Policies and Procedures for Statement of Operations
We prepared statements of each farm’s operations that illustrate the performances of the farms, in terms of sacks of corn, during the first harvest year. Income before Royal Taxes is equal to the harvested sacks of corn less operating costs. Sihathor’s farm harvested 48,600 sacks of corn during the year and had a total operating cost of 12,317 sacks of corn, which resulted in income before Royal Taxes of 36,283 sacks of corn. Pemsah’s farm harvested 35,300 sacks of corn and had a total operating cost of 8,080 sacks of corn, which resulted in income before Royal Taxes of 27,220 sacks of corn. Amenhotep required a Royal Tax of one out of every four sacks of the yearly harvest to be paid at the end of the year. Sihathor paid 12,150 sacks of corn in Royal Taxes, which gave him a net income of 24,133 sacks of corn. Pemsah paid 8,825 sacks of corn in Royal Taxes, which gave him a net income of 18,395 sacks of corn.
Financial accounting policies and procedures helped to make the statements of each farm’s operations relevant and reliable. The straight-line depreciation method depreciated the oxen, farm implements, and building over their useful lives. For example, the cost of purchasing the oxen divided by their expected life yielded the yearly depreciation amount applied for the oxen. Due to the death of Sihathor’s worker, he granted the worker’s widow an annuity of one sack of corn per lunar cycle for the rest of her life. The present value of this annuity was 95 sacks of corn, which we accounted for as a pension expense of 95 sacks of corn. The net loss from the death of the two oxen totaled 83 sacks of corn. Policies and Procedures for Statement of Corn Flows
We prepared the statement of cash flows using the direct method and cash basis of accounting to calculate the net effects of corn inflows and outflows on the corn account. The net corn flow measures each farm’s ability to meet financial obligations. The net income differs from the net corn flow because revenues and expenses are recorded on the accrual basis in the statement of operations. These revenues and expenses are only recorded when they are earned or incurred. In contrast, the statement of corn flows records all corn flows, regardless of whether expenses or revenues have been incurred. An example of this difference is the treatment of the pension expense for the widow of Sihathor’s worker. The statement of operations recorded the entire 95 sacks of corn as an expense, but the statement of corn flows records an outflow of two sacks of corn because only two have been paid to date. Additionally, the payments for the buildings are recorded differently on the statement of operations and the statement of corn flows. Each noble’s corn flow statements record outflows of 100 sacks of corn for the building construction costs. The total expenses recorded on the statements of operations for Sihathor and Pemsah are 160 and 110 sacks of corn respectively, equivalent to the total accumulated depreciation for one year. Sihathor and Pemsah only paid 100 sacks of corn for their buildings, but they incurred expenses worth 160 and 110 sacks of corn. Both net income and net corn flows are important measures for evaluating the performance of the farms. Performance Measures
In order for Amenhotep to decide which noble to invest future capital with, there are many performance ratios that must to be examined. Since Amenhotep collects his Royal Tax from the amount of corn each noble harvests in a...