Accounting for Managerial Decisions

This article discusses the fundamental qualitative characteristics of accounting information, the advantages and disadvantages of listing a company on the Australian stock exchange, and the importance of human capital and intellectual property in financial statements. It also includes a case study on Turner Manufacturing Co. to demonstrate the use of ratio analysis in assessing the financial position of a business.

Running Head: Accounting and Financial Management
Accounting for Managerial Decisions

Accounting and Financial Management 1
Question 1
Relevance and reliability of the accounting information are its fundamental qualitative
characteristics. Both these features are quite important to achieve the acceptable quality of the
information. Relevance is that feature of accounting information that is achieved when
information is said to be capable of influencing the decision of intended users such as
investors, lenders of finance and other creditors of the business to which such information is
related to. Whereas reliability of information is achieved when it is verifiable, neutral and can
be represented faithfully. Reliable information must be accurate and true in nature (Obaidat,
2007).
Both the above discussed characteristics of the accounting information are related in such a
manner that focus on one will amount to negligence of other and also vice versa. Sometimes
the information that is quite relevant for the intended users might not be reliable enough to
allow them to undertake sound decision making. The framework of preparation and
presentation of financial information suggests various constraints on the relevance and
reliability of information. One of these constraints is the timeliness of information. It can
cause conflict between relevance and reliability of accounting information. If out of date
information is reported it will become irrelevant but if the information is reported without
resolving the uncertainties, it might affect the reliability of such information. Further,
choosing the appropriate amount to measure assets and liabilities may involve such conflict.
In such situations it is necessary to maintain proper trade-off between these two
characteristics to meet the objectives of the financial statements containing accounting
information. The required trade-off can be maintained by using the information which is
more relevant of whatever information is reliable (Schöndube-Pirchegger & Schöndube,
2017).

Accounting and Financial Management 2
Question 2
If the firm Laurie Farms get s listed on the Australian stock exchange, it will be privileged by
various opportunities. The listing on ASX will enhance the public recognition as well as the
firm’s commercial standing. Also, the firm will be benefited by the high public profile that
will be good for its business (PWC,2016). Further, the scope of new capital formation for the
business will be enhanced as it will allow the firm to attract the potential investors towards
the firm. Furthermore, it will be easier for the firm to provide the better incentives to the
employees by the way of granting share options. In case of listed companies, it is not required
to provide personal guarantees of the directors of the company for the borrowings. The listing
on ASX will mandate the company to act transparently so as to protect the interests of its
stakeholders and also it will allow them to operate in the most ethical manner following the
corporate governance practices.
Though, the listing of Laurie Farms will be beneficial in the above ways to the firm, there are
certain negative implications also that the firm will have to face if it gets listed on the ASX.
These implications are discussed further. The firm will become more vulnerable to the market
fluctuations and such fluctuations will not be in control of the firm. Publicly listed companies
have to comply with various regulatory requirements such as principles and standards of
corporate governance. Further, the owners of the firm may be distracted from their basic
responsibility of managing the business in the course of dealing with the investors
(McDowall, 2018).
Question 3
The financial position of any entity can be ascertained using the advanced tool of accounting
and financial management i.e. ratio analysis. Ratio analysis helps in assessing the financial
position of the business from various viewpoints such as liquidity, profitability, efficiency,

Accounting and Financial Management 3
solvency etc. The liquidity and solvency position of the business can be ascertained using the
statement of financial position of the business without the need to refer to the income
statement of the entity. In the present case of Turner Manufacturing Co. only balance sheet is
available to evaluate the financial performance of the business. The liquidity position is
achieved by the company when it has sufficient amount of current assets to meet its short
term debt obligations. The liquidity position of the business can be ascertained using the
current and quick ratio. The ideal current ratio of any entity is 2:1 (Foster, 2004). The current
ratio of Turner Manufacturing Co. is 2.48: 1 and this indicates the firm is effectively
managing its current assets to meet its short term financial obligations and hence its liquidity
position in the market is sound. The quick ratio of the company is 1.33:1and this shows that
the firm has more liquid assets than its current liabilities. These assets are capable of being
converted into cash as and when required. Further the solvency position of the business is
determined using the debt equity and debt to assets ratio. Solvency position of the company is
said to be sound when the assets of the business are financed using more of the funds of
investors than that of creditors. The debt equity ratio in the present case is 3.20 and this
shows that the financial risk on the company is higher due to excessive usage of external debt
financing than the internal or equity financing. Further, the debt to assets ratio of the
company is 76% and this shows that that firm has more assets than its overall liabilities of the
business. Therefore, the financial leverage of the company is lower and it has less financial
risk (Penman & Penman, 2007).
From the above ratios, it can be concluded that the Turner Manufacturing Co. is having sound
liquidity and solvency position in the market and therefore, the company is said to be
performing well.
Question 4

Accounting and Financial Management 4
The term human capital comprises of the employees of the organisation as well as their skills,
knowledge and the experience (Koster, 2017). Human resources contribute significantly to
the organisational development and hence are considered as the most valuable asset for the
business. In the today’s world where the economies are highly innovation driven and
knowledge based, human capital management has become necessary because organisations
invests huge sums of money in developing and managing their work force (Abeysekera &
Guthrie, 2004). Human capital has a great impact on the important business areas such as
innovation of product or services, customer satisfaction and the overall profitability. Human
capital accounting helps in managing effectively the human resources of the business. HRA
also enables the firm to determine and measure the total expenditure incurred to train the
employees in terms of benefits obtained from such human resources. HRA also helps a firm
in identifying the root causes of high employee turnover and preventive measures to deal with
the same. Moreover, the recognition of Human capital in the financial statements helps the
users of financial statement to assess the inner strength of the firm.
Arguments against the human resource accounting:
The value of human capital must not be recognised in the financial statements as its term of
existence is quite uncertain and hence its valuation in the circumstances of uncertainty will
offer only unrealistic results. There is always a difficulty in owning retaining and utilising the
human capital and there remains a constant problem in managing the human resources of the
company. Also, since there is no standard method that is universally accepted for the
valuation of human resources, it is not correct that human capital must be valued for the
business (Oseni & Igbinosa, 2015).
In the today’s world intangible assets are becoming the key assets of the business. These
assets have no physical existence and are also termed as intellectual capital of the business

Accounting and Financial Management 5
such as brand, trademarks, patents, technological know-hows, research and development etc.
These assets provide sustainable corporate competitiveness to the business (Kirkpatrick,
2006). The reporting for intellectual capital must be undertaken to close the gap between the
organisation’s book value and market value. The inclusion of intellectual property in the
financial statements provides better insights of the real value of the business of reporting
entity. Also, it facilitates reducing the information asymmetry. The recognition of human
capital in the financial statements helps in building improved reputation of the reporting
entity.
Arguments against the inclusion of intellectual capital in the financial statements:
The information on the intellectual capital doesn’t fulfil the qualitative characteristics of the
accounting information intended to achieve the purpose of fair presentation. Moreover, the
intellectual capital fails to meet the definition and criteria of recognition of the assets. To
measure the information regarding intellectual property involves high amount of subjectivity
(Bontis, 2003). Also, there does not exist any market for the intellectual assets and the
absence of properly organised markets sets these assets apart from the other assets. Hence it
is not appropriate to recognise these assets in the financial statements of the entity
(Morrissey, 2015).

Accounting and Financial Management 6
References:
Abeysekera, I., & Guthrie, J. (2004). Human capital reporting in a developing nation. The
British Accounting Review, 36(3), 251-268.
Bontis, N. (2003). Intellectual capital disclosure in Canadian corporations. Journal of Human
Resource Costing & Accounting, 7(1), 9-20.
Foster, G. (2004). Financial Statement Analysis, 2/e. Pearson Education India.
Kirkpatrick, M. G. (2006). Intellectual assets and value creation: implications for corporate
reporting. Organization for Economic Co-operation and Development.
Koster, E.G. (2017). ‘Human capital’ as a part of the financial balance sheet. Retrieved
from: < https://www.eapm.org/human-capital-part-financial-balance-sheet/> Accessed
on: 07.08.2018.
McDowall, L. (2018). Article: Publicly Listing a Company, the Advantages &
Disadvantages. Retrieved from:
http://www.integralcapital.com.au/public_panel/publicly_listing_by_Len_McDowall.
php> Accessed on: 07.08.2018.
Morrissey, H. (2015). Human capital is the ultimate intangible asset. Retrieved from: <
https://www.telegraph.co.uk/finance/comment/11413191/Human-capital-is-the-
ultimate-intangible-asset.html> Accessed on: 07.08.2018.
Obaidat, A. N. (2007). Accounting Information Qualitative Characteristics Gap: Evidence
from Jordan. International Management Review, 3(2).

Accounting and Financial Management 7
Oseni, A. I., & Igbinosa, P. E. (2015). Accounting for Human Capital: Is the Statement of
Financial Position Missing Something?. Journal Of Educational Policy And
Entrepreneurial Research, 2(5), 108-114.
Penman, S. H., & Penman, S. H. (2007). Financial statement analysis and security
valuation (p. 476). New York: McGraw-Hill.
PWC. (2016). Listing a company on the Australian Securities Exchange. Retrieved from: <
https://www.pwc.com.au/legal/assets/listing-company-asx.pdf> Accessed on:
07.08.2018.
Schöndube-Pirchegger, B., & Schöndube, J. R. (2017). Relevance versus reliability of
accounting information with unlimited and limited commitment. Business
Research, 10(2), 189-213.