ReviewEssays.com - Term Papers, Book Reports, Research Papers and College Essays
Search

Advice on the Preparation of a Complete Set of Financial Statements for the Year-End of 2016

Essay by   •  October 16, 2018  •  Term Paper  •  2,442 Words (10 Pages)  •  886 Views

Essay Preview: Advice on the Preparation of a Complete Set of Financial Statements for the Year-End of 2016

Report this essay
Page 1 of 10

1. Advice on the preparation of a complete set of financial statements for the year-end of 2016.

According to IFRS, a complete set of financial statements includes a balance sheet, a statement of comprehensive income, a statement of changes in equity and a statement of cash flows. In addition, note disclosures, which are a summary of significant accounting policies and other explanatory information should be included. Yet, the company only prepared a balance sheet and an income statement without reporting other comprehensive income. Thus, the company needs to prepare other statements.

Moreover, there are two problems regarding the format of balance sheet. Firstly, the amount of assets is not equal to the amount of liabilities and shareholders’ equity. In other words, the balance sheet is not balanced. The company should investigate the reasons behind this fraud. Secondly, current assets should be reported first. Yet, it first reported long term assets. Thus, it is advised to report the current assets first.

2. Accounting advice for the 2016 transactions
Issue #1: How to record R&D?

Case Facts & Analysis:
SKI incurred $350,000 total on R&D and all of the costs have been capitalized as an asset on the balance sheet. Yet, some of them should be expensed and patents should not be categorized under R&D.

Appropriate Treatment:

According to IFRS, research cost is always expensed.

Development costs may be capitalized if all six criteria are met. Technical feasibility is met as SKI is using the most recent technology. It has the intention to complete and ability to use or sell it. The product will also generate probable future economic benefits as it is expected to have substantial future sales. SKI has also availability of adequate resources and the ability to measure reliably the expenditure attributable to its development. Moreover, only directly related development cost can be capitalized.
The direct material and wages of engineers in development cost should be capitalized to the engine amount as they are directly related expenditures. The total research cost should be recorded as expenses. The wages of administrative staff, advertising cost, building overhead, penalties should be recognized as expenses as these are not directly attributable to the engine. Particularly, penalties are an abnormal cost.

In addition, patent is instead an intangible asset, and should be presented separately in the balance sheet.

Recommendation:
SKI should capitalize $165000 into engine, recognize $167000 as expense and record $18000 patent as intangible asset.

Effects on the Financial Statements and the user of the financial statements:
This will decrease net income, thus decrease tax, and also decrease assets as less cost
s are capitalized.

Issue #2: How to record non-monetary exchange?
Case Facts & Analysis:
SKI ordered a shipment 6,000 insulated fabric gloves, which it in return provided leather gloves and $2,000. Under IFRS, it is a non-monetary exchange with commercial substance since the gloves are made of different materials.

Appropriate Treatment:
It should be valued at the fair value of the asset given up or the fair value of the asset received if this is more reliably measurable. Gains and losses should recognize immediately. Accordingly, SKI should use the fair value of leather gloves given up as it is more reliable.

Recommendation:

SKI should debit fabric gloves as $194000 and credit leather gloves as $170000, cash as $2000 and gain as $22000.

Effects on the Financial Statements and the user of the financial statements:
This transaction will increase net income and thus increase the tax, and increase inventory. Thus, the profitability of SKI might be positively affected.

Issue #3: How to record the new sales initiatives?
a. Case Facts & Analysis:

SKI shipped 1,000 snowmobiles to Speed and offered it the right to return any units that could not be sold before the end of the winter season in March 2017. They already recorded sales of $280,000. Measurability is reasonable certain and collectability is reasonably assured. Yet, since return is allowed, risks and rewards have not passed for the goods that may have chance to be returned. Thus, only the unreturned portion fulfills the three revenue recognition criteria stated under IFRS.

Appropriate Treatment:
SKI should make an estimation on the portion of goods that may be returned. It should recognize revenue for the goods to which it expects to be entitled. Whereas, for the goods it estimates are going to be returned, no revenue is recognized, rather a refund liability is recognized.

Recommendation:

Say if SKI estimated only 10% of goods will be returned as it believes that there is high customer demand for the product and returns will be minimal.

SKI should debit cost of sales as $170000 and credit inventory as $170000 to adjust the inventory amount. Besides, it should debit cash as $280000 and credit refund liability as $28000 ($280000*10%) and revenue as $252000.

Effects on the Financial Statements and the user of the financial statements:

This treatment will decrease net income, which decreases the tax paid and increase liability.

b. Case Facts & Analysis:
SKI structured a contract with Rides that no payments to SKI were required to be made until the snowmobiles were sold to Rides’ customers. Under IFRS, this is a consignment sale. However, SKI recorded sales of $280,000 and cost of sales of $175,000 when the shipment was made in September.

Appropriate Treatment:
When SKI ship the inventory, they still cannot record it as revenue as it still retains control over the inventory and possess its legal title and risks of ownership. It can only record as revenue when Rides sell the goods. Since Rides only sold 40% of the inventory at the end of 2016, SKI can only record this portion as revenue.

Recommendation:

When goods are shipped to Rides, SKI should debit inventory on consignment as $175000 and credit inventory as same amount. When it notifies that Rides sells the goods, it should debit cost of goods sold $70000 ($175000*40%) and credit inventory on consignment as same amount to adjust the inventory amount. Also, it should debit accounts receivable $112000 (280000*40%) and credit consignment sales as same amount.

Effects on the Financial Statements and the user of the financial statements:
This treatment will decrease net income through decrease in sales revenue, and reduce tax paid. The amount of inventory on balance sheet will be higher.

...

...

Download as:   txt (14.8 Kb)   pdf (108.8 Kb)   docx (16.2 Kb)  
Continue for 9 more pages »
Only available on ReviewEssays.com