Principles of Accounting Course Jebel Ali Merchandising Company - Case Study Example

PRINCIPLES OF ACCOUNTING COURSE Principles of accounting course Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 29, 12, 2010 Principles of accounting United Arabs Emirates (UAE) is a worldwide establishment with many companies in the field of commerce. One of their merchandising companies is the Oracle merchandising that deals with innovative and comprehensive industries software solutions for retailers. In the software industries oracle gives the most original and integrated suite of software application for vision guided retailing. It deals with the key components such as database, middleware and applications. Oracle merchandising is in a position to utilize the most accurate inventory evaluation methods; the gross profit and retail methods where the physical enumeration or the count of the inventory is taken. Inventory consists of merchandise that a business has already bought or purchased but has not sold. For that reason inventory is classified under current assets because it can be sold in near future and be converted to cash. The inventory of Oracle company under Gross profit and retail methods is counted, the value determined and the total physical value is compared to the general ledger account where in case any adjustment is needed, it is done appropriately. And because Oracle is a big company, there are some inventories whose physical count is impossible for such cases it relies on some particular financial statement records for the valuation of the inventory. Income statement is a summery of operating revenue earned and operating expenses incurred in a specific accounting period. They are prepared every month in order for management to get useful financial tool for measuring and controlling the company’s operational performance. There is a different between an income statement of a service company and a merchandising company. Unlike a merchandising company, which relies on merchandise sales for its revenue, services enterprises depends on rendering their services as a source of their revenue. The service industry therefore has grown to be a large company of advanced economics especially in globalization. Due different trade “stuff” that they offer, the income statement of a merchandising company and that of a service company differs. For a merchandising company income statement there is included revenue, expenses and general administration expenses. These expenses include the cost of Goods sold which relates to sales volume. Here is an example of an income statement from Jebel Ali Merchandising Company. On the other hand, the income statement of a service company doesn’t have expense related to sales volume by virtue of the fact that it doesn’t rely on selling merchandise but offer services at a charge. Therefore, its statement has service revenue minus any expense that relate to that particular service. This calculation is the one that leads to Net Income as shown in Double J’s service company income statement below: Double J company Income statement for the year ended 31st Dec 2010 Service Fees 150,000 Advertising 2,000 Insurance 1,000 Salaries & Wages 1,500 Traveling Expenses 1,000 Rent 2,000 Total Operating expenses 7,500 Net Income 142,500 Another difference is brought by the fact that while merchandising company does not charge its service, service company charge. Due to this difference you find that the average time a merchandising company takes to go from cash to cash commodity is longer than that of a service company. This is referred to as the operating cycle and is longer in merchandising company due to the purchase and sale of merchandise. Balance Sheet Clay and Stephen (1997) define a balance sheet as a “documented report of a company’s assets and obligations as well as the residual ownership claims against its equity at any given point in time” (p. 45). This being a cumulative record, it reflects the results of all recorded and accounting transactions since the company started. A balance sheet is an important document for presenting to those people and organizations that are interested in the financial affairs of a company. It is also use by creditors to assess the company’s ability to pay their dues. All this information among others is given by a balance sheet. The balance sheet assets and equities are listed and classified according to their general characteristics. A balance sheet for a merchandising company has got the following components Current Assets: In this listing, cash and other assets are included. These assets in merchandising company are known as inventories and are easily converted into cash within the operating cycles. Current assets are only that merchandise that must be converted into liquid cash within the time of business dealing according to Clay and Stephen (1997). Other assets are held not for the purpose of reselling but because they provide some useful services. In a balance sheet current assets are listed in order of their liquidity and include account receivables, temporary investments, cash, inventory and prepaid expenses among others. Cash: Cash is that money on hand and in bank that can be accessed if required for business operations. This is the first entry in a balance sheet. Marketable Securities: Market investments are short time excess funds that are not required immediately for business operations. These funds are supposed to be invested in securities that are easily convertible into cash when required. Accounts Receivable: These are the amount that your debtors owe you. They can be classified as current assets if they are to be collected soon. Inventories: Theses are goods that are available for sale. Prepaid expenses: Prepaid expenses are those payments that are made prior to services. Unlike many other entries, it is not possible to convert prepaid expenses into current assets. Insurance premiums and rentals can fall in this category if paid in advance. Investments: These are funds and securities held for a specified purpose and for unspecified time. They usually include mortgages, bonds and shares for another company. Money held for a pension funds are also investments. Plant Assets: They are also called fixed assets that are used in business operation for a long period of time. Fixed assets generate income through their deployment in operations. Other Assets: These assets can not be classified under current and fixed assets. They are listed as other and include miscellaneous fund for special purposes among others. Current Liabilities: Away from assets, the other side of balance is usually labeled equity. There are current liabilities that have to be discharged in the period of the normal business operation. A very good example is the amount you owe to your creditors. Long-Term Liabilities: These are debts that are not to be paid until a period of more than a year elapses. Owner's Equity: This section is usually subdivided on the balance sheet. On one side the amount directly invested and any portion of retained earning converted into paid-in capital is recorded. Net earnings that are retained are preserved for the other side. A merchandising company and a service company have almost similar balance sheet apart from the fact that a balance sheet of a service company do not have inventory. Inventory is a record of unsold merchandise and Service Company do not deal with selling of tangible goods. A sample expanded balance sheet for a merchandising company with inventory will look like this Assets Cash Sh.__________ Accounts receivable Sh.__________ Inventory Sh.__________ Short-term loans Sh.__________ Prepaid expenses Sh.__________ Long-term loans Sh.__________ Land Sh.__________ Other Assets Sh.__________ Inventory Sh.__________ Short-term loans Sh.__________ Other Assets Sh.__________ TOTAL ASSETS Sh.__________ Liabilities Accounts payable Sh.__________ Short-term notes payable Sh.__________ Interest payable Sh.__________ Taxes payable Sh.__________ Long-term notes payable Sh.__________ TOTAL LIABILITIES Sh.__________ Capital or Owner's Equity Stock Sh.__________ Retained earnings Sh.__________ TOTAL CAPITAL or OWNER'S EQUITY Sh.__________ Reference Clay, J, and Stephen, H 1997, Guide to Preparing Financial Statements, Practitioners Publishing, Spring. Read More