Financial Accounting

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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 expect the accountants to be reliable, verifiable and objective. As a part-time accountant, Andrew will have to advice Grace that the company financial statements provided should be based on objective evidence. The company financial statement information should be faithful in presentation; free from prejudice and neutral. In October 2010, the company advertised in major newspapers and magazines. The entire amount of $25,000 was recorded as a prepaid advertising and Grace expect the benefits of advertising to continue and sustain through next year. In this case, we understand that there is no such information that the advertisement is going to sustain through a period of time. Therefore, the advertisement should be a one-time used and should not be considered as a prepaid advertising. On the 1 April 2010, the company bought and paid $10,000 for a 2-year fire insurance. It was recorded as prepaid insurance and there were no further entries. Grace feels that there was no need for further entries because the fire insurance is still in force. In this case, Grace has violated another reliability principle. Initially, the financial statement recorded as full payment of $10,000 for a 2-year fire insurance. The usage of the insurance period used should be incurred into entries instead of recording the full paid $10,000 fire insurance. As such, the 9 month of expired insurance (1st April 2010 till 31st December 2010) should be recorded in the financial statement.

Thirdly, Good Food Company needs to report all their assets depending on the actual cost received to the businesses. When looking at fixed assets such as machinery, only the original cost of the item is recorded. On 31st March 2010, the company purchased a new machine, which has a useful life of 5 years and a residual value of $20,000. In the information relates to purchase and installation of the machine, it has included the repair cost of $2,000 into the statement as capital expenditures....
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