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Internal Assessment for cape accounting unit one

Internal Assessment for cape accounting unit one

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  • 1. An investigation into, social, ethical and technological issues and how they impact on the Jamaica Public Service Company Limited for the year 2008.Name : Alex EllisSchool : Oberlin HighTerritory : JamaicaRegistration # : 100086Teacher : Ms. JonesCentre # : 100086Date : April 2011
  • 3. Nothing in life is ever successful without the corporate effort of many gifted people whoare willing to submit their assistant. This work is a product of my thoughts, ideas, perspectivesand work. This product has given me the exposure to the knowledge I have placed in this SchoolBased Assessment (SBA). First and foremost I would like to thank the heavenly father for giving me the knowledgeand wisdom, so that I was able to complete this School Based Assessment. I Alex Ellis wouldlike to extend my sincere gratitude to Miss Jones for assisting me to carry out the necessaryrequirement of Caribbean Advanced Proficiency Examination syllabus and to making sure thatthis SBA was successful at the end. I also would like to thank Keron Brown for lending me his computer and printingfacilities so that this School Based Assessment could meet the presentation standards of theCaribbean Advanced Proficiency Examination syllabus.
  • 4. The Jamaica Public Service Company Limited is incorporated and domiciled in Jamaicaand is eighty percent (80%) subsidiary of Maru Energy JPSCO Barbados SRL, which isincorporated in Barbados. The ultimate holding company is Marubeni Corporation, which isincorporated in Japan. The company preference shares are listed on the Jamaica stock Exchange(JSE) market. Jamaica Public Service Company Limited having its preference shares listed on theJamaica Stock Exchange market shows that the company is a public limited company (a limitedliability firm whose securities is traded on a stock exchange and can be bought and sold byanyone). The company is strictly regulated by law, and is required by law to publish its completeand true financial position so that investors can determine the true worth of its shares or stock. Marubeni Caribbean Power Holdings Incorporation at the time period being investigatedowns eighty percent (80%) of the Jamaica Public Service Company Limited, while a furthernineteen point nine percent (19.9%) of the ordinary shares is held by the Accountant General andthe Development Bank of Jamaica on behalf of the Government of Jamaica collectively, and theremaining zero point one percent (0.1%) is held by individuals. Jamaica Public Service Company Limited being a public limited company has someadvantages such as; it can raise huge amount of money from the sale of shares, the company can
  • 5. easily raise finance as financial institutions are more willing to lend to public limited companiesand production cost may be lower as firms may gain from economies of scale. However thecompany confronts some drawbacks of being a public limited company which includes; settingup cost can be very expense, it is possible for an outside interest to take control of the company,and the company shareholders are not able to deal with their customers at a personal level. The company has certain legal, social, ethical and technological issues that impact on thefinancial reporting of the company and the company in general. This research is done to assessthese issues listed above and how they have impact on the Jamaica Public Service CompanyLimited.
  • 6. To determine the accounting standards used by the Jamaica Public Service CompanyLimited.To learn how the Jamaica Public Service Company Limited controls its accountspayables, accounts receivables, cash and inventory.To assess how technology impact on the financial accounting of the Jamaica PublicService Company Limited.To find out the advantages and disadvantages of the Jamaica Public Service CompanyLimited operating as a public limited company.To find out the ethical and social issues that impact on the financial report of the JamaicaPublic Service Company Limited.To analyze the performance of the Jamaica Public Service Company Limited using ratioanalysis.
  • 7. Module 1: Justify the use of standards in Accounting. Justify the use of control systems in organization.. Assess the impact of technology on financial Accounting.Module 2: Assess critically the advantages and disadvantages of the various forms of organizations Prepare financial statement from incomplete records or where records are deficient or erroneous.Module 3: Discuss the social and ethical issues in financial reporting. Analyze the performance of an entity using ratio analyses, and explain the limitations
  • 8. In order to carry out this Accounting Internal Assessment, primary and secondary datacollection methods were used. The primary data collection method used was an interview, whilethe secondary data collection methods include: textbooks, internet and published financialstatements. The interview was carried out on September 16 2010, with a member of the financedepartment of the Jamaica Public Service Company Limited. The person interview was askedapproximately seven questions pertaining to the research that is being carried out on thecompany. All the questions in the interview were answered by the person interviewed. Figureone in the appendices shows the list of questions asked in the interview. A total of four textbooks were used in conducting the research. These textbooks wereused to source definition of jargons in the accounting field, and for explanation of accountingstandards and what they entail. The researcher also made use of sources from the internet to getinformation that weren’t found in the textbooks used. The methods used by the researcher could be said to be credible and valid since the datawas concerned with the period being investigated and the sources used have an excellentreputation in the field of accounting, hence they are credible, reliable and valid sources. Due to the engagement of the researcher in curricular activities he was unable to gatherother person point of view to have a more concise researcher been presented.
  • 9. The Jamaica Public Service Company Limited financial statements are prepared inaccordance with the International Financial Reporting Standards (IFRS) and their interpretationsadopted by the International Accounting Standards Board (IASB), and comply with the provisionof the Companies Act. The International Financial Reporting Standards refers to the new numbered series ofpronouncements that the International Accounting Standard Board is issuing, as distinct from theInternational Accounting Standards (IAS) series issued by its predecessor. The InternationalAccounting Standard is a set of standards stating how particular types of transactions and otherevents should be reflected in financial statements. The Companies Act is an act of parliamentgoverning limited companies. The Companies Act require the Income Statement Account to givea true and fair view of the income of the company for the financial year, and the Balance Sheet togive a true and fair view of the state of affairs of the company as at the end of the financial year. The presentation of the Jamaica Public Service Company Limited financial statements isrequired by law to follow the objectives of International Accounting Standard one (IAS 1) whichprescribes the basis for presentation of general purpose financial statements of previous periodsand with the financial statements of other entities. IAS 1 states that a company financialstatement should includes a balance sheet, an income statement, a statement of changes in equity,
  • 10. cash flow statements and notes. The IAS 1 also states that the financial statement must state thename of the company, the country of incorporation, the balance sheet date, and the period. IAS 1stipulates a brief description of the nature of the activities of the company, and the currency interms of which the financial statements are expressed should be given if they are not otherwiseapparent. The standard states that financial statements are a structured representation of thefinancial position and financial performance of an entity. The objective of the financial statements is to provide information about the financialposition, financial performance and cash flows of an entity that is useful to a wide range of usersin making economic decisions. Financial statements shows the results of the management’sstewardship of the resources entrusted to it. To meet this objective, financial statements provideinformation about an entity’s: assets, liabilities, equity income and expenses, including gain andlosses, contributions by and distribution to owners in their capacity as owners and cash flows.Figure two through to five shows the Jamaica Public Service Company Limited Balance Sheet,Income Statement, Cash Flow Statement and Statement in changes in equity. The Balance Sheet which is also known as the statement of financial position as aminimum items which it should include, these are: all the company fixed or long term assets,current assets, long term liabilities, current liabilities and the shareholders equity. The companybalance sheet is shown in figure 2 in the appendices where it is structured under two mainheadings assets and shareholders’ equity and liabilities. The assets headings has two subheadings noncurrent assets known as fixed assets and current assets. The shareholders equity andliabilities headings has three sub headings namely; shareholders equity which consist of thecompany finances, current liabilities which are the company’s debt or obligations that are due
  • 11. within one year, and the noncurrent liabilities which are the debts that are not due currently suchas long term loans. The income statement which is also known as the trading profit and loss account is acompany financial statement that indicates how the revenue of the company is transformed intonet income. The IAS 1 which stipulates that for the income statement preparation the statementmust show the company revenue, the cost of sales, gross profit, expenses and the net income forthe company. The Jamaica Public Service Company Limited statement of income for the year2008 is shown in the appendices in figure 3, it shows all the headings as lay down by the IAS ,however the cost are summarized under some of the headings but are explained in the companynotes. The notes that are attached to a company financial statement give explanation andworkings of figures in the statement. For example in the company income statement one of theitems listed on the statement is other income, and only shows the total of other income howeverit indicate that you can visit note 22(a), this is also shown in the appendices in figure 6. Another critical piece of statement that is prepared under the IAS 1 is the statement ofchanges in shareholders’ equity. This statement explains the changes in a company retainedearnings over period being reported on. It break down changes affecting the account such asprofits or losses from operation dividends paid, and any other items charged or credited toretained earnings. This statement for the company is shown in figure four in the appendices. Thestatement of change in shareholders’ equity shows the change in shareholders’ equity, howeverthere is a similar statement known as the statement of cash flow which shows the flow of cash. The cash flow statement is the only statement in the financial statement that is preparedin accordance to the International Accounting Standard seven (IAS 7). The objective of IAS 7
  • 12. requires the provision of information about the historic changes in cash and cash equivalents ofany entity by means of a statement of cash flow which classifies cash during the period fromoperating, investing and financing activities. The operating activities are the principal revenueproducing activities of the entity and other activities that are not investing or financing activities.Investing activities involves the acquisition and disposal of noncurrent assets, while financingactivities are of a result of a change in the size and composition of the contributed equity andborrowings of the company. The statement of cash flow for the company is shown in figure 5 inthe appendices. All the statements that are prepared by the use of technology, resulting intechnology impacting on the company’s financial reporting. The use of technology at the Jamaica Public Service Company Limited has impacted onthe company financial accounting over the years. The benefits the company receive from the useof technology in its financial reporting includes; increased functionality (this is where reports arenow more accessible), improved accuracy, faster processing and better external reporting.However the use of technology requires for workers to be able to use computers and accountingsoftwares. The use of technology at the company affects other aspects of the business whichhelps in business operations. Technology which has gone a far way is also used by the companyin its internal control system. An internal control system includes all the procedures and policies taken by an entity tosafe guard assets and ensures accuracy in financial records. The objective of any control systemin an organization is to:  Indentify the social and ethical issues in financial reporting  Complying with company policies, regulations and government laws
  • 13.  Assess the operating effectiveness of the organization and its structure and  Discourage occurrence of errors or irregularities.Two internal control systems used by the Jamaica Public Service Company are inventory controland cash disbursement. The internal control system for inventories consists of perimeter fencing; security guards ascompany property. Workers at the company are segregated into different areas so has to havepersons been responsible for any problem that may occur. At the Jamaica Public ServiceCompany limited only persons with authorization are able to access files such as payrolldocuments. Controlling the disbursement of cash at JPS is very important. This is done by preparing abank reconciliation statement each month. A bank reconciliation statement is helpful to thecompany in that it can highlight a surplus of cash at bank that could be invest and earn interestand it helps to discover errors early. An objective of internal control system is to identify the social and ethical issues in financialreporting. The Jamaica Public Service Company Limited has some social and ethical issues thataffect the financial reporting of the company. The social responsibilities of the companyincludes; making a contribution to promoting culture, promoting further education and learningand stating their involvement in the country. Ethical issues includes: dignified in the treatment ofthe workforce, honesty in dealing with all stakeholders, fair in reporting financial and nonfinancial issues and recognize as a fair dealer. These are the social and ethical responsibilities ofthe company. Does the company carry out these responsibilities? The company which offersscholarship to student pursuing Engineering career in tertiary institutions and sponsor sports
  • 14. development in the country. As indicated by picture 2 in the appendices is an image of thecompany as a sponsor of a track event in Jamaica. A business can be following the guidelines governing the preparation of its financialstatements and carrying out its social and ethical responsibilities and their performance is notgood. In order to analyze the performance of an entity ratios are used, these include profitabilityratios, financial ratios and investing ratios. Profitability ratios include; return on capitalemployed (ROCE), net margin percentage, expenses to sales ratio, and gross margin percentage.The financial ratios are: current ratio and acid test ratio. The investing ratios consist of earningsper share (EPS), debt ratio and borrowings to net worth ratio. In order for ratios to be useful andreliable, they must be reasonable accurate. The net margin percentage is related to sales by the following formula: net margin dividedby sales times a hundred. The Jamaica Public Service Company net margin percentages for 2008and 2007 respectively are:8845000 x 100 = 0.895% (2920000) X 100 = -0.37199%988204000 785388000The net margin percentage as increased by one point three percent (1.3%), this is a goodindicator of profitability for the company. It can be further explained by the gross marginpercentage and the expenses to sales ratio. The gross margin percentage for 2007 and 2008respectively are:264843000 X 100 = 26.8004% and 236492000 X 100 = 30.11486%988204000 785388000
  • 15. The margin had fallen by three point three percent (3.3%), therefore this is not the indicator ofthe rise in net profit in 2008. Gross profit which has increase from two hundred and thirty sixmillion four hundred and ninety two thousand dollars (USD $236 492 000.00) to two hundredand sixty four million eight hundred and forty three thousand dollars (USD $264 843 000.00),which is an increase of twelve percent (12%), this is due to the increase in operating revenue bytwenty five point eight percent (25.8%) this is depicted by figure 7 in the appendices where inshows the rise in operating revenue from 2007 to 2008. The expenses margin to sales for 2007and 2008 respectively are:2422113000 X 100 = 30.82718% and 256253000 X 100 = 25.93118%785388000 988204000As indicated above by the working out the margin had fallen by five percent (5%) in 2008, whichis a positive sign to higher net profits. Higher net profit for the company was as a result of lowerfall in the gross profit margin and a greater fall in the expenses margin. Another profitability ratio is the return on capital employed. It shows the returns inpercentage on the capital that is employed. As shown by the working below in 2007 when thecompany made a lost the ROCE was zero point eight percent (0.8%), however in 2008 the ROCEincreased by three point one percent (3.1%) to carry the ROCE for the year 2008 to two pointfour percent (2.4%). That was indicating that for every one hundred united states dollar (USD$100) of capital employed in 2008 a profit of two dollar thirty six cents (USD $2.36) was made.2007: -2920000 X 100 = - 0.78% 2008: 8845000 X100 = 2.36% (389442000 + 361520000)/2 (36152000 + 387220000)/2
  • 16. As shown in the working above in 2007 when the company made a lost the ROCE was negativezero point seven eight percent (-0.78%) however in 2008 the ROCE increased by three point onefour percent (3.14%) to carry it to two point three six percent (2.36%). This is indicating that forevery one hundred dollars ($100.00) of capital employed a profit of two dollars thirty six cents($2.36) was made in 2008. Financial ratios or solvency ratios are ratios that calculates if the business has sufficientresources to meet their debts when due. Two types of are the current ratio and the acid test ratio.The current ratio compares the total current assets to total current liabilities and indicateswhether there are sufficient short term assets to pay short term liabilities. For the company in2008 its current ratio was 1.6:1 or 1.6 times as shown by the working below. 234124000 = 1.6 times 145192000The acid test ratio is similar the current ratio the only difference is that it doesn’t includesinventory. In 2008 the company acid test ratio was 1.3: 1 or 1.3 times as indicated by theworking below. 190195000 = 1.3 times 145192000 Investment ratios are of particular interest to people who have invested in a company.These ratios include earnings per share, debt ratio and borrowings to net worth. Earnings pershare give the best view of performance. It indicates how much of a company’s profit can beattributed to each ordinary share in the company. The company Earnings Per Share was fourcents in 2008 ($0.04) and negative one cent (-$0.01) in 2007 as indicated in figure 2 at the end of
  • 17. the income statement. The debt ratio compares the total assets and it’s concerned with whetherthe company has sufficient assets to meet all its liabilities when due. The company debt ratio for2007 and 2008 are fifty eight percent (58%) and fifty six percent (56%) respectively. Theborrowing to net worth ratio indicates the proportion that borrowings represent of a company’snet worth, it also shows the degree of risk to investor in ordinary shares in a company. Ratios that are used to analyze financial statements however have their own limitations.Ratio analysis is a retrospective and not a prospective examination. Ratio analysis is based onaccounting and not economic data. They don’t capture significant off balance sheet items. Basicratios can be manipulated through accepted alterations of accounting policies exampleLIFO/FIFO. Financial statements accounts reflect historical cost not necessarily economic value.Also ratio analysis doesn’t tell the entire story. There may be a good reason to supportmanagement’s decision to reduce or increase liquidity or fixed assets in a different manner thanthe rest of the industry.
  • 18. The Jamaica Public Service Company Limited prepares its financial statement inaccordance with the International Financial Reporting Standards and their interpretations adoptedby the International Accounting standards Board. The company uses IAS 1 for the presentationof its financial statements except for the statement of cash flow which the IAS 7 is used. Thecompany has several control system to control its operations, these consist of cash disbursement,inventory control and accounts receivables and payables control. As indicated in the research thecompany operations is affected by the use of technology positively which has foster developmentfor the company through improved accuracy and faster processing. The Jamaica Public Service Company Limited have social and ethical responsibilitieswhich it has to carry out, these includes:  Defining their responsibilities as corporate citizens  Stating their involvement in the country  Promoting further education and learning  Fair in reporting financial and non – financial issues  Honesty in dealing with all stakeholdersThe company which is a public limited company has its own benefits and drawbacks asmentioned in the introduction where it’s able to raise large amount of capital by issue of shareson the stock market and also its possible for an outside interest to take over the company as withthe case with the company where a Japanese company now owns the company.
  • 19. Based on the ratio analysis of the company financial statements it could be shown that thecompany current ratio was not good because it was below two which is indicating that thecompany is unable to pay its short term debts twice. Also the ratios showed that the shareholdersreturns aren’t great.
  • 20. The researcher would like to recommend that the Jamaica Public Service CompanyLimited continues to follow the guidelines in the preparation and publication of its financialstatements set by the International Accounting Standards Board and the Companies Act. Theresearcher indicated that the company should increase in participation in its involvement in thecountry by sponsoring educational and sporting events. The researcher would also like to recommend that the company increase the use oftechnology so has to have reduced cost in the long run which will increase profit for thecompany and that the company make other decisions so has to increase profits in the comingfinancial year.
  • 21. Interview Questions 1. What form of organization is the Jamaica Public Service Company Limited? 2. What are the advantages of been such a company? 3. What are the disadvantage of been such a company? 4. What are accounting standards used by the company? 5. Does the company use control systems? If yes what are they? 6. Does technology impact on the financial accounting and how? 7. What are social and ethical issues that have to be considering when doing financial reporting?Figure 1Picture 1
  • 22. FIGURE 2
  • 23. FIGURE 3
  • 24. FIGURE 4
  • 25. FIGURE 5
  • 26. Operating Revenue 1200000 1000000 988204 AMOUNT IN THOUSAND 800000 785388 600000 400000 operating revune 200000 0 2007 2008 YEARFigure 7Picture 2
  • 27.  (2010, September 16). Accountant. (A. Ellis, Interviewer) Hall, D., Jones, R., Raffo, C., Chambers, I., & Gray, D. (2004). Business Studies. London: Pearson Education. (2009). JPs Financial Statements. Kingston: Jamiaca Public Service Company Limited. Randall, H., Stephens-James, L., Lamorell, C., Francis, L., & Noel, D. (2007). Accounting for CAPE. London: Cambridge University Press. Teck, T. B., Wee, A., Chan, O., & Sinanan, R. (2007). Cape Accounting. Caribbean Publishers. Wood, F., & Sangster, A. (2008). Business Accounting 2. London: Prentice Hall.