Methods of Accounting
Dsicuss about the Influence Of The Nature Of Government Accounting.
The process of accounting is a dynamic process wherein the recording and recognition of transactions are done on the basis of two method which are generally used. These methods are Cash basis of Accounting and Accrual basis of Accounting. These methods are used widely used in every accounting business.
In cash basis accounting system, all the transactions are recorded and presented on the basis of cash as and when such cash are received. In accrual system of accounting the revenue is recorded when it is actually earned and expenses are recorded when such expenses are actually incurred. Accrual basis of accounting does not depend on whether cash is received or paid. The core difference between cash basis of accounting and accrual basis of accounting is that the timing of the transactions is different in each case. The difference which arises between cash basis of accounting and accrual basis of accounting is mainly due to the difference in timing of recognition of elements of the financial statements (Tiron Tudor and Mutiu 2012). In business, normally accrual basis for recording of transactions are preferred as transactions are recognized as and when such transactions take place. However, certain businesses are there which do not have a high revenue or turnover and has simple transactions to record follow cash basis of accounting. Accrual basis Accounting of transactions are used by firms which have a high turnover and also there is the cash that in order to get the financial accounts audited the company needs to prepare the financial accounts on the basis of accrual system of recording transactions (Bergmann 2012).
The benefits of using cash method of recording transactions is that it is a simple method and easy to implement and follow. Moreover, it allows the business to keep a track of the cash inflows and outflows in a business (Irwin 2012). The method of cash basis also has its impact on the amount of tax which is to be paid by the business considering the amount of cash which is banked. In the case of accrual method, the basic advantage is that the matching of income and expenses as and when they occur. Accrual method allows the business to estimate clearly the future profits which can be earned by the business (VanZante 2013).
Alpha ltd is engaged in the business of providing online services to airlines which is situated in New Zealand. The company recognizes transactions on accrual basis and the difference which arises in the value of cash basis and accrual basis is due to the treatment of depreciation which is $ 96,000 and also due to the unallocated revenue which is of amount 43,000. The management of the company follows accrual basis which is very useful for matching the revenues and expenses of the company. The net profit which is generated by the company is estimated following the accrual basis of accounting and the cash generated from operations is calculated following cash basis of accounting. Both the figures are necessary as they are used for matching the revenues and also clearly pointing out the transaction which have caused the difference in revenues on the basis of cash and accrual accounting.
Benefits of Cash Basis Accounting
The responsibility of the external auditor is to ensure that the financial statement is showing true and fair view. The role of the external auditor is to investigate the annual reports of the company and form an opinion whether annual reports of company are fairly represented or not. The main responsibility of the auditor is to analyze the financial reports of the company and also form an opinion on the financial statement of the company (Davidson, Desai and Gerard 2013). In many cases the management of the company is of the view that the auditor is responsible for detecting fraud and error which is not the case and therefore the auditor is an independent person who is responsible for the analysis of the financial statements of the company in order to form an opinion on the financial statement of the company.
Therefore, from the above discussion it is clear that an auditor is responsible to ensure that the financial statements are fairly represented and the shareholders are protected from any manipulations. The audited balance sheet of the company is the basis on which the potential investors of the company decide whether or not to invest in the shares of the company. The auditor is responsible to act in the best interest of the shareholders of the company and determine whether the financial reports of the company is showing true and fair view or not. The auditors of the company are to also ensure that the there is no omission or manipulation in the
As per the case study provided in the assignment, the annual reports of Air New Zealand is given for the year 2016. The analysis of the financial statement is to be done, on the basis which the questions given in the assignment is to be solved.
As shown in the financial report of the company, the annual report of the company is audited by Deloitte which is an auditing firm engaged in the auditing and other non-auditing services which it can provide to other companies. As per the Deloitte, all the matters which are presented in the financial statement of Air New Zealand for the year 2016 are shown and presented fairly as per the requirements of New Zealand Equivalents to the Financial reporting standard and International financial reporting standards. All components of the financial statements are fairly represented as per the opinion of the auditor (William Jr, Glover and Prawitt 2016). Deloitte has issued an unqualified report for the company and believes that the financial statements are fairly represented following all relevant New Zealand standards on accounting. The auditor do not take any responsibility about the securities and control over the group financial statement.
Benefits of Accrual Basis Accounting
A qualified Audit opinion refers to the opinion which is issued by an auditor when there is some material misstatement in the financial reports of the company. Such type of report might also be given if the there is some restriction on the access of information by the management of the company (Blandón and Bosch 2013).
The net profit as shown in the annual reports of the company for 2016 is $ 463 million and the figure of cash from operation is shown at $ 1074 million. The cash from operation which is shown in the cash flow statements is greater than the net profit figure which is shown in the profit and loss statement of the company. The major reason for the difference in the figure which is stated as net profit and cash flow from operations can be attributed to certain transaction which are treated differently in case of both the statements (Wu and Shen 2013). There are certain items which are to be deducted in order to arrive at total revenue and certain non-cash items which are needed to be added back in order get the cash revenue of the company. Such Items includes Depreciation expenses, impairment losses and similar other expenses of such nature.
As provided in the annual reports, the directors of the company which are members of the audit committee are Tony Crater, Jan Dawson and Jonathan Mason. The audit committee main function is to supervise financial reporting framework and review various disclosures and treatments. The audit committee of any company is the major committee which have a significant role in the management of the company (Aldamen et al. 2012). The primary responsibility of the committee is to look after the audit process, framework for reporting, various legal regulations which are followed by the company
The directors have identified letter of credit and performance of bonds which is of the amount of $ 33 million as contingent liability of the business. This is disclosed in the notes to accounts of the company. Contingent Liability can be defined as certain transactions which are uncertain in nature that might occur in the near future and which cannot be measured reliably in current circumstances (Bova 2016).
In the case of Interwood, the currents assets of the company comprise of cash balance, account receivables, prepaid expenses and office supplies which gives a combined figure of $ 62,417. Whereas the current liabilities of the companies consist of account payable and accrued expenses and GST amount which is to payable by the company. The combined figure of current liabilities of the company gives a figure of $ 12,065. The working capital of the company which is the figure which is the difference between the current assets and current liabilities of the company (Makori and Jagongo 2013). The working capital of the company is suitable so the company has ample amount of capital to fund the current expenses and obligation of the company (Mathuva 2015). Favorable or positive working capital suggest that the company has operational efficiency and has the capability to meet the current obligation of the company.
Reference
Aldamen, H., Duncan, K., Kelly, S., McNamara, R. and Nagel, S., 2012. Audit committee characteristics and firm performance during the global financial crisis. Accounting & Finance, 52(4), pp.971-1000.
Bergmann, A., 2012. The influence of the nature of government accounting and reporting in decision-making: evidence from Switzerland. Public Money & Management, 32(1), pp.15-20.
Blandón, J.G. and Bosch, J.M.A., 2013. Audit firm tenure and qualified opinions: New evidence from Spain. Revista de Contabilidad, 16(2), pp.118-125.
Bova, M.E., 2016. The Fiscal Costs of Contingent Liabilities. International Monetary Fund.
Davidson, B.I., Desai, N.K. and Gerard, G.J., 2013. The effect of continuous auditing on the relationship between internal audit sourcing and the external auditor’s reliance on the internal audit function. Journal of Information Systems, 27(1), pp.41-59.
Irwin, T., 2012. Accounting devices and fiscal illusions. International Monetary Fund.
Makori, D.M. and Jagongo, A.O., 2013. Working Capital Management and Firm Profitability: Empirical Evidence from Manufacturing and Construction Firms Listed on Nairobi S ecurities Exchange, Kenya.
Mathuva, D., 2015. The Influence of working capital management components on corporate profitability.
Tiron Tudor, A. and Mutiu, A., 2012. Cash versus accrual accounting in public sector.
VanZante, N., 2013. Using the Basic Accounting Equation to Help Students Understand Differences Between the Cash Basis and Accrual Basis. Management Accounting Quarterly, 14(2), p.34.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.
Wu, M.W. and Shen, C.H., 2013. Corporate social responsibility in the banking industry: Motives and financial performance. Journal of Banking & Finance, 37(9), pp.3529-3547.
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