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Finance & Accounting
Pages 5 (1255 words)
Date: To: Mr Stephen From: Accounting analyst Subject: Analysis of Wiki Art Gallery (WAG) Purpose This memo documents analysis on whether the current accounting practices and financial reporting methods of WAG are used correctly to account for revenue and related expenses in the calculation of the company’s net income…
Financial Analysis of the Wag’s Judgments and Method of Calculating Net Income According to Canadian accounting standards for private enterprises (ASPE), WAG’s financial judgments and methods used have resulted to overstatement and understatement of net income in various ways. First, the method of calculating and awarding dividends and salaries has resulted in the understatement of net income. In Wiki Art Gallery (WAG) dividends are shared on 50 per cent basis on monthly basis and this was paid up to $400 until April 2012. The amount of dividend paid out to shareholders determines company’s annual net income because they determine the difference between assets and liabilities. According to the Canadian accounting standards for private enterprises (ASPE) a company is restricted from paying out dividends before passing balance sheet test whereby the declared dividends must be equal to or less than the difference between the assets and liabilities. The act of paying dividends on monthly basis instead on annual basis leads to the understatement of WAG’s annual net income as it prejudices the company’s ability to pay creditors therefore increasing the cost of liabilities. Additionally, the increased interest rates should be captured in WAGs annual income statement to reflect the true net income. ...
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