We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Athina Building Supplies Ltd Essay Sample

essay
The whole doc is available only for registered users OPEN DOC

A limited time offer!

Get a custom sample essay written according to your requirements urgent 3h delivery guaranteed

Order Now

Athina Building Supplies Ltd Essay Sample

I am an advisor to the CFO hired to evaluate the events that occurred during the year ended December 31st, 2017, and to prepare a report on an examination of the financial statements, any issues with Athina’s new management, and any problems that could potentially affect net income and the amount the national chain is due. CONSTRAINTS

Following the International Financial Reporting Standards (IFRS) would be beneficial to both the new investors and the old owners seeing as how IFRS leaves less up to judgement and would provide more consistency. Under the assumption that the new investors are looking to grow and expand the company, using IFRS would be useful if the company were to ever need more investors or a loan from the bank. Growth would mean that additional investors and a possible bank loan could be necessary. Assuming that the company was already using IFRS, it would be in their best interests to continue using those standards because switching to the Accounting Standards for Private Enterprises (ASPE) would be costly seeing as how they are not a part of the national chain of stores anymore, and following no standards at all is out of the question due to the fact that Athina’s financial statements will be looked at by external parties and it is important that they are consistent, accurate and can provide useful information. USERS AND OBJECTIVES

In this case, as an advisor to the CFO, I am under the assumption that I have no power in making any decisions that will affect the financial statements or the net income. This means that no stakeholders are directly or indirectly influenced by my actions because all I am doing is providing insight to the CFO in regards to the issues presented to me. Therefore, there are no users in this situation. In terms of objectives, it is possible that you, as the CFO, would have wanted income maximization to be an objective seeing as how the net income of the company determines how much money the national chain receives; but again, because we have no control over the financial statements of Athina, the most we could do is speculate on the information provided and see what could have been done differently. ISSUES

Sales on Collection of Cash from a Builder – Revenue Recognition In regards to sales on collection of cash from a builder, the issue here was that the $150,000 worth of expenses associated with the sales was incurred but the $275,000 revenue earned from the sales on homes was not recorded on the income statement. The IFRS criteria for revenue recognition are as follows: A) Risks and rewards are transferred. B) Amount of revenue can be estimated. C) Costs can be estimated. D) Collection is assured. Criterion a) is satisfied because the houses have been sold and the buyers have paid. Criteria b) and c) are satisfied because both values have been determined and provided. Criterion d) is essentially satisfied, as it says that none of the builders have failed to pay back any money that they owe. Athina should have recognized the sales on homes as revenue and therefore should have earned revenue of $275,000. This means that the reported net income before unusual or non-recurring items for the year ended December 31, 2017 is understated by the same amount. Additionally, the assets on the balance sheet are understated by said amount as well due to the lack of increase in the Accounts Receivable account. Kitchen Cabinets – Write-Off

By writing off the full unamortized portion of the costs, this means that there was a loss on the income statement (which would work out to be an expense) and this would have decreased the net income before unusual or non-recurring items by $110,250. [See Appendix A for calculation.] In regards to the write-off of the unsellable kitchen cabinets, Athina had many other methods of recording this event on their financial statements. The first would be that instead of capitalizing the $210,000 to set up displays to promote the line, these displays could have been recorded as an Advertising Expense. One of the IFRS criteria for something to be considered an asset is that the benefit must be reasonably measurable. When it comes to anything done for the purpose of advertisement or promotion, it is hard to measure the benefit and that is why this cost could have been expensed rather than capitalized. However, by recording this event as an expense this would mean that Athina’s net income would have been overstated by $210,000 and that is an undesirable outcome for the national chain.

The second way that Athina could have approached this issue is that Athina could have considered the write-off as an unusual or non-recurring item seeing as how the inventory-turned-obsolete was not something that happens regularly. In this case, by considering this event as unusual or non-recurring, there would have been no effect on the net income before unusual or non-recurring items. The final way that Athina could have approached this issue is that instead of writing off the entire unamortized portion of the costs in 2017, they could have continued amortizing the inventory and then written off the cabinets at a future date in, or past April 2018, when they could no longer sell the products. This would have been the ideal option. By putting off the immediate full write-off, their net income before unusual or non-recurring items would be understated by $110, 750. Furthermore, in the future, when calculating future depreciation expenses, Athina would have to adjust their useful life to the remaining four months that they are able to sell the product. J. Alexander – Revenue Recognition

The issue that here exists in how to account for the $200,000 non-refundable fee that J. Alexander had paid. Athina recorded the $200,000 as a long-term deposit and is planning to recognize it as revenue over the term of the contract but it would have been possible to recognize the $200,000 payment as a critical event; it could have been recorded as revenue on that very day. Risks and rewards were transferred in the sense that J. Alexander had paid Athina in exchange to own and operate the plumbing department. Both revenue and cost can be estimated because the value of the payment is known, and collection is assured because the fee is non-refundable. This would mean that their net income before unusual or non-recurring items would have been understated by $200,000. Even though the previous method of recording revenue is possible, it would be best for Athina to continue with their original plan of recognizing it as revenue over the term of the contract. By doing so, this would be a better reflection of the company and its income and it would also better match revenues and expenses throughout the following years.

It would be better for Athina to place these funds in an Unearned Revenue account as opposed to a Long-Term Deposit account because that is a better representation of what the payment is. The revenue recognized at year end would have been equal to $9,169 [See Appendix B for calculation.] and this would mean that the net income before unusual or non-recurring items was understated by that amount. Assets Purchased Several Years Ago – Depreciation of Assets What Athina did in this situation was correct in the sense that they took into account that depreciation had occurred, and made changes accordingly and as soon as possible. What they could have done was added disclosure in the notes section of their financial statements stating why the depreciation expense was so high for that year end. Because depreciation that has occurred over several years is not usually recorded as a large expense in one year, it’s possible that this event could have been considered an unusual item and therefore would have been excluded from the calculation of net income before unusual or non-recurring items. This would mean that Athina’s net income before unusual or non-recurring items was understated by $175,000. Repair Cost Expense – Capitalization

The issue here exists in Athina considering the $125,000 as a repair cost. Due to the fact that the $125,000 was required to get the equipment in working condition (in other terms, ready for use), it should have been capitalized along with the purchase price of the equipment. By wrongfully recording this cost as a repair expense, this would mean that the net income before unusual or non-recurring items was understated by $125,000. The balance sheet would have additionally been understated by the same amount. CONCLUSION AND RECOMMENDATION

With all of the suggested approaches, the net income before unusual or non-recurring items could have gone from $510,000 (what was reported for the year ended December 31, 2017) to a value of $1,204,919. [See Appendix C for calculation.] This would have meant that instead of receiving $2,500, the national chain could have received a total of $176,230. [See Appendix D for calculation.] In terms of recommendations, I would suggest that when preparing the year-end financial statements and even throughout the year as business transactions occur that the management and those involved in preparing the statements assure that they account for events in a proper manner, making sure that they are following IFRS standards and allocating things onto the balance sheet and income statement accordingly. APPENDICES

APPENDIX A – UNAMORTIZED PORTION CALCULATION
*Assumed that dealership rights were obtained in April 2013
Original Cost = $210,000. Estimated Useful Life = 10 years, no residual value given. $210,000 / 10 years
= Yearly Depreciation Expense of $21,000
$21,000 / 12 months
= Monthly Depreciation Expense of $1,750
Number of Months between April 2013 and December 2017
April 2013 to December 2013 = 9 months
January 2014 to December 2017 = 4*12 months = 48 months
(9mo + 48mo)*$1,750
= Accumulated Depreciation of $99,750 as of December 2017. $210,000 – $99,750
= Unamortized Portion of $110,250.
APPENDIX B – J. ALEXANDER REVENUE
Payment of $200,000, 10 year contract. Straight-line over length of contract. $200,000 / 10 years.
= $20,000 / year.
=$1,667 / month, rounded to nearest dollar.
July 15, 2017 – December 31, 2017
= 5.5 months
5.5*$1,667
= $9,169 rounded to nearest dollar
APPENDIX C – NET INCOME WITH SUGGESTED ADJUSTMENTS
Net Income for year ended December 31, 2017: $510,000
Adjustments:
+ $275,000 Understatement from Sales on Homes
+ $110,750 Understatement from Kitchen Cabinet Write-Off
+ $9,169 Understatement from J. Alexander Revenue
+ $175,000 Understatement from Unusual Asset Depreciation
+ $125,000 Understatement from Repair Cost Expense
Net Income with Suggested Adjustments = $1,204,919
APPENDIX D – POTENTIAL PAYMENT TO NATIONAL CHAIN
Original Payment to National Chain:
25% of ($510,000 – $500,000) = 25% of $10,000
= $2,500
What National Chain Could Have Received with Adjusted Net Income:
25% of ($1,204,919 – $500,000) = 25% of $704,919
= $176,230, rounded to the nearest dollar.

We can write a custom essay

According to Your Specific Requirements

Order an essay
Get Access To The Full Essay
icon
300+
Materials Daily
icon
100,000+ Subjects
2000+ Topics
icon
Free Plagiarism
Checker
icon
All Materials
are Cataloged Well

Sorry, but copying text is forbidden on this website. If you need this or any other sample, we can send it to you via email.

By clicking "SEND", you agree to our terms of service and privacy policy. We'll occasionally send you account related and promo emails.
Sorry, but only registered users have full access

How about getting this access
immediately?

Become a member

Your Answer Is Very Helpful For Us
Thank You A Lot!

logo

Emma Taylor

online

Hi there!
Would you like to get such a paper?
How about getting a customized one?

Can't find What you were Looking for?

Get access to our huge, continuously updated knowledge base

The next update will be in:
14 : 59 : 59
Become a Member