Earnings per Share

Question:

Discuss about the Accounting for Managers for Principles of Accounting Theory.

An accountant of an organization performs all the financial functions that are related to the accuracy, collection, analysis, recording and presentation of the financial operations of an organization. Generally, an accountant has various administrative roles in the operations of a company. These include – financial data collection, entry of financial data and generation of financial report of an organization (Scott 2011). The accountants also play the role of a financial interpreter and financial adviser. Thus, an accountant also presents the financial data and information of an organization to the people outside (customers) and within (employees) an organization. The other duties of an accountant include dealing with third parties like financial institutions, shareholders, customers and vendors. Therefore, an accountant should also look after the day-to-day operations that take place within an organization under the supervision of the plant manager. An accountant is responsible for the financial management of the firm (Boateng 2013). Thus, in order to keep the working capital amount in notice, to keep an account of total debt and equity of the firm, it is an essential factor for the accountant of the firm to keep, store and maintain all the financial information of the organization including the financial activities performed by the plant manager. The other reason is that to keep the record of the financial activities of the plant manager based on the day-to-day operations falls under the rules, regulations and policies of the accounting standard of the country Australia that is AASB.

A cash flow statement is the financial statement that indicates all the transactions of an organization or a business in a summarized way during the accounting period. A cash flow statement is classified under three heads, these are – cash flows from operating, cash flows from investing and cash flows from financing activities (McPhail 2012). The statement of cash flow shows the movement of cash that indicates whether the particular line item is cash out flow or cash inflow. The terminology cash in the cash flow statement implements both the cash equivalents and cash. Therefore, this particular financial statement gives relevant information and data in order to access the liquidity, solvency and quality of an organization. As per the standard of accounting, the cash flows from the operating activities involve the flows of cash from the principal activities of revenue generation like the purchase and sale of services and goods. On the other hand, cash flows from investing activities include the cash outflows and cash inflows that are related to the activities, which generate cash flows and income in the future, such as the buy or sale of long term assets (Marsh 2012). In addition to this, in the cash flows from the financing activities include the cash flows that are associated with the transactions with the creditors and stockholders, like – the purchase of treasury stock, issuance of share capital and dividend payments. Therefore, as per the rules and regulations of the accounting standard of the country Australia (AASB), Wayne should not be concerned about the net cash outflows for investing activities that is shown in the cash flow statement, because to show the net cash outflows for investing activities in the cash flow statement is the standard structure of the financial statement.

Dividend Payout Ratio

For any company, annual report is an essential factor; especially the company is a corporation with the limited liability company with members or with shareholders. The common and the simple structure of an annual report of an organization is composed of the discussion and the analysis of the business operations of a particular year, the future objectives of the organization, about the current management within the firm and the financial results of the firm for the particular financial year. Moreover, among all the different parts of the annual report, the length of the financial report is generally the longest one as the company discloses all the financial transactions that took place throughout the one whole financial year in this section (Glautier, Morris and Underdown 2011). Various types of financial statements such as the cash flow statement, the balance sheet, the income statement, the equity statement and their associated notes are provided in this section. Therefore, the doctor should not complain about the lengthy financial report of the company where he invests his money in order to earn higher return (Scott 2012). Moreover, the doctor should take help of an accountant or a financial analyst who will help him to understand the financial condition of the firm in details based on the financial data provided in the annual report of the organization.

The term economic discussion indicates the discussion where both the economy and the financial matters are interlinked. This type of discussion is mainly required in case of a start up of any business as in the operation and regulation of a business; both the financials and the present economic condition play an important role in order to run the business profitably. Here, as per the case study, Luigi and Gina should discuss both the types of economic decisions that are cost minimization and profit maximization (Gaffikin and Aitken 2014). In addition to this, the information that will be required to make these decisions include – optimization of resource allocation, optimum utilization of the resources. In addition to these, the market survey and market analysis report is also an essential factor for taking economic decisions. For all these survey and analysis, Luigi and Gina Cicello should take help of an accountant. The reason behind this is that the service of the accountant includes the analysis of the financial statements. Here, for start up of the business, Luigi and Gina Cicello should also ask the accountant to prepare projected cash flow, projected cash budget, projected capital budget, projected balance sheet and projected income statement. The reason behind this is that the projected financial statements of the start-up business help the owners of the business to run the business successfully and efficiently in future (Feldmann and Rupert 2012). The estimated costs, cash inflows and outflows help the owners of the business to understand the financial condition of the business and accordingly necessary steps can be applied. Therefore, the services of an accountant are an essential factor for operation and regulation of any business.

Dividend Yield

The profit margin ratio is defined as the net income divided by the revenue or the net sales of an organization. As per the transaction 1, when the transaction like sold of obsolete inventory at cost took place, the net income of the firm increases. Thus, the numerator of the formula of the profit margin ratio also increased. This increased numerator will give rise to the profit margin of the company.

The earnings per share (EPS) are defined as the net income less dividends on preferred stock divided by the total numbers of outstanding shares (Doran 2012). As per the transaction 2, the earnings per share will decrease as the dividend issued increased. With the increase in the issued numbers of share dividend on the ordinary shares, the numerator will decreases and thus the earnings per share will also decrease.

The dividend payout ratio is defined as the dividends divided by the net income. As per the transaction 3, a cash dividend has been declared on the ordinary shares. This will lead to an increase the total amount of dividend and thus the numerator will increase and it will lead to increased dividend payout ratio of the company.

The dividend yield is defined as the annual dividends per share divided by the price per share. As per the transaction 4, the GST was paid owning to the tax office. This indicates the company has to pay more taxation that will lead to reduction of income and thus the profit of the company will also reduce (Wolk, Dodd and Rozycki 2013). As the profit percentage of the company decreases, the dividend yield of the firm will also decrease.

Quick ratio is defined as the current assets fewer inventories divided by the current liabilities (Devine 2012). As per the transaction 5, the inventory has been purchased on credit, thus the amount of inventories increased and the numerator of the formula decreased. With the decrease in the numerator, the quick ratio of the firm will also decrease.

Current ratio is defined as the current assets divided by the current liabilities (Deegan and Unerman 2011). As per the transaction 6, inventory was sold for cash, therefore, the total inventories of the company will reduce and finally the current assets of the particular firm will also reduce. The reduced numerator will result into decrease in the current ratio.

Similarly, as per the transaction 7, the current assets will increase as the bad debt is written off by the firm. As the current assets increases, the numerator will also increase and thus, the current ratio of the firm will increase.

Receivable turnover is defined as the net credit sales divided by the average accounts receivables. As per the transaction 8, the collected account receivable will lead to the increase in the denominator and thus the receivables turnover ratio will decrease.

Inventory turnover ratio is defined as sales divided by inventory. As per the transaction 9, the numerator will increase, so the inventory turnover ratio will also increase.

Debt ratio is defined as the total debt divided by the total assets. As per the transaction10, additional ordinary shares for cash are issued, thus the denominator of the formula increases. This will lead to decrease in the debt ratio of the firm.

References

Boateng, P. (2013). Principles of accounting theory. [Place of publication not identified]: Dog Ear Publishing, Llc.

Deegan, C. and Unerman, J. (2011). Financial accounting theory. Maidenhead, Berkshire: McGraw Hill Education.

Devine, C. (2012). Accounting theory. Routledge.

Doran, D. (2012). Financial Reporting Standards. Sterling Forest: Business Expert Press.

Feldmann, D. and Rupert, T. (2012). Advances in accounting education. Bingley, U.K.: Emerald.

Gaffikin, M. and Aitken, M. (2014). The Development of Accounting Theory (RLE Accounting). Hoboken: Taylor and Francis.

Glautier, M., Morris, D. and Underdown, B. (2011). Accounting. Harlow, England: Financial Times/Prentice Hall/Pearson.

Marsh, C. (2012). Financial management for non-financial managers. London: Kogan Page.

McPhail, K. (2012). Accounting ethics. London: SAGE.

Scott, W. (2011). Financial accounting theory. Toronto, Ont.: Pearson Canada.

Scott, W. (2012). Financial accounting theory. Toronto: Pearson Prentice Hall.

Wolk, H., Dodd, J. and Rozycki, J. (2013). Accounting theory. Thousand Oaks: SAGE Publications.