accounting - topic 4

insolvency

occurs when a company cant pay its debts on time, typically when its liabilities exceed its assets, it is assessed by considering whether the company can obtain additional funds to meet it obligations if current resources are insufficient

insolvency under the corporations act

leads to an appointment with an administrator, who takes control of the company and if the company isn’t able to become solvent again its assets may be sold and the money raised will be used to repay its creditors

3 alternative actions for insolvent companies

voluntary administration, liquidation and receivership

voluntary administration

occurs where a business seeks external management to assist them to pay their debts, avoiding liquidation

role of the voluntary administrator

investigate the companys affairs, report to creditors and recommend whether the company should enter into a dead of companys arrangement, go into liquidation or be returned to the directors

appointment of a voluntary administrator

usually by company directors after they decide if the company is insolvent or likely to become or less commonly by a liquidator, provisional liquidator or a secured creditors

liquidation

occurs when a business is unable to pay its debts when they fall due, a liquidator is appointed to sell the assets of the business in order to pay its debts

three types of liquidation

court, creditor voluntary and member voluntary liquidation

court liquidation

starts as a result of a court order usually made after an application by a creditor

creditor voluntary liquidation

initiated by the company directors when concerned the company cant pay its debts

member voluntary liquidation

a way for solvent companies to shut down

role of the liquidator

collect, protect and sell the companys assets, investigates its failures and reports to the ASIC and creditors, distributes remaining funds after covering costs and secured creditors to priority and unsecured creditors before applying for deregistration

liquidator

arent required to act unless there are enough assets to cover their costs, if funds are lacking some creditors may agree to fund recovery efforts and if successful the liquidator can seek court approval to compensate those creditors for their risk

receivership

occurs where a secured creditor seeks to recover, via the appointment of a receiver, what they are owed in outstanding debts if a business defaults on a secured loan

role of the receiver

pay out the money collected in the order required by the law, report to the ASIC any possible offences or irregular matters they come across and collect and sell enough of the charged assets to repay the debts owed to the secured creditors

duties of a receiver

primary duty is to the companys secured creditors, main duty owed to the unsecured creditors is an obligation to ensure that any property sold is done at market value or the best reasonable price and has the same general duties as a company director

order of repayments of creditors

costs for the liquidators, administrators or receivers for conducting liquidation, secured creditors ranked on debt instrument, all outstanding employee entitlements, unsecured creditors ranked on pro-rata basis and shareholders

CSR - corporate social responsibility

concept of business acknowledging and taking responsibility for its impact on the environment, both social and natural, within which it operates, the company may be seen having some degree of obligation towards a number of groups and individuals like shareholders, employees and general public

real life examples of CSR

recycling waste, reducing energy use, contributing to charities and changing a way the business operates by being selective about what products to sell, production and distribution processes and elimination of waste

costs associated with engaging in socially and environmentally responsible practices

providing sponsorship, donations or other forms of community service, they need to employ more staff if required, costs of producing CSR reports and recording data

examples of costs associated with engaging in socially and environmentally responsible practices

lack of regulation makes it difficult to determine what needs to be reported, different users have different needs for the information and it may not always be meet and users of information may use it for there advantage and against the preparer to accommodate their own agenda

potential income associated with engaging in socially and environmentally responsible practices

a favourable perception of the company - by customer may lead to greater sales or market share, in the general community leads to a positive impact and public image and among its employees may lead to greater productivity due to enhanced staff morals

benefits potential income associated with engaging in socially and environmentally responsible practices

corporations can gain improved relationships with stakeholders, enhance their reputation, avoid government regulations, gain competitive edge, reduce political risks and maintain their license to operate

Ethics

are a set of principles that help people decide what is right or wrong, different from laws as one cannot be issued penalties for doing the wrong thing ethically

code of conduct

gives advice on how the professional business people should carry out their roles in a fair and ethical manner

professional behavior expected - ethics

objectivity, integrity, professional competence and confidentiality

characteristics of an ethical person

honesty, loyalty, fairness, caring, respect, integrity and accountability

ethical issues that could be encountered in financial dealings between business owners/managers and their employees

staff may be expected to work long hours, get paid low wages, endure dangerous conditions and overseas workers may be employed at low rates of pay these arent legally wrong but staff fear to speak up afraid of losing their job

ethical issues that could be encountered in financial dealings between business owners/managers and their clients

transfer of information to competitors, inferior products sent to foreign customers and gifts from suppliers may mean that a manager will stick to one supplier rather than changing to a cheaper or more suitable supplier

ethical issues that could be encountered in financial dealings between business owners/managers and their investors

public companies may choose to invest in risky ventures thereby endangering amounts left for investor dividends and managers might have shares in other businesses and may not always act in the best interest of the business they are employed in

important financial principles of asset management

protection, efficient, accurate, internal control, separation, authorisation, security and asset register

AM - accurate

accurate information available to management to enable compliance with requirements of first 2 principles and ensure adherence to the published policies

AM - internal control

internal control procedures over assets need to be formal and structured depending on size and complexity of a business as well as following principle of internal control

AM - authorisation

proper authorisation must take place for purchase of new assets, disposal of old assets and use of assets for non business processes

AM - asset register

maintaining an asset register which records all assets owned and all the details including insurance

internal control procedures

segregation of duties, established line of responsibility, appropriate security, adequate documentation, authorisation processes exist and employment needs to be reliable

appropriate levels of investment in non-current assets

as non-current assets represent the base upon which the revenue earning capacity of many businesses rely, they must be effectively managed

appropriate management of non-current assets

security, record keeping, asset levels, investment decisions and avoid over investments

manage NCA - security

protects assets through financial risk coverage and physical measures with appropriate mechanisms

manage NCA - asset levels

ensure appropriate levels of assets are maintained to support income generation and sustainability

manage NCA - investment decisions

assessing the costs and benefits of each assets before investing and how it aligns with future plans

manage NCA - avoid over investment

dont acquire more assets than needed as the unused capacity is costly so the surplus should be sold or leased to other parties

appropriate management of accounts receivable

credit checks, credit procedures, regular systems and separation of duties

manage AR - credit checks

establish internal control to maintain credit checks for all customers that purchase inventory on credit

manage AR - credit procedures

suitable and clear processes for granting credit to new customers, extending credit to existing customers and managing the payment of credit sales

manage AR - regular systems

established to send out accounts for credit sales regularly and offer payment incentives like a discount

appropriate management of inventory

separation of duties, secure storage, smart purchasing, maintain levels and accurate records

manage I - secure storage

keep inventory in restricted and secure areas

manage I - smart purchasing

consider discounts and offers to increase benefits of acquiring the inventory

manage I - maintain levels

making sure inventory levels match demands which can be monitored by current information technology to streamline ordering and predict supply requirements

manage I - accurate records

using the perpetual inventory system to keep recent records which are available for the business

appropriate management of cash

vulnerability, internal controls, physical controls and bank account access

manage C - vulnerability

cash is highly vulnerable to theft and fraud so, strong internal controls are essential to keep it safe

manage C - internal controls

internal controls should include separating duties for receiving, recording and paying cash to prevent mismanagement

manage C - physical controls

safes, regular banking, virus protection and secured electronic systems with updated passwords

manage C - bank account access

must be limited to authorised staff, with receipts and payments double checked by senior personnel, regardless of banking method either in person or online

appropriate management of short term debts

refers to borrowing repayable within 3-12 months, failure to pay leads to insolvency, financial planning must include how short term debts will be repaid, monthly budgets and cash flow statements help track repayment ability and overdrafts are acceptable for financing short term debts

appropriate management of long term debts

typically repaid over 10-20 years, businesses should avoid owing more than they own, gearing measures the proportion of borrowed funds to total assets and common types are mortgages and debentures

appropriate level of equity capital - benefits

reduces financial risks by avoiding high gearing, no interest repayments required, offers financial stability if leverage remains low and suitable for funding long term assets

appropriate level of equity capital - costs

excess equity may lead to inefficient use of funds, may restrict business expansion and asset purchases and misses out on tax benefits from interest deductions