mbafpx5010lancegilassessment1
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May 16, 2024
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Accounting Methods for Leaders Capella University - MBA-FPX5010
Accounting Tools & Practices Lance Gil Assessment – 1
Urban Outfitters Corporation “Urban Outfitters is a lifestyle retailer dedicated to inspiring customers through a unique combination of product, creativity and cultural understanding. Founded in 1970 in a small space across the street from the University of Pennsylvania, Urban Outfitters now operates over 200 stores in the United States, Canada and Europe, offering experiential retail environments and a well-curated mix of on trend women’s and men’s clothes, from boho dresses, denim and graphics to shoes, hats, and backpacks, as well as beauty, intimates, swim and a collection of handpicked vintage clothing. Urban Outfitters also carries everything you need to decorate your small space, apartment or dorm, with a UO Home collection that includes bedding, tapestries, rugs, shower curtains and furniture. Our Music + Tech collection is a go-to destination for vinyl, record players and tech accessories” (URBN, 2022).
https://fourweekmba.com/urban-outfitters-business-model/
What Are Financial Statements Financial statements are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to understand. These statements are audited for accuracy and are included in the annual reporting. Balance Sheet Overview of Assets, liabilities and stockholder’s equity for a given time frame
Income Statement Revenues and expenses for a specific time frame Cash Flow Measurement of how well a company can generate cash to pay financial obligations Stockholder Equity Statement Changes in stockholder equity for a given period Comprehensive Income Statement
Changes in net assets not listed on the income statement
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Why Do We Need Financial Statements “A company's financial statements
provide insight into a company's financial position, profitability, and growth potential
. Taken together, financial statements allow analysts to conduct fundamental analysis to evaluate a stock's value and growth prospects. Financial statements also can signal red flags about financial instability or accounting improprieties” (Investopedia, 2024).
Financial statements provide a snapshot in time of the company’s financial health looking at their revenue, expenses, profitability and debt.
The objective of financial accounting and statements that come out of that practice is to present “fairly the financial position of a company to current and potential stockholders, creditors, security analysts, and other interested parties.
Financial statements are governed by the standards of financial accounting.
Credible financial management is critical to the integrity of business and investors to obtain accurate data to make decisions.
Components of A Financial Statement The major elements of the financial statements (i.e.,
assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses
) are discussed below, including the proper accounting treatments and disclosure requirements.
Assets
Assets are things that a company owns and have value. Assets are typically recorded on the balance sheet at their original cost (also called historical cost) less accumulated depreciation, which is an expense that reflects the wear and tears on assets over time. Assets include fixed assets and current assets.
Typically, businesses like to keep track of their assets in order to measure how much they are worth or to serve as collateral for borrowing money or other financing activities. Assets also help investors make decisions on whether the company is doing well financially since they can see what assets are available to be used for future growth.
Liabilities Liabilities are obligations of the business that may need to be paid back over a period of time. These would include both short-term (current) liabilities such as accounts payable and long-term liabilities such as mortgages.
Typically, businesses like to keep track of their liabilities in order to measure the total amount that they owe or are obligated to payout. Liabilities also help investors make decisions on whether the company is doing well financially. Since they can see how much debt the business has taken on and if it may be too much to handle.
Shareholder’s Equity
Equities are claims by owners of a business on its assets after all debts have been paid off. These would include things such as common stock, preferred stock, treasury stock (stock repurchased by a company), and accumulated other comprehensive income (AOCI). Typically, businesses like to keep track of their equities in order to measure ownership interest or how many shares of a company an individual has.
Cash VS Accrual Basis Cash Basis
Revenue and expenses recorded when money is exchanged
Good for smaller businesses
Income taxed when cash in deposited in the bank Numbers are realized when transactions are finalized Accounts for the income paid or the expense paid as it takes place Flow is not shown Accrual Basis Adopted by Urban Outfitters Revenue and expenses recorded as earned and occurred
Provides accurate profitability Itemized by accounts payable and receivable for an accurate real time snapshot of the financial state of the business Forces accountability in a timely fashion Ensures GAAP compliance
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Capitalizing VS Expensing Expensing the cost over future periods reduces significant cost spike and income fluctuations Increase the asset balance without impacting the liability balance allowing financial ratios to seem more favorable. We may overcapitalize or undercapitalize
Reduces taxation over the short term
Boost profitability over the long term Manipulation of Financial statements
“Expensing vs. capitalizing refers to how a cost is treated on the financial statements. Expensing a cost indicates it is included on the income statement and subtracted from revenue to determine profit. Capitalizing indicates that the cost has been determined to be a capital expenditure and is accounted for on the balance sheet as an asset, with only the depreciation showing up on the income statement.
There is not an objective distinction between expensed costs and capitalized costs; each company determines for itself which costs should be capitalized vs. expensed (within GAAP guidelines). Most companies follow a rule that any purchase over a certain dollar amount counts as a capital expenditure, while anything less is an operating expense” (Business Literacy institute 2024).
Advertising Costs •
Advertising costs are expensed upon occurrence
•
Advertising costs are incurred to promote the brand
•
Advertising costs are recorded under operating expenses
•
Advertising costs are associated with catalog printing, web marketing and website Bartleby.com
Store opening Costs •
Store opening costs are incurred •
Store opening costs are also know as startup costs and occur before the business begins •
Administrative expenses are deducted from the gross margin in the consolidate statement of income
•
Companies can elect to deduct a portion of the start up costs to extend out the tax benefit over years to capture as much tax benefit as possible over time. Bartleby.com
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Web Development Costs “
The accounting for costs associated with developing and populating an internet website differs in some respects from the guidance on other types of software development.
Intangibles—Goodwill and Other—Website Development Costs
, provides guidance on accounting for costs incurred in each of the five stages of website development. The stages of website development are”: (PWC 2021)
Stage
Activity Accounting Placement Planning Project planning
Functionalities Hardware Apps/Software
Graphics Content Vendor Award Expense Application Infrastructure Dev. Dev of hardware/software
Domain name Hardware purchase Hardware software installation Hardware software testing Capitalize Graphics Dev. Design web pages Capitalize Content Dev. Content data entry conversion Software integration database / website Expense
Capitalize Operating Training and Onboarding employees SSL registration website User Admin Back up Maintenance hosting Upgrades Enhancements Expense Capitalize
Notes “Notes to the financial statement include important factors that were used in preparing the statement. Notes will include information such as cash or accrual accounting procedures, valuation for inventory, reporting of events, intangible assets, and contingent liabilities” Estevez 2020.
“The footnotes describe in detail the practices and reporting policies of the company's accounting methods and disclose additional information that can't be shown in the statements themselves” Estevez 2020.
References Business Literacy Institute (2024) Expensing vs Capitalizing Retrieved April 24, 2024 from. https://www.business-literacy.com/financial-concepts/expensing-capitalizing/#:~:text=Expensing%20a%20cost%20indicates%20it,up%20on%20the%20income%20statement. CA Foundation (2024) Elements of Financial Statements CA Foundation. Retrieved April24, 2024from. https://unacademy.com/content/ca-foundation/study-material/accountancy/elements-of-financial-statements
Estevez E. (2020) Financial Footnotes: Reading the fine print. Investopedia. Retrieved April 24, 2024 from. https://www.investopedia.com/articles/02/050102.asp#:~:text=The%20footnotes%20describe%20in%20detail,shown%20in%20the%20statements%20themselves.
Mathieu (2021). Competitive advantages of a custom developed web application. BOCASAY Retrieved April 24,2024 from.
https://www.bocasay.com/competitive-advantages-custom-development/
Maverick J.B. (2022).Why Do Shareholders Need Financial Statements? Investopedia. Retrieved April 24, 2024 from. https://www.investopedia.com/ask/answers/032615/why-do-shareholders-need-financial-statements.asp
PWC Viewpoint (2021). 5.2 website development costs. PWC. Retrieved April 24,2024 from.
https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/software/software/chapter5/52_website_develop.html#pwc-topic.dita_20a4e5e6-ee1b-4272-8c1b-e3ccdae3277b
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