ACCM 4200: Financial Accounting and Reporting - Assessment - Answer

Financial Accounting

Case Scenario/ Task

Assessment Description

Learning Outcome 4: Develop information gathering (research) and communication strategies to

enable the provision of professional advice to a client.

Objective: The objective of this assignment is to learn to effectively research a technical aspect of

accounting and communicate professional advice to a client, via a business letter.

Background to the case study:

You are a graduate accountant working for Cameron and Associates a public accounting firm situated at

89999 George Street, Sydney NSW. The senior manager, of your firm, John Evans, has asked you to

follow up on an email sent by a client, namely –

Peter Kitchener, the managing director of Grandma’s Kitchens Ltd – his email has raised a number

of issues regarding his company and your manager would like you to research the issues and draft a

response in the form of a business letter – see email information in case study details below. The

maximum length of the letter is 1,250 words (excluding any calculations).

Part A: Technical component 15% - This mark covers the technical content of your advice and the

explanation on each of the issues, the calculations and the sources used.

Part B: Communication Skills – Letter Writing 10% - This mark covers the generic skills of business

letter writing; layout, clear meaning, structure and organisation, appropriate tone and grammar, spelling

and punctuation etc.

The assignment is designed to test the following skills:

1. Your knowledge and your ability to research the issues and then apply the information appropriately

using judgement to correctly identify the relevant standards and legislation that relate to the issues

raised by the client.

2. Your written communication skills – business letter writing

Any work which has been copied or shared between students will result in a Fail grade for both students

concerned. So please make sure that the answer to this individual assignment is your own work and not

copied from any source. Please make sure you follow the guidelines for assignments especially those

relating to the presentation of written work, late assignment policy and academic integrity.

Please check the marking rubric for each part to ensure that you have followed all the guidelines for

presenting your work.

Issue 1:

As per IAS 18 the revenue is recognized at the point of time where the exchange of goods and services take place and it is certain that the seller will receive compensation in exchange for the goods and services that have been rendered by him.

Therefore, this implies that the realization of the amount and invoicing is not essential for the purpose of recognizing revenue rather the virtual certainty of the realization is essential.

Here, we can observe that the entity has a large number of customer base and the goods are made available to customers through different intermediaries like wholesaler distributors, retail customers and through various motels, cafes and souvenir style shops. The sale is recorded at the time of receipt of money from the customers. Therefore, the sale is recognized at the realization of the money rather than the accrual of the sales.

This principle of recognizing sale is incorrect as this method does not recognize the sale at the correct point of time. The accrual and certainty of the sale is more important for its recognition rather than realization. If the sale is recognized at the realization point then the financial statements prepared by applying this principle might also not reflect the true and fair position of the business as the expenses of the business might not be able to justify the sales of the business. In the same manner, in the case of advance receipt for the sale of the goods the principle would pose a greater problem if the transaction is reversed later and the amount has to be reversed. This method is also inconsistent with the principle prescribed by IAS.

Therefore, the sale made to various groups of customers should be recognized at the point in time when the exchange of goods has taken place and the realization of the amount becomes certain for the entity.

Issue 2:

A capital asset is an asset that is expected to generate future economic benefits over a number of years. The investment that is involved is generally in large amount. The entire amount that is invested is depreciated over the life of the asset after deducting the expected residual value of the asset. The asset is recorded in the Balance Sheet at its cost after deducting for all the depreciation or amortization that has been recognized for the given asset till date. The amount of depreciation is determined keeping in mind the various methods of depreciation and the method that is most suitable and justifiable for the asset is applied for the computation of the depreciation.

Here we can observe that an item of machinery has been manufactured in-house by the entity that would enable the drying process of the pickling plant much more effectively. Keeping in mind the nature of benefit that is rendered by the machinery we can state that the machinery will provide economic benefit to the entity over number of years.

The asset is recognized by the entity at the cost that has been incurred by the entity irrespective of its market value if the asset has been acquired by the entity at a value which is less than the market value. The machine has been manufactured in-house at a cost of $250000. However, the market value of the machine is $525000. The factory manager wants to show the item at its fair market value of $525000 and show the balance amount as sales revenue. The factory manager is also manufacturing similar type of machine for two other business entities and he thinks that it increases the goodwill of the company. We can observe that this type of transaction is unusual in nature as it generally does not take place during the normal working of the business. The gain cannot be recognized as sales revenue as the gain has not arisen from the normal operations of the business. The amount is not a gain rather a savings in the cost that would have to be incurred b the entity on the purchase of the machine. Therefore, it cannot be recognized as sales revenue. Moreover, if it is recognized as sales revenue it would increase the sale of the company by a considerable amount and it would not be justifiable. The impact of the savings would arise in a single year itself which will not be correct and will not preset a true and fair position of the business in the financial statements. Therefore, the machine has to be recognized at a cost of $250000 and it cannot be recognized at its market value of $525000 and the income that is generated as a result of sale of the machinery should be treated as income from non-business activities in the year of sale.

Issue 3:

In the given case it can be observe that the provision for doubtful debts had been erroneously recorded at 0.02% in place of 2% by the accounting clerk. This has impacted all the statements of the financial statements as it has led to overestimation of the profits in the income statements for the previous year and over-valuation of the accounts receivable for the previous year.

Since, the financial statements have been prepared for the last year the effect for the same would be present in the financial statements. This would result in underestimation of the profits for the current year and would also lead to correct valuation of the accounts receivable in the Balance Sheet and correct position of the accumulated profits can also be obtained. Therefore, providing for the provision for doubtful debts for the previous year in the Balance Sheet would be feasible.

The sales would be shown at their gross amount therefore, the figure of the revenue would remain constant irrespective of the amount of provision for doubtful debts. The gross profit of the company would also not be impacted as the provision for doubtful debt would be an indirect expense. However, the net profit would be impacted for which appropriate disclosure in the notes to the financial statements can be provided for reference. If the performance of the sales division is judged on the basis of the sales and provision for doubtful debts appropriate disclosures and treatments should be made in the formats that reflect the provision for current and previous year for the doubtful debt.