York Limited- Changing the Financial Year for Recording the Cost of Advertisement - Case Study Example

Case report Task Table of Contents Case report Table of Contents 2 Introduction 3 Role and users of the information 3 Constraints and criteria related to the case and decision-making 5 Situation analysis and alternative course of actions/solutions to the presented problems 5 Evaluation of the alternative course of actions 7 Recommendations 8 Implementation 8 Reference 9 Introduction York Limited is a mid-sized privately owned company existing in Toronto. The company has 100 franchised chain stores which it supplies its merchandise. However, all the franchised stores are individually owned. The company benefits from low cost of purchasing the merchandise due to the economies of scale. The company allows the 100 stores to sell the merchandise on its behalf and in return, get a royalty on sales made by the franchised stores. The company implemented a new strategy that was aimed at increasing the profitability levels of the franchised stores. The reward strategy was also aimed at facilitating the implementation of fair accounting standards and principles as established by the IFRS. A comparison done to assess the performance of the franchised stores shows that Calgary store won the award after recording the largest percentage increase in the level of profit after tax. This report, therefore, presents analysis of the appropriateness of the accounting methods implemented by the Calgary store during the contest. Below are the analyses. Role and users of the information It is organizations’ objectives to provide useful financial information to current and potential investors, creditors and other users. The purpose of this is to help investors make informed investment decisions. The ability of an enterprise to generate enough cash to meet its obligation may be affected by investor and creditor’s perception of a company. This may eventually influence market prices and enterprise security. The third objective of financial reporting is to provide information about economic resources of an enterprise, their stake in those resources, the effect of transaction events and circumstances that could change their stake in those resources. The fourth objective is to provide information about the financial performance of a period. The fifth objective is to provide information on company’s expenditures, borrowing, and repayment activities and capital transactions. Lastly, it is a company’s objective to show the proceedings of the agency relationship. That is, whether the relationship between the company’s board and management has been fruitful. On that note, I have been asked to assume the capacity of an accountant to assess the appropriateness of the accounting methods used by the Calgary franchising store. The information presented in the report is useful to various stakeholders of the store. The stakeholders are the customers, employees, investors, Creditors, suppliers, the management and the government (Lee, 2006, pp. 3-78). The first category of people who use financial information is investors. Investors who provide capital to a company are concerned about the levels of risk, and return from their investments. They need financial information to help them decide whether they should buy or sell shares of a particular company. They are also interested in information that enables them to assess the ability of a company to pay cash dividend. The second category of people is employees. Employees need to know whether their employer is financially stable. They use this data to evaluate the employer’s ability to remunerate them. Lenders use financial information to access loan-repayment potential of an enterprise. Suppliers and other trade creditors are interested in financial information to enable them to determine whether the amount owed to them will be paid without default. Customers are interested in financial information to determine the life span of an enterprise, especially when they have long-term involvement with an enterprise. Government and their agencies use the financial information to regulate the activities of an enterprise and to determine tax policies. They also use the information to compute national income. The management uses the information for decision-making. Lastly, the public use financial information to determine the trends and recent development activities of an enterprise (Lee, 2006, pp. 3-78). Constraints and criteria related to the case and decision-making According to the case, the obvious constraints of the case are the rule regulating the shipment of goods (F.O.B) by IncoTerms and the accrual concept, established by the IFRS. On the other hand, the criteria for decision-making in this case include maintaining a record of both the book and the market value of assets; payback period should only be used during the project valuation process rather than estimating a project’s life; lastly, past information is the best source of information for decision-making. Situation analysis and alternative course of actions/solutions to the presented problems First, the limit to the preparation of account reports are under the regulations of generally accepted accounting principles (GAAP). According to the case of the Calgary franchising store, the following are the rules limiting the report: the accrual concept, the rules regulating overseas transportation (F.O.B), and asset valuation methods. The accrual concept states that revenue and costs from operating activities must be recognized only when earned or incurred. They must be matched with one another, so long as their relationship is justifiable. In preparation of financial information for a particular period, only revenues and cost for that period should be used. That means revenues and costs from other periods cannot be used in preparation of financial information thus reporting. For instance, the Calgary store designed a new advertising campaign for the fiscal year of 2015. Being that launching the program at the end of October 2014 incurred expense in that year; the advertising cost should be recognized in the year 2014 rather than the following year, as did the Calgary store. Therefore, the alternative course of action and the ultimate decision, in this case, is to include the cost of advertisement in the 2014’s financial statement. Second, free on board (F.O.B) is a term used in the shipment of goods. It generally implies that the seller is free of any expense or liability once the goods have departed her/his premise. This means the buyer would be responsible for the shipping and loading expenses. On that note, the owner of the goods but not the seller should pay the freight payment allegedly being owed to MSC ($ 5,200). Therefore, in order to make a well informed-decision, the Calgary store should refer to the terms and implications of F.O.B. Third, assets lose value due to tear and wear. In accounting terms, this cost is referred to as the depreciation. In establishing the value of an asset, it is advisable to record the book or market value, in order to reflect either the depreciation cost or the current market conditions. Concerning the case study, issue nine presents a situation on the value of assets to be recorded. The owner of Calvary store mentions that the current value of the store is $ 980,000. On the other hand, a further investigation on the value of the building reveals that the original cost of the store is $ 650,000 with an accumulated depreciation of $ 162,500. From this information, the book value of the building is (650,000 – 162,500) = $ 487,500. In this situation, it is advisable to maintain both the book and the market value of assets. The available information on the market and book value of the Calgary store premise indicates an increase in the value of the store. If the asset was disposed, the disparity between the market and book value is referred to as the capital gain. All of this information is useful for decision making thus should be available. Therefore, in this context, an alternative and the ultimate decision are to maintain a record of both the book and market value of the store’s assets. Fourth, in order to avoid such actions as adjustments in the residual and life span of assets, the company should rely on past information in order to avoid such adjustments. The adjustments alter the appearance of the company’s financial position and indicate that the company lacks the basic information on such evaluations. Past information referred in this context is available in the data the databases of the government and various organizations. Therefore, this situation implies a weakness of the company. Lastly, the company acquired a patent from the Towers Software Company, at the cost of $ 100,000, to handle special print jobs for their small print operation. The Calgary store did a mistake of matching the life of the patent to its expected payback period of around four years. A payback period is the time it would take for a project to return the entire amount invested initially. Therefore, it does not mean that a project’s life ends after the initial investment is paid back. Such inaccurate estimations negatively affect the estimation of a projects total cash inflows thus, generates inaccurate information on the project’s net present value. Consequently, the inaccurate information would facilitate incorrect decision-making. Therefore, an alternative and an ultimate possible solution to this problem is to obtain an accurate information on the life span of the patent from either the seller, other organizations and other organizations that deal with the collection of such information. Evaluation of the alternative course of actions Concerning the first case under the above situation analysis, the proposed recognition of the advertising expense in the financial year 2014 is beneficial to the company for the reason that it reflects a compliance with the GAAP. Thus depicts credibility in the company’s accounting practices. In the second situation above, the reference to the terms and conditions of F.O.B will reduce the uncertainty about who bears the cost of freight as requested by the MSC. The advantage of the alternative is that it will reduce the cost borne by the Calgary store. Therefore, this alternative does not present any disadvantage to the company. In the third situation above, the preparation of both book and market value of the company’s asset is beneficial to the company for the reason that the records will give a clear picture of the value fluctuations of the assets. Secondly, it will present the current value of the assets, which reflects the current market conditions. Third, the alternative will enhance the determination of an asset’s capital gain or loss. The alternative presents an insignificant disadvantage, which is the increase in work for the accountant. In the fourth and last situation above, the company should seek past information from credible sources as proposed. The benefits of this alternative is a reduced decision-making based on guesses, thus reduce inconvenience caused to the users of such information. However, the alternative presents disadvantages, which are the high costs of obtaining such information and the risk of obtaining inaccurate information. Recommendations After analyzing the pros and cons of the alternative actions, it is evident that the advantages of all the proposed alternative actions outweigh the disadvantages. Therefore, all the proposed alternative courses of action should be implemented. Implementation In the first situation analysis, the implementation plan will simply involve changing the financial year for recording the cost of advertisement. In the second situation analysis, the cause of action is to retrieve a copy of the terms and conditions of F.O.B. If deemed necessary a legal counsel should be sought. In the third situation analysis, the preparation of both the market and book value of assets simply involves informing the accountants on the necessity of such records. In the fourth and the last situation analysis, the following preparations are important: gathering of the information needed, searching for the available sources of such information, selecting a credible source and seeking the required information. Reference Lee, T. A. (2006). Financial reporting and corporate governance. Chichester [u.a.]: John Wiley & Sons. Read More