CASE STUDY: This research question consists of a case study: You are a graduate accountant working for McKenzie and Associates a public accounting firm. The address of the firm is 777 South Terrace, Adelaide SA 5000. The manager of your firm, Ms Maria McKenzie has asked you to draft a letter in response to an email received from a client - Mr Con Pewter, the managing director of Pewter Ltd, raising a number of issues regarding his company.
Maximum Length is 1000 words (excluding calculations).
Dear Maria
Thank you for your phone call this morning, as discussed I am emailing below the accounting issues we briefly discussed. By the way to assist the accounting team in our decision making process could you please make sure you reference any relevant sources relating to your advice, for example AASBs, Corporations Act, and relevant websites.
1. A customer has lodged a law suit against our company. We sold the customer a hard drive which was faulty and it has caused a huge loss of data for their business. The court decision to award damages to the customer was held on 26th March 2016; however the amount of the damages will not be decided until 30th September 2016. Our lawyer has advised the damages will be between $50,000 and $1 million. Please advise what steps we should take, in order to record this event in our financial statements for the year ending 30th June 2016.
2. Our sales team sells iPads and offers an interest-free period of 12 months to certain customers. These customers received the benefit of having their payment deferred for 12 months. The total amount owing by these customers is $250,000 and we use 7% as our discount rate in all financial transactions. Please advise what the correct accounting treatment would be to record these transactions.
3. As discussed I have attached the information in relation to the Statement of Cash Flows and I am so pleased that you agreed to prepare the Statement for us. I am still fairly confused though - do we really need a Statement of Cash Flows? What purpose does it serve? If it is so important why are we worrying about an Income Statement which is based on accrual accounting? Can't we just combine the two statements and work out the profit on a cash basis? The cash balances in the cash flow statement are exactly the same as the one mentioned in the balance sheet. Wouldn't that confuse everyone that we are repeating the same information?
Please respond by letter (not email) as I would like to present this to the Board. I look forward to hearing from you in the near future.