Task 1:
Lucia works as an accountant for a motor vehicle engine parts manufacturer called Vroom Ltd, owned by an international car firm. Her manager, Freda Chuse, is paid a bonus depending on the profitability of the company. If Vroom Ltd makes $1 million profit, Freda receives a bonus of $20 000 that increases progressively to $30 000 for a $3 million profit. If the profit of Vroom Ltd exceeds $3 million, Freda receives the maximum bonus of $30 000. Vroom Ltd currently receives a grant from the government of $100 000 per year to employ and train apprentice mechanics.
At the end of May, it appears that Vroom Ltd will make a profit of approximately $3.5 million for the year ending 30 June 2016. Freda approached Lucia and said that if the company made too much profit then the government may stop paying Vroom Ltd the grant for training apprentice mechanics, and it would lose the $100 000 tax-free cash inflow. Freda instructed Lucia to find ways of deferring recognition of as much revenue as possible until the following financial year, for which the forecasts for the industry were quite poor, and to accrue as many expenses as possible at the end of the current accounting period when it came to making the end-of-period adjustments. Although Lucia was not happy with this instruction, she did not want to risk her own opportunities for promotion by upsetting her manager.
Required:
A. Who are the stakeholders in this situation?
B. Why do you believe Freda asked Lucia to do this?
C. What are the ethical issues involved here?
D. Can Lucia defer revenues and accrue as many expenses as possible and still be ethical?
Task 2:
An accountant prepared a statement of financial position for a business using the horizontal layout. In this statement, the capital of the owner was shown next to the liabilities. This confused the owner, who argued: ‘My capital is my major asset and so should be shown as
an asset on the statement of financial position.' How would you explain this misunderstanding to the owner?
Task 3: Scott and Co. Ltd, in operation for three years, produces antique reproduction furniture for the export market. Its most recent set of accounts is set out below.
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Scott and Co. Ltd
Statement of financial position as at 30 November 2014
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$'000
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$'000
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Current assets
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Accounts receivable
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820
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Inventory
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600
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1420
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Non-current assets
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Plant and machinery at cost
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942
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Less accumulated depreciation
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(ISO)
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762
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Freehold land and buildings
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228
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990
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Total assets
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Current liabilities
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Bank overdraft
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385
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Accounts payable
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665
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Taxation
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95
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1.145
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Non-current liabilities
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12% debentures
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200
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Shareholders' equity
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Paid-up capital (issued at $1 each)
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700
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Retained profits
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365
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1 065
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Total liabilities and shareholders' equity
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2 410
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Scott and Co. Ltd
Statement of comprehensive income for the year ended 30
November 2014
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$,000
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Sales
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2,600
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Less cost of sales
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(1.6201
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Gross profit
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980
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Less other expenses
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(6601
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Profit for the year
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320
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Income tax
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(951
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Profit for the year after tax
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225
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Proposed dividends
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(1601
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Retained profit for the year
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65
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The company has asked an investor to invest $200,000 by purchasing 50,000 new ordinary shares at $4 each. Scott wishes to use the funds to finance further expansion.
Required:
A. Assess Scott's financial position and performance, and comment on any features you consider to be significant (Hint: analyse the profitability, efficiency, liquidity and investment ratios)
B. State, with reasons, whether or not the investor should invest in the company on the terms outlined.