Question

Amanda Ltd is a manufacturing company operating in Parramatta, Sydney. The company has been successful since its inception in the early 1990 and has even won twice the “Best Corporate Citizen Award” presented by the City of Parramatta Council. The company has recently been facing multiple problems including declining profit, loss of inventory (through theft or spoilage) in the warehouse, and declining reputation from its stakeholders. Coincidently, all these problems started when the head of Accounting Department, Sofia Bryant, voluntarily retired from her position recently. Her retirement was provoked by a sarcastic comment made by the Sales Manager during board meeting, that “Amanda Ltd can cut down its cost by shutting down Accounting Department. After all we will even be better off without this department”.

Part A

1. Evaluate the statement, “Accounting is the Language of Business”.

2. Discuss how Accounting and Governance helped Amanda Ltd in winning the Best Corporate Citizen Award.

Part B

3. a. Why some firms might prefer a perpetual inventory system to a period inventory system?

b. Explain how using perpetual inventory system could help Amanda Ltd to minimise the loss of inventory.

4. How would the application of the principle of segregation of duties could prevent the loss of inventory at Amanda LTD?

Answer 1

Amanda Ltd, A manufacturing Company Operating in parramatta started its business in 1990 has won "Best Corporate Citizen Award"twice. Since Sofia Bryant, Head of Accounting Department retired, the company is facing many problems like decreasing profilts and loss of inventory and declining reputation from stakeholders.

PART A

1) Accounting is the Language of Buiness

The phrase "Accounting is the Language of Business" is attributed by Warren Buffet, the chairman and CEO of Berkshire Hathaway, during a CNBC interview. It is a means of communicating information about a business.The Financial Satements drawn through the process of Accounting provides the vital information about the business to the concerned individuals and organisation based upon which they take their decisions. Without the process of Accounting Analysis and interpretation there will be no information about the performance of the business. One Can be able to improve their business basedupon the information available through the process o Accounting.

Accounting is a Global Language like Music. Numbers work the same way anywhere in the world. When global mergers or business deals take place, the parties involved can easily understand the financial aspects of any deal by looking at financial reports. An investor may not be familiar with the particulars of a specific industry, but by investigating a company's financial statements, they should be able to tell whether or not the business shows potential to be a sound investment.Understanding the meaning behind the numbers is an important component of speaking the language of business fluently

2) Accounting and Governance

In the case of Amanda Ltd , the head of Accounting Department, Sofia Bryant, had played an important role in achieving the “Best Corporate Citizen Award” twice. Sofia being responsible for the accounts of the company has maintained all the accounting practices which are governed by the company and ensured that there is a good decision-making process, policies and procedures to ensure accuracy, consistency and responsiveness to key stakeholders including customers, shareholders and regulators. Due to the Accounting Practices aand the governed policies which made the company to be successful in its business and gained huge profits, Stakeholders satisfaction to continue to invests in thr business and thus achieved the “Best Corporate Citizen Award”

3a) There are two types of Inventory Systems. Perpetual and Periodic Inventory System.

Perpetual Inventory Sysytem:  Perpetual inventory system provides a running balance of cost of goods available for sale and cost of goods sold. Under this system, no purchases account is maintained because inventory account is directly debited with each purchase of merchandise. Each time the merchandise is sold, the related cost is transferred from inventory account to cost of goods sold account by debiting cost of goods sold and crediting inventory account. Thus knowing the real time valuation of the inventory.

Periodic Inventory System : Periodic inventory is a system of inventory in which updates are made on a periodic basis. This differs from perpetual inventory systems, where updates are made at the end of the year. In a periodic inventory system no effort is made to keep up-to-date records of either the inventory or the cost of goods sold.

Firms prefer Perpetual Inventory System to Periodic Inventory System because perpetual Inventory syatem provides real time count of inventory and ost of Goods sold. It also provides valuable information to business owners, such as discounts, purchases, and returns. Reduces physical inventory counts.It helps in formulating purchasing poliies, detection of thefts and spoilages, helps in ascertaining the effecieny of ware house. These advantages are not available in periodic inventory system as the valuation is done in the end of the year and there is no sope of ascertaining the things befor in hand. Hence, most of the firms prefer Perpetual Inventory System to Periodic Inventory System.

3b) Perpetual System can help to minimise the loss of Amanda ltd

Inventory planning is important to both meet demand and maximize sales. Accurate inventory planning prevents too much inventory that can tie up cash and risk inventory obsolescence, write-downs, and price reductions that lead to lower profit margins. With the help of the Perpetual Inventory System , Ammanda ltd will be able to know the real time values of the inventory and Cost of goods sold using the software packages. IN this, each inventory is maintained as each ledger thus helping us to know purchases, discounts, returns, loss, theft etc. Based upon this the company can invest in the inventory to meet the expected sales for that particular year. Thus wie can utilise the cash optimally minimising the risks and losses and increase in profits.

4) Application of the principle of segregation of duties could prevent the loss of inventory at Amanda LTD

Segreagtion of Duties is one of the important internal control for any organisation. So, Amanda Ltd can use this internal control to prevent the loss of inventory. For this segregation there should be atleast two employees made responsible for the inventory maintaing the accounting regaurds and safeguarding. Employees share responsibility for related transactions so that one employee’s work serves as a check on the work of other employees.

When a company segregates the duties of employees, it minimizes the probability of an employee being able to steal assets and cover up the theft. For example, an employee could not steal inventory from a company and have the theft go undetected unless someone else changes the inventory records to cover the shortage. To change the records, the employee stealing the inventory must also maintain the inventory records or be in collusion with the employee who maintains the inventory records.

Amanda Ltd can make the following to prevent the loss of inventory:

1) Assignment of specific duties to each employee Which makes him accountable for specific tasks

2) Rotation of employee job assignments to discourage employees from engaging in long-term schemes to steal from them. Employees realize that if they steal from the company, the next employees assigned to their positions may discover the theft.

3) Use of mechanical devices Companies use several mechanical devices to help protect their assets. Bar codes scanners make it difficult for employees to steal inventory and alter company documents and records.