Question

QUESTION 3:

Maritime Ltd is in the process of closing its books for the year-end. What is the impact for each of the following adjustments in each of the following:

Statement of Financial Performance

Statement of Financial Position

Cash Flow Statement

Scenario 1: Maritime Ltd purchased a new range of boat steering parts from an overseas manufacturer. The company has estimated that warranty costs will be 4% of total sales. Total sales for the current income year is $640,000.

Scenario 2: The auditors estimate the provision for long service leave should be $112,000 instead of the current provision of $150,000.

Scenario 3: Maritime Ltd decides the effective life of equipment purchased in the current year is 8 years and not the 6 years originally estimated. The difference in the depreciation expense each year is $47 000.

Scenario 4: The allowance for doubtful debts has been calculated as a percentage of total sales, being 2% of $1,000,000. However, it is decided that it would be more appropriate to calculate the allowance as a percentage of credit sales (i.e. 3% of $750,000).

Answer 1

Scenario 1: Purchase of parts & warranty expenses of 4% should be recorded in Statement of financial performance as these are expenses. Sales of parts will be recorded as revenue in Statement of financial performance. Inventory from purchase in current asset & net profit due to above transaction will be recorded in retained earning in Statement of financial position. This transaction will result in net operating cash flows in cash flow statement.    

Scenario 2: Increase in Provision for long service leave would increase liabilities in Statement of financial position. There will be no impact in Statement of financial performance and cash flow statement.

Scenario 3: There will be retrospective impact of change in useful life of asset. The depreciation charge in Statement of financial performance will decrease, which in turn will increase net profit. Fixed asset balance in asset side & retained earnings in liabilities side of Statement of financial position will increase. There will be no impact on cash flow statement.

Scenario 4: Provision for doubtful debts will increase in Statement of financial performance, which in turn will decrease net profit. Debtor balance in asset side will decrease and retained earning in liabilities side will decrease in Statement of financial position. There will be no impact in cash flow statement.