Introduction, Review of accounting Process and Financial Statements
Generally Accepted Accounting Principles (US GAAP)
US GAAP is the generally accepted accounting principles followed by companies operating in USA and or listed in the Wall Street exchange. It involves enormous volume of standards, interpretations, opinions and bulletins, formulated by the FASB (Financial Accounting Standard Board). It also involves the recommended points of AICPA (the accounting profession), and the SEC (Securities and Exchange Commission). The GAAP principles are formulated by the authoritative standards by policy organizations and generally accepted methods of accounts preparation. It is related to the IAS standards in certain ways. “US GAAP is very detailed, reflecting the litigious environment in the US which calls for more and more detailed regulation. US GAAP cannot be detached from regulatory intervention by the SEC.” (Generally accepted accounting principles, explanation of US GAAP, 2004).
GAAP is insisted for organizations in order to keep the confidence of the stake holders of the companies on the reliability of the accounting standards. Investors are relying on the published financial statements for assessing the financial position of the business. Thus in order to take appropriate investment decisions the published financial statements has to procure adequate standards. The GAAP is ensuring minimum level of consistency in the published financial statements of the companies. In the reporting of financial data by way of financial statements, including revenue measurement, balance sheet items classification, and measurements of outstanding shares, companies have to follow GAAP rules. (Generally accepted accounting principles –GAAP, 2009).
International Accounting Standards
International Accounting Standards (IAS) is a standard for preparing submitting different financial statements. Now the name of IAS has changed as International Reporting Standards. The standards and guidelines of the IFRS play an important role in the preparation of the financial statements as it has a standard set of principles to be followed for each item of the financial statements. The quality of the accounting report is measured on the basis of the accounting standards it follows. “High quality accounting standards are critical to the development of a high quality global financial reporting structure.” (SEC concept release: International accounting standards, 2000).
If company follows the IFRS standards in preparing financial statements, it will be useful in auditing, analysis of the statements and reports…etc. The financial statements which are prepared in accordance with the standards of IFRS will be having different qualities like easy understanding, no ambiguity in statements…etc.
Liquidity
Liquidity is the capability to convert an asset to cash within a short term period without any price discounts. It is the degree to which the asset or security that can be marketed without influencing the asset’s price. The liquidity of assets has high importance in trading activities. It is also refereed as marketability. Liquidity ratios such as current ration and quick ratio are used for calculating the liquidity of the assets. Investors are interested in liquidity of the funds together with its profitable return. (Liquidity, 2009).
Comparison between methods of financial statements preparation of Unilever and Kraft Foods
Accounting information and policies of Unilever Ltd
The Unilever is following the accounting policies suggested by IFRS of for the preparation of their consolidated financial statements. It is in accordance with the IFRS issued by the IAS Board. Historical cost convention is followed by the company for its fixed asset valuation. As per the amended rules of IAS, the company is required to present their financial statements with new disclosures which facilitating the users of the statements to measure the objectives, policies and procedures adopted in the capital management.
Financial Statements Standards of Unilever
Balance sheet: In the balance sheet presentation Unilever adopted the following changes.
- The creditor’s funds and funding from derivatives are reclassified as net debt. Borrowings are renamed as financial liabilities to meet the requirements of IFRS 7.
- For translating the foreign currency transaction in home currency, the balance sheet items are valued at year end rate. (Financial statements, 2007, 72).
In presentation of income statements, costs and revenue relating to restructuring, business disposals and impairments are disclosed. Individual items having significant to the stake holders are also disclosed separately for providing additional information to the investors for understands the financial performance in detail. (Financial statements, 2007, 75).
In the preparation of cash flow statement, cash and cash equivalents such as cash at bank and in hands and other highly liquid interest bearing securities having maturity period of three months and less are involved. (Financial statements, 2007, 74).
Financial statements presentation of Kraft Foods
Kraft Foods Limited follows the US GAAP standards for the presentation of its financial statements. As per the requirements of the US GAAP, the company records marketing costs as expense in the year in which it occurred. This is differentiating from the IFRS as in IFRS, the marketing costs are treated as capital expenditure and treated as deferred revenue and written down in the following years. All types of marketing costs are treated and recorded as expense and it is deducted from the revenues. (Meet our new boss, 2007, 32).
Which is more useful for both of the companies; Net income or cash from operating activities?
In my opinion, cash from operating activities in more useful for the investors to make the investment decisions. The cash from operating activities indicates the liquidity of the investment made with the business. The net income figures shown in the financial statements may not be fully realizable in to cash as it involves closing stock items. Thus the net income shown in the income statement may not be available to the investors as revenue for the year.
Additional conclusion: The foreign exchange transactions
Foreign currency translation in Kraft Foods: The Company translates the results of operation of its foreign subsidiaries using average exchange rates during each period, whereas balance sheet accounts are translated using exchange rates at the end of each period. Currency translation adjustments are recorded as a component of shareholders equity. (Meet our new boss, 2007, 68).
Foreign currency translation in Unilever: For translating the foreign currency transaction in home currency, while preparing the consolidated financial statements of income statements, cash flow statements, assets and liabilities are valued at annul average rates of exchange. The balance sheet items are valued at year end rate. (Financial statements, 2007, 72).
References
Financial statements. (2007). Unilever Annual Report and Accounts, 72.
Generally accepted accounting principles, explanation of US GAAP. (2004). 12 Manage the Executive Fast Track.
Generally accepted accounting principles –GAAP. (2009). Investopedia.
Liquidity. (2009). Investopedia.
Meet our new boss. (2007). Kraft Foods Inc. 2006 Annual Report.
SEC concept release: International accounting standards. (2000). U.S Securities and Exchange Commission.