Financial Reporting and Ethics - The Institute of Chartered ...

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FINANCIAL REPORTING AND ETHICSCASE STUDY 2BMA & Co. is a firm of Chartered Accountants acting as financial consultants to Mr. Jones,the proprietor of “the ice cream parlour”. Mr. Jones has produced draft accounts for theyear ended 31st May 2008 which include a trading account as follows:Trading account for the year ended 31st May 2008:NSales 144,000Cost of Sales 90,720Gross Profit 53,280He has noticed from reading the journal of his trade association that the average grossprofit is 40% on sales and he requests that an investigation be carried out to explain whyhis gross profit appears to be lower than the average and also apparently worsening.An analysis was carried out by Anibema & Co. of the make-up of the sales for the last twomonths. This analysis is shown below:AprilMayNNIce Cream 3,000 3,900Coffee-percolated 2,800 3,300Coffee-prepacked Cups 1,700 1,500Lemonade 1,200 900Orangeade 2,000 1,800Black Currant Cordial 1,100 90011,800 12,300A comparison of the purchase invoices with the price list showed the gross profit % onsales to be coffee-percolated 33%, coffee-prepacked cups 40%, lemonade 46%, orangeade48%, blackcurrant cordial 42%.The gross profit % of the ice cream was calculated as an average based on comparing totalmonthly cost of ice cream with total monthly sales of ice cream- the result was 25%.Required:(a) Draft a letter to Mr. Jones with supporting data to explain why the gross profit %appears to be worsened from April to May.(b) Draft a note to the partner quantifying any possible loss and specifying any furtherwork you think should be carried out to confirm the reason why the gross profit %of the “the ice cream parlor” is lower than the industry average.282
CASE STUDIESSUGGESTED SOLUTION(A) A letter to Mr. Jones explaining why his gross profit % is on the decline.ANIBEMA & CO. CHARTERED ACCOUNTANTSJones Esq.The Ice Cream Parlor,14 Oweh Street,Lagos.29th June 2009Dear Mr. JonesRE: ICE CREAM BUSINESSIn accordance with your instructions, we have conducted an investigation into the reasonswhy your gross profit percentage appears to be lower than the industry average and whythe situation worsened from April to May 2008.We have analyzed the sales together with their associated gross profit percentages andhave obtained the overall gross profit percentages of 36.7% in April and 35.1% in May,which are in line with your suspicion (attached appendix refers). The reasons for thisdecline might be poor fixing of selling prices, poor sales mix, high cost of purchase anderrors in stock counting or valuation. However, from available information, the main reasonfor the decline is that a lower sales mix was achieved in May. Although total sales rosefrom 11,800 to 12,300, the rise came mainly from ice-cream and percolated coffee, wherethe gross profit achieved were 25% and 33% respectively. On all other items, where grossprofits are 40% and above, sales were down in May. We trust that this reason has satisfiedyour curiosity and would wish to investigate more on your sales mix.We would be gladly and readily available to offer further clarifications should the needarise.Yours Sincerely,Anibema & Co.(Chartered Accountants)Determination of the company’s average gross profit % for April and May including SalesMix%.APRIL MAYSales Gp% Gr( N) Mix(%) Sales GP% GR( N ) Mix(%)Ice cream 3,000 25 750 25.40 3,900 25 975 31.80Coffee Percolated 2,800 33 925 23.70 3,300 33 1,080 26.80Coffee - 1,700 40 680 14.40 1,500 40 600 12.20prepacked cupsLemonade 1,200 46 552 10.02 900 46 414 7.30Orangeade 2,000 48 960 17.00 1,800 48 864 14.60Blackcurrant 1,100 42 462 9.30 900 42 378 7.3011,800 4,329 99.82 12,300 4,311 100.00Average GP%:April= 4,328× 100 = 36.7%11,800283
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FINANCIAL REPORTING AND ETHICS1.3.3
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ACCOUNTING AND REPORTING POLICIESsu
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ACCOUNTING AND REPORTING POLICIES2.
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3AMALGAMATION, ABSORPTION ANDRECONS
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ACCOUNTING STANDARDSThere is no SAS
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ACCOUNTING STANDARDSIFRS 7 Financia
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7THE ENVIRONMENT: CORPORATE,PROFESS
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10ETHICAL THREATS TS AND SAFEGUARDS
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11CORPORATE GOVERNANCE11.0 LEARNING
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Page 269 and 270: APPENDIX IICOMPREHENSIVE QUESTIONS
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Page 279 and 280: CASE STUDIES(iii)(iv)The floor sale
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Page 303 and 304: INDEXAAbsorption, 17, 19, 39, 40, 4
Page 305 and 306: INDEXProfessional Behaviour, 136, 1
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