Review of Accounting Process and Financial Statements, Research Paper Example

Generally Accepted Accounting Practices (GAAP)

This is a set of accounting rules that are regarded as permissible to professional accounting bodies. The term generally accepted also implies that the rules encompassed in the code have highly practical application in the accounting profession. The GAAP combines rules that govern the accounting profession including both statutory rules that stipulate the specific legal framework of the country including national law, national accounting practices as well as local stage exchange requirements. It also encompasses non statutory requirements such as international accounting standards and relevant statutory requirements in other countries. The US GAAP specifically is defined as having substantial authoritative support and that the true and fair view of financial statements should be the fair view in (GAAP BPP 2009).

International Accounting Standards (IAS)

The International Accounting Standards Board (IASB) provides a framework for the accounting practice. The standards in the form of International Accounting Standards (IAS) sets out the procedures to be applied in arriving at the fair value of various aspects of the financial statements of a business entity.  The international accounting standards ensure that the treatment that is used on all the various aspects of the financial statements is standard in all the parts of the world. This ensures ease of interpretation and comparison of financial results

Liquidity

This is an aspect of the financials that is used to measure the amount of money that a company has to settle its debts and possibly meet other unforeseen and immediate needs for cash (BPP 2009). Liquid assets therefore refer to cash and cash equivalents that could be easily converted into cash for the use in offsetting liabilities. The liquidity ratio is important in financial statements as it helps to determine how well as company is doing and how easily it can finance its short time debts.

Comparisons between the cash flow statements of the two companies. Both companies use the International Accounting Standards IAS and specifically IAS 7- Statement of cash flows. However, there is a fundamental difference as outlined below

Kraft Foods

The company uses the indirect method of preparing the statement of cash flows. This method takes the income from operating activities and adding by exception any necessary additions and deductions from the investing and financing activities. This makes the statement of cash flows easy to prepare but hard to interpret since the underlying figures that result in these additions and deductions.

Unilever Limited

The company uses the direct method of preparation of cash flow statements. This method takes the cash from operating activities and adds the qualifying additions as well as the deductions from the other categories of income namely cash from investing activities as well as cash from financing activities. This gives the user of the financial statements a good idea of the figures that make up the amounts

The net income in my opinion is more vital than the cash from operating activities. This is because it’s a clearer indicator of how the company is performing after taking into consideration the other costs that have gone into generating that income. This is especially the case since most companies can massage their profits to show high profits while they have borrowed heavily to raise capital for this operation. This might lead to a wrong impression on the financial health of the company.

Conclusion Form the Financial Statements

Kraft Foods

Return on Capital Employed

=Profits/Net Assets =2884/9917 =29%

The return on capital employed in Kraft foods though not very low, is not very impressive. This means that mush as the company is quite profitable a sudden fall in prices or demand due to decrease global market prices for their products would lead to reduced profitability of the company.

Unilever

Returns on capital employed =3871/5957 =64.9%

Unilever has a quite impressive return on capital employed. This implies that they can withstand a fall in their demand as well as and global changes leading to a decrease in their prices. Similarly the company can sustain heavy investment in plant and machinery without suffering liquidity problems. The company therefore can sustain its operations for the foreseeable future.

References

BPP Learning media (2009). Financial Reporting. BPP publishers. London

Kraft foods website. Retrieved 12 Nov 2009. Available <http://www.kraftfoodscompany.com/assets/pdf/2008_Kraft_Fact_Sheet.pdf.>

Unilever limited. Financial statements. Retrieved 12 November 2009. Available <http://www.unilever.com/images/ir-ar08-financial-statements_tcm13-163118.pdf>