ACC3101 Student Activities Module 5 Solutions

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

Discussion Questions

P 11.13 Prepare a DFD context, Level 0

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P 11.10 Prepare a Document flowchart

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Ethics Use Stakeholder analysis framework to answer the ethical dilemma below (Horngren et al 5th ed p128)

The net profit of Bynum & Hobbs, a department store, decreased sharply during the first part of 2008. Ron Bynum, owner of the store, anticipated the need for a bank loan in the last months of 2008. In June 2008, Bynum instructs the store’s accountant to record a $6 000 sale of furniture to the Bynum family, even though the goods won’t be shipped from the manufacturer until July 2008.

Recommended stakeholder analysis steps: (NOTE: this is a full answer but you may have other issues and or recommendations to make. Words in BOLD are key statements to make for gaining marks in an exam.)

1. Recognise the ethical situation/dilemma. The owner is proposing an unethical treatment of revenue. Bynum & Hobbs a department store that expects to seek a loan in the future due to downturn of business, so the change is likely to be material if a $6 000 sale will make all the difference to getting or not getting the loan. Revenue must be recognised when it is earned. This occurs when ‘the seller has transferred to the buyer the significant risk and rewards of ownership’, in other words when the goods are delivered (AASB 118, para. 14).

The dilemma is that early recognition of revenue will inflates revenue and net profit, while it reduces inventory. Consequently, the accounts do not show a true and fair view of the company’s position. Reduction of inventory will reduce the value of current assets and therefore have a detrimental effect on the current ratio and may cause the company not to be able to be granted its vital loan. In the worst case scenario this may cause a failure of the business.

2. Analyse principal elements asking questions such as: • What parties (stakeholders) may be harmed or benefited? Harmed – Creditors, and the lenders (other owners if there are any). Benefited – Owner, employees

• Whose rights or claims may be violated? Lenders, creditors, employees

• Which specific interests are in conflict? To deliberately overstate revenue and net profit as well as understate inventory on the balance sheet for the year is dishonest and unethical. It contravenes most of the fundamental principles of the APES 110 Code of Ethics for Professional Accountants: Integrity, Objectivity, Professional Competence and Due Care, and Professional Behaviour. The owner’s own position and potentially the jobs of the employees (including the accountant’s) are at stake if the business liquidates due to inability to obtain finance (the loan).

• What are my responsibilities and obligations as an accountant advisor? The accountant advisor is bound by the Code of Ethics for Professional Accountants and has a duty of care that extends beyond the firm, colleagues and owners/shareholders and includes other stakeholder groups who may not have a financial interest in the firm - including the community.

3. Identify alternatives and asses impact of each on stakeholders 1. Do nothing – breach of professional ethics to act in the best interests of all stakeholders. 2. Discuss the seriousness of the action with owner(s) – may not be able to get to other owners or may lose client for countering owner; alternatively other owners may see the seriousness of action and override Ron. 3. Discuss seriousness of action with Ron Bynum – may not be interested in your opinion or may be convinced that the action is unethical and should not be done as a result of your explanation. - Impact on stakeholders 1. Do nothing – external stakeholders will be compromised in their investment and financing decisions. 2. Discuss with other owners – if they take action to overturn the Ron, stakeholders will know the true financial position of the firm; if they do nothing, internal and external stakeholders may be compromised. 3. Discuss with Ron Bynum – if he overturns his decision, stakeholders will not be compromised; if Ron goes ahead with the decision, all stakeholders will be compromised as well as the owner(s) and yourself as accountant advisor. 4. Select the most ethical alternative, considering all the circumstances & the consequences. Alternative 3 should be the first action to be taken. If the owner does not agree with not going ahead with not including this revenue, you should attempt to raise it with other owners (if any) (Alternative 2) or if there are any, internal or external auditors. You should not decide to do nothing. To remain ethical, an accountant must be willing to lose his/her client. It is better to protect one’s reputation even if doing so causes short-term hardship Other possible suggestions: Refer to the professional bodies (CPA Australia or ICAA) for guidance. Seek own legal advice if considered necessary.

SUGGESTED ANSWERS TO STUDENT ACTIVITIES

Activity 5.1

P 11.2 (a & b only)

|Document |Source |# of copies |Purpose |
|Vendor Invoice |External |2 |1 - part of voucher pkg. |
| | | |2 - remittance advice |
|Purchase order |Internal |5 |1 - vendor |
| | | |2 - accounts payable |
| | | |3 - receiving |
| | | |4 - requesting department |
| | | |5 - purchasing |
|Purchase requisition |Internal |2 |1 - purchasing |
| | | |2 - requesting department |
|Packing slip |External |1 |1 - accompanies delivery |
|Receiving report |Internal |3 |1 - to accounts payable via inventory stores |
| | | |2 - purchasing |
| | | |3 - files in receiving |
|Check |Internal |2 |1 - original to vendor |
| | | |2 - copy in voucher pkg. |
|Disbursement voucher |Internal |1 |authorizes payment of invoice(s) |

P 11.10 Prepare a DFD Context & Level 0

P 11.15 Excel
a.

This problem is self-correcting. You should modify your bank reconciliation spreadsheets until the balance per books matches the $106,928.68 listed in the problem.

|XYZ, Inc. | | | | |
|Bank Reconciliation Worksheet | | |
|Date: |4/26/2005 | | | |
|Ending Balance, per bank statement: |$97,525.33 |
|Deposits in transit: | | | |
| |1 | |15,000.00 | |
| |2 | |25,000.00 | |
| |3 | | | |
| |4 | | | |
| |5 | | | |
| |6 | | | |
| |7 | | | |
| |Total | | |40,000.00 |
|Cheques Outstanding: | | | |
| |1 | |(2,256.75) | |
| |2 | |(13,567.95) | |
| |3 | |(14,775.00) | |
| |4 | | | |
| |5 | | | |
| |6 | | | |
| |7 | | | |
| |8 | | | |
| |9 | | | |
| |10 | | | |
| |11 | | | |
| |12 | | | |
| |13 | | | |
| |14 | | | |
| |15 | | | |
| |16 | | | |
| |17 | | | |
| |18 | | | |
| |19 | | | |
| |20 | | | |
| |Total | | |(30,599.70) |
|Bank service charge: | | |25.00 |
|Interest earned: | | |(21.95) |
|Adjusted bank balance: | |$106,928.68 |
| | | | | |
|Balance per books: | | |$106,928.68 |
| | | | | |
| |Do the balances agree? |Yes |

b. (b was not required by is here for interest)

Should include input validation controls into their spreadsheet. Listed below is an example of an input validation control for deposits in transit, but it can be easily adapted for all input fields in the reconciliation. In addition, the following simple IF Statement can be implemented to test whether the adjusted bank balance agrees with the balance per books: =IF(E93E91,"No, re-check data entry", "Yes").

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c.

|Cheque paid by bank this month:|Cheque written this month: |
|Cheque number |Amount |Cheque number|Amount |Cheque Cleared? |Cheque cashed for |
| | | | | |different amount? |
|3487 |13,567.95 |3502 |6,500.00 |=VLOOKUP(C3,$A$3:$B$8,2,FALSE) |=D3-E3 |
|3502 |6,500.00 |3503 |3,876.95 |3876.95 |0.00 |
|3503 |3,876.95 |3504 |7,400.00 |#N/A |#N/A |
|3505 |18,255.95 |3505 |18,255.59 |18255.95 |-0.36 |
|3508 |17,500.00 |3506 |2,593.50 |#N/A |#N/A |
|3510 |12,000.00 |3507 |11,000.00 |#N/A |#N/A |
| | |3508 |17,500.00 |17500 |0.00 |
| | |3509 |14,500.00 |#N/A |#N/A |
| | |3510 |12,000.00 |12000 |0.00 |

#N/A - Cheque has not cleared.

Activity 5.2

■ Use Stakeholder analysis framework discussed in Module 01 to answer the ethical dilemma below (Horngren et al 5th ed p266)

During 2007, Darden Furniture changed to the average cost method of accounting for inventory. Suppose that during 2008, Darden changed back to the FIFO method and the following year switched back to the average cost again.

Recommended stakeholder analysis steps: (NOTE: this is a full answer but you may have other issues and or recommendations to make. Words in BOLD are key statements to make for gaining marks in an exam.)

1. Recognise the ethical situation/dilemma. The owner is proposing to change the method of valuing inventory. Darden Furniture appears to be a small company so a change of this nature may not be material. There are no requirements to maintain the same inventory valuation method from year to year. The only requirement is that there is full disclosure to all stakeholders that this has been done, the method used and a restatement of accounts for the current year using the previous year’s method to show a comparison. (AASB 102).

[You should explain what effect the valuation method changes have on profit and inventory asset – refer back to your pre-requisite accounting courses]

The dilemma arises if the declaration of change of method is not done. The remainder of the discussion suppose this position by Darden. The effect on net profit, inventory and the accounts would not show a true and fair view of the company’s position without the declaration (notes to the accounts). This could be considers as a form of Earnings Management.

2. Analyse principal elements asking questions such as: • What parties (stakeholders) may be harmed or benefited? Harmed – Creditors, customers, bank (other owners if there are any). Benefited – Owner, employees

• Whose rights or claims may be violated? Bank, creditors, customers, employees

• Which specific interests are in conflict? To deliberately revalue inventory on the balance sheet and overstate net profit for the year is dishonest and unethical. It contravenes most of the fundamental principles of the APES 110 Code of Ethics for Professional Accountants: Integrity, Objectivity, Professional Competence and Due Care, and Professional Behaviour. The owner’s own position and potentially the jobs of the employees (including the accountant’s) are at stake if the business liquidates due to manipulation of accounts from year to year.

• What are my responsibilities and obligations as an accountant advisor? The accountant advisor is bound by the Code of Ethics for Professional Accountants and has a duty of care that extends beyond the firm, colleagues and owners/shareholders and includes other stakeholder groups who may not have a financial interest in the firm - including the community.

3. Identify alternatives and asses impact of each on stakeholders 1. Do nothing – breach of professional ethics to act in the best interests of all stakeholders. 2. Discuss the seriousness of the action with other owners – may not be able to get to other owners or may lose client for countering owner; alternatively other owners may see the seriousness of action and override Darden. 3. Discuss seriousness of action with Darden – may not be interested in your opinion or may be convinced that the action is unethical and should not be done as a result of your explanation. - Impact on stakeholders 1. Do nothing – external stakeholders will be compromised in their investment and financing decisions. 2. Discuss with other owners – if they take action to overturn the Darden, stakeholders will know the true financial position of the firm; if they do nothing, internal and external stakeholders may be compromised. 3. Discuss with Darden – if he overturns his decision, stakeholders will not be compromised; if Josh goes ahead with the decision, all stakeholders will be compromised as well as the owner(s) and yourself as accountant advisor. 4. Select the most ethical alternative, considering all the circumstances & the consequences. Alternative 3 should be the first action to be taken. If the owner does not agree with not going ahead with not including this revenue, you should attempt to raise it with other owners (if any) (Alternative 2) or if there are any, internal or external auditors. You should not decide to do nothing. To remain ethical, an accountant must be willing to lose his/her client. It is better to protect one’s reputation even if doing so causes short-term hardship Other possible suggestions: Refer to the professional bodies (CPA Australia or ICAA) for guidance. Seek own legal advice if considered necessary.