HOMEWORK 5 3
Executive Summary
In this report, a detailed analysis of the understanding of concepts from chapter 9 on long-term investments, chapter 13 on long term obligations, chapter 15 on financial reporting and concepts, and finally chapter 16 on the statement of cash flows is provided. Analysis of concepts in these chapters are important to understand the nature of operations of the business and in particular, the determination of investments, payments of obligations due from the external financing, guiding principles and standards in the preparation of the financial statements, and the analysis of the cash inflows and outflow from the business. I will utilize the annual report from Home Depot Inc.to the apply analysis and understanding of these four chapters.
Introduction
In the assigned reading, a detailed analysis of the intent of the Management to the investment is analyzed in chapter 9, and this report provides deeper analysis in the simplest form possible. When the business invests, it must be able to look for ways of sourcing funds. Some of the financing methods required repayment in the future, and such pavements are explained in chapter 13. Many stakeholders rely on accounting information. Businesses need to prepare financial based on particular standards and assumptions, which are explained in detail in chapter 15. Finally, understanding the statement of the cash flows is important, and content for this particular financial statement is evaluated in detail and with examples drawn from Home Depot.
Understanding Statement of Cashflow
The statement of the cash flows is one of the financial statements that is prepared by the business entities. Companies should prepare this statement to illustrate receipt and payment that have been made by the business entity in a given accounting period (Walther, 2020). It is important that investors determining the liquidity position of the company by establishing whether cash at the end of the period has increased or decreased. In the event of the increase, stakeholders are determined to establish the cause of the increase and the same case in the event decline.
Operating, investing and financing activities are the main components of the statement of the cash flows (Walther, 2020). Operating activities deal with receipts and payments, which influences income. The first item in the operating activities is the net earnings or net income. From the annual report of Home Depot (2020), the net earning recorded in the statement of the cash flows is picked from the income statement that is $11,242. Net earnings are adjusted with reconciliations of the expenses, changes in the assets and liabilities, which ultimately gives net provided by operating activities $13,743. Similarly, net cash used cash in the investing and financing activities is equal to ($2653) and ($10834) respectively. From this analysis, it is clear that the main source of the cash for the Home Depot is operating activities, which is the reason for the increase in the ending cash balance to $2133 compared to the beginning balance of $1778.
The intent of the Management
The intent of Management is explained in chapter 9, which explains the reason why a business makes a long-term investment. To better understand this concept, it is important to establish long-term investment instruments that are used in the business. Principally, a business can invest in bonds or equity securities. Bond investment is a debt security, which allows companies to issue bonds so that they can raise money and repay in the future date. Bonds can be issued at a discount, which means they are issued lower than par value attracting lower interest payment but more than par value in the final payment.
Similarly, bonds that can be issued are premium, which is higher than face value attracting higher interest payment and final payment is lower than the par value. However, the intent of the Management to issue bonds is to hold to maturity and pay at a later date (Walther, 2020). The Home Depot issues long-term debts with an amortized approach applying an effective interest rate approach (The Home Depot Inc., 2020).
Equity securities are another form of long-term investment. Corporations can use equity securities if they want to gain control of another company (Walther, 2020). It could be one of the strategies for businesses that wish to buy a substantial amount of securities with long-term objectives to take full ownership of such companies. Similarly, the business can use equity securities by investing in the companies that they predict stock prices would increase, thus making a profit (Walther, 2020). Therefore, it is important to establish the amount of the stock that the business entity owns in other companies to understand the intent of Management better.
Long-Term Obligations
Some of the sources of funds used in the long-term investment should be repaid at a future date. In the capital structure of the business entity, equity and debt are the main components. Equity is the ownership of the business, while debt is the obligation of the business to external parties. Before a company makes any long-term investments, they must calculate the projected returns expected from such investment, which in turn will help the company establish whether or not they will make adequate returns that are capable of paying back obligations.
Two main long-term obligations apply to the majority of the business entities. First are long-term notes, which refer to bank loans secured by the business to fund investment and business entities. These loans last for more than the accounting period. Businesses are required to pay interest on the long –term notes for a particular period until when the loan matures upon which principal amount is cleared. Second, it is the bond payable. For the business that raises money through bonds, they make interest payments to the bond annually or semi-annually as agreed with bondholders and face value of the bond when the bond matures (Walther, 2020). However, some of the bonds have coupon payments.
Accounting concepts and assumptions
In the preparation of the financial statements, there are particular accounting assumptions that businesses should follow. For public traded companies in the United States, they are required to comply with SOX and GAAPs in financial reporting. SEC is charged with the mandate of regulating and checking compliance of public traded companies with accounting standards and government policies that are outlined, which is necessary to ensure all corporations prepare truthful, reliable, verifiable, consistent, and comparable financial statements (Walther, 2020).
Main accounting assumptions used in the preparation of the financial statement are accrual assumption, where businesses are required to recognize revenue when earned and expenses when incurred, a monetary unit principle which requires a transaction to be recorded in units of the money, going concern that requires the accountant to prepare alluding to the fact that business will still be in existence and time principle which requires financial reports should be particular cover period and finally, entity principle which demands that business and transaction relating to the owners of the company should be recorded separately. Finally, organizations should disclose the change in accounting methods and standards that are applied in the preparation of the financial statements. For example, The Home Depot discloses that GAAPs is applied in the computation of the estimates, LIFO is used in accounting for inventory, depreciation is computed using the straight-line method, and finally, financial statement statements are prepared by the consolidation of the accounts from its subsidiaries (The Home Depot Inc., 2020). Finally, external independent auditor Craig states that financial statements are true and free from material error which is one of the requirements for enhancing internal controls.
Conclusion
In conclusion, accounting concepts analyzed in the report demonstrates the amount of time spent in preparation of the financial statements. Every item on the financial statement matters and an organization needs to follow due process and comply with policies, standards, and rules that govern the preparation of the financial documents. It is important because it creates confidence in the stakeholders that uses financial documents of various companies for various reasons.
References
The Home Depot Inc. (2020). Form 10-K. (Annual Report). Retrieved from https://otp.tools.investis.com/clients/us/home_depot/SEC/sec-show.aspx?Type=html&FilingId=14030444&CIK=0000354950&Index=10000#HD10K02022020_HTM_S72F1EE8BD352548D944BE7B265D81E22
Walther, L. (2020). Principles of accounting. Retrieved from http://www.principlesofaccounting.com/