Toy Central-Accounting Issues - Essay Example

? Running head: Toy Central- Accounting Issues Toy Central- Accounting Issues Insert Insert Insert O8b September 2011 Outline Introduction Toy Central Accounting Issues Conclusion Toy Central- Accounting Issues Toy central financial information should be confirmed to adhere to the generally acceptable accounting principles alongside the value estimates made by the companies’ management. The financial statements of Toy central indicate that the company had experienced difficulties in its corporate governance and consequently financial difficulties. Performance sustainability of Toy Central Corporation in the Toy industry largely depends on risks involved with corporate governance. The company is considering the improvement of its corporate governance to ensure that the financial scandals it had experienced would never be repeated. The presentation of financial statements should disclose transactions for related parties, accounting policies of the organization, and conflicts of interest between Troy Central Corporation and the transacting parties. The periodic financial statements need to be reviewed to ascertain adherence and enable the necessary revisions in the organization with respect to corporate requirements. Capitalized costs or licensing fees of Toy Central Corporation should be expensed when incurred considering the fact that assets are used up. Expenses are considered as money flowing out and liabilities are being incurred. The costs are incurred in the process of manufacturing toys, carrying out other company’s activities that involve the ongoing central operations and offering other related services. Amortization of costs over the life of a contract is appropriate, since Toy Central Corporation is an ongoing business. It is only acceptable for a period of not more than sixty months after the commencement of the business, the period of investigation of the probability for a new business that is being started. With regard to general business rules for expense deductions, it is not allowable to deduct the expenses of a new company, since expenses are assumed to be incurred prior the company’s birth. It is outlined that only expenses for a company that has been in operation for a long time can be deducted. It is however appropriate to amortize the capitalization costs of a new company if start up expenditure results in an operational entity and the equal installments deductions are started within first month of the business (Stickney, Weil, Schipper and Francis, 2009, p. 426-430) This process enables new companies to deduct the business investigating creation costs and the costs incurred in creating and starting up the business. It is important to note that the businesses can only deduct those costs that are deductible by business that existed and those that qualify for election. Expenses incurred in investigating business opportunities are deducted over the period of 60 months and are inclusive of expenses that relate to general and specific business situations like marketing, research, and development to determine the viability of the business opportunity. Other costs such as site identification and selection costs are included in amortizable costs. Amortizable costs of developing a new business may include costs such as advertising costs, consultancy fees, licensing fees and salaries. Costs that do not qualify for amortization include incorporation costs; start up costs for interests, experimental costs and property acquisition costs subject to depreciation (Carmichael and Graham, 2010, p.126). Delgo Movies accounting issues arise from Hollywood accounting, which is rather inconsistent with the generally accepted accounting principles. Delgo Movies use Hollywood accounting to budget and keep records of film production financial gains. The issue of concern in Hollywood accounting is that expenditures of film production are often inflated to significantly reduce profits of the productions to decrease the burden of profit sharing agreements with respect to the net profit. Delgo film production accounting is based on the entertainment industry. The accounting issues that arise in the industry affect actors and scriptwriters. The issues are proved to emanate from copyright infringement such as the Buchwald case, which was mistakably referred as creative accounting. The breach of contract led to the restructuring of the art Buchwald’s contract for the film called coming to America. Accountants are referred as the creative people in the case where a studio had half of the profits and an income of twenty-five percent overhead charges. It recorded a breakeven point at approximately three times over and above the cost and thirty percent of the returns as rental charges, distribution fees, and interest on what was advanced. There are several applicable forms of Hollywood accounting such as formation of a subsidiary to undertake a given task while the parent entity extracts income from the subsidiary in form of fees for specific services. However, the forms range from simple schemes to much more complex schemes. With respect to Hollywood accounting, calculation of overhead reduces the stated profits of a movie. The overheads are calculated in the accounting profession in a controversial manner as production overhead, marketing overhead, and distribution overhead. Production overhead is calculated as 15% of total production costs and distribution overhead as 30% of gross rentals, while marketing overhead is 10% of all advertising costs. Statistics have it that approximately five percent of film production officially states their net profits because of Hollywood accounting and the belief that only fools accept exact net profits in their contracts. The big actors and scriptwriters in the entertainment industry insist on declaration of gross revenue instead of net profit as it reduces the chances of declaring net profits, thus Production Company will not claim a certain amount of the reported revenue (Taylor, 2010, p.123). Auditors should also undertake to assess other accounting issues such as material misstatement through understanding of the firm to be audited and its environment. The information concerning the firm to be audited needs to include the nature of the organization, leadership, objectives, mission, and processes carried out within the business. The risk factors that may lead to material misstatements must be evaluated to develop an overall understanding of the factors that may prevent the organization from achieving its goals. The firm’s performance risks may arise from organizational changes such as new employees, rapid business growth, governance and information system restructure (Khosrowpour, 1996, p.96). The auditor must also evaluate the response of organizations to the specific risks that may prevent the organization from achieving its objectives. Evidence regarding management actions and counter active measures against the risks need to be assessed, due to the auditor’s level of risk assessment. The auditor selects the most appropriate audit procedure with regards to the assessment of the risk of misstatements. The question as to whether or not sufficient evidence of the risks involved was obtained qualifies or disqualifies the auditor’s work in the organization and auditing as a profession. References Carmichael D. R. and Graham L. (2010). Accountants Handbook. NJ: John Wiley and Sons. Khosrowpour, M. (1996). Information Technology management and organizational innovations: Proceedings of 1996 information resources associations international conference. Washington DC: Idea Group Inc (IGI). Stickney, C. P., Weil, R. L., Schipper, K. and Francis, J. (2009). Financial Accounting, an Introduction to Concepts methods and Uses. OH: Cengage Learning. Taylor, J. (2010). Film Finance for Beginners. NY: Jeffrey Taylor. Read More