QUESTION 1 (56 Marks) – 8 marks (i.e. Identification of applicable accounting concept 2 marks; description of accounting concept 1 mark; application to the scenario 4 marks; final conclusion 1 mark) for each of the seven situations given below
Your Aunt Naivety is a fashion designer who is relatively well-known in the industry. She has retained Mr. K Itall (called “KI” from now on) who has misled your Aunt into thinking that he “Knows it all” when it comes to accounting. However your Aunt is not quite sure about KI’s advice. She has presented the following situations and the advice she received from KI relating to her financial statements for the year ended 28th
February 2020. She wishes to have your opinion and the reasons as to why you say what you say.
a) Your aunt has bought a nice cupboard for £2,500 for her exclusive personal use. Kl has advised her to show this as a fixed asset in the company’s books as, according to him, there is no difference between her personal expenses and that of the company she runs.
b) Although your Aunt is a very gifted designer it is difficult to quantify this in monetary terms. However KI has suggested that £10,000 is shown in the Statement of Financial Position (Balance Sheet) as an asset. He argues that it should be more but that the Prudence Concept prevents him from increasing it.
c) Your Aunt prepares financial statements for the year ended 28th
February 2020. On 26 February 2020 her company sold £10,000 worth of goods to X Ltd. X ltd paid for the goods on 5 March 2020. KI has ignored this transaction as a sale in preparing the financial statements since the money was received after the year-end.
d) The Closing Inventory (Closing Stock) as at 28th
February 2020was estimated at £105,000. It was noticed later that a box of buttons amounting to £100 had been missed. The Financial statements have been audited and approved by the Board of Directors and filed in the Companies House. KI says that the £100 should be adjusted for in the accounts.
e) Your Aunt’s company was taken to Court as one of the hooks in a dress broke and seriously scarred a famous model. She has won damages of £25,000. This was appealed but your Aunt’s Company lost the appeal on 10 January 2020. The amount is payable by 10 March 2020. KI says that this need not be included as the amount has not been paid.
f) The depreciation for fixtures and fittings was set at 10% on cost. For the past five years these were depreciated at that rate. KI has suggested that the depreciation rate is reduced from 10% to 5% so that the profits would increase.
g) Your Aunt trades extensively with the EU Countries. There is a distinct possibility that the company may cease to trade if there is a no deal Brexit, as has been suggested by some parts of the government. KI says that there is nothing to worry about in this situation and that the company can continue to prepare its financial statements the same as before.