Financial Accounting

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Contents
Introduction......................................................................................................................................3
Main body........................................................................................................................................3
Case on investment......................................................................................................................3
Case on Contingencies.................................................................................................................5
Aero Inventory.............................................................................................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
Financial accounting is known as the branch of accounting that helps in analysing the
company’s financial position. This helps the managers and the directors of the company to take
financial decision so that they are able to produce the practical strategies which helps in
increasing the financial condition of the company ( Buchanan and Davis, 2018). By using the
standardised guidelines to record the transactions and summarising these financial report in
financial statement is conducted through the process of financial accounting. This report is based
on three different cases where the study of financial information is present and various rules and
regulations that requires to provide best and ethical financial result is described with the help of
this report. Also how the inventory is managed and the account receivable is recorded is
considered in this report.

Main body
Case on investment
a. Explanation of the situation which have the unrealised loss and when will these
unrealised losses be reported as a part of net income
In the accounting terms there are difference that exist between the realized as well as unrealised
losses. It is seen that the realised loss refers to the loss that derives from the complete
transactions that happens. Whereas the unrealised loss refers to the losses which occurs on the
paper but the transaction is in process and has not been completed. It is seen that unrealised loss
is considered as the paper loss that occurs to the company without being actually realised. If the
unrealised loss are recorded in the books of accounts then it is called to accumulated loss that are
recorded in the books (Cascino and et. al., 2017). There are various condition which includes that
unrealised losses would occur and it has to be recorded in the books of accounts, some of which
includes, for example if the company owns an asset and the asset value decreases then this is see
that the companies incurred a loss on that asset and it should recorded here in the books. It is
seen that if any of the loss that occurs from the sale of the security are not reported on the income
statement until the securities are sold in the market by the company. Only the unrealised losses
are recognised on investment which are held as trading or non-trading securities when the current
market value is below the previous valuation.

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 Also if the investment are trading in the market and there is unrealised loss that occurs in
the current period than it affects the accounting period and is reported in the income statement of
the year. But only the changes that occurs in the income statement are recorded in the current
period.
It is seen that the usually the non-trading losses are shown as a component of stock
holders equity. Also the accumulated losses over the year may result in the giving the negative
shareholders equity.
b. Various classifications that these types of short and long-term stocks and bonds can be
classified into? And how are they reported in the Financial Statements?
There are various classification according to which the long term and the short term stocks and
the bonds can be classifies into (Henderson, Herbohn and Howieson, 2015). These can be classified
into the influencing or the controlling debt and equity securities as well as the non-influencing or
non-controlling debt and equity securities. The non-controlling or the non-influencing debt or
equity can be classified in to as:
 Trading
 Non trading
 And held for collection securities
It is also seen that influencing and controlling activities can also be classified into these sections.
There are different ways according to which these classified debt or equity are shown in
the balance sheet. Some of which includes that investment that are used for trading must be
shown at the fair value in the balance sheet and if there is any gain or loss in this part must be
recorded for the period that is currently going. However if the securities are held as non-trading
then they are shown at the fair value at the balance sheet date, but the holding gains or losses are
considered as the stockholders equity items. Also the investments that are held for collection are
recorded at the amortized cost or at the net present value.
c. If an investment is classified as a Trading Security and it is in a loss position and I do
not want to have the unrealized loss reported in net income, can I reclassify the asset?
No, it is not possible for Mr. Wheeler to reclassify the asset and not to disclose the loss
position that has occurred. As the classification for disclosure is adopted once and should not be
changed due to any reason. The classification is considered as one of the main and important
accounting principle which is defined at the beginning of adoption of financial statements. Hence

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if Mr. Wheeler wants to adopt to change then a permanent and real change is required in way to
manage the investment.
d. Explain, why are short-term investments in stock and bonds valued at market value?
Debt equity investment are classified into the trading securities and are bought for the
purpose of selling them within the short frame of time. These investment are classifies as short
term assets and are revalued at each of the balance sheet date with the current market value as it
helps in depicting more accurate and still objective of financial information to the users.

Case on Contingencies
Part 1
Reporting the estimated product warranty cost for each of the two types of merchandise is
one of the important part which should be considered while performing their obligations ( Kieso,
Weygandt, and Warfield, 2016). As for the Product grey, Benson should use and make provisions
for the warranty expenses that may be incurred by him for 1% of the sales amount of the current
year according to the matching principle that is followed by them. This would increase the
expenses of the company and would result in lower net income and would increase the liabilities.
While on the other hand for the product yellow, it should only make the disclosure on the
footnote. While it is suggested to them that 1% of the warranty has to be recorded. For this it has
been classified that there are two criteria for making the provisions which includes:
 Taking probable approach of >50%.
 And a reasonable estimate.
As it is seen that in this case 1% would be considered as high, hence the company should put
in the footnotes that they are having an expected warranty claims, but the amount of those
claims cannot be reasonably estimated.
Part 2
As it is seen that in this case the loss is of big amount and the company is having the
difficult time being sued for the case. As the loss is seen to be probable and the estimate is
available for the law suit to be made (Kimmel, Kieso, and Trenholm, 2016). Hence in this case
expense should be increased by the $1000, 000. As a result this will lower the net income of the
company and would increase the contingent liability by $100, 000.
As it is seen that the matching principle required that the loss should be recorded in the
year 2010, while the law suit may not be settled for as many years in future.

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 While if talking practically, no entry would be recorded for the same. Only a footnote is
considered that would be used for disclosure.

Aero Inventory
Part 1- Circa 2008
1) Aero Inventory has a “. . . reputation as one of the hottest stocks on AIM.” (Provide
reasons why this may be a hot stock.)
It is seen from the financial statement of the aero inventory that why this stock is considered as
the hot stock and is beating the stock market accordingly (Macve, 2015). There are various
reasons for this which includes that there is an increase in the sales of the company from 247 to
440 in the current year which shows around an increase of 78%. While on the other hand the
profit of the company has also increased from 31 to 51 which is an increase of 64.5%, also the
companies EPS has increased by 68% which the best in the industry. The companies return on
equity is considered as 18.6% which is the main reason due to which the company’s stock is
considered as the hottest stock in the market.
2) “. One can make a handsome return by persuading airlines to hand over the fiddly
business of sourcing and delivering everything from nuts and bolts to drinks trolleys
and air-conditioning filters.”
As it is seen that the company can make a good amount of profit from persuading the airline
to the fiddly business of sourcing. This can be seen through,
Gross margin that can be checked as (440-278)/440= 37% and the Profit margin increases
from 51/440= 11.6%.
3) “Parts outsourcing is a cash-intensive business . . .”
As it is seen that inventory is the largest asset which has the huge amount of margin which can
be considered as 81% of the asset value (Maskell, Baggaley and Grasso, 2016). Also it is seen that
the cash flow from the operation is negative and is considered as 4 times larger than the net
income that it has. From the above business it is seen that free cash flow is negative in this
business also the company is heavily dependent on the bank loans due to which the company’s
debt equity ratio is very high,
Debt ratio= 553/848= 65%
4) “Aero Inventory has a strong cash-to-cash cycle and is close to the highly sought after
‘negative’ cash-to-cash cycle.”

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 This statement is false. As the operating cash flow is negative from the above business. As it
can be seen from,
DIO = 709 days + DSO = 61 days - DPO = 158 days = 612 days
However the cash to cash cycle is positive and is 612 days greater than 1 ½ year.
5) “Financing costs are not significant for Aero Inventory.”
This statement is true. As financing cost is one of the biggest cost for the company as it is
computed as,
Financing cost= 20/440 which gives 4.5% of the sales figure.
6) “Operating cash flows are strong, thus allowing the payment of dividends.”
This statement is false. As it is seen that the companies operating cash flow is negative ( Maynard,
2017). And it is considered as a situation of critical evaluation why the company is paying
dividends (Warren Jr, Moffitt, and Byrnes, 2015). The free cash flow is negative for both the year.
2007: -121.1 – 40.6 – 10.2 = -171.9, 2008: -223.4 – 29.1 – 15.7 = -268.2
The dividends are clearly being financed by the lenders as they are the only significant
source of cash.

Conclusion
From the above report it is concluded that the financial accounting is one of the main source
of knowing the financial information of the company. These helps the company to make various
strategies so as to increase their profits. Also the company should take into consideration the fact
that unrealised losses are recorded in the books of accounts as an accumulated losses.

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References
Books and journals
Buchanan, D.L. and Davis, M.H., 2018. Cash Flow Modelling and Financial Accounting. World Scientific
Book Chapters, pp.7-37.
Cascino, S., Clatworthy, M., Garcia Osma, B., Gassen, J. and Imam, S., 2017. The Usefulness of
Financial Accounting Information: Evidence from the Field.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson
Higher Education AU.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2016. Intermediate Accounting, Binder Ready Version.
John Wiley & Sons.
Kimmel, P.D., Weygandt, J.J., Kieso, D.E. and Trenholm, B., 2016. Financial Accounting. Wiley Custom
Learning Solutions.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or
Threat?. Routledge.
Maskell, B.H., Baggaley, B. and Grasso, L., 2016. Practical lean accounting: a proven system for
measuring and managing the lean enterprise. Productivity Press.
Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.
Narayanaswamy, R., 2017. Financial accounting: a managerial perspective. PHI Learning Pvt. Ltd..
Warren Jr, J.D., Moffitt, K.C. and Byrnes, P., 2015. How Big Data will change accounting. Accounting
Horizons, 29(2), pp.397-407.