ACCOUNTING AND DECISION MAKING

Accounting and Decision Making Summative Assignment

Case Study Analysis: Dyed in The Wool Limited and Homespun

Subjective Judgement in Financial Statements

For Dyed In The Wool Limited (henceforth “DITW”), the first area of judgement would be the classification of assets. The presentation of Land and Buildings and the revaluation of its property stated within the financial statements is being considered by way of facts presented in the case. This would pertain to the valuation of building and property.

Accounting standards identify areas which give way to an accurate picture of the economic conditions of a company, by way of prudence, neutrality, true and fair accounts, and substance.

The company states its revaluated property as worth $3 million, whereas previously valued at $800,000 in 2011's balance sheet. However, additional information states that this valuation was done on the basis of an offer of $2.5 million received by Jim Riley, the CEO of DITW, which he felt was a lower offer at the time and that market values would be higher. However, information suggests that the market took a subsequent downturn effecting property values negatively, but the said information was presented the way it was on Mr. Riley's belief that a stronger balance sheet would help raise money for the business.

In addition, with regards to pre-invoiced sales, the same need to be corrected in the revenue head of the income statement and the inventory head under the current assets of the balance sheet. The listing of the advanced order as a sale is incorrect as no delivery has been made, no advance against the sale has been received, and the required delivery is in the next financial year.

DITW also need to account for the provision of bad debts, as amounts overdue over the period of 90 days need to be taken as possible bad debts. With regard to the sufficient evidence from the industry grapevine, the customer who owes an amount of approximately $219,750 (out of which $137,000 are 90 days overdue) may not be in the financial health to make the payment and unless a formally adjusted repayment schedule is agreed, the amounts need to be provisioned as bad debts.

In light of IASB's Conceptual Framework and GAAP's IAS 8, information needs to be presented reliably in accordance with economic substance in order to give a true and fair view. In addition, an entity cannot rectify inappropriate accounting policies by disclosure. Thus, in the case of DITW's properties, revaluation should be done again by a bank-approved evaluator, in order to facilitate bank borrowings and show realistic values.

Lastly, the company's investments in Homespun are listed under the current assets head of the balance sheet. As DITW owns 100 per cent of the shares of DITW, it is a fully-owned subsidiary and the same needs to be listed under the non-current assets of the company as either 'Shares in subsidiary' or 'Shares of associate concern' unless the company is considering selling Homespun within a one year period, contrary to what is indicated in the ...