Provide an assessment of the draft statement/ Managerial Accounting
As the lead auditor for Easter Bunny & Tooth Fairy Ltd, a company that manufactures a range of products for the Easter holiday and for Tooth fairy celebrations, a look at the draft statements provided by management has raised some concerns for you. You note that their sales revenue has been falling since 2009 but expenses have increased. Plus it appears that less and less people believe in the Tooth Fairy so a question of whether sales will continue to fall seems likely. As such, you have requested further information in the form of projected cash flow for the upcoming year from management. They have just sent you the following;
Attachment: Cash flow forecast for three months to 30th September 2012
| Cash inflows (,000) | July | August |
Sept. |
| Receipts (1) | 700 | 780 |
880 |
| Loan Receipt (2) | 600 | ||
| Government subsidy (3) |
200 |
||
| Sale of financial assets | 200 | ||
| TOTAL CASH INFLOWS | 900 | 1380 |
1080 |
| Cash outflows | |||
| Operating cash outflows | 800 | 800 |
1160 |
| Interest payments | 160 | 160 |
160 |
| Loan repayment |
240 |
||
| TOTAL CASH OUTFLOWS | 960 | 960 |
1560 |
| Opening cash (July 1) (100) | |||
| Closing cash | (160) | 260 |
(220) |
| Notes to cash flow |
1: Cash receipts from customers should improve given anticipated improvements in economic conditions. Company has also committed extra resources to the credit function, in order to speed up collection of overdue debts
2: Loan expected to be received in August 2012 is currently being negotiated with parent company, Halloween Ltd.
3: Government subsidy will be received once the application has been processed. It is awarded to companies that operate in areas of high unemployment and subsidises wages and salaries paid to staff.
Required;
a) Provide an assessment of the draft statement of financial statement and an assessment of the cash flow forecast
b) What are your recommended audit procedures going to be
c) Your conclusion to the briefing notes (remembering that an auditor should have a healthy scepticism)
Statement of Financial Position
| 30 June 2012 $,000 | 30 June 2011 $,000 | |
| Assets – current | ||
| Accounts receivable | 8,400 | 7,440 |
| Inventory | 5,200 | 3,200 |
| 13,600 | 10,640 | |
| Assets – non current | ||
| Property, Plant & Equipment (1) | 5,200 | 4,800 |
| Investments | 100 | 140 |
| Deferred tax Assets (2) | 940 | 40 |
| 6,240 | 4,980 | |
| Assets – intangible | ||
| Goodwill (3) | 320 | 360 |
| Development costs capitalised | 480 | 360 |
| 800 | 720 | |
| TOTAL ASSETS | 20,640 | 16,340 |
| Equity | ||
| Share Capital | 1,200 | 1,200 |
| Retained earnings | (2,100) | 380 |
| (900) | 1,580 | |
| Liabilities – Current | ||
| Accounts payable | 10,000 | 7,200 |
| Short-term loans (4) | 3,200 | 1,600 |
| 13,200 | 8,800 | |
| Liabilities – non current | ||
| Provisions (5) | 740 | 600 |
| Long-term loans (6) | 7,600 | 5,400 |
| 8,340 | 6,000 | |
| TOTAL EQUITY & LIABILITIES | 20,640 | 16,340 |
1: PP& E includes land & building valued at $1,000,000 over which a fixed charge exists
2: Deferred tax Assets represents several loss-making years by the company. The amount has unutilised carry-forward tax losses
3: Goodwill: relates to acquisition of subsidiaries in 2008
4: Short-term loans consist of bank loan $2,660,000 (payable October 2012), short-term loan $240,000 (payable September 2012) and bank overdraft of $300,000
5: Provision: relate to warranties to customers
6: Long-term loans consist of a debenture repayable October 2012, and a loan from bank repayable December 2013.
