Task 3 Abdul Salam LLC's Financial Position Redraft Equity ✓ Solved

Task 3abdulsalam Llcs Financial Position Redraftequity And Liabili

Redraft Abdulsalam LLC's financial position, including the equity and liabilities, based on the given data. The data includes assets such as share capital, inventory (raw materials and finish goods), debentures, net profit, and other assets. The task involves reconstructing the statement of financial position to accurately reflect the company's financial standing, considering the provided information.

Additionally, the assignment discusses the evolving roles in the accounting profession in the 21st century, the application of positive and normative accounting theories, and the impact of creative accounting measures on the company's financial statements. You are required to explain a new skill set needed for modern accountants, identify a positive and a normative theory with justification, redraft the financial position considering creative accounting measures, and analyze the implications and recommendations based on the altered financial statements.

Sample Paper For Above instruction

Introduction

The modern accounting profession is experiencing significant transformation driven by technological advancements and evolving stakeholder expectations. Accountants today are required to develop a diverse set of skills to stay relevant and add value beyond traditional roles. This paper discusses one such critical skill set, explores the application of positive and normative accounting theories, and evaluates how creative accounting influences financial statements and decision-making within Abdulsalam LLC.

Essential Skill Set for Modern Accountants

Among the many competencies demanded in the 21st-century accounting landscape, strategic financial analysis stands out as vital. This skill enables accountants to interpret financial data not merely as numbers but as strategic tools to support decision-making. It involves understanding economic environments, financial indicators, risk assessment, and the implications of various accounting policies on a company's overall strategy. Mastering financial analysis equips accountants to provide insights that guide management in resource allocation, investment decisions, and risk management, aligning with their expanded strategic roles (Laux & Leuz, 2020).

The Role of Positive and Normative Accounting Theories

Accounting theories guide the development and application of financial reporting standards and practices. Positive accounting theory (PAT) predicts and explains actual accounting practices based on empirical evidence, while normative accounting theory (NAT) prescribes ideal standards for financial reporting based on normative principles of fairness and transparency (Watts & Zimmerman, 1986; Roberts & Whited, 2012).

In the context of Abdulsalam LLC, a positive theory example is the assertion that companies tend to engage in earnings management to meet earnings forecasts or market expectations. This theory explains real-world behavior based on managerial incentives. Conversely, a normative theory might recommend that companies should fully disclose all financial risks and provisions, ensuring transparency and fairness to stakeholders. This prescriptive approach emphasizes ethical standards, promoting accountability and trustworthiness.

Redrafting the Financial Position with Creative Accounting

The initial statement of financial position for Abdulsalam LLC as of 30th September 2020 is summarized as follows:

• Share Capital: OMR 5260,000
• Debentures: OMR 1540,000
• Net Profit: OMR 2500,000
• Inventory - Raw Materials: OMR 2500,000
• Inventory - Finish Goods: OMR 3000,000
• Other Assets: OMR 3800,000

Considering the management’s creative accounting measures:

1. Increase raw materials inventory: This aims to understate expenses related to obsolete raw materials, thereby inflating assets and net profit.
2. Decrease finished goods inventory: This indicates damage or reduce inventory value, ostensibly to reflect higher cost of goods sold, but can also mask inefficiencies.

To reflect these measures, the balance sheet is adjusted as follows:

• Raw Materials Inventory: Increase by an agreed amount (assume OMR 200 for illustration). New raw materials inventory: OMR 2700.
• Finished Goods Inventory: Decrease by the same amount (OMR 200). New finished goods inventory: OMR 2800.

The revised statement of financial position would show higher total assets due to increased raw materials and marginally lower finished goods inventory, creating a distorted yet seemingly healthier financial stance.

Analysis of Creative Accounting Impact

The application of creative accounting techniques, such as inflating raw materials and deflating finished goods inventories, impacts the financial statement's credibility and comparability. These practices can mislead stakeholders regarding the company's true financial health, potentially exaggerating profitability and asset base (Al-Dalabih, 2017).

For management, such measures may serve short-term goals like attracting investors, securing loans, or meeting earnings targets; however, they undermine financial transparency and can jeopardize stakeholder trust in the long run. Regulatory bodies and auditors have a responsibility to scrutinize such practices to ensure compliance with accounting standards and prevent manipulation.

Recommendations

To mitigate the risks associated with creative accounting, it is recommended that Abdulsalam LLC adopts strict internal controls and adheres to ethical accounting principles. Regular audits, transparent disclosures of inventory policies, and compliance with International Financial Reporting Standards (IFRS) are essential. Furthermore, fostering an ethical corporate culture that discourages manipulation promotes sustainability and stakeholder confidence.

It is also advisable for the company to enhance financial literacy among management and accountants, emphasizing the importance of accurate reporting for strategic decision-making and corporate governance.

Lastly, regulators should engage in more rigorous enforcement of accounting standards and provide education programs to detect and prevent creative accounting practices.

Conclusion

The evolving role of accountants necessitates new skills like strategic financial analysis, vital for adapting to technological and regulatory changes. Recognizing the influence of positive and normative theories helps in understanding and guiding accounting practices ethically and effectively. The case of Abdulsalam LLC illustrates how creative accounting, while tempting for short-term gains, can distort financial realities and undermine trust. Implementing ethical standards and transparent practices ensures long-term sustainability and stakeholder confidence in corporate financial reporting.

References

• Al-Dalabih, M. (2017). The Practice of Creative Accounting on the Jordanian Banking Sector: A Case Study in the Northern Region. Journal of Accounting and Financial Management, 4(2), 87-105.
• Laux, C., & Leuz, C. (2020). The Economics of Materiality. Journal of Accounting and Economics, 70(2-3), 101316.
• Roberts, R. W., & Whited, T. M. (2012). Financial Statement Analysis and Security Valuation. Pearson.
• Watts, R. L., & Zimmerman, J. L. (1986). Positive Accounting Theory. Prentice Hall.
• Jeremiah, O., & Daferighe, E. (2019). The Evolving Dimensions of The Accounting Profession and The 21st Century Expectations. Accounting Today, 8(4), 22-29.
• Leuz, C., & Verrecchia, R. E. (2021). The Economics and Politics of Corporate Disclosures. Journal of Accounting Research, 59(8), 537-583.
• Robinson, S., & Dechant, C. (2022). Ethics and the Accounting Profession: Navigating Challenges in a Dynamic Environment. International Journal of Accounting, 57(1), 35-52.
• Barrett, R. (2020). The Impact of Technological Advancements on Accounting Skills. Journal of Financial Transformation, 51, 170-179.
• Petersen, C., & Plenborg, T. (2012). Financial Statement Analysis: A Practitioner's Guide. Pearson.
• Mensah, K., & Arhin, K. (2018). Inventory Management and Financial Performance of Ghanaian Banks. International Journal of Finance & Banking Studies, 7(1), 45-59.