Question

QUESTION 1

1. In class you learned that In order to measure profitability and financial position properly, accruals and deferrals need to be accounted for.

(a) Explain the difference between between profitability and financial position.

(b) Explain how accountants know if they're measuring profitability and financial position "properly".

(c) Differentiate between accruals and deferrals and provide specific examples of each. .

Answer 1

a. Financial performance is a broad concept. It takes into consideration Revenues, Expenses, growth, and even profitability whereas Profitability being a narrow concept considers only profit element . A company would have performed well financially but would have lower profit due to extraordinary items.

b. Accounting is the most important part to run a business as it gives a clear presentation of what is happening in the business. It is used to measure the economic posting and economic performance of the company. Its working measurement principle is fair value approach.

The analysis also provides a written record of your company's progress over time.

1. Conduct Variance Analysis.
2. Explain the Most Significant Variances.
3. Review Key Metrics.
4. Review Progress Toward Operational Goals.
5. Decide if Changes are Warranted.

There are generally six steps to developing an effective analysis of financial statements.

1. Identify the industry economic characteristics.
2. Identify company strategies.
3. Assess the quality of the firm's financial statements.
4. Analyze current profitability and risk.
5. Prepare forecasted financial statements.
6. Value the firm.

c. Accrual and Deferral are a part of those types of accounting adjustment entries where there is a time lag in the reporting and realization of income and expense. Accrual occurs before a payment or a receipt and deferral occur after a payment or a receipt. These are generally related to revenue and expenditure largely.

Accrual		Deferral
Accrual occurs before a payment or receipts		Deferral occurs after a payment or receipt
Accrued expenses are already incurred but not yet paid		Deferral expenses are already paid but not yet incurred
Accrual in related to prepone or an expense or revenue which leads to cash receipt or expenditure		Deferral leads to postponing of an expense or revenue which leads to placing of that amount in liability or an asset account
Accrual is incurring the expenses and earning the revenue without paying or receiving cash		Deferral is paying or receiving cash in advance without incurring the expenses or earning the revenue
The accrual method leads to an increase in revenue and decrease in cost		The Deferral method leads to a decrease in revenue and increase in cost
The end objective of the accrual system is to recognize the revenue in the income statement before the money is actually received		The end objective is to decrease the debit account and to credit the revenue account