Top Line Company limited operates a management bonus scheme based on company per
ID: 2543973 • Letter: T
Question
Top Line Company limited operates a management bonus scheme based on company performance and market price of shares in the stock market. In the recent past the company have paid massive bonus and the external auditor have consulted you on the following issues
a) A firm over-accrues a restructuring provision in order to be able to reverse a portion of the accrual into future earnings if needed in order to meet company earnings targets.
b) Production is expanded beyond current requirements in order to capitalise more overheads into inventory and by so doing increase incentives compensation for company officers
c) Sales is recognised upon the shipment of goods to a company’s field representatives
d) The company create dummy customer at the year-end where revenue is recognised on bill and hold basis.
Required
Explain the accounting principles applicable in each case above
Explanation / Answer
A. Accrual principle applies to first issue. According to this principle, accounting transactions are recorded in period they actually took place instead of in the period in which casflows related to them took place.
2. Matching principle applies to second issue. According to this principle, the cost associated with carrying out business should be in the period when they can be match with revenues they help to generate.
3. Reliability principle applies to third issue. According to this principle only those transactions should be recorded which are objective and verifiable.
4. Revenue recognition principle applies to forth issue. According to this Principle, revenue is reported in the financial statements in the accounting period in which cash representing that revenue is actually received.