Criteria (equally weighted, each criteria 9 marks)
Unsatisfactory (1-3 marks)
1 2 3
Low Pass – Pass grade (4-5 marks)
4 5
Above average (6-7 marks)
6 7
Excellent (8-9 marks)
8 9
Content
The letter did not satisfactorily explain how the income figure is derived or the difference between personal and business assets, investments and expenses. Further the letter did not analyse the situation or advise whether to borrow. There was no justification of advice given, ie, analysis of data, through revised income statement or cash at bank account.
There was some explanation of how the income figure is derived or the difference between personal and business assets, investments and expenses. There was some analysis of the situation and advice as to whether to borrow. There was some justification of advice given, but no inclusion of analysis of data, through revised income statement or cash at bank account.
There was a satisfactory explanation how the income figure is derived and the difference between personal and business assets, investments and expenses. Further the letter satisfactorily analysed the situation and advised whether to borrow. There was satisfactory justification of advice given, ie, analysis of data, through revised income statement or cash at bank account.
The letter fully explained how the income figure is derived and the difference between personal and business assets, investments and expenses. Further the letter fully analysed the situation and advised whether to borrow. There was full justification of advice given, ie, analysis of data, through a completely revised income statement.
/9
Written expression:
USE OF WRITING TIPS provided in lectures
The student’s work reflects poor English expression and does not use the writing tips provided. Writing is unclear, lacks fluency, and is frequently grammatically incorrect.
The student’s work reflects fair to satisfactory English expression and some use of the writing tips provided. Writing is unclear and lacks fluency on some occasions, and there are some grammatical errors.
The student’s work reflects good English expression and a good use of the writing tips provided. Writing is fluent and clear, with few grammatical errors.
The student’s work reflects excellent English expression and excellent use of the writing tips provided. Writing is fluent and very clear, with very few, if any, grammatical errors.
/8
Unsatisfactory
0 1
Low Pass
2 3
Above average
4 5
Excellent
6
Logical Structure of Argument
The letter did not have any logical structure leading to a satisfactory conclusion.
The letter showed some evidence of a logical structure that led to and supported a conclusion
The letter showed good evidence of a logical structure that led to and supported a conclusion.
The letter showed strong evidence of a logical structure that led to and supported a conclusion.
/5
Unsatisfactory
0
Low Pass
1
Above average
2
Excellent
3
Writing and
presentation style:
USE OF MODEL provided in lectures
The letter is not presented using the appropriate model provided.
Sometimes, but not always consistently, the letter is presented using the appropriate model provided.
On most occasions, the letter is presented using the appropriate model provided.
The letter has been consistently presented using the appropriate model provided.
/5
Student Portfolio
A printout of the student portfolio experience was not submitted.
The printout of the student portfolio experience indicates a minimal attempt at recording the experience.
The printout of the student portfolio indicates a reasonable attempt at recording the experience.
The printout of the student portfolio experience indicates a comprehensive attempt at recording the experience.
/3
Total Marks
/30
Johnson & Robertson
Accounting Practice
Merilyn and Bob Haines
Brisbane Water Tank Solutions
18 September 2007
Dear Ms & Mr Haines
Brisbane Water Tank Solutions’ Income Statement Query
1. Facts
It is in my understanding that based on the assessment of your company, Brisbane Water Tank Solutions, to your income statement ended 01 September 2007, and you have concluded that you are ready for expansion. This decision is due to the fact that your initial analysis of income statement can result to a net profit of at least 0,000. However, such decision is less certain because there is a mixed of personal and business assets, investments and expenses. You wish to be more accurate in income statement analysis to make your company financially ready for the nearing expansion plan.
2. Re-Assessment of the Income Statement
In the appendix, there are several methods that were applied to determine the consistency of the initial analysis of the firm. The complete presentation of income statement was focused on re-assessing the decision of the firm to expand based on 0,000 net profit benchmark. There are several findings that are as follows that can dissolve the accuracy of the initial assessment:
· Proceeds from the sale of family car, holiday cost of the Bahamas tour and investment of Merilyn and Bob are personal costs
· Cash receipts do not include bank borrowing
· Credit sales and cash receipts from sales collection will both be included in sales account
· Opening and closing inventory as well as purchases regardless of payment terms will be included under cost of goods sold account.
· Cash or non-cash transactions will be considered in income statement as long it is appropriate to carry respective accounts
· All accounts that are not considered in income statement will be included in balance sheet
Supposedly, the personal gains and costs that have been mistakenly included in the initial income statement should be adjusted (e.g. either added or deducted). However, it will be two times problematic when the revised income statement will be adjusted because all other accounts will be changed. For convenience and since the firm already carry-out their finances by including there personal gains and costs, the revised income statement is prepared by including them. They are automatically absorbed by the capital account as shown in the notes to journal entries. Specifically, these include investment of Merilyn and Bob, sale of family car and the Bahamas tour.
Further, there are accounts that must not be included in the revised income statement rather in the balance sheet. Specifically, these include cash, factory, delivery trucks and cranes, merchandise inventory, payments, receivables, bank borrowings and the contra-account of accumulated depreciation.
According to (1999), the income statement is a financial statement that reflects the movement and final result of corporate operations which may result to net income or net loss. To re-assess the initial analysis of the company that the seven-month operation from February 1 to September 1, 2007 results to net income of at least 0,000, six basic parts of the income statement are considered, computed and analyzed as follows:
· Revenue on sales
· Cost of goods sold
· Gross profit on sales
· Operating expenses
· Other income/ expenses
· Net income or net loss
According to , the structure of the income statement is shown formally in paragraphs 81, 82 and 87.
Paragraph 81. As a minimum, the face of the income statement shall include line items that present the following amounts for the period:
(a) revenue;
(b) finance costs;
(c) share of the profit or loss of associates and joint ventures accounted for using the equity method;
(d) tax expense;
(e) a single amount comprising of (i) the post‑tax profit or loss of discontinued operations and (ii) the post‑tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation; and
(f) profit or loss.
Paragraph 82. The following items shall be disclosed on the face of the income statement as allocations of profit or loss for the period:
(a) profit or loss attributable to minority interest; and
(b) profit or loss attributable to equity holders of the parent.
Paragraph 87. Circumstances that would give rise to the separate disclosure of items of income and expense include:
(a) write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs;
(b) restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring;
(c) disposals of items of property, plant and equipment;
(d) disposals of investments;
(e) discontinued operations;
(f) litigation settlements; and
(g) other reversals of provisions.
These basic parts comprised the presentation in the revised income statement (standard). The computation explicitly showed that the firm resulted to a net income of ,800 at least 50% short of the benchmark for expansion of at least 0,000. The computation can be checked using the worksheet, t-accounts and journal entries for accuracy. Due to this, the firm is not in line with the benchmark and has overstated their income statement performance. The source of the problem is the inclusion of personal expenses and investments including inappropriate placing of some accounts which must be in the balance sheet.
I recommend that the annual income statement in particular and financial statement in general of the firm should have a clear stance regarding personal accounts and business accounts. This can be done by avoiding deposit/ drawings of personal accounts into the business accounts. Separation of them should be clearly established. Otherwise, misjudgment based on income statement will deviate from real financial performance. It is also suggested that a certified accountant should handle the operational recording and adjustments on the company’s books.
3. Conclusion
In my conclusion, it is in my opinion that Brisbane Water Tank Solutions erred in their initial evaluation of the income statement of the business particularly on meeting the 0,000 benchmark. This is based on the re-assessment applied on a seven-month performance from February 1 to September 1, 2007. The revised income statement resulted to a new value of net income which is ,800 after application of specific approaches based on academic books and AASB income statement provisions.
As a final note, Brisbane Water Tank Solutions should tap alternative ways to finance its expansion plan because the revised net income is short of the benchmark. There are different ways of financing expansion efforts such as different types of equity and debt financing. These finances are not required to be 100% exclusive of one type rather can also be vertical (one type of equity/ debt to another type of equity/ debt) and horizontal (one type of equity to one type of debt) combination.
Should you have any further queries in relation to these matters, please do not hesitate to contact me.
Yours faithfully,
Hui Chun Yang
Senior Manager, Small Business Section
Johnson & Robertson
Appendix
Brisbane Water Tank Solutions
Revised Income Statement (Worksheet)
Seven-Month Period from February 1 – September 1, 2007
Account Title
Trial Balance
Adjustments
Income Statement
Balance Sheet
Dr
Cr
Dr
Cr
Dr
Cr
Dr
Cr
Cash
5,000
0,000
4,700
0,300
Accounts Receivable
345,000
345,000
Factory
200,000
200,000
Delivery Trucks and Cranes
110,000
110,000
Accumulated Depreciation
11,500
11,500
Merchandise Inventory
210,000
0,000
330,000
0,000
330,000
330,000
Account Payables
270,000
480,000
210,000
Bank Payables
150,000
150,000
Brisbane Water Tank Solutions, Capital
685,000
330,000
75,000
430,000
Brisbane Water Tank Solutions, Drawing
40,000
40,000
Sales
660,000
660,000
Purchases
480,000
480,000
Cash Expenses
244,700
244,700
Depreciation Expense (Factory, truck and cranes)
11,500
11,500
Brisbane Water Tank Solutions
Revised Income Statement (T-Accounts)
Seven-Month Period from February 1 – September 1, 2007
Cash
Factory
Truck and Cranes
Merchandise Inventory
Capital
165,000
270,000
200,000
110,000.00
210,000
330,000
330,000
165,000
45,000
40,000
120,000
200,000
150,000
244,700
110,000
30,000
554,700
210,000
315,000
45,000
705,000
30,000
150,300
760,000
430,000
Bank Payables
Sales
Accounts Receivable
Purchases
Accounts Payable
150,000
315,000
345,000
480,000
270,000
480,000
345,000
210,000
660,000
Cash Expenses
Depreciation Expense
Accumulated Depreciation
Drawing
244,700
11,500
11,500
40,000
Brisbane Water Tank Solutions
Revised Income Statement (Standard)
Seven-Month Period from February 1 – September 1, 2007
Revenue from Sales
Sales 660,000
Cost of Goods Sold
Merchandise Inventory, Beginning 210,000
Add: Purchases 480,000
Less: Merchandise Inventory, Ending 330,000
COGS 360,000
Gross Profit on Sales
Sales 660,000
Less: COGS 360,000
Gross Profit on Sales 300,000
Less: Operating Expenses
Cash Expenses 244,700
Depreciation Expense 11,500
Operating Expenses 256,200
Net Income/ (Loss) 43,800
Notes to Income Statement – Journal Entries
Cash 165,000
Brisbane Water Tank Solutions, Capital 165,000
Factory 200,000
Brisbane Water Tank Solutions, Capital 200,000
Trucks and Cranes 110,000
Brisbane Water Tank Solutions, Capital 110,000
Merchandise Inventory 210,000
Brisbane Water Tank Solutions, Capital 210,000
Cash 45,000
Brisbane Water Tank Solutions, Capital 45,000
Cash 150,000
Bank Payables 150,000
Cash 30,000
Brisbane Water Tank Solutions, Capital 30,000
Cash 315,000
Sales 315,000
Accounts Receivable 345,000
Sales 345,000
Purchases 480,000
Accounts Payable 480,000
Brisbane Water Tank Solutions, Capital 330,000
Merchandise Inventory 330,000
Accounts Payable 270,000
Cash 270,000
Brisbane Water Tank Solutions, Drawing 40,000
Cash 40,000
Cash Expenses 244,700
Cash 244,700
Accumulated Depreciation 11,500
Depreciation Expense 11,500
Credit:ivythesis.typepad.com
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