Financial Accounting of The Nguyen Family - Assignment Example

Financial accounting Part A - 9 marks If you were the bank that received this report what would be your comments? The Nguyen family lacks accounting knowledge. They mixed up the items of the statement of the financial position and the items of income statement. The financial statement was not prepared properly using the accounting rules so it cannot show clearly the financial position of the company neither can it show the profitability and liquidity of the business. Would you congratulate them on their profit? Explain why or why not. (2 marks) No, the business is just about to begin its operations but it has so it cannot have any profit. The transactions being recorded are just but investments for instance, capital contributions which goes to the statement of financial position and not income statements. Is cash the same as profit? Explain (3 marks) Cash is not the same as profit because cash is a current asset and hence found in the statement of financial position while profit is a cash inflow (revenue) and is found in the income statement. Cash is the amount of money in possession of the company either in hand or in the bank while profit is got by subtracting total operational expenses from the gross revenue. Is the income statement prepared properly? If not, please explain and prepare appropriate financial statements. (4 marks) The income statement is not properly prepared because the business has not conducted any business operations however; the transactions are just the initial outlay and should be included in the statement of financial position. The appropriate financial statement to be prepared is therefore a statement of financial position. This statement is prepared as shown below. Nguyen family Statement of the financial position As at 30 June 2012 Assets House 330,000 Kitchen equipment 8000 Tables and chairs 20,000 Computer 2,000 Cash 40000 Total assets 400,000 Capital and liabilities Capital 200,000 Bank loan 200,000 Total capital and liabilities 400,000 Calculations House acquisition cost= purchase price + renovation 280000+50000= 330,000 Part B 18 marks What is GST and how does it work? (2 marks) GST is a consumption tax that is broad based and is usually charged at 10% on most services and goods that are consumed in Australia. It replaced a number of indirect taxes and wholesales tax in the country. This kind of tax is usually felt throughout the chain of production by all links even though the consumers are the ones who finally bear its cost. The supplier collects the tax from the consumers and then should be accountable to the Australian Tax Office [ATO]. The supplier should be registered for GST so that they can be able to offset GST they collect on the supplies that are made against the GST paid on acquisitions (Wilson, pg. 3). Why was it introduced into Australia? (3 marks) It was introduced to offset the deficit in the budget because many people will be motivated to work hence joining higher tax brackets implying more taxes. Secondly, it reduces the company’s vulnerability to the next global crisis because the income will increase since many people will be attracted to work. Finally, it aids in the growth of standard of living and productivity growth (North Ryde, 830-838). Is this similar to other countries? – give at least 2 other examples of countries with GST. (2 marks) This is similar to the countries because it is levied on goods and services. Other countries with the GST include New Zealand and Canada. Summarize the arguments for changing GST from the ITB article. Then give your opinion as to what you think should happen and why. (3x3+2=11 marks) The GST was raised as a result of cut in the personal income tax because the country is faced with threatened living standards due to ageing population, weak productivity growth and falling of the commodity prices. This lowers the amount collected as personal income tax hence deficit in the country’s budget. To offset this, the government introduced the goods and services act, GST (Menon, pg. 245). It was also done to cut personal income tax hence motivating more people to work thereby making them to enter higher tax brackets. Further, reliance on other indirect taxes instead of direct tax like personal income tax supports higher living standards and higher growth (Wilson, pg. 3). Introduction of the GST prevents the company from drifting along hence reducing their vulnerability to the next global crisis. This change will therefore lead to a higher increase in income because it increases the participation of the workforce hence lifting the productivity. This is achieved by lowering the personal income tax which is offset by lowering their spending while leaving other taxes intact and unchanged (Menon, pg. 245). In my opinion, GST should be fully implemented because it has more merits, it increases living standards, productivity and decreases deficit in the budget. Part C 23 marks What are intangibles? (2 marks) These are long term non-monetary resources of as entity that can be identified but they do not have physical existence. They usually derive their value from legal or intellectual rights and from the value they usually add to the other assets (Cohen, pg. 294). Give 3 examples of intangible assets. (3 marks) Intangible assets include (Cohen, pg. 294). Goodwill This kind of intangible asset is usually recognized when a business acquires another. It indicates the excess of the cost that is paid by the buying business over the asset values of the purchased business. For instance, a business might pay $ 10million for another business which is valued at $ 8.5 million; the excess which is $1.5 million represents the goodwill value for the company. Goodwill value comes about as a result of good reputation of the business and other contributing factors. Copyright These are exclusive rights given to a person specifically an originator or creator or an assignee to publish, print, perform, record or film literary work, musical or artistic materials. This therefore enables them to continue creating and selling the products or services. Patents This grants control to a research or manufacturing company over the sale of a particular design and patent’s use. For instance, a company may be granted a patent so that it can be the only one producing a specific product in the market. However, when the company is sold, the patent bearer would still be allowed to oversee the production of this patented product or design. How are they recorded for accounting purposes? (4 marks) An intangible asset is recognized whether self created or purchased at cost if and only if it satisfies the following conditions: first, the cost of the asset should be able to be measured reliably; and when is it likely that its future economic benefits that are associated to it will flow to the business. This applies to both internally and externally acquired intangible assets. However, when the above two conditions are not met, the IAS 38 indicates that the expenditure on them is to be recognized as an expense basically when it is incurred (Cohen, pg. 294). They are recorded as assets at cost when they meet the two conditions but when they are not met, they are recorded as an expense. Which Accounting standard applies to Intangibles? (2 marks) The accounting standard applied to intangibles is the International Accounting Standards 38 (IAS 38). It outlines the definition, recognition, initial measurement, subsequent measurement, disclosures, and amortization of the intangible assets (Cohen, pg. 120). What does the ITB article say about recording and valuing software as intangibles? Summarize the arguments, and then give your opinion. (10+2 =12 marks) The purchased computer software is capitalized. The hardware operating system is usually included in the hardware cost. However, internally developed computer software either for sale or for use, they are charged to expense until probable future economic benefits, technological feasibility, ability or intent to sell or use the computer software, ability to measure the cost, and resources to complete the computer software. This intangible asset is initially recorded on the financial statements at the cost of acquiring it or at their purchase price. However, when it is internally generated, the requirements states that its cost be expensed immediately. The amortization requirements state that the pattern of the economic benefits be spread over the useful life of the software using the straight-line method as the default method. There are two main general rules that affect the recording and valuing of software as an intangible. They show whether it should be capitalized as property plant and equipment or just be expensed. It is recorded as PPE is it meets the PPE criteria of providing goods and services. For instance, when it is used in a greater part of the operations of the company intended to generate profits. However, it is not recorded as a PPE when it acts as a means for warehouse so that inventory management duties are performed efficiently. The second criterion which is based on cost indicates that if one copy of this software is worth more than $100,000, it should be classified as a PPE hence be amortized just like other assets over its economic life. Conversely, if two copies of the software go for $ 150, 000, they should be recorded as intangible assets. However, when the above two conditions are not met, the computer software would be recorded as intangible asset whether generated internally or purchased. In my view, software should be recorded and valued as an intangible asset because it has no physical existence. Its cost should be amortized over its useful life. Work cited Wilson, Michael H. Goods and Services Tax: An Overview. Ottawa: Dept. of Finance, Canada, 1989. Print. Australian Gst Legislation: With Overview : Current to 1 January 2011. North Ryde, N.S.W: CCH Australia, 2011. Print. Menon, Natasha. A Practical Guide to the Goods and Services Tax. Toronto, Ont: CCH Canada Ltd, 2006. Print. Cohen, Jeffrey A. Intangible Assets: Valuation and Economic Benefit. Hoboken, N.J: Wiley, 2013. Internet resource. Read More