Advanced Financial Accounting Report: Youtus Enterprise Case Study

This report provides an analysis of the financial accounting practices of Youtus Enterprise, examining key aspects such as its transformation into a public company and the implications for its accounting information system and corporate governance structure. The report delves into the complexities of debt versus equity financing, considering the financial burdens and liabilities associated with each. It explores the potential impact of foreign subcontracting and the importance of developing local supply chains to mitigate risks. Furthermore, the report discusses corporate interventions in public policy changes, using Wesfarmers as an example. The application of agency theory is considered in relation to lease agreements and their effects on the debt-to-equity ratio, ultimately concluding that purchasing machinery is the more financially sound decision for Youtus Enterprise. The report references key literature in financial accounting to support its analysis and conclusions.

ADVANCED FINANCIAL ACCOUNTING

Table of contents
Introduction......................................................................................................................................3
Youtus Enterprise operation............................................................................................................3
Conclusion.......................................................................................................................................6
References........................................................................................................................................7
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Introduction
Positive accounting theory propagates the contractual view of the firm and the services of
contract which firms enter in order to obligate its accounting activities. Accounting policies used
by the firm must fulfill the contractual obligations stated by the stakeholder’s contract. This
means company like Youtus enterprise while transforming into public company has to and must
adapt to newer policies to match the contractual obligations of investors and stakeholders
associated with the firm (Schaltegger & Burritt, 2017).
Youtus Enterprise operation
The accounting information system of the company should be developed because after entering
the public sector operations the company has to create financial statement in a more evident form
to show the financial position of the firm. Investor based on financial position make decision on
further investment hence proper financial statement are to be prepared which will need more
detailed information from the accounting information system.
Corporate governance structure of the company has to change as the company is now publicly
owned and their shareholders are also owners of their share within the firm. Hence more
competent corporate governance is required which has a broader view on the stakeholder interest
(Francis, Hasan, Park & Wu, 2015).
The company’s status will change and the organizational structure of the company will change
which will lead to change in business status of the form of the company. They will now have to
divide profit with its stakeholder. Therefore, it is important to change the business status for
Equity Financing.
It is very uncertain to decide that cost of funding for debt is higher than cost of equity financing.
Although in cases of loss the cost of debt financing is higher than the cost of equity funds. This is
because irrespective of the company's operating profit or loss, the company is liable to pay
interest on the debt taken. This increases the financial burden on the company. Hence, it can be
said that the cost of having funds from debt financing is more of physical and behavioural nature.
This is because it puts the company under a certain liability which the company has to perform
where as equity capital is a capital which cannot be met by a company its fails to incur profit
(Libby, 2017). This has a huge liability over the firm which exist until and unless the debt is
paid off by the firm after a certain period of time. Hence it can be said that financial pressure of
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meeting the debt is higher on the firm and thus it can be said that cost of funding under debt
financing is higher than that of equity.
Retaliation in relation to foreign subcontracting can heavily affect the operations of the firm as it
operates with contractors from China and Bangladesh. This will slow down the production of the
firm. If there are possible margin set or ban on foreign subcontracting there will be huge damage
to the operations of the firm. Hence, it is important to consider that the company will have to
take possible measure of substituting the production material import to a local manufacturer or
supplier (Kieso, Weygandt & Warfield, 2016). The company will have to contact and create
nexus with local supplier so that they are able to get supplies on a continuous basis and the
company is able to operate in an more coherent manner. It is to be mentioned that through the
usage of possible network creation the firm will have to develop a local supply chain which will
ensure that in circumstance of regulatory change in relation to foreign subcontracting the
operational activities of the firm is not hampered (Henderson, Peirson, Herbohn & Howieson,
2015).
There are various examples of corporate interventions in public policy changes and formulation
which has happened within the companies in the past. A common example of such corporate
intervention is that of Wesfarmer which is a huge company and has involvement of a lot of
stakeholder which are associated with operations of the firm. It is to be mentioned that through
the use of corporate strength the company brought changes to its accounting policy which was
heavily criticized by the external critics. The company introduced accounting systems within the
firm to counter regulatory changes within the Accounting Standard of AASB. It is to be
mentioned that through the use of corporate interventions the company made sure that all the
necessary changes and policies are formulated which is then implied within the current system to
develop the accounting system of Wesfarmers which helped the firm in meeting the AASB
standard of accounting (Beatty & Liao, 2014).
Agency theory is theory which propagates the concept that a person is decision maker in respect
of organization. The concept bears that the agent is making decision which are best suitable for
the organizations as it will benefit himself. Now looking at current situation, the best decision in
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regard of lease that is to be made will have impact on debt equity ratio. The current lease will be
considered as a Capital lease as machinery is being leased. Capital lease generally increases the
debt to equity ratio which means debt capital increases in respect of equity capital which creates
disequilibrium within the capital structure. Increase in debt decreases the profit earned due
increase in lease expenses hence shareholders are adversely affected as the dividend payout
decreases. Hence the leasing will adversely affect the debt to equity ratio and will decrease the
wealth of shareholder investing in the firm.
As discussed above the possible reason for Youtus Enterprise not entering a lease agreement is
that it will adversely affect its debt to equity capital ratio. Similarly, the capital structure will be
directly affected by it. It is to be mentioned that the other option of buying the machinery which
has a life of 6 years is better. Buying that will be a more profitable option because the company
will be able to have full ownership of machinery and will be able to salvage the following
machinery at the end of the life.
Conclusion
This will increase the assets strength of the company which increase the financial stability of the
firm and will also help the firm in effective operational activities. In this way the company will
be able to operate in a more coherent manner which will be beneficial for the company in the
long run (Nobes, 2014).
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References
Beatty, A. & Liao, S., (2014). Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economics, 58(2-3), pp.339-383.
Francis, B., Hasan, I., Park, J. C., & Wu, Q. (2015). Gender differences in financial reporting
decision making: Evidence from accounting conservatism. Contemporary Accounting
Research, 32(3), 1285-1318.
Henderson, S., Peirson, G., Herbohn, K. & Howieson, B., (2015). Issues in financial accounting.
Pearson Higher Education AU.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting, Binder Ready
Version. John Wiley & Sons. California
Libby, R., (2017). Accounting and human information processing. In The Routledge Companion
to Behavioural Accounting Research (pp. 42-54). Routledge. London
Nobes, C., (2014). International classification of financial reporting. Routledge. London
Schaltegger, S., & Burritt, R. (2017). Contemporary environmental accounting: issues, concepts
and practice. Routledge. London
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