Question

Describe the nature of a business, the role of accounting, and ethics in  business, & Describe and illustrate the use of horizontal analysis in evaluating a company’s performance and financial condition.

Answer 1

Nature of Business

It refers to the industry specific to which business is carried out. However for few nature of business refers to the constitution of the business. It is a phrase that has contextual sense when referring to a particular industry or business. Depending on the enterprise, commercial transactions will follow the nature of that business. Generally, it means that commercial self-interest and a rational outlook will prevail. However, it can mean very specific things regarding certain businesses which are cyclical or seasonal. It would be in the nature of tourist businesses to have on and off seasons with corresponding prices. It is in the nature of agricultural businesses to have more cash flow after harvests. It is in the nature of the stock market to reward profitable businesses and punish unprofitable businesses.

Role of Accounting in Business:-

(a) Measurement: Accounting measures past performance of the business entity and depicts its current financial position.

(b) Forecasting: Accounting helps in forecasting future performance and financial position of the enterprise using past data.

(c) Decision-making: Accounting provides relevant information to the users of accounts to aid rational decision-making.

(d) Comparison & Evaluation: Accounting assesses performance achieved in relation to targets and discloses information regarding accounting policies and contingent liabilities which play an important role in predicting, comparing and evaluating the financial results.

(e) Control: Accounting also identifies weaknesses of the operational system and provides feedbacks regarding effectiveness of measures adopted to check such weaknesses.

(f) Government Regulation and Taxation: Accounting provides necessary information to the government to exercise control on the entity as well as in collection of tax revenues.

Role of Accounting in Business:-

1. Improved society: A few decades ago, children and workers were ruthlessly exploited. Trusts controlled some markets to the extent that prices were fixed and small businesses stifled. Influence was applied through intimidation and harassment. Then society reacted and demanded that businesses place high value on ethics, fairness and equal rights resulting in framing of anti-trust laws, establishment of Government agencies and recognition of labour unions

2. Easier Change management: Attention to business ethics is critical during times of fundamental change - times like those faced presently by businesses, whether non profit or for-profit. During times of change, there is often no clear moral compass to guide leaders through complex conflicts about what is right or wrong. Continuing attention to ethics in the workplace sensitizes leaders and staff for maintaining consistency in their actions.

3. Strong teamwork and greater productivity: Ongoing attention and dialogue regarding values in the workplace builds openness, integrity and community, all critical ingredients of strong teams in the workplace. Employees feel a strong alignment between their values and those of the organization resulting in strong motivation and better performance.

4. Enhanced employee growth: Attention to ethics in the workplace helps employees face the reality, both good and bad in the organization and gain the confidence of dealing with complex work situations.

5. Ethics programs help guarantee that personnel policies are legal: A major objective of personnel policies is to ensure ethical treatment of employees , For example, in matters of hiring, evaluating, disciplining, firing, etc., an employer can be sued for breach of contract for failure to comply with any promise it made, so the gap between stated corporate culture and actual practice has significant legal, as well as ethical implications. Attention to ethics ensures highly ethical policies and procedures in the workplace. Ethics management programs are also useful in managing diversity. Diversity programs require recognizing and applying diverse values and perspectives which are the basis of a sound ethics management program. Most organisations feel that it is far better to incur the cost of mechanisms to ensure ethical practices than to incur costs of litigation later.

6. Ethics programs help to avoid criminal acts “of omission” and can lower fines. Ethics programs help to detect ethical issues and violations early, so that they can be reported or addressed.

7. Ethics programs help to manage values associated with quality management, strategic planning and diversity management. Ethics programs help identifying preferred values and ensuring that organizational behaviors are aligned with those values. This includes recording the values, developing policies and procedures to align behaviours with preferred values, and then training all personnel about the policies and procedures. This overall effort is very useful for several other programs in the workplace that require behaviors to be aligned with values, including quality management, strategic planning and diversity management. For example, Total Quality Management initiatives include high priority on certain operating values, e.g., trust among stakeholders, performance, reliability, measurement, and feedback.

8. Ethics helps to promote a strong public image: An organization that pays attention to its ethics can portray a strong and positive image to the public. People see such organizations as valuing people more than profit and striving to operate with the integrity and honor.

Horizontal Analysis:-

Horizontal analysis (also known as trend analysis) is a financial statement analysis technique that shows changes in the amounts of corresponding financial statement items over a period of time. It is a useful tool to evaluate the trend situations.

The statements for two or more periods are used in horizontal analysis. The earliest period is usually used as the base period and the items on the statements for all later periods are compared with items on the statements of the base period. The changes are generally shown both in dollars and percentage.

Dollar and percentage changes are computed by using the following formulas:

Horizontal analysis may be conducted for balance sheet, income statement, schedules of current and fixed assets and statement of retained earnings.

Example:-