QUESTION
SOLUTION
Q1. The annual report of ASX for the year 2011 has been downloaded and the information has been collected from the balance sheet and the income statement of the company. Based on the information collected the following assessment has been made.
a) The account receivable for the year 2011 is $266,888,000 and the total current assets are $3,593,168,000. Thus it can be said that the receivables are 7.4% of the total current assets. Account receivables are much less than the cash available which is $1,951,599,000 and 54% of the total current assets. It is always beneficial that the account receivables are less and thus lower account receivable is always targeted.
b) The account receivables as mentioned in the notes have three basic components namely, trade receivables, margins receivables and receivables from related parties. Thus in considering how much is owed by the customers, trade receivables and margin receivables is considered. The total trade receivables is $59,210,000 and the margin receivables is $190,788,000
c) At the end of the financial year the company expects that of the given trade receivables $58,072,000 will be collected. This show that the amount of 98% of the amount can be recovered however there are also receivables for different periods as different slabs have been shown in the annual report that how much receivable will be collected and at what time interval.
d) The figure of impairment has been provided as $1,138,000 in the current financial year. This has been shown in the Note 11 of the annual report of the company. The other debtors have not been included.
Q2.
In the current situation the information that is related to the accounts department and the other person making entries is having no connection with the accounting personnel. This is the biggest issue and may result in account receivables which are not actually accounted for and has been considered as the payment that has been made and cleared. For the purpose of internal accounting it is very essential that the accountability should be held by single person. Thus this problem will be solved when James either take full accountability or the account personnel. Considering the situation wherein the cheques have been cleared whereas the letters are still pending to be entered. In such a case there will be double accounting of the single transaction. This will lead to the situation where the company may end up with two issues. Firstly the profits may be inflated leading to the decision making that may not be correct. Secondly the company may face the issue of not providing the correct details and may thus be questioned by the auditors.
Thus it is very necessary that the internal accounting have to be in place where there are certain steps of entering the transaction into the system (CAAO, 2008). This has been understood that the internal accounting is very essential for the compliance of any organization and thus indirectly the operations of the company. In order to ascertain that such issue do not arise the two fold accounting as depicted in the current scenario will come up again and again and will create further issues. Thus it is very important to recognize the implications of such a system. In case the process is smoothen and the accountability is known it will be come much simpler to track the position of the transaction and thus suitable decision can be taken.
Thus it is very important to recognize the importance of the internal accounting and take suitable steps to strength the accounting and the auditing system of the company which will ensure the company is meeting the compliance of the company. A further step thus is required to be taken which will reduce the occurrence of such issues.
Q3.
a) The inventory on hand can be calculated by physical stock at hand. This is done by dividing inventory under various heads such as raw material inventory, work in progress goods inventory and the finished goods inventory. When measuring inventory by physical stock method, This is termed as full inventory cycle method wherein each and every type of raw material has been considered. This type of method is generally favored as it provides the complete details of the inventories that are available and thus estimation is provided on the finished goods that can be produced in a given time frame.
b) Under the periodic inventory system the purchase of the raw material or any other purchase is not updated regularly thus the periodic inventory system does not update the inventory account and thus the inventory account is updated once in the complete year or the given period (Stroh, 2001). At the end of the year the adjustment is made for the inventory account based on the closing of the purchases. Thus in order to calculate the inventory level the average of the opening stock and the closing stock is taken. This is to say the inventory level at the start of the period and at the end of the period is taken and the mean value is taken as the inventory level for the period. This is the only way and the simplest way to estimate the inventory level under the periodic inventory system.
c) The inventories are shown under the current assets in the balance sheet for the financial reporting. This is because the inventories can be in the form of raw material, work in progress goods or the finished goods (Piasecki, 2009). In all the cases the inventory are the assets to the company. Secondly these asset i.e. inventories are readily transferred and convertible into cash for the company. This is because the raw material can be used to produce finished goods which can be sold in the market. Thus the inventories form the current assets of the company and are shown in the balance sheet as the asset for the company.
Also the inventories of finished products have to be maintained at certain points in order to fulfill the demand which has been generated by paying in actual for it. Thus it is considered as asset for the company which can generate required cash for the company.
d) The major difference between the bad debts and the doubtful debt is that the bad debt is the actual amount that has been considered that will not be paid to the company however the amount is estimated for the doubtful debts and the actual value of doubtful debt may be more or less than the actual amount (Ross, 2009). This is to say that the bad debts are a sub set of doubtful debt and suitable error term can be associated to it. This error will be negative if the bad debt is less than doubtful debt and will be positive in case of higher value for bad debt.
Doubtful debts are required as it provides an insight for the possibility of these being converted into bad debt. Thus it becomes important that the doubtful debts be estimated correctly so that the suitable decisions can be taken.
e) Broadly the receivables can be of two types, namely, account receivables and notes receivables. Account receivables are the amount that the customers owe to a company in return of the goods and services (Ross, Westerfield & Jordan, 2009). Notes receivables occur when the customers have actually signed the agreement along with the promissory notes with the company. These are more beneficial as it increases the legal binding for the payment to be made to the company. The account receivable along with the notes receivable is termed as trade receivable for the company. However the receivables can be further classified for the various heads such as interest receivables, margin receivables, revenue receivables etc. This has been in order to identify the heads which are contributing to the various receivables for the company.
References:
Piasecki D.J. (2009). Inventory Management Explained: A focus on Forecasting, Lot Sizing, Safety Stock, and Ordering Systems.
Stroh M.B. (2001). A Practical Guide to Transportation and Logistics
Ross S.A. (2009) Corporate Finance
Ross S.A., Westerfield R. and Jordan B.D. (2009). Fundamentals of Corporate Finance Standard Edition
County Auditors’ Association of Ohio. (2008). Internal Accounting Control Manual
LE83
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