HC1010 Accounting for Business Decisions

HC1010 Assignment Details and Requirements

Purpose:

This assignment aims to reinforce and extend students knowledge and understanding of key topics in this course (HC1010) including: Overview of Accounting, Organisational Structure the Reporting Environment, Corporate Governance, Statement of Financial Position, Statement of
Financial Performance, Cash Flow Statement, Financial Statement Analysis, Accounting for Business Transactions, Cost Concepts Behaviour, Preparation of Budgets, and Cost-Volume Profit-Analysis through independent research and application of knowledge and skills.

Assignment Details:

David is the new accountant for a company that builds small aeroplanes for hobby enthusiasts. The company, HobbyAero Ltd, employs 200 people. About 3 years ago, the company underwent a major expansion of its aeroplane-building facilities because of increased demand for its aeroplanes from overseas buyers. To do this it borrowed $10 million through a loan with a bank.

The loan agreement contains the following clauses:

1. HobbyAero is to maintain a current ratio of at least 2:1
2. The after-tax profit margin must be at least 10 per cent

If the company fails to meet either ratio in any year, the $10 million is immediately payable.

Last year the government removed a 20% tariff on small aeroplanes and the company has had difficulty competing against international competitors. Consequently, the company has had to reduce its profit margins to compete with overseas suppliers.

The following are extracts of the preliminary final results for HobbyAero Limited:

After reviewing the accounts, David found the following issues:

1. One small hobby plane that was still unsold at year-end is recorded as inventory in the balance sheet at $50m. However, David is certain that the most this plane could be sold for is $20m.
2. An overseas customer owing the company $10 million has recently informed HobbyAero Ltd that they are in severe financial trouble and will only be able to pay half the amount owing. The balance in the provision for doubtful debts is only $1m.

These two items have not been reflected in the preliminary final results.

As you are an accounting student, you have been asked to advise on the following:

1. Explain to David how the accounts receivable and inventory should be valued on the financial statement. After applying the correct measurement basis, determine the effect of the adjustment of the accounts receivable and inventory on: (1) profit and (2) assets.
2. Explain to David the effect of the adjustment to accounts receivable and inventory on the Current ratio and the after-tax profit margin. Will the change in these ratios have an effect on the loan agreement with the bank?
3. Explain to David the difference between financial and management accounting. Give an example of how management accounting reports would be incorporated into financial accounting reports.
4. Explain to David what liquidity and financial structure ratios from the balance sheet could indicate the company is in financial difficulty. Calculate these liquidity and financial structure ratios for HobbyAero Limited.
5. Explain to David what the ethical challenges he is facing in this scenario for both the business and for the accountant working for the business.

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