The Impact of a Bonus Incentive Scheme on the Financial Statements - Assignment Example

Case Study Students Name Institution Supervisor Date Case Study 1 Ethics and Governance The impact of a bonus incentive scheme on the financial statements Required A. Who are the stakeholders in this situation? A stakeholder is any party which may be having an interest in an organization. The main stakeholders here are the government and the employees of Vroom who are Lucia and her manager Fred Chusa. B. Why do you believe Freda asked Lucia to do this? Deffered revenue is a liability created when an organization receives money good and services not yet provided. Deferred revenue is derived from the concept of revenue recognition whereby revenue is only recognized when the process of earning it is completed (GlobeScan Inc., 2003). C. What are the ethical issues involved? The ethical issues involved are the fact that Freda intends to report wrong financial information to the stakeholders of Vroom Ltd. Therefore, by so doing the financial reports would not be giving the true picture of the company therefore may misguide any decisions which may be based on them (Ball, Robin & Wu, 2000b). D. Can Lucia defer revenues and accrue as many expenses as possible and still be ethical? In accrual basis of accounting, any goods or services are used and paid for are accrued to reflect the expenditure of the previous reporting period. Also, for money received and yet no goods or services have been received, this income is deferred (Lockheed M. 2004). Therefore, according to the matching principle, revenues are matched to their corresponding expenses in the same accounting period and under the revenue recognition principle, revenues are only recognized when realized and earned (Hogget, Medlin, Edwards, Tilling & Hogg, 2012). Therefore Lucia can only accrue expenses relating to the previous period and defer payments for goods and services not yet received. Any deviation of the accepted treatment of unrealized income as well as accrued expenses would therefore render Lucy to be unethical in her accounting practice (McLaren, 2002). Case Study 2 Retain or Sell a Business Should Lucy retain the business or sell it, given her requirement that the profit margin must be 10%? Explain the reason for your conclusion, showing calculations. Adjusted Entries: a) Fees Revenue = $414 285 - $900 = $413 385 b) Salaries = $283 170-$2 300 = $280 870 c) Rent expense = $19 800 + $1 400 = $21 200 d) Depreciation = $6 000 RIGHTFINANCE.COM Income Statement For the year ended 30 June 2013 INCOME Revenues: $413 385 Fees revenue EXPENSES Salaries $280 870 Subcontracting expenses 57 815 Council rates expense 2 600 Insurance expense 7 000 Advertising expense 12 500 Rent expense 21 200 Depreciation expense 6 000 Sundry expenses 2 400 332 570 PROFIT $ 80 815 Profit Margin = ($80 815/$413 385) % = 19.5% Lucy should therefore retain the business. This is because, after adjusting the books of appropriately, Lucy acquires a profit margin of 19.5% which is higher than 10%. Therefore, the business yields more than her expected rate of return. Case Study 3 Designing an accounting system You have been asked for an opinion on the accounting system that would be most suited to the needs of this company. Give your response to the following queries: A. Should the company use a sales journal? Why or why not? If a sales journal is used, what procedures would you recommend to record entries in it and to send invoices to customers as soon as possible after deliveries? A sales journal is essential for the organization. It should be determined if the sale is on credit with terms which may allow for a discount if the credit is paid within a specified period(Hogget et al ., 2012). In this case, a discount is legible for credits cleared within 10 days. Therefore for a cash payment the journal entry is as follows: DR cash CR a revenue account For a credit sale transaction the journal entry would be as follows: DR an accounts receivable CR a revenue account B. Is a purchases journal needed, or can all purchases be recorded in the general journal? A purchases journal is used for recording of those purchases which are made on credit. The purchase of fixed assets is recorded in the general journal while the cash purchases are recorded in the cashbook. In the Silvertail Petroleum Ltd, it is not clear how purchases are received either through cash or on credit. Therefore all purchases cannot be recorded in the general journal as it is the fixed assets which are recored in the general journal. C. Should the company use a cash receipts journal, considering that some 30 to 50 cheques are received by mail each week? If so, what special columns would you use? A cash receipts journal is used to record the cash inflow, cash sales as well as cash collections. Since the company is receiving many cheques in a week, then a cash receipt journal is essential for the company (Ali & Hwang, 2000). I would include columns such as sales tax payable, accounts receivable, sales discount, miscellaneous, sales and cheques/cash columns D. Should the company use a cash payments journal? Explain. The company has not been described to have its purchases on credit and therefore a cash payment journal should be maintained to record all the cash payments done in the company. Case Study 4 Refer to the latest financial report of JB Hi-Fi Limited on its website, www.jbhifi.com.au, and answer the following questions: 1. JB Hi-Fi Limited is one of Australia’s major home entertainment retail organisations. After reviewing the financial report, what types of different accounting journals would you expect the company to use? The types of journals that may be used by JB Hi-Hi Company include the sales journal, cash receipts journal, cash payment journal as well as the general journal 2. From the statement of cash flows, name the journal(s) or journal summaries in which you would expect to find the following transactions recorded: (a) receipts from customers - cash receipts journal (b) payments to suppliers and employees – General journal (c) dividends paid to members of the parent entity – Cash payments journal (d) payments for property, plant and equipment – General journal 3. From the financial statements and notes in relation to revenues and expenses, name the journal(s) or journal summaries in which you would expect to find the following transactions recorded: (a) Cost of sales expense – Payment Journal (b) Sales and marketing expenses – Payment journal (c) Other income - General journal (d) Occupancy expenses – General journal 4. In general journal format, provide entries that could be made by the company to account for all of the items in (2) and (3) above. (a) cost of sales expense – Payment Journal DR Expenses CR Bank Being expenses on the cost of sales (b) Sales and marketing expenses – Payment journal DR Expenses CR Bank Being expenses on sales and marketing (c) Other income - General journal DR Bank CR Revenue Being other income now recognized (d) Occupancy expenses – General journal DR Expenses CR Bank Being occupancy expenses now recognized References Ali, A., Hwang, L., 2000. Country-specific factors related to financial reporting and the value relevance of accounting data. Journal of Accounting Research 38 (1), 1–21. Ball, R., Robin, A., Wu, J., 2000b. Incentives versus standards: properties of accounting income in four East Asian countries, and implications for acceptance of IAS. Working Paper, University of Rochester. GlobeScan Inc. (2003). Corporate Social Responsibility Monitor 2003. Toronto, Canada. Hogget, J., Medlin, J., Edwards, L., Tilling, M. & Hogg, E. 2012 Accounting, 8th Edition, John Wiley and Sons Australia, Ltd Lockheed Martin. (2004). Ethics and Business Conduct – How the Ethics Process Works at Lockheed Martin. Bethesda, MD McLaren, D., (2002). Corporate Engagement by ‘Socially Responsible’ Investors: a practical paradigm for stakeholder governance? UK: Ashridge Read More