Financial Accounting Problem Set #1: Burberry, Accruals, Revenue

This financial accounting problem set analyzes Burberry's financial statements, focusing on accounts receivable, inventory, and revenue recognition. It examines Burberry's disclosure of receivables, bad debt expense, and inventory valuation methods. The assignment further explores accruals and earnings management through a case study involving Lamek Photography plc, discussing the impact of accounting manipulations. Finally, the problem set delves into long-term revenue recognition using the percentage-of-completion method, applying it to a construction contract and comparing it to the completed contract method. The solution provides detailed calculations and answers, offering a comprehensive understanding of financial accounting principles.

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
Part I: Accounts Receivables and Inventory—Burberry (20 points)...............................................1
Part II: Accruals and Earnings Management (15 points).................................................................6
Part III: Long-term revenue recognition (15 points)........................................................................8
REFERENCES..............................................................................................................................11

EMBA Financial Accounting
Problem Set #1
Name:
Part I: Accounts Receivables and Inventory—Burberry (20 points)
Refer to the extracted financial statement information for Burberry for the fiscal year
ended March 31, 2017. All figures are in million GBP.
Does Burberry disclose its receivable balances on a net or gross basis?
From its annual report it had been stated that, Burberry has disclosed its balances of
receivables on net basis (Annual report of Burberry, 2017).
As of March 31, 2017, what was the total amount due to Burberry from its accounts receivable
(i.e., trade receivable)?
The total amount of trade receivable which comprises all non current and current trade
receivables along with portion of receivable for recovery (Annual report of Burberry, 2017).
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As of March 31, 2017, what percentage of its outstanding trade receivable does Burberry not
expect to collect?
Accounts receivable 352
annual sales 2766
days 365
Percentage 46.45%
What was the bad debt expense recorded by Burberry for the fiscal year ended March 31, 2017?
How much was the write-off for the period?
Burberry had recorded bad debt expense at the ending of fiscal year 2017 which was
written off as 0.3 GBP million (Annual report of Burberry, 2017).
What is the total amount of impaired and unimpaired trade receivables that are overdue as of
March 31, 2017? Is the allowance for doubtful accounts sufficient to cover this amount? Please
discuss.
With context of trade receivable, it has stated 17.2 GBP million were impaired and here
20.9 GBP million was not impaired. The allowance of doubtful accounts are sufficient for
covering this specific amount (Annual report of Burberry, 2017).
2

Which product division of Burberry exhibited a decline in revenues in 16/17 compared to 15/16?
Product division 2016 2017 Percentage change
Accessories 901.7 1033.2 14.58%
Women 729 791.9 8.63%
Men 548.4 623.5 13.69%
Children/other 90.7 108.1 19.18%
Beauty 202.5 184.4 -8.94%
Retail/wholesale 2472.3 2741.1 10.87%
Licensing 42.4 24.9 -41.27%
Total 2514.7 2766 9.99%
Therefore, product division of beauty is declining by 8.94% from 2016 to 2017.
How does Burberry report its inventory? Does the company measure inventory costs using the
same method across all product divisions? Explain.
Inventories are represented in lower of cost along with net realisable value. Cost
comprises purchase cost, conversion and design cost for upbringing inventory at present
condition and location. The inventories on basis of beauty product division which consist of
finished goods and raw material's cost with application of weighted average method. All various
product division along with inventory cost is identified with First in first out methods by
accounting fashion season with inventory offering (Annual report of Burberry, 2017).
Does Burberry record any provisions related to its inventory?
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This group sells and manufactures luxury goods with changing demands of consumer
and trends related to fashion. Along with outcome, it is important for considering recovering
inventory cost linked to required provisions. Burberry has recorded inventory provision of 505.3
GBP million.
(Annual report of Burberry, 2017)
What fraction of the total inventory balance of Burberry as at March 31, 2017 relates to finished
goods?
GBP Million Proportion
Raw materials 32.7 6.47%
Work in progress 1.8 0.36%
Finished goods 470.8 93.17%
Inventory 505.3 100.00%
(Annual report of Burberry, 2017)
Discuss the profile of Burberry (e.g., lifecycle, profitability), given its operating, financing, and
investing cash flows between March 2016 and March 2017.
Cash flow 2016 2017 Percentage change
Operating 411.3 560.7 36.32%
Investing (outflow) 137.5 95.6 -30.47%
Financing (outflow) 167.1 342.2 104.79%
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Operating cycle (2017)
Inventory period+Accounts receivable
period
Inventory turnover
COGS 832.9
Inventory (2016) 486.7
Inventory (2017) 505.3
Average inventory 496
Inventory period 1.68 days
Receivable turnover
Credit sales 2766
Accounts receivable (2016) 351.9
Accounts receivable (2017) 352
Average accounts receivable 351.95
Receivable turnover 7.86
Accounts Receivable period 46.44 days
Operating cycle 48.12 days
(Annual report of Burberry, 2017)
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Part II: Accruals and Earnings Management (15 points)
The net income of Lamek Photography plc decreased significantly during 2016. Rose Carpenter,
owner of the company, anticipates that the company will need a bank loan in 2017. Late in 2016,
Carpenter instructed Tekin Almond, the accountant and a friend of yours, to record a £8,000 sale
of portraits to the Carpenter family, even though the photos will not be shot until February 2017.
Carpenter also told Almond not to make any entries on December 31, 2016 for the following
transactions:
Salaries owed to employees who worked in 2016 . . . . . . . . . . £12,000
Prepaid rent that expired in 2016 . . . . . . . . . . . . . . . . . . . . . . £1,000
1. Compute the effect of this alternative transaction structure on the Lamek’s
reported net income for 2016. Are earnings understated or overstated (and by how
much)?
The salary owned to employees will decrease its net income as it is expense to business
entity. Further, its impact of this stated transaction(salary) has overestimated its net income by
£12,000 and sale of £8000 which did not incur.
2. Why did Carpenter take these actions? Provide a short discussion of the parties that are
helped by and those that are harmed by Carpenter’s actions.
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Carpenter took this action for overstating its financial position and to create good image
to its investors and to reflect positive statement. The parties which were involved in this
misstatement are Rose carpenter (owner) and Tekin almond (accountant).
3. As a friend of Tekin’s, what would be your advice to him?
As Tekin Almond, I would advise him to not to involve in misstatements of its financial
as if it would be reviewed in audit then it might lead to more penalty or cost as compared to
actual loss.
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Part III: Long-term revenue recognition (15 points)
Balfour Beatty won the contract to build the Aquatics Centre for the 2020 Olympics. Assume the
following about this long-term contract:
The Olympic Development Authority agreed to pay Balfour Beatty £400 million for this
construction, which is expected to be completed on Dec 31, 2019. Balfour Beatty estimates the
total cost to be £240 million. The Olympic Development Authority will make the following cash
payments to Balfour Beatty: £100 million in 2016, £100 million in 2017, £100 million in 2018,
and £100 million in 2019. Balfour Beatty started to work on the contract on January 1, 2016
(first day of its 2016 fiscal year) and it incurred £80 million of actual costs in 2016 and £60
million of actual costs in 2017. Before Balfour Beatty recognized revenue for 2017, it revised its
total cost estimate to £260 million, but the actual costs for 2018 and 2019 eventually amounted
to £130 million. The contract was completed at the end of 2019 as scheduled. Balfour Beatty
uses the percentage-of-completion method to recognize revenues from long-term contracts.
Ignore taxes.
1) How much revenue can Balfour Beatty recognize from the Olympic Aquatics Centre
contract in 2016?
Percentage Completion Method=Expenditure Incurred Till date/Total Estimated Costs of
Contract
Particulars Amount in million Pounds
Calculation of Percentage Completion 2016
Actual Costs Incurred (a) 80
Cost of Construction (b) 240
Percentage of Completion c= a/b 33.33%
2) How much revenue can Balfour Beatty recognize from the Olympic Aquatics Centre
contract in 2017?
Percentage Completion Method=Expenditure Incurred Till date/Total Estimated Costs of
Contract
Particulars Amount in million Pounds
Calculation of Percentage Completion 2017
Actual Costs Incurred (a)80+60 60
Cost of Construction (b) 260
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Percentage of Completion c= a/b 23.08%
3) How much revenue can Balfour Beatty recognize from the Olympic Aquatics Centre
contract in total?
Particulars Amount in million Pounds
Calculation of Percentage Completion 2018-2019
Actual Costs Incurred (a) 130
Cost of Construction (b) 80+60+130 270
Percentage of Completion c= a/b 48.15%
Particulars Amount in million Pounds
Calculation of Profit
Total Contract Value 400
Percentage Completed 48.15%
Contract Revenue Generated Till Date (a) 192.59
Actual Cost Incurred (b) 130
Profit for 2017 62.59
Particulars Amount in million Pounds
Year Profit
In 2016 53.33
In 2017 32.31
In 2018 and 2019 62.59
Total Profit as per Percentage Completion method 148.23
4) Had Balfour Beatty used the completed contract method (instead of the percentage-of-
completion method as stated in the earlier instructions), how much more (or less) total net
income (ignoring taxes) would it have reported over the whole contract period?
Particulars Amount in million Pounds
Total Value of Construction Contract to Balfour Beauty (a) 400
Total Cost Actually Occurred (b) 270
Net profit from construction contract c=a-b 130
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