Student life does not generally afford a great deal of free time to pursue your personal interests; however, at one point, you may have considered turning a personal interest or hobby into an official enterprise. Today, you have finally decided to turn that hobby into a business but have realized that you need start-up capital from a lender or investor. To obtain funding, you need to convince a lender / investor that your business is more than a hobby. You need to demonstrate that you have a firm grasp of your business, the accounting practices that impact your business, the controls needed to safeguard assets, and which accounting system will produce accurate and relevant financial information. 1. Describe the type of business you have created including: a. The product or service, and general staffing plan. Provide a rationale for your plan. Having worked years with my stepdad in his business creating pieces of furniture, it inspired me to create my own business. Wood Arts is a small business based in North Miami, Florida and was founded in 2014 by me, Jalyll Suarez. Wood Arts specializes in creating custom wood furniture and stylish carvings. The furniture includes tables, chairs, cabinets, book shelves and desks. Our company consists of 22 employees who are assigned to different areas in the whole company.
The company is led by a general manager, followed by two assistant managers, a human resource representative, a marketing agent and an accountant. Our company’s operating hours are Monday through Saturday from 8.00am to 8.00pm. The business is closed every Sunday to allow employees to rest and get ready for the week ahead. The general manager is responsible for the overall management of the company; he oversees all the activities and ensures all employees work towards achieving the common goal of the company. The general manager also ensures that policies, procedures and government regulations are implemented. The human resource representative is responsible for hiring, and training employees. The accountant’s role is to ensure that the company has sufficient amount of working capital. He prepares the profit and loss statement and monthly closing and cost accounting reports. Inventory control would be a part of the general manager and the accountant’s responsibility. Our company is still growing and once it stabilizes, then we can create more departments and hire more employees. Our marketing agent’s job is to create value for our customers and create client relationships.
She conducts research and determines which markets to target and how our company can reach all these markets. b. The form of your business and the benefits it offers your particular business. Wood Arts has plans to form the company as a corporation. According to Weygandt, Kimmel & Kieso (2012), a corporation is a business that is organized as a separate entity and is under the state corporation law. The company has ownership divided into transferable shares of stock. As a corporation, people will not be personally liable for the assets and debts of the business. Lorette (2013) stated that when a company incorporates, it protects its personal assets from lawsuits, debt collection and other issues that can arise.
Incorporating allows investors to invest without fear of losing their assets. c. A chart of accounts specific to your business, including a rationale as to the selection of each account. (Note: The chart of accounts is a blueprint of your business for the lender/investor. It should report the expected resources that you will consume in your business (assets), the sources of those resources (liabilities and equity), the sources of revenue, and expenditures that you expect to incur to earn those revenues. You may build a detailed chart that includes business units, divisions, product lines, etc.)
2. Based on the form of your business, analyze whether or not you will be required to use Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) accounting methods and how the IFRS / GAAP convergence will impact your business. Suggest how you will incorporate any changes into your books and records. Currently, Wood Arts is following Generally Accepted Accounting Principles (GAAP) for accounting needs. Since this is the first year of operations, there is a thought process to consider IFRS International Financial Reporting Standards (IFRS) for accounting as I would like this company to grow globally. The accountant has strong proponents of US GAAP and has followed the GAAP standard. By the end of this fiscal year, financial reports have to be generated.
To prevent illegalities and irregularities created by inconsistent financial disclosures, using the IFRS seems to be an effective solution (Weygandt, Kimmel & Kieso, 2012). Though there are many similarities between US GAAP and IFRS, there are some significant differences in both the accounting standards. In an effort to convert from US GAAP to IFRS, the complexity mainly occurs with the basic concept that the GAAP is a rules-based accounting standard whereas IFRS is principles-based standard (Weygandt, Kimmel & Kieso, 2012). Both the standards were constructed purely for various different purposes and to solve the issues of different user groups. Ernst & Young (2012) determined that there are major differences between GAAP and IFRS that would impact the current business and that need to converge are revenue recognition and foreign currency translation. 3. Prepare a pro forma balance sheet and income statement providing the assumptions made and support the valuations assigned.
4. Considering the value of assets (assigned per your balance sheet) used within your business, recommend two (2) specific internal controls that you will implement to protect your company’s assets and resources, justifying how each will provide assurances to management. According to Weygandt, Kimmel & Kieso (2012), establishment of responsibility, segregation of duties and independent internal verification are among the methods used to control fraud in a company. These methods help to safeguard a company’s assets, enhance the reliability of the accounting information and increase efficiency in operations. Wood Arts uses these methods on a daily basis to detect and prevent fraud. More than one person is checking the accuracy of all the financial transactions and information through segregation of duties; which is the concept of having more than one person required to complete a task. After the accountant records all the transactions, the general manager goes through to verify all the information is correct. By having two separate people handle the same task, it makes it harder for one to engage in unethical behavior of stealing.
Establishing responsibilities is also a vital step of internal control because it keeps every employee solely responsible for a given task; therefore, making it easy to detect who committed fraud and from where. 5. Based on the internal control recommendations that you made, suggest how you will implement each within your business environment, indicating how challenges or resistances will be overcome. Resistance comes due to fear of the unknown and lack of effective communication. When employees clearly understand what is being required of them, and how to do it; they will not oppose to the challenge. Management should communicate effectively the need for the changes and educate employees the importance of internal controls in a company. At Wood Arts, we will establish responsibility by ensuring that only authorized personnel are allowed to handle cash, and we will assign each employee a password that will help us track any fraudulent activity in case it occurs. Wood Arts will assign related purchasing activities to different individuals like the assistant managers and the accountant.
Different people will order merchandise, get approval from the general manager, and the receiver will be a different person. Our company will verify all its financial records periodically and report any irregularities to management (Weygandt, Kimmel, & Kieso, 2012). 6. Evaluate the impact of the regulatory environment, including the Sarbanes-Oxley Act and other regulatory requirements, on your business venture, giving considering to how you intend to comply with the requirements and the general impact to decision making within your business. The Sarbanes Oxley Act was passed by congress in 2002. This Act was enacted in response to the high-profile Enron and WorldCom financial scandals to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise (Rouse, 2007).
The act is administered by the Securities and Exchange Commission which sets deadlines for compliance and publishes rules on requirements. Wood Arts has its internal controls in place and the management team ensures that all employees comply with the government regulations. By following the guidelines in the Sarbanes Oxley Act, our company will be able to build the confidence and trust in investors and lenders, thereby, giving us an opportunity grow while building our company name as a trusted company. Other regulations that our company complies with includes the Fair Labor Standards Act, the Environmental Protection Agency and The Safety and Health Act of 1970. Following all these regulations not only will it prevent Wood Arts from lawsuits and fines, but it will also help develop a good company image and reputation.
7. Use at least four (4) quality academic resources in this assignment. Ernst & Young LLP. (2011, December 31). “US GAAP versus IFRS” The basics.
Retrieved from http://www.ey.com/publication/vwLUAssets/US-GAAP-v-IFRS:The-Basics.pdf Lorette, K. (2013, May 19). Advantages and Disadvantages of the Corporate Form of Business. Retrieved form http://www.smallbusiness.chron.com/advantages-disadvantages-corporate-form-business-4389.html Rouse, M. (2007, September 1). Sarbanes- Oxley Act. Retrieved from http://www.techtarget.com/definition/sarbanes-oxley-act Weygandt, J. J., Kimmel, P.D., & Kieso. (2012). Financial Accounting. (8th ed.). Hoboken, NJ: John Wiley & Sons, Inc.