SE Machinery Pty Ltd (SEM) Term Paper Example | Topics and Well Written Essays - 2000 words

SE Machinery Pty Ltd (SEM) - Term Paper Example When the customer contributed $500,000 as capital contribution to SEM in May 2011, it appeared in the books as part of the Equity or Capital Account and reported as part of the gross profit by yearend which ended June 2012.. In such a transaction wherein actual cash was received and SEM chose to recognize the cash inflow as capital, the tax law provides that this be considered as ordinary income. Division 6 – Assessable Income and Exempt Income, Section 6.5, states that Australian residents’ ordinary income are assessed whether derived from within Australia or outside, including those derived indirectly or directly â€Å"from all sources† (Australian Parliament 1997, Section 6.5). As Flynn, M.(2009, p.171) had stated, â€Å"The second test is to ask whether the receipt represents a flow produced by an item of capital. If it does, the receipt is revenue.† B. However, the Arthur Murray principle will apply for the prepayment. According to Kater, E. (2009), u nder that principle, income is generally not derived until after services or products have been delivered, except in a situation wherein there may not be a refund of prepayment according to a contract. There was no contract which specifically stated there can be no refund under certain conditions. Income was recognized in June 2012 even though products were yet to be delivered in August 2012. The prepayments were recognized as revenue so that the gross profit includes the value of that prepaid order. But requirements for such a capital contribution to be considered an Income of SEM were not yet completed although prepaid. The goods (Teftoffelex) were delivered only in August 2012. Since there is no contract stipulating that the prepayment was not refundable, the Arthur Murray principle will allow for the delay in payment of Income Tax corresponding to the $ 1,200,000 worth of orders. SEM has received payment and delivered the orders only in August 2012. Thus, this will result in hav ing unearned income as of yearend, June 2012. The Arthur Murray Principle will be applicable because income should be recognized only after the fulfilment of an order and after payment had been received. But this only means that in the next income declaration, income tax would have to be paid for the $1,200,000. The book entries should have been as follows (Appendix 1) It is only after the delivery of goods that the liability account, Unearned Revenues, amounting to a total of $ 1,200,000 should be reversed to consider the entire $ 1,200,000 as Sales. Thus, the proper advice to SEM is to adjust the Sales by $ 1,200,000 because it is in fact still a liability (as Unearned Income) and will remain that way until the goods are delivered. II A. Explanations for Revenue and Expense Accounts 1. Bad Debt Deduction After Write-Off = $8,000 Section 63 paragraphs 34-39 allows for deductions of bad debts only after they have been written off. (AG/ATO 2012, TR 92/18). The Australian Taxation Law under Act No. 55 as amended, in Division 21-5. 2. Interest Expense on Working Capital = $ 25,000 Borrowed @ 8% Interest From February 1, 2012 to end of June 2012 which is 5 months, SEM should recognize the accrued interest expense. This would amount to 25,000 x 0.08 x 5 mos. / 12 months = $ 833. According to the AASB 123 Core Principle (AG/AASB 2009, p. 7 & 9), â€Å"Borrowing Costs that are directly attributable to the acquisition, construction, or production of a qualifying asset form part of the cost of that asset. All other borrowing costs are recognized as an expense.† This should include interest (Section 6a p. 9). Usually, interest expenses are prepaid upon release of borrowed money. And based on the Principle of Profit Determination of the AASB(AAT & Willis, D. 1997, p.7), the expense should be matched with the revenue given a certain period. Thus, upon receipt of the loan, interest expenses should have been treated as Prepaid Interest. And the Prepaid Interest asset account should be reduced by the accrued expense value which would amount

Financial Management & control Essay Example | Topics and Well Written Essays - 2750 words

Financial Management & control - Essay Example The company has not been able to earn more from the money of its shareholders. In 2011, it has earned approximately 30% lesser than 2010 from the money invested by its shareholders which resulted in a decline in return on equity. The debtors’ collection rose by 47 days over the previous year which means that in 2011, the company now required 130 days to get the money from its debtors which it did in 83 days in 2010. This not only blocks the money for the company but also makes the company lose on the interest of the money blocked with the debtors. The chance of the debtors going bad also increases if the payment cycle expands which has been proved by bad debts going up by more than 200%. The operating profit of the company has halved from 17% in 2010 to 8.5% in 2011, which implies that even when the company has sold more than the previous year, it has not been able to make profits out of the sales. This can be due to many reasons. The company might have sold at lesser price or the company might have incurred greater selling expenses. ... The current ratio of the company increased from 1.5 in 2010 to 1.8 in 2011. The increase in the current ratio is a result of the increase in current assets which includes an increase in the debtors’ collection period due to which the debtors are rising, an overdraft bank balance and more than doubling of bad debts inflating the current ratio. The acid test ratio increased from 1.2 in 2010 to 1.5 in 2011. This indicates that the company now has lesser short-term assets to sell in order to cover up its immediate liabilities without selling off its inventories. The company’s ability to pay off its interest expenses has also declined and it is indicated by the fall in the interest cover ratio from 9.6 times in 2010 to 4.34 times in 2011. This is due to the shortage of funds which has been blocked by the debtors, increasing bad debts, bank overdraft balance etc. The gearing ratio describes the level of the company’s capital being funded by the owners’ money ver sus the money of creditors. Here, it has declined by 3% as the creditors collection period has also slightly decreased. This means that the company is paying off its creditors earlier than it used to do in the previous year. This results in lesser availability to creditors’ funds and more reliability of the business on the owners’ equity. The earnings per share of the company declined from 0.63 in 2010 to 0.29 in 2011. A decline in EPS is the result of a decline in the profitability of the company. EPS measures the allocation of company’s profit to each of its outstanding shares. Since profit has declined, the allocation to each share also declined and hence the EPS. The operating cash flow per share of the company increased from 1.2 in 2010 to 1.5 in 2011