AFA100 Winter 2020: Financial Accounting Case Assignment Solution

This document presents a complete solution to a financial accounting case assignment for Happy ReLeaf Ltd, a cannabis retail outlet. The solution includes journal entries for January 31, 2019, along with a statement of financial position, a statement of retained earnings, and a statement of earnings for the quarter. Furthermore, the assignment addresses the issue of revenue recognition, comparing the current method with an alternative approach based on product delivery completion. A memo to Penelope Wildflower discusses the impact of the alternative approach on the company's current ratio, arguing for its positive influence. The document concludes that the change in the revenue recognition method will have a positive impact on the current ratio of the business. The assignment is for AFA100 Introductory Financial Accounting. Bibliography is also included.

Running head: INTRODUCTORY FINANCIAL ACCOUNTING
Introductory Financial Accounting
Name of the Student
Name of the University
Author Note

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INTRODUCTORY FINANCIAL ACCOUNTING
Table of Contents
Answer to Question 1...................................................................................................................2
Answer to Question 2...................................................................................................................4
Answer to Question 3...................................................................................................................5
Bibliography.................................................................................................................................7

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INTRODUCTORY FINANCIAL ACCOUNTING
Answer to Question 1
Journal Entries for the Quarter 31st January 2019

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INTRODUCTORY FINANCIAL ACCOUNTING
Cash 191664
Sales 191664
(Cash sales made to the consumers)
Accounts Receivable 3912
Sales 3912
(Sales made to on account to consumers)
Cash 28456
Discount 880
Online sales 29336
(Sales made online)
Cost of Goods Sold 123702
Inventory 123702
(Costs of goods sold to consumers)
Sales Returns 3320
Cash 3320
(Sales returns made on cash sales)
Purchases 135000
Cash 100000
Accounts Payable 35000
(Purchases made on cash and on account)
Advertising Expenses 4000
Prepaid Expenses and Deposits 4000
(Advertising expenses expired for the quarter)
Legal service expense 3500
Trade Payable 3500
(Bills payable at a future date)
Cash 20000
5% Bank Loan 20000
(Loan taken from bank)

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INTRODUCTORY FINANCIAL ACCOUNTING
Refridgirator 15000
Cash 15000
(Purchase of refridgirator for cash)
Depreciation 417
Refridgirator 417
(Depreciation charged on refridgirator for 1 month)
Depreciation 2000
Accumulated Depreciation 2000
(Depreciation charged of property and equipment)
Administrative Expenses 37243
Cash 37243
(Cash payments related to administrative expenses)
Note Payable 22289
Cash 22289
(Reduction in the amount of note payable)
Sales 12000
Cash 12000
(Sales pending clearence)
Income Tax 13556
Income Tax Payable 13556
(Income tax paid on profits earned)
Answer to Question 2
Statement of Financial Position

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INTRODUCTORY FINANCIAL ACCOUNTING
Assets Amount Liabilities Amount
Cash 231451 Current Liabilities:
Accounts Receivable 28806 Trade Payables 154302
Prepaid Expenses and Deposits 28136 Other Current Liabilities 115765
Inventory 215759
Refridgirator 14583 Total Current Liabilities 270067
Total Current Assets 518735
Non-current Assets: Non-current liabilities:
Property Plant and Equipment 39298 Notes Payable 7700
Accumulated Depreciation -7610 Loan Payable 20000
Total Non-Current Assets 46908 Total Non-Current Liabilities 27700
Shareholder's Equity
Share Capital 160000
Retained Earnings 107876
Total Shareholder's equity 267876
Total Assets 565643 Total Liabilities and shareholders' equity 565643
Statement of Retained Earnings
Particluars Amount
Opening Balance 82701
Add: Profit during the period 25175
Closing Retained Earnings 107876
Statement of Earnings for the Quarter

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INTRODUCTORY FINANCIAL ACCOUNTING
Particulars Amount Amount
Sales 209592
Less: COGS 123702
Gross Margin 85890
Depreciation 2417
Management Fees 13850
Salaries 9260
Equipment rental 1778
Supplies 1200
Total Expense 47160
Operating Income 38731
Other Income -
Net Operating Income 38731
Income Tax @35% 13556
Net Income 25175
Answer to Question 3
Date: 27th March 2020
To: Penelope Wildflower
From: *****
Re: Method of recording sales from new online ordering system
This memo is being sent to you to let you know about the differences in the revenue
recognition due to the usage of the old method and the new method. This will then be utilised to
understand the impact which will be laid on the current ratio.
Revenue Recognition: Current Approach
In the current approach, the sales are being recognised as a revenue as soon as the order is
being placed. However, there is a significant hindrance to this type of revenue recognition. The
sale is not considered as completed unless there is certainty about receiving revenue from the

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INTRODUCTORY FINANCIAL ACCOUNTING
sales. In the current case, it happens only when the customers show valid documents. Otherwise,
the sale would not be considered as completed. Hence, the sales which are completed may result
in the loss of revenue for the business. The stock which was recorded as being sold also remains
in the inventory. Hence, this results in a decrease in the liquidity of the business.
Alternative Approach
An alternative approach to this practice is to record a sale only when the delivery of the
products is complete. This provides more clarity to the business in revenue recognition as there is
no uncertainty involved in this situation. Even if the sale is not complete, not recording it would
keep the inventory levels intact. Otherwise, either the cash balance or the accounts receivable
balance can also be recorded as the sale is definitely complete.
Impact on current ratio
The alternative approach would result in an increase in the current ratio. This is because
recording a sale only after it is complete is beneficial for the business. It would eliminate any
uncertainty involved in the process of revenue recognition. Until the payment is received, the
accounts receivable would be higher. If it is a cash sale, there would be an increase in the cash
balance. There would be no sudden reversal in the balances of the current assets. The cash
balance of the business can also be maintained in a healthy manner with the change in the
revenue recognition manner of the business.
On an overall level, it can be concluded that the business is better off with the change in
the revenue recognition method as it would have a positive impact on the current ratio of the
business.

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INTRODUCTORY FINANCIAL ACCOUNTING
Bibliography
(2020). Pwc.com. Retrieved 28 March 2020, from
https://www.pwc.com/gx/en/audit-services/ifrs/publications/ifrs-15/ifrs-15-solutions-
retail-consumer-industry-pwc.pdf
(2020). Ey.com. Retrieved 28 March 2020, from
https://www.ey.com/publication/vwluassetsdld/technicalline_03068171us_revrec_rcp_25
july2019/$file/technicalline_03068-171us_revrec_rcp_25july2019.pdf?OpenElement