Accounting: International Financial Reporting and Ethics Issues

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ACCT 311:1 – FALL 2015 ASSIGNMENT 3 - INTERNATIONAL FINANCIAL REPORTING & ETHICS ISSUES [72 POINTS] The assignment is based on the material covered in chapters 2, 4,5, 7, 9, 11 and 12 of the course text – th Intermediate Accounting (15 Ed.), Kieso, Weygandt and Warfield. You may also find useful resources to address the requirements of Part A of this assignment on the IASB’s website, especially in its conceptual framework document. Part B of this assignment focuses on understanding and applying the AICPA Code of Professional Conduct (Especially Part 2). Information about accessing the Code is available at the course Canvas site https://svsu.instructure.com/courses/4151 . GENERAL GUIDELINES 1. Your responses MUST be presented in memorandum format. (Negative grading of up to 4 points is applicable if the memo format is not properly used.) 2. The memo should be written in clear language from the perspective of a staff accountant writing to her/his manager. 3. The memo should not exceed 10, double line spaced, 12-point font, type written pages (8 1/2” x 11”) in length. 4. Do NOT use note book pages or other sizes of paper. 5. You may use bullets, tables or other appropriate mechanisms to present your responses. 6. You are required to work independently on this assignment. While you may discuss the assignment with your peers, the work submitted for grading must be that of the student whose name and ID number appears on the assignment ONLY. ASSIGNMENT REQUIREMENTS PART A – INTERNATIONAL FINANCIAL ACCOUNTING & REPORTING ISSUES (30 Points) 1 1. Review the details of Pinafore Holding B.V. Group Consolidated Income Statement presented on page 83 in the attached annual report. Then answer questions 1(a) – (c) below. a) Identify ONE difference between the format / structure of the Pinafore Holding B.V. Group, iGAAP-based income statement and the US-GAAP-based income statement of a U.S. company as presented in Chapter 4 of the text book, for example those presented on pages 165 and 172. (1 Points) b) Identify ONE irregular item reported by the Pinafore Holding B.V. Group. (1 Points) 2. Review the IASB’s Conceptual Framework for the Preparation and Presentation of Financial Statements (2010) (available at the following link), then describe the other means that are available for communicating financial reporting information, besides financial statements? (2 Points) 3. Review the iGAAP-based Balance Sheet of Pinafore Holdings B.V. Group presented on page 86 of the attached annual report (available at the following link) identify TWO differences between the structure / format of the iGAAPbased balance sheet of this British firm and that prepared by USGAAP-based firms, as shown in chapter 5 of the course text, for example on pages 213 and 237. (2 Points) 4. Review the information for Liberty International and Kimco Realty presented on pages 645/6 of the course text. Then answer question 4(a) – (d) below. (a) Compute the following ratios for both companies: i. ii. iii. iv. Return on assets [ Net Income / Average Total Assets] (2 Point) Profit margin on sales [Net Income / Total Revenue] (2 Point) Asset turnover [Total Revenue / Average Total Asset] (2 Point) How do the companies compare on these three performance measures? (2 Points) (b) Liberty reports a revaluation surplus (see pages 641 – 643 in the course text) of £1,952. Assume that £1,550 of this amount arose from an increase in the net replacement value of investment properties during the year. Prepare the journal entry to record this (£1,550) increase. (2 Points) (c) Under the UK (and IASB) standards, are Liberty’s assets and equity overstated relative to what they would be under US-GAAP? If so, why? (2 Point) (d) When comparing Liberty to US companies, like Kimco, what adjustments would you need to make in order to have valid comparisons of ratios such as those computed in 4(a) above? (2 Point) 2 5. Review the IFRS Insights section of Chapter 9 on pages 525 – 534 in the course text. Then briefly describe TWO differences between US-GAAP and iGAAP in the methods allowed for inventory valuation. (4 Points) 6. Review the following information related to NEC Enterprises. Then complete question 6(a) and (b) below. NEC Enterprises uses the lower-of-cost-or-net-realizable-value (LCNRV) method, on an individualitem basis, in pricing its inventory items. The inventory at 31, December 2013, consisted of products A, B, and C. Relevant data for these products appear below. Estimated selling price Acquisition cost Replacement cost Cost to complete Selling costs Normal profit margin Item A Item B $120 $90 75 80 78 33 30 10 10 20 10 5 Item C $90 36 32 30 20 5 (a) Using the LCNRV rule under IFRS, determine the proper unit value for statement of financial position (balance sheet) purposes at December 31, 2013, for each of the items above. (3 Points) (b) Using the LCM rule under US GAAP, determine the proper unit value for statement of financial position (balance sheet) purposes at December 31, 2013, for each of the items above. (3 Points) PART B – PROFESSIONAL RESPONSIBILITY & ETHICS ISSUES (42 Points) Unique Design Concepts (UDC) was a private company that manufactured office, school and restaurant furniture in the English-speaking Caribbean. The company began its operations in 1984 and quickly attained a leadership position in the industry as a direct result of its high quality products and its aggressive sales and credit policies. UDC manufactures an indigenous line of furniture as well as a leading international brand of ergonomic chairs – Glove - under license from an Austrian firm. All UDC’s products met or exceeded international standards. The Company’s sales team was engineered for efficiency and growth, and consistently delivered double-digit sales growth through its export activities in the Caribbean and Central America. Export sales accounted for forty-five percent (45%) of overall sales. The company utilized a generous credit policy and offered attractive discounts for prompt payment by customers. Its rapid growth had placed a considerable strain on the administrative resources of UDC. As a result, UDC had recently employed several persons at the middle management level to help relieve this administrative strain. 3 Your friend, Tom De Gazon, a CPA, was one of the persons recently hired by UDC. He was appointed to the newly created position of Supervisor – Revenue Accounting. His contract provided for a probationary period of three months before his appointment was confirmed. As part of his orientation, Tom was given a copy of the company’s chart of accounts, its accounting manual and “read-only” access to the accounting system. While reviewing the general ledger, Tom noticed a debit entry of $500,000 to WIP Inventory two days before the end of the third quarter and an off-setting credit entry to the same account a few weeks later, on November 7th for the same amount. The entries aroused Tom’s interest and he decided to review the journal and supporting documents. The full journal entry follows: Date Account Title & Explanation Dr. Cr. 9-29-14 WIP Inventory $500,000 Administrative Expenses $500,000 To reclassify production costs The entry on November 7th was a reversal of the above entry and Tom found no supporting documents for either entry. While having lunch with the Chief Accountant, Darcelle Mark, Tom asked whether she was aware of the third quarter adjusting entry that reclassified a substantial amount of administrative expenses as inventory. Mark indicated that she was aware of the entry, and explained that it was made based on the company’s experience during the 2013 audit. During their examination of the company’s 2013 records the auditors had discovered that several items were misclassified and required a similar journal entry in order for the firm to receive a clean report. The company complied with the auditors adjustments at that time. Mark also indicated that it was her understanding that UDC also decided to make a similar adjustment for 2014 as the control flaws that led to the 2013 errors had not been corrected. Tom asked Mark about the criteria used for estimating the amount of the adjustment and whether similar adjustments had been made in the first or second quarter of 2014. Mark casually responded that she assumed the CFO (Hayden LaCroix) had used his professional judgment since he had given the directive for the third quarter entry to be made, and that she was not sure whether similar entries were made for the first two quarters of 2014. Mark seemed surprised when Tom told her that the entry was subsequently reversed in November 2014 and suggested that he speak with the CFO about it. Tom casually raised the matter with the CFO following a weekly departmental meeting and was told it was "not a big deal" and he should be concentrating on activities in his core area of responsibility. Tom conducted some additional investigations and discovered that the company would not have met its third quarter income target without the September 29 th adjusting entry. When Tom attempted to share this latest information with the CFO he was reminded that he was still on probation and advised to be more strategic about the issues he pursues. Tom asked for your advice. REQUIREMENTS 1. What facts in this scenario are relevant to Tom De Gazon's ability to comply with the provisions of the AICPA Code of Professional Conduct? (3 Points) 4 2. What questions must Tom De Gazon answer as he determines the appropriateness of the company's accounting related to the reclassification of its administrative expenses as assets and the responses of the CFO to his questions? (5 Points) 3. Identify and briefly describe the specific principles of the AICPA Code of Professional Conduct that might be relevant to Tom De Gazon's resolution of this situation. (6 Points) 4. Explain why you think any TWO of the principles you identified in requirements 3 above are relevant to Tom De Gazon’s resolution of the situation. (4 Points) 5. Identify TWO types of threats to compliance with the AICPA Code of Professional Conduct (e.g., adverse interest, advocacy, familiarity, self-interest, self-review, undue influence) that are present in this scenario. Use information from the case to support your choice. (4 Points) 6. How significant is each type of threat you identified to compliance with the principle(s)? (2 Points) 7. For each type of threat to Tom's compliance with the requirements of the AICPA Code of Professional Conduct that you identified in requirement 5 above, indicate ONE safeguard that might be implemented to reduce the threat to an acceptable level. (2 Points) 8. Identify at least THREE parties / stakeholders that should be involved in the resolution of this situation, and explain why you think each of these parties should be involved in the resolution of this situation. (6 Points) 9. Outline an approach (series of steps) that Tom De Gazon might take to resolve this situation in conformity with the AICPA Code of Professional Conduct. (10 Points) Supporting Materials • iasb conceptual framework.pdf • • annual results pinafore holdings bv group - dec 2013.pdf http://pub.aicpa.org/codeofconduct/Ethics.aspx (链接到外部网站。) (AICPA Code of Professional Conduct) • http://www.ifrs.org/Pages/default.aspx (链接到外部网站。) (IASB Website) 5
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