Task 2 (a) The term capital refers to the assets and cash that a business has, which can be various assets such as machinery and houses. Also, it can be the capital that a company gains from the assets of its owner. (b) First of all, it can be errors of addition. This means that there might have other errors causing the wrong number to be posted, and it is easy to observe. Second, there might be an error of transposition in which a number has been written the wrong way around, like £120 was recorded as £102. (c) First of all, it can be the error of omission which means when the whole transaction has not been recorded. For example, a copywriter buys a new business laptop but forgets to enter the purchase in the books. The second is the error of reversal. It occurs when two mistakes have canceled each other out, such as when you use cash to purchase £100, but you credit the purchase account and debit the cash account. Task 3 Income Statement for Andy Brittle for the year ending 31 December 2021 £ Sales Less: Returns Inwards £ £ 355,000 (11,500) 343,500 Cost of Sales Opening Inventory Purchases Less: Returns Outwards Carriage Inwards Less: Closing Stock 12,000 135,000 (13,500) 1,900 (14,500) 120,900 222,600 GROSS PROFIT Expenses General Expenses Wages Depreciation for Vehicle Depreciation for Equipments Decpreciation for Premises 18,700 49,000 15,750 20,400 6,400 110,250 NET PROFIT 112,350 Extract of non-current assets from the balance sheet for Andy Brittle as at 31 December 2021 Non-Currrent Asset Vehicles Equipments Premises At Cost £ 105,000 120,000 160,000 Depreciation Net Book Value £ £ 30,750 74,250 38,400 81,600 26,400 133,600 289,450 Task 4 According to the cost concept of accounting, all purchases of goods like assets or items required for expenditure should be recorded and held in books at cost. In other words, all transactions must be recorded in the accounts at the original cost. To begin with, it is straightforward to use and apply because the reference market prices are not involved. As a result, users do not need to do market research to determine the current price or market worth of financial products because previous costs are not vulnerable to future adjustments. Second, using the cost concept ensures the objectivity of accounting information. The subjective value rises, and declines do not muddle the numbers in your financial accounts. This concept concerns the treatment of accounting information when preparing financial statements. It refers to the concept that all the material items should be appropriately reported in the financial statements. Material items are considered items whose inclusion or exclusion results in significant changes in the decision-making for the users of business information. First, it will become simpler and easier to analyze data since it reduces the need to record every business transaction, as only the material ones require complete disclosures. Second, a reliable method for determining priority concerns enables businesses to make a compelling argument for how they deploy people, money, and expenditures(Mary, 2016). Task 5 (a) According to Sanderson(2020), management accounting is used by managers and directors to make judgments about a company's everyday operations. For example, cash budget and capital investment appraisal reports. Financial accounting is the record-keeping leading to preparing annual financial statements such as balance sheets and income statements. In terms of the target audience and purpose of information, management accounting is mainly for internal use, and managers and directors will use them for making current and future decisions, planning, and control for their business. Take cash budget as an example; after looking at planned monthly cash incomings and any planned cash outgoings, managers may plan to expand their company further or reduce their sales costs since they ran out of cash. In contrast, financial accounting has some internal uses, but it is much more for external use like government, shareholders, banks, and investors may have more interest in it. It focuses on financial performance and the financial position at the end of a period. Take the income statement as an example, it includes the profit, expenses, and sales of that company in the past. Thus, investors may find out the company's profitability by calculating the gross and net profit margin and decide if they will have further investment. In terms of legal status, there do not have any legal requirement restrictions for management accounting. Because management accounting reports are only issued internally, each company can develop its system and regulations for producing managerial reports. In other words, there is no centralized system regulating the reports. It is also not required for businesses to create and produce it. However, financial accounting reports are highly regulated by different organizations like The Financial Accounting Standards Board (FASB) in the United States(US) as the information is released to the public. It is a must that the calculation, the figures, and the format meet the requirements, according to Sean (2021). It is also a must for public limited companies to make financial accountings like income statements and balance sheets. In terms of the time, the data and numbers of financial accounting must be coming from the past. For example, the income statement looks at the year ending in a month. In contrast, knowing that management accounting is for managers doing strategic planning helps them set realistic goals. Thus, management accounting looks at the historical record and creates business predictions. (b) In terms of content, the balance sheet shows a company's assets, liabilities, and shareholder's equity. At the same time, income statements include revenue and cost from sales, expenses, gross profit, and net profit. The similarity is that both of them will show the net profit. In terms of time, according to Vishal(2021), the income statement summarizes a company's financial performance within a given period. In contrast, the balance sheet reflects its financial situation at a particular time. The balance sheet can help assess financial health using ratios such as current ratio, acidtest ratio, and return on capital employed in terms of financial analysis. However, the income statement focuses on net profit margin, gross profit margin, and price-to-earnings ratios. Task 6 May Davis Cash Budget for the three months ending 31st December 2019 £ Jan £ Feb £ March Reciepts Cash Sales Credit Sales Total Reciepts 5,000 2,000 7,000 5,850 1,667 7,517 6,300 1,950 8,250 Payments Cash Purchases Rent Insurance Wages Total Payments 4,000 1,000 600 820 6,420 4,400 1,000 600 820 6,820 5,500 1,150 600 820 8,070 Net Cash flow Opening balance Closing balance 580 (1,500) (920) 697 (920) (223) 180 (223) (43) Task 7 Companies develop a cash budget based on sales and production estimates and assumptions about necessary expenditure and accounts receivable collections. Financial statements like income statements, balance sheets, and cash flow statements are written documents that detail a company's operations and financial performance(Chris, 2022). In terms of times, a cash budget is a prediction for a weekly, monthly, quarterly, or annual budget for the future, whereas financial statements record the past data. The cash budget does not include depreciation. This is because depreciation is a cost that affects the value of a company's assets every month. This is a non-cash expenditure, meaning the company is not spending cash. As a result, depreciation is not included since the cash budget maintains track of all actual cash inputs and outflows (Lauren, 2017). Cash budget is a management accounting and financial statements are financial accounting. Therefore, there are no any format restrictions for cash budget while there are restrictions on financial statements. First of all, a cash budget can identify a potential cash shortage earlier. When companies make predictions, they may find out that the expense might be too high or sales in cash are too low, and they cannot pay off their debt. Thus, it can immediately spot cash flow problems, and companies can avoid them. Second, companies can have better planning when they develop a cash budget since it will clearly show where a business has more cash than expected or less cash than expected. The company can then plan to expand its company, increase its expenses or apply for a bank loan when there is more cash. However, the company would reduce its cost of sales or find a cheaper supplier or arrange an extra time to pay bills from suppliers when there is less cash. As a result, the company can have more efficient planning and better decision-making. Third, it can ensure that businesses can afford to pay their suppliers and employees as it better planning on cash flow. Suppliers and employees will have a lower risk of leaving as they pay the bills on time. Fourth, it helps spot problems with customers' payments and solves them. For example, when the sales credit is too high and the company run out of cash, the company can try to offer discounts for the buyers paying upfront or paying for goods quickly. Fifth, external stakeholders such as banks and investors may be engaging in cash budget. When the cash budget shows an increase in cash flow, there will be more demand for the company's products and prospects for expansion. This might be a positive signal for investors to invest in this company. On the other hand, the company estimates the expenses are significantly more than the company's cash inflow. Investors may not be willing to invest, and the bank might not offer debt to that company. Sixth, setting up goals like the sales each month can keep motivating the workers to achieve the goals when it is achievable. Workers can aim to follow and strive, but laborers might lack motivation and become lost if there is no cash budget. However, even though the cash budget has many advantages, it still has some disadvantages. Since the budget is set, essential and profitable opportunities may be rejected following a budget, as mentioned that some stakeholders may be interested in a cash budget. Companies may make a fake budget and cash flow to attract investors. Also, when targets are set too challenging, staff might be demotivated. Task 8 A capital reserve is a line item in the equity portion of a company's balance sheet that indicates cash on hand that can be used to cover future expenditures or offset capital losses(Alicia, 2021). For example, cash is received when selling fixed assets and profits on the redemption of debentures. Revenue reserves are portions of profits earned by a company's regular operations, which are then set aside according to Debitoor (2021). For instance, it is the net profit that a company makes out of its operations. In terms of the inherent meaning, the significant difference is that revenue reserve is created from the trading activities of a business. Take James May's vehicle hire business as an example; the profit through renting out the cars is taken out can be known as a revenue reserve. In contrast, capital reserves are not created through trading activities but capital profit. Regarding the distribution, revenue reserve can be distributed as dividends to the shareholder from trading, but capital reserve cannot. Moreover, revenue reserves are always received in monetary value like cash, but capital reserves may not. Revenue Reserve is mainly for short-term and mid-term purposes since they can get earnings from trade more quickly. In contrast, the selling of assets may take time, and therefore it is mainly for long-term purposes like a plan for expansion or saving for inflation and instability in the future. Issuing stock refers to a corporation's shares are giving to investors. The whole number of shares that make up a company's ownership is known as its total ownership (AccountingTools, 2022). First of all, issuing shares avoids the liabilities of debt. Since when you want to have more capital, borrowing money from the bank includes an interest rate, but the stock does not involve any interest, and you do not pay the money back. Moreover, when you have lots of debts and loans, it might look risky to your potential investors due to the high gearing. Second, the liquidity of shares is high, and it can be easy to be traded. For example, when some founders would like to sell their portion of the company for profit, they can sell the share that they owned. Therefore, the problem of ownership can be solved. Also, it can improve the company's cash flow as more investments have come from cash which the company can then expand their business and pay for the resources they need to build it more quickly. Third, employees might be motivated to work harder when a proportion of the shares are given to the laborers and workers. They may feel that they are part of the company and would like to increase the share price by working harder to earn extra money. However, issuing shares has its drawbacks, and diluting the ownership of a company may be one of them. Since issuing, stocks means that the company's owners are selling portions of ownership, this might lead to owners owning less in their company. Thus, owners might need to share profits and growth with their shareholders. Moreover, the owners may have less control over their company. Knowing that shareholders have the right to vote for the company's decision-making, it becomes more difficult for the company to make plans and investments since they need to consider the shareholders' concerns. It also becomes more difficult for companies to expand their business. This is mainly because, to attract investors, a company's financial performance needs to be good. However, when a company tries to expand its business by investing in new industries, the profit might be lower since the high expense, and investors may not want to invest. As a result, to maintain an excellent financial position, the company's development may be hindered. It is also compared with shares and debt. Issuing shares might take much more time and cost because issuing shares is complicated and involves time. In contrast, applying for debt and loans requires the bank's approval. It involves less time to receive the money from the bank. Reference 1. Mary (2016), “Materiality: Five Benefits of a Great Assessment”, available at: https://corporate-citizenship.com/2016/08/18/materiality-five-benefits-greatassessment/ (Accessed: 24-5-2022) 2. Sean (2021), “How Financial Accounting Differs From Managerial Accounting”, available at: https://www.investopedia.com/ask/answers/041015/how-does-financialaccounting-differ-managerial-accounting.asp, (Accessed: 27-5-2022) 3. Vishal (2021), “Balance Sheet vs. Income Statement: What’s the Difference?”, available at: https://www.businessnewsdaily.com/16513-balance-sheet-vs-incomestatement.html (Accessed: 27-5-2022) 4. Chris (2022), “Financial Statement”, available at: https://www.investopedia.com/terms/f/financial-statements.asp (Accessed: 27-5-2022) 5. Alicia (2021), “Capital Reserve’, available at: https://www.investopedia.com/terms/c/capitalreserve.asp#:~:text=A%20capital%20res erve%20is%20a,created%20out%20of%20its%20profit (Accessed: 27-5-2022) 6. Debitoor (2021), “Reserves – What are reserves?”, available at: https://debitoor.com/dictionary/reserves#:~:text=Revenue%20reserves%20are%20porti ons%20of,financial%20strengthening%20of%20the%20company (Accessed: 27-5-2022) 7. AccountingTools (2022), “Issued stock definition”, available at: https://www.accountingtools.com/articles/issued-stock (Accessed: 27-5-2022)
