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Desmond Financial Accounting 1 Assignment
Desmond Financial Accounting 1 Assignment
1
Q1.1 What, in economic principle, should be the determinant of what accounting
information is produced? Should
economics be the only issue here? (Consider who the users of accounting
information are) (10 Marks)
Accounting information is fundamental for strategic decision-making within business
operations, intricately linked with economic principles. However, it's not solely guided by
economic doctrine but also influenced by various stakeholders who play a significant role
in its formulation and dissemination.
Investors, creditors, management position holders, governmental entities, and other
interested parties collectively shape the landscape of accounting information production.
Their diverse needs and aspirations, ranging from financial performance metrics for
investors to risk assessments for creditors, highlight the dynamic interplay of interests in
the realm of accounting.
Frank Wood's assertion (1967) regarding the importance of accounting information
underscores its critical role in influencing economic decisions. It's not just about providing
insights into past, present, or future events but also rectifying past evaluations, ensuring
its indispensable role in guiding decision-making processes, and fostering economic
growth.
Cost-benefit analysis acts as a vigilant gatekeeper in accounting information production.
Each financial insight exacts its toll, necessitating a careful weighing of costs against
benefits to ensure that the value derived justifies the resources invested. This process
ensures efficient allocation of accounting resources, maximizing their utility in aiding
decision-making.
Consistency and comparability are essential pillars upholding financial transparency.
Adherence to consistent accounting methodologies over time and comparability with
industry peers facilitate meaningful analysis, enabling stakeholders to discern trends,
benchmark performance, and make informed decisions amidst the sea of financial data.
Transparency and disclosure serve as guiding principles in financial reporting. Shaban
Mohammadi's research (2015) underscores the transformative power of full disclosure
and transparency in fostering investor confidence, mitigating risks, and bolstering
profitability. Clear and comprehensive disclosure ensures that stakeholders navigate the
financial landscape armed with knowledge rather than speculation, fostering trust and
accountability in financial markets.
The principle of fair presentation serves as the moral compass in financial reporting,
anchoring the narrative of financial statements in integrity and impartiality. Rooted in
meticulous adherence to stringent accounting standards and regulations, it underscores
the commitment to transparency and honesty in financial reporting practices, thereby
enhancing the credibility and reliability of financial information.
Accounting information production is a collaborative endeavor, harmonizing economic
imperatives, stakeholder needs, and the inviolate principles of transparency and fairness.
Striking this delicate balance ensures that accounting information emerges not merely as
a ledger of numbers but as a beacon of truth, reliability, and utility in the crucible of
decision-making, driving sustainable growth and prosperity.
Q 1.2 Reporting inventories in the financial statements provides a further example
of the need to apply subjective judgement. For the inventories of a retail business,
what are the main judgements that are required?
Give a summary for each method. (10 Marks)
The reporting of inventories in financial statements for a retail business involves
subjective judgments in several important areas. One of these is determining the Net
Present Value (NPV) relating to inventory. This will require forecasting future cash flows
in relation to anticipated sales, levels of inventory turnover, and potential obsolescence,
among other things. NPV is useful where there is the need to make a profitability
measurement of the inventory investments since this then purports that these estimated
cash flows are discounted to their present value to give the time value of money the
needed relevance.
There is, once again, a reliance on systematic physical inventory counts in the exercise
of sound judgment. Retailers must determine the timing and frequency of counts,
appropriate sampling methodologies, and the resolution of discrepancies between
physical counts and recorded amounts for inventory. They afford retailers the chance to
ensure the honesty and accuracy of the recorded existence and condition of inventory
items in their premises.
“These counts involve the meticulous verification of inventory items to authenticate their
existence and condition, thereby safeguarding the integrity and accuracy of inventory
records.” (Nayani, 2014)
The second major area requiring prudent judgment is the allocation of overhead costs to
inventory. Retailers must allocate indirect expenses, such as rent and utilities, to inventory
while selecting an allocation base and rates. This act of careful working helps to establish
true value in accordance with cost of goods sold besides inventory valuation that allow
for indirect expenses.
1. The owners introduced P 50,000 of equity which was paid into a bank account opened
in the name of the business.
2. Premises were rented from 1 January 2014 at an annual rental of P20,000. During the
year, rent of P25,000 was paid to the owner of the business.
3. Rates (a tax on business premises) were paid during the year as follows:
- XXX for the period 1 January 2014 to 31 March 2014: P500
- XXX for the period 1 April 2014 to 31 March 2015: P1200
4. A delivery van was bought on 1 January 2014 for P12,000. This is expected to be used
in the business for four years and then sold for P2,000.
5. Wages totaling P33,500 were paid during the year. At the end of the year, the business
owed P630 of wages for the last week of the year.
6. Electricity bills for the first three quarters of the year were paid totaling P1650. After 31
December 2014, but before the financial statements were finalized for the year, the bill
for the last quarter arrived showing a charge of P620.
7. Inventories were bought on credit totaling P143,000.
8. Inventories totaling P12,000 were bought.
9. Sales revenue on credit totaled P35,000 (cost of sales P74,000).
10. Cash sales revenue totaled P35,000 (cost of sales P16,000).
11. Receipts from trade receivables totaled P132,000.
12. Payments of trade payables totaled P121,000.
13. Van running expenses paid totaled P9,400.
At the end of the year, it was clear that a credit customer who owed £400 would not be
able to pay any part of the debt. All the other trade receivables were expected to be settled
in full.
THE LEDGER BOOKS OF TT and Co. AS AT 31 DECEMBER 2014
CAPITAL
Debit Credit
Date Details Amount Date Details Amount
1/1/2014 Balance c/d 50000 1/1/2014 Bank 50000
1/1/2015 balance b/d 50000
RENTAL EXPENSES
1/01/2014 Bank 20000 1/1/2015 Balance c/d 20000
1/1/2015 Balance b/d 20000
PREPAID RENT
1/1/2014 Bank 5000 1/1/2014 balance c/d 5000
1/1/2014 balance b/d 5000
BANK
1/1/2020 capital 50000 1/1/2014 rent 20000
31/12/2014 cash revenue 35000 1/1/2014 prepaid rent 5000
account
31/12/2014 receivables 132000 1/1/2014 rates 500
1/4/2014 rates 1200
1/1/2014 van 12000
1/1/2014 electricity 1650
1/1/2014 inventory 12000
31/12/14 account payables 121000
van running
31/12/14 expenses 9400
31/12/14 wages 33500
RATES
1/1/2014 Bank 500
1/4/2014 Bank 1200
1700 Balance c/d 1700
VAN
1/1/2014 bank 12000 balance c/d 12000
ELECTRICITY
1/1/2014 Bank 1650
Accounts
31/12/14 Payable 620
2270 balance c/d 2270
INVENTORY
accounts
1/1/2014 payable 143000 1/1/2014 cost of sales 74000
1/1/2014 bank 12000 1/1/2014 cost of sales 16000
balance c/d 65000
155000 155000
balance b/d 65000
ACCOUNTS
PAYABLES
31/12/2014 bank 121000 1/1/2014 inventory 143000
31/12/2014 Bad Debts 400 1/1/2014 electricity 620
31/12/2014 wages 630
31/12/2014 Balance c/d 22850
144250 144250
ACCOUNT
RECEIVABLES
31/12/14 Sales revenue 152000 31/12/14 bank 132000
balance c/d 20000
152000 152000
VAN RUNNING
EXPENSES
31/12/14 Bank 9400 31/12/14 balance c/d 9400
1/1/2015 balance b/d 9400
COST OF SALES
1/1/2014 Inventory 74000
1/1/2014 inventory 16000
90000 1/1/2014 balance c/d 90000
WAGES
31/12/14 Bank 33500
Accounts
31/12/14 Payables 630
34130 31/12/14 balance c/d 34130
BAD DEBTS
Accounts
31/12/2014 Payables 400
31/12/14 Balance c/d 400 400
Capital 50000
Bank 750
Van 12000
Inventory 65000
Account payable 22850
Account receivables 20000
Rental Expenses 20000
Prepaid rent 5000
Electricity 2270
Rates 1700
Sales revenue 187000
Cost of sales 90000
Van Running Expenses 9400
Wages 34130
Bad debts 400
TOTAL 260250 260250
REFERENCES
Wood, F., & Sangster, A. (2013) Frank Wood’s Business Accounting Volume 1
Pearson Higher Ed, UK
Horngren, C. T., Sundem, G. L., & Stratton, W. O. (2002). Introduction to Management
Accounting. Prentice Hall.
Financial Accounting Standards Board. (2018). Concepts Statement No. 8:
Conceptual Framework for Financial Reporting. Retrieved from
https://www.fasb.org/resources/ccurl/1069/386/2018%2008%20CON%208.pdf
(Accessed: February 15, 2024)
International Accounting Standards Board. (2018). Conceptual Framework for
Financial Reporting. Retrieved from https://www.ifrs.org/-/media/project/conceptual-
framework/final-version-of-conceptual-framework.pdf?la=en (Accessed: February 15,
2024)
Mohammadi, S. & Moein Nezhad, B. (2015). 'The role of disclosure and transparency
in financial reporting', International Journal of Accounting and Economics Studies
Nayani, S. (2014). Inventory Management - A Strategic Decision. International Journal
of Research in Management & Business Studies, 1(1), 1-6.
White, J. (2021). Allocating Overhead Costs to Inventory: Methods and
Considerations. Journal of Accounting and Finance, 12(3), 45-56.
Green, M. (2018). Managing Consignment Inventory in Retail Businesses. Supply
Chain Management Review, 22(4), 78-89.
Wood, F., & Sangster, A. (2013) Frank Wood’s Business Accounting Volume 1
Pearson Higher Ed, UK