Grandma’s Kitchens Ltd Issues raised by the Board of Directors
Issue 1:
A large number of customers buy our products on a wholesale basis for their sales outlets and have set up credit facilities with us. As a company that prides itself in preserving and pickling fresh produce we like to make sure that our products reach as many people as possible. So in addition to the retail customers (Customer Type A) and supplying wholesale distributors (Customer Type B), we also entered into agreements with a number of cafes, motels and souvenirs style shops that sell Australian made products to tourists (Customer Type C). These customers hold our products on their shelves and when our representative visits them on a monthly basis, they return any items that are unsold and accept another batch of products from us. They are then invoiced for the items sold by them and payment is made within a month after the date of the invoice. At present we record the sales entry on receipt of the money from all types of customers as that seems to be the most consistent way to do this. The moment we receive the cash we enter the sale in our books and then bank the cash received. The newly appointed Finance Director has informed the board that he thinks this is incorrect and should be changed and Elizabeth Mccain the financial controller thinks he may be correct. Do we need to change the way in which we account for sales revenue and if so what does it involve?
Issue 2:
Jonny Appleton our manufacturing engineer designed and then manufactured an item of machinery which enables us to dry the fresh produce used in our pickling plant much more effectively. As this item of plant was manufactured in-house the only costs associated with it was the additional materials we needed to purchase for the machine, which was $250,000. It works so effectively and efficiently that it cut our manufacturing time by about 2 hours per batch. The factory manager wants us to show this item at its fair value (estimated at $ 525,000 by him) and to recognise the gain as sales revenue. He thinks this is fair as he has been asked by two other businesses “Granny’s Jam” and “Martha’s Pies” if he would be interested in manufacturing a similar machine for them and is presently in the process of doing so. He says that this increases the goodwill of the company too, and wants us to show this asset in the financial statements for the year ending 30 June 2016. Can we do that? How should we treat this? We haven’t had a transaction like this before.
Issue 3:
In calculating the allowance for doubtful debts last year (year ended 30 June 2015) the accounts clerk who did the calculation made a big error in his excel spreadsheet and understated the amount significantly. Instead of allowing for 2% sales revenue ($3.5 million last year and $3.9 million estimated for the current year) which is the company’s accounting policy, the amount allowed was just 0.02%. How should we treat this in the current year’s financial statements? I have said that the board could decide on how we deal with this but unfortunately we are equally divided and Elizabeth said that as the problem is less than 5% of sales revenue it is not material. The sales director is concerned that his sales figures will be impacted by this. How should we treat this? Can the board just decide?
Hint: Remember that your firm plans to charge the client for your advice; as a check ask yourself if you would pay for the advice you have drafted.