Assignment 2.1: Justification Report – Part 1 Assignment 2.1: Justification Report – Part 1 The root cause of the problem JUSTIFICATION REPORT 2 For a long period of time, our highly esteemed clients have been deciding on the type of accounting methods that they like their own accounts to be handled. There are many times that these clients make us of one or even more accounting methods. Many of our clients want what is convenient to them and this is what usually guides them. Nevertheless, the most complaints that we are receiving is that most of them are making massive losses in their businesses. As a matter of fact, our firm has been operational for around twenty years now. We know that there is a tendency of people starting up a new business and tend to remain operational for about three years and then become bankrupt. According to the research we have carried out this businesses end up falling because of the accounting criteria being used (Hung, 2000). For this reason, if the problem that is facing us as well as other business is not operational accounting but related to business running, then we would manage to retain and maintain many clients. This would lead to increase in profitability as well as increased operations. Alternative solutions that needed Many businesses normally get to blunt side because of the tax burden they experience in their operations. In order to manage arriving at the required tax, we normally use accounting periods that accounts annually showing different operations that have take place during that period. The two main accounting methods that we have already adopted are accrual accounting method and Cash accounting method (Hung, 2000). To start with Accrual accounting method is referred as the method where various transactions are updated as soon as they occurred. This is mostly in disregard to the time when an item is paid for or delivery time of that item. However, the cash system method is where transaction is update especially when payment has already been permitted and delivery of that item made. For example, if the sale of an item was made on November and the payment of that item was done in February, according to accrual method of accounting, the update of this item will be made in the month of October however, in the cash system, the update of the item will actually be made in February. As a matter of fact, the main victims of our business are the small business entities. In oder to make clear on basic need of settling for one accounting method especially for these business , we need to set criteria to be followed for these small businesses and see whether they will change in profitability and management in the next fiscal year (Sekaran, 2006).. Criteria of choosing from the best alternatives For the accrual and cash method we may subject various businesses with the following; per year, the business should at least have a turnover of less than three million dollars. The second thing is that they are required to have a tax levy pay of lea than a million dollar annually. Thirdly, we may consider any business that can run on accrual or cash system despite of the tax figures that business is subjected to. Some of these businesses may include charity organizations and scholarly institutions. Another thing to put into consideration is whether the businesses have always made all their tax levies entirely on accrual system or the cash system. Therefore, these will always subject the businesses to the preference they may have always held. Finally our firm may consider the businesses mostly on the basis of the preference in order to avoid situations that 3 JUSTIFICATION REPORT are contradictory with clients on ways of handling all their accounts. Thus, in this case the businesses will need to be consulted and give feedback on what they intend to have. Conducting the research At the opening of the fiscal year, the business that will be selected in the above hypothesis will need to be classified so as their transactions to be considered under the Accrual or Cash systems. During this fiscal year, all the transactions made will strictly be put in the above criteria and this will be done in the next three fiscal years. Therefore, the three years is actually the time that has already been identified for any joining business to exit in our business. At the end of the period, the businesses that have already been under evaluation will actually be investigated as whether they already survive or has fallen (Huang, & Brown, 1999). They will also be evaluated on how they may be fairing as well as coping up with the tax system. For this reason, the system that will have acquired greater percentage will definitely become the main guiding principle. In conclusion, when the favorite alternative is actually chosen as the best for the accounting firm it will be the principles of the business to give the upcoming business on the best accounting method that may suit best for that business to exist in the market. References JUSTIFICATION REPORT Huang, X., & Brown, A. (1999). An analysis and classification of problems in small business. International Small Business Journal, 18(1), 73-85. Hung, M. (2000). Accounting standards and value relevance of financial statements: An international analysis. Journal of accounting and economics, 30(3), 401-420. Sekaran, U. (2006). Research methods for business: A skill building approach. John Wiley & Sons. 4 Assignment 2.2 Justification Report Part 2 Justification Report Part 2 Root problem of the business For so many years, we have given our clients priority to decide on the type of accounting methods that they would like their accounts handled as well as use more than one or even more JUSTIFICATION REPORT 2 accounting methods. As a matter of fact, many of our clients are normally guided by what they consider to be convenient. Nevertheless, we are getting so many complaints from our clients who are making massive losses in their businesses. It is a fact that our firm has been operational for around twenty years now. There is a tendency of many starting businesses to remain operational for around three years and then declared bankrupt (Chesla, 2000). To my opinion the main problem that is making them bankrupt is the accounting criteria being applied by various businesses. Therefore if the main problems causing the exit of many clients in the market are not operational accounting but related to running of the businesses, then it is true that our firm will manage to retain so many clients and end up increasing profitability as operational increases. Alternative solutions It is a fact that many businesses usually get to the blunt side because of the tax burden they have on their operations. In order to reach at the tax required, we normally use accounting periods that accounts annually together with the operations that have already taken place in that period. The two major accounting methods that we have already adopted are cash accounting method and Accrual accounting method. To start with the Accrual accounting method referred as the method in which all transactions made are updated immediately they occur. This is actually in disregard to the actual time when the delivery of item was paid for. On the contrary, the cash system method is where you normally update transactions immediately when delivery has been made or when the payment has been remitted (Dechow, 1994). For example, if sales were made on November and the payment of the items was made in January, then according to the accrual method, the update will actually be made in that month of November on the other hand, in cash system, the system will actually be made in January. As a matter of fact, our major casualties are those small business entities. In order to clarify the dire need to settle for one accounting method for small entities, we are needed to set criteria for these small businesses and see whether they be any changes especially in the profitability in the financial year. Criteria of choosing from the given alternatives For both accrual and cash system we can easily subject various businesses with the following; First of all the businesses are required to have a turnover that is less than three million per every financial year. Secondly, the businesses need to have a tax levy that does not exceed million dollars per every financial year. Thirdly, we may consider any business that can run on Accrual or cash system despite the tax figure subjected to it. The business may consider including charity organizations together with the scholarly institutions. The fourth consideration will be on businesses that have made tax levies either entirely on cash or accrual method. Therefore, such businesses we subject them according to the preference they have held (Hung, 2000). Lastly, we can consider businesses on their preference so as to avoid situations that are contradictory with the clients mostly on the basis of handling all their accounts properly. Therefore before taking any initiative our firm will have to make consultations and give feedback on what they can have. 3 JUSTIFICATION REPORT Conducting the research At the start of the financial year, the business that will be chosen following the above criteria will be classified according to their transaction in order to be considered under the Accrual or cash system. Throughout the financial year, their transactions will be required to be in the above criteria and this need to be done for at least three financial years. As a matter of fact, three years is actually the time frame that has been indentified for all businesses that are starting operating to exit the business. Therefore, at the end of these three years these firms that have been under evaluation and decision have to be made whether they continue their operation or be demolished (Barth, Cram, & Nelson, 2001). Also, it will be put in consideration how they have been coping up or fairing on with the tax system. In fact the system that will manage to yield a great percentage of success will actually become the main guiding principle of these firms. Therefore when choosing the alternative that is favorite as an accounting method for the firm, it should be the principle of the firm to give all the upcoming businesses on the best accounting method that will suit that firm in order to continue its operations in the market. References Barth, M. E., Cram, D. P., & Nelson, K. K. (2001). Accruals and the prediction of future cash flows. The accounting review, 76(1), 27-58. JUSTIFICATION REPORT 4 Chesla, E. L. (2000). Practical solutions for everyday work problems. New York: Learning Express. Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of accounting and economics, 18(1), 3-42. Hung, M. (2000). Accounting standards and value relevance of financial statements: An international analysis. Journal of accounting and economics, 30(3), 401-420.
Purchase answer to see full attachment