Why Financial Accounting is Important ?
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Introduction to Financial Accounting
Financial accounting is concerned with maintaining records of all the financial transactions of business. It is the process of recording, classifying, summarizing and interpreting the business transactions. Main purpose of financial accounting is to determine business performance and the financial position through preparing income statements and balance sheet. Therefore, it provides all the useful information to various stakeholders. Halfords Group plc is a leading retailer company which is headquartered in Redditch, England, United Kingdom. The company has two operating divisions that are Retail and Autocentres. The retail division manages its business in the United Kingdom and Ireland as well as produces motoring and cycling products. However, Autocentres division provides car services and repairing to both retail and other customers in UK. The present report will discuss the organization record keeping system to produce the financial statements. Further, the report describes usefulness or importance of company's financial statements for its external stakeholders.
Financial statements include both income statements and balance sheet. Business performance can be determined through income statement whereas balance sheet is prepared to determine the business financial status. Both the statements provide useful information to the external stakeholders of company. External stakeholders include individuals, groups and business entities that are external to the business. There are various kinds of external stakeholders for the Halford Group plc that are suppliers, customers, competitors, government and community.
Revenues: The revenue is the business income that Halford Group plc can generate through its operating activities. The company receive incomes through providing services and sale its products to the customers. The accounting principle for recording the revenues is revenue recognition principle according to the principle revenues is recorded at the time when company sold the product and rendered services. It should be recorded on accrual concept not on the cash basis. Cash will be debit and another account is credit for the revenues. Both the Halford's company department retail and Autocentres get revenues through selling the motoring products and rendering services to the customers.
Expenses: Expenses are the business function through which company require making payments to the other party. The cash account is credit and another account is debited for recording the expenses. Advertisement expenses, purchase, discount and rebates, rent expenses and wages expenses are the type of business expenses. The expenses are recorded on the basis of accrual concept without considering that cash is really paid or not. Further, matching accounting principle says that expenses are matched with the revenues.
Profits: The gross profit is the excess of total sales over the cost of goods sold. However, net profit is the excess of gross profit over the total of indirect business expenses. Halford Company’s income statement shows gross profit and net profit at the end of the period. It is the results of business operating functions.
Assets: Each and every company have certain type of assets that indicate company's ownership on them. Assets are used by the companies that help to get future economic benefit. Halford Group plc assets include both current assets and fixed assets. Current assets are assets that will be converting in cash within the time period of 12 months and liquid in nature. However, fixed assets are used in the business for longer time period. For instance, cash, building, land, machinery, accounts receivables, equipment and accounts payables are the type of Halford company's assets. The cost principle stated that assets must be shown at their original cost less depreciation.
Liabilities: These are the company's financial obligations that Halford's company require to pay out. It includes both current liability and long term liabilities. Current liabilities are company's debts that are paid in 12 month period such as accounts payables and bank overdraft. However, long term liabilities are the long term loans taken or borrowed by the company. The liabilities are credited and showed at original value.
Equity: It is the portion of total assets that owned by shareholders or the company owners. It indicates the owner's financial share towards the business assets of Halford Group plc. Equity shareholders are the owners of the company, also termed as net worth. Share capital and reserve and surplus are the part of business equity. Reserve and surplus include retained earnings, general reserve, capital reserve and other reserve balances.
Income statement: It combines all the business expenses and business revenues so as to ascertain the business profit or loss. Business will have profit when business revenue is higher than total business expenditures and vice versa. Stakeholders can acquire different information through these statements. Halford Group plc generates revenues through both the retail and Autocentres division. Retail division revenue comprises the sales value of goods and services to the customers. It includes revenue through cycling, car enhancement, Car maintenance and income from travel solution (Margin, Share and Share, 2014). However, Autocentres division revenue comprises the value of provided car services. Service revenues are recorded when services are rendered to the customers. Furthermore, business operates various kind of sales promotion schemes so as to increase the level of sales. The revenue figures that are reported in the income statements that are net of all the discounts and rebates. In addition to it, other income such as finance income also shows in the income statements. Finance income is the interest income on the investment that is made by the company. On the other hand, expenditure such as cost of sales, other operating and finance expenses are included in the total business expenditures. Cost of sales includes the purchase and other direct expenditures in order to sale the business products (Scott, 2014). However, operating expenditures are required for the operational purpose. It comprises store staffing expenses, store occupancy, warehouse, distribution and support costs. On the other hand, finance expenses comprise the interest payments on the borrowings. Halford's gross profit or loss is determined through subtracting the cost of sale to the total revenue.
However, net profit or loss is determined through subtracting the total of indirect expenses to the gross profit. External stakeholders of Halford Group plc such as government determines the total business revenues and profitability in order to make economic growth of the country (Naylor and Bowen, 2012). However, competitors also analyse the business profitability, expenditures and income so as to make comparative analysis. They can formulate important business policies that help to compete effectively in the market. Further, lenders provide funds to the business ventures so they assess the business earning capacity and also the business performance. They can make risk and return analysis associated with the invested funds. Moreover, improvement in business performance leads to higher the business ability to generate higher funds from the lenders.
Balance sheet: Along with the income statements, Halford Group plc also prepares balance sheet to assess the business financial performance. These statements comprise all the business assets and business liabilities. Assets involves all the current assets as well as fixed assets that are used by business to get return. Current assets comprise trade receivables, cash and inventories while fixed assets comprise property, plant, other equipment and intangible assets of both the divisions (Edwards, 2013). It is used in the business for the production purpose and rendering services to the customers. On the other hand, liabilities include business equity and current as well as long term liabilities. Shareholders are the owners of company hence, the amount invested by them is considered as the business equity. However, current liability involves creditors and trade payables, bank overdraft, provisions and other deferred incomes while long term liabilities include Halford's long term borrowings. On contrary, Halford's equity includes shareholder’s funds, retained earnings, share premium as well as all the reserve and surplus. These statements provide financial information to various stakeholders of Halford Group plc.Through using these statements, lenders can assess the business ability to pay the funds on right time. They can determine the solvency position of Halford's Group plc that helps to take better investment decisions. However, creditors or suppliers can assess the creditworthiness of the business thus, they can make decisions whether the credit should be provided or not to the business. Competitors analyse the financial status of business for the comparison purpose. They can determine the business liquidity and solvency position. It helps competitors to take important financial decisions for the business development.
In addition to it, government assesses the financial performance of business as higher the financial status contributes to higher the economic growth and development. They can assess the illegal practices of business and eliminate it through making regulatory policies. Further, it generate tax revenues on the business profitability therefore, it can assess that company is paying taxes regularly or not. In addition to it, shareholders can determine the security of their holdings and assess both the operational and financial risk to the business (Schroeder, Clark and Cathey, 2011). Lower level of business risk in the company can attract the investors, so business will be more able to generate funds for the different purposes. Customers are the source of business revenues for Halford Group plc. Both the division of comp any such as Retailer and Autcentres sell products and provide services to the customers. Therefore, all the business operations are done with the objective of satisfying the customer’s need. Increasing the number of customers as well as their satisfaction level help to retain customers for the long term and generate customer loyalty to a great extent. Thus by doing this, Halford Group plc can increase its profitability and strengthen its financial position. Thus, it can be concluded that financial statement satisfies all the information need of Halford's external stakeholders. Thus, stakeholders will be more able to take effective decisions.
Record keeping system: Halford Group plc keep a detailed record of all the business transactions for preparing final accounts. It maintains records of all the operations so as to prepare the income statement as well as balance sheet. Under the income statement, both the revenue and cost of goods sold are reported to determine the amount of gross profit or gross loss. The cost of goods sold is concerned with the total cost of purchase and the direct expenses that are incurred for selling purpose. It is determined through adding the beginning inventory cost to the total purchase cost and subtracted to the closing inventory. Therefore, it is cleared that to identify that the cost of goods sold is properly or correctly recorded or not under the income Statement, company needs to make proper valuation of opening inventory (Nordmeyer, n.d.). Thereafter, the cost of products that are produced or purchased by the company for sales purpose is computed. It can be computed through adding all the direct cost to the total purchase expenditures. Suppliers give invoice to the business at the time of purchasing, therefore it can be used for the verification purpose. However, direct cost is such kind of cost that directly relates to a specific cost object. It includes the expenditures that are involved for contributing the inventory in sell able position. For instance, carriage inward, wages and octroi are such kind of expenditures that will be included in the cost of goods sold (Edwards, 2013).
Further, in case of production units where Halford produces the products, company incurred production or factory overhead will be considered as the direct expenses. Therefore, it must be included in the cost of goods sold. After that, company subtracts the cost of ending inventory to the total cost. Thus, it is cleared that Halford Group plc calculates the cost of producing cycles in the retail division. However, under the Autocentres division, cost of rendered services for repairing and others purpose will be included in the cost of goods sold. In addition to it, accounting principles that are followed by company can also be used for identifying that the cost of goods sold recorded is correct or not. For instance, all the transactions are recorded on the basis of double entry book keeping (lawlor, 2008). Under this system, all the accounting transaction has two aspects hence, recorded in both the debit as well as credit sides. Moreover, matching principle also can be used for that purpose. This principle says that all the business revenues and expenditures should be matched up. For instance, cost of goods sold by the business is deducted from the total sales and also reduce the inventory. Hence, it can be verified through measuring the inventory also. In addition to it, it should be seen that marketing, selling and administrative expenses should not be included in the cost of goods sold. This is because these kinds of expenditures are indirect expenditures. Therefore, it must be reported as indirect expenditures and subtracted from the gross profit so as to ascertain the net profit.
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Corporate Governance: Good corporate governance is the key of success for each and every business organization. Corporate governance is the system of rules, practices and processes that Halford's requires to be followed (Council, 2003). Company is properly directed and controlled by these rules. Both the internal and external stakeholders have certain kind of interest in the organization. Therefore, corporate governance involves the interest of shareholders, management, customers, suppliers, government and community. Management of Holford Group plc plays a primary role in fulfilling these kinds of responsibilities. Chairman of the company keeps attention that all the works should be done in an efficient manner that helps to create sustainable and long term shareholder value. The management board has established a high level of standards for governing all the operative functions at Halford. Groups have implemented all the values, behaviour and set standards in the organization. It helps to maintain business integrity and getting high level of investors trust (Harford, Mansi and Maxwell, 2012). Corporate governance at Halford's undertakes the reviews of performance of the Board, all the business committees and individual directors. Moreover, it determines the independence of directors and reports on company's policies. Halford makes policies for the health and safety purpose and establishes strategy for managing business risk (Müller and Drax, 2014). Further, corporate governance receives reports for the environmental, charitable and political donations. Under the corporate governance, responsibilities of all the members of the management board tend to vary from each other. Halford is a UK based company therefore the group complies with the UK corporate governance code.
Board Chairman: The chairman of company gains highest authority in the management. He is responsible for leading and governing all the business activities. It designs the agenda and working styles so as to keep strong management. It manages the overall business functions. Further, it facilitates meetings and promotes effective relationships. In addition to it, they establish an effective communication with the shareholders and other stakeholders.
Group chief Executives: After the chairman, chief Executive of the company sets business objectives and design strategies to achieve the targets of business. It delivers financial plans and sets objectives for the other members of organization (Acharya and et. al., 2013). Further, it manages business risk with the approved and accepted level of risk profile.
Non Executive director: It evaluates the actual performance with the target decided and appraises the Board members. He visits to the various retail stores, Autocentres and distribution centres. It monitors financial information and availability of business risk as well as makes effective control to the company.
Therefore, it is cleared that Halford Group plc is trying to understand and improve its performance and manage the overall functions. Products, stores, delivery from vehicles and services rendered have impact greatly on the environment. Therefore, company is highly responsible for ensuring environmental protection (Babiak and Wolfe, 2009). Halford has implemented better technology for reducing the level of greenhouse gas emission. Further, company is maximum utilized its cycling and distribution centres that is resulting in enhancing the store delivery management. Moreover, for effective use of natural resources such as water, company has invested in Smart water meters. In addition to it, company has added an energy management system and made plans for the voltage reduction that helps to maximum utilization of energy. On contrary, Halford is trying to ensure that all the customers are able to get the products and services at minimum efforts (Tricker, 2015). Under the work inclusion programme, Halford introduced Bikeworks for the cycle industry. It prepares a three month training programme for improving the personnel technical skills and their work experience. Both the divisions are serving customers through stores and online facilities. Company is doing ethical trading by interacting with the suppliers and communities in a fair manner. Stores are providing quality products at minimum cost and try to improve it on the regular basis. Company is also focused on getting feedback from the customers and store colleagues for this purpose. In addition to it, group is providing employment opportunities (Bebchuk and Weisbach, 2012). Autocentres division has organized a great apprentice scheme. Furthermore, Halford is working with the trade associations, research institution and government organization so as to ensure safety and improve performance standards.
There are two kinds of stakeholders that are internal and external. Internal stakeholders are the part of organization while external stakeholders put impact from the outside of organization. Three important stakeholders that can be identified from Halford's annual financial statements are investors, creditors and government (de and Harris, 2000). Objectives of all the external stakeholders are vary from each other. Therefore, company prepares the financial statements that help to satisfy the needs of different stakeholders.
Investors: Investors are the persons that invest their funds in the Halfor Group plc. They are mainly concerned with getting higher return on their investment. Therefore, they need distinct type of information from the Halford's financial statements. They make risk and return analyse with the associated investment through determining the Halford's operational and financial risk. They identify the gearing level in the business as higher the level indicates high level of risk and vice versa. The reason behind that is if company uses high level of debt in the capital structure than it will impose fixed financial burden to the company. Therefore in case of business loss, if company cannot pay the interest payment, it impacts the business position in the negative direction. Lenders are required to get interest payment on time to time, therefore they invest their funds in such organizations that have stable financial position. Moreover, they assess the Halford's profitability level and solvency position of the business so as to ensure safety and security of their funds. A business that has good track record of operational as well as financial performance can attract investors to fulfil its financial needs.
Creditors: Creditors are also considered as one of the important external stakeholders for Halford Group Plc. They give credit to the company on different terms. Terms used by creditors at the time of providing credit are vary from business to business. They collect information regarding business profitability margin and its stability from the Halford's income statements. However, from the balance sheet, they determine the liquidity position and the creditworthiness of the business (Nini, Smith and Sufi, 2012). Liquidity is the measurement of the company's ability to pay its short term financial obligations. They extend high level of credit to the company if it has a good liquidity position than others. Moreover, if company has good corporate image in the market then suppliers provide credit on the favourable terms of the business.
Government: Government plays major role in the overall economic development. Therefore, they require all the information about company's operations. At first, they determine the profitability as high profitability contributes to increase the economic growth. Moreover, increased sales depicts the increased level of customer spending. Major source of government's income is tax revenue. Thus, they identify the tax payments made by the business on the profits earned from the income statements. Therefore, they make spending and taxation policies. In addition to it, increased production also helps to build economic development for the country. Government can assess the demand and supply of products that are produced by the company (Morsing, 2006). Further, it can assess illegal business practices and ensure that Halford's is following all the rules and regulations or not such as environmental rules and labour laws. In case of any negligence behaviour by the company, government may impose penalty or other kind of lawsuits to the business. Halford has to provide socially responsible products that do not cause any harm to the community. Government can determine the competition level and make policies so as to prohibit unfair business practices. It also helps to protect domestic organization from the multinational corporation in the industry.
On the basis of above report, it can be concluded that financial statement helps stakeholders in getting useful and their interest line information. They can take effective decisions through analysing these statements. Moreover, the report is described that business net results can be obtained from the income statements. However, balance sheet indicates the financial position of business. The report states that board members of the company are responsible for performing different functions for fulfilling the corporate governance purposes. The report is explained that company has initiated different programmes such as Bikeworks for providing services to the customers very quickly. Further, it is focused on the maximum utilization of natural resources, energy and fuel efficiency in order to ensure environmental protection. It provides equal employment opportunities and trading ethically. Thus, Halford is able to achieve its business targets in a quick manner. This in turn, company ensures business development and long term sustainability for the future years.
Books and Journals
- Acharya, V.V. And et. al., 2013. Corporate governance and value creation: Evidence from private equity. Review of Financial Studies. 26(2), pp.368-402.
- Babiak, K. and Wolfe, R., 2009. Determinants of corporate social responsibility in professional sport: Internal and external factors. Journal of Sport Management. 23(6). p.717.
- Bebchuk, L.A. and Weisbach, M.S., 2012. The state of corporate governance research. In Corporate Governance (pp. 325-346). Springer Berlin Heidelberg.
- Council, A.C.G., 2003. Principles of good corporate governance and best practice recommendations. Australian Stock Exchange Limited.
- De Chernatony, L. and Harris, F., 2000. Developing corporate brands through considering internal and external stakeholders. Corporate Reputation Review. 3(3). pp. 268-274.
- Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting) (Vol. 29). Routledge.
- Harford, J., Mansi, S.A. and Maxwell, W.F., 2012. Corporate governance and firm cash holdings in the US. In Corporate Governance (pp. 107-138). Springer Berlin Heidelberg.
- King Committee on Corporate Governance and Institute of Directors (South Africa), 2002. King Report on Corporate Governance for South Africa, 2002. Institute of Directors in Southern Africa.
- Margin, G., Share, P.F.D.P. and Share, P.F.Y.D.P., 2014. Halfords Group plc. Change. 1. p.Q3.
- Morsing, M., 2006. Corporate social responsibility as strategic auto‐communication: on the role of external stakeholders for member identification. Business Ethics: A European Review. 15(2). pp.171-182.
- Müller, R. and Drax, C., 2014. Operational Risk Management as an Integrated Part of Safety Management Systems. In Aviation Risk and Safety Management (pp. 73-76). Springer International Publishing.