Question

basic accounting course:

QUESTION 4: Accounting Concepts

You are employed as a graduate accountant in a mid-tier accounting firm.  One of the partners has asked you to review the following cases where a client has violated at least one of the assumptions, concepts or definitions you studied at university.  The partner has asked for a written report in your own words (using references where appropriate), to please explain:

a)which concept or assumption has been violated, and;

b)what the correct treatment should be.

i.The manager of a firm was advised by the accountant that the loss of large sums of money was probably because several customers were close to bankruptcy. The customers concerned probably would not be able to pay their debts. The manager has argued that no allowance should be made because the losses have not yet occurred.

ii.The owner of a farming property argued that the value of a public road running past his land should be included among the farm’s assets. He felt this was right because the road made it quicker and easier for him to transport his products. “this means that the road is an asset to the farm,” he said.                                                       [5 marks]                      

QUESTION 5:   Cash Flow Statement

           Below are the summarised cash flow statements for two businesses. Comment in your own words using referencing where appropriate on which one has a healthier cash flow situation and justify your answer by explaining the significance of each of the three types of cash flows for each business:

	Anaconda Ltd	Calibre Ltd
Cash flow from Operating Activities	13 100	(13 900)
Cash flow from Investing Activities	(7 800)	20 100
Cash flow from Financing Activities	(6 700)	(3 800)
Net increase / (decrease) in cash held	(1 400)	2 400
Cash at the beginning of the year	7 100	3 400
Cash at the end of the year	5 700	5 800

[Approximately 400 words expected in your answer]

Answer 1

Question 14: i) The Accounting concept which is been violated in the case of not recording of the provision for doubtful debts is PRUDENCE. It States that an entity should record all its assets and liabilities at recoverable about it should record all the foreseeable losses and only record actual gain.

The Manager SHould Make Provision of the debts as the same was considered as doubtful

ii) In order to be recognized as an asset in Financial Statment, it must follow the definition as laid down in the IASB Framework:

An ASSET is a resource controlled by the entity as a result of past event and from which the future economic benefits are expected to flow to the entity.

In This case, The Road was Nowhere controlled by the entity nor the economic benefits pertaining to the road will flow to the entity. So the same should not be added to the cost of the farm. Road will not be recorded as an asset.

Question 15: To Analysis the Cash Flow Statements of Ananconda Ltd and Calibre Ltd, we will analyze one by one cash flow from all the Three Activity in the cash flow which is Operating, Investing and Financing.

1. Cash Flow from OPerating Activity: It Constitutes the Revenue generating activities of a business. It Tells how much cash company generates from its Core Operations.

The Cash Flow From Operating Activity for Anaconda Ltd is 13100, which indicates that Anaconda Ltd generates surplus from its operations and the operations are Profitable to the Company, on the other hand, the cash From Operating Activity of Calibre Ltd is (13900), which indicates that it suffers deficit of cash and also loss from its core business.Anaconda Ltd has better Operating Flows from Calibre

2. Cash Flow From Investing Activity: It Shows the Cash Flow From Both Short Term and Long Term Investment. In the case of Anaconda Ltd, due to Operational Surplus, the same is being invested in Investments thus resulting in an outflow of cash totalling (7800), whereas due to the deficit suffer by calibre ltd from operational activity the same withdraw from investment a sum total of 20100

3. Cash Flow From Financing Activity: A total Amount of (6700) is repaid by Anaconda Ltd to the Financers of the Company whereas it is (3800) in case of Calibre Ltd.

Overall in all 3 cash flow Anaconda Ltd proves to be better than Calibre Ltd.