Financial Accounting Report — Case Study and Business letter Essay Example

Pickled Peppers Ltd

Suite2525, Level 28, Plaza Building

525 Charles Street

Adelaide SA 5000

21 May 2014

Mr. Peter Piper

Adelaide SA 5000

Dear Peter

This is to thank you for bringing up the different issues which the change in accounting system and policies has on the overall performance and financials of the company. The financial team has read towards the issues which were identified and would like to present before you the changes which have to be incorporated and the different dimensions which have to be changed so that better financials are prepared. To address the different issues we will highlight the issue which you brought forward and back it up with the solution so that there is no confusion and the issues gets addressed properly

Issue 1: You brought forward the fact that sales entries are recorded when the money is actually received and not when the actual goods are sent. You have even highlighted that all entries for all type of customers are done in a similar manner which includes retail customers (Type A customers), wholesalers (Type B customers) and cafes, motels and souvenirs style shops (Type C customers).

Solution: Recognizing sales after the money is collected from the market is incorrect as sales entries needs to be posted in sales book when it takes place. IAS 18 states that all sales transactions needs to be recorded when the sales takes place and when revenue is recognized the same has to be accounted for at fair value (IAS, 2014). The process also

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Mr. Peter Piper

states that all the transactions should be recorded at fair value and should actually reflect what the business is expected to earn.

In the present situation the recording of transaction when money is received needs to be changed and replaced for customer type A & type B and entries have to be posted when the sales actually takes place irrespective of the fact when the money is collected. In case of type C customers the same has to be carried out but little care has to be taken as the unsold goods are sent back. This will require ensuring proper entries in the name of the stores whom the goods are sent and when the goods are returned by the stores credit note has to be made for the same. This will help to verify the accounts and will ensure that entries are posted when sales take place and return entries are also made when goods are returned and cash is collected. This will help to simplify the process and ensure that corrective entries are passed for each party.

Issue 2: You have highlighted that due to improvement in the process of manufacturing the business has been able to reduce the cost and earn additional revenues. The business wants to treat it as an asset and look at highlighting the gains based on it as a profit which the business has made. In addition to it the assets will be shown at fair value and the treatment which needs to be encountered for it has to be determined?

Solution: IAS 38 requires that all research and development expenses which helps the business either in the present or in the future needs to be shown in the financial statement

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Mr. Peter Piper

at fair value (IAS 38, 2014). This states that the business will have to bring forward the cost of machinery at its fair value and while looking to so fair value has to be ensured. The other reason which supports the same is that all assets which have a monetary value needs to be correctly recognized. Even FRS 100 states that all research and development expenses have to be highlighted in the financials in the same year when they take place so that final profit or loss are shown at correct value (SSAP 13)

This can be viewed from one slightly different angle as well as since the process involves continuing with the manufacturing operations and is plant and machinery so it can be treated as a fixed asset. This requires that the asset is recognized at fair value and whatever the gains that the business is able to make on account of those asset has to be recognized in a similar manner as losses are recognized. This will thereby require that the financials are correctly recognized and the asset are highlighted in the financials. A disclosure can be provided regarding the additional profits which the business was able to make on account of the changes and need to bring it to the notice of the people. This will thereby help to ensure that the assets are correctly recognized and will highlight the true and actual position of the business.

Issue 3: You highlighted that the business has not accounted for the doubtful debts last year and when asked about it the management states that it is less than 5 percent of the overall

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Mr. Peter Piper

sales so it won’t have any impact. You want to know the financial treatment which needs to be carried out for it?

Solution: The FASB has stated that all provision for doubtful debts have to be recognized and highlighted in the financials for the same year. It is absolutely compulsory that the business encounters for provision for doubtful debts as it will then help to highlight the correct value of the assets and liabilities. Even the principle of conservatism states that the business need to state all the expenses which it might occur so that the financials reflect the true picture and is fair picture.

Having a provision for doubtful debts will help the business to deal with the contingencies and will provide an opportunity where the normal business proceedings won’t be disrupted. It doesn’t matter whether the it accounts for more than 5% or less than 5% of the total base as even a slight change will have an impact on the financials and liquidity. In case the same is not accounted in the year it should be then it results in impacting the future financials and will thereby not highlight the actual and true value of the business. Decisions based on it will be flawed and incorrect.

It is imperative that at the present situation a retrospective effect for provision for doubtful debts have to be made for the previous year. This will thereby help to reflect the correct profits and other financials for the last year as well. Doing a retrospective effect will help

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Mr. Peter Piper

to create a provision and if the business encounters such problems then it will have an opportunity to dealing with the same in the best possible manner.

I hope that the different solutions which have been provided to you will help to deal with the different issues which you have raised. I have also attached a list of references which were used to answer the problems and if the need arises you can look into the same for greater details. I also hope that all your doubts have been solved but if you have any confusion or want more detailed solution then you are always welcomed to contact us and we will try to reply back to you with the solution in the shortest possible time

Thank You

Yours Sincerely

Kym Smith

Accountant

21May 2014

Mr. Peter Piper

References

IAS 38. (2014). IAS 38 Intangible Assets. Retrieved on May 22, 2014 from http://www.iasplus.com/en/standards/ias/ias38

IAS. (2014). IAS 18 Revenues. Retrieved on May 22, 2014 from http://www.iasplus.com/en/standards/ias/ias18

SSAP. (2014). SSAP 13 Accounting for Research & Development. Retrieved on May 22, 2014 from http://www.icaew.com/en/technical/financial-reporting/uk-gaap/uk-gaap-standards/ssap-13-accounting-for-research-and-development