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HC1010 Accounting for Business : Accounting for Business Transactions

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Purpose:

This assignment aims to reinforce and extend students’ knowledge and understanding of key topics in this course including: Overview of Accounting, Organisational Structure & the Reporting Environment, Statement of Financial Position, Statement of Financial Performance, Cash Flow Statement, Financial Statement Analysis, Accounting for Business Transactions, Cost Concepts & Behaviour, Preparation of Budgets, and Cost-Volume-Profit-Analysis through independent research and application of knowledge and skills.

Assignment Details & Requirements:

John has approached you to advise him regarding a business that he intends purchasing, John is also interested to advise him on some accounting related matters. An Extract from the financial statements of the business shows total assets and liabilities as listed below:

A review of the business operations shows that building was bought 4 years ago and is reported at carrying amount of $600,000, the current market value of the building is $900,000. Inspection of inventory reveals that 12% of the inventory is obsolete, for which there is limited demand. Further 15% of the accounts receivable is overdue by more than 120 days. The accounts receivable and inventory are carried at their gross amount and cost value respectively on the financial statements. A review of Income statement reveals that business has not provided for any bad debt expense and upward prevision of inventory.

As you are an accounting student, you have been asked to advise on the following:

a. John has a very limited understanding of the term Assets. With reference to the conceptual framework for accounting, Explain to John the nature of goodwill and how goodwill is accounted for in the books of account as an asset.

b. Based on the information provided, John believes the business is worth $500 000. With reference to the different measurement’s methods in accounting, advise John on the appropriateness of his assessment.

c. Explain to John how the accounts receivable and inventory should be valued on the financial statements. If the business was to apply the correct measurement basis, determine the effect on: (1) profit and (2) assets.

d. Explain to John why the profit for any given period can be different depending on whether a cash- or accrual-based accounting system is used. Explain to John the preference to use accrual based accounting

e. Explain to John who the users of the financial statements of the business could be and explain their interests.

f. Explain to John the components of the cash flow statement and the difference between cash flows from operating activities, investing activities and financing activities and their importance to the users of the financial statements.

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