Question 1.

The value of the write off for the allowance for Doubtful Debts is inadequate. Managements are unwilling to adjust it although the amount leads to a material misstatement of Accounts Receivable. The amount of the misstatement is limited to the Receivables and is able to be calculated.

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Doubtful debts are the account receivables that a business is not sure will be paid by creditors. Therefore, an allowance is made for them in the books of account (Sigidov, Korovina, & Trubilin, 2016). This allowance is known as the allowance for doubtful debts and is entered as a current contra-entry with accounts receivables. If a company sells goods worth $10000 on credit, it could allow Doubtful debts of $2000. When the business is certain that a buyer that purchased goods worth say, $950 will not pay, the debt is written off. The account for account receivables is credited by $950 and the account for allowance for doubtful debts is debited by $950, affecting only the balance sheet.

An inadequate value of the write off for the allowance for the doubtful debts leads to a misstatement of the account receivables such that the net realizable value is higher than it should be. The reason the management is unwilling to adjust the amount is that the understated value of the write off boosts the value of its assets in the books. Also, it does not affect the Income statement as the value is already covered under doubtful debts.


A retailer provides a valuation for inventory at sales price less an allowance for sales margin.

An inventory is a list of goods that are in stock at the end of a trading period. These goods include finished goods, goods that are a work in progress, raw materials and producer goods. Inventories are entered into the balance sheet as current assets.

Inventory valuation involves calculating the value of the inventory at the end of a reporting period. It involves determining the cost of selling goods. This cost involves direct expenses that are incurred during the conversion of raw materials to finishing goods and the sale of the goods. These expenses include direct labour, raw materials, transportation and factory overheads.

The valuation of inventory does not involve administration costs or selling costs (Shogren, Wehmeyer, & Little, 2017). The retailer, therefore, used a wrong method for valuation of inventory when she subtracted the allowance for sales margin from the sales price. Sales margin is got by subtracting the cost of sales from the net revenue generated from sales.


The Block company has just been advised that its main customer who purchases 45% of its stock has just gone into liquidation. Due to the specific nature of its products Block company is unlikely to find another customer of this size. Block has been starting to have difficulties in making sales to continue operating.

Liquidation means converting one’s assets into cash money and using the money to pay creditors. This happens in cases of bankruptcy or dissolution of companies or partnerships (Cox, 2015). When the customer went into liquidation it means that they are no longer able to purchase goods or services from The Block Company. And having been responsible for 45% of the company’s purchases, the customer’s withdrawal is a big blow to the Block company.

The specific nature of the Block company means that the chances of replacing the customer are very thin. Therefore, the company is going to be making losses equivalent to the 45% that the customer left with because that amount of goods are not moving.

The Block company has the option of widening the scope of its products because varied products will attract more clients. This would help in putting the company on its feet again. Aggressiveness and creativity would be the way forward.

However, in the current situation, The Block Company will not realize enough revenue to cover its operational costs and this will eventually lead to the collapse of the company since it will no longer be able to run.


The Croucher Company has been valuing its buildings using the fair value method. Its buildings are currently shown in the balance sheet at their current market value of 18.5 million dollars. The buildings originally cost 12 million dollars.

The fair value is a method used to measure the estimated market values of assets and liabilities. The fair value takes into account factors such as cost of acquisition, replacement costs, risk, cost of return on capital and the perceived utility of the asset by the individuals involved.

In an efficient market, the fair value and the market value are close or even equal. This is due to market transparency that allows investors to respond fast and effectively to information about changes in the market. In a behavioural finance setting, however, there is a disparity between the fair value and the market value. This results from cognitive bias among both sellers and buyers of the assets. It takes into account the potential benefits and disadvantages that the buyer and the seller would enjoy or suffer from the sale of the asset. Sometimes the price that both the buyer and the seller deem ‘fair’ to both parties could be higher than the general market price. This generates the term special value which forms part of fair value assessment.

The buildings at Croucher Company originally cost $12 Million. The value of the buildings has increased over time due to various reasons such as the changes in the transparent market price. The market price now places the value of the buildings at $18.5 Million.

Other reasons that may contribute to this include upgrades in the buildings such as renovations or extensions that will effectively increase the value of the buildings. The perceived utility of the building is also put into consideration. Another method that could be used to establish the current value of the Croucher company buildings is to look into the prices of other buildings that are similar and put into consideration their values.


The Kaycee Company values its inventory at LIFO and is unwilling to change to FIFO as required by the Australian accounting standards. The amount of the misstatement is known and is limited to its effect on the inventory.

LIFO stands for ‘Last In First Out’ which means that the oldest inventory is sold first. This method is not recommended by the Australian Accounting Standards because it is believed to be inaccurate such that the closing inventory does not accurately reflect the value of goods currently in stock. Again, most companies sell new products before the old products, and therefore, FIFO, which stands for ‘First In First Out’ would be the most preferred inventory method.

The Australian Accounting Standards prohibits the use of LIFO for inventory because for one, during inflation, LIFO method produces a higher Cost of Goods which translates to lower profits and a lower entry in figures in the statement of financial position, compared to FIFO. Note that inflation is almost a constant happening in the economy. Therefore, when LIFO is used for income tax, it produces a lower tax due to the lower profits (Li, Yu, & Wu, 2017). LIFO is used in deferring payment of income tax. Again, when a company decides to set the sale price in accordance with the purchase price, it is most appropriate to start with the most recent purchases as they best reflect the changes in price. However, LIFO begins with the oldest purchases and this downgrades the asset value.

The FIFO method provides inventory for current purchases which produce an asset value that best reflects the current changes in prices which leads to better accounting accuracy. FIFO is easier as a record-keeping method since it has fewer inventory layers to keep a track on. Furthermore, the FIFO method realizes a higher profit which translates to higher income tax. FIFO is the best method to get inventory moving especially if the goods are perishable or subject to changes due to weather. The FIFO method is therefore recommended by the Australian Accounting Standards.

Kaycee Company is, therefore, making a wrong move by using LIFO as the inventory valuation method instead of FIFO. It can, however, be argued that the company is hesitant to change to FIFO because this way it can delay paying income taxes. It will also pay low taxes due to the lower profit realized from using the LIFO method.

The misstatement in the inventory will affect values in the company’s balance sheet and income statement.


The Genome company has prepared its financial statements but has left out details of its related party disclosures due to privacy issues. This information is required to be included under the Australian accounting standards and while the effects are material, they are able to be calculated.

Related parties are persons or entities that are affiliated with the reporting entity. They include persons that have joint control over the reporting entity, persons that are members of the management committee or entities that are a parent entity, a subsidiary entity or a joint venture with the reporting entity which in this case is Genome company.

Genome company, in this case, is required to disclose the name of the Parent entity or the Management committee. This is regardless of whether any related party transactions have taken place or not. Related party transactions refer to the transfer of goods, services or obligations between the related parties and the reporting entity regardless of whether there were payments made or not (LU, 2017). Items such as purchase of goods, allowance for doubtful doubts, amount of transactions and transfer of research that have anything to do with related parties should also be disclosed in the books of account. Any key management compensations that may include long term benefits and post-employment benefits should also be put down.

Related party transactions, as well as the relationship of the related parties with the reporting entity, should be disclosed. This goes a long way in determining the effects these relationships have on the financial statements of Genome company. Related party transactions could bring about material misstatements that will result in misinterpretation of the books of account which by extension leads to making the wrong decisions for the firm. Related parties are also known to be responsible for many cases of fraud in reporting entities as was the case with Enron.

Failure to disclose related parties by Genome company, therefore, poses many risks to the company which also include risks of misstated material as is the case in Genome.




Question 2

Report on the Weaknesses in the sales procedures of The Big Office Company.


Any company that deals in daily cash sales should have proper book keeping procedures that ensure that all the cash is traceable and well accounted for. Many companies overlook the importance of handling cash effectively which leads to its misplacement, lose or even theft by staff (Guesalaga, 2016). Businesses that handle daily cash payments and invoices should utilise software like Quickbooks. Quickbooks helps businesses to manage daily transactions.

When a business receives cash payments and invoices on a daily basis, the payment is recorded in the Undeposited Funds Account in a Quickbook. This is then displayed in the Record Deposits tab (Hingorani, Beasley, & Bradford, 2015). When recording in books, the entry in the Undeposited Funds Account is entered in respective journal entries. This ensures that all the cash is accounted for and can be easily tracked down. Also, it allows a business owner to deposit several days’ worth of cash to the bank with an amount that echoes that of the books. The depositing of cash payments should be done physically to ensure that they match with sales records.

This system ensures that petty theft by members of staff is greatly reduced or totally eliminated. It enables the company to grow and decisions to be made based on correct reports. It also encourages discipline among employees. The business owner is also forced to become a role model and give frequent reports concerning the financial position of the company.

There should be a clear delegation of roles in a business to bring about organization and to ensure that all the employees are carrying out their specific roles effectively. A sense of hierarchy is also very essential in a sales organization. In case there is a breach anywhere in the cash handling system it will be easier to trace the origin of the problem this way since each section of the system has someone responsible for it. This will also make it possible to detect theft or loss of money. However, when every employee is responsible for any task available, conflict, confusion and losses will definitely occur.

Analysis of The Organisation.

The Big Office Company deals in the sales of stationery and office equipment through its stores. It also sells at the shops, via the internet and delivers orders that are made through phone calls Sidney Metropolitan within a day. The company receives cash on a daily basis since all the sales are made for cash.

In the store, customers pay the staff member that is available at the counter, who in turn creates an invoice and hands over the customer a receipt. For orders made through the phone, a staff member creates unique numbers, creates two invoices and sends the driver to deliver along with both invoices. The driver brings back cash and one of the invoices. When the day ends, each staff member hands over cash to the store manager who locks it in the safe and deposits the cash to a bank the next day, alone.


The Big Office Company lacks a book keeping system where all the cash payments should be recorded and accounted for. The lack of a system means that cash can easily be misappropriated without the owner noticing.

The company lacks organisation.  Any staff member is responsible for any department of sales. Any staff member can handle in-store sales, any staff member can handle orders made by phone, any staff member can handle internet sales. This makes it difficult to trace the origin of a problem in case one arises since the manager would not know who had facilitated the transaction at hand.

The manager does not enter the day’s sales into journal entries. He receives the day’s cash payments from the various staff members and locks the money in a safe overnight. It is difficult to keep track of the Company’s financial position without a proper record of the transactions.

The manager himself is viable to misappropriation of funds since he goes to the bank alone for depositing purposes and without sales records that would be used to ensure that the cash available matches what is in the records.


The Big office should adopt a proper record keeping system such as Quickbooks which helps businesses to manage daily transactions and ensure that all the cash is accounted for.

Each employee should have a well-defined role in the business. There should be employees in charge of the instore sales, employees in the telephone orders department and employees responsible for the internet transactions. Each department should then provide a report and a cash record that matches the cash payments.

The store manager should then enter these records in their respective journal entries. Keeping a journal will ensure that all the money is traceable and secure. Therefore, the manager will not even have to go to the bank each day. He could keep a few days’ worth of cash payments and deposit all of it as a lump sum of money. Since cash deposits have to be matched with the records, the store manager will not afford to misappropriate the money. And neither will the staff members. This will ensure continued growth and better-realised profits for the company.


For a sales organisation to prosper, an effective book-keeping system is necessary. In the same breathe the system should be organized with defined roles and a clear-cut hierarchy. The Big Office Company should implement the recommendations above so as to get rid of its loopholes and prosper as a sales organisation.



Cox, J. (2015). Business Law. Oxford University Press.

Guesalaga, R. (2016). The use of social media in sales: Individual and organizational antecedents, and the role of customer engagement in social media. Industrial Marketing Management, 54, 71-79.

Hingorani, K., Beasley, B., & Bradford, J. (2015). Enhancing student learning of ERP configuration through a Quickbooks tutorial. Issues in Information Systems, 16(1), 132-141.

Li, Q., Yu, P., & Wu, X. (2017). Shelf life extending packaging, inventory control and grocery retailing. . Production and Operations Management, 26(7), 1369-1382.

LU, H. (2017). Related Party Transactions (Doctoral dissertation).

Shogren, K. A., Wehmeyer, M. L., & Little, T. D. (2017). Preliminary validity and reliability of scores on the Self-Determination Inventory: Student Report version. . Career Development and Transition for Exceptional Individuals, 40(2), , 92-103.

Sigidov, Y. I., Korovina, M. A., & Trubilin, A. I. (2016). Creation of provision for doubtful debts. International Journal of Economics and Financial Issues, 6(4), , 1542-1549.


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