Information Systems And Accounting Processes: Different Transactions Essay

Question:

Describe about the Information Systems and Accounting Processes for Different Transactions.

Answer:

Introduction

This report is based on accounting and financial management of Adelaide ltd. This report is divided into two parts and each part has different concern. In this report discussion related to revenue recognition and cash flow statement has been conducted. In this report, different transactions have been stated and whether they will be recognized or not were discussed. On the other hand, cash flow statement has been prepared in the part B of this report. Cash flow statement shows inflow and outflow of cash in the business organization. Operating activity, financing activities and investing activities are important aspects of cash flow statement.

Revenue Recognition:

Revenue recognition is the process of recording revenue earned by the business organization during the reporting period. There is dedicated accounting standard for that deals with revenue recognition. Australian Accounting Standard Board has made standard for recognizing revenue in the financial statements of the business organization. Australian Accounting Standard Board 118 is the revenue recognition accounting standard under which related rules and regulation has been provided. It deals with all term and conditions that shall be fulfilled for recognizing revenue in the financial statement or in income statement (Wagenhofer, 2014). Therefore business entity wants to record revenue (sales revenue, revenue from sale of assets, lease revenue, etc) has to fulfill certain conditions. Following are some case in which revenue recognition is tested:

This is the case of revenue recognition of sale of goods during the reporting period. Business entity cannot recognize revenue from sales as and when sale takes place. But there are certain conditions that shall be fulfilled in order to recognize sales revenue. Following are conditions to be satisfied:

  • All the risk and rewards related to ownership of good has been transferred to its buyer
  • Amount of sales made can be measured reliably
  • Business organization will be receiving all the economic benefits related to transaction of sale on probable basis
  • Cost related to transaction of sales can be reliably measured
  • Business entity does not possess with any control over product and does not has managerial involvement related to product that is sold (Wagenhofer, 2014).

In present case of Adelaide Ltd, sale of $ 600,000 has been affected during the year. Out of $ 600,000, 75 % i.e. $ 450,000 has been received and remaining sales will on credit. On the other hand, past experience suggests that it is probable that 96 % of the sales made will be collected. Therefore by applying able conditions on Adelaide Ltd case, it can be said that it is estimated that that only 96 % sales will be received and all other conditions remains fulfilled. Adelaide Ltd can recognize $ 576,000 ($ 600,000 * 96 %) of sales revenue in its books of accounts.

In this case Adelaide Ltd had received $ 200,000 from a customer for the manufacturing of special purpose machinery. In order to recognize revenue all five conditions mentioned above shall be fulfilled and if any one or more conditions not fulfilled then business entity cannot book revenue. In this case of Adelaide Ltd, following two conditions are not fulfilled in this transaction and they are as follows:

In this transaction all the risk and rewards related to product (in this case is special purpose machinery) is not transferred to buyer or customer in this case. At this point of time product is not in existence. Another reason of not recognizing this as revenue of the Adelaide Ltd is that at this point of time Adelaide Ltd holds control over product that they produce for customer and has been involved with product that is to be produced. Other conditions may get fulfilled but these two conditions are not attracted (Savage et al., 2013). Therefore advance received customer cannot be recognized as revenue for the reporting period.

In this case Adelaide Ltd has rented spare space of warehouse and has received advance payment of $ 24,000 on 1st April, 2016 for next six months period. In this case it can be analyzed that this transaction cannot be treated as sale of goods and above mentioned five conditions cannot be used to comment on revenue recognition. As renting of spare space in warehouse is not ordinary activity of Adelaide Ltd. This case can be treated as revenue arises from use of assets of the company by others during the year. Following conditions should be fulfilled to recognized revenue from rendering warehouse:

  • Amount of sales made can be measured reliably
  • Business organization will be receiving all the economic benefits related to transaction of sale on probable basis

Therefore applying above two conditions on Adelaide Ltd, amount of renting service is certain and Adelaide Ltd will be receiving such amount from customer. Therefore rent received can be recognized in the financial statement in income statement as income from other sources with $ 12,000 (for 3 months) and in balance sheet as advance rent with $ 12,000 amount (for 3 months).

In this case, Adelaide Ltd had received shares from and of Melbourne ltd (client of Adelaide ltd) as a gift. Now question arises whether this transaction will be recorded in books of accounts or not. For this purpose, if gift received is tangible and resalable in the market then it should be recorded in the books of accounts. In case of Adelaide ltd they are in receipt of shares which is tangible and can be sold in the market. Therefore theses shares received shall be recorded in the books of accounts at fair market value at the point when it is received.

Under this case of Adelaide Ltd, they had received equipment in exchange of creditor account. Under this transaction Adelaide Ltd has gained equipment i.e. asset and loose creditor account balance of $ 3,000. In this case, exchange asst (i.e. equipment) will be recorded on fair value of asset and if any loss or profit will be transferred to profit and loss account or income statement prepared during the year (Savage et al., 2013). Therefore following is the transaction and different heads of financial statements of Adelaide Ltd will be affected with this transaction:

In balance sheet equipment (asset) received in the transaction will be recorded with fair value of asset i.e. $ 3,200. Debtor account or customer account will be credited with its balance sheet amount i.e. $ 3,000. At last profit made on exchange transaction shall be recorded in profit and loss account as profit made on exchange on transaction. Following is the journal entry

Particulars

Dr. / Cr.

Amount

Equipment (Asset) account

Dr.

$ 3,200

Debtor or Customer account

Cr.

$ 3,000

Profit on exchange of accounts

Cr.

$ 200


Statement of cash flow

A: Prepare a cash flow statement using the direct method

Cash flow statement

As at 30 June

PARTICULARS

AMOUNT

Cash flow from operating activities

Cash received from customers or collection

$272,000

Calculation of cash payment to supplier

($219,000)

Selling expenses

($20,000)

Administrative expenses

($9,000)

Interest expenses

($7,000)

Income tax payments

($1,000)

Net cash flow from operating activities

$16,000

Cash flow from Investing Activities

Sale of equipment

Purchase of new equipments

($7,000)

Net cash flow from investing activities

($7,000)

Cash flow from Financing Activities

Issue of bonds

$10,000

Dividend paid

($26,000)

Net cash flow from Financing activities

($16,000)

Net Increase or decrease in cash and cash equivalents

($7,000)

Cash and cash equivalents at beginning of period

$33,000

Cash and cash equivalents at end of period

$26,000

(Alin-Eliodor and Traian-Ovidiu 2013)

WORKING NOTE

Calculation of cash receipt from customers

Net sales + beginning accounts receivable – Closing accounts receivable

$ 286,000 + $ 14,000 – $ 28,000 = $ 272,000

Calculation of cash payment to supplier

Purchase + closing stock of inventories – beginning stock of inventories + beginning accounts payables – Closing accounts payables

COGS = Purchase + beginning stock of inventories – closing stock of inventories

$ 194,000 = Purchase + $ 25,000 – $ 38,000

Purchase = $ 194,000 - $ 25,000 + $ 38,000 = $ 207,000

Cash payment to supplier = $ 207,000 + $ 38,000 - $ 25,000 + 43,000 - $ 31,000

Cash payment to supplier = $ 232,000

Calculation of selling expenses

Selling expenses – depreciation expenses

Selling expenses = $ 28,000 - $ 8,000 = $ 20,000

Interest expenses for the year = $ 7,000

Administrative expenses for the year = $ 9,000

Income tax payments = Beginning income tax payable – ending income tax payable + income tax expenses

Income tax payments = $ 20,000 - $ 26,000 + 7,000

Income tax payments = $ 1,000

B: Prepare reconciliation between profit and cash provided by operating activities.

Particulars

Amount

Net profit

$ 41,000

Depreciation

$ 8,000

Change in working capital

($ 33,000)

$ 16,000

(Bhandari and Iyer, 2013)

Working note:

Calculation of change in working capital

Particulars

Amount

Increase in accounts receivable

($ 14,000)

Increase in inventory

($ 13,000)

Decrease in accounts payable

($ 12,000)

Increase in income tax payable

$ 6,000

Change in working capital

($ 33,000)

Conclusion

It can be concluded that management of organisation shall be aware about revenue recognition so that financial statements of business organisation shall reflect true and fair information. There are different conditions that shall be fulfilled by business transaction for the recognition as revenue in books of accounts. From this report it can be analysed that cash flow statement presents flow of cash in the business organisation. Every business undertakes three major activities and cash flow statement analyses flow of cash from these activities. These activities are operating, investing and financing.

References

Bhandari, S.B. & Iyer, R. 2013, "Predicting business failure using cash flow statement based measures", Managerial Finance, vol. 39, no. 7, pp. 667-676.

Alin-Eliodor, T. & Traian-Ovidiu, C. 2013, "Presentation of Consolidated Statement of Cash Flows under IAS 7, Statement of Cash Flows", Journal of Knowledge Management, vol. 3, no. 1, pp. 118-133.

Wagenhofer, A. 2014, "The role of revenue recognition in performance reporting", Accounting and Business Research, vol. 44, no. 4, pp. 349-379.

Savage, A., Cerf, D. & Barra, R.A. 2013, "Accounting for the Public Interest: A Revenue Recognition Dilemma", Issues in Accounting Education, vol. 28, no. 3, pp. 691.

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