Accounting

Introduction

The analysis of financial documents, such as income statements or balance sheets, allows companies to measure performance. In addition, analysis can be useful in budgeting and strategic planning activities. Certain values represented in financial documents can be used to compare the company’s performance to some of its key competitors’, thus indicating its position in the market. Therefore, financial analysis is a crucial tool that is used by all companies, irrespective of their type and size. Vertical and horizontal analyses are among the most popular approaches to reviewing balance sheets and financial statements.

Horizontal Analysis

Horizontal analysis is often used in accounting, as it enables comparing values over time, thus showing a historical trend (Porter & Norton, 2015). For instance, in a recent annual financial statement, net sales of the company for the past several years will normally be included. Thus, horizontal analysis is useful for the management to track the company’s progress and financial position.

Another possible format of horizontal analysis is to include data from the two most recent statements and to state the variance in a different column (Bragg, 2017). In this way, the variance between the values represents the overall trend, which can be either positive or negative. Overall, the horizontal analysis of income statement is beneficial for many companies, as it allows tracking progress and performance over time. As shown by Szramiak (2017), this can assist the management in determining various patterns and cycles that other types of analysis would not be able to identify.

Vertical Analysis

A vertical analysis is a tool used for comparing values in financial statements or balance sheets. It is considered to be a proportional analysis method, as every value is analyzed in percentage share of other values (Wright, n.d.). For example, different types of current assets, including cash and cash equivalents, inventory, and more, would be represented as a percentage of total assets. As shown by Freedman (2017), such a technique is useful when the analysts need to identify the shares of different components in the key indicators.

Similar to ratio analysis, a vertical analysis can indicate if the share of current assets is too low or if the company is facing debt issues. Thus, where a horizontal analysis shows trends, a vertical analysis is usually used to gain insight into the financial values constituting the balance sheet or financial statement.

Ratio Analysis

Financial ratios are frequently used by companies of different types and sizes, as they allow to view the company’s position and performance in different aspects. Some ratios are designed to compare the company’s performance to its main competitors. For instance, benchmarking is often used to determine the company’s position in the market by comparing financial ratios (Peavler, 2017). In benchmarking, certain financial ratios, such as the gross profit margin, are compared to the ones achieved by the leading companies in the market (Peavler, 2017). Using ratios instead of dollars also allows benchmarking with international companies and obtaining precise information regardless of the changes in currency.

Conclusion

Overall, financial analysis is a crucial component of the firm’s success. It helps managers to identify gaps in productivity or threats that could affect the company’s position in the future. A financial analysis also enables the company to monitor trends in sales, assets, and other financial indicators over time, which helps in tracking its progress and market position. Lastly, using the financial ratio analysis, managers and analysts can analyze the firm in comparison with its competitors or market leaders, which can help the company to grow and develop.

References

Bragg, S. (2017). Horizontal analysis. Web.

Freedman, J. (2017). What are horizontal, vertical & ratio analysis in accounting? Web.

Peavler, R. (2017). Limitations of ratio analysis: Advantages and disadvantages of ratio analysis for business. Web.

Porter, G. A., & Norton, C.L. (2015). Financial accounting (10^th ed.). Boston, MA: Cengage Learning.

Szramiak, J. (2017). 2 ways to analyze an income statement. Business Insider. Web.

Wright, T. C. (n.d.). What does vertical analysis of a balance sheet tell about a company? Web.

Financial ratios

Profitability ratios

These are ratios used to determine the efficiency of the company is using the resources to create profits. For AeroTech International Plc, the gross margin ratio was negative because a loss was registered during the financial year 2010. A gross margin of 1.5 and a profit margin of 1.4 was made during the financial year 2010. This indicates that the sales were few. As such, there is a need to improve sales management so that profits can be made from the operations of the company.

Return on equity was high (18.07), while the return on investment was low (0.119). This indicates that the company is making a few investment programs to promote the growth of the business. On the other hand, the company has acquired enough assets to facilitate business operations. This is indicated by the return on assets of 0.13. Also, the company has improved its equity because the equity ratio is high (0.53). Shareholders get a fair share of the profits made by the company. This is indicated by the return on the capital of 0.21.

Market ratios

The market ratios show that the company has maintained the current assets at a manageable level compared to current liabilities. The current ratio of the company is 6.25, and this shows that the company has minimized the number of current liabilities. On the other hand, the acid-test ratio indicates that the company has increased the number of current assets. The cash ratio indicates the cash and marketable securities have increased to a great extent. Also, the operating cash flow ratio shows that the company has maintained a low number of current liabilities.

Debt ratios

The debt ratio expresses the number of debts that a company has in comparison to the assets owned by the company. A debt ratio of 0.10 is favorable because it indicates that the company can repay all debts, and maintain a high number of current assets. The company has not acquired any long term debts, and this is an indication that there is adequate liquidity.

The company has maintained higher returns to the shareholders by providing high payments for the capital invested. This is indicated by the high payout ratio. Also, the shareholders get a favorable share value. This shows that the company is willing to attract as many investors as possible so that a lot of resources can be available for investment.

GAAP and IFRS Convergence

Generally accepted accounting standards (GAAP) is a set of strict accounting rules that are applied in financial reporting. These standards define specific concepts, making such processes more transparent and stable (“About GAAP,” n.d.). Another set of accounting regulations is the International Financial Reporting Standards (IFRS). These norms also regulate how different transactions have to be reported in financial statements. In the United States, there are still many arguments regarding either adoption of the IFRS or the convergence of the U.S. GAAP with international standards. The main goal of this paper is to analyze the main aspects of the convergence of the U.S. GAAP and IFRS.

The Necessity of the Improvement of IFRS

There is an opinion that the IFRS should be further developed before obligating the U.S. companies to report under them. In order to discuss this issue, it is necessary to carefully compare these two different sets of standards. The IFRS are the system of standards that are widely used in the world (“About us,” n.d.). Meanwhile, GAAP are applied only within the United States. There are several key differences between these two sets. First, as mentioned above, the IFRS are globally accepted standards, and they are used in more than a hundred countries. GAAP were designed specifically for American companies. Although Canada used these principles for a long time, they eventually were converged with the international standards.

Therefore, certain difficulties take place when American firms perform at an international level. Second, one of the main differences between two systems is that they use different methods to evaluate accounting processes (Choi & Meek, 2011). The GAAP require researching and have strict rules. On the other hand, the IFRS offer general patterns that are based on principles. Therefore, GAAP obligate companies to make all transactions under specific rules that give no room for exceptions. However, the IFRS allow interpreting similar situations differently (Choi & Meek, 2011). Third, these systems use dissimilar approaches not only to track inventory but also for a reversal of inventory. For example, the IFRS allow reversing the amount of the write-down if market assets increase in value. However, GAAP state that it cannot be done. Therefore, GAAP cannot respond to positive development in the marketplace.

These differences show that GAAP are a less effective system than the IFRS. The latter is more flexible thus might be applied to a wider range of business situations. Therefore, there is no need to wait for further development of the IFRS. It is a time-tested instrument that is successfully used by leading international companies.

Disadvantages of Convergence

Another important issue is the IFRS and GAAP convergence as this process might negatively affect the U.S. companies. It started in 2002 when the Norwalk Agreement was signed by the International Accounting Standards Board and the Financial Accounting Standards Board (“About the FASB,” n.d.). This step was made to improve the quality of accounting standards. Two main objectives were set: to make standards compatible and to maintain compatibility. Consequently, the Boards issued the Roadmap that described a convergence plan. Three main aspects formed the basis for it: high quality, common standards, and needs of investors.

It triggered a new international accounting trend. Many national bodies that set standards established policies of convergence with IFRS. For example, the UK Accounting Standards Board used the principles of international standards to design its own ones (“Convergence between IFRS and US GAAP,” 2016). Similar policies are applied by a number of different standard setters.

However, there are several disadvantages of the convergence. First, European countries do not favor GAAP, although it is undergoing modification. Second, the convergence will not result in substantial cost savings in the long run. On the other hand, the adoption of the IFRS will lead to an increase in foreign investments and greater capital flow. Therefore, the convergence of the U.S. GAAP and IFRS is not the adequate measure to address the existing problems in international accounting.

Protection of the U.S. Interests

The protection of the U.S. interests is another significant topic to discuss as foreign organizations are responsible for the development of new standards. This topic is one of the main concerns of American businesses. However, there are several important points that prove that international standards will not be harmful to local companies. Standard setters understand that firms are interested in doing business in foreign countries. That is why they develop different methods to facilitate such processes. Moreover, they pay particular attention to the protection of companies’ interests and market integrity. The main principle of the international system of regulation is to support informed investment operations by means of comprehensive and just disclosures (“What we do,” 2013). All the involved parties, such as investors and financial markets, rely on the accounting data of high quality. Such information is crucial for effective performance. Therefore, international standards aim at maintaining the confidence of investors in the reliability of provided data. Moreover, all securities regulation bodies cooperate closely, creating international regulations to improve the overall performance of capital markets.

Conclusion

The convergence of the U.S. GAAP and IFRS is a highly controversial topic. There are several most important aspects that require discussion: further development of the IFRS, compatibility of different standards, and protection of the interests of U.S. companies. Some specialists believe that advantages of the convergence outweigh its shortcomings. However, the analysis reveals that certain drawbacks to which this process will lead are too significant to neglect them. Therefore, it is necessary to change the existing strategy and focus on the adoption of the IFRS.

References

About GAAP. (n.d.). Web.

About the FASB. (n.d.). Web.

About us. (n.d.). Web.

Choi, F., & Meek, G. (2011). International accounting (7th ed.). Harlow, England: Pearson.

Convergence between IFRS and US GAAP. (2016). Web.

What we do. (2013). Web.

Introduction

Managerial and financial accounting are vital components of modern business but they both contribute to overall operations in different ways. Accounting serves the purpose of determining the operations of a business in regards to future projections, past performances, and current requirements. Managerial accounting has its links in cost management, cost accounting, investment management, and activity management.

Nonetheless, all businesses utilize accounting when they seek to carry out various executions in their daily operations. Therefore, both managerial and financial accounting are of interest to different audiences. For example, although investors are not part of daily business operations, they are interested in knowing how their investment portfolios are performing. On the other hand, managers require all the relevant information to be on their fingertips so that they can make quick and relevant decisions.

Managerial and financial accounting are both components of the management accounting whereby professionals in this area are recognized as Certified Management Accountants (CMA). Management accounting is a broad accounting discipline that consists of financial accounting, tax accounting, internal auditing, and managerial accounting. Therefore, financial and managerial accounting both provide different career paths but in general terms the former is mostly concerned with the production of financial statements while the latter deals with the internal activities of an organization. This essay is an exploration of the differences between managerial and financial accounting with much attention being given to the former.

The main difference between managerial and financial accounting

Financial accounting as a tool is used to access the fiscal health of a business mostly for the benefit of external stakeholders. Therefore, the audience of financial accounting includes stockholders, the board of directors, investors, and other institutions. All activities that pertain to financial accounting are time-related. For instance, financial accounts often reflect the performance of an organization over a certain period.

Financial accounting is regulated by various existing principles such as the General Accepted Accounting Principles (GAAP). Therefore, “financial accounting reports must be filed at least annually and they have to be made public in the case of publicly traded companies” (Etramway, 2007). Managerial accounting is a tool that managers utilize in their decision-making duties. Managerial accounting is part of an organization’s daily activities and it is not based on past data but prevailing and future conditions. The most distinctive feature of managerial accounting is the fact that it is short-term. Therefore, “managers often have to make operational decisions in a short period in a fluctuating environment, management accounting relies heavily on forecasting of markets and trends” (White et al., 2011).

The main difference between managerial and financial accounting is that the former is for internal purposes, while the latter is for external uses. Both accounting disciplines are important to business progress because financial accounting is vital to investors while managerial accounting aids in progressive decision-making. Financial accounting is more rigid than managerial because it is subject to GAAP.

On the other hand, managerial accounting is a relaxed affair that mostly involves ‘guesses or estimates’ (Etramway, 2007). In managerial accounting, accuracy is often not an issue as long as a manager can be able to make informed decisions.

In today’s business environment, the managerial accounting profession has risen in prominence. In just a few decades, managerial accounting has moved from being theoretical to a practical application. For instance, a 2011 survey on accounting trends revealed that “managerial accounting skills are going to be in high demand in future as a result of major shifts in the global economy” (White et al., 2011). The advent of the information age in the 21^st century has meant that managerial accounting is a major determinant of an organization’s success. Therefore, it is now important for professionals to be able to account for information management.

Managerial accounting has changed a lot over time beginning from the era of the Industrial Revolution (Martin, n.d.). During this time, operations moved from the home to the office and the management of multiple processes gave birth to managerial accounting. The Industrial Revolution also made it necessary for businesses to seek scientific management movement. Later on, managerial accounting was affected by several factors including the convergence of modern transport, the need for environmental conservation, globalization, mass food industry, civil movements, and the advent of the digital age. Today, managerial accounting grows in tandem with a business’ level of information requirements.

Conclusion

The CMA designation is one of the most important qualifications in the field of management accounting. Overall, there are approximately twenty thousand CMAs in the world. CMA designation is offered through the Institute of Management Accountants (IMA), a global organization that certifies qualifications. CMA is offered after a candidate satisfies several requirements including having a bachelor’s degree and passing two exams.

Ethics is a major component in CMA designation and individuals might lose their status for not upholding this practice. Essentially, “Obtaining a CMA demonstrates a commitment to the profession because of the time and financial costs required and also signals that a job applicant or employee has a certain level of experience in management accounting” (Martin, n.d.).

References

Etramway. (2007). Introduction to managerial accounting. Web.

Martin, J. R. (n.d.) Management accounting: concepts, techniques, and controversial issues. Web.

White, L., Clinton, B., Merwe, A., Cokins, G., Thomas, C., Templin, K., & Huntzinger, J. (2011). Why we need a conceptual framework for managerial costing. Strategic Finance, 93(4), 36-42.

Introduction to IAS

The International Accounting Standards Board (IASB) is an international accounting standard defining body, which works independently for International Financial Reporting Standards (IFRS). It sets the International Accounting Standards (IAS), which provide a global, standard method of accounting and reporting in many countries. Since 2000 when globalization became widespread and international holdings became the norm, many western firms and those from the East, invested in other countries, which followed their national reporting standards. To bring in standardization and uniformity and to avoid confusion, the IASB was formed. IAS prescribes the rules to enter accounting and financial information in financial statements and books of records. By following international standards, uniformity was brought and financial statements could be compared, followed with reliability and accuracy without misconceptions. IAS has issued 41 standards that cover different elements of financial reports. Examples are IAS 1, presentation of financial statements, IAS 38, intangible assets, IAS 41, agriculture (IAS 2017).

Criticism is raised about the utility of IAS. USA follows its own GAPP standards, and it expects everyone to follow these standards. While IAS prescribes rules for reporting, it is clear that these rules are prescriptive and do not identify frauds (Deloitte 2017). This paper discusses four IAS standards and examines how fludubai follows the standards. The four standards are IAS 1 – Presentation of Financial Statements, IAS 2 – Inventories, IAS 16 – Property, Plant & Equipment, and IAS 18 – Revenue.

Main objectives and scope

The objectives of IAS are primarily to bring uniformity and standardization in financial reporting. In a globally connected world, these standards define the manner and calculations for financial information, specify how calculations are made, so that investors across the world can interpret and understand financial information in the same manner. There is consistency in adopting global frameworks where concepts are financial statements are defined uniformly. As a result, an investor in China would be able to correctly interpret and understand financial information such as revenue, inventory, debt, assets, and other aspects. The scope of IAS is to allow many countries that had their methods of calculating the financial information to adopt standard methods. Earlier, investors had to spend efforts on understanding what data was included. IAS has removed this confusion and it is possible to interpret and use information consistently, irrespective of the nationality or location of a business entity. Some important objectives of the five-selected IAS are given below.

IAS 1 – Presentation of Financial Statements

Objective of the standard is to specify requirements to prepare financial statements, their format and structure, content required, the accrual basis of accounting, any concerns and risks, and the distinctions made. The financial statement is expected to give a comprehensive and full disclosure of the financial positions, the profit, loss, incomes, statements of cash flows, and other details. The scope is that the standard applies to financial statements, prepared for public and regulatory use, and for users who do not have resources to obtain tailored reports as per their requirements (IAS 1 2014).

IAS 2 – Inventories

These specify the requirements to account for different types of inventories and their valuation. Inventories are valued at the lower cost and net realizable value. The standard indicates the methods used to value the costs using techniques such as weighted average cost and first-in-first-out. The objective of the standard is to define the accounting method of treating and valuation of inventories. It helps to determine the inventory costs, considers these costs as expenses, provides for the write-down of net realizable value, and gives formulas to calculate costs. Scope includes inventories in various classes, held for sale as finished goods, stock pending in the manufacturing stage, various consumables, and other categories. It does not include material in construction contracts, financial instruments, and biological assets of agriculture (IAS 2 2003).

IAS 16 – Property, Plant & Equipment

The standard refers to the consideration given for different types of pant, property, and equipment. Costs are measured for the property, equipment, plants initially, and then evaluated using a revaluation model and further depreciated. This depreciated amount is distributed over the remaining useful life. The objective of the standard is to define how property, plant, and equipment are treated. The main issues are to identify and value assets, set their carrying value, depreciation charges, and any impairment losses from these assets. The scope of the standard is to account for plant, equipment, property. Exclusions are for biological assets such as agriculture, exploration assets for minerals, oil, gas, and other mineral rights (IAS 16 2014). For airlines, airplanes, owned by the airplane and on a long-lived lease, equipment on such airplanes such as radio and communication, engines, landing gear, etc. wherein, these items are not included in the lease contracts are included (IATA 2016).

IAS 18 – Revenue

The standard details the accounting measures to identify revenue from multiple sources. These sources include the sale of goods and services, ancillary products, income from royalties, dividends, interest, lease, and other sources. It is measured at a structured fair value of the assets for which cash or cash equivalent is received when required conditions are met. The objectives of the standard are to define the method of accounting for revenue that is obtained from different types of events and transactions. It considers gross inflow of cash and cash equivalents, receivables from the sale of primary goods and services, and secondary services such as food and beverage (IAS 18 2009).

Key definitions

Some important definitions related to IAS are given as follows (Ramin and Reiman 2013):

Accounting policies

These are rules, principle conventions, and practices used by the entity to prepare financial statements. IAS removes ambiguity in these definitions.

Amortization/ depreciation

The defined and set procedures to depreciate or reduce the value of an asset over the useful life.

Asset

This is a resource that a firm owns or controls due to past events and from which future economic gains are forecast.

Borrowing costs

Costs of interest and other than a firm incurs when it borrows funds.

Cash flows Cash inflow and outflow into the firm account or cash equivalent.

Consolidated­ financial statements: These are financial reports of a group of firms that are shown as coming from a single entity.

Liability

This is the obligation of the firm from past events, settled with cash outflow or other cash equivalents.

Revenues

It is the increase in cash flows, asset enhancements, and other economic benefits with a decrease in liabilities. Revenues can be positive, indicating profits or negative, indicating losses.

Inventories

These are goods and material purchased and maybe in the form of finished goods held for sale, work in progress, and other goods from which economic value can be realized.

Disclosures

Disclosures are voluntary and mandatory provisions where important information that impacts the decision making of investors is given. Mandatory disclosures refer to information that must be disclosed by law and regulations, while voluntary disclosures refer to information revealed that is beyond the required information. The extent and nature of voluntary disclosure depend on the regulatory and investment climate, industry, firm size, and governance and ownership structure. Some firms may donate to political parties, activists groups, IAS specified some voluntary disclosures, and these are presented below.

IAS 1

The standard requires mandatory disclosures about assets, liabilities, equity, income and expenses, contribution by owners and distributions to them, and cash flows. Components of the financial statements at a minimum require a statement of the financial position or the balance sheet, values for profit and loss, changes in equity, cash flows, explanatory notes, and accounting policies, and comparative information. All this information is for the end of a given period. The importance is given to the faithful representation of the cash flows and financial performance, condition, and definition, using accrual basis for accounting. Comparative statements, which show similar values for the previous one to five years, must be given (IAS 1 2014).

IAS 2

Inventories disclosures should reveal the accounting policy used for inventories, carrying amount of supplies, merchandise, work in progress, finished products, and classifications. Details such as the fair value less selling costs, carrying amount, write-down as an expense, and reversal of write-down considered for NRV along with notes on issues that made such reversal imperative. Other disclosures include the amount used as a mortgage for liabilities and the cost of goods sold. IAS 2 allows firms to report inventories to show operating costs, the nature of costs, and the amount of net change in inventories. Certain costs are not included and these include abnormal waste, storage costs, unrelated administrative costs, losses/gains from a foreign currency, and interest costs for purchases with deferred terms (IAS 2 2003).

IAS 16

Property, plant and equipment are recognized as assets when economic benefits are possible and when asset costs are measured with reliable methods. Costs include costs of initial purchase or lease, running and operating costs, and costs of servicing and parts replacement. When the cost of each part is significant, then separate depreciation is allowed. Equipment such as aircraft requires regular inspection, tests, approvals, and these costs are allowed for current and future expenses. Two costing models are allowed, cost model, where the assets are valued at costs less the depreciation and revaluation model where the asset is examined at a revalue amount as the fair value, less depreciation, on the date of valuation. Depreciation is allowed and spread over the useful life of an item. When an item is retired from service, it should not appear in the financial statement and any gain or loss is reported. Disclosures include measurement bass, depreciation method and rates, gross carrying amount, reconciliation details, restrictions on title, expenditures, contractual terms, and compensation (IAS 16 2014).

IAS 18

Disclosures for revenue must consider cash inflows and economic gains from the sale of goods, from providing services, cash from interest, royalties, lease and rentals, and dividends. Airlines sell food products and beverages on airplanes and charge extra for excess baggage and preferred seats. All income from these revenue streams must be considered and defined (IAS 18 2009).

Examples from annual reports of flydubai airlines

This section presents examples of the three IAS standards from the financial statement of flydubai airlines. Information for the four standards is spread across multiple pages in the annual report. It is not feasible to present all pages. Hence, a representative snapshot from the report is given (Fludu 2017).

Example of IAS 1

Fig 1 illustrates a snapshot of flydubai financials. Information about important values and the financial health is given for 2015-16 along with note numbers where explanations are given. Investors can view this snapshot and then examine other parts of the report.

Example of IAS 2

fludubai does not give a detailed breakup of items in the inventory. Rather, it clubs all the items under this head and gives a single value for the combined inventories. A note explains the methodology used to calculate the inventory. Fig 2 illustrates the value of inventories.

Example of IAS 16

Fig 3 gives information about property, plant, and equipment.

A detailed note about the method of calculating the assets is given in Fig 5.

Example of IAS 18

Fig 5 gives a detailed breakdown of revenue from various sources and segment.

Conclusion

The paper discussed IAS standards and examined four standards from the list of standards. The manner in which flydubai airlines applies these standards in the annual report was detailed. The report shows adherence to IAS specifications. However, disclosure levels for various accoutring heads are minimal, though they meet the prescribed standards. A point to note is that the report does not mention details of properties owned, of type and age of aircraft leased, and other important information. Therefore, it is difficult to compare the statements with other comparable airlines. flydubai is a low cost, budget airline, hence, the reporting levels may not be detailed, while all mandatory disclosures are made. The conclusion is that flydubai follows all requirements of IAS.

References

Deloitte 2017, IASB and IFRS Interpretations Committee, Web.

flydubai 2017, Financial statements for the year ended 31 December 2016, Web.

IAS 2017, International Accounting Standards, Web.

IAS 1 2014, IAS 1 – Presentation of Financial Statements, Web.

IAS 2 2003, IAS 2 – Inventories, Web.

IAS 16 2014, IAS 16 – property, plant and equipment, Web.

IAS 18 2009, IAS 18 – Revenue, Web.

IATA 2016, Airline disclosure guide: Aircraft acquisition cost and depreciation, Web.

Ramin, KP & Reiman, CA 2013, IFRS and XBRL: How to improve business reporting through technology and object tracking, Web.

Executive Summary

The current operational audit report is prepared to observe deficiencies noted during the audit of Subway restaurant. There are problems with safety, cleanness, food handling, and parking. The recommendations are also presented in the report that could help in bringing changes and improvements in various operations of the restaurant. However, operational activities that adhere to business requirements are not considered in the findings and recommendations sections. The primary concern of the operational audit is to identify and review weak points and suggest suitable solutions to improve them. The recommendations are based on the evidence collected. They are related to adopting techniques that could help the restaurant to mitigate operational management issues. Moreover, operational deficiencies that contradict the nature of the brand such as limited options on the menu are not considered as weaknesses of its operation.

The objective of the Audit

The core objective of the audit is to perform an operational audit by emphasizing on the customer service of Subway and recommend changes for improvement to overcome deficiencies identified in the audit.

Scope of the Audit (with date and time)

The focus of the audit report is on customer services of Subway. The selected location for audit is Subway restaurant located at Colonel Glenn Highway, Fairborn, OH. Therefore, the internal audit of the restaurant was conducted to review its different operational activities. The audit was conducted by preparing simple questions that were answered after the completion of the audit. The visit to Subway restaurant was made on January 21, 2017, at 8 p.m. The reason for choosing this time was to perform the audit of operations during peak business hours.

Background of Subway

Subway is an American fast-food restaurant chain that is headquartered in Milford, Connecticut, US. The restaurant chain was established by Fred DeLuca and Dr. Peter Buck in 1965 (“Subway Business Overview” 3). Currently, it has 44,882 restaurants operated by franchise companies in 112 countries. Subway is the largest restaurant operator and single-brand restaurant chain in the world. The main products of Subway are Submarine Sandwiches and Pizzas. However, Subway also offers salad, wraps, cookies, doughnuts, and muffins, etc. Customer satisfaction and loyalty are priorities of Subway and the business operations of the restaurant focus on preparing great sandwiches.

Findings and Recommendations

The results of the operational audit are summarized in Table 1 by sorting them into different categories and procedures. There were three options including strong, medium, and weak for each category and procedure to identify the level of success.

Table 1. Operational Audit results of Subway for each category and Procedure.

The audit results in Table 1 highlight a few deficiencies of Subway that need improvement and/or changes. The finding and recommendations related to each deficiency are discussed separately for clarity of discussion.

Finding 1: Safety Procedure

The safety procedure of the Subway restaurant is inadequate as there is no fire extinguisher in the restaurant. The safety and security of staff and customer are essential in the restaurant business. The operational management of the restaurant lacks precautionary and safety plans to evacuate in the case of an emergency (see Table 1). Also, the internal environment of the restaurant is closed that does not have sufficient ventilation and freshness. Moreover, the use of sprinklers is common in restaurants. Although Subway provides this service, there is a need for improvement.

Recommendation

The safety of staff and customer is the implied responsibility of restaurants. The management of Subway should allocate a sufficient amount of budget to purchase fire extinguishers and safety alarms. The UK Health and Safety Executive provides regulations for the protection of employees that require the management of restaurants to take sufficient precautionary and safety measures to avoid accidents, casualties, and injuries. The ethical and moral responsibility cannot be denied while doing business (“A guide to health and safety regulation in Great Britain”). The strict actions are required to follow by the management of restaurants as they are responsible for any unusual incident within the premises of a restaurant. Precaution is better to reduce the threat of the occurrence of an unusual event. Spending on fire safety should be the priority above all other expenditures including decoration. The safety and security standards mentioned in the Act of Federal Fire Prevention and Control Act of 1974 should be strictly followed by the operation management of the restaurant.

Finding 2: Weak in Cleanness

Cleanness is the important element that attracts customers towards the restaurant. Cleanness is also the basic right of customers visiting a restaurant. Subway has unclean restrooms that do not suit the brand that is highly popular globally. The restrooms and sitting areas were dirty and smelly (see Table 1). The management mainly focuses on cleaning tables and chairs in the restaurant. The lack of attention to other areas also creates difficulties for customers. The entire internal environment of the restaurant should be cleaned to avoid the spread of diseases.

Recommendation

Environmental protection is a major issue along with food safety. The management of Subway should prepare a schedule for the cleaning staff. The operational manager should regularly check the work of cleaning staff to ensure that the entire area of the restaurant is cleaned and if there is a need to bring change in the existing cleaning plan or strategy then he/she should make it. The change management strategy is required for the franchise to ensure high standards of dining. Subway is a chain of restaurants. Therefore, there should be no issue with a shortage of cleaning staff. The franchise can hire more cleaning staff and prepare a shift schedule for the staff to avoid issues related to cleaning (Motarjemi and Lelieveld 1072).

Finding 3: Food Handling Safety Problem

Food handling is another major deficiency of the staff working in Subway. There is a high risk of wastage of food material in the franchise. Food handling is an art that every restaurant staff should practice while handling ingredients or final food products (see Table 1).

Recommendation

Subway’s staff requires training to handle food items. The problem of Subway can be resolved by providing training to employees with a demo to handle the food. The chances of mishandling increase in the restaurant during peak timings. The management should organize a shift schedule in a way that more staff should be available during peak hours. The evaluation is based on the number of customers visiting the restaurant at a particular time (Baret, Lehndorff, and Sparks 172).

Finding 4: Issue of Parking

Customer satisfaction is the key to success for a restaurant business. Operational management also includes extra services provided to customers. The parking facility is also one of the major issues at Subway (see Table 1). Customers have to wait for a long time to park their vehicles and enter the restaurant. The activity is insufficiently managed as the parking lot is not specifically provided by Subway. The major problem related to parking is the shortage of space that prevents customers to dine in Subway. The parking is not convenient for customers that also need special attention to the management of Subway.

Recommendation

The understood responsibility of a restaurant is to facilitate customers from the time of their arrival to leaving the restaurant. Subway should rent a space outside the restaurant. The extra space should be allocated to parking. Moreover, employees should be assigned to provide services to customers in the parking lot. Valet parking is required to facilitate customers.

The deficiencies noted in the franchise of Subway are not difficult to manage. The problems can be resolved by adopting the changes recommended in this report. The management needs to focus on extra facilities along with the quality of food. The quality and prompt delivery of services are required to manage the overall operations efficiently. Furthermore, teamwork is essential for implementing small changes in operation management. Managers of Subway should take the responsibility to overcome major issues through team management. The framework including staff schedule is significant for implementing the plan prepared for bringing improvements in the restaurant’s operations.

Works Cited

“A guide to health and safety regulation in Great Britain.” Health and Safety Executive, 2013, Web.

Baret, Christophe, Steffen Lehndorff and Leigh Sparks. Flexible Working in Food Retailing: A Comparison Between France, Germany, Great Britain and Japan. Routledge, 2013. Web.

Motarjemi, Yasmine and Huub Lelieveld. Food Safety Management: A Practical Guide for the Food Industry. Academic Press, 2014. Web.

“Subway Business Overview.” Franchising, 2017, Web.

Introduction

There are many users of business information who do not work for companies but are associated with them directly or indirectly. These users are considered as external users, and they do not have access to the financial information generated by different departments of a company. Therefore, they have to rely on the qualitative and quantitative information prepared by the company’s accountants and verified by its auditors. This information is periodically prepared, and it is available to its users after some time. There are different financial statements prepared by companies, which are identified and discussed along with their purpose in this paper. There are different accounting concepts related to the information prepared and reported by companies, which are also covered in this paper.

Importance of the Study

The study of the accounting cycle and financial statements is important as it could help users to understand the purpose of financial reporting and assist them in making their decisions. The disclosures by companies are assessed for their relevance, reliability, completeness, and timeliness. For example, shareholders would be interested in determining the return on their investment in the company’s stocks. Therefore, they would consult the financial information provided by the company to estimate their return. Furthermore, such a study can help in understanding how financial reporting affects different stakeholders.

Accounting Cycle

The seventh step of the accounting cycle is the preparation of financial statements. There are different financial statements that are prepared by publicly listed companies. These financial statements summarize the financial performance of the company in the last reporting year. Therefore, it could be stated that they are prepared and reported at the year-end. A company’s year-end is the last working day of the accounting period. Moreover, companies can change their reporting period to reconcile with their tax period (Rich et al. 132). In addition to year-end financial statements, companies also prepare financial statements on a quarterly basis. These statements are important as they provide timely information to users as compared to year-end financial statements. Furthermore, companies provide comparative financial statements of the previous financial period. It allows users to compare and evaluate the financial performance of companies in the last two accounting periods.

Basic Financial Statements

There are four different financial statements that are prepared by companies. These include “statement of income (income statement), statement of financial position (balance sheet), statement of changes in equity, and statement of cash flows” (Whittington 148). The statement of income is prepared for the entire financial period. It indicates the company’s revenue, cost of sales, selling and administrative expenses, and other expenses to determine its gross profit and operating profit. Furthermore, the statement includes interest expenses and tax paid by the company to determine its net profit. In addition to these, the statement also indicates the income attributable to the company’s equity holders and minority shareholders along with the basic and diluted earnings per share. The statement of financial position provides information about the company’s assets, liabilities, and equity on the last working day of the accounting period. It implies that the information provided in the statement is for a particular day and not for the entire period. The statement of cash flows is the most useful financial statement as it provides information about cash receipts and cash payments made by the company during the accounting period. The statement is structured in three different sections including cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. The sum of cash flows from all these activities determines the ending cash position of the company on the last working day of the accounting period. The statement of changes in equity provides details of changes in the owner’s equity during the year. The changes in equity are due to the company’s earnings, dividends paid, revaluation of assets and liabilities, and equity withdrawals, etc. (Yona 117).

Users of Financial Statements and Their Purpose of Using Such Statements

There are different users of financial statements including customers, creditors, shareholders, investors, financiers, tax authorities, government, and the general public. They all have different interests, and their requirements of information also vary significantly. For example, creditors would be interested in determining whether the company can settle its accounts payable. They assign a credit limit to a company based on its previous dealing with them. On the other hand, customers would assess the company’s financial worth and ability to manage their orders. Most importantly, shareholders, who provide finance to the company, would be interested in determining if their investment in its equity would generate a sufficient return for them. Managers act as agents of shareholders (Porter and Norton 11). Therefore, they need to make decisions that are favorable and generate value for shareholders. The regulators and tax authorities would assess the company’s compliance with regulations and policies to ensure that it is fulfilling its corporate obligations. Moreover, the general public would be interested in the information about the company’s actions and investments for its corporate social responsibility. Therefore, it could be argued that all users of financial information have different information needs that must be satisfied by the company through its reporting.

Accounting Concepts

There are different accounting concepts that relate to the preparation of financial statements. Some important concepts are going concern concept, accrual concept, matching concept, consistency concept, and materiality concept. The accrual concept requires companies to “recognize revenues when they are earned and expenses when assets are consumed” (Pingle 33). The going concern concept is based on the assumption that the company will continue to use its assets in the coming periods. The matching concept requires companies to “recognize expenses in the same period when revenue is recognized” (Pingle 95). The materiality concept implies that companies should record all those transactions that are likely to affect the users of financial information and their omission would result in wrong decisions (Flood 16). The consistency concept requires companies to follow accounting principles and policies on a consistent basis. They should not change their accounting methods without adjusting the previous period’s financial information based on the new methods. In addition to these concepts, there are other concepts including conservatism and economic entity concept that should also be considered by companies when preparing their financial statements.

Conclusion

The discussion provided in this paper concludes that preparation of financial statements by companies is a key step in the accounting cycle. There are different types of financial statements, and they serve various objectives of users. These financial statements are prepared on a regular basis and their frequency varies. Finally, companies are expected to adhere to the concepts and principles of accounting when preparing their financial statements.

Works Cited

Flood, Joanne M. Wiley GAAP 2015: Interpretation and Application of Generally Accepted Accounting Principles. John Wiley & Sons, 2014.

Pingle, Michael. Basic accounting concepts: A Beginner’s Guide to Understanding Accounting. Xlibris Corporation, 2013.

Porter, Gary A., and Curtis L. Norton. Financial Accounting: The Impact on Decision Makers. Cengage Learning, 2012.

Rich, ‎Jay, et al. Cornerstones of Financial Accounting. Cengage Learning, 2012.

Whittington, O. Ray. Wiley CPA Exam Review 2013, Financial Accounting and Reporting. John Wiley & Sons, 2012.

Yona, Lucky. Financial Accounting for Executive MBA. AuthorHouse, 2013.