Reference no: EM13342606

SECTION :

(Scenario based)

The general manager of Qantas had two concerns: the company's worsening cash position ($3000 cash and No bank loan at the end of 2011, No cash and a $7,000 bank loan at the end of 2012) and an inadequate level of net profit. (According to General Manager).

1.      The general manager was confused because the company had a $9,000 profit, yet seemed, as noted above, $10,000 worse off in its cash position. Explain briefly how, in general, this difference between profit and cash change can happen.                

2.      The general manager proposed changes in the company's accounting policies in a few areas in an attempt to show a higher profit. He met the company's auditors to discuss these ideas. What do you think the auditors should have said? 

3.      For each of the proposed changes below, considered separately and independently, calculate the effect on 2012 net profit and total assets as at 31^st December 2012. Assume a company tax rate (Australia) as income tax rate.

a)      The general manager suggested recognizing revenue at an earlier point. If this were done, net account receivables would be increased by $12,000 at 31^st December 2011 and by $23,000 at 31^st December 2012. 

b)     The general manager suggested changing the inventory cost policy to FIFO (which would still produce costs less than net receivable value). Doing this would increase 31^st December 2011 inventories by $4,000 and 31^st December 2012 inventories by $1,000.  

c)      The general manager suggested that the company not account for deferred income taxes, but rather treat income taxes payable in each year as the income tax expenses. The deferred income tax liability was $2,800 at 31^st December 2011 and, without these changes, $2,600 at 31^st December 2012. 

d)     The general manager suggested capitalizing more of the company's product development costs and amortizing additional capitalized amounts over five years, using the straight line method. If this were done, $4,000 of 2011 expenses would be capitalized at 31^st December 2011 and $6,000 of 2012 expenses would be capitalized at 31^st December 2012.