ACCOUNTING

Accounting

Accounting

Question 1

a. During recent times many countries in Europe have seen periods of recession which can be great source of information to generate a downside report. A similar kind of scenario has been created for Canada as well that has faced a period of recession and there are several key areas of their economy where change has emerged due to the period of recession. According to the article by Alexa (2008) she has mentioned several risks which occur due to the changes occurring in the financial environment of a country. There are three key financial risks mentioned in the article which are financial or liquidity risk, market risk or credit risk.

Financial risk is associated with the lending and borrowing rates of company. During the periods of recession interest rates are increased in order to control the periods of recession but it leads to losses or bankruptcies for the firm. The soaring interest rates increase the interest expenses to be paid by the firm on the amount of its borrowings. The interest expense burden increases so much that it turns the net income of the firm into a loss. On the other hand firms are unable to expand or take more loans to make investment in other sectors because increase in the interest rate decreases spending and borrowing of the people and the companies operating in the economy.

Market risk on the other hand is the amount of losses that occurs due to changes or fluctuations in the market prices due to changes occurring in either fluctuation in the foreign exchange rate or in the borrowing rate of an economy. These fluctuations have a direct impact on the cost of the commodities which is the major reason why material cost increases for Palmer Ltd. The third risk is the credit risk which occurs when the customers are unable to pay for the goods or services purchased from a company. The amount which is not paid is recorded as an amount of bad debts in the financial statements of a company. During the crisis or recession periods the bad debts or amount uncollected increases for the firms and this is the reason why bad debts amount increased for Palmer limited during an accounting year.

The following are the financial statements of Palmer limited which shows the impact of changes occurred in the volume of contracts, size of holding back payments, impact on the credit period given to the customers, level of bad debts and change in the material cost due to increase in interest rates during a recession period.

 

 

 

 

Sales

2057.4

 

 

 

 

 

 

Cost of Goods Sold

 

 

Materials

809.5

 

Labour

799.9

 

Depreciation

24.1

 

Manufacturing O/H

110.3

Total cost of Goods Sold

1743.8

 

 

 

Gross Profit

313.6

 

 

 

 

Less Selling and Administration

223.1

 

Less Interest

7.4

 

 

 

Operating Income

83.1

 

 

 

 

Plus other income

0.0

 

Less Other Costs

99.9

 

 

 

Net Income before Taxes

(16.8)

 

 

 

 

Less Taxes

0.0

 

 

 

 

 

 

Net Income after Taxes

(16.8)

 

 

 

Old Contacts

 

Credit Given (Months)

1

Holdback %

10

Holdback period (Months)

4

 

 

New Contracts

 

Credit Given (Months)

2

Holdback %

12

Holdback period (Months)

6

Reduction in new sales contacts due to economic downturn %

 

 

93.0

92.0

90.0

89.0

88.0

 

 

 

 

 

 

 

 

Unexpected bad debts (in month of expected ...