Ownership Concentration and Accuracy of Financial Reporting

Question: Discuss about the Ownership Concentration And Accuracy Of Financial Reporting ? Answer: Introduction Plato Limited is known for the quality of computers that they have been manufacturing. Recently, it is seen that sale of computers have reduced. The cash flow of Plato limited shoes that they have to improve in various areas so that they can regain the competitive position in the market and also grow further. The organization should, first and foremost, understand the importance of financial reporting so that they can improvise on the current reporting strategy that is used by the organization. The company will have to introduce monthly cash budget so that they can undertake immediate corrective actions rather than that of waiting for the ultimate time period when the situation gets out of control. Cash Flow statement The cash flow statement of Plato limited should be analysed by the management. The analysis will help the management to understand wherein they are currently making their investment and the areas wherein they need make further investment. The cash flow statement of Plato limited is as follows:- Cash flows from operating activities Amount in Net Income 430000 Depreciation and amortization 550000 Gain on sale of facility -150000 Increase in trade receivables -150 Decrease in inventories 80 Decrease in trade payables 30 Cash generated from operations 829960 Cash flows from investing activities Purchase of property, plant, and equipment 0 Proceeds from sale of equipment 0 Net cash used in investing activities 0 Cash flows from financing activities Proceeds from issue of common stock 0 Proceeds from issuance of long-term debt 0 Dividends paid 560000 Net cash used in financing activities 560000 Net increase in cash and cash equivalents 269960 Cash and cash equivalents at beginning of period 2015 4690 Cash and cash equivalents at end of period 2015 4350 Current strategy used by Plato Limited Looking at the cash flow statement, it is seen that there are certain areas wherein the organization needs to make some investments and some areas, they should make disinvestment. This will help the organization to grow further and also reduce the losses that they are currently making. Few of the investment decisions that would help the organization to grow further are discussed below. The deduction depreciation method which is used by the organization should be changed, so that the management have some little extra cash to spend. Currently, the organization charges the full years depreciation in the year of acquisition and this expensive. There are other depreciation methods which the organization can use so that the organization is not burdened with the depreciation cost. The organization can understand the life of the equipment, asset or facility and accordingly, the depreciation should be spread over a period of time. This will ensure that at any point of time, the organization is not burdened with excess cost of depreciation. The sale of equipments and other assets should be planned in advance so that the management doesnt have to sell the equipments at a very cheap price. If the life span of equipment is 7 years time then the organization should sell the equipment on completion of 5 years. This will ensure that the organization receives a better price for the equipment. In 5 years time, the organization can upgrade to existing technology with the sale of outdated equipments. The organization should reduce the inventory that they have with themselves as this is one of the best ways by which they can reduce the cost. The organization can have a tie-up with the supplier to supply the inventories, as and when required, rather than that of filling the inventory once in a month or quarterly. If the organization is having excess inventory with itself then there are very high possibilities that the inventory may not move. If the inventory doesnt move then the organizations money will be held up in inventory. Trade receivable should be reduced to the great extend so that bad debts and possibilities of bad debt can be reduced. The organization can set a time period of 45 days for the trade receivables so that the customers can pay the money in maximum of 45 days time. The trade receivables have been reduced from 570 in 2014 to 420 in 2015. This is a positive sign. The management and the sales executive in the team should ensure that the students should be motivated to opt for EMI. The organization can give an option of 3 months or 6 months EMI options rather than that one year or 18 months EMI options. The current investment and the cash and bank have reduced drastically in the year 2015, as compared to what it was in the 2014. This is not a positive sign for any business. The current investment for Plato Ltd in 2014 was 350 and in the year 2015, it was reduced to 20. Similarly, in the year 2014, the cash and bank was 620, which was reduced to just 10, in the year 2015. This is a negative sign for the growth and betterment of the business. The organization should reserve some cash and at the same time, they should also make some more current investments. This will help the business to survive in difficult times. The current liabilities of the organization should be reduced at the earliest so that the organization is not financially burdened. The trade payables has reduced from 320 to 290 in 2015 and this is a positive sign but the organization will have to put in more efforts to reduce it further. The bank loan taken should be paid off at the earliest. This will help the organization to make further investments. The bank loan in the year 2014 was 200 and it didnt reduce at all in the year 2015 so this is not a positive sign for any business. The tax liability of the organization has reduced in the year 2015 but the organization will not be in a position to do anything about this. The dividend paid by the organization to the investors is quite high and the organization need not pay such huge dividends when they are already in trouble. The organization will have to look for ways by which the dividends paid can be reduced. The retained earnings of Plato Limited are a positive sign that the organization has saved something for the betterment of the future of the organization. The organization should increase the retained earnings or they should look for ways by which the retained earnings can be used for the betterment of organization so that the organization can gain back its old position in the market. Lastly, if the organization thinks that they would require some money for the purpose of restructuring the business then they can think about issuing share capital so that the business can grow further with equipments (Garrett 2014). Accounting Business To The management of Plato Limited From The consultant Date March 31, 2016 Reference Importance of accounting This memo will take about the importance of accounting in business. Different types of financial reporting tools are available and each one has its own importance. Certain tools are mandatory while others can be used by business if the management wants to use it for convenient accounting. It is very important for a business to understand the importance of accounting so that they can put in equal efforts in accounting. Accounting is a way by which the financial data of the organization is collected and presented in a perfect format so that it can be easily understood by the stakeholders of business. The accounting reports are used by the tax authorities, creditors, and investors to analyze the current position of the organization. Asset management, fund raising and future investments are few of the common and important decisions that are undertaken by way of using the accounting reports. Balance sheet, cash flow statement, statement of retained earnings and income statement are few of the commonly used accounting reports in large organizations. Each report helps in monitoring the business. It is the responsibility of the management to analyze the accounting reports at regular intervals so that the business decisions can be controlled at the right time. A detailed analysis of the role of each of the accounting report is discussed below. Balance sheet will help the business owners to understand the assets, liabilities and also the owners equity of the organization. This accounting report will give a synopsis of the organizations current financial situation. This can be accessed by the management to understand the areas wherein they need to improve and the areas wherein they need to improve. If Plato Limited applies for loan from any financial institution then the financial institution will analyse the previous years balance sheet so that they can understand the financial situation of the business. The decision to lend or not is based on the soundness of the balance sheet (Tanyi 2015). Just like balance sheet, cash flow statement is also important for the business. With the help of cash flow statement, the decision makers can understand the current cash inflow and cash outflow of the business. It is the responsibility of every business unit to ensure that the cash inflow is more than that of the outflow. Plato Limited will have to look for ways by which the inflow can be increased and at the same time, the outflow should be reduced. The cash flow statement will help the decision makers to understand the solvency of the organization at any point of time. Plato limited will have increase the liquidity of the business so that they can make quick business decisions. Increase in liquidity would mean that the business is capable enough to pull in sufficient funds for the growth or expansion of the expansion. With regards to the assets, liabilities and owners equity, additional information will be provided by the cash flow statement. The organization can plan their future cash flows with the help of this accounting report. The organization can understand the funds that will flow into the business in the near future and also the funds that would move out of the business. Taking the cash inflows and outflows, the business decision should be taken (Barth 2015). Retaining earning accounting cant be ignored by business. Retained earnings are used by the organization to repay the debts that they have taken, to restructure the organization or some other investment which can save the organization from the financial crunch. The statement of retained earnings will help the decision makers of business to understand the change in the retained earnings over a period of time. Throughout the year, the organization will track the additions and subtractions from the retained earnings. This is used by the management to make any decision regarding the investment plans that they have. Similarly, this is also referred by the creditors when an organization requests for financial support. Plato Limited should ensure that the retained earnings are well maintained. This is a positive sign for the business. If there is a reduction in the retained earnings of the business then the investors and shareholders will be sceptical about making an investment in the organization. The creditors will also not be willing to lend money as they may assume that the financial position of the organization is very weak (Filip 2015). Income statement will help the organization to understand the income, gains, expenses or losses that they made during the reporting year. This is also called as the profit and loss statement of the organization. This statement is used by the lending institutions, banks, lenders and shareholders while they are planning to make an investment in the organization. The shareholders and the creditors will compare the year-on-year income statement of the organization to understand if the financial situation of the organization is improving. Income statement of the organization can be used for predicting the future performance of the organization. The last five years income statement can be analyzed to understand the revenue that would be generated by the organization in the upcoming years. The income and losses of the organization can be predicted with the help of income statement and hence, this helps the organization to understand the cash flow that will take place in the upcoming years (Jhunjhunwala 2014). Plato limited should analyse the last five years income statement so that they can understand the change in figures of various components. Accordingly, the management can make decisions so that the organization can look for ways by which they can reduce the amount that they spending on activities that arent yielding much results. The future investments that the organization will make should be dependent on the yields that they received in the past. Similarly, the organization will have to cut down on the losses that they expenses that are ultimately leading to losses (Whittington 2015). The financial reports of an organization are not only used by the internal decision makers but it is used by various external bodies for various purposes. Few of the bodies that commonly go through the financial statements of any organization are as follows: - The investors will try to understand the businesss behaviour before they make an investment in any business. They will thoroughly go through the financial reports of an organization and finally, they will make a sound decision on investment. The financial reports also help the investors to understand the fair activities and also the wrong activities that are undertaken by them (Hunton 2015). Common people also go through the financial statements to understand the various well being activities that are undertaken by the organization. This allows them to form a perception of the organization. This helps the organization to develop goodwill and reputation. If an organization is not accepted by the common people then their survival in the market would be difficult. The tax paid by the organization is verified based by the government officials by way of analysing the financial statements. The government agencies also track the various activities that are undertaken by the organization. They also try to understand of the organization is involved in legal practices alone so that the interests of the investors, shareholders and other stakeholders can be safeguarded by the business (Akbar 2015). It is very important for Plato limited to consider these accounting methods so that the organization can track its expenses and income effectively. In case of ignorance, the business may start to suffer huge losses. Recommendation for monthly cash budget Looking at the situation of Plato Limited, it can be said that the organization is really confused about the investment that they will have to make and the investments that they need to ignore. Monthly cash budget is one of the easiest ways by which the decision makers of the organization can be rest assured about the spending and savings that they need to undertake. Plato limited can start with monthly cash budget so that they can track the cash flow of the organization. The purpose of monthly cash budget is as follows: - This budget will help the organization to understand the short-term requirements of the business. The management will be aware of the investment that they would be making in various activities in the upcoming month. The decision makers will aware of issues that requires immediate attention so accordingly, funds can be allocated to those tasks. Similarly, if the management feels that they have some excess cash with them for the upcoming month then the organization can look for some short-term investment plans that can yield good returns (Imhof 2015). There are various advantages of preparing short-term budgets over a period of time rather than that of having one budget for the complete year. Few of the advantages of having monthly cash budgets are discussed below. The management will be aware of the incomes that they will be receiving in the upcoming month. This will help the management of Plato Limited especially during the financial year end. Many organizations end up paying more tax, so that they can safeguard themselves from the complications that may arise due to paying less tax. This can be avoided with the help of monthly cash budgets. The organization will be aware of the income that will come-in, in the upcoming month so taxes can be paid accordingly (Bertomeu 2015). If Plato limited is planning to take some loan from a financial institution then the executive will also for pro forma of the balance sheet. If the monthly cash budget is not in place then the organization will take ages to prepare a final pro forma of balance sheet but with the help of monthly cash budget, the pro forma of balance sheet can be prepared in no time. The organization can easily avail loan from the lending institutions (Litt 2014). The management of Plato limited will be aware of the areas wherein the organization is spending more than required. If the management notices that the office supplies are being ordered in excess then the management can check for suppliers who can offer better price for the office supplies. On the other end, the management can also try to understand if the office supplies are being used appropriately or if they are being wasted (Boochun 2014). It is important for Plato Limited to prepare estimated cash budget and actual cash budget. This will help the organization to understand the various wherein they are spending much more than required. The company will be able to understand the areas wherein they need to concentrate and invest more and also the areas wherein you need to disinvest. In many situations, the management may feel that they are falling short of cash but with the help of cash budget, the management will get to know about the cash requirements of business, in advance so the management will get sufficient time to make arrangements for cash (Kermis 2014). Plato Limited will be informed about the corrective actions that they need to take. If the organization is immediately informed about the wrong steps that they have taken then the corrective actions can be implemented easily. Implementation of corrective measures would be difficult if the management is not able to understand the corrective actions for a long period of time (Piotroski 2014). Conclusion The management of Plato Limited should analyze the financial reports of the organization at regular time period. This will give the management an idea on the areas wherein they need to concentrate. The organization should compare the financial reports of the previous years to the current year so that they can understand the areas which have changed and the areas which require immediate attention. Monthly cash budget can be a saviour for Plato Limited. This cash budget will help the organization to understand the short-term fund requirements, expenses and income. This will also help the organization to take corrective measures immediately. 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