Financial Accounting
Question 1
Discuss the accounting principles and concepts that were violated in the case. Explain the appropriate accounting treatments that should be used.
Accounting is a systematic recording of business transactions and statements relating to assets, liabilities and summarizes the financial events that occur in a business. There are certain accounting principles and concepts to preparing reports on financial statements. These accounting principles and concepts are usually referred to as General Accepted Accounting Principles (GAAP). Financial statements or reporting should provide information that is advantageous to present to potential investors and creditors in order for them to make rational investment, credit and other financial decisions. Because of these guidelines of GAAP, consistency in the methods of preparations of financial statements or accounts of businesses has been maintained.
In the case of Good Food Company, there are a few accounting principles and concepts that were violated. Firstly, Grace as the CEO of the company does not want to disclose regarding the 13th bonus amount for all eligible employees. This is because the employment contracts with the employees do not cover bonus. Hence she feels that there was no need to disclose with regards to the 13th bonus amount paid to employees. One of the basic accounting foundation principles is the full disclosure principle. According to this principle, all revenues and expenses incurred should be shown in the same financial period. The main objective of this principle is to avoid any overstatements of income at any time. Therefore, Grace should disclose all information within the statement or in the notes to the statement. Information that is disclosed should be enough for investors or creditors to make a judgment over their financial status.
Secondly, the company has violated the reliability principle. When financial reports are generated by professional accountants, we
Discuss the accounting principles and concepts that were violated in the case. Explain the appropriate accounting treatments that should be used.
Accounting is a systematic recording of business transactions and statements relating to assets, liabilities and summarizes the financial events that occur in a business. There are certain accounting principles and concepts to preparing reports on financial statements. These accounting principles and concepts are usually referred to as General Accepted Accounting Principles (GAAP). Financial statements or reporting should provide information that is advantageous to present to potential investors and creditors in order for them to make rational investment, credit and other financial decisions. Because of these guidelines of GAAP, consistency in the methods of preparations of financial statements or accounts of businesses has been maintained.
In the case of Good Food Company, there are a few accounting principles and concepts that were violated. Firstly, Grace as the CEO of the company does not want to disclose regarding the 13th bonus amount for all eligible employees. This is because the employment contracts with the employees do not cover bonus. Hence she feels that there was no need to disclose with regards to the 13th bonus amount paid to employees. One of the basic accounting foundation principles is the full disclosure principle. According to this principle, all revenues and expenses incurred should be shown in the same financial period. The main objective of this principle is to avoid any overstatements of income at any time. Therefore, Grace should disclose all information within the statement or in the notes to the statement. Information that is disclosed should be enough for investors or creditors to make a judgment over their financial status.
Secondly, the company has violated the reliability principle. When financial reports are generated by professional accountants, we
References: AccountingCoach®, (2004), Introduction to Accounting Principles, http://www.accountingcoach.com/online-accounting-course/09Xpg01.html, accessed on 18th February 2011 Barreveld, D.J., (2002), The Enron collapse: Creative accounting, wrong economics or criminal acts, iUniverse Inc, USA Price, M., (2009), Take it from the top: When Deloitte execs made ethics a priority it filtered on down, Ethisphere, http://ethisphere.com/take-it-from-the-top-when-deloitte-execs-made-ethics-a-priority-it-filtered-on-down/, accessed on 21st February 2011 Tutor2u, (2007), Accounting Concept and Conventions, http://tutor2u.net/business/accounts/accounting_conventions_concepts.htm, access on 19th Februrary 2011 Walter, T.H.Jr, Charles, T.H., Zulbaidah, B.I., Chng, C.K., Fazilah, S., Mak, Y.T., (2005), Financial Accounting In Singapore and Malaysia, Prentice Hall Walter, T.H.Jr, Charles, T.H., C.W. Thomas, Suwardy T., (2011), Financial Accounting International Financial Reporting Standard, 8 edition, Pearson Education South Asia