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Company Accounting: McCarthy’s Cafes Ltd

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Question:

Discusss about the Company Accounting for McCarthy’s Cafes Ltd.

 

Answer:

To,

Mary McCarthy

Managing Director,

McCarthy’s Cafes Ltd,

Suite 6889, Level 18, Cafe Plaza Building,

685 Charles Street,

Adelaide SA 5000

Respected Madam,

At first I would like to thank you for asking us to assist you in the process of making decision regarding various relevant sources that would guide the accounting team of the firm McCarthy’s Cafes Ltd.

It has been found that there are various problems that are related to the financial condition of the firm Piper, Pepper and Associates. In this regard, the computation of the depreciation and the asset valuation are considered as the significant issues that pose a threat to the particular business regarding its sustainability in the present competitive market. The financial statement preparation is based on the guidelines of accounting that are ubiquitous at the particular point of time (Leo, Hoggett & Sweeting, 2012). Additionally, any other inconsistencies that exist in the present policies of accounting might be determined and might have an influence on the business’s various financial strategies.

 

A detailed study of the financial condition of the firm is mandatory in order to determine the significant financial strategies for development of the business venture (Vanderhoof & Altman, 2013). Moreover, the present market share and the type of industry to which the firm belongs to is considered a vital factor as these help the organization to develop various financial strategies based on the condition of both home and international market (Needles, Powers & Crosson, 2013).

The financial policies are required to prepare the policies of the business and it has been found that the particular firm had obtained a business segment of Karen’s Coffees Ltd for $950000. Nevertheless, the book value was recorded as $650000 for the total transaction. Therefore, this inequality in measuring the assets should be rectified in the annual reports of the firm in order to reflect the proper financial situation of the organization. It has been found that McCarthy’s Cafes Ltd proposes to bridge up this gap in the book as goodwill. However, the valuation of intangible properties (such as goodwill) should be treated in an accurate way in order to assess the relevant financial situation of the organization. Generally, intangible assets are considered as a vital component of financial policies (Singh, 2014). Therefore, these assets should be measured and accounted separately for the operational policies of the business. The economic value of properties for a particular period has to be assessed with the aim to measure the value of the intangible assets of the firm (Christensen, Baker & Cottrell, 2014). In addition to this, the increase in the goodwill is not involved in the assets as it is stated in the AASB 138, in the paragraph 48 that the goodwill that has been generated internally should not be considered as the property in the financial statements.                

The valuation of the firm is measured on the basis of the condition of the external market environment, which includes spontaneous creation, volatility and the issues regarding re-enforcement and protection (Predko, 2015). Thus, business analysts play a vital role in an organization as he can relate the exchange between estate owners and gift tax purposes. On the basis of the financial condition of the firm, it’s marketing and operational policies are generally determined (Christensen, Glover & Wood, 2013).  

Thus, business transactions are considered as goodwill and it has an influence on both the marketing and operational policies (Bierstaker, Janvrin & Lowe, 2014). The intangible assets’ value should be evaluated in a proper way to evaluate the value of original assets accurately. It has been noted that intangible assets are mainly documented in the financial statements only if it brings economic advantages to the organization (Christensen, Glover & Wood, 2013).    

As per AASB 116, paragraph 15, it can be said that any plant, property and equipment (PPE) that gets qualified for the recognition criteria of a property should be considered at its cost. On the other hand, AASB 116, paragraph 29 states that a business is eligible is to select either the revaluation model or cost model as the accounting policy and the whole class of PPE should be implemented with the policy. According to paragraph 36, PPE should be revalued and not just one asset. However, I am afraid that this gain might not be considered as the sales revenue. According to AASB 116, paragraph 39, the gain is not considered within the sales revenue. Additionally, if the carrying value of assets is increased due to revaluation, the increased amount is mentioned in the comprehensive income and is collected in equity under the revaluation surplus.  

 


The operational policies of business should be restructured to evaluate the various issues of an organization (Hribar, Kravet & Wilson, 2014). On the other hand, the revised budget and profit and loss statement imply that it fall short by 10 to 15%. Thus the value of land should be revised to meet the present value of the firm. For bridging this gap, profits of the firm have been raised to $2500000. The revised budget will help the firm to allocate accurate costs for its operations and this will help to set organizational goals (Needles, Powers & Crosson, 2013). For the particular firm, the assets and liabilities should be revaluated for assessing its pertinent value.

The firm’s balance sheet and income statement should be prepared based on the recognition criteria of the Australian Accounting Standard Board (Messier, 2014). Therefore, internal auditing, which is considered as an efficient financial instrument should be implemented within the firm. This will help to prevent financial irregularities and will also abolish the wastage of financial resources. The firm should focus mainly on the development of effective forecasting policies for the firm (Hribar, Kravet & Wilson, 2014). This will help to protect the business from any kind of financial crisis.

The assessment of the depreciation on the machinery is a major problem as it damages the firm’s financial processes. The depreciation rate has been recorded as 2% in context of 20%, whereas, the rate of building depreciation is recorded as 0.5% instead of 5% in the books of accounts. It has been analyzed that the present rates of depreciations that are followed in the firm has been much lower than the original rate of depreciation that has been accepted by the firm (Needles, Powers & Crosson, 2013). The depreciation on machinery is considered as an important part of the firm’s financial policies. Thus, the business has to opt one from the marketing strategies of business and accounting for depreciation. In order to assess the proper costs of depreciation, the firm can select any one among both the methods of depreciation – straight line and written down method (Bierstaker, Janvrin & Lowe, 2014). Therefore, it can be said that implication of proper financial policies helps a business to remove all its discrepancies from its operational policies. Moreover, the measurement method of the firm should be shifted to the method of fair value in order to assess the present market condition based on the present value of the assets.          

Treatment of errors: When any error is identified within the financial report, the most important thing is to assess the error’s materiality prior to the treatment as the material errors are only needed to be adjusted in the earlier financial reports. As per the AASB 108, paragraph 5, an item is counted as a material, only if the misstatement of the particular item influences the decision making skills on the basis of the financial statements. The particular firm can also follow the guidelines that are provided in the AASB 108 in order to identify the materiality by comparing the pre-determined base amount with the error percentage. At the time, when this percentage is greater than 10%, error is counted as material and if it less than 5%, then it is considered as immaterial. On the basis of the error’s nature, fair judgment should be applied in order to determine materiality. 

 


The journal entries are required to be structured in a proper way and should also be adjusted accordingly and accurately as this will help to diminish the gap in between the depreciations of various accounts (Hribar, Kravet & Wilson, 2014). Additionally, by rectifying the journal entries, the adjustments in the books of accounts can also be done that help the firm to run in right direction. In case of computer systems, the life span has been miscalculated that resulted into financial inconsistencies. Therefore, the firm should e-calculate the life span of all the assets in order to get accurate and relevant data.

On the basis of the provided information related to third issue, the error would result into an overstatement of property as an amount of accounts receivable, which should be significantly higher. For a material error, a retrospective restatement should be implemented for error of earlier period. However, if the retrospective adjustments are not applicable, then the changes should be done in future accurately.

 


Thus, the organization should take some measures and should also develop some strategies both marketing and operational to decrease its discrepancies and to identify the depreciation amount of the assets (Needles, Powers & Crosson, 2013). The additional amount at the end of three years should be replaced for developing accurate financial policies. Moreover, the transformation of the firm from proprietary to public company might also affect the financial and operational policies of the firm, along with these; legal complexities might also occur (Christensen, Glover & Wood, 2013). Thus, adequate resources and time is required for running the business successfully (Bierstaker, Janvrin & Lowe, 2014). Therefore, it can be said that the particular business organization McCarthy’s Cafes Ltd might require sufficient amount of financial resources in order to meet the working capital or the daily expenses for operating the business effectively and efficiently.   

Lastly, I would again like to thank you for asking help from our organization. We will look forward to continue working with your company.       

Regards

Peter

Senior Manager,

Piper, Pepper and Associates

59889, George Street,

Unley, SA 5061

 

References

Bierstaker, J., Janvrin, D., & Lowe, D. J. (2014). What factors influence auditors' use of computer-assisted audit techniques?. Advances in Accounting, 30(1), 67-74.

Christensen, B. E., Glover, S. M., & Wood, D. A. (2013). Extreme estimation uncertainty and audit assurance. Current Issues in Auditing, 7(1), P36-P42.

Christensen, T. E., Baker, R. E., & Cottrell, D. M. (2014). Advanced Financial Accounting. The McGraw-Hill Companies, Inc.

Hribar, P., Kravet, T., & Wilson, R. (2014). A new measure of accounting quality. Review of Accounting Studies, 19(1), 506-538.

Leo, K. J., Hoggett, J., & Sweeting, J. (2012). Company Accounting, Google eBook. John Wiley & Sons.

Messier, W. F. (2014). An approach to learning risk-based auditing. Journal of Accounting Education, 32(3), 276-287.

Needles, B. E., Powers, M., & Crosson, S. V. (2013). Principles of accounting. Cengage Learning.

Predko, I. (2015). Accounting-and-Control Support for the Companies Activity in the Context of Crisis. Accounting and Finance, (4), 61-66.

Singh, M. (2014). Simplifying Private Company Accounting Standards: Understanding the Costs. CFA Institute Magazine, 25(3), 51-51.

Vanderhoof, I. T., & Altman, E. (Eds.). (2013). The fair value of insurance liabilities (Vol. 1). Springer Science & Business Media.

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