Changes to Accounting Policies

Discuss About The Structure Should Be Simple And Decentralized?

The manager of the firm is considering the changes in the depreciation method and approaches for recognizing uncollectible amounts from accounts receivable.  To improve the performances, following changes can be made to aforementioned policies.

Currently, the company is using written down value method in which the depreciation of assets remain high in the initial years and keeps on reducing with the value of the assets. Alternatively, the company can use straight line method to charge depreciation. Under this method, the depreciation is equally spread over the life of the assets, thus it helps in equalizing the profits over the years.

Secondly, the alternative approach for uncollectible is to directly write off the uncollectible portion instead of creating provision for that. This will reduce the liabilities portion of the balance sheet and hence, will improve the financial position. Importantly, the company should try to keep the uncollectible as low as possible. This can be done either by changing its collection method and / or giving the less credit period. 

Any company’s performance can be well evaluated from its accounting ratios. In the given case, the company’s net profit ratio is 29.51%. This ratio indicates the net profit generated against its sales. It is an important ratio for any company and there is no standard ratio numbers for net profit ratio. As the higher the ratio the better it is. Further, it indicates that the company’s business is effectively managed and generating good numbers of profit.

Next ratio is return on assets ratio which is 3.57%. This ratio indicates the profit generated against the net assets. In given scenario, the company’s net assets are $228,416 and net profit is $8,154. The ratio of 3.57% indicates that by employing $1 in net assets the company can generate $3.57. This ratio is also higher the better as it shows effective and optimum utilization of assets.

Another ratio is return on equity ratio which is 4.13%. Similar to return on assets, this ratio shows the net profit generated against the shareholder’s equity. The company has shareholder’s equity of $197,500 and net profit of $8,154. The ratio of 4.13% indicates that if a shareholder is investing $100 in the company, then the company is generating $4.13 of profit from that. This ratio is also higher the better.

Comparative balance sheet compares the company’s current year financial position with the pervious year’s financial position. The company’s comparative balance sheet shows the improvement in the financial position of the company. To briefly explain, the major changes noticed in comparative balance sheet are that the company’s non-current assets have been increased by 10.07% and current assets have been increased by 36.43%. In total, there is an increase of 19.59% in total assets. Moving to liabilities, the total liabilities have been decreased by 8.95% and equity portion have been increased by 23.89%. To summarize, the financial position of the company have improved significantly.

Particulars	30 June, 2017	1 April, 2017	Increase (decrease)
(in $)	(in $)	Amount	Percent
(I) Assets
Current Assets:
Cash	71,900	51,000	20,900	40.98%
Supplies	6,675	12,000	–                 5,325	-44.38%
Accounts Receivable	15,560	6,000	9,560	159.33%
Total current assets	94,135	69,000	25,135	36.43%
Building	118,950	122,000	–                 3,050	-2.50%
Furniture	15,331	–	15,331	100.00%
Total Assets	228,416	191,000	37,416	19.59%
(II) Liabilities
Current Liabilities:
Accounts Payable	18,600	22,600	–                 4,000	-17.70%
Water expenses payable	470		470	100.00%
Wages Payable	200		200	100.00%
GST	3,132	2,400	732	30.49%
PAYGW	360		360	100.00%
Total current liabilities	22,762	25,000	–                 2,238	-8.95%
Non-Current Liabilities	–	–	–	0.00%
Total liabilities	22,762	25,000	–                 2,238	-8.95%
Shareholders’ Equity
Capital	197,500	166,000	31,500	18.98%
Retained earnings	8,154		8,154	100.00%
Total shareholders’ equity	205,654	166,000	39,654	23.89%
Total Liabilities and Equities	228,416	191,000	37,416	19.59%

The common size balance sheet shows a horizontal view of the balances. It shows the portion of total assets bifurcated between non-current and current assets and further between non-current and current liabilities. By comparing the common size balance sheet of both the years, we noticed that company’s investment in non-current assets have been decreased from 63.87% to 58.79%. This is mainly due to charge of depreciation. Further, the investment in current assets has been increased from 36.13% to 41.21%. Moving to liabilities, the liabilities have been decreased from 13.09% to 9.97%. This is a good sign for the health of the company. To comment overall, the company’s financial position has been improved.

Particulars	30 June, 2017	1 April, 2017
(in $)	(as a %)	(in $)	(as a %)
(I) Assets
Current Assets:
Cash	71,900	31.48%	51,000	26.70%
Supplies	6,675	2.92%	12,000	6.28%
Accounts Receivable	15,560	6.81%	6,000	3.14%
Total current assets	94,135	41.21%	69,000	36.13%
Building	118,950	52.08%	122,000	63.87%
Furniture	15,331	6.71%	–	0.00%
Total Assets	228,416	100.00%	191,000	100.00%
(II) Liabilities
Current Liabilities:
Accounts Payable	18,600	8.14%	22,600	11.83%
Water expenses payable	470	0.21%		0.00%
Wages Payable	200	0.09%		0.00%
GST	3,132	1.37%	2,400	1.26%
PAYGW	360	0.16%		0.00%
Total current liabilities	22,762	9.97%	25,000	13.09%
Non-Current Liabilities	–	0.00%	–	0.00%
Total liabilities	22,762	9.97%	25,000	13.09%
Shareholders’ Equity
Capital	197,500	86.47%	166,000	86.91%
Retained earnings	8,154	3.57%		0.00%
Total Shareholders’ Equity	205,654	90.03%	166,000	86.91%
Total Liabilities and Equities	228,416	100.00%	191,000	100.00%

Not only the financial impacts are there on the business, there are many other political, social and environmental factors which need to be considered. For example, the type of business carried in a country is highly affected by environmental and social factors. So, before starting any business a feasibility study needs to be conducted to check whether the proposed business can be carried and is allowed by the government. Further, the organizational structure also plays an important role in the development of business. So, the structure should be simple and decentralized.

References:

Staff, I. (2017). Return On Assets – ROA. [online] Investopedia. Available at: https://www.investopedia.com/terms/r/returnonassets.asp [Accessed 23 Sep. 2017].

Staff, I. (2017). Return On Equity – ROE. [online] Investopedia. Available at: https://www.investopedia.com/terms/r/returnonequity.asp [Accessed 23 Sep. 2017].

Accounting for Management. (2017). Net profit (NP) ratio – explanation, formula, example and interpretation | Accounting for Management. [online] Available at: https://www.accountingformanagement.org/net-profit-ratio/ [Accessed 23 Sep. 2017].

Bragg, S. and Bragg, S. (2017). Net profit ratio. [online] AccountingTools. Available at: https://www.accountingtools.com/articles/2017/5/5/net-profit-ratio [Accessed 23 Sep. 2017].