Answer 1)
The role of each of the financial statement is explained hereunder:
Income Statement:
Also known as Profit and Loss Statement, income Statement, indicates the net profit or loss of the company during the year.
Balance Sheet:
Also known as the Statement of the Financial Position, Balance Sheet provides information about the financial position of an entity at a given date. Balance Sheet consist of following items:
- Assets
- Liabilities
- Equity
It works on the principle of Assets= Liabilities+ Equity
Cash Flow Statement:
Cash Flow Statement provides information about actual cash transactions in the entity held during the year. The movement of cash flow is classified into following three sections:
Operating Activities: Shows cash transactions relating to primary business operations of the business.
Investing Activities: Represents cash flow from the purchase and sale of capital assets.
Financing Activities: Shows cash flows from share capital and loan borrowings, along with the payment of dividend and interests.
Answer 2)
Certified Public Accountant(CPA) is the professional designation regulated by a professional body in the United States. He is required to log into some stipulated hours of practice of work prescribed by the state he is working in. On these professionally logged in hours of practice, he is entitled to claim the level of accounting practice he desires.
In comparison, an accountant is a professionally educated individual, who helps the organization in maintaining financial records, analyze financial records. He may or may not be a CPA, but he do have advanced knowledge of financial statements and their effects on business of the entity. However, he is not required or stipulated to work under any regulations of a professional body.
In the nutshell, an accountant cannot to do work of a CPA but a CPA can work as an accountant.
ii) The role of an accountant and accounting is impeccable in the society as in today’s era, an accountant, with the help of his education, training and knowledge can serve the multiple needs of the society. With the help of accounting standards, accountants ensure full justice to the matter relating to reporting, taxation, legislation, etc. In other words, an accountant with the help of science of accountancy, creates a dynamic pattern which assists business in shaping its future in the most ethical and fair manner, which ultimately directs in the benefit of the society. This makes the profession of accounting and the role of an accountant, an instrument of socio-economic change and welfare to the society.
Answer 3)
Service Company:
A service company is the one that offers services to its customers through the skills of its employees. For Instance, tax filing, legal services, etc. are services being offered by a legal firm. The financial transactions of these companies include billing a customer for services provided, collecting the fees and recording it.
Merchandising Company:
Merchandising company works completely differently from service company. The former purchases inventory from various vendors, then sells that to its customers and receive the payment. In other words, unlike service company, Inventory is the primary asset of the merchandising company.
The accounting charts of both types of the companies, differ in the following ways
Balance Sheet:
Although the balance sheet of both the companies has sections relating to assets, liabilities and equity but the difference lies in the assets section. Since, merchandising companies have Inventory as their primary asset, their current assets section includes an inventory. However, there is no such section in service company as they just provide services to the customers and do not sell inventory.
Another difference is relating to the type of accounts payable a company has. For instance, a merchandising company can have an account payable standing in relation to purchase of the inventory. On the other hand, a service company may have a service revenue receivable account for expected payment for services provided.
Income Statement:
The major difference between the income statement of service company and merchandising company is relating to Cost of Goods Sold. Since, merchandising companies sells inventory, their income statement includes cost of goods sold, however, since there is no inventory purchased in the service company, their income statement do not include the cost of goods sold.
Second, service companies also do not report any sales tax expense in their income statement and include only service tax. In the contrary, merchandising companies are liable to pay sales tax but they do not need to report service tax.
Answer 4)
Assuming i have chosen to set up a merchandising company, i would suggest for automating of accounting process as it offers following benefits:
- Eliminate paper at the source: make information available instantly
- Expedite approval: enable quicker decision making and greater information security
- Save money: take advantage of quick-pay discounts and avoid penalties
- Integrate with accounts payable systems: leverage data and remove errors
- Comply and audit more easily: prove payments in a snap
ii) Since, merchandising companies is having cash sales and receives cash immediately from the customers and also because inventories lies on the shelf, there may arise problem of theft/ fraud. Thus, the tool of internal control can be used to prevent such risks:
Problem: Risk of theft of cash receipts
Solution:
- Daily reconciliation of cash receipts and deposits
- Pre-numbering of receipts relating to purchases/sales.
- Intact Deposit
- No cashing of personal checks out of un-deposited receipts.
Problem: Inventory Theft:
- Ensuring bar code marking on each product and bar code catching machine for unbilled items at the exit of the store.
- Monitoring employees activities through cameras
- Creating a culture of accountability.
Works Cited
Definition - What are Financial Statements? (n.d.). Retrieved March 4, 2014, from Accounting-Simplified.com: http://accounting-simplified.com/financial/statements/types.html
Otis, M. (n.d.). Difference Between Balance Sheet of a Merchandising Company and Service Company. Retrieved March 4, 2014, from Chron: http://smallbusiness.chron.com/difference-between-balance-sheet-merchandising-company-service-company-14649.html
