Accounting Concepts and Policies

Gray, S. J.; Campbell, L. G.; Shaw, J. C.

ACCOUNTING CONCEPTS AND POLICIES

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Introduction Accounting is a process in organizations that involves identification, analysis, recording and interpretation of financial data from economic entities. This data will be reported in form of financial statements to the users. The process is governed by policies, rules, concepts and procedures that are to be followed. Revenue recognition significance and How to determine when revenues are recorded The significance of the principle of revenue recognition is that revenues are realized in the accounting period earned, that is, the period when the buyer and seller enter into an agreement to transfer cash asset and revenue is realized and recorded as cash payment that has been received or collected to the company. Collection of cash payment to be received is reasonably assured in this principle. It gives certainty in cash to be collected. This principle is also called realization concept, Realization principle shows how revenue and profits are recognized when realized. The concept also states that revenue and profits are not anticipated but are recorded when recognized by entering into the income statement only when realized in the form of either cash or of other assets the cash recognized of which can be assessed with reasonable certainty. Explain the difference between a product and period expense. Product expense They are all costs incurred in producing units during an accounting time period they include direct material costs, direct labour costs and production overheads costs. This product costs are capitalized and expensed (charged to the income statement) only when the company producing sells inventory. The costs may be carried from one period to the other accounting period. Period expense They are Selling and general administrative expenses identified within a particular accounting period in which these expenses are incurred, and then are charged against company sales revenue in that same accounting period. They are also called period costs. Discuss the matching concept as it relates to accounting for revenues and inventory. Matching concept is also called accruals concept. It states that revenue and costs incurred in a particular transaction must be recognized as they are earned or incurred, not when or as the cash is received or paid. The costs and revenues must be matched with each another so that a good accounting relationship of the costs and revenues can be established or justifiably assumed, and can be dealt with in the income statement account as of the period to which they relate. Difference in approach to valuation by US GAAP and IFRS There is a difference in IFRS and US-GAAP. Discussing in a concept level it contains, IFRS is considered to be more of "principles based" standards of reporting accounting unlike the U.S. GAAP which is considered to be more of "rules based." The issue of IFRS being principle based gives a competitive advantage over the US GAAP since it can represent and capture all the economic transactions better than US GAAP. The following are the differences between the two bodies of accounting. Intangibles Intangibles are treated in a principle based way in IFRS than in the US GAAP. GAAP take acquired intangibles such as advertisement costs at fair value unlike IFRS which will take and only recognize it when the intangible asset has an economic benefit in the future and has a desirable measured liability. Inventory Costs TO value the cost or value of inventory, IFRS, does not allow the use of last-in, first-out (LIFO) method for accounting for inventory value. Under U.S. GAAP, both LIFO method and first-in, first-out (FIFO) method of inventory estimation is used. The move by IFRS to a single LIFO method of inventory costing leads to an enhanced comparability between accounting reports of various countries, and eliminates some suspicious requirements that adjust LIFO inventories in the comparison analysis by analysts. Write Downs Under IFRS, inventory can be written down in accounting records, the write downs are allowed to be reversed in the future only if a specific criteria has been met. It is opposite under U.S. GAAP, where once the inventory has been written down, no reversal is allowed even in the near future. Accounting conventions Both the two companies use IFRS in reporting there financial information. They formulate and publish financial statements for the public interest standards to be observed. They use the principles set in IFRS. Auditing standards for the two companies Samsung use auditing standards in reporting there statements unlike Apple Inc. which present statements that are not audited. Samsung apply the general audit standards and policies required in auditing. Income statement items Samsung Item 2015 units in trillion 2014 units in trillion Sales 47.12 52.73 Gross profit 18.16 18.88 Operating profit 5.98 5.29 Profit before income tax 6.22 5.59 Net profit 4.63 5.35 Samsung is performing poorly in their net income. There is decreased shift in profit in the two years. It is registering lower revenues and high expenses in their operations. Apple Item 2015 in millions 2014 in millions Sales 75,872 74,599 Gross profit 30,423 29,741 Operating profit 24,171 24,246 Profit before income tax 24,573 24,416 Net profit 18,361 18,024 Apple is doing well good in their performance. The net profit has increased between the two years of reporting. Balance sheet items Samsung Item 2015 units in billion 2014units in billion Current assets 109,990.5 115,146.0 Non-current assets 117,259.9 115,277.0 Liabilities 59,631.1 62,334.8 Shareholders’ equity 167,619.3 168,088.2 Total assets 227,250.4 230,423.0 The financial position of this company is stable because the liabilities and shareholders’ equity are less than the company assets. Apple Item 2015 in millions 2014 in millions Current assets 76,092 89,374 Current liabilities 76,092 80,610 Total liabilities 165,017 171,124 Total assets 293,284 290,479 Shareholders’ equity 128,267 119,355 The company is stable because it has more assets than liabilities. Retained earnings is money that is left to the company when all dividends are paid out to the shareholders. It is that portion of company income that remain to the company when all items and costs are deducted. There more net income is earned retained earnings also increase. The retained of apple Inc. is 101,494,000,000 in year 2015 and 92,284,000,000 in year 2014. There is an increase because of increase of net income of the company.

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ACCOUNTING CONCEPTS AND POLICIES

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