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Accounting - Profit and Loss - Balance Sheet - Cash Flow statement - Assessment Answer

Solution Code : 1ACCD

Question: Accounting

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Accounting Assignment

Assignment Task

Task: 1

The following statement of cash flow is available for bee Pee company:

Accounting

Required

Analyse the statement of cash flow for BEE PEE. What changes to the cash management policies would you recommend to the company? Should the company continue to pay a dividend? (page 222)

Task: 2

2. In an article titled “ Money to be made from forensic accounting” published in the Australian Financial Review on 2 July 2013, John Authers state : Big discrepancies between revenue recognised and the flows recorded on the cash flow statement inmply a company is, in effect, borrowing sales from the future to make quarterly targets.” Explain what Authers mean and how this impacts current and future profits.

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Solution:

Task: 1

For the company we can observe that the net cash from operations has drastically reduced. The main factors contributing to it are the excess payment that has been made to suppliers and employees and the increase in the interest payment when compared to the previous year. The company had low balance of cash and cash equivalents in the year 2000 but it has still acquired property by cash in the year 2001 which has further reduced the balance of cash and cash equivalents. Therefore, this transaction is not recommendable keeping in mind the current cash position of the company. The company did not have sufficient cash balance and has declared and paid dividend as well which has further reduced the cash balance making it negative.

Keeping in mind the current cash position of the company, the payment of dividend is not recommended to the company because it is further reducing the cash balance of the company. Since payment of dividend is at the discretion of the management the dividend should either not be declared or the payment should be deferred.

The cash management of the company is not proper. This can be assessed because the company has approached a negative cash balance in the year 2001. The company has not been able to efficiently manage its funds and its usage or applications of funds is very high when compared to it sources which has led to negative cash balance. It implies that the company might be suffering working capital shortage during the course of working. This type of situation is not favorable for the company as it would affect the stability and going concern of the company. The company might not be able to cater to its short-term obligations in absence of funds which would bring the operations of the company to a standstill and would endanger the short-term solvency and long-term survival of the company.

Task : 2

In this quotation, the author means that the sale has been recognized at a time prior to its realization. As per the accounting standard, sale is recorded on accrual basis and not on receipt basis. Therefore, the revenue would be recorded in books at the time when it has been earned rather than its realization. Therefore, even if revenue has been realized subsequently it would be recorded I the year of its accrual and it would be included in that year itself for the purpose of computation of profit. The unrealized portion of revenue is carried forward as current asset in the form of debtor in the Balance Sheet of the entity.

Here, in this article the author implies that this principle of accounting has been misutilized by the companies in order to meet their targets for a certain period. When the management assesses that the quarterly sales target has not been achieved then in order to achieve them in the books of accounts the revenue that would accrue in future is consider accrued before is accrual. This proves that the company has been able to achieve its target which in turn moves the share price of the company in positive direction.

The author also states that when the realization of revenue and the recording of revenue have big discrepancies on a consistent basis then it implies that the company is recording the sales before its accrual. The sale that is attributable to future years is recorded currently in order to achieve the set target of the company. In this manner, the entity is able to enhance the current profit of the company and meet the target that has been pre-determined by the management. However, since the profit of the future period has been recorded in the current period it would adversely impact the profitability of the entity for the future period. Since, the targets have not been achieved in the current period it would place additional burden to future period where the entity has to compensate for the profits that have been lost in the past period in addition to achieving its target for the future period. Therefore, if the entity fails to again meet its targets does not borrow the profit further from the future years then the profitability of the company would drastically fall in the financial statements and the gap between target and performance would be perceived wider than the gap that is actually present.

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