Description
Purpose of Assignment
This week's activity illustrates the role a company's accounting method plays in financial statement reporting. In this assignment, students evaluate the events occuring in a business setting and determine how to properly analyze those events to identify the impact on both cash and accrual accounting methods.
Assignment Steps
Resources: Generally Accepted Accounting Principles (GAAP), U.S. Securities and Exchange Commission (SEC)
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Scenario: BizCon, a consulting firm, has just completed its first year of operations. The company's sales growth was explosive. To encourage clients to hire its services, BizCon offered 180-day financing - meaning its largest customers do not pay for nearly 6 months. Because BizCon is a new company, its equipment suppliers insist on being paid cash on delivery. Also, it had to pay up front for 2 years of insurance. At the end of the year, BizCon owed employees for one full month of salaries, but due to a cash shortfall, it promised to pay them the first week of next year.
As the senior accountant, the Chief Financial Officer has asked you to prepare a memo to be sent to management notifying them of the delayed wage payments.
Prepare the memo in a maximum 700 words including the following information to better outline the situation:
- Explain how cash and accrual accounting differs for each of the events listed in the above scenario and describe the proper accrual accounting.
- Assess how at the end of the year, BizCon reported a favorable net income, yet the company's management is concerned because the company is very short of cash. Explain to management how BizCon could have positive net income and yet run out of cash.
Format your assignment consistent with APA guidelines.
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Explanation & Answer
Attached.
MEMORANDUM
TO:
Management
FROM:
Senior Accountant
DATE:
October 21st, 2017
SUBJECT:
Delayed Wage Payments
CC:
Chief Financial Officer
This memorandum wishes to draw attention to concerned stakeholders on the worrying
consistent delays witnessed in wage payments in the company. It is observed delayed payments
leads to undesirable or unfavorable inefficiencies in the firm’s operations. If the problem
persists, it is anticipated that it may threaten the going concern of the business and lead to
possible closure. Part of the problem may require us to relook into the accounting standards and
concepts that the company uses when preparing its accounts. In practice, accounts may be made
by cash accounting or sometimes accrual accounting (Needles, Powers & Crosson, S.2013).
However, the rules require that financial statements and accounts be prepared on accrual
accounting basis.
There exists a big difference between statements prepared on cash accounting and
statements prepared on accrual accounting basis. T...