Accounting Principles: Budgeting and Financial Statements Analysis

This report provides a comprehensive analysis of accounting principles, focusing on their application within an organization, specifically Genius Food Company. It examines the purpose and scope of accounting functions, including financial, cost, and management accounting, and discusses the role of technology in modern accounting. The report includes a 12-month cash budget for Genius Food Company, along with a variance analysis to assess the impact of different scenarios. Furthermore, it covers the preparation of financial statements, ratio calculations, and an evaluation of business performance, highlighting both the benefits and limitations of financial ratios. The report also addresses issues of ethics, regulations, and compliance within the accounting context and concludes with recommendations for improving accounting practices. Desklib provides students access to this and other solved assignments.

UNIT 5 ACCOUNTING
PRINCIPLES

Table of Contents
PART 1............................................................................................................................................4
INTRODUCTION...........................................................................................................................4
MAIN BODY..................................................................................................................................5
An examination of purpose & scope of accounting function within an organization.................5
Critical evaluation of accounting function..................................................................................6
Main branches of accounting.......................................................................................................7
Accounting system and role of technology in modern-day accounting......................................8
Issues of ethics, regulations and compliance...............................................................................8
Memorandum...............................................................................................................................9
Preparation of 12 months’ cash budget of Genius Food company..............................................9
Analysis of Impact of variance on cash budget in different scenarios using variance analysis 10
Benefits and limitation of budget..............................................................................................12
Range of budgetary control solutions to support organization decision-making......................13
PART 2..........................................................................................................................................13
Preparation of financial Statements...........................................................................................13
Detailed letter to Client..................................................................................................................15
Calculation of ratios...................................................................................................................15
Evaluation of business performance year on year.....................................................................16
Limitation of financial ratio as a measure of performance........................................................17
Benefits of contemporary accounting software packages with example of accounting software
in market....................................................................................................................................17
Conclusion.................................................................................................................................18
Recommendations......................................................................................................................18
REFERENCES..............................................................................................................................20

Books and Journals....................................................................................................................20

PART 1
INTRODUCTION
Accounting in modern day has a vital role to play in running business by assisting in
keeping track of expenses and income, making sure compliance with statutory requirements,
providing quantitative financial information to management, investors and government in order
to use the same in making business decision effectively. Management accounting is one of the
most significant branch of accounting.
Introduction of management accounting & principles of management accounting
Management accounting refers to the use of statistical and financial data associated with
an organization in order to generate budgetary reports, perform variance analysis, create
inventory reports in an attempt to assist internal management in carrying out decision making
activities with respect to attaining operation efficiency (Maheshwari, Maheshwari and
Maheshwari, 2021). MA takes into account both financial and non – financial information while
performing planning and decision – making activities for an organization. At the management
accounting is largely meant for internal purposes only, the users of its information include
employees and management personnel of the organization. The following are the principles of
management accounting:
 The past and future information of the organization are gathered in order to perform
managerial accounting, produce reports, statements and evidences in order to forecast the
future prospects of the business (Kim, Na and Park, 2021).
 The policies and procedures must be consistent and stable with respect to management
accounting in order to make right and accurate decisions.
 MA is done with the aim of drawing management’s attention towards the issues that are
meant to be exceptionally important. This is done through establishing comparison
between planned and actual performance to determine the deviations and causes for the
same.
 MA assists in measuring skills of managers with respect to the activities they are assigned
to be performed within a given time period. This is done through techniques such as ratio

analysis and others, so that maximum and efficient resource utilization can be ensured
within an organization.
MAIN BODY
An examination of purpose & scope of accounting function within an organization
Accounting is important for all businesses irrespective of whether it is small or large in size.
With the help of this function, businesses are able to track their sales, manage inventory and
payroll, etc. Therefore, the primary purpose for which accounting functions are performed is to
keep or maintain the records of financial transactions taking place in a day to day business
operations (Maheshwari, Maheshwari and Maheshwari, 2021). The following are the purposes
underlying the accounting function in an organization:
 Accounting helps in maintaining the financial records of day to day business transactions
which in turn facilitates the generation of key financial statements that is, income
statement, statement of financial position and cash flow statement. These statements are
meant for determining whether the business is profitable or not, the financial position of a
concern on a particular date and generation and spending of cash during a given period of
time respectively.
 Accounting is helpful in understanding what is going on in the business in financial
terms. This is done through comparing the financial records with that of previous records
and accordingly allocation budget in an appropriate and accurate manner.
 Another significant purpose for which accounting is performed is to ensure that statutory
requirements are complied with the manner it is required. This is possible through the
adoption of appropriate accounting processes and systems within an organization (Kim,
Na and Park, 2021).
 Financial records generated as the outcome of accounting facilitates future projections
through budgeting. The historical financial records are used for analyzing trends in
business performance and accordingly future projections are made to ensure profitability
of business operations.
 The accounting information indicated through financial statements are useful in
communicating the performance and position of the business to the users of accounting
information.

Scope of accounting
The financial transactions that are associated with a business concern are recorded and
maintained through up to date books of accounts which in turn assists in evaluating the
operational outcome & financial position of the business at the given date. It begins with the
preparation and collection of financial information which are processed and evaluated through
the application accounting standards and principles and accordingly, the results are reported to
the internal and external users of accounting information. It is not restricted to keeping records of
financial transaction, however, preparation of financial statements at the year end, comparison of
financial outcome of one year with another year and generating budgetary reports comes under
the scope of accounting.
Critical evaluation of accounting function
Accounting function helps in making informed decisions, meetings the needs and
expectations of stakeholders and society at large. This is because the financial results that are
generated through accounting processes and systems provide useful insights for decision making
to both internal and external parties to the organization and thus, the function is deemed as of
great importance within the organizational context. There are several advantages of accounting,
such as the following:
Assists in informed decision making: Through accounting function proper records of financial
transactions are maintained and on this basis management find it easier to make decisions while
planning for future business activities, preparing budgets and establishing coordination among
different departments within the organization (Shcheglovskaya, 2018). Furthermore,
maintenance of financial records within businesses facilitates comparison between financial
results of one year with the financial results of another year to determine the trends and
deviations in business performance. Also, accounting allows management in analyzing
accounting information against the goals of the organization.
Meeting the needs of stakeholders: Accounting function is important from the perspective of
shareholders which involves creditors, employees, investors and even the local community. The
need of investors that could be satisfied through accounting is that they determine whether their
investment in a concern is safe or not by judging the financial performance of the business.
Creditors need that could satisfy through accounting is that they can ascertain the level of risk

associated with their lending. They also determine whether they should grant loans or credits to
the business by understanding the credit worthiness of the latter through accounting information.
The investors and creditors are interested in accounting information in order to get paid for their
expected returns and interest obligations respectively.
Meeting the needs and expectations of society: Appropriate handling and efficient utilization
of scarce resources is what the need of society and the same is fulfilled through accounting
function. The profitability of the business depicted through income statement is useful for society
in determining whether the business fulfilling its CSR requirements or not (Muliyati and et.al.,
2021). Accordingly, the image or reputation of the business can be established and eventually
profitability can be enhanced.
Main branches of accounting
Branches of accounting means the types or fields associated with accounting. The main
branches of accounting are financial accounting, cost accounting and management accounting.
These are explained in detail as follows:
Financial accounting: This branch of accounting is meant for maintaining financial
records and determining the financial performance and position of the business at the end of the
period. The day to day business transactions are recorded in books of accounts and accordingly,
periodical reports for the management and other stakeholders of the business are prepared. It
follows GAAP and emphasizes largely on historical data. The outcome of this branch is the
financial statements which assists and advise stakeholders and management of the organization
on several grounds such as investments, loan extension and acquisitions. The analytical skills
and competencies in accounting software are needed for performing financial accounting.
Cost accounting: It is another important branch of accounting which is performed with
the purpose of controlling the costs associated with production, distribution and other operational
aspects of the business (Gornik-Tomaszewski and Shoaf, 2020). Through this branch of
accounting, the operational efficiency of business can be determined by identifying the variances
in actual and predetermined costs. It facilitates understanding of cost behavior with respect to the
changes taking place in production and sales volume. Accordingly, decision makers determine
the areas where there is a need to reduce cost exists along with determining the areas where the

need of spending more exists. Here, accountant must be having excellent analytical skills and
strong base of accounting.
Management accounting: This branch of accounting is largely concerned with the
internal management of the organization. It addresses the problem of how the funds should be
allocated to different activities of the business. So, it is confined to the needs of management
rather than following accounting rules (Ochoa and Gómez, 2018). The purpose of this branch of
accounting is to improvise the administration of the company, enhance profitability and
provision of financial reports to management which influences the budgets and planning. Also,
here forecasting is done to suggest best practices to business which could lead to meeting
organizational goals and gain higher profits. The skills and competencies need for this profession
involves reporting & controlling, technical and analytical skills, leadership and knowledge of
professional ethics & values.
Accounting system and role of technology in modern-day accounting
Accounting systems are various accounting software that helps the business to understand keep
the tracking of company income, expenses and other financial systems. There are basically four
main types of accounting system that uses by every organization such as cost accounting,
inventory management system, job costing and price optimization system (Messer, 2020).
Role of technology in modern-day accounting:
In the present world of full of innovation, the role of technology plays vital role in the modern-
day accounting. It is because technology and software has ease the work of daily accounting. The
impact of which management of the organization able to complete their work on time. The
technology has transformed the sector with many new and advance accounting software which
has ultimately result into the completion of work with high accuracy and low error. Not only
that, the company also able to organize the audit of its business in highly efficient manner
(Maheshwari Maheshwari and Maheshwari, 2021). The impact of which the company able to
avoid tax penalties and other business related issues.

Issues of ethics, regulations and compliance
One of the most popular issue associated with accounting is the misappropriation of assets which
involves using the assets of the company for the purpose other than the interest of the company.
Therefore, conflict of interests arises. Also, full disclosure principle of accounting leads to
breaching confidentiality of certain business information (Jamaluddin and et.al., 2019).
Also, several changes took place in regulations and accounting standards which required to be
applied retrospectively to the business situations. Accordingly, it may indicate deteriorated
business performance against what the performance was before the application of new
regulations or accounting standards. Therefore, business could lose its ability to raise additional
capital from the market and also the shareholder’s objective of wealth maximization could get
hampered.
At last, the compliance with the accounting ethics, regulations and standards may affect
businesses poorly because sometimes disclosure leads to unveiling of confidential business
information which needs to be hided from competitors (Abednazari and et.al., 2018).
Memorandum
Memorandum
To: Accounts manager, Genius Foods
From: Graduate Trainee
Date: 28th May, 2021
Subject: Regarding analysis of impact of variance in different scenario on cash budget of
company.
Preparation of 12 months’ cash budget of Genius Food company
Particular
s Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Receipts
Opening
Balance
800
0
104
00
-
396
00
-
7990
0
-
1344
00
-
1674
00
-
1610
00
-
2084
00
-
2534
00
-
2764
00
-
3266
00
Sales 600
00
400
00
450
00
4000
0
5000
0
6000
0
4000
0
4500
0
6500
0
4500
0
4000
0

Issue of
Shares/De
b
0 0 200
0 0 0 2000 0 0 0 2500 0
Total 680
00
504
00
740
0
-
3990
0
-
8440
0
-
1054
00
-
1210
00
-
1634
00
-
1884
00
-
2289
00
-
2866
00
Less
Payments
Purchase
s
480
00
800
00
810
00
9000
0
7500
0
4800
0
8000
0
8100
0
8000
0
9000
0
6000
0
Selling &
Admin Exp
280
0
340
0
180
0 1000 2000 2400 2500 2400 2600 2600 2400
Marketing
Exp
500
0
420
0
300
0 2500 4000 2800 2400 4200 2800 2500 2400
Property/
Rental Exp
180
0
240
0
150
0 1000 2000 2400 2500 2400 2600 2600 2400
Closing
Cash
104
00
-
396
00
-
799
00
-
1344
00
-
1674
00
-
1610
00
-
2084
00
-
2534
00
-
2764
00
-
3266
00
-
3538
00
Analysis of Impact of variance on cash budget in different scenarios using variance analysis
1. Increase in sales revenue by 10% per month due to reduction in price by 20%:
Actual Total Sales Revenue = 649000
Budgeted Total Sales Revenue = 590000
Variance = Actual – Budget = 649000 – 590000
= 59000 Favourable
On the basis of above calculation, it has been analysed that the gap between actual and
budgeted sales revenue is favourable. It is because of the decrease in the sales price. The
impact of this scenario over the cash budget is that the total cash inflow and closing cash
balance will increase but do not change from negative to positive.
2. Increase in sales revenue by 20% per annum and increase in marketing expenses by 10%

per annum:
Sales Revenue Variance:
Actual Total Sales Revenue = 708000
Budgeted Total Sales Revenue = 590000
Variance = 708000 – 590000
= 118000 Favourable
Marketing Expenses Variance:
Actual Total Marketing expenses = 44620
Budgeted Total Marketing expenses = 38800
Variance = 44620 = 38800
= 5820 Unfavourable
On the basis of above variance calculation, it has been analysed that the marketing expenses
has increases by only 5820 but the sales revenue on the other hand has increases by 118000.
The impact of which the cash inflow of the business increases at higher number as compared
to increase in cash outflow which leads to increase in closing cash balance (John, 2019).
3. Offering supplier with one-month trade credits:
Actual Total Purchase cost = 813000
Budgeted Total Purchase cost = 861000
Variance = Actual – Budgeted = 813000 – 861000
= -48000 Favourable
On the basis of above calculation, it is identified that the actual total purchase cost of
hospitality company such as Genius Foods has reduced to 813000 while the budgeted is
861000 that result into -48000. The impact of which the cash outflow of company has reduced
and closing cash balance increases but not change from negative to positive.
4. Reduction in rental property cost by 15% per month:
Actual Total Rental cost = 21335
Budgeted Total Rental cost = 25100

Variance = Actual – Budgeted = 21335 – 25100
= -3765 Favourable
The impact of over scenario over the company cash budget is that their cash outflow has
reduced while on the other hand closing cash balance has increases due to reduction in rental
property cost.
Benefits and limitation of budget
The role of budget is to help the company to estimate the future income and expenses of the
business based on the past data. It basically allows the management of Genius Foods
organization to better understand that whether their business have enough revenue in order to
pay its expenses. Hence, it is important for the company including hospitality start-ups that
they should use budget for identifying issues and also the corrective actions to solve those
issues.
Benefits of using budgets:
 It helps the company to manage their money effectively.
 The role of budget is to allocate appropriate resources to the projects.
 It is also helpful in monitoring the performance of the various department as well as
cash management of the company.
 Another benefit of using budget to the Genius Food hospitality company is that they
can easily plan for future and improve business decision-making process.
 The most significant benefit of budget is that it helps the company to identify the area
which leads to higher cost and the corrective actions they require to resolve the budget
related issue (Bybordi, Ousama and Shreim, 2019).
Limitations of using budget:
 It is one of the most time consuming process which sometime divert the management
of the company from their actual goal and target (Hamdan, Chen and Anshari, 2020).
 Another limitation of using the budget to Genius Food company is that it is quite costly
process. It means the company unable to arrange the funds for their regular budget