Winters, 2008). The estimation of the interest rates shows the amount of interest that to be paid by the company during a period time. The financial statements show the interest rates that to be paid by the company. It is the responsibility of the auditor to determine and evaluate the tax rate to be paid during a period of time. The effective interest rate is the rate that is actually paid or earned on an interest, financial product or loan due to the result of the compounding(Wolf, 2008). The company may have to pay fixed rate of tax on the amount borrowed during a period and may earn interest from a deposit. The effective rate of interest is to calculated on the basis of the guidelines of the IFRS rules. The financial report of the company shows the calculation of the interest rate and the total value of the company. Straight line method for Wal-Mart Straight line method use amount which are subtracted the asset salvages value from the overall total cost to get the decreasing asset cost. The devaluation sum continues as before over the advantage's life. Utilize straight-line devaluation when the quality you get from the benefit continues as before every year. The benefit is higher when the company utilizes the straight-line method instead of the double declining equalization(Zopounidis, 2008). With double declining parity, the company deducts a greater amount of the benefit's quality amid the start of the advantage's life.the financial statement of the company shows the calculation of depreciation of the assets which shows the decrease in the value of the assets during a specific period. The starlight line method has been followed by Wal mart to calculate the depreciation during a period of time. It is the method used to minimize the carrying amount of the fixed asset over the useful assets. The method is basically used to design the pattern of consumption of the underlying assets. Therefore, it is used to determine the cost of the fixed asset and the useful life of the assets. The company can use straight line method to calculate depreciation of the assets. Conclusion The financial report of the companies shows the effective tax rate and method of calculating depreciation of the assets. The companies follow different accounting standards. The preparation of the financial statements is based on the rules and guidelines prescribed the accounting standards. References Berk, J. and DeMarzo, P. (2007).Corporate finance. Boston: Pearson Addison Wesley. Choi, F. (2003).International finance and accounting handbook. Hoboken, N.J.: J. Wiley. Elliott, B. and Elliott, J. 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