It is prudent to treat such income as accrued or deferred income as it has not been received and should not be treated as sales income (Nikolai et al 2009). The accounting standards require that revenue should be recognized when earned and received. Invoices raised on a long term contract for a customer show an ending balance of 219,750. The company is confident that the amount will be fully recovered. However, 137,000 relates to amounts due over 90 days. This amount may be written off as a bad debt since the customers industry is experiencing financial difficulties. No provision for bad debt has been made by the management. A prudent approach would be to make a provision in the 2012 accounts. It is advisable in the future for the management to create provisions if it anticipates making losses (Nikolai et al 2009). There are inventories worth 105,000 relating to a customer who signed a long-term contract. These inventories are neither sold to another customer. The customer is not in a position to clear unpaid balance and keeping such stock jeopardizes the liquidity position of the company since they are not moving. The matching principle requires that revenues should be matched with their relevant costs (Nikolai et al 2009).. It is advisable treat such stocks as losses by reducing the closing inventories. The carrying amounts of land and building increased to ?3 million as at December 2012. The facts are that a revaluation reserve has been created and the balance in the balance sheet adjusted upwards. However, the cost principle requires that assets be recognized on the basis of historical cost and not the current market value. Because of this principle it is advisable for the accountant to make changes in the land and buildings account and use the historical cost. The revaluation should also be a note of the financial statement in accordance with the principle of full disclosure (Nikolai et al 2009). Q2-Preparation of the Cash Flow Statement DITW CASH FLOW STATEMENTS FOR THE YEAR ENDING 31st DEC 2012 2012 a) Cash flow from operating activities ?'000' Profit from operations 727 Add: Interest 51 depreciation 317 Loss on sale of equipment 32 legal costs on patent rights 3 Operating profit before working capital changes 1,130 Working capital changes: Increase in trade and other receivables (147) Increase in inventories (55) Decrease in trade payables (152) Decrease in tax payables (185) Decrease in dividends payable (325) Cash from operating activities 266 b) Investing activities sale of equipment 100 Investment In Homespun (800) (700) c) Financing activities Interest paid (51) Dividends paid (425) (476) Increase/(decrease) in cash and cash equivalents during the year (910) Cash and cash equivalents b /f 9 Cash and cash equivalents c/f (901) Q3-Performance evaluation Looking at appendixes 1 and 2 below, the actual results of the budget are lesser than the original amounts thus giving a rise to variances. Variances can either be favorable or unfavorable. In the case of Homespun, the actual results are unfavorable since the actual amounts are less than the budgeted amounts. The variance has been caused by an increase
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