Organizational Chart
There are three types of decision making which are taking place at the different level of organization. At strategic level of decision, an overall picture of accounting information is needed which basically involves financial report such as balance sheets and income statement (Dichev, 2008). At functional level organization-level decisions that carry day to day, operations are taken. At functional level accounting data input and maintenance take place.
Q2. Users and Purpose of Accounting
Solution: Accounting refers to the recording of the transaction which includes the detailed examining of all the budgeting proceedings (Riahi-Belkaoui, 2004). The basic function of accounting is to provide all the information related to any transaction of buying and selling, it also helps to observe the profit and loss account of the organization by determining the actual cost of the product and comparing it with the actual profit of the product.There are two users of accounting information: External users and internal users. External users are basically the one who invests in the business or increase the profit by buying the organization's product, such as stockholders and consumers. Financial accounting information is provided to the external users as it helps those making decisions regarding investment or purchases (Riahi-Belkaoui, 2004). Whereas internal users are the inside management of the organization, this management can be of operational management or the managers. Accounting information is provided to them as they are responsible for maintaining the profit and loss summary of the organization that helps them evaluating the company’s progress.
3. Advantages and disadvantages
Sole Traders
Advantages: In this type of business, the initial capital required to start of the business is very low. There is no distribution of the profit as all the profit is kept by the owner himself. The business details are kept very confidential.Disadvantages: The liability in this business is unlimited with no legal agreements which might create a problem for the sole proprietor. The entire decision making is done by one person that minimizes the chance of innovation and flexibility in decision making.
Partnership
Advantages: The high amount of capital can be collected from the partners. This type of business is easy to run and access because of less strictness in laws of forming the business. Responsibilities of the business are distributed among the partners. The partners can help each other in decision making.
Disadvantages: The most common disadvantage of this business is the mismatch of the opinions and ideas between the partners that results in dissolution of the business. This business requires the agreement of all the partners as per its nature, conflict with one partner can disturb the business life cycle.
Private company
Advantages: This type of business conducts limited liability which helps in saving the investment of shareholders. The high amount of investment can be funded through the selling of shares (Dyck & Zingales, 2004).Disadvantages: The financial information cannot be kept confidential as all the information is required by the shareholders that include profit and loss account statement, yearly percentage return expected.
Public company
Advantages: This business offers limited liability to its shareholders. The life of this business is long as the death or retirement of one shareholder will not affect the business. There is no limit on a number of investors engaged in the business (Dyck & Zingales, 2004); therefore, the company can generate high funds for investment.Disadvantages: The legal structure is very strict for forming a public company. The decision making is very difficult and slow because of the large size of the company.
4. Assets, liabilities, sources of revenue
Sole proprietorship:
Five Assets: Cash, Accounts receivable, Office equipment, Furniture, Prepaid rent.
Five Liabilities: Accounts Payable, Notes Payable, Taxes payable, short-term loans, Deferred Income.
Two Sources of equity for the business: Owners investment and Retained earning
Two ways they might earn income or revenue: Passive Income and Portfolio Income
Private Company
Five Assets: Equity investments, other receivable, Loans from investors, placements, financial Assets.
Five Liabilities: Corporation tax payable, warranty liability, Bonds payable, Debentures, Loans payable.Two sources of equity for this business: Retained Earnings and reserve accounts.
Two ways they might earn income or revenue: Sales Income and Royalty Income.
Partnership
Five Assets: Temporary investments, office equipment, Building, Long-term investments, prepaid expenses.
Five Liabilities: Short-term notes, Tax payable, Accrued payroll, salaries payable, Interest Payable.
Two sources of equity for this business: Partners Investment and Venture Capital.
Two ways they might earn income or revenue: Sales Income and Portfolio Income
5. Financial Planning for Mark
How might Mark finance his decision to buy a large van, tools and hiring an apprentice?
Solution: The best way for Mark to finance his tools, large Van and an apprentice is to take money from a private investor through short-term investment or to take the loan from a bank and payments should be agreed to be paid on installment basis that would not burden Mark's liability department.
Which stakeholder will be interesting in Mark’s decision to buy a large van, tools and hire an apprentice?
Solution: Individual stakeholders will be interested in Mark's idea to invest a certain amount of money in his business plan, to buy a large van, tools and hire an appendix as the amount of investment cannot be considered too much and the expected return is also not certain. Individual stakeholders may include private investors, relatives and small banks.
Two risks that Mark would be taking by following his plans?
Solution: Two types of risk can be:- If the lender increases the rate of return the liabilities of Mark will increase than anticipated- Launching of new technologies in the electrical department can somehow disturb Henry’s profit.
6. Financing decision for Henry.
Why do you think Henry would be concerned about his profit?
Solution: Henry was concerned about the profit because he had to pay off his liabilities as he took a certain amount of loan from the bank and his plan was to pay off his liabilities by earning high profits. It can be assumed that he expected high profits in his business which made him took the loan from the bank to optimize his profit but the reduction of profit made him pay his bank liability by selling his vans.
How could Henry use accounting information to find the possible reasons for the decrease in the profit?
Solution: At the time when Henry realized the initial decrease in sales, he could have controlled his expenses. Decision making can be considered a reason for the decrease in profit, as he planned to buy the second van without predicting the futures policies of the business. Follow-up of accounts receivable can be also one factor of this decrease in profit.
The financial information to be used by the bank.
Solution: The amount of capital invested by Henry in the business before asking for the loan could have helped the bank manager to lend him the money for the new van. Cash flow history would also a considered point for Henry in his business.
Additional information
Solution: The manager would examine the payback ability of Henry that can be known by the nature of his business and the life of the business. This will help the bank manager to make the decision as long life business are more reliable and the chances of getting the loan back are maximized.
Reason to financial information to the driver?
Solution: Henry might have disclosed his financial information with his driver to make him understand the profit and loss nature of the business which might have helped his driver to make up the decision regarding his work. Another reason for sharing the financial details can be to make him feel more like a partner or a stakeholder rather than an ordinary employ which might boost his working energy.
Reasons, why Henry might have decided to sell the two vans, repay the loan and invest the balance of the proceeds in a term deposit?
Solution: The reasons can be as follows:
Henry was not able to deal with the pressure of handling his liabilities and due to a decrease in the profits, his liabilities towards the bank was a big pressure for him so selling all his assets to pay his liability was the preferred option for Henry.
As the business was not going as per the goals set by Henry, therefore taking a further risk in the business was not a good option.
Term deposit gave Henry an opportunity to earn a certain amount of percentage through an investment which was a safe idea of investment as compared to investing more in the business that was not showing a good sign of sales.
Why might Henry have decided to carry on the business despite the profit trend his business was showing?
Ans. Henry might have considered this decrease in the profits on a temporary basis and waited for the right time to generate sells. He might have consulted a financial person to evaluate the further ongoing nature of the business. Another reason for Henry to carry on the business can be to revise his marketing strategy and made short term targets of the organizations rather than setting long-term plans at this point of time when the company was facing a decrease in sales.
References
Dichev, I. D. (2008). On the balance sheet-based model of financial reporting. Accounting Horizons, 22(4), 453-470.
Dyck, A., & Zingales, L. (2004). Private benefits of control: An international comparison. The Journal of Finance, 59(2), 537-600.
Riahi-Belkaoui, A. (2004). Accounting theory. Cengage Learning EMEA.
