Financial Theory: Accounting Principles, Codes of Practice, and Cost Analysis

This report explores the different accounting principles, codes of practice, and cost analysis in financial theory. It discusses the differentiation between accrual and cash methods of accounting, identifies relevant codes of practice and legislation, and emphasizes the importance of cost analysis in organizations. The report also examines contingency planning and the impact of cost overruns on organizations.

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Financial Theory
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Executive summary
In this report, a hypothetical company Woolworth's has been taken to analyze and observe the
different accounting principles which should be applied by organizations. The code of conducts
and legislation which should be applied by the management of organizations has been studied in
details. The different costs which are essentials for an organization have been considered. The
importance of contingency planning has been observed in this report and it also been analyzed
that cost overruns are bad or not for an organization.
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Table of Contents
Executive summary.....................................................................................................................................1
Introduction.................................................................................................................................................3
Finding and discussions...............................................................................................................................3
1.1 Differentiate between accrual method and the cash method of accounting....................................3
1.2 Explaining and identifying the codes of practice and legislation which are relevant, for the process
of management in Woolworths...............................................................................................................3
1.3 Basic principles of accounting and their uses in the organizations....................................................4
1.4 Important definitions and relevant examples of:..............................................................................5
1.5 Contingency planning........................................................................................................................6
1.6 Indicate how to check the actual expenditures of the company.......................................................6
1.7 Definition of cost overrun. Are cost overruns always proves to be bad?..............................................7
Conclusions..................................................................................................................................................7
Recommendations.......................................................................................................................................7
References...................................................................................................................................................8
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Introduction
In this report, the different financial cost and their relevance in an organization have been
considered. The accounting principles and their relevant uses in the business have been
discussed. The accounting methods followed by the organization have also been discussed in this
report. The code of practices and the legislation which are relevant have been considered in this
report. So a hypothetical company has been taken named Woolworths group which is an
Australian company engaged in retailing business, to analyze the effect and the profits and losses
earned by the company by effectively using the different practices and accounting principles.
Finding and discussions
1.1 Differentiate between accrual method and the cash method of accounting
The principal difference between accrual and cash method of accounting is the timing
difference of the recognition of expenses and revenue. According to Adamyk and Adamyk,
(2017), in cash basis the revenue and expenses are recognized immediately that is when the cash
has been a receipt or when there is payment of cash, the revenue is recognized immediately. In
accrual method of accounting the revenue and expenses are recognized only when the revenue
has been earned and when the invoice has been prepared but payment has been done.
Woolworth group follows the accrual basis of accounting to recognize their revenue and
expenses of a business. In their view doing business by following accrual methods of accounting
is profitable, they can also follow the cash basis of accounting.
1.2 Explaining and identifying the codes of practice and legislation which are
relevant, for the process of management in Woolworths
The policies and procedures are an important part of a business which if followed
effectively and efficiently will give in numerous benefits to the organization. As opined by
Kieso et.al. (2016), the different policies and legislation which should be followed by every
organization whether big or small are:
 Authorization: for instance, who are the authorities for authorizing small
payments of the organization such as purchasing different tools for the employees
 Selecting the suppliers of the company who offer a reasonable price for supplying
materials to the company
 Determining when to order new stocks without any delay
 Risk management of the entity by professionals
 Collection of debt
 Collections of receivables from the debtors
 Reconciling bank accounts with the cash account on regular intervals
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 Investment of the business from where they can get maximum returns
 By following the Accountability act 2013, of Australia, which helps to records
documents of the transactions
 By complying the Commonwealth Procurement Rules, which assist the
organization in procuring records and maintaining the records of the organizations
and also helps to give important information to the supplier of the company
Woolworth group of companies comply with the GAAP principles that are
generally accepted accounting principles and also follow the relevant legislation
for operating their business. They maintain accuracy while recording the
transactions and bookkeeping. Their funds and financial transactions are recorded
by the supporting documents so that the auditor can do their work efficiently and
the company and the audit of the company can be audited reliably. The different
bank accounts of and the funds of the company are always shown in the books of
the company and the company does not allow any off transaction to be recorded
in the books
1.3 Basic principles of accounting and their uses in the organizations
According to McCall, (2017), the basic principles of accounting which should be
followed by every organization are:
Matching principles: The requirement of this principle is that the company should apply
the accrual method of accounting. This principle expresses that the revenues of business
should be get matched with the expenses of the business. This principle can be used in our
organization i.e. Woolworths group to report the expenses and sales of the business in the
same financial accounting year.
Going concern principles: This principle assumes that the business will never cease, it
will go on and on. This principle will assist our organization to defer the prepaid expenses of
the company in the next accounting period
Cost principle: from the view of an accountant, cost means the amount which has been
paid which has purchased a product or to manufacture a product, whether the transaction
occurred previous year or 10years ago. This is the main reason that it is known as historical
cost when the amount is recorded in the financial statements. This principle can help the
company to know the historical cost of the assets.
Revenue recognition principles: when a company is following accrual basis of
accounting this principle helps the company to recognize the amount of revenue when the
services have been rendered to the recipient or when the goods are sold to the customers,
irrespective of the fact the money is actually received or not by the organization. This
principle will help our organization Woolworth’s group to recognize the revenue as the
transactions occur.
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Conservatism concept: this concept helps the accountant to select the best suitable
alternatives out of the different alternatives available to him. This principle can help the
accountant of our organization to be objective and independent and also unbiased.
Full disclosure principle: this principle express that the company should provide all the
information and explanation that are material and which can be useful to the stakeholders of
the company. The information can be given in notes to accounts or in footnotes. This
principle can assist our organization to disclose all the material information to the
stakeholders of the company and to also to state the different accounting policies used by the
company.
Materiality concept: This principle assists an accountant of the company to use their
professional judgments in determining whether the information which or the amount which is
to be recorded in the financial statement is material or immaterial. This concept can help our
organization in determining the materiality of the amount which is to be recorded in the
financial statement.
Monetary unit assumption: This principle assumes that the purchasing power of the
currency does not vary with time. This principle can help our organization to record the
transactions in the currency of the organization where the organization is located i.e.
Australian dollar.
Economic Entity assumption: this principle assumes that for doing an accounting of an
entity that the owner and sole proprietor of the entity are different. This principle will help
our organization by separating the owner transaction from sole proprietor while doing
accounting.
Time period assumption: This principle express that a company can record and report to
the stakeholders the reports of short term accounting period says, a financial report for the 4
months ended, 2015. This principle can assist our organization to provide short term financial
report to the stakeholders of Wools worth's group.
1.4 Important definitions and relevant examples of:
Fixed cost: As opined by Fieler, et al. (2018), fixed cost is a cost which remains fixed
even if the productions of the organization's changes. For example, the depreciation of
assets remains fixed even if there is a change in the production because depreciation is
not associated with the increase or decrease of production. The machine will be
depreciated in the same amount even if there is an increase or decrease in the
productions. The other example is a salary of management.
Variable cost: according to Zakeri, et al. (2015), variable cost is a cost which changes as
with the production of goods by the organizations. For examples, direct labor expenses,
direct material expenses, commissions, fees of transactions occurred by the company.
Semi-variable cost: As per Gunarathne and Samudrage (2018), it is a cost which
includes both variable and fixed cost. For instance, wages of labor is a semi-variable cost
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because if a worker works more than the time which he usually works in a day then the
wage rates of the worker will increase and it is difficult to analyze whether it is fixed cost
or variable cost.
Direct cost: it is a cost which can be identified on a product. For example the cost of
direct material, overhead expenses can be identified on a particular product
Indirect cost: it is the cost which cannot be identified on a particular product. For
example, rent, salaries of the employees, electricity expenses. These are the expenses that
cannot be identified on a particular product
1.5 Contingency planning
According to Wu and Chen (2017), contingency planning is planning which can assist the
organization to respond immediately to an important future situation or event which is
contingent i.e. may occur or may not occur. The example of contingency planning in the
form of budget is given below:
Opportunities or risk
(1)
Effect/impact on
project
(2)
Probability of risk
(3)
Result
(4) = 2*3
A 1000 dollar 10 percent 100 dollar
B 5000 dollar 20 percent 1000 dollar
C -5000 dollar 30 percent -1500 dollar
D -1000 dollar 45 percent -450 dollar
E -4000 dollar 50 percent -2000 dollar
Expected amount -2850 dollar
1.6 Indicate how to check the actual expenditures of the company
To monitor the regular expenditure of the business is crucial for every organization. The
expenditure of the company must be compared with the budgeted expenditure prepared by
the company. To monitor the actual expenditure company should prepare a budget and for
this company will require the following information’s:
 The actual expenditure incurred till date
 Future expenditure of the company which are going to incur
 Negative or positive variances of the company
 The pattern of the expenditure of the company should be analyzed, especially for
staff who are on contract basis
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1.7 Definition of cost overrun. Are cost overruns always proves to be
bad?
Cost overruns mean that the actual cost incurred by the company exceeds the estimated or
budgeted cost of the company. Cost overruns can happen when the estimated budget of an
organization falls below the actual expenditures of a company. It is bad for an organization if
there is a cost overruns situation's because at that time the company has to take loans from
the banks or from the lenders which can cost interest to them and which can also increase the
cost of the project. So, cost overruns always prove to be bad for the organization
Conclusions
It is analyzed that different accounting principles can be applied by the company for
effective result. The codes and conduct of an organization have been identified which helps the
company to perform better in their financial areas. The different cost has been studied which
helps the company to analyze which cost can be reduced to increase the profit of the company.
The important aspect of contingency planning has been taken into consideration.
Recommendations
It is to be recommended that the company should apply their accounting principles efficiently
and effectively so that it will be profitable for the company in the long run. It is also to be
recommended that the company can use either cash basis or accrual method of accounting for
their accounting purpose. The company should analyze their fixed cost, variable cost, indirect
cost, semi-variable cost and also direct and if there exists an opportunity to cut these cost,
company should immediately take appropriate measures.
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References
Adamyk, O. and Adamyk, B., (2017). Accounting methods for public sector entities. CZECH
JOURNAL OF SOCIAL SCIENCES, BUSINESS AND ECONOMICS.–2017. Available at
http://dspace.tneu.edu.ua/bitstream/316497/26840/1/Adamyk%20and%20Adamyk_Chech
%20Journal_2017.pdf [Accessed on 1st April 2019]
Fieler, A.C., Eslava, M. and Xu, D.Y., (2018). Trade, quality upgrading, and input linkages:
Theory and evidence from colombia. American Economic Review, 108(1), pp.109-46. Available
at https://economia.uniandes.edu.co/files/profesores/marcela_eslava/papers/EFX_july2017.pdf
[Accessed on 4th April 2019]
Gunarathne, N. and Samudrage, D., (2018). ANALYSIS OF THE COST STRUCTURE:
PERSPECTIVES FROM THE MANUFACTURING COMPANIES IN SRI LANKA. Asia-
Pacific Management Accounting Journal, 13(3). Available at file:///E:/nerdy/accounting
%20theory/resources/709-1-3044-2-10-20190403.pdf [Accessed on 3rd April 2019]
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., (2016). Intermediate Accounting, Binder Ready
Version. John Wiley & Sons. Available at
https://s3.amazonaws.com/academia.edu.documents/35905258/ch17.pdf?
AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1554749997&Signature=OIlUW
CJrlpJ9EV2%2BH4YaGaehnFc%3D&response-content-disposition=inline%3B%20filename
%3DUPDATE_SUPPLEMENT_1996_to_accompany_and.pdf [Accessed on 2nd April 2019]
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McCall, N.C., (2017). Financial Reporting: An Analysis of Accounting Methods and
Principles (Doctoral dissertation, The University of Mississippi). Available at
http://thesis.honors.olemiss.edu/902/1/Thesis--Cole%20McCall.pdf [Accessed on 3rd April 2019]
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