Analysis of Accounting Principles and Financial Statement Concepts

This report provides a detailed analysis of accounting principles and their application in financial statements. It explores the roles of financial information for various stakeholders, including bankers, investors, and labor unions, examining the importance of balance sheets, income statements, and cash flow statements. The report delves into specific accounting principles such as the economic entity assumption, historical cost, time period principle, and going concern principle, illustrating their practical implications through case studies. Furthermore, it clarifies the distinction between dividends and expenses, explaining why dividends are not treated as expenses. The report also outlines the purpose of auditors' reports and their role in ensuring the accuracy of financial statements, and touches upon the preparation of financial statements and the information they provide regarding assets, liabilities, and equity. The report concludes with exercises on preparing financial statements.

ACCOUNTING
SKILLS

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................3
MAIN BODY...................................................................................................................................3
Part A......................................................................................................................................3
Question 1. .............................................................................................................................3
Question 2 ..............................................................................................................................5
Question 4...............................................................................................................................6
Question 5...............................................................................................................................8
Question 7 ..............................................................................................................................9
Part B....................................................................................................................................11
Exercise 1.............................................................................................................................11
Exercise 2.............................................................................................................................12
Exercise 3.............................................................................................................................13
Exercise 4. ...........................................................................................................................14
Exercise 5.............................................................................................................................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................18

EXECUTIVE SUMMARY
The report summarise about importance of accounting principles and concepts in a
detailed manner. The report is categorised into two parts. First part abstracts information regards
to role of financial information, accounting principles and about dividends. While the second
part summarise about preparation of different financial statement in order to get information
about total liabilities, assets etc.
MAIN BODY
Part A
Question 1.
(A) If you were a banker, why would you need information from PepsiCo’s financial
statements?
Bankers need the financial statements for multiple purpose. Basically, bankers ask for financial
statements for companies at the end of a financial year. Generally, banks want to check balance
sheets, profit & loss account statement etc. Herein, below reason for which bankers can see the
financial statement:
 Balance sheet- The Balance Sheet shows the assets, debt and net value (equity) of
business at a particular time period (Ahadiat and Martin, 2015). Taking the time to
analyse the balance sheet of business enable bankers to get a clear understanding of
company's plan. The Bank must aim for good net worth and the liabilities-to-equity ratio.
Analysing the balanced sheet lets the bank decide whether its existing and/or potential
debt obligations can be met by the company.
 Income statement- The Income Statement or Profit and Loss Statement shows how
much money the corporation received over a number of years and how much was left
after payment of costs (net income). Analysing this argument will enable companies as an
owner to assess whether there are possible areas for controlling costs or areas that seem
out of line. By help of it, bankers can become able to analyse whether they should make
credit transaction with company or not.

So these are the reasons for which bankers will be interested to assess financial information of
PepsiCO's company.
(B) If you were a potential investor in PepsiCo stock, what information would you want from
their financial statements?
Investors are those who make investment in company’s practices and securities. They
need to analyse financial position of companies so that they can take decisions whether they
should make investment or not. Herein, below list information is mentioned which is needed by
investors:
 Net profit- Financial reports will show the net income of a corporation, net profit is the
cash left over by a corporation after all costs have been paid. "Does company make
money?" is often the first question asked, but it's just a point of departure (Ragland and
Ramachandran 2014). By analyse the information about net profitability, investors take
decision about making investment.
 Sales- It is also a key information which is assessed by investors in order to take suitable
actions for investment. This is so because if PepsiCo's company's sales revenue is higher
then it may leads to higher payment of dividend to shareholders. Hence, investors
evaluate information about sales.
 Cash flow Statement- For business entities, cash is the king. Investors interpret the
bank's cash as a symbol of being able to deal with unexpected issues and focus on new
possibilities. Free cash flow is a sign of successful operations and in accordance of the
information of cash flow, investors analyse efficiency of companies.
(C) If you were a labor negotiator for a union that represents a group of PepsiCo’s employees,
which financial statement would provide you with the most useful information?
For labour union, income statement will be suitable. This is so because under it, detailed
information regards to companies operations, revenues, cost of sales etc. is provided (Stone and
Lightbody, 2012). Such as in the aspect of above company, there are income statement for two
years 2013 and 2014. The labour union can analyse key information about how much salary and
wages expenditures is done by company during these years.

Question 2 .
*Melissa is the owner of Missy’s Tea Shop, a sole proprietorship. She purchases a new
computer for her personal use at home. Melissa records the computer as an asset of Missy’s
Tea Shop.
 Overview- In accordance of given case, this is being stated that Melissa who is a sole
proprietor of a tea shop buys a computer for personal use but records it as an assets of tea
shop. The concept which she is applying is wrong. Under this case, below mentioned
accounting principle is needed to be applied:
Economic entity assumption principle- The accountant holds all a sole proprietorship's business
transactions apart from the private transactions of the company owner (Daly, Hoy, Islam and
Mak, 2015). A sole proprietorship and its holder are deemed to be one party for legal purposes,
but they are treated as two different entities for billing purposes. Thus, in the context of above
case, owner of tea shop should keep its personal financial transactions separate from business
transactions.
*Houston Electronics purchased an office building several years ago for $500,000. The office
building could be sold today for $850,000. The accountant will now show the building as an
asset on the books for $850,000.
 Overview of case- As per the given information, this can be find out that Houston
electronic company made purchasing of building some years ago whose value was of
$500000. In current time period, the value of assets is of $850000. The accountant is
presenting the value of assets as $850000 in books of accounting. In this context, they
should apply an appropriate accounting principle which is as follows:
Historical cost accounting principle- In accounting, the historical expense of a financial item is
that item's initial estimated economic value. Historical cost accounting includes recording assets
and liabilities at their historical values that are not adjusted for adjustments in the prices of the
products (Pan and Perera, 2012). In the aspect of above case, this is important for their
accountants to record their financial transactions in accordance of historical cost accounting
principle.

*Henry is a new accountant for Acme Foods. He is extremely busy and has decided that he
can prepare the financial statements every two years.
 Overview of case – In accordance of given data, this can be find out that Henry is a new
accountant and busy. That is why he is planning to prepare financial statements in each
two years. This policy is wrong, he should make financial statements at the end of each
year. For this purpose, there is an accounting principle which is needed to be applied:
Time period principle- The concept of time period is a financial accounting principle which
implies that all companies and organizations should divide operations into periods of time. Such
intervals are often referred to as time periods for accounting and reporting and may be weekly,
quarterly, semi-annual, annual, or any other time span. Such as in the above case, it is essential
for accountant to prepare income statements at the end of each year in accordance of this
accounting principle.
*The Candle Store is having financial problems. It has no plans to liquidate, but decides to
use market value to report their assets since they plan on moving to a smaller store.
 Overview of case- The given company is facing monetary issue and recording assets as
per the market value though they are planning to move to a smaller store. It shows that
they are using wrong concept to record their assets. In this aspect, it is important to them
to follow below mentioned accounting principle which is as follows:
Going concern principle- This accounting theory implies that a business will continue to remain
long enough to meet its goals and obligations and in the future will not be liquidated. If the
financial position of the business is such that the accountant concludes that the business will not
be able to continue, this determination must be reported to the accountant (McLeod and Harun,
2014). In the above company, they should apply this accounting concept so that financial
statements can be prepared in an effective manner.
Question 4.
Dividends, you have learned, are a distribution of income, not an expense. What is the
difference? Why can’t the corporation list them as an expense, since dividends are just
another amount of money paid out to somebody?

Dividend- The term dividend can be defined as a reward which company pays to their
shareholders. This can be paid to companies in different forms such as cash payment, stock or
any other way. Basically, the corporation's dividend is determined by board of directors and this
needs approval from shareholders. Though, this is not a liability for companies to pay the
dividend. It is a part of profit which is being shared by business entities with its shareholders.
This dividend is not recorded as an expense. There is difference as the dividend is not an
expenses. It is so because dividends of a business are not an expenditure and therefore will not
show on its statement of profits. Cash dividends are a payment of part of the earnings of a
company paid to its shareholders. When a company has preferred shares, the dividends on
preferred shares are excluded from the net income of a company in order to arrive at common
stock earnings. As well as money or stock dividends paid to stakeholders are not reported in the
income statement of a corporation as an expenditure. This is because securities and even money
dividends do not impact the net income of a business.
Why it is not recorded as an expenses:
Dividends are not an expenditure. Therefore, dividends never show as an expenditure on
the financial statements of an issuing company (Siriwardane, Low and Blietz, 2015).
Alternatively, dividends are viewed as a transfer of a company's equity. As such, dividends are
deducted from the balance sheet equity portion and are also deducted from the balance sheet cash
line item, resulting in an overall decrease in the balance sheet size. When dividends are reported
but not yet paid, they will be listed on the balance sheet as current liability. Dividends paid
during the fiscal quarter are also classified as capital outflows in the funding portion of the cash
flow statement.
Apart from it, the dividend is shared with the shareholders of companies not to other
parties so it can not be considered as an expense (Osmani, Al-Esmail and Weerakkody, 2017).
As well as this is distributed from the net income of companies. For this no addition cost is paid
by companies. So these above mentioned reasons show that dividend is not an expenses. It is just
a sharing of profits among shareholders of companies who make investment in company with an
expectation of gaining higher amount of return. By comparison to costs, dividends are not

component of a business profit measurement: they are not a cost of business. They are essentially
a process through which businesses allocate to their investors the profits they have made.
So in accordance of above mentioned discussion, this can be stated that payment of dividend is
not an expenses. The main reason of it is that payment of dividend does not impact to balance
sheet and profit & loss account of companies (Mitrić, Stanković and Lakićević, 2012).
Question 5.
(a) Purpose of auditors' report.
Auditors' report- Basically, an auditor's report is designed to provide assurance that the financial
reports of an entity do not contain material errors (Liu, 2012). It is assumed that the auditor will
provide the organization and its financial statements with a complete picture. They also have to
state their relation to the financial statements in the report, and whether they operate externally or
directly for the business. Herein, below purpose of auditors' report are mentioned which are as
follows:
 The report allows financial statement clients to ensure the financial information is
accurate or not.
 The most crucial thing is that the government wants the company to comply with the
rules and regulations, so the audit report says it follows the rules and laws (Jones, 2014).
 Audit report benefits the investor as the investor can think the business is booming and
there is no concern.
(b) What is going concern concept?
Going concern- The current accounting principle means that the corporation will continue its
activities in the potential and will not be forced to sell or suspend operations for any reason
whatsoever (Elijido-Ten and Kloot, 2015). A business is an ongoing concern if there is no
evidence to say that in the near future it will or will have to interrupt its activities. In other
words, the going concern is a basic accounting concept. This assumes that a corporation can
execute its current plans, use its existing assets and continue to meet its obligations during and
after the next fiscal year. Basically, it is an expectation that the company will remain profitable
and also that the value of its assets will last. The fundamental theory is also referred to as the
idea of continuing concern.

(c) Are losses, restructuring, and the disposal of segments necessarily precursors to the demise
of the company?
No, the losses, restructuring, and the disposal of segments are necessarily precursors to
the demise of the company (Anis, 2017). This is so because in business, loss can be occurred in
any time which does not mean that business will close. Companies can make effective policies
and plans to overcome from losses. As well as restructuring of business is also a necessary
process of companies in order tom grow in competitive market. Thus, above mentioned
statement is not accurate.
(d) What is auditors saying about above company?
The auditors are stating that company has limited amount of cash and working capital to
fund its upcoming operations. As well as in accordance of consolidated financial statement of
company, this can be find out that they had net loss which resulted as accumulated deficit of
$49.7 million. Along with this financial statement does not not consists any modifications which
may result from outcome of the uncertainties.
Question 7 .
Is Unique factory considered a business or non business company?
In accordance of given data, this can be find out there are two financial statements which
are balance sheet and income statement. The information included in both of statements states
that above company is to be considered as a business entity. It is so because of following
reasons:
 Net sales- In the income statement , it is stated that there is sale of $174206 and $209203
for year 2014 and 2015. This is indicating that they are making sales transaction with
customers and it is being done in a business entity. A non business entity does not make
any sales transactions or if they make transaction then does not record in their accounting
books.

 Selling, general and administrative expenses- Under the financial statement of company,
this is being stated that they are making expense on selling and administration in both of
years. The company which is involved in process of business makes these expenses and
records in their accounting books. This shows that company is considered as business
entity.
 Income tax expenses- This can be defined as a type of expenditure which is paid by
companies to government on the occurred amount of income during a particular time
period (Pernsteiner, 2015). It is essential to business entities who conduct specific
operations and activities. Such as in the income statement of above company, this can be
find out that they are making payment of income tax expenses which are $2388 and
$3534 for year 2014 & 2015. It shows that company is considered to be a business entity.
 Stock holder equity- In the above company, there are different number of stockholders
who are making investment. Basically, the stakeholders make investment in business
entities not in the non business entities. Such as the total value of stakeholder equity is of
$86919 and $90908 for year 2014 and 2015. This is indicating that above company is a
business entity.
 Long term debts- The company is taking huge amount of debts from different sources and
recording it in their balance sheet. As well as they are recording this amount, in their
balance sheet. The amount is of $25676 and $20491 for year 2014- 2015. This huge
amount of debts shows that company is operating their business activities in large
number.
 Investment- In the aspect of current liabilities of this company, it can be find out that
there is investment amount in both of years 2014 and 2015. It is showing that company is
involved in the context of business operations. Such as in year 2014, the amount of
investment was of $1061 which reduced in next year 2015 and became of $303.
So in accordance of above discussion, this can be find out that company is considered to be a
business entity because they are conducting all those activities which are performed by
businesses.

Part B
Exercise 1.
Total liabilities- Total liabilities are the net debt and financial commitments accrued at any
particular time by a business to people and organizations. Total liabilities are listed on the
financial statements of a company and are part of the overall accounting equation: assets =
liabilities + equity. There are mainly two types of liabilities which current and non current
(Abayadeera and Watty, 2016). In the below mentioned statement, this can be find out that there
is non current liabilities are of $41000 and current liabilities are of $24000. Eventually, it is
essential for companies to keep their overall liabilities lower as much as possible. If companies
liabilities are lower then the assets then it is considered as a suitable condition. Such as in the
below mentioned company, their total liabilities are of $65000 and total assets are of $173000.
This shows that their financial position is in an effective manner.
Balance sheet of Brock Corporation’s for year ending:
EQUITY:
Capital stock – 100000
Retained earnings- 8000
108000
LIABILITIES:
Non current liabilities-
Long term debt- 41000
41000
Current liabilities-
Accounts payable- 24000
24000
TOTAL LIABILITIES AND EQUITIES 173000
ASSETS:
Current assets-
Cash- 25000
Accounts receivable- 46000
Inventory - 33000
104000
Non current assets- 69000

Property, plant & equipment- 69000
TOTAL ASSETS 173000
Analysis- The total liabilities of above company are of $65000. As well as the value of equities is
of $108000.
Exercise 2.
Income statement- The statement of profits and loss shows a business ' financial results for a set
period of time. The statement quantifies the amount of revenue earned and costs incurred during
a fiscal quarter by a company as well as any net profit or loss arising from it. The income
statement is an essential component of an institution's financial statements (Yap, Ryan and Yong,
2014). The other aspects of the accounts are the balance sheet and cash flow statement.
Net income- Net income equals for a company is the amount left after all costs and expenditures
have been subtracted from sales. Net income is used by listed companies to help measure their
earnings per share (EPS). As well as shareholders assess the information about net income of
companies before taking decision regards to investment in companies. This is so because if net
income is higher then there will be more change that return on investment will be higher.
Income statement for year ending 31 December, 2018:
Particulars Amount (IN $)
Sales 560000
Less: cost of goods sold 400000
Gross profit 160000
Less: Salary expenses 40000
Operating profit (Profit before interest and tax) 120000
Less- Interest expenses 30000
Less- Income tax expenses 25000
Profit after interest and tax 65000