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BUS304 Accounting Theory And Accountability
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BUS304 Accounting Theory And Accountability
0 Download3 Pages / 602 Words
Course Code: BUS304
University: Murdoch University
MyAssignmentHelp.com is not sponsored or endorsed by this college or university
Country: Australia
Questions:
1. How does a provision for underperforming loans affect the earnings of a firm? Should a reduction in equity be recognised?2. What are the implications of a change in accounting policy affecting provisions for (1) shareholders, and (2) analysts such as credit rating agencies?3. Should the $20 million provision or a larger provision be used in analysing the performance of the company? If so, how would you determine the size of the adjusted provision?
Answer:
Meaning of net loss
Net loss is referred as the net operating loss that takes place while the expenses of the company exceed its total revenue or net income generated during the particular period of time. If the business have net loss, it is not necessary that they will go bankrupt as they may continue their operation using the retained earnings or can borrow from outside. However, using this strategy the business can survive for short run as for long the entity will require profits for surviving (Bartov & Mohanram, 2014). Net loss appears on the bottom line of the entity and it is calculated through using the following formula –
Revenue – Expenses = net loss or net profit.
Net loss is the example for matching principle as expenses and revenues are matched under the particular period of time. Expenses incurred for generating the income under the particular period is included in the same period irrespective of the time of expense. Net losses can be occurred due to lower amount of revenues, unsuccessful marketing activities and strong competition. COGS also have an impact on the net loss. The purchase cost of the products and the production cost are subtracted from the revenues. Remaining balance is used for cover off the expenses and generating profits. However, if the COGS exceed the funds allocated for meeting expenses it will result into net loss (Robinson et al., 2015). Further, the expenses also generate net loss. Even if the company earned the target revenues and COGS remains under limits, overspending and unexpected expenses may exceeds the gross profit leading to net loss.
Impact of net loss on shareholder’s return
Negative net income or net loss has large adverse impact on the on the entity as compared to the financial loss. Net loss may shake the confidence of the investor and can have large impact on the ability of the company for distributing the profits as return on the equity to the shareholders. Further, it case of Talent2 it is expected that the revenue from recruitment will fall by 16% and the total revenue will fall to $ 114.4 million whereas it was expected for $ 228.7 million. Further, owing to the impairment charges associated to the Hong Kong and UK’s operation the projected loss before charging tax amounting to $ 5.5 million. It will further make the shareholder’s return unviable (Godfrey et al., 2010).
Further, the companies generally pay the dividends from the profits it makes. Hence if it does not able to earn any profit it will have adverse impact on the dividends payment to the shareholders. Further, if the entity borrows the funds for paying dividend it will lead the company into further debt. On the other hand, if it uses the the retained earnings for paying out dividend to the shareholders it will hamper the regular operation of the entity (Popa & Ciobanu, 2014). Hence, the net loss will have adverse impact on the shareholders return and will make it unviable.
Reference
Bartov, E., & Mohanram, P. S. (2014). Does income statement placement matter to investors? The case of gains/losses from early debt extinguishment. The Accounting Review, 89(6), 2021-2055.
Godfrey, J., Tarca, A., Godfrey, J., & Picker, R. (2010). Financial accounting theory & practice. Milton, Qld.: John Wiley & Sons.
Popa, A. E., & Ciobanu, R. (2014). The financial factors that influence the profitability of SMEs. International Journal of Academic Research in Economics and Management Sciences, 3(4), 177.
Robinson, T. R., Henry, E., Pirie, W. L., Broihahn, M. A., & Cope, A. T. (2015). International Financial Statement Analysis, (CFA Institute Investment Series). John Wiley & Sons.
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