Financial accounting - Assignment Example

In the context of a company or a business unit, an income is what is mostly referred to as the earnings after interest, depreciation and tax (EADIT). The gain can be described as an increase in the amount of revenue and/or income by a specific amount, as compared to a previous figure (Gupta 213-250). According to IAS 18, revenue is supposed to be recognized exclusively under the following criteria: when a business unit has completed the transfer of ownership of goods; when a business has ceased exercising applicable managerial authorities and has given up any form of control over the goods; when the amount of the expected revenue can be determined with consistency; when it is certain that financial inflows resulting from a certain business transaction will be directed to an entity; and when expenditures and costs related to a business transaction can be measured with consistency (Christian and Lu?

denbach 64-87). On the other hand, revenues obtained through the provision of services should be recognized “where the outcome of a transaction involving the rendering of services can be estimated reliably, associated revenue should be recognized by reference to the stage of completion of the transaction at the end of the reporting period. The importance of distinguishing between the terms in financial reporting is to facilitate the provision of reliable material information to the users of financial statement (International GAAP 328).

The case study IBI Ryan PLC (the company) is a wholesaler of a wide range of consumer electronic, computing and telecommunications products. The company imports the bulk of its goods using container transportation and distributes from large regional warehouses to its customers, who range from individuals who have ordered on-line to large national retail chains. The company is finalizing financial statements for the year ended 31st March 2013. The company has experienced significant fluctuations in revenue and profits over the last 5 years.

The financial statements as currently prepared, show an operating profit of ?51 million on revenue of ?4,003 million. According to the case, the company anticipated a delivery of the goods on Sunday the 31st March, one day before the preparation of the financial statements. Unfortunately, the delivery did not happen owing to a heavy snowfall for two consecutive days until Tuesday. The sales invoices showed a total sale of ?50,000. The delivery was not made but the company’s revenue for the financial year ending 31st March includes the sale.

According to the requirements of revenue recognition as stated in the international accounting standards 18, the revenue of ? 50,000 could be measured with certainty and reliability. The cost incurred during the transaction could also be measured with a satisfactory level of certainty and reliability (? 25,000). The economic benefits of the transaction would flow to the company if the transaction were finalized. However, since the delivery was not done according to plan, within the financial period, the ownership of the goods was still with IBI Ryan.

That means that the company did not pass the significant risk and reward of ownership of the goods to the buyer. Secondly, the company still had managerial authority and control over the goods. Therefore, the revenue