Make the following calculations In January, Ml decided to stop using a signífica
ID: 2558271 • Letter: M
Question
Make the following calculations In January, Ml decided to stop using a signíficant piece of manufac turing equipment. The equip ent, purchased in 2015, is still quite useful because it can be retrofitted to produ items, but it no longer fits within MI's strategic plan. Details of the disposal are as follows: ment, pu Year Cost Accumulated depreciation Net book value 2015 $750,000 (25,000) 2016 $750,000 (50,000) $700,000 2017 $750,000 (75,000) $675,000 According to the board of directors' meeting minutes, while management of MI intends to sell the machinery because it is only three years old and still has considerable life, the company may con- tinue to use it to produce some units until a buyer is found. Management is responsible for these asset disposal decisions. Assets can be ready within 30 days equipment notice, and the marketing department has begun advertising on local websites in order to sell the Based on the area in which MI is located, there are many manufacturers and a sale should occur in the short term. When it was advertised for sale in January 2017, MI posted an asking price of $450,000 for the equipment. MI predicts that it will take approximately one month to disassemble the equipment. MI has had a number of interested buyers but one in particular has expressed some strong interest. A new company wanting to produce outdoor resin furniture is interested, but is unable to purchase the quipment immediately because it won't be opening up until February 2018. The potential buyeris however, willing to place a 25% deposit on the equipment immediately. As a means of cutting costs, Fred is considering revising the presentation of the financial state- ments to show just revenues and expenses instead of the current presentation of showing a full cost of goods sold statement. Fred is questioning the purpose of presenting such detail in the financial statements. "You and I know what is going on in these books, why do we need to show all this stuff? nually. He has also asked you to include in your report reasons why financial statements are prepared an-Explanation / Answer
Solution:
Mr. Fred,
Financial statements is not just showing the details of Revenue and expenses. rather it contans many other terms such as Assets, Liabilities, Shareholder's equity etc. every business needs money to grow itself from parties outside the business. it can be from individuals, financial institutions, Banks or the term which we use technically is retail investor, Qualified institutional buyer (QIB) etc. by issuing Equity shres, Prefrences shares, Debentures, Bonds etc.
why will anbody invest in our business.
as everyone wants to increase his money value. if our investors anylyse that money will grow by investing in any company by considering fector such as sale of company is increasing, profit of company is increasing etc. then they will surely lend money to company.
Now the main question starts as how our investors will anylyse that money will grow or in other words we can say why it is necessary to provide all the details in financial statements rather than just revenue and expences:
Financial statements, a prime documents which is considered by our investors to know that how much our company progressed throughout the period. revenue is a big term which include reveue from operations ( Main activity), Non- Operations, other income etc. in same way, expences incluse direct expences such as purchase of raw material, advertisement expences, income tax paid etc. we can not merge expences with statutory dues. while computing profits other fectors considers such as opening inventry, closing inventry, freight, wages etc.
No bank will lend money until we could not provide complete details to them or we can say just by giving revenue and expences.
one reason we can say, it is necessory to provide complete bifucated details in financial statements to avoid any confusions in the minds of our investors, lenders, customers etc. or we can say to attrect all these parties for investing more and more money in our business.
Secondely, Government has made many regulations in respect of prepartion of financial statements to prevent the interest of investors. so it is our responsibility to provide true and complete details and comply all those regulations.
Bifurcating all the expences in financial statements helps business to anylyze the figures such as revenue is increasing or we can say which revenue is increasing from operations, non-operations etc. which expenses are increasing, in computing ratios such as interest coverage ratioes etc. if we merge all the expenses, we will not able to anylyze. same will happen with our investors as they will not anylyse it. this may results in stop investing money by them or start withdrawing money by them.
Why financial statements are prepared annualy:
As discussed earlier Government has made many regulations in respect of prepartion of financial statements to prevent the interest of investors. by laws, companies comanies prepare Financial statements quarterly and annualy. many regulatory agencies, such as the U.S. Securities and Exchange Commission, SEBI and other financial market watchdogs, require financial statements from publicly listed companies in such frequency i.e. quarterly and annualy. Most investors pay attention to quarterly filings, but the annual publication of Financial statements draws more interest. Internally, a company may adopt a shorter or longer time period as the company suit to review its activities, and it's common for accountants to prepare interim reports covering periods as short as one month. But annual filings are more comprehensive and touch on various aspects of company activities, including non-financial data.
From investor point of view, it is quite complicated for him to review monthly data and regularly effect his anylytical decision. also decision made by management in big comanies needs some time to show his results. we can not question their judgements just within one or two month and consquentialy change them.
we can say, law has been drafted after considering all above facts and therefore, financial statements are prepared annualy.
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