Qualitative Generalising in Accounting Research †MyAssignmenthelp

Question: Discuss about the Qualitative Generalising in Accounting Research. Answer: Introduction This report is based on AMP limited. This report describes the accounting policies followed by the company and the accounting strategies. The report also contains two years annual audited data of AMP limited. The annual report of AMP includes the consolidated financial position, consolidated income statement , consolidated statement of changes in equity and consolidated cash flow statement. This report clearly describes the procedure of preparation of financial statements. This is a three step process and consists of the examples related to the preparation of cash flow statement, trading and profit loss account, and balance sheet (Parker and Northcott, 2016). The two theories of financial accounting i.e. positive and normative are also discussed in this report. Accounting Policies Disclosure of AMP Australian Accounting Standards Board (AASB) has issued certain guidelines for the preperation of financial statements. At the time of recording the values in the financial statements, these values are rounded to the nearest million dollars ($m). Accounting policies are the policies which are applied by the company at the time of making financial sttaements. These policies includes the value at which the assets and liabilities are recorded by the company. The assets and liabilities related to investment contracts and life insurance contracts are measured on a fair value basis and all the other assets and liabilities are valued on the basis of historical cost. There are some amendments in the AMP accounting policies in the year 2015 (Francis, et al., 2016). The amendments were AASB 2014-9 which was related to the method of equity in separate financial statements and AASB 2015-5 which was related to the investment entities. The person who is responsible for accounting estimates is the management itself. The material misstatement risk of accounting estimates depends upon the subjectivity and complexity associated with the process, the number and significance of assumptions that are made, the availability and reliability of relevant data and the probability of uncertainty associated with the assumptions (Kvaal, 2017). The accounting policy of AMP related to inventories includes that inventories should be included in the financial statements at the cost of inventory or its net realisable value whichever is lower. In case of intangible assets, only those costs are being carried forward which creates future benefits for the company. The critical factors related to accounting estimates are that the methods of conducting business, circumstances of the industry in which the company is operating, other external factors and new accounting pronouncements. Flexibility of accounting policies The accounting flexibility differs from firm to firm. AMP is following the accounting policies as per the Australian accounting standards board. So, members are not having enough power to assess the accounting policies and estimates (Howieson, 2017). The accounting flexibility of AMP is under the management. So, managers are only required to follow their guidelines. If the power of flexibility is less with the managers then the accounting data will be less informative. If managers are having high flexibility then the accounting information will become more informative. Positive theory of financial accounting: Accounting gives the investors and managers a standardized system to record the financial transaction of a company in a consistent, transparent and informative way. Today's accounting systems provides accurate methods for representing a company's performance by carefully applying the accounting theories. Flexibility in accounting policies helps the managers to take decisions imm ediately. The company is required to allow managers to change the accounting policy as per the need of the organization. The two major theories of accounting are positive accounting and normative accounting. Positive accounting theory is also known as PAT. Positive accounting theories are based on observing particular phenomena. The aim of this theory is that by observing a number of things the person will be able to predict the future. Positive accounting theory was developed with a view to identify the best accounting theory for the company from the various theories used by other companies (Loyeung, et al., 2016). Some of the examples of positive accounting theories are stakeholder theory and legitimacy theory. The main aim of Watts and Zimmermans positive accounting theory is based on the aim of identifying the relationship between the individuals which are responsible for the output of the firm. The relationship should be between the managers and the debtors of the firm or it mi ght be between the managers and the owners. According to positive accounting theory, the organization should be aligned in such a way that it can integrate the interest of owners and managers of the firm (Ward and Lowe, 2017). In PAT, the persons who are having the authority for the preperation of financial statements are the managers (Lukka and Modell, 2017). The cost occurred in establishing bond between the managers for the preparation of financial statements is known as bonding cost. In positive accounting theory, the cost incurred in monitoring or auditing of financial statements is known as monitoring cost. Another assumption of PAT is that the actions of agents are controlled by contractual arrangements otherwise it leads to residual loss. On the other hand, normative theory of financial accounting is completely different from PAT. Normative theory of accounting: Normative theory does not evaluate the present condition of company. Rather than discussing what is happening in t he company, normative theory guides the developers of accounting policies on the basis of theoretical principle. The major disadvantage of normative theory is that it is based on theoretical principles and on the other hand, the major advantage of PAT is that it is more practical and is related to current events (Martins and Martins, 2017). Normative theory is more suitable for the company because this theory first analysis the nature, structure and the issues that the company is facing then suggest the most appropriate solution to the company. This theory is totally based on practical approach so by adopting this theory the company will definitely get the solution for its issues because the suggestion provided by noemative theory is practically possible. Positive accounting theory is totally a theoretical approach. So, it only suggests the theories which are already used by some companies. The nature and structure of every company is different. So it is possible that one theory is best suitable for a company and will result in failure for another company because of differentiation in operations and the issues of the company. Positive accounting theory is based on the universally accepted principles. Normative theory is just the opposite of it. Accounting Strategy Evaluation The accounting strategy of a firm should be analyzed by its performance in financial statements. The company is required to prepare a strategy for all the activities related to finance that may happen in the near future. Accounting strategy helps to take immediate measures at the time of financial crises. The complexity in the preparation of financial statement depends upon the nature of the firm. Accounting strategy involves recording of all the financial transactions in proper accounting format so that these records can be further used for the preperation of financial statements. AMP is related to providing financial advice so it involves recording each and every transaction on regular basis. Financial statements include balance sheet, trial balance and profit and loss account and cash flow statement. Income statement includes the revenues and expenses of the firm and helps in calculating net income of the firm (Bergh, et al., 2017). Trial balance and profit and loss account are pr epared to identify the sum total of expenses and revenues of the company to determine whether there is a profit to the company or loss. The credit side of profit and loss account includes the revenue from dividend and interest and the debit of profit and loss account includes all the expenses made by the company like advertisement, insurance, salaries, carriage outward, trade expenses and any other expense. Balance sheet is prepared to measure the actual performance of the company. Balance sheet is the sum total of all the other financial statements. Balance sheet includes the fixed assets, fixed liabilities, current assets, current liabilities and equity shareholders and preference shareholders. The total of both liabilities and assets is equal in balance sheet. The reason behind this balance is that the company uses all its liabilities in the purchase of assets. Cash flow statement is divided in three parts i.e. operating, financing and investing activities. Cash flow statement sh ows the sources and uses of cash. There are two methods of preparing cash flow statement, one is direct method. In direct method cash flow information is measured by directly subtracting the expenses from cash receipts. In case of indirect method, one can arrive to cash flow information by adding or subtracting non-cash items from net income (Newcastle University, 2017). There are three steps for the preparation of financial statement (Chiapello, 2017) i.e. understanding the meaning of debit and credit balances, analyse the debit and credit balances and treatment of debit and credit balances. Understanding the meaning of debit and credit balances: The first step related to the preparation of financial statements is proper understanding of debit and credit balances. It is divided into two parts. First is debit balance in trial balance. The debit balance in trial balance consists of expenses and losses or deferred revenue expenditure and assets (Vardon, et al., 2016). Second is credit balance of trial balance. The credit balance consists of revenue and gains or liabilities, capital, provision and reserves. The second step is analyzing which debit balance is an asset and which debit balance is expenditure or loss. In the same way, which credit balance is a liability and which credit balance is an income or gain. While analysing the debit balance, if the balance is being recovered by the firm then it should be treated as an asset and if the balance should not be recovered then it should be a loss to the firm (Cornell and Warne, 2016). On the other hand, if the firm is liable to pay any amount to the creditor then it should be treated as liability to the firm and if the firm is not liable to pay any amount to creditor then it should be treated as gain. The third step of financial accounting process is the treatment of debit and credit balance. Treatment of debit balances: The balances of losses and expenses on the basis of direct or indirect are transferred to the debit side of either Profit Loss Account or Trading Account as the case may be. The deferred revenue expenses and assets are directly transferred to the asset side of balance sheet. Treatment of credit balances: The balances of revenues and gains on the basis of direct or indirect, are transferred to the credit side of either Profit Loss Account or Trading Account as the case may be (Bailey, 2016). The balances of liabilities, provisions, capital and reserves are transferred to the liabilities side of the balance sheet. Disclosure of the Quality of Financial Statements AMP is maintaining transparency, accuracy and consistency in its accounting records. It increases the quality of financial statements. Every company is required to disclose the material information to its human resources. The goal is achieved with the contribution of employees and if the company hides the material information from the employees then it will become a little confusing for the employees that in which direction they have to work and if the employees get to know about the hidden information then it will lower down their morale because they will think that the company is not trusting them. In case of financial statements, the balance at the end of each year is being carried forward to the next year. If there is any material misstatement in one year then it is going to affect the quality of the financial statement of next years till the mistake is identified by the company. The quality of disclosure helps the company to avoid the interference of government in the operations of the company. the quality fo financial statements also maintains the reputation of the company. GAAP refers to generally accepted accounting principles. GAAP consists of the crucial principles of accounting which increases the quality of financial records. GAAP helps in the maintenance of consistency in accounting. GAAP helps to avoid the managers ability to misstate any information in the financial statements. GAAP is a network of experts of accounting. GAAP includes few best Australian minds. These experts helps in setting out the principles as per the nature and structure of the company. The financial records of the company must be disclosed in this way (Almeida and Fernando, 2017). Example of Trail balance: Particulars Debit Credit Opening stock ---- Plant $ Machinery ---- Carriage inward ---- Carriage outward ---- Building ---- Purchases ---- Wages ---- Sundry debtors ---- Salaries ---- Furniture ---- Trade expenses ---- Drawings ---- Advertisement ---- Insurance ---- Discount on sales ---- Bad debts ---- Bills receivable ---- Bank balances ---- Capital ---- Sundry creditors ---- Sales ---- Bank loan ---- Interest received ---- Discount on purchases ---- Example of Trading and Profit $ Loss Account: Particulars Amount Particulars Amount Opening stock Purchases ---- Less: discount ---- Carriage inward Wages Gross profit (transferred to PL) ---- ---- ---- ---- ---- Total Sales ---- Less: discount ---- Closing Stock ---- ---- Total Carriage outward Salaries Trade expenses Advertisement Bad debts Insurance NP(transferred to balance sheet) ---- ---- ---- ---- ---- ---- ---- Total Interest received GP (transferred from Trading A/C) ---- ---- Total Balance Sheet Assets Amount Liabilities Amount Fixed Assets: Furniture ---- Plant and machinery ---- Building ---- Current Assets: Bank balance ---- Bills receivable ---- Sundry debtors ---- Closing stock ---- ---- ---- Total Long-term liabilities: Capital ---- Add: Net profit ---- Less: Drawings ---- Current Liabilities: Sundry creditors ---- Bank loan ---- ---- ---- Total Section 5: Potential Red Flags of AMP The red flags indicate the most crucial factors of the company which leads to fraud if not properly analysed. The management is responsible for everything that is happening in the company. Red flags are not the sign of happening of fraud. Red flag # 1 indicates inability to reconcile financial accounts on regular basis. If the company is unable to update the transactions done on regular basis then it leads to misrepresentation of transaction because of which the chances of fraud increases within the organization. Misrepresentation is a form of fraud which means intentional mistake in the recording of the actual transactions. Red flag # 2 is a sign of unexplained variances in the financial records. Negative variances occurs when the actual revenues are lower than the revenues planned while making the strategy and positive variances occurs when the actual expenses are lower than planned expenses. These variances are required to described carefully by the managers. If there remains any kind of unexplained variance then it leads to fraud within the organization. Red flag # 3 indicates the inquiry about large quantities adjustment or significant dollar amount adjustments. It means the company is required to analyse in detail the large quantity adjustments. While the procurement of raw material, the company is required to determine the difference between the pre-decided requirement of raw material and the actual quantity of raw material purchased. If there is a huge difference then this will indicate the chances of fraud. So, the company is required to focus on the quantity of material used to avoid the occurrence of fraud. Red flag # 4 indicates illogical discrepancies in the budgeted and actual results. Discrepancies are common in actual and budgeted results because the budgeted results are estimated as per the internal and external environmental conditions in that particular period of time. Future is uncertain so there are chances that the prices of raw material w ill increase or the preferences of customers will shift from one product to another or any political changes or changes in governmental regulations. But these all are logical discrepancies. So, the company should find out the logical reason behind the discrepancy in the actual and budgeted result and if the discrepancy is not due to these factors then in such case the company is required to evaluate the results because illogical discrepancies leads to fraud. Red flag # 5 indicates the chances of fraud related to unapproved employees and vendors. The company also includes certain policies and criteria for employees and vendors. Those vendors and employees who satisfy the criteria are approved by the company for further dealings and operations. This policy helps in avoiding fraud. If some unapproved vendors and employees are seen by the company then the company is required to enquire about them immediately. Red flag # 6 is related to the gaps in check numbers and receipts. The company is issuing the checks as per the serial numbers so if any check number is found missing then this needs to be carefully analysed. Red flag # 7 indicates the mismatch of receipts and deposits. The company is required to evaluate the deposits and receipts from time to time. The company is making the expenses from the receipts from customers or if any loan taken from the customers. If there is huge mismatch between the expenses and receipts then it needs to be analysed because receipts and deposits are the most crucial factors for every company. Red flag # 8 is a sign of behavioural changes in employees pattern. The employees are the people who are responsible for the success or failure of the strategy of the employee. If the company found any changes in the behaviour of the employees then in this case, the company is required to talk about it with the employees and try to find out the reason behind this change. Because if timely action is not taken in this concern then it increases t he negativity in the minds of employees and the chances of employees of doing fraud increases (Backof, et al., 2016). Conclusion After proper analysis of this report, it is concluded that AMP is required to be more flexible in the preparation of financial accounts. Some of its liabilities reduced in 2016 as compared to 2015. These liabilities include defined benefit plan liabilities, deferred tax liabilities, external unit holder liabilities, employee benefits, interest-bearing liabilities, payables and current tax liabilities. AMP is disclosing all the material information in its annual report. As per the analysis of the report, the most suitable theory for AMP is normative theory of accounting. 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