Discuss about the Schism Outline of Principles of Accounting.
|
Item |
Error |
Correction |
|
Wages for factory staff directly involved in making the gym equipment |
These expenses are in the nature of capital expenses and should not be debited to income statement |
Installation expenses should be capitalised with the asset |
|
Rent & Production managers salary |
Expenses have not been allocated to their respective heads |
Expenses which have been jointly incurred should be proportionately distributed among various departments |
|
Factory Equipment, Office Equipment and Sales Managers Vehicle |
These expenses are in the nature of capital expenses and should not be debited to income statement |
These are assets purchased and should be shown in the balance sheet at the depreciated values |
|
Closing stock of raw material, work in progress and finished goods |
No Adjustment in the income statement made |
The stock of these assets will be used in the next year. The amount of such closing stocks should be deducted from the income statement and shown in the balance sheet |
|
Depreciation |
No Adjustment in the income statement made |
Depreciation for the assets should be charged to the income statement and the asset should be shown at the reduced value in the balance sheet. |
|
Gas |
The amount paid for gas has not been included in the income statement |
The amount paid for gas should be reported under appropriate head in the income statement |
Note: there is a difference of $6500 in the statement of Pl. this amount has been assumed to be paid towards gas expenses.
|
Cost of Goods Manufactured |
||
|
Particulars |
Amount |
Amount |
|
Raw Material Used |
||
|
Add: Opening Stock |
– |
|
|
Add: Purchases of Raw Material |
2,60,000 |
|
|
Less: Closing Stock |
26,000 |
2,34,000 |
|
Work in Progress |
||
|
Add: Opening Stock |
– |
|
|
Less: Closing Stock |
52,000 |
-52,000 |
|
Wages for other factory staff |
13,000 |
|
|
Factory Cleaning Cost |
6,500 |
|
|
Rent |
22,750 |
|
|
Electricity |
5,850 |
|
|
Production Managers Salary |
26,000 |
|
|
Gas |
6,500 |
|
|
Depreciation on Factory equipment |
55,900 |
|
|
Cost of Goods Manufactured |
3,18,500 |
|
Statement of Income |
||
|
Particulars |
Amount |
Amount |
|
Sales |
5,85,000 |
|
|
Less: |
||
|
Cost of Goods Sold |
2,46,500 |
|
|
Administrative Expenses |
55,250 |
|
|
Selling and Distribution Expenses |
58,500 |
3,60,250 |
|
Profit for the year |
2,24,750 |
|
Cost of Goods Sold |
|
|
Particulars |
Amount |
|
Opening Stock of Finished Goods |
– |
|
Add: Cost of Goods Manufactured |
3,18,500 |
|
Less: Closing Stock of Finished goods |
72,000 |
|
Total |
2,46,500 |
|
Administrative Expenses |
|
|
Particulars |
Amount |
|
Purchase of office supplies |
13,000 |
|
Administrative Wages |
13,000 |
|
Administrative Expenses |
10,400 |
|
Depreciation on Office Equipment |
2,600 |
|
Rent |
3,250 |
|
administration manager |
13,000 |
|
Total |
55,250 |
|
Selling And Distribution Expenses |
|
|
Particulars |
Amount |
|
Sale staff salaries |
28,600 |
|
Advertising |
6,500 |
|
Rent |
6,500 |
|
Depreciation on Sales Manager Vehicle |
3,900 |
|
Sales manager |
13,000 |
|
Total |
58,500 |
|
Calculation of Depreciation |
|
|
Particulars |
Amount |
|
Factory Equipment- Purchase Cost |
1,82,000 |
|
Add: Installation Cost- Wages for factory staff directly involved in making the gym equipment |
97,500 |
|
Total Cost |
2,79,500 |
|
Depreciation |
55,900 |
|
Office Equipment-Purchase Cost |
13,000 |
|
Depreciation |
2,600 |
|
Sales Manager Vehicle- Purchase Cost |
19,500 |
|
Depreciation |
3,900 |
|
Allocation of Rent Expense |
|
|
Particulars |
Amount |
|
Factory |
22,750 |
|
Administration |
3,250 |
|
Selling and distribution department |
6,500 |
|
Allocation of Production Managers Salary |
|
|
Particulars |
Amount |
|
Factory |
26,000 |
|
Administration |
13,000 |
|
Selling and distribution department |
13,000 |
Based on the calculation and statement of profit above we can see that Twister Pty ltd has earned a profit of $ 224750 for the current year. Cam Rollins has started a new business and initially any new businesses require huge capital investment (Seal, 2012). In the given scenario we see that the company has invested its major funds in assets and now is in deficit of cash. In order to avail for overdraft facility Cam needs to convince the bank managers that the company will be performing well enough to pay back the amount loaned.
Considering the above financial data we can see that the company has been performing well. In the first year of its existence the company has managed to earn sufficient profits. Therefore, the bank should extend the overdraft facility to Twister Pty Ltd. while ascertain the credit rating of the company the bank may also ask for financial statements of the company. They may also require a forecasted set of financial statement in order to understand the financial viability of the company (Siciliano, 2015). The company will also be required to keep a security with the bank, which can be used in case they fail to repay the overdraft amount. The bank would take a lot of points into consideration before extending the overdraft facility to the company.
The banks firstly require the credit rating of the company in order to evaluate the financial viability of the company. These rating are done by financial institutions. Availability of line of credit is highly dependent on the credit rating of the company. All the past credit history of the entity is taken into consideration in order to arrive at this credit rating. The bank would take into consideration the financial statements of the company in order to determine the net work and profitability of the company they may also require that the financial statements be audited by a proper accountant (Taillard, 2013). After taking the financial performance of the company into consideration the bank would ask for sufficient collateral to cover the overdraft amount. All the assets cannot be used as collateral, only the assets that can be easily marketable can only be used as collateral. Apart from the collateral the bank may also ask of personal guarantee from one or more of the owners of the business. They are required to provide their own financial details in order to avail the credit facility form bank. Apart from collateral and guarantees bank also considers the personal relation of the client with the bank. Therefore, the bank should extend the overdraft facility to Twister Pty Ltd as the financial position of the company is healthy.
In the given scenario we see that Cam has been approached by a new supplier who would supply him the raw material for the factory asset at a very cheap rate. The quality of such raw material is not as good as that of the current material. The supplier informed Cam that minor accidents may take place due to poorer quality of the raw material. Even after taking the compensation for injuries provided to customers the raw material would still be cheaper to the Cam.
Taking the above data into consideration we are of the view that Cam should not change his supplier for raw material in order to save. Cam has just set up a new business and it need to provide quality services to its customers. If they fail to provide proper quality services to the customers then it will harm the financial position of the company in the long run. Using the cheap quality material in his factory will increase the chances of injury to its customers. Though the supplier said the injuries which occur are minor, the customers will not want to refer the services to any other people. Also, in case if any customer is dissatisfied or harmed with any of the product, they may file a legal suit in the court of law (Girard, 2014). This may hamper the goodwill of the business and will definitely cast too much financial burden on the company.
The quality of the services to be provided should never be compromised with. Maintaining the work and quality will help grow the business in future. It will also help them expand and create a reputation for the brand name (Lerner, 2009). Also, using a low grade product to provide services may be against the regulatory norms. In case the regulatory authority comes across such information then it may land the bunnies in hot waters. This will result in os of reputation and fines and penalties. The company needs to provide good quality services in order to maintain the reputation of the business. Customer satisfaction should be the major aim for the newly established business (McLaney & Adril, 2016). Also we see that company has been earning sufficient profits. There is no need for the company to cut back on any of the expenses. So they should not use low quality materials.
Therefore we see that in order for the company to maintain its reputation and goodwill, and also for them to avoid any legal and regulatory fines and penalties they should not switch to lower quality raw materials (Piper, 2015). Trying to save a dollar on raw material may cost them lots in order to cover for the losses incurred due to them. Hence, the company should not switch to lower quality products in order to save money.
References
Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.
Lerner, J. J. (2009). Schaum’s outline of principles of accounting. New York: Schaum.
McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United Kingdom: Pearson.
Piper, M. (2015). Accounting made simple. United States: CreateSpace Pub.
Seal, W. (2012). Management accounting. Maidenhead: McGraw-Hill Higher Education.
Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.
Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: Wiley.
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