Criteria (equally weighted, each criteria 9 marks)


Unsatisfactory (1-3 marks)


 


1                        2       3                


Low Pass  – Pass grade (4-5 marks)


4                            5                     


Above average (6-7 marks)


 


6                                              7


Excellent (8-9 marks)


 


8                                  9


 


Content


 


The letter did not satisfactorily explain how the income figure is derived or the difference between personal and business assets, investments and expenses. Further the letter did not analyse the situation or advise whether to borrow. There was no justification of advice given, ie, analysis of data, through revised income statement or cash at bank account.


There was some explanation of how the income figure is derived or the difference between personal and business assets, investments and expenses. There was some analysis of the situation and advice as to whether to borrow. There was some justification of advice given, but no inclusion of analysis of data, through revised income statement or cash at bank account.


There was a satisfactory explanation how the income figure is derived and the difference between personal and business assets, investments and expenses. Further the letter satisfactorily analysed the situation and advised whether to borrow. There was satisfactory justification of advice given, ie, analysis of data, through revised income statement or cash at bank account.


The letter fully explained how the income figure is derived and the difference between personal and business assets, investments and expenses. Further the letter fully analysed the situation and advised whether to borrow. There was full justification of advice given, ie, analysis of data, through a completely revised income statement.


 


 


 


          /9


Written expression:


USE OF WRITING TIPS provided in lectures


The student’s work reflects poor English expression and does not use the writing tips provided.  Writing is unclear, lacks fluency, and is frequently grammatically incorrect.


The student’s work reflects fair to satisfactory English expression and some use of the writing tips provided.  Writing is unclear and lacks fluency on some occasions, and there are some grammatical errors.


The student’s work reflects good English expression and a good use of the writing tips provided.  Writing is fluent and clear, with few grammatical errors.


The student’s work reflects excellent English expression and excellent use of the writing tips provided.  Writing is fluent and very clear, with very few, if any, grammatical errors.


 


 


 


            /8


 


Unsatisfactory


0                                      1


Low Pass


2                                     3


Above average


4                                        5


Excellent


6


 


Logical Structure of Argument


The letter did not have any logical structure leading to a satisfactory conclusion.


The letter showed some evidence of a logical structure that led to and supported  a  conclusion


The letter showed good evidence of a logical structure that led to and supported a conclusion.


The letter showed strong evidence of a logical structure that led to and supported a conclusion.


           /5


 


Unsatisfactory


0


Low Pass 


1


Above average


2


Excellent


3


 


Writing and


presentation style:


USE OF MODEL provided in lectures


The letter is not presented using the appropriate model provided.


 


Sometimes, but not always consistently, the letter is presented using the appropriate model provided.


On most occasions, the letter is presented using the appropriate model provided.


The letter has been consistently presented using the appropriate model provided. 


 


            /5


Student Portfolio


A printout of the student portfolio experience was not submitted.


The  printout of the student portfolio experience indicates a minimal attempt at  recording the experience.                                        


The printout of the student portfolio indicates a reasonable attempt at recording the experience.


The printout of the student portfolio experience indicates a comprehensive attempt at recording the experience.


                                                 


 


          /3


Total Marks


 


                        /30


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 



 


Johnson & Robertson


Accounting Practice


 


Merilyn and Bob Haines


Brisbane Water Tank Solutions


 


18 September 2007


Dear Ms & Mr Haines


 


Brisbane Water Tank Solutions’ Income Statement Query


 


1. Facts


It is in my understanding that based on the assessment of your company, Brisbane Water Tank Solutions, to your income statement ended 01 September 2007, and you have concluded that you are ready for expansion.  This decision is due to the fact that your initial analysis of income statement can result to a net profit of at least 0,000.  However, such decision is less certain because there is a mixed of personal and business assets, investments and expenses.  You wish to be more accurate in income statement analysis to make your company financially ready for the nearing expansion plan.


 


2. Re-Assessment of the Income Statement


In the appendix, there are several methods that were applied to determine the consistency of the initial analysis of the firm.  The complete presentation of income statement was focused on re-assessing the decision of the firm to expand based on 0,000 net profit benchmark.  There are several findings that are as follows that can dissolve the accuracy of the initial assessment:


·         Proceeds from the sale of family car, holiday cost of the Bahamas tour and investment of Merilyn and Bob are personal costs


·         Cash receipts do not include bank borrowing


·         Credit sales and cash receipts from sales collection will both be included in sales account


·         Opening and closing inventory as well as purchases regardless of payment terms will be included under cost of goods sold account.


·         Cash or non-cash transactions will be considered in income statement as long it is appropriate to carry respective accounts


·         All accounts that are not considered in income statement will be included in balance sheet


 


Supposedly, the personal gains and costs that have been mistakenly included in the initial income statement should be adjusted (e.g. either added or deducted).  However, it will be two times problematic when the revised income statement will be adjusted because all other accounts will be changed.  For convenience and since the firm already carry-out their finances by including there personal gains and costs, the revised income statement is prepared by including them.  They are automatically absorbed by the capital account as shown in the notes to journal entries.  Specifically, these include investment of Merilyn and Bob, sale of family car and the Bahamas tour. 


 


Further, there are accounts that must not be included in the revised income statement rather in the balance sheet.  Specifically, these include cash, factory, delivery trucks and cranes, merchandise inventory, payments, receivables, bank borrowings and the contra-account of accumulated depreciation. 


 


According to  (1999), the income statement is a financial statement that reflects the movement and final result of corporate operations which may result to net income or net loss.  To re-assess the initial analysis of the company that the seven-month operation from February 1 to September 1, 2007 results to net income of at least 0,000, six basic parts of the income statement are considered, computed and analyzed as follows:


·         Revenue on sales


·         Cost of goods sold


·         Gross profit on sales


·         Operating expenses


·         Other income/ expenses


·         Net income or net loss


 


According to , the structure of the income statement is shown formally in paragraphs 81, 82 and 87.


Paragraph 81. As a minimum, the face of the income statement shall include line items that present the following amounts for the period:


(a)    revenue;


(b)    finance costs;


(c)    share of the profit or loss of associates and joint ventures accounted for using the equity method;


(d)    tax expense;


(e)    a single amount comprising of (i) the post‑tax profit or loss of discontinued operations and (ii) the post‑tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation; and


(f)     profit or loss.


Paragraph  82. The following items shall be disclosed on the face of the income statement as allocations of profit or loss for the period:


(a)    profit or loss attributable to minority interest; and


(b)    profit or loss attributable to equity holders of the parent.


Paragraph  87. Circumstances that would give rise to the separate disclosure of items of income and expense include:


(a)    write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs;


(b)    restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring;


(c)    disposals of items of property, plant and equipment;


(d)    disposals of investments;


(e)    discontinued operations;


(f)     litigation settlements; and


(g)    other reversals of provisions.


These basic parts comprised the presentation in the revised income statement (standard).  The computation explicitly showed that the firm resulted to a net income of ,800 at least 50% short of the benchmark for expansion of at least 0,000.  The computation can be checked using the worksheet, t-accounts and journal entries for accuracy.  Due to this, the firm is not in line with the benchmark and has overstated their income statement performance.  The source of the problem is the inclusion of personal expenses and investments including inappropriate placing of some accounts which must be in the balance sheet. 


 


I recommend that the annual income statement in particular and financial statement in general of the firm should have a clear stance regarding personal accounts and business accounts.  This can be done by avoiding deposit/ drawings of personal accounts into the business accounts.  Separation of them should be clearly established.  Otherwise, misjudgment based on income statement will deviate from real financial performance.  It is also suggested that a certified accountant should handle the operational recording and adjustments on the company’s books.  


 


3. Conclusion


In my conclusion, it is in my opinion that Brisbane Water Tank Solutions erred in their initial evaluation of the income statement of the business particularly on meeting the 0,000 benchmark.  This is based on the re-assessment applied on a seven-month performance from February 1 to September 1, 2007.  The revised income statement resulted to a new value of net income which is ,800 after application of specific approaches based on academic books and AASB income statement provisions.


 


As a final note, Brisbane Water Tank Solutions should tap alternative ways to finance its expansion plan because the revised net income is short of the benchmark.  There are different ways of financing expansion efforts such as different types of equity and debt financing.  These finances are not required to be 100% exclusive of one type rather can also be vertical (one type of equity/ debt to another type of equity/ debt) and horizontal (one type of equity to one type of debt) combination.


 


Should you have any further queries in relation to these matters, please do not hesitate to contact me.


   


Yours faithfully,


 


Hui Chun Yang


Senior Manager, Small Business Section


Johnson & Robertson


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


Appendix



 


Brisbane Water Tank Solutions


Revised Income Statement (Worksheet)


Seven-Month Period from February 1 – September 1, 2007


Account Title


Trial Balance


Adjustments


Income Statement


Balance Sheet


Dr


Cr


Dr


Cr


Dr


Cr


Dr


Cr


Cash


5,000


 


0,000


4,700


 


 


0,300


 


Accounts Receivable


 


 


 345,000


 


 


 


  345,000


 


Factory


  200,000


 


 


 


 


 


  200,000


 


Delivery Trucks and Cranes


  110,000


 


 


 


 


 


  110,000


 


Accumulated Depreciation


 


 


 


11,500


 


 


 


11,500


Merchandise Inventory


  210,000


 


0,000


 330,000


0,000


 330,000


  330,000


 


Account Payables


 


 


270,000


480,000


 


 


 


210,000


Bank Payables


 


 


 


150,000


 


 


 


150,000


Brisbane Water Tank Solutions, Capital


 


 685,000


330,000


  75,000


 


 


 


430,000


Brisbane Water Tank Solutions, Drawing


 


 


  40,000


 


 


 


    40,000


 


Sales


 


 


 


660,000


 


    660,000


 


 


Purchases


 


 


 480,000


 


 480,000


 


 


 


Cash Expenses


 


 


 244,700


 


 244,700


 


 


 


Depreciation Expense (Factory, truck and cranes)


 


 


   11,500


 


   11,500


   


 


 


 



 


Brisbane Water Tank Solutions


Revised Income Statement (T-Accounts)


Seven-Month Period from February 1 – September 1, 2007


 


Cash


Factory


Truck and Cranes


Merchandise Inventory


Capital


       165,000


       270,000


       200,000


 


 110,000.00


 


       210,000


      330,000


  330,000


      165,000


         45,000


         40,000


 


 


 


 


 


      120,000


 


      200,000


       150,000


       244,700


 


 


 


 


 


 


 


      110,000


         30,000


       554,700


 


 


 


 


 


 


 


      210,000


       315,000


 


 


 


 


 


 


 


 


       45,000


       705,000


 


 


 


 


 


 


 


 


       30,000


       150,300


 


 


 


 


 


 


 


 


      760,000


 


 


 


 


 


 


 


 


 


      430,000


 


 


 


 


 


 


 


 


 


 


Bank Payables


Sales


Accounts Receivable


Purchases


Accounts Payable


 


       150,000


 


   315,000


      345,000


 


       480,000


 


  270,000


      480,000


 


 


 


   345,000


 


 


 


 


 


      210,000


 


 


 


   660,000


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


Cash Expenses


Depreciation Expense


Accumulated Depreciation


Drawing


 


 


       244,700


 


 


     11,500


       11,500


 


         40,000


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 



 


Brisbane Water Tank Solutions


Revised Income Statement (Standard)


Seven-Month Period from February 1 – September 1, 2007


 


Revenue from Sales


Sales                                                              660,000


 


Cost of Goods Sold


Merchandise Inventory, Beginning          210,000


Add: Purchases                                           480,000


Less: Merchandise Inventory, Ending     330,000


COGS                                                                        360,000


 


Gross Profit on Sales


Sales                                      660,000


Less: COGS                          360,000


Gross Profit on Sales                                  300,000


 


Less: Operating Expenses


Cash Expenses                   244,700


Depreciation Expense          11,500


Operating Expenses                                   256,200


 


Net Income/ (Loss)                                      43,800


 


 


Notes to Income Statement – Journal Entries


 


Cash                                      165,000


            Brisbane Water Tank Solutions, Capital             165,000


 


Factory                                   200,000


Brisbane Water Tank Solutions, Capital             200,000


 


Trucks and Cranes              110,000


            Brisbane Water Tank Solutions, Capital             110,000


 


Merchandise Inventory       210,000


            Brisbane Water Tank Solutions, Capital             210,000


 


Cash                                      45,000


            Brisbane Water Tank Solutions, Capital             45,000


 


Cash                                      150,000


Bank Payables                                                         150,000


 


Cash                                      30,000


            Brisbane Water Tank Solutions, Capital             30,000


 


Cash                                      315,000


            Sales                                                                          315,000


 


Accounts Receivable          345,000


            Sales                                                                          345,000


 


Purchases                             480,000


            Accounts Payable                                                   480,000


 


Brisbane Water Tank Solutions, Capital 330,000


            Merchandise Inventory                                           330,000


 


Accounts Payable               270,000


            Cash                                                                          270,000


 


Brisbane Water Tank Solutions, Drawing 40,000


            Cash                                                                          40,000


 


Cash Expenses                   244,700


            Cash                                                                          244,700


 


Accumulated Depreciation            11,500


Depreciation Expense                                            11,500


 


                       


           



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