Provides definitions of some common accounting terminologies and their importance
Generally accepted accounting standards
These are the guidelines used to prepare books of accounts. The structure consists of rules, standards, and agreements that preside over the preparation of accounting information. These standards are important because through their use there is consistency in the preparation of financial statements. Such consistency facilitates the comparison of financial statements across firms or even over a given number of years (Kaplan & Cooper, 2009).
Contra Asset account
In most cases, the balance in an asset account is expected to be positive. A contra asset account is an asset account that has either a zero balance or a positive balance. An example of a contra asset account is accumulated depreciation. These accounts are important as they represent costs that are considered liabilities of a firm.
Historical cost
An asset is initially bought at this cost. When reporting assets in the financial statements, they are reported at cost less the accumulated depreciation to derive the net present value. The use of historical costs is important as it brings about consistency in reporting. Users of financial statements can determine the price at which assets are bought and by how much they have depreciated over the years (Gillan & Martin, 2007).
Accrual basis against Cash basis accounting
Under the accrual basis of accounting, revenues and expenses are recorded in the accounting books. This happens not only when they are earned but also when they are incurred. Cash basis on the other hand recognizes expenses and income when cash is involved in the transaction. There has to be an actual money exchange for it to be recorded in our books of account.
Accounting standard codification
This is the numbering of accounting standards for easier identification. Each standard is given its own unique number identification number. This number facilitates recognition and minimizes instances of confusion of the standards (Jones, 2008).
Looks at three companies and their fundamental differences in the preparation of books of accounts and financial statements
Of the three firms, Lockheed is an IT firm, Samsung an electronics firm, and RTL group is an entertainment network. There are fundamental differences in the preparation of their books of accounting (Weetman, 2007). The financial statements of the three companies for the year 2007 form the basis of this discussion. A glimpse at the income statements of the three companies reveals fundamental differences. RTL being a service-based company does not have a trading account in its income statement. The item of stock of goods is also absent in the income balanced sheet of RTL limited being a service-based company, as opposed to the other two.
For Samsung and Lockheed, the net income is more useful while for RTL cash from operations. This is because Samsung and Lockheed are manufacturing firms. Hence, changes in their current assets do not directly affect production. For RTL however, the level of current assets that influences the cash from operations is a major determinant of revenue (Brimson, 2010).
All three companies in question are multinationals with branches in different countries. Accounts are therefore prepared on a consolidation basis. Segment information can be found in the prepared segment accounts. Additional information about each segment is available on the notes to the financial statements. Using the net incomes of the three firms we may conclude that incomes are on the rise and the future financial statements will post better results.
References
Brimson, J. A. (2010). Activity Accounting: An Activity-based Costing Approach. London: John Wiley and Sons.
Gillan, S. L., & Martin, J. D. (2007). Corporate governance post-Enron: Effective reforms, or closing the stable door? Journal of Corporate Finance, 929-958.
Jones, M. (2008). Management Accounting: An Introduction. Chicago: John Wiley and Sons.
Kaplan, R. S., & Cooper, R. (2009). Cost and Effect: Using Integrated Cost Systems to Drive Profitability and Performance. London: Harvard Business School Press.
Weetman, P. (2007). Financial and Management Accounting: An Introduction. Chicago: Prentice-Hall.