Advance Financial Accounting

Running text: Advance Financial Accounting
Advance Financial
Accounting

Advance Financial Accounting
The Youtus Enterprise has been advised for incorporating a better accounting information
system (AIS), for improving the method of corporate reporting, providing the shareholders
with the information relating to the use of shareholder’s funds in business operations,
producing proper report regarding machinery depreciation, tax calculation, inventory levels
etc. and putting the policies and procedures into the AIS for handling the sensitive clients,
suppliers etc.
For Youtus, effective corporate governance is required to establish vision, mission and values
which are really necessary in case the company is looking for an expansion because these are
the things which are evaluated by the prospective investors, suppliers and shareholders of the
company. In case of equity financing, the shareholders will put the pressure on the
management of the company to be more transparent, efficient, accountable and responsible,
so here too the company needs the proper corporate governance. Apart from this, Youtus has
entered into the foreign markets and thinking of increasing the sales figure so proper
corporate governance is required by the company for meeting the rules and regulations of
foreign countries and also for attracting investors and customers in the foreign country.
Youtus should even change its business status from sole proprietorship to company limited
by shares because it will protect the owner’s assets from being used for the debt payment in
future and owner will be liable for the debt payment up to the value of shares held by him, (1st
Formations, 2019) facilitating the company to raise more capital from the public in case of
further expansion. Also, tax can be strategically managed by the companies having the
business status of company limited by shares. The EBIT of the business can be distributed by
way of salary, wages, dividends etc. which gives rise to an effective tax structure.
The company is having two options for raising fund in order to expand the production that
includes debt financing and equity financing. However, cost of funding under the equity
financing seems to be better over the debt financing. Company need to pay interest on debt
taken whereas dividend to the equity shareholders. If we talk about the interest, then it is a
fixed cost which results in a higher break-even point, which gives rise to the risk of
insolvency during the period of financial distress and also increases the debt equity ratio.
Investors and shareholders always look at this ratio to know the risk associated with their
return on invested fund. If debt to equity ratio is high, then it has a direct and adverse impact
on the amount of dividend to be distributed to the shareholders of the company that is, it
usually lowers the dividend amount. Under debt financing, sometimes the owner of the
business has to keep some assets of the company as collateral with the creditor or loan
provider. In some cases, the owner has to give his personal guarantee for the debt payment.
However in case of equity, the dividends are paid to the shareholders, only if the company
has earned profit in the financial year. Valuation of the company can be negatively affected in
case of having more debt in the capital structure (Forbes, 2018). In case of equity, the owner
of the business actually divides the financial risk among the large number of shareholders. At
the time of profit, these shareholders will get the dividend and in case of loss, they cannot
claim for the same. Even at the time of business failure they cannot ask for the right to be
paid (BUSINESS NEWS DAILY, 2018).
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Advance Financial Accounting
Australian government is trying to protect the interest of manufacturing industry for which
the possibilities are there of noticing changes in foreign subcontracting regulations. However,
Youtus Enterprise is thinking of driving the outcome of the regulation relating to foreign
subcontracting into its own favour. The company can start its manufacturing unit in the
special economic zones, which are completely free from custom duties, which will be
beneficial for the company to set up its manufacturing plant in those territories which are free
from any sort of duties. Similarly, the company can operate at those places which come under
Free Trade Zones (FTZ), assisting the company, in adding value to the imported products by
carrying out its manufacturing and then re-exporting without any custom related interference
(aph.gov.au, N.D.). Apart from these, the company may go for self-manufacturing rather than
subcontracting, as now they will have to cater a large number of audiences, which will force
them to produce in bulk and thereby resulting in achieving economies of scale and higher
profits.
Once the businesses know about how the decisions taken by the government can affect their
operations, they frame the strategies for effectively establishing the proper communication
with government. The business adopts a variety of tactics to influence the government policy
and drive it in their favour which include business lobbying, political contributions, interest
group participation and business interactions taking place in business arena. Example- In
collaboration with the food producers, the oil and gas industry won the battle over the
mandate related to ethanol in the year 2013. As a result for the first time in history, the
Environmental Protection Agency did not agree to increase the amount of ethanol and other
biofuels that is required to be mixed into gasoline (THE HILL, 2013).
When a business leases an asset, it could have a significant impact on the financial statements
and also on the key ratios of the company. However, its impact is more in case of capital
lease. YouTus, is planning to take machinery on lease which lies in the capital lease category
because lease life exceeds 75% of the machinery’s useful life. Capital lease always affect the
ratios calculating the long term liability. Capital lease is a lease that transfers all the risks and
rewards to the lessee (Deloitte, N.D.). The transaction of capital lease results in the formation
of larger liabilities. So, the debt-to-equity ratio of the company with capital lease appears to
be higher when compared with the company with operating lease (Chron, N.D.). The
shareholders are adversely affected by the Lease liability. Capital lease are recorded in the
Balance sheet and thereby, we have to make a proper accounting for interest expenses and
depreciation charged on the machinery. The liability is even amortized over the lease period,
which results in the same kind of interest expense as is generated by the mortgage. Also, the
depreciation and interest expenses reduce the amount of net income which means lower
retained earnings and lower dividend amount. The depreciation and interest expense results a
decline in the net income margin because of lower net income and higher asset level declines
the total asset turnover (Chron, N.D.).
However, the company may drop the idea of capitalising its lease agreement and may opt for
operating lease. With the operating lease comes the tax benefit, wherein the company may
deduct the amount as a part of operating expenses in the year of making the payment. Even, it
usually results in low administrative cost because operating lease consist of all maintenance
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