Reference no: EM13500716

Yummy Ltd is a producer of specialist health drinks.  The company has a year end of 31 March.  It normally approves and then publishes its financial statements in June of each year, and holds its annual general meeting (AGM) in July.  It is now May 2010 and the finance director is trying to finalise the financial statements for the financial year that recently ended on 31 March 2010.  He has asked you to provide explanations regarding the treatment of the following items in the financial statements:

i)                    On 15 March 2010 a contract was signed for the purchase of new equipment costing €690,000 to be delivered and paid for on 30 June 2010.  The equipment will be brought into use immediately on delivery. 

ii)                  During March 2010 Yummy Ltd began legal proceedings against a competitor company whose website was using a domain name registered by Yummy.  On 28 March 2010, Yummy's lawyers filed a claim for €180,000 in damages.  The solicitors have advised that the case is likely to take several months to settle and the outcome is uncertain at this stage.  Legal fees, for which no provision has as yet been made, are expected to be €25,000.

iii)                On 25 April 2010, the board of directors proposed a final dividend of €1 per ordinary share be paid for the year ended 31 March 2010, subject to approval at the shareholders' AGM.  The company had 2 million ordinary shares in issue at 31 March 2010.

iv)                At the AGM, the board of directors will announce that two of the company's production sites in France will be combined on 30 September 2010.  This will result in initial redundancy costs of €300,000, but annual savings of €450,000.

Requirement:

a)      Prepare the report for the finance director, setting out and explaining how the above matters should be treated in the financial statements of Yummy Ltd for the year ended 31 March 2010.

b)      Identify and discuss two other areas of accounting choice or judgement (not related to those in points i)-iv) above) that can have an impact on the financial statements. You should explain what impact these two areas would have on the balance sheet, income statement and / or the cash flow statement.

c)      'Historic cost accounting should be replaced by current cost accounting'.   Outline the main arguments for and against this statement.