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Identification of the Ethical Issues

Discuss about the Revenue Recognition for Rules and Scenarios.

In the context of business, stakeholder means a person who possesses some sort of interest in the business of a firm. The interest of the stakeholder could be financial or non-financial. In the current case of Big Business Tobacco (BBT) which is a company engaged in the manufacturing and selling the tobacco products, the major stakeholders could be shareholders, management, customers, government, lenders, and the society (Carroll, Brown, and Buchholtz, 2017). The shareholders are directly interested in the success and failure of the company while the government is indirectly interested. The government levies taxes on the income earned by the business, therefore, through indirect, but the interest of government lies. Further, the customers and lenders are also financial interested in the business of the company. However, the society which consumes the products manufactured by the company is indirectly interested in the business of the company. In the current case of BBT, the management of the company is considering the issue of inclusion of health warning on the packet of cigarette. The major stakeholders which are getting affected by this issue could be identified as management, shareholders, and the consumers.

The debate in the current case is on the issue of inclusion of health warning on the cigarette packs. The marketing manager contends that inclusion of such a warning would result in a loss of considerable market share which will ultimately affect the bottom line of the company adversely (CTI, 2016). On the other hand, the public relationship manager considers that not putting the health hazard warning on the cigarette pack would be unethical and detrimental to the consumer’s interest. The cigarette is considered to be one of the most hazardous tobacco products to the human health. Thus, public relationship manager considers that disclosure of warning on the pack is necessary to make the consumers aware of the adverse impact of cigarette consumption on the health (Gore, 2015).

The management is in dilemma as to whether the health warning should be included on the cigarette pack or not. The inclusion of health warning potentially affects the profits adversely but at the same time it also safeguards the public interest and meets the corporate social responsibility requirements. On other hand, if the warning is not included, the profits will get boost up, but at the same time it will breach the corporate social responsibility requirements and affect the public interest prejudicially. Thus, the main issue before the management is to find out a way so that proper balance could be struck out between the interest of shareholders and the consumers (Gore, 2015).

Rules for Revenue Recognition

Randall Hedges is the public relationship manager in BBT. Being a public relationship manager, he talks in the favor of the public interest or the consumer’s welfare. However, the views of Randall Hedges appear to be meticulous and ethical. In his views, the company would be benefited in the long term if it complies with the corporate social responsibility requirements by conducting its business in public interest. Therefore, if the company gives health warning on the cigarette pack, it would be advantageous for it in the long term. Further, he argues that the demand of the company’s products in Australia is unaffected by that disclosure of health warning. This suggests that disclosure of such a warning will not affect revenues of the company adversely by a big margin (Carroll, Brown, and Buchholtz, 2017).

The suggestions given by Randall seems to be appropriate and ethical, thus, if I was in the position of Randall, I would have given the same suggestions to the company. Further, it could be noted that though it is not obligatory for the company to make warning disclosure on the cigarette packs in some of the Asian Markets as of now, but it would be made some day. Considering the public interest and consumer awareness concerns, the government in the Asian countries may take steps to make it compulsory to disclose warning in the packs. Thus, the company would have to comply with it not now but at some later point of time. However, if it complies with this now, it could help the company build good perception of the consumers, which will positively affect the demand in long term (Carroll, Brown, and Buchholtz, 2017).       

The primary issue in regard to recognition of revenues relates to timing of recognition. The timing of recognition implies the identification of the point in time when the revenues from the sale of goods or rendition of services can be said to be recognizable in the books of accounts of the entity (Bragg, 2010). There is international accounting standard (IAS) 18 which prescribes the whole procedure in regard to recognition of revenues (IAS 18, 2012). The standard divides revenues into three major categories such as sale of goods, rendition of services, and others. The revenues in the form of interest, royalties, and dividends fall under the “other” category. Commonly, for all the categories of revenues, the standard lays down that for recognition of revenue two conditions must always exist. The first is flow of future economic benefits and the second is reliable measurement of the amount (IAS 18, 2012).

Scenarios for Revenue Recognition

The above two conditions are very basic and requires to be complied with in each and every case, whether the revenues arise from the sale of goods or rendition of services, or from interest, dividend, and royalty. Further, there are certain specific conditions that are to be complied in regard to specific category of revenues. For instance, the IAS 18 prescribes that revenues from the sale of goods should to be recognized when five crucial conditions are satisfied. The first crucial condition requires transfer of all the risks and rewards by the seller to the buyer in relation to the goods subjected to the transaction (IAS 18, 2012). The second condition is that the seller should no longer be holding control of the goods being sold. The third condition stipulates that the amount of the sales consideration of the goods being sold should be measured reliably (IAS 18, 2012).


The fourth condition relates to estimation of uncertainty in regard to receipt of the economic benefits by the sale of goods. The last and the fifth condition relates to reliable measurement of the cost incurred in manufacturing and making the goods ready for sale. Thus, when these five conditions are satisfied beyond all doubts, the revenues from sale of goods can be recognized in the books of the entity (IAS 18, 2012). In the current case, Brian Kelly who is engaged in exploration and extraction of minerals (gold) finds out a piece of rock. He gets that piece of rock valued by an expert at an amount of $60,000. However, the revenue does not arise at this stage because Brian Kelly still possesses that piece of rock and assumes all the risks and rewards in this respect.

However, two weeks later, Brian Kelly sells that piece of rock a jeweler for an amount of $75,000. This is the point in time when the revenues get accrued for recognition in the books of Brian Kelly. The movement Brain Kelly transfers the rights and obligation in respect of piece of rock and gives possession to the jeweler, the conditions in regard to recognition of revenue gets satisfied. Therefore, Brian Kelly should recognize revenues from sale of piece of rock at $75,000 on the date when the piece of rock is handed over to the jeweler (Bragg, 2010). A plant manager is responsible to administer and supervise the plant operations in an effective and efficient manner. The plant manager is responsible to ensure that the resources such as employees, plant and equipment are used optimally and smoothly. In this regard, the plant manager would be responsible to take decisions as regards deployment of the resources and plant maintenance scheduling etc (Heizer et al., 2009). In order to make such decisions, the plant manager would information which will comprise a mix of non-financial as well as financial data. However, the non financial information which relates to quantitative data is more important for decision making in the areas of plant operations management, but it does not means that financial information is of no use (Crosson and Needles, 2010).

The financial information also plays a crucial role in operations management. It could be worthwhile to emphasize here that all the crucial areas of a business such as production, marketing, accounting, and administration are interrelated to each other (Crosson and Needles, 2010). This implies that to make managerial decisions in one area would require information from all other areas. For example, if the plant manager is required to make out a decision regarding repair and maintenance of plant, he would need cost and benefits analysis in addition to the analysis of quantitative data. The cost and benefit analysis would require financial information. Thus, the use of financial information and the role of accounting could not be negated in the plant operation management (Crosson and Needles, 2010).

In the current case, the plant manager contends that there is no need to maintain financial data to take day to day decisions pertaining to plant operations. This contention of the plant manager is not valid because the financial information plays a crucial role in every sphere of decision making whether it is related to plant operations or marketing. The information on cost, prices, and historical trend is generated by the accounting and finance department of the company (Grabski, Leech, and Sangster, 2009). In order to make decision making process less time consuming and effective it is of paramount importance to integrate different functions across the entity. This implies that there must be proper integration between accounting, finance, production, marketing, and administration functions of the company (Grabski, Leech, and Sangster, 2009).

In order to achieve this integration among different functions of the company, it becomes essential to implement the enterprise resource planning system. The enterprise resource planning system integrates different functions of the company on a real time basis. The crucial information for decision making is shared among different function on a real time basis resulting in reduction in the time (Grabski, Leech, and Sangster, 2009). Therefore, overall it may be concluded that the accounting and finance function plays a critical role in all domains of decision making in an entity and hence the importance of maintaining daily records can not be undermined. Whether it is plant manager or marketing manager, everyone requires accounting information in their decision making process (Grabski, Leech, and Sangster, 2009).


Management accounting refers to the process of analyzing the accounting and costing data to assist the top management in formulation of the plans and strategies. The scope of management accounting is very wide as it covers the knowledge of principles of accounting, finance, and costing (Chapman, Hopwood, and Shields, 2011). There are numerous handy tasks which a management accountant has to perform in an organization. For example, resource allocation, testing optimality, and conducting cost benefit analysis. Traditionally, these tasks were used to be performed by manual computations, but in the present scenario, the use of information technology has increased to a lot extent. Now, the computations for these tasks are performed using highly customized computer softwares (Chapman, Hopwood, and Shields, 2011). 

The unprecedented benefits of the use of information technology have made it compulsory for the firms to opt for automation of the entire process through the use of softwares and computer programs (Chapman, Hopwood, and Shields, 2011). Thus, since the process of managerial decision making have been automated, therefore, it is pertinent for the management accountant to be well versed with the knowledge of information technology. The management accountant should be acquainted with the knowledge on how to use the software to analyze the data and prepare reports. However, the in-depth knowledge to fix the technical issues in the computer technology is not crucial for the management accountant. It is essential that he has technical knowledge to use the IT resources in day to day functioning (Chapman, Hopwood, and Shields, 2011).

Stratum Ltd

Horizontal Analysis of Statement of Profit and Loss

2016 ($'000)

2017 ($'000)

Variance ($'000)

Variance (%)

Revenues

    13,750.00

        16,000.00

             2,250.00

16.36%

Expense, excluding finance cost

    11,965.00

        13,705.00

             1,740.00

14.54%

Finance cost

                -  

                    -  

                       -  

0.00%

Profit before income tax

      1,785.00

          2,295.00

                510.00

28.57%

Income tax expense

         535.00

             878.00

                343.00

64.11%

Profit

      1,250.00

          1,417.00

                167.00

13.36%

Stratum Ltd

Horizontal Analysis of Statement of Financial Position

2016 ($'000)

2017 ($'000)

Variance ($'000)

Variance (%)

Current assets

Cash and cash equivalent

         100.00

               80.00

                (20.00)

-20.00%

Trade and other receivables

         335.00

             380.00

                  45.00

13.43%

Inventories

         720.00

             770.00

                  50.00

6.94%

Total Current assets

      1,155.00

          1,230.00

                  75.00

6.49%

Non-Current assets

Other financial assets

         160.00

             140.00

                (20.00)

-12.50%

Property, plant, and equipment

      2,785.00

          3,400.00

                615.00

22.08%

Total Non-Current assets

      2,945.00

          3,540.00

                595.00

20.20%

Total assets

      4,100.00

          4,770.00

                670.00

16.34%

Current liabilities

Trade and other payable

         500.00

             505.00

                    5.00

1.00%

Total Current liabilities

         500.00

             505.00

                    5.00

1.00%

Non-Current liabilities

Long-term borrowings

      1,750.00

          1,750.00

                       -  

0.00%

Total Non-Current liabilities

      1,750.00

          1,750.00

                       -  

0.00%

Total liabilities

      2,250.00

          2,255.00

                    5.00

0.22%

Net assets

      1,850.00

          2,515.00

                665.00

35.95%

Share capital

      1,500.00

          1,600.00

                100.00

6.67%

Retained earnings

         350.00

             915.00

                565.00

161.43%

Total equity

      1,850.00

          2,515.00

                665.00

35.95%

Stratum Ltd

Horizontal Analysis of Statement of Changes in Equity

2016 ($'000)

2017 ($'000)

Variance ($'000)

Variance (%)

Share capital

Ordinary:

Balance at the start of period

      1,500.00

          1,500.00

                       -  

0.00%

Issue of share capital

                -  

             100.00

                100.00

0.00%

Balance at the end of period

      1,500.00

          1,600.00

                100.00

6.67%

Retained earnings

Balance at the start of period

         200.00

             350.00

                150.00

75.00%

Total recognized profit for the period

      1,250.00

          1,417.00

                167.00

13.36%

Dividend paid-Ordinary

    (1,100.00)

           (852.00)

                248.00

-22.55%

Balance at the end of period

         350.00

             915.00

                565.00

161.43%

Stratum Ltd

Common Size Analysis of Statement of Profit and Loss

2016 ($'000)

% to revenues

2017 ($'000)

% to revenues

Revenues

    13,750.00

100.00%

           16,000.00

100.00%

Expense, excluding finance cost

    11,965.00

87.02%

           13,705.00

85.66%

Finance cost

                -  

0.00%

                       -  

0.00%

Profit before income tax

      1,785.00

12.98%

             2,295.00

14.34%

Income tax expense

         535.00

3.89%

                878.00

5.49%

Profit

      1,250.00

9.09%

             1,417.00

8.86%

Stratum Ltd

Common Size Analysis of Statement of Financial Position

2016 ($'000)

% to revenues

2017 ($'000)

% to revenues

Current assets

Cash and cash equivalent

         100.00

2.44%

                  80.00

1.68%

Trade and other receivables

         335.00

8.17%

                380.00

7.97%

Inventories

         720.00

17.56%

                770.00

16.14%

Total Current assets

      1,155.00

28.17%

             1,230.00

25.79%

Non-Current assets

0.00%

0.00%

Other financial assets

         160.00

3.90%

                140.00

2.94%

Property, plant, and equipment

      2,785.00

67.93%

             3,400.00

71.28%

Total Non-Current assets

      2,945.00

71.83%

             3,540.00

74.21%

Total assets

      4,100.00

100.00%

             4,770.00

100.00%

Current liabilities

Trade and other payable

         500.00

27.03%

                505.00

20.08%

Total Current liabilities

         500.00

27.03%

                505.00

20.08%

Non-Current liabilities

0.00%

0.00%

Long-term borrowings

      1,750.00

94.59%

             1,750.00

69.58%

Total Non-Current liabilities

      1,750.00

94.59%

             1,750.00

69.58%

Total liabilities

      2,250.00

121.62%

             2,255.00

89.66%

Net assets

      1,850.00

100.00%

             2,515.00

100.00%

Share capital

      1,500.00

81.08%

             1,600.00

63.62%

Retained earnings

         350.00

18.92%

                915.00

36.38%

Total equity

      1,850.00

100.00%

             2,515.00

100.00%

The results of the horizontal analysis conducted on the profit and loss statement show that the revenues increased by 16.36% in the year 2017 over the figure of 2016. Further, the expenses also increased by 14.54%. There was observed an overall increase of 13.36% in the net profit of the company in the current year as compared to the previous year. Further, the statement of financial position shows a reduction of 20% in the cash and cash equivalent while an increase by 13.43% and 6.94% in the trade receivables and the inventories. Overall current assets increased by 6.49% in the year 2017 as compared to 2016. The other financial assets have decreased by 12.50% while the plant and machinery went up by 22.08%.


Overall, the total assets are up by 16.34% and the total liabilities are up by 0.22%. This shows that the company is performing well in the market. Further, the total equity is up by 35.95%. The primary reason for this increase in the total equity is sharp increase in retained earnings. The ending balance of the retained earnings was increased by 161.43% in 2017 as compared to 2016.     

The results of the vertical analysis show that the expenses were 87.02% of the revenues in the year 2016 which reduced to 85.66% in the year 2017. Due to the decrease in expenses, the profit before tax increased from 12.98% to 14.34%. However, there was observed a reduction in the net profit from 9.09% to 8.86% in the current year which seems mainly due to increase in income tax expense. As regard the statement of financial position, it was observed that total current assets reduced as a percentage to total assets in the year 2017 to 25.79% from 28.17%. However, there was a slight increase in the non-current assets from 71.83% to 74.21% in the year 2017. The total liabilities as a percent of total equity reduced significantly in the year 2017 to 89.66% from 121.62% in 2016.

References

Bragg, S.M. 2010. Wiley Revenue Recognition: Rules and Scenarios. John Wiley & Sons.

Carroll, A., Brown, J., and Buchholtz, A. 2017. Business and Society: Ethics, Sustainability and Stakeholder Management. Cengage Learning.

Chapman, S.C., Hopwood, A.G., Shields, M.D. 2011. Handbook of Management Accounting Research. Elsevier.

Crosson, S.V. and Needles, B.E. 2010. Managerial Accounting. Cengage Learning.

CTI. 2016. Business and Society, Stakeholders, Ethics, Public Policy: Business, Business. Cram101 Textbook Reviews.

Gore, J. 2015. Ethical Issues. American Journal of Nursing,115(3), pp. 13-13.

Grabski, S., Leech, S., and Sangster, A. 2009. Management Accounting in Enterprise Resource Planning Systems. Butterworth-Heinemann.

Heizer, Jay, Render, Barry, and Rajashekhar. 2009. Operations Management. Pearson Education India.

IAS 18. 2012. Revenue. [Online]. Available at: https://www.ifrs.org/Documents/IAS18.pdf [Accessed on: 27 January 2017].

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