Finance
Your Aunt Naivety is a fashion designer who is relatively well-known in Europe. She operates through an English limited company (called “company” from now on). She has retained Mr. K Itall (called “KI” from now on) who has misled your Aunt into thinking that he “Knows it all” when it comes to accounting. However your Aunt is becoming quite uneasy with him. Therefore, she has presented the following situations and the advice she received from KI relating to her financial statements for the year ended 31 Aug 2019. She knows you study finance and wishes to have your opinions and more importantly the reasons as to why you say what you say in the following matters:
Your aunt has bought a nice table for £2,500 for her exclusive personal use. Kl has advised her to show this as a fixed asset in the company’s books as according to him there is no difference between her personal expenses and that of the company.
Suggested answer format for each individual situation above]
The applicable accounting concept for this situation is …………………………….
This accounting concept states that ……………………………………….
When this accounting concept is applied to this situation we find that………………………..
Therefore, KI is correct/wrong
Although your Aunt is a very gifted designer it is difficult to quantify this. However, KI has suggested that £10,000 is shown in the Statement of Financial Position (Balance Sheet) as an asset in your Aunt’s company. He argues that it should be more but that the Prudence Concept prevents him from increasing it.
Suggested answer format for each individual situation above]
The applicable accounting concept for this situation is …………………………….
This accounting concept states that ……………………………………….
When this accounting concept is applied to this situation we find that………………………..
Therefore, KI is correct/wrong
Your Aunt’s company prepares financial statements for the year ended 31st August 2019. On 29 August 2019, her company sold £10,000 worth of goods to X Ltd. X ltd paid for the goods on 5 September 2019. KI has ignored this transaction as a sale in preparing the financial statements since the money was received after the year-end.
Suggested answer format for each individual situation above]
The applicable accounting concept for this situation is …………………………….
This accounting concept states that ……………………………………….
When this accounting concept is applied to this situation we find that………………………..
Therefore, KI is correct/wrong
The Closing Inventory (Closing Stock) as at 31 August 2019 in your Aunt’s company was estimated at £105,210. It was noticed later that a box of buttons amounting to £100 had been missed. The Financial statements have been audited and approved by the Board of Directors and filed in the Companies House. KI sys that the £100 should be adjusted for in the accounts.
Suggested answer format for each individual situation above
The applicable accounting concept for this situation is …………………………….
This accounting concept states that ……………………………………….
When this accounting concept is applied to this situation we find that………………………..
Therefore, KI is correct/wrong
Your Aunt’s company was taken to Court as one of the hooks in a dress broke and seriously scarred a famous model. She has won damages of £25,000. This was appealed but your Aunt’s Company lost the appeal on 10 August 2019. The amount is payable by 10 November 2019. KI says that this need not be included as the amount has not been paid.
Suggested answer format for each individual situation above]
The applicable accounting concept for this situation is …………………………….
This accounting concept states that ……………………………………….
When this accounting concept is applied to this situation we find that………………………..
Therefore, KI is correct/wrong
The depreciation for fixtures and fittings was set at 10% on cost for your Aunt’s company. For the past five years these were depreciated at that rate. KI has suggested that the depreciation rate is reduced from 10% to 5% so that the profits would increase.
Suggested answer format for each individual situation above]
The applicable accounting concept for this situation is …………………………….
This accounting concept states that ……………………………………….
When this accounting concept is applied to this situation we find that………………………..
Therefore, KI is correct/wrong
Your Aunt’s company trades extensively in the EU Countries. She sells 95% of her designs in Paris, Milan and Frankfurt. There is a possibility that the company may cease to trade if there is a “hard Brexit” due to WTO tariffs which will make her designs far less competitive as compared with EU designers. Your Aunt understands that all 27 EU member countries will have to agree if there is to be a “soft Brexit”. Someone has informed her that Spain will not agree to a “soft Brexit” unless they are given Gibraltar. The UK government will never agree to this. Therefore, it is more likely than not that there will be a “hard Brexit”. KI says there is absolutely nothing to worry about in this situation and that the company can continue to prepare its financial statements the same as before.
Suggested answer format for each individual situation above]
The applicable accounting concept for this situation is …………………………….
This accounting concept states that ……………………………………….
When this accounting concept is applied to this situation we find that………………………..
Therefore, KI is correct/wrong
Advice to your Aunt Naivety
KI is correct/wrong in _____________ instances from 7 instances. Therefore, Aunt Naivety I
suggest that you, give K Itall a bonus/retain him/sack him.
