University Financial Accounting Report: Accounts, Revenue, Errors

This report provides a detailed analysis of various financial accounting topics. Part I focuses on accounts receivable and inventories using Burberry's annual report, examining topics such as trade receivables and inventory valuation. Part II delves into long-term revenue recognition, applying the percentage of completion method to a construction project. Part III investigates financial statement errors, identifying their impact on assets, liabilities, and retained earnings. Finally, Part IV explores accruals and earnings management, analyzing scenarios involving unearned revenue and unethical accounting practices. The report includes calculations, explanations, and references to relevant accounting literature and the Burberry annual report.

Running head: FINANCIAL ACCOUNTING
Financial Accounting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1FINANCIAL ACCOUNTING
Table of Contents
Part I: Accounts Receivable and Inventories – Burberry...........................................................3
Question 1:.............................................................................................................................3
Question 2:.............................................................................................................................3
Question 3:.............................................................................................................................4
Question 4:.............................................................................................................................4
Question 5:.............................................................................................................................4
Question 6:.............................................................................................................................4
Part II: Long-term revenue recognition......................................................................................5
Question 1:.............................................................................................................................5
Question 2:.............................................................................................................................5
Question 3:.............................................................................................................................6
Question 4:.............................................................................................................................6
Part III: Financial Statement Errors...........................................................................................6
Question 1:.............................................................................................................................6
Question 2:.............................................................................................................................7
Question 3:.............................................................................................................................7
Part IV: Accruals and Earnings Management............................................................................8
Question 1:.............................................................................................................................8
Question 2:.............................................................................................................................8
Question 3:.............................................................................................................................9

2FINANCIAL ACCOUNTING
References and Bibliographies:................................................................................................10

3FINANCIAL ACCOUNTING
Part I: Accounts Receivable and Inventories – Burberry
Question 1:
From the provided annual report of Burberry, it has been identified that trade and
other receivables are included in current assets besides maturities more than 12 months after
the date of the balance sheet statement. Receivables are realised initially at fair value and they
are gauged at amortised cost using the method of effective interest rate less impairment
provision (Burberryplc.com 2019). It has been found that Burberry discloses its receivable
balances on a net basis.
Question 2:
Burberry has segregated its trade receivables into current and non-current trade
receivables. The non-current trade receivables amounted to £76.4 million at 31st March 2017,
while net trade receivables of the organisation amounted to £191.8 million at the same date.
However, trade receivables included other accounts like financial and non-financial
receivables, accrued income and prepayments as well. Therefore, at 31st March 2017, total
trade receivables reported by Burberry were £352 million.

4FINANCIAL ACCOUNTING
Question 3:
From the segmental analysis disclosed in the 2017 annual report of Burberry, the
product division of the organisation mainly includes accessories, women’s clothing, men’s
clothing, children and other clothing and beauty products. Out of these four products, beauty
products of the organisation witnessed a decline from £202.5 million in 2015/16 to £184.4
million in 2016/17.
Question 4:
For measuring inventories, Burberry discloses them at lower of net realisable value or
lower of cost. The costs comprise of all purchase costs, conversion costs, design costs and
other costs spent on transferring the inventories to their current condition and location (Beatty
and Liao 2014). In case of inventories associated with the beauty product division including
finished products and raw materials, weighted average method is used for cost measurement.
In case of other product divisions, the determination of inventory cost is made by using First-
In-First-Out method by considering the fashion seasons for which there has been inventory
offer. During necessity, there is creation of provision for minimising cost to below or equal to
net realisable value in relation to condition and nature of inventory along with estimated
utilisation and saleability.
Question 5:
At 31st March 2017, the total inventory balance of inventory has been £505.3 million
out of which finished goods have amounted to £470.8 million. Therefore, the fraction of
finished goods in inventory has been 93.17% in 2017.
Question 6:
From the annual report of Burberry in 2017, it could be said that Burberry is a global
luxury brand based on UK involved in selling its products through wholesale and retail

5FINANCIAL ACCOUNTING
channels. For 2016/17, the organisation has accounted for 77% of sales revenue in retail and
22% in wholesale. In addition, it provides licensing agreements, which is 1% of total revenue
leveraging the technological expertise of the license partners.
Part II: Long-term revenue recognition
Question 1:
From the provided information, the cost incurred in 2016 by Balfour Beatty has been
£80 million. The estimated total cost of the project has been £240 million, while the price of
construction is £400 million. However, there has been no previous recognition of revenue.
Therefore, the revenue to be recognised from the contract in 2016 could be computed by
using the following formula:
Revenue = (Cost incurred until date/ Estimated total cost x Contract price) – Revenue
previously recognised
Revenue = £80/£240 x £400
Revenue = £133.33 million
Question 2:
By considering the above-formula, the revenue to be recognised in 2017 is calculated
as follows:
Revenue = (Cost incurred until date/ Estimated total cost x Contract price) – Revenue
previously recognised
Revenue = £ (80 + 60)/£260 x £400
Revenue = £215.38 million

6FINANCIAL ACCOUNTING
Question 3:
The same formula is used for calculating revenue recognition from the contract in
2019 or total:
Revenue = (Cost incurred until date/ Estimated total cost x Contract price) – Revenue
previously recognised
Revenue = £ (80 + 60 + 130)/£260 x £400
Revenue = £261.54 million
Question 4:
If Balfour Beatty uses the complete contract method rather than percentage of
completion method for revenue recognition, the total net income would be £130 million
(£400 million - $80 million - $60 million - $130 million), which is lower by £131.54 million
compared to the percentage of completion method.
Part III: Financial Statement Errors
Question 1:
Current Assets (O) 10,000 Long-term assets (U) 9,050
Current Liabilities NE Long-term liabilities (U)
Capital Stock NE Retained Earnings (O) 950
Explanation:
There is overstatement in current assets, since cash payment of $10,000 has not been
recorded that has resulted in overstatement of cash account and the entire current assets’
account. However, there is understatement in long-term assets, since the coffee machine

7FINANCIAL ACCOUNTING
bought has not been recorded along with the depreciation incurred on it half-yearly. As a
result, this has caused understatement of long-term assets by $9,050. Moreover, due to non-
recording of depreciation expense, retained earnings have been overstated by $950.
Question 2:
Current Assets NE Long-term assets NE
Current Liabilities (U) $250,000 Long-term liabilities NE
Capital Stock NE Retained Earnings (O) $250,000
Explanation:
There has been understatement of current liabilities by $250,000, since out of
$750,000, 1/3rd of the amount has been for technical support. Due to the non-provision of
support in the year 2011, it would be adjudged as advance from the customer creating current
liabilities. Moreover, since technical support has not been provided in the past year, there
would be recognition of revenue in the period the services have been provided. Due to the
provision of service in the year 2012, there should be recognition of revenue in that year and
not in 2011.
Question 3:
Revenues NE
Expenses NE
Retained Earnings NE
Explanation:

8FINANCIAL ACCOUNTING
According to the method of percentage completion, there would be realisation of
revenue in accordance with the percentage of project completion. Percentage completion is
computed by dividing period revenue by total project revenue (Henderson et al. 2015). In this
case, percentage completed is 66.67% (2/3 x 100) and thus, revenue recognised is 66.67 % of
£3 billion and the amount stands at £2 billion. This denotes the recognition of expenses as per
the actual figure. Therefore, there has been accurate recognition of expenses, revenues and
retained earnings.
Part IV: Accruals and Earnings Management
Question 1:
Service revenue of £8,000 is still unearned due to the non-completion of services until
January 2017. There has been improper record of sales amounting to £8,000. The
organisation has informed the accountant of not recording accrued salary of £12,000 along
with expired prepaid rent of £1,000. The non-recognition of these expenses has resulted in
excess revenue and ultimately, the impact is on net income.
Items Amount (in £)
Improper record of service revenue 8,000
Accrued salaries expense 12,000
Rent expense 1,000
Total overstated net profit 21,000
Question 2:
The carpenter has advised the accountant of not recording adjusting entries due to the
requirement of funds for the organisation along with enhanced income statement

9FINANCIAL ACCOUNTING
performance. This action is unethical, as the organisation could obtain loan on cheaper
interest rate (De Waegenaere, Sansing and Wielhouwer 2015). In this situation, the banks
providing loans would be affected owing to wrong interpretation of figures in the income
statement. Moreover, there would be default risk on the banks due to the action of the
carpenter in hiding expenses. The effect would be on the investors as well for wrong
representation of net income, since they would invest in the organisation by seeing higher
income (Hoyle, Schaefer and Doupnik 2015). However, the situation is different, since the
organisation has lower income compared to the figure shown in the current income statement.
Question 3:
The accountants have to follow the code of conduct at the time of preparing financial
statements. They are liable to depict accurate figures for disclosing the actual performance of
the organisation (Warren and Jones 2018). Therefore, the accountant needs to refuse the
instructions of the carpenter to hide expenses and disclose unearned revenue in the form of
earned revenue. By conducting the same, there would no breach of the code of conduct on the
part of the accountant.

10FINANCIAL ACCOUNTING
References and Bibliographies:
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economics, 58(2-3), pp.339-383.
Burberryplc.com., 2019. [online] Available at:
https://www.burberryplc.com/content/dam/burberry/corporate/Investors/Results_Reports/
2017/AnnualReport/Burberry_AR_2016-17.pdf [Accessed 11 Apr. 2019].
De Waegenaere, A., Sansing, R. and Wielhouwer, J.L., 2015. Financial accounting effects of
tax aggressiveness: Contracting and measurement. Contemporary Accounting
Research, 32(1), pp.223-242.
Gassen, J., 2014. Causal inference in empirical archival financial accounting
research. Accounting, Organizations and Society, 39(7), pp.535-544.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial
accounting. Pearson Higher Education AU.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2016. Intermediate Accounting, Binder
Ready Version. John Wiley & Sons.
Narayanaswamy, R., 2017. Financial accounting: a managerial perspective. PHI Learning
Pvt. Ltd.
Nobes, C., 2014. International classification of financial reporting. Routledge.
Warren, C. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.