Accounting Standards, Research Paper Example

Question One: Describe how accounting policies are defined in the literature

According to the Accounting Standards Codification, there are specifically selected procedure, rules and principles which a business enterprise chooses in the preparation and presentation of its financial statements and disclosures at the end of its specified accounting period ( Accounting Standards Codification Professional Review , n.d.).

Upon deciding which accounting policies to apply in a given enterprise, the following factors must be kept in consideration:

1. Reliability: The information provided in the statement should such that it can be used by third parties and other stake holders in decision making.
2. True and fair view
3. Substance over form: the information presented should be based on the economic importance of an item and not its legal substance.
4. Relevance: the information provided should be able to solve problems pertaining to the current economic trends.
5. Prudence: The valuation of the assets and incomes of an entity should not be overstated or understated.

The accounting policies specifically deal with:

• Depreciation method to apply i.e. neither of the following: reducing balance method, straight-line method etc
• Stock pricing
• How consolidation of accounts will be dealt with
• The going concern (good will) of an entity.

The accounting policies used by an entity must be disclosed in the annual statements of the entity.

NB: Any accounting policies applied by an entity MUST comply with the accounting standards of their respective countries or regions.

Question Two: Discuss how the authoritative literature addresses comprehensive income

Comprehensive income is the sum of gains or losses from items that don’t appear on the income statement (since they are not realized) and net income.

Authoritative literature defines comprehensive income not in technical terms but in absolute terms and in plain English.

Question Three: Define three classifications within net income and give an example of each

Net income is a broad term that is defined as the balance of an entity’s total income/revenue less the entity’s total expenses (Downes & Goodman, 2006; Accounting Standards Codification Professional Review, n.d.). It can be classified into the following:

• Personal/individual net income: this is the residual income that an individual receives after the tax due from him is levied from the gross income.

Jerry’s Income Statement

Corporate net income: This is the residual income of an organization after the company’s expenses, losses charged on the income statement and the due taxes are deducted from gross profit.

XYZ income statement

Partnership net income: This is the income derived from a partnership business before the sub division of the reported profits to the individual partners.

Example: Peter, Ben and Susan are carrying on a partnership business sharing profits in the ratio of 3:1:2 .If the profit amounted to $100 000,then,this would be sub divided in accordance with the above ratios,Hence,each will receive his /her individual partnership income.

Question Four: Define three classifications within other comprehensive income and give an example of each

Other comprehensive income: This is the sum of gains or losses from items that don’t appear on the income statement (since they are not realized) and net income.

These items can be classified as follows:

Gains or Losses from conversion of functional currency to Presentation currency:

When say a foreign branch of a company is preparing financial statements to be presented to the mother company in a different state/country, it has to translate the functional currency to Presentation currency (currency of the mother company) (Wildman, 2009).This translation could lead to either Gain or loss.

Consider the following:

The mother company is in US and the branch in Kenya.

Exchange rates at closing and reporting dates:

At Closing date: 70 Kenyan shilling to 1 US $(dollar)

At reporting date: 72 Kenyan shilling to 1 US $(dollar)

Supposing that the closing balance of assets in the foreign branch (which is in Kenya) is Ksh.1,000,000 (one million) i.e. $14285.71.This is the amount that will be quoted at the books of the branch in Kenya. During the presentation, there’s a gain of Ksh2 per $1. It therefore means that there’s an overall loss of $396.82.i.e ($14285.71-$13888.89=$396.82)

Gains or losses from Revaluation of Property, plant and Equipment (Intangible assets)

A company may at times revalue its intangible assets so as to determine the current market value of the assets (Wildman, 2009). This may lead to either a Gain or Loss.

An Organization acquired a parcel of land at $1000 five years back. On revaluation it was found that the same parcel of land is priced at $2500. This results to an overall gain of $1500. This gain is not reflected on the income statement but on revaluation account (Accounting Standards Codification Professional Review).

Gains or Losses from Non-strategic assets (Available for sale)

Non strategic assets/available for sale assets are investments that have a highly liquid and available market but aren’t treasury bills or bonds and aren’t held for trade or speculative reasons. As such, gains or losses from these investments are included in other comprehensive incomes and not net income.

They include equity securities and other debt instruments.

For instance, a stock was bought at $100 two (2) years back and currently trades at $ 115,then,theres a gain of $15.This gain will not be included in the income statement of the entity.

References

Accounting Standards Codification Professional Review. (n.d.). Retrieved November 13, 2010 from http://asc.fasb.org/home&u=MTEtMTMtMjAxMDsxMToyNjtBQUE1MTg4MDtTdHJheWVyIFVuaXZlcnNpdHk7ODBDNTRGRDk2QjFEMUY0MjkxM0M4MUJDM0FDNUQwREE=

Downes, J., & Goodman, J.E. (2006). Barron’s Finance & Investment Handbook. 7^th ed. Berlin: Barron’s Educational Series.

Wildman, J.R. (2009). Principles of Accounting. New York: BiblioBazaar.