ATMC ACC506 Task 2: Financial Analysis of Michael's Business Report

This report presents a comprehensive financial analysis of Michael's Mobile Phones, focusing on its financial position as of a specific period. It begins with an introduction that highlights the company's loss and liquidity position. The report then delves into the core accounting methods, comparing and contrasting cash-basis and accrual-basis accounting, with an emphasis on the advantages of the accrual method for business analysis and compliance with GAAP. The subsequent section categorizes assets and liabilities, differentiating between current and non-current assets and liabilities, and providing examples such as accounts receivable, plant and equipment, and various types of liabilities. The report concludes by summarizing the company's financial challenges and suggesting the need for management intervention to improve financial performance, while also highlighting the importance of inventory management methods. References to relevant accounting literature are also provided.

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ACCOUNTING

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Contents
Introduction......................................................................................................................................3
Cash-basis or an accrual-basis.........................................................................................................3
Categorization of Assets..................................................................................................................4
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

Running Head: ACCOUNTING
Introduction
In this report a detailed research is conducted of the Michael’s business to identify the financial
position. As per the financial statements it can be gathered that, the company is making a loss in
the month of July. The loss amounted to $3727.8 and this also reflects that the sales are not
enough to recover the costs incurred by the company. The current assets are more than the
current liabilities which stated that the liquidity position of the company is strong; however the
profitability area needs immediate action (Cohen and Karatzimas, 2017).
Cash-basis or an accrual-basis
There are two types of the basis of accounting and the same has been explained in detail. The
two types of the accounting processes are cash basis of accounting and accrual basis of
accounting. Whereas in case of accounting, following the accrual basis of accounting is termed
as recording accounting transactions for revenue when earned and expenses when incurred
(Connectus, 2016).
The two major differences between two of the methods is as follows.
Basis Definition
Income Statement While preparing the income statement, the
income that is recorded is lower in case in of
the cash basis of accounting and the same is
higher in case of the accrual basis of
accounting.
Degree of Accuracy In case of cash accounting the degree of

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accuracy is low in comparison to the accrual
basis of accounting.
The accrual basis of the accounting is most beneficial as there are several advantages which can
be availed by Michael’s Business. The primary advantage is that it grants more useful business
analysis. The concept of matching of the expenses and the incomes will give correct position of
the business. For example the cost of the expensive plant and equipment can be spread over the
years. The time frame will decide the benefits and this is one of the core advantages amongst the
rest of them (Moselhe, et al 2018).
The next advantage which can be availed by Michael’s Business is that accrual basis of the
accounting is compliant with GAAP. In this manner the statements are prepared, that are
unaffected by the timings of the cash while negotiating the business deals. This way the financial
statements are presented in more representative manner. The accrual basis of accounting is also a
medium to control the cash (Cohen and Karatzimas, 2017).
Categorization of Assets
The current assets are one of the elements presented in the balance sheet, which can be readily
changed in the cash within the one financial cycle. On the other hand, the non-current assets are
the assets that are difficult to the change in the cash. (Aničić, 2017).
The case is similar with the current liabilities and non-current liabilities as the current liabilities
which are due in a financial year (Petrovic, Manson and Coakley, 2016).

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The major reason for categorization of the assets and liabilities as current and non-current is the
importance to know the timing of the asset and liability in order to collect the cash and the settle
the dues immediately. The categorization also helps in understanding the importance of the cash
and its movement in the potential direction (Lubyanaya, et al 2016).
Examples of Assets
Accounts receivables
Accounts receivables are the current assets to which the goods are given on credit. The credit is
mainly for 30 to 60 days. These are generally in the form of the invoices raised by the business
(Petrovic, Manson and Coakley, 2016).
Plant and Equipment
The plant and equipment are categorized as non-current assets which are purchased for long term
business. In the present scenario, the delivery van and shop and showroom costs $34440 and
$196290.09 respectively (Chen et al 2016).
Examples of Liabilities
Current Liabilities
The current liabilities are obligations which are required to be paid within one fiscal year and the
best example is the accounts payable. It is different from the notes payable and are kind of the
debts that are created by legal instruments. The amount of the accounts payable in case of
Michael’s business is worth $3773.
Non-Current liabilities

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The non-current liabilities are those which are acquired for more than one fiscal year. Loan from
bank and financial institutions is considered as the item of the non-current liability. In this
scenario the bank loan of Michael’s business is $87400.
Conclusion
After preparing the financial statements of the business of Michael’s it can be stated that if
company continuous to incur losses it can create severe problems. In order to control the
situation the management needs to take the action. Further, the company has used the weighted
average method for the inventory whereas FIFO shall be used to make the proper record of the
inventory.

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References
Aničić, J., Simić, N., Petrović, V. and Aničić, D., 2017. Financial aspects of current assets
management in Serbian economy. Journal of Process Management. New Technologies, 5(2),
pp.36-44.
Chen, T., Xia, L.I., Tiantian, H.U., Xiao, F.U., Xie, Q. and Fang, P., 2016. Analysis of assets and
liabilities of secondary public hospitals in Wuhan city. Chinese Journal of Hospital
Administration, 32(7), pp.503-506.
Cohen, S. and Karatzimas, S., 2017. Accounting information quality and decision-usefulness of
governmental financial reporting: Moving from cash to modified cash. Meditari Accountancy
Research, 25(1), pp.95-113.
Connectus, (2016) Advantages of Accrual basis of accounting [Online] Available from
https://connectusfund.org/6-advantages-and-disadvantages-of-accrual-basis-accounting
[Accessed on 15th January 2019]
Lubyanaya, A.V., Izmailov, A.M., Nikulina, E.Y. and Shaposhnikov, V.A., 2016. Evaluation of
the Effect of Non-Current Fixed Assets on Profitability and Asset Management
Efficiency. International Journal of Environmental and Science Education, 11(15), pp.7745-
7753.
Moselhe, A.K., Mohamed, M.O., Musa, M., Mohamed, M. and Yassin, Y.K., 2018. Is Accrual
Basis Accounting Better Than Cash Basis Accounting in Evaluating the Financial Performance?.

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Petrovic, N., Manson, S. and Coakley, J., 2016. Changes in Non‐current Assets and in Property,
Plant and Equipment and Future Stock Returns: The UK Evidence. Journal of Business Finance
& Accounting, 43(9-10), pp.1142-1196.