ACC506 Accounting Fundamentals

In addition, you are aware of the following organisational policies:?Assets are depreciated using the method that maximises the expense in the initial years (and minimises the expense in later years).?Office furniture is depreciated at a rate of 30%.?Doubtful debts are adjusted at 30 June each year, so that the provision equates to 5% of the accounts receivable balance at the end of the year.You have just received a query from E Ferguson, expressing some concerns the partners have about the business.  These concerns include:

 

1.The partners are unhappy aboutthe high costs of wages for their bookkeeper.  E Furguson has asked you to explain whether it is necessary for the bookkeeper to prepare a bank reconciliation everymonth.

 

2.The partnership has been using a perpetual inventory system based on the average cost method of inventory valuation.  The partnersare concerned that this does not allow themto report theirfinancial performance and position in the most ‘positive light’ (i.e. they feel another method may result in financial statements that are more attractive to future investors and lenders).

 

3.The partnership is considering making a substantial investment into manufacturing machinery which would allow them to manufacture their own inventory from raw-materials, rather than purchase inventory ready-made.   However, they are concerned about how much of their investment will be recorded as an asset and how much will be expensed.Details of the proposed purchase are as follows(assume no GST): 

Purchase price (before discount) $20,000b)Trade discount ($3,000)c)Freight $2,200d)Installation costs $650e)Initial training costs (for machine operator) $570f)Initial testing costs $500g)Costs to reorganisethe company’s inventory department $6,0004.In addition, the partners are also concerned that their businesses performance is not as good as that of theircompetitors: G Henderson, I Johnson &K Lairy who reported a current ratio of $1.60 (p.186), a gross grofit percentage of 48% (p.242), and a days in inventory ratio of 40 days.  Your task:Access the general journals, ledger and trial balance of A Blake, C Dairy & E Ferguson, which you prepared in task 2a (Case Study –Part 1).  Using this information, you are now required to:

 

a)Correct any errors that were identified in your task 2a spreadsheet (if applicable)

b)Optional: some accountants find it beneficial to prepare an accounting worksheet.  A worksheet does not form part of the accounting system, but is an additional tool to assist with the accounting process.  It is not a mandatory requirement for this assessment task, but you may like to prepare a worksheet to assist you with steps c, d & f below (you may copy the worksheet format from the topic 4 resources on Blackboard).c)Prepare adjustment journal entries to accountforthe 6dot points above(note: no adjustments are required for rent or advertising expenses; these costs relate entirely to the 2017 financial year).

 

d)Post the adjustment journal entries (which will include updating the ledger accounts you have previously prepared, and creating new accounts as required); you will also need toupdate the trial balancee)Prepare closing journal entries (do notpost these)f)Prepare financial statements: (1) Income Statement, (2) Statement of Changes in Equity, and (3) Balance Sheet).  Note:it is recommended that you prepare and present these in Excel, using the format shown on page240 (for the income statement and statement of changes inequity) and page 184 (for the balance sheet)of the course textbook: Nobles et al. 2016.

 

 g)Calculate the following financial ratios: (1) Current ratio, (2) Gross Profit percentage, and (3) Days in inventory ratio(note:use ending inventory balance as average inventoryfor thiscalculation).  
Page | 4h)Prepare a brief report in response to the 4concerns raised by the partners.  In your report, you mustdirectly address the concerns raised by the partners.  In doing so, please briefly explain the following concepts:a.The importance of internal controlb.Earnings management

 

c.Different options for accounting for inventory d.The accounting standard and general guidelines for recording non-current assets(note:a scaffolding activity will be conducted in week 8 or week 9 computer workshops which will assist with this).  e.Interpretation of the current ratiof.Interpretation of the gross profit percentageg.Interpretation of the inventory ra