Sample Accounting Paper on Users of Financial Statements

Forum Questions and Answers

Forum One: Users of Financial Statements

Financial statements have different categories of users. One of the categories is the external users of financial statements. The group contains creditors, tax authorities, investors, regulatory authorities, and customers (Mehaela, 2008). In essence, the objective of financial statements case is to aid in making informed business decisions. Although the external users are in the same category, the applications of financial statements for each of the people in the group are different, based on their objectives concerning the organization. For instance, the creditors may request for financial statements to enable them to assess the borrowing power of a business and potential for the business to pay off its debts. Creditors can be suppliers of different products as well as fiscal lenders. Additionally, they determine the creditworthiness of an organization before setting its credit terms. The credit terms are set by creditors, such as banks, depending on the financial health of the organization (Cole et al., 2009). The tax authorities may read financial statements to evaluate the credibility of filed tax returns. Without the financial statements, they would be unable to tell whether the tax returns that were filed and remitted taxes are accurate. Investors evaluate financial statements with the objective of determining whether a potential investment is worthy of their input. Only investments that promise reasonable returns are worth funding, hence investors need to understand the worth of business before committing their funds to the enterprise. Additionally, customers who need stable suppliers need to evaluate the financial returns of their probable suppliers to determine whether their business would be sustainable. Similarly, regulatory authorities have to access financial statements to determine whether the company’s disclosure of financial information complies with the set rules and regulations (Cole et al., 2009).

References

Cole, V., Breesch, D. and Branson, J. (2009). Are users of financial statements of publicly and non- publicly traded companies different or not? An empirical study. Social Science Research Network, Paper 3. Retrieved from papers.ssrn.com/sol3/papers.cfm?abstract_id=1407566

Mehaela, L. (2008). Regarding the users of financial statements and their information needs. Economics, 13: 49 – 55. Retrieved from ftp://ftp.repec.org/opt/ReDIF/RePEc/bac/pdf/2008/20081309.pdf

Forum Two: Margin between the End Market and an Upstream Market

            Competition between companies can be within and across different industries. Strategies for innovation, therefore, come in handy when organizations need to create value for customers while maintaining a competitive advantage. In other sectors, such can be difficult to attain, especially when competition is stringent. However, companies can apply different strategies to use innovation in service or product delivery. An example of such innovation is through making margins between the end and upstream markets. A furniture manufacturer is an example of such an organization since it obtains raw materials from suppliers and uses the raw materials to produce final products which are sold to end users (Bass, 2017). Comparing other businesses like the super market and the warehouse companies, the furniture manufacturer is the only business that deals with both raw materials and final products. It is the only company that adds value to the products obtained from other companies before selling them to the final user.

Undoubtedly, the objective of the furniture manufacturing company is to maximize the profits that can be obtained from the difference between the purchase of raw materials and sale prices for each of the products. The model of business run by the companies obtains profits as a percentage of product manufacturing costs. For instance, most manufacturing companies that make margins between the end users and the suppliers through adding about 20% to the total production cost to make the profit. The company depends on the market conditions to achieve maximum profitability. When selling to direct customers, the profitability of the company is optimum and the owner can gain higher profit margins compared to other businesses which only sell final products made by others (Kotler et al., 2006).

References

Bass, B. (2017). The definitions of upstream and downstream in the production process. Hearst Newspapers LLC. Retrieved from smallbusiness.chron.com/definitions-upstream-downstream-production-process-30971.html

Kotler, P., Rackham, N. and Krishnaswamy, S. (2006). Ending the war between sales and marketing. Harvard Business Review. Retrieved from hbr.org/2006/07/ending-the-war-between-sales-and-marketing

Forum Three: Strategies for Short-Term Financing

            A business needs both long term and short-term financing options to survive. For start-ups and growing businesses, a variety of short-term financing options are available to be pursued by the entrepreneurs. Most of the short-term financing options depend on loans and advances from different sources and are in line with a variety of different terms and conditions. Some of the short-term financing options include bank overdraft agreements, customer advances, and the sale of goods in installments (Davoren, 2017). Each of these strategies has its advantages and shortcomings. The bank overdraft agreements entail obtaining finances in the form of bank overdrafts up to a certain amount without any questions. However, a proprietor must be able to give up some asset as collateral for the loan. The bank overdrafts are mainly advantageous when a business is sure of making profits, and the funds would be refunded easily (Kumaran, 2015). On the other hand, it can be a serious source of problems where the business is unable to pay its loan, and the bank possesses the asset issued as collateral. Accounts receivable financing is such that a company that is expecting some funds from another source takes the invoice bills to a bank or any other financial institutions which give funds minus a small charge. Additionally, the banks then have the responsibility of collecting the payment from the debtors at the right time. The advantage is that small firms can continue their businesses without waiting for debtors, while the key limitation comes in when debtors default. Similarly, companies dealing with large, difficult to fill orders can get short-term financing through customer advances. This is of a significant advantage as the businesses have the opportunity to operate without exactly getting into debt or lending to customers.

References

Davoren, J. (2017). What is short term financial planning. Hearst Newspaper LLC. Retrieved from http://smallbusiness.chron.com/shortterm-financial-planning-60081.html

Kumaran, S. (2015). Sources of short- term and long- term financing for working capital. Invensis Global Outsourcing Services. Retrieved from https://www.invensis.net/blog/finance-and-accounting/sources-of-short-term-and-long-term-financing-for-working-capital/

Forum Four: The efficient market hypothesis (EMH)

According to Investopedia (2017), the efficient market hypothesis asserts that beating the stock markets is impossible. The claim is founded on the argument that the stock prices at any given time reflect all the essential functions. In the EMH, the stocks are always traded at their most fair value. The market efficiency as described by EMH is such that no investor, no matter the quality of market advice, is capable of beating the markets (Malkiel, 2003). Therefore, it is difficult to purchase undervalued stocks or for investors to over-inflate their stock prices inappropriately. The operations of the efficient market hypothesis are such that corporate managers, in making investment decisions as well as in valuing their stocks. On the one hand, the EMH emphasizes the impossibility of cheating the stock markets, yet it has been proved beyond reasonable doubts that various investors have been able to deceive the stock markets and to gain their stock shares at minimal prices, in the past (Malkiel, 2003). For example, Warren Buffet, on several occasions purchased stocks at meager prices (Investopedia, 2017). While proponents of the EMH purport that there is no value in searching for minimum stock shares, the evidence of past stock market failures shows that there is a possibility of failure in the stock market. For instance, the stock market crash of 1989 and the Dow Jones Industrial age both show that share prices can show significant deviations from the fair stock prices in the market. Corporate managers should thus attempt to understand the market sufficiently before making attempts at purchasing stocks.

References

Investopedia (2017). Efficient market hypothesis – EMH. Investopedia LLC. Retrieved from www.investopedia.com/terms/e/efficientmarkethypothesis.asp

Malkiel, B. (2003). The efficient market hypothesis and its critics. CEPS Working Paper No. 91. Retrieved from www.vixek.com/Efficient%20Market%20Hypothesis%20and%20its%20Critics%20-%20Malkiel.pdf

Forum Five: Types of Investor portfolios

Investors interested in the stock market can access two kinds of investment portfolios. They can be either passive or active depending on what the intention of the investor is and how rapidly they want the returns to be earned. The passive portfolios are applicable as a saving strategy and are slower in growth (Abraham, 2017). On the other hand, the active portfolios are more likely to be used as a tool for fast economic returns and are associated with fast-moving stocks. Passive portfolios are more common amongst conservative investors than liberal ones while the active portfolios are associated with the more aggressive investors because of the nature of the investments. In essence, active portfolio management emphasizes the need to outperform existing markets through different strategies. On the other hand, the passive portfolio management only generates a return that is equal in value to a given price index without outperforming the index (Investopedia, 2017). Comparing the two investment portfolios gives the impression that the active portfolio is more suitable for long-term investment purposes and to yield a greater return on investment. As an aggressive investor, the active investment portfolio is more reasonable as it enables one to gain regarding returns on investment. Moreover, the active portfolios are also subject to different changes in the business landscape, including political temperatures at any given time, economic shifts, shifts in the market trends, and specific organizational factors (Abraham, 2017). This implies that it will not only enable the investor to gain financially but will also expand their knowledge of the business environment and thus enhance their decision-making capacity.

References

Abraham, S. (2017). 5 popular portfolio types. Investopedia LLC. Retrieved from www.investopedia.com/articles/basics/11/5-popular-portfolio-types.asp

Investopedia (2017). Efficient market hypothesis – EMH. Investopedia LLC. Retrieved from www.investopedia.com/terms/e/efficientmarkethypothesis.asp

Forum Six: Price of Coupon Bonds

Calculating the price of a coupon bond from zero-coupon bonds is somewhat difficult to achieve since there are no periodic coupon payments. However, to calculate the price of a coupon bond from the yields of zero- coupon bonds, the first step is to determine the number of periods for payment. For instance, most zero coupons are payable semi-annually. The interest associated with the zero coupon bonds is equivalent to the maturity value minus the bond purchase price.  Based on this information, the zero- coupon bonds must then be equated to a coupon bond hence the yield, say 6%, has to be calculated for semi-annual payments. The total payment periods for a bond maturing in 5 years based on the zero- coupon bonds would be ten would the biannual yield will be 3% (Fontinelle, 2017). Therefore, the zero coupon bond price would be given by:

Bond price for zero coupon bonds = M/ (1+ i)n

M in the above equation is the bond par value while n is the number of payments. The yield per pay period is given by i. In every case, the bond price has to be lower than the par value since these bonds are always discounted during sales. The rationale for this is that investors should be incentivized to purchase them and the discounts provide an excellent way to provide this incentive. Given the differences between zero- coupon and coupon bonds, the differences in the bond prices between bonds with the same maturity period are inevitable. The coupon bonds are sold at higher values since the coupon payments already provide an incentive to investors (Forbes et al., 2008). On the other hand, the zero-coupon bonds have no midway payments hence the only incentive availed is the price discounts.

References

Fontinelle, A. (2017). Advanced bond concepts: bond pricing. Investopedia. Retrieved from www.investopedia.com/university/advancedbond/advancedbond2.asp

Forbes, S.M., Hatem, J.J. and Paul, C. (2008). Yield to maturity and the reinvestment of coupon payments. Journal of Economics and Finance Education, 7(1): 48- 51. Retrieved from www.financialresearches.com/wp-content/uploads/2016/03/ForbesHatemPaulpaper-1.pdf

Forum Seven: Leveraging for Competitive Advantage

Leveraging has and continues to be used by different organizations across the world as a way of maintaining a competitive advantage. Various stances that an organization can adapt to use leverage as a source of competitive advantage exist. The first is through leveraging of customer analytics, which is accomplished through maintaining an up-to-date customer record and information, through which an organization can study customer behaviors and dynamics (Lambourdiere et al., 2016). As such, the organization learns more about its customers, their needs and the potential for providing the value needed. In a market where there is a lot of competition, leveraging customer analytics can be the starting point for prolific competitive advantage growth. Morgan (2017) opines that understanding the discrepancy between where the company is relative to the customer expectations can help in information management and competence building within the organization. Additionally, as the organization learns more about customer needs and demands than before, it becomes more probable to leverage the organizational products, culture, and behaviors to reflect what the customer wants. For instance, organizational cultures can be changed to reflect the organic needs of customers or environmental conservation beliefs of the society as a means of leveraging for competitive advantage. Maintaining customer centric stance on operational aspects can be the core of organizational performance and effectiveness. Different strategies can be applied to enable an organization earns more significant competitive advantage through customer leveraging, and they are all dependent on data collection and analytics. Methods of data analytics including call center logs, web traffic, and web surveys can be used to obtain data and use the data to expand the capabilities of the organization to gain competitive advantage.

References

Lambourdiere, E., Rebolledo, C. and Corbin, E. (2016). Exploring sources of competitive advantage among logistics service providers in the Americas. Supply Chain Forum: An International Journal, 18(1): 36 – 45. Retrieved from www.tandfonline.com/doi/abs/10.1080/16258312.2017.1283936?journalCode=tscf20

Morgan, B. (2017, May 16). Leveraging customer analytics to gain competitive advantage. Forbes Magazine. Retrieved from www.forbes.com/sites/blakemorgan/2017/05/16/leveraging-customer-analytics-to-gain-a-competitive-advantage/#539966f4222f