Accounting Theory Assessing the Financial Condition

Question: Discuss about the Accounting Theory for Assessing the Financial Condition. Answer: Introduction Accounting Issues The following were the accounting issues that led to the collapse of Dick Smith Assessing the financial condition- Dick Smith failed to assess its existing financial condition. This led to unplanned expenditure, which had adversely affected the financial condition of the business enterprise. In addition, unaccounted costs was not considered or taken into account while framing the operational policies of the business organization. Recording Transactions- Failure to record the inherent financial information would have an adverse impact on the financial policies of the business entity. As such, every financial information shall have to be analyzed in an appropriate manner and fully recorded in the books of accounts. Due to the expansive policies adopted by the business entity, there has been an increase in the operational expenses for the business enterprise. Bonin (2013) stated that Dick Smith has unaccounted operational expenses for the business entity and therefore would lead to the unnecessary wastage of the resources for the business entity. Each financial transaction was not recorded in a detailed manner, which led to the distortion of the facts. Working Capital - The working capital is an essential factor that would ensure smoother business functionalities for the enterprise. In the case of Dick Smith, the business entity has failed to assess the working capital requirements of the company and respond appropriately in the context of financial sustainability and growth. In this regard, Deegan (2013) noted that the following are the essential components of the working capital in the organization. Fixed Assets - The fixed assets of the organization is one of the essential factors that contributes directly to the generation of income. As such, the measurement of the fixed assets in the organization depends upon the nature of the accounting method followed in the business organization. According to Jones (2015), Dick Smith failed to assess the valuation of the fixed assets in the organization and would therefore led to a adverse impact on the operation and financial policies of the business enterprise Current Assets - The current assets in the business organization would include the assets that would be converted into cash in the next few months. According to Smith Tucker (2013), the valuation and the utilization of the current assets in the business organization and have an impact on the operational policies of the business enterprise. In the case of DICK Smith, the current assets in the business organization have been utilized in an irregular manner and lead to financial irregularities for the business entity. The current assets present in the Fraudulent or Misleading Reporting Fraudulent or misleading reporting of the financial information of the business enterprise can have an impact on the financial condition of the business enterprise and would create a wrong perception on the stakeholders of the business organization. According to Deegan (2016), there were several instances of manipulation of financial information that lead to the wastage of the financial resources for the business entity. Effect on Stakeholders According to Setyorini Ishak (2012), the investors, shareholders as well as the customers are the key parties that would constitute the stakeholders of the business organization. As such, these parties shall be equally affected during the research procedure. The investors, shareholders as well as the regular customers of would be most affected by the collapse of Dick Smith. The investors would be concerned about their necessary investors that have been made upon the company. In addition, the company has sold shares to the public in raising additional finance. Therefore, such shareholders would be concerned about the lower prices of the shares in the market. Dick Smith has been around for quite a period and has developed consumer loyalty in the domestic market of Australia. As such, its consumers shall also be concerned about the collapse of the brand. In this regard, it can be stated that finding alternative brand would be difficult for consumers would be difficult for the consumers who have been loyal to the brand over a period. Influential Attribute Affecting Operational Strategies The primary factor, which drove the management to act in such a manner, was the need for increase in revenue and achieving greater profits. As such, the management of the business enterprise purchased heavy machinery on a consistent basis to enhance the organizational productivity. However, this procedure was not well planned and led to the increase in the expenses for the firm. The misinterpretation of financial information and discrepancies in the recording of the financial transactions led to such a situation. The evaluative accounting theory measures a particular event or financial transaction in terms of the qualitative as well as quantitative benefits towards the company (Parker 2012). The actions of the management of the company can be attributed to the evaluative accounting theory. The management of the company has adopted aggressive operational policies and has an impact on the business functionalities of the organization. According to Al-Htaybat von Alberti-Alhtaybat (2013), the evaluative accounting theory relates to adopting a proactive approach and involves investing substantially to attain the organizational goals and the objectives. The stakeholders of the company have to be regularly informed of the financial strategies and the developments implemented in the organization. This had a positive effect on the shareholders of the organization, as they were optimistic about the financial returns that can be attained from the investments. Therefore, the business entity had adopted the evaluative accounting theory in order to attain high levels of profitability as well as the sales revenue, irrespective of the actual financial consequences on the firm. Accounting Theories The following are the different accounting theories that are relevant for business entities operating in the existing global market. Descriptive Theory- The descriptive accounting theory states the consequences and the impact of the financial events happening within the organization (Bonin 2013). It states the inherent financial policies present in the business and its possible consequences on the existing operational structure of a business enterprise. Normative accounting Theory - The normative accounting theory relates the present activities and its impact on the future consequences of the organization (Parker, Guthrie Linacre 2011). The normative accounting theory can be considered particularly useful in the forecasting the sales revenue as well as the profitability levels in the business entity. Evaluative accounting Theory The evaluative accounting theory defines the qualitative and the quantitative requirements of the business organizations. Oluwadare Sam (2015) mentioned that the evaluative accounting theory would assist a business entity in assessing the role played by financial policies and its contribution towards organizational growth and sustainability. Communicative Accounting Theory - The communicative accounting theory defines the basic and the future theories that can be used in determining the present and the future events of the organization (Parker, Guthrie Linacre 2011). The communicative accounting theory has been an important part in developing appropriate accounting as well as financial policies in ensuring business survivability in an intensively competitive market. Inductive accounting Theory- The inductive accounting theory would assist the business organizations to evaluate the past events (Smith Tucker 2013). Thus, this is a potent tool to corrective measures and identify the existing discrepancies. Deductive accounting Theory The deductive accounting theory is developed by the method of deduction. As such, the deductive accounting theory is solely based on facts and would have to be considered in the development of the financial policies of the business entity. According to Groot Selto (2013), the deductive accounting theory is developed to attain a future objective. Generally accepted accounting theories - Parker (2012) stated that the generally accepted accounting theories has been developed to provide the framework or the guidelines regarding the development of the financial statements in the business organization. Generally accepted Accounting theories are the most accepted accounting theory in the global market. It is relevant to all types of businesses that are operating in the global market and has proved itself as a reliable framework in the global market. Groot and Selto (2013) stated that generally accepted accounting theories must be followed when the financially statements has been used externally by parties outside the business organization. Therefore, the generally accepted accounting theories can be considered as the most significant in the global market Smith Tucker (2013) mentioned that the Financial Accounting Standards Board (FASB) has been instrumental in developing the generally accepted accounting theories. When compared to other accounting theories, the generally accepted accounting theory would have to be considered more pertinent and flexible. References Al-Htaybat, K. von Alberti-Alhtaybat, L., 2013. Management Accounting Theory Revisited: Seeking to Increase Research Relevance. International Journal of Business and Management, 8(18), p.12. Bonin, H., 2013. Generational accounting: theory and application. Springer Science Business Media. Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia. Deegan, C., 2016. Financial Accounting. McGraw-Hill Education Australia. Groot, T. Selto, F., 2013. Advanced management accounting. Pearson Higher Ed. Jones, S. ed., 2015. 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