Good Research Paper On Accounting Concepts And Policies

Question 1: NZ FRAMEWORK

Qualitative characteristics
Characteristic 1: Relevance
Good accounting information should be relevant. Information is considered relevant when it can influence the decision of the users of accounting information (Norton & Porter, 2011). This implies that the inclusion of the information should make a difference in the decision of users. Information can only be relevant if it is timely, has a predictive and feedback values.

Characteristic 2: Reliability:

Information should be free from bias and material errors in order to be depended upon by the users as faithfully representing the intended purpose (Needles & Powers, 2013).

Characteristic 3: Understandability:

Accounting information should be presented in a manner that it is readily understandable to the users (Edmonds, McNair & Olds, 2013). Users require the information for different purposes hence it would be useless if the users do not understand them.

Characteristic 4: Comparability:

It should allow users to compare the statements of two or more firms. Comparability is enhanced when different entities use similar accounting standards and policies for similar transactions or events (Edmonds, McNair & Olds, 2013).

Characteristic 5: Consistency:

An entity should apply similar accounting policies for similar events from one period to another (Walther, 2013). Consistent application of accounting policies will enhance comparability of performance between periods.
1.2 Definitions of accounting elements
1.2.1. Balance sheet
A balance sheet is a financial statement that shows the worth of an entity at on a given date (Thomas & Ward, 2012). It indicates what a business owns and what it owes by listing all the assets, liabilities and shareholders’ equity of the company. The purpose of the balance sheet is to enable users to assess the financial health of the entity. This is can be done by determining the percentage of debt and equity in the total assets.
1.2.2. Statement of changes in equity
It details the changes in shareholders’ equity in a given financial period (Mitrione, 2013). It indicates the movements in elements affecting equity such as dividends, net profit or loss, capital and revenue reserves, treasury equity, among other items (Mitrione, 2013). It also shows how changes in the above items affect the value of shareholders’ equity.
1.2.3. Income Statement
The income statement indicates the results of the operations of a business in a given financial period (Reeve, Warren & Duchac, 2012). It lists all the incomes earned as well the expenses incurred during a particular period (Reeve, Warren & Duchac, 2012). The purpose of this statement is to enable the users to assess the profitability of the entity.
1.2.4. Statement of cash flows
It details the sources and uses of cash in an entity during a particular financial period. It enables to understand the cash flows a business generates or uses in operating, investing and financing activities (Kimmel, Weygandt, Kieso & Oddo, 2013). It allows users to determine the liquidity of the concern using cash flow measures of liquidity.
1.2.5 Notes to the accounts
Notes to the accounts are additional information provided in a company’s annual report. They give details as well as additional information that are not included in the financial statements (Edmonds, McNair & Olds, 2013). Their purpose is to enhance the understandability of the financial statements by the users.
1.3. Going concern assumption
The accountant would have prepared the accounts as a going concern. The entity’s problem resulted from financial challenges. However, the government intervened and advanced money to the entity. With the help from the government, the entity is no longer in financial difficulties and, therefore, does not have the necessity to cease its operations. The accountant should, however, include in the notes to the financial statements a statement indicating that without the financial aid from the government, the entity would not have been a going concern.

Question 2: Accounting Policies

2.1 Receivables

A) Net profit before adjustment 73,200

Less: Bad debt (5,000)
Less: Doubtful debt (6,200)
Net profit after adjustment 62,000
Bad debt is the amount that has been written off as a loss to the entity hence it is deducted from the income. Doubtful debts are receivables that the business is not likely to collect and may become bad debts in future. The accounting policy here is to use the allowance method in which an allowance for doubtful debts account is created, and the amount of doubtful debt is debited as doubtful debts expense in the income statement.

B) Balance sheet

Current asset
Receivables 12,200
Less: Doubtful debt allowance (6,200)
Total 6,000
c) The qualitative characteristic adopted is reliability. Deducting allowance for doubtful debts ensures the balance of accounts receivables is not biased or overstated. I used the prudence concept as a secondary quality of reliability by avoiding overstating accounts receivable.
2.2 Inventory
The accountant should include raw materials, work-in-progress and finished goods in the total value of inventory. The NZ framework provides that entities disclose inventory in the balance sheet at the lower of cost and net realizable value (Horngren, 2012). The accountant should determine the cost of stocks which includes the cost of purchase and the cost of conversion. Several methods such as FIFO, LIFO, among others may be used. The net realizable value is determined, and the lower of the two is indicated in the balance sheet as the value of closing inventory. The value of inventory will be shown as a current asset in the balance sheet. The cost of inventory sold is debited in the income statement.
2.3 Property, Plant and Equipment
Property, plant and equipment are classified as non-current assets in the balance sheet. PPE includes land, motor vehicles, furniture and fittings, machinery, among other items. Items of PPE are initially valued at the acquisition cost (Elliott & Elliott, 2008). The value reported in the balance sheet is the cost net accumulated depreciation. In subsequent periods, PPE items may be revalued and are reported at the revalued amounts less accumulated depreciation. The disclosure must include a note indicating all the items making up PPE plus their corresponding calculations.

Question 3: Balance Day Adjustments

i) Accruals

Impact on income statement

The unpaid advertising expense will be added to the advertising expense for the period. The effect will be an increase in total expenses and hence a reduction in net income by $1026. This is in line with the accrual accounting basis.

Impact on the balance sheet

The accrued advertising is a liability Mercury Energy Company and will be shown under current liabilities. The impact will be an increase in current and total liabilities by $1026 and a decrease in capital by the same amount. Shareholders’ equity will decrease since net income decreased.
ii) Prepayments
The insurance expense relating to the financial period ended 31st January, 2015 will only be $100. The amount debited in the company statement will be $100. The balance, $200, is a prepayment and will not have any impact on the income statement. On the balance, $200 will be shown as current asset. The effect will be a reduction in cash by $300 and an increase in prepayments by $200. Therefore, total assets will decrease by $100. Net income will be reduced by $100 hence shareholders’ equity will also fall by $100.
iii) Depreciation
Annual depreciation = 4,000/4 = $1000

Depreciation expense for each year will be $1000 and the accumulated depreciation in the second year will be $2000.

Adjustment entry for the second year
Question 4: Effect of transactions on expanded accounting equation
4.1 Net income will increase retained earnings in the Statement of Retained Earnings and increase equity in the balance sheet.
4.2 The $15,000 is likely to be net income which is shown in the income statement. The net income will also be shown as an increase in retained earnings in the Statement of Retained Earnings as well as an increase in Equity in the balance sheet.
4.2 The $22,000 withdrawn for personal use constitutes a drawing hence it will reduce the equity in the balance sheet. Cash will also decrease by the same amount. The withdrawal will not have any impact on the income statement.

Question 4: Effect of transactions on expanded accounting equation

4.1 Net income will increase retrained earnings in the Statement of Retained Earnings and increase equity in the balance sheet.
4.2 The $15,000 is likely to be net income which is shown in the income statement. The net income will also be shown as an increase in retained earnings in the Statement of Retained Earnings as well as an increase in Equity in the balance sheet.
4.2 The $22,000 withdrawn for personal use constitutes a drawing hence it will reduce equity in the balance sheet. Cash will also decrease by the same amount. The withdrawal will not have any impact on the income statement.
Question 5: Financial statements for sole trader

References

Edmonds, T., McNair, F., & Olds, P. (2013). Fundamental financial accounting concepts. New York, NY: McGraw-Hill/Irwin.
Elliott, B., & Elliott, J. (2008). Financial accounting and reporting. Harlow: Financial Times Prentice Hall.
Horngren, C. (2012). Introduction to financial accounting. Essex: Pearson Education.
Kimmel, P., Weygandt, J., Kieso, D., & Oddo, A. (2013). Financial accounting. Hoboken, NJ: John Wiley & Sons, Inc.
Mitrione, L. (2013). Principles of financial accounting. Milton, Qld: John Wiley and Sons Australia.
Needles, B., & Powers, M. (2013). International financial reporting standards. Mason, OH: South-Western, Cengage Learning.
Norton, C., & Porter, G. (2011). Introduction to financial accounting. Australia; United Kingdom: South-Western Cengage Learning.
Reeve, J., Warren, C., & Duchac, J. (2012). Principles of accounting. [S.l.]: South-Western Cengage Learning.
Thomas, A., & Ward, A. (2012). Introduction to financial accounting. London: McGraw Hill Higher Education.
Walther, L. (2013). Financial accounting. San Bernardino, CA: principlesofaccounting.com.