Fair‐Value Accounting Understanding Accounting and Finance

Question: Discuss about the Fairà ¢Ã¢â€š ¬Ã‚ Value Accounting for Understanding Accounting and Finance? Answer: Evaluation of the sources of finance of Bes Taste Introduction The report consists of the sources of finance of Bes Taste, as it wants to expand its business. The business of the company is associated with catering mainly. The company has approved its plan from the local authority. The plan consists of expanding its existing building as well as other fixed assets. The management has the intention of 1000000 to invest for the capacity expansion. However, it will borrow from the market for expansion in operation, as it will need more working capital. Therefore, the main challenge of this report is to present the feasible option of resourcing the capital as well as the working capital. The report has also maintain the insights on the different sources of finance during the analysis of availability of the resources. Sources of finance There are many sources of finance present in the market. However, not all of them are suitable for the companies to use in capital expansion. Thereby, it is required to make the decision on basis of some technical feasibility as well as on basis of some tangibility resources. In this context, the discussion would go on with evaluating the sources of finance in the market for capital expenditure as well as necessary working capital. Barth (2015) found that sources of long-term finance are different while the sources of working capital are from another world. The criteria of sourcing of those capitals from outside of the company is different too. However, Boczko (2012) saw that internal sources of finance could be used in the business for any purpose unless some regulatory constraints make the usage of the funds strict towards some definite activities. In this course of action, the sources of finance may be divided into two parts external and internal sources. However, the sources can be categorised into two parts further long-term and short-term sources. The different categories of finance may provide different solution and the test of feasibility for them are different too. Internal sources of finance According to Bodnar and Hopwood (2012), internal sources of finance are present in the balance sheet of the company. It is useful in expanding as well as to run the operating cost. The main resource is the retained earnings from the net profit of the business. Any business may use its past-retained earnings in its operation for meeting the expenses regarding working capital. However, Bragg (2013) found retained earnings as a part of reserve balance in the equity. Therefore, strictly speaking, the capital in the balance sheet can be the source of finance for incurring the expenses regarding capital expansion. However, the major problem with this fund is to transfer it at different level of activities. The reserve funds can be utilised in working capital too. However, there is another source current assets, which is used to meet the requirement of working capital. In this context, the major propulsion can be achieved in using the current assets speed. The short period of asset alloca tion can be used in running the operation on daily basis (Bodnar and Hopwood 2012). External sources of short-term finance The external sources of finance can be used in operating cost for the short-term requirements. The sources like short-term debt from the banks and the lenders in the market are the main resources of short-term finance for meeting the working capital requirements of the business. In addition to this, Boczko (2012) saw that the external sources could help the company to meet the emergency requirements of the operating cost as well. The treasury bonds and commercial paper in the financial market are two rich names of resourcing the short-term finances in the business. External sources of long-term finance The external sources of finance for long-term financing in the business is required for expanding the business mainly (Allatt 2001). There are many resources to acquire the long-term finance; however, not all of them are suitable for every company. Therefore, a management must conduct a feasibility test before making any decision to borrow or sourcing the funds from external sources. The feasibility must have covered the risk, cost of borrowing and the ease of availing the funds. The sources like long-term loans from lenders or by issuing the bonds in the market, venture capital or lease hiring of the machineries. The risk of long-term loans from the lenders is high as the future is uncertain and cannot be predicted always. In the meantime, the different types of funds is venture capital for expanding the business. In this regard, Baldwin and Bordoli (2011) saw that venture capitalist provides the seed capital for expanding a running business instead of some pledged shares or authori ty of proceeding with the management decision of the business. The funds are available for the entrepreneurs mainly and the borrowing cost is low. However, the risk is higher in this case than that of the taking loans from the market as the management may loss its power of making decision in the business (Bandy 2011). The lease-hiring cost in the business is low. However, it is possible for acquiring any new machineries mainly. The management may hire new machineries at low expense and run its operation by reducing its capital expenditure in a revenue year. It also helped to meet the desired cost of capital of the business (Barth 2015). Recommendation In the context of Bes Taste, the working capital can be met from the internal funds as the business has run well for the last six years. However, the cost of borrowing a long-term loan might reduce the profitability of the business. Therefore, it would be better to mobilise the working capital of the business by mixing with short-term loan and retained funds in the balance sheet. Further, the company needs to expand its catering business. The target of expanding the building as well as some other non-current assets needed funds too. The expansion of the building would be possible by borrowing long-term loans from the lenders or issuing the bonds in the market. The requirement of other non-current assets could be met by leasing them from the market. It would reduce the cost of borrowing for the long-term debt in the business of Bes taste. The risk of sourcing different funds in this expansion would be low as the risk associated with hiring machines is low. Further, the company might h ave some reserve in its hand to invest 1000000 for its business expansion program. Conclusion From the above report, it can be concluded that Bes Taste must source its long-term finance from the external market, as they may not be able to source it from its reserve. However, the requirements for the working capital can be achieved from the retained earnings as well as from the short-term debt. Collection of information from the final accounts of a business assistance in decision-making for the management According to Bragg (2013), final accounts provide us the information of profitability of the business as well as the financial position of the company for a certain period. The final accounts consist of trading, profit loss account and balance sheet of the business for a certain period or a financial year. In this context, the managers may get useful information such as profit and retained earnings from the business. It might provide the management an idea of reserve available from the revenue operation of the business. The trading account provides the information of revenue from buying and selling goods as well as the growth in the business (Harrison 2008). The balance sheet has the most importance in this regard, as the management may make important decision on analysing the financial position of the business. From the balance sheet, management may get the information of current assets and liabilities for operational purpose. It is important to know these two particulars as it pro vides the information on working capital management of the business (Dept 2014). The assets and the liabilities can send the information on long-term situation of the business and the capability of the company in that period. In addition to this, the position of the equity provides the information on capacity of the management. The equity and reserve provides the material to the management to assess their capacity to expand or to invest in the business (Collier 2012). In this context, Bes Taste can manage the expansion program by analysing its final accounts minutely. The position of the accounts in terms of assets and liabilities can be measured and the effective capacity to bear more debt in the company is understandable by evaluating the balance sheet. Further, the growth in the income of the business of Bes Taste can be seen from the income statements. The management may consider discussing on this matter for making better decision in expanding the business and sourcing the fund in this regard. Stakeholders requirement of accounting information Investors The investors normally try to gather all types of accounting information. However, they are limited to balance sheet and the profitability of the business. The position of the business by evaluating the assets and the liabilities of the business is the main objective for the investors to understand the future of the business. Further, they also like to know the capacity of repaying the investment by the company in terms of current financial situation (Finance basics 2011). Lenders Lenders of the market like to gather information on the credit position of the company in current situation. The debt position as well as the cost of interest of the company is valuable to them further, the creditors also analyse the materials on credibility of providing the loan to the firms on basis of the future development of business so that they can repay the loaned amount (Gilbertson and Lehman 2013). Employees and their representatives The employees of the firms usually want the information on the situation of the balance sheet and the long-term liabilities of the business. They also like to gather information on the revenue and trend of revenue from the past performance. Additionally, they need to know the accrued liabilities of the company due to their pension and retirement payment like superannuation. Customers The customers of the company normally do not need the accounting information. However, they may gather information like revenue generated from any segment or the accounting position of the business in B2B segment (Grieve 2013). In addition to this, the credit position is also important for the customers before doing business with the firms. The general public The public do not require the accounting information of a firm, as they have no interest in the business of the firm. Additional sources of finance Bank Overdraft The overdraft from the bank is a type of borrowing for the individual and the firms. As opined by Collier (2012), bank overdraft is considered as the loan for the business in zero balance. The firms get this loan on basis of some special requirements made between the two parties. The overdraft allows the company to run its operational expenses when they have insufficient funds in their balances (Hughes 2011). There are many reasons of occurring overdraft in the business. The main reason is to fulfil the requirement of cash deficit in the balance of the business. Thereby, the main challenge of an over drawn account is to maintain the overdraft amount under control as the interest rate of overdrawing amount is much higher than normal short-term loan. The overdrawing facility is available only for the current account. This facility is also available for the credit card holders with their savings accounts. The main advantage of this account is to maintain a positive cash balance in the business and the urgent payments can be made by overdrawing some amounts for emergency purpose (IMF. External Relations Dept. 2012). The overdraft is quickly available for the business accountholders as well as it is flexible to use. The main disadvantage is higher cost of interest. Usually, the interest rate is higher than the normal loan (Kay and Ovlia 2012). Trade credit The term is associated with the finance. It is a type of external sources of finance for short-term financing the business. The firms get this loan from its suppliers on payment of the goods and services taken from the suppliers. The credit sales is provided by the sellers to encourage the buyers to buy the products or services at no cost and may on later date (Young 2011). The credit instrument is not a formalised one and the percentage of credit is usually depended on the managements relationship with the suppliers. The main advantage of this type of credit is its flexibility and reduces the requirement of the capital in business. It also reduces the cost of interest. The cost becomes expensive for the company due to failing to pay the creditors on time the demerits of the trade credit. Terms Loan It is a formal instrument to get the short-term loan from the banks and the lending institutions for the firms. In this regard, the companies take this type of loan to pay the uncertain expenses for the ongoing projects mainly (Kieso, Weygandt and Warfield 2011). The term loan has the option to pay periodically for the borrowers. The main advantage of this loan is its low cost of financing as well as the flexibility of payment option for the borrowers. The repayment can be done in a negotiable period while the cost of interest is low (Messner 2015). The disadvantage of this loan is the risk associated with the loan as it acts like debt financing instrument in the business. Further, the lenders need the collateral security, which can be sold at any time due to failing repaying the loan by the borrowers. Ordinary shares The ordinary shares of the business are the number of shares present in the equity of the business. The shares issued and unissued in the business may be considered as the ordinary shares. The share of the business is basically the holding of authority in the firms by the investors who have bought the shares of any certain firm. The main advantage of this share is to get dividend from this shares as well as it provides the authority to hold the percentage of the rights of the company. However, the demerit of ordinary shares is uncertainty in payment of dividend and the risk associated with the price of the shares in future (Romney and Steinbart 2012). Retained profits Retained profit is a particular in balance sheet of the firms. The profit retained from the revenue accounts in the reserve of the business is known as the retained profit. The management decides on the percentage of payment as dividend from the profit of the business and rest of the portion is retained as the reserve. It is used in business or operation in future and an internal source of fund for expansion of the firms (Sanchez-Matamoros, Gutierrez-Hidalgo and Macias 2015). The major disadvantage of this fund is the classification of the retained earnings in different types of reserves like CSR reserve, general reserve, capital reserve etc. it is difficult to maintain the different types of reserve in the business and manage the mobility of the funds. Types of balance Items Debit Credit Revenue accounting Expense accounts Inventory Accounts payable R. Smith, Drawing Sales returns and allowances Purchases Purchase discounts Allowance for doubtful accounts Bank overdraft Purpose of trial balance As opined by Scarborough and Cornwall (2011), trial balance provides us the accumulated closing balances of the ledger accounts of the business of a certain period. The main purpose of preparing a trial balance is to balance all the different particulars in the accounting statements. It records the debit entry in the account and provide credit entry for every debit entry. It makes the entry of accounts balanced after a certain period. It also helps the accountants to find the error in accounting if the balance does not exist after preparing it (Tutt 2012). The trial balance ensures that all the data are considered from the ledgers assisting to identify the discrepancy in the accounting information (Atrill, Harvey and McLaney 2001). Journal of share issuing Debit Bank 180000 (150000*1+.2*150000) Credit Share capital 150000 (150000 Credit Share premium 30000 (.2*150000) [20% premium] Trial balance DR CR Capital 45000 Debtors 32900 Creditors 5000 Returns Add: credit note 2500 3450 5950 2710 Purchase Add: Error Add: Drawings of goods 25000 4500 29500 4590 Sales Add: Cash sales Less: Error 30485 24205 (3900) 50790 Discounts allowed Add: Discounts Allowed 6800 4275 Discounts received Less: Discounts received 5630 4275 9905 Drawings 8220 Wages and salaries 7000 Equipment 8000 Cash 24205 Receivable 6800 Credited to J Sullivan 1650 Suspense account 405 Total 126850 124795 References Allatt, G., 2001. 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