PART ONE
1) TERMINOLOGY AND ACCOUNTING FOR FINANCE
a. Accounting Concepts
· According to (2005), as one of the concepts adopted in , the going-concern concept assumes that an organisation will continue in existence for the foreseeable future. An organisation should prepare its financial statements on a going-concern basis unless the organisation is being liquidated or has ceased trading or the management has no realistic alternative but to liquidate the organisation or to cease trading. When preparing financial statements, the management should assess the organisation’s ability to continue as a going concern. When the management is aware of material uncertainties which may cast significant doubt upon the organisation’s ability to continue as a going concern, those uncertainties should be disclosed. When the financial statements are not prepared on a going-concern basis, the fact should be disclosed, together with the basis on which the financial statements are prepared and the reason why the organisation is not considered to be a going concern. When an organisation suffers from severe losses and net deficits (liabilities exceed assets), perpetrators may still try to adopt the going-concern basis in order to avoid sending a negative message to readers. When readers become aware of the organisation’s inability to sustain the going-concern basis, they may decide to pull the plug and to withdraw their financial support. That would become a self-fulfilling prophecy maximising the likelihood of the organisation going bust. The results may be massaged in the perpetrators’ favour through the good and bad years. Perpetrators may try setting aside certain unnecessary provisions which would only materialise if the organisation in question was being wound up, such as provision for large-scale redundancy payments and other significant provisions (overstatement of liabilities). Perpetrators may also try stating assets at their break-up value, which is not consistent with the going-concern concept. In some cases, by using an inappropriate valuation basis, perpetrators may want to portray a higher net worth for the organisation in the financial statements. Financial statements are usually prepared in the basis that the organisation is a going concern because measures based in break-up values tend to be irrelevant to readers seeking to assess the organisation’s operating capabilities, financial adaptability and cash generation ability.
· provide guidance on financial statements presenting a true and fair view of a company's financial position ( 1993). Although there is no formal definition of a ‘true and fair view’, it is generally considered that financial accounts should be prepared on the basis of the four fundamental concepts. Going concern was already given, the remaining three are: (1) accruals; (2) consistency; and (3) prudence ( 2000). Accrual accounting, the recognition of elements of income and expense even though cash has not yet changed hands, is mandatory. Second, financial reports should employ appropriate accounting practices that are consistently applied. Lastly, the concept of prudence or conservatism should prevail. The financial statements should present an overall picture that is not in any way misleading and should disclose all information that is material to the proper understanding of the financial condition of the company.
· If the concepts of accruals and prudence were in conflict, the prudence concept took precedence under SSAP 2. However, this ceased with the introduction of FRS18, where the the going concern assumption and the accruals concept were identified as the two accounting concepts that are ‘part of the bedrock of accounting’ and playing ‘a pervasive role in financial statements’. The description of accounts should be unambiguous, striking a balance between the completeness of disclosure and the clarity of summarization.
b. Marvin makes a career choice
1. Income & Expense Summary (for the week ended 7 July)
INCOME
Fee £750
EXPENSE
Costume £3,000
Book £2,000
Playing Cards £400
Travel Expense £20
TOTAL EXPENSE £5,420
NET INCOME/LOSS (£4,670)
2. As of 7 July
ASSETS
Cash in Bank £750
Costume £3,000
Book £2,000
Playing Cards £400
TOTAL ASSETS £6,150
LIABILITIES
Playing Cards Liability (£400)
TOTAL CAPITAL £5,750
Marvin invested £5,000 from his savings to buy the costume and the book plus the £750 that he earned from his first appearance is equal to £5,750. This is an amount which is in agreement with the total capital.
c. Marvin buys rabbits
1. Cash Book (First Week)
DATE DEBIT CREDIT BALANCE
July 1 £3,000 £3,000
2 £2,000 £5,000
3 £400 £4,600
7 £20 £750 £6,130
2. Cash Book (Second Week)
DATE DEBIT CREDIT BALANCE
July 7 £6,130
8 £490 £6,620
10 £15 £100 £6,535
11 £18 (£6,553)
12 £9 £120 (£6, 442)
13 £250 (£6, 192)
14
3. Balance Sheet
4. Trial Balance
d. Esmeralda appears, then disappears
2) FINANCIAL STATEMENTS
REFERENCE
Credit:ivythesis.typepad.com
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