A Case Study of Brotherand Olamide Limited

You are the Group Chief Accountant of Kofi Limited and Olamide Limited. Kofi Limited is a holding company while Olamide Limited is a subsidiary company registered in Nigeria. Kofi Limited is a medium-sized retailer of imported and retailer of hand sanitizers in Ghana. Due to numerous requests from the customers in Nigeria for the companys product, Kofi Limited decided to expand its operations to Nigeria to increase sales and make more profits for the shareholders. In 2016 the business registered a new company in Nigeria and named it Olamide Limited. The sole purpose of incorporating Olamide Limited in Nigeria was to boost the companys market share and make more profits for the shareholders. But the financial performance of Olamide Limited has not been encouraging to the management of the business, and shareholders have complained about the decision to expand into the Nigerian Market. Shareholders have noted with dismay that Olamide Limited has reported continuous losses for the business for the past two years. The financial statements show that the Nigeria expansion strategy was extremely bad and management is blamed for the bad decision to expand into the Nigerian market. Management explained the past performance at the Annual General Meeting and provide forecast to the future performance of the business. At the meeting, the management assured the shareholders that measures taken in 2019 is going to put an end to the loss making of Olamide Limited. The Managing Director explained that the losses recorded were temporal and that the future financial performance will be better. Contrary to the promise made to the shareholders, 2019 financial performance was also not encouraging, because Olamide Limited has recorded a net loss of GH GH100,000 for the year ended 31st December, 2019. The Managing Director argued that unless something drastic is done to the figures in the 2019 financial reports for the period under review, the going concern assumption for Olamide Limited has to be revoked. This net loss recorded for 2019 was due to high expenditure on advertisement incurred for that period, while sales fell below the expected target. The Managing Director is concerned about Olamide Limited continuous reporting of losses to the group and called for an emergency meeting to be held to decide on the figures to be include d in the 2019 financial statements. At the Board meeting to discuss the figure to be included in the financial statements, the following key managers made some statements for the consideration of the Managing Director. Notable among them were reprinted for the consideration of the board. The Group General Manager argued and was quoted here that: Figures to be included in the financial statement are always grey and that there are very little absolute figures in the financial statement. A smart manager is able to save the reputation of the business in times of financial difficulties by simply changing accounting policies to boost performance of the business. Just a change of the companys depreciation policy from straight line method to reducing balance method is enough to change the companys net loss to net profit for the business. The Group Operational Manager sided with the comment made to change net loss to net profit using the companys policy and defended his position that Managers are engaged to maximize profits for the shareholders, therefore, any financial performance that does not show profit, simply means that management has failed. Therefore, there is the need to adjust the companys policy on depreciation in order to maximize profit for shareholders.

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The Group Marketing Director contributed to the discussion and said that He knows of companie s that have manipulated their financial statements and the reputations of the managers involved were enhanced due to better performance recorded by the business. Therefore, to boost the financial performance of Olamide Limited, there is the need to double the companys sales figures and reduce the operating expenses by half to boost net profit of the business. He commented further that the stakeholders will not know that the figures in the financial statements were manipulated unless they are informed about it.

As the Group Chief Accountant and a young professional accountant in the making, you tried to object to some of the comments made by your colleagues at the meeting. You reiterated the concerns of International Financial Reporting Standards (IFRS) regarding the issues of qualitative characteristics of financial statement at the meeting. Your concerns were due to several seminars you attended on IFRS on the conceptual and regulatory framework used to prepare financial statements by businesses. IFRS requires that the financial statements prepared should comply with accounting concepts, assumptions that are commonly referred to as qualitative characteristics. Despite your worries, the Managing Director deliberately refused to take your advice into consideration and prepared the final accounts of Olamide Limited against the ethical and moral considerations that show the net profit for the business as shown below:

Statement of Financial Position as at 31st December, 2019 Olamide Limited

Kofi Limited

GH000 7,500

7,300

14,800

2,800 6,300

5,700

14,800

Assets

Noncurrent assets (Note 1) Current assets

Inventory

Trade receivables

Bank

Total Assets

Equity and liabilities Equity

Stated capital (GH1 each) Retained Earnings

Noncurrent liability 7% Debenture Current liabilities Bank overdraft Trade payables Taxation

Total equity and liabilities

GH000

2,000 2,400 600

2,000 3,500

400 3,100 600

GH000 9,400

5,000

14,400

5,500 4,800

4,100

14,400

GH000

2,400 3,700 1,200

2,000 800

1,700 3,800 200

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Statement of Comprehensive Incomes for the year ended 31st December, 2019

Olamide Limite d GH000

Revenue 12,000 Cost of sales 10,500 Gross profit 1,500 Operating expenses 240 Operating profit 1,260 Finance cost 210 Profit before tax 1,050 Tax expense 150 Profit after tax 900 Dividend paid for the year 250

Note 1: There were no disposals of plant during the year by either company.

Question1

Kofi Limited

GH000 20,500 17,000 3,500 500 3,000 600 2,400 400 2,000 700

As a professional accountant who is concerned about the qualitative characteristics of preparing financial statements.

(a) You are required to:

(i) Explain five (5) qualitative characteristics of IFRS that is used to prepare financial statements to your colleagues at the meeting. (10 marks)

(ii) Explain the difference between profit and profitability. (5 marks)

(iii) Explain the concept of going concern and the implication of revocation of going concern assumption when financial statements are prepared. (5 marks) (Total marks 20)

Question2

(a) With reference to the case study above. You are required to calculate for Kofi and Olamide Limited, two ratios of significance to:

(i) Management. (3 marks)

(ii) Creditors. (3 marks)

(iii) Shareholders. (3 marks)

(iv) Comment on the profitability ratios, liquidity ratios and efficiency ratios calculated

between Kofi Limited and Olamide Limited for the period under review.

(v) Explain three (3) advantages for using ratio analysis.

(vi) Explain two (2) disadvantages associated with the use ratio analysis.

(6 marks) (3 marks) (2 marks)

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(Total marks 20)

Question3:

Depreciation is considered as accounting policy and operational expense for the accounting period. The value to be included in the financial statement is calculated based on the decision of the Board. (a) Youarerequiredto:

(b)

(i) Explain the difference between capital expenditure and revenue expenditure, and how each type of expenditure will affect the financial statements of a business. (6 marks)

(ii) Explain why it is important to distinguish between capital expenditure and revenue expenditure, and briefly explain the accounting treatment of each type of expenditure.

(6 marks)

(iii) Under what circumstances will you consider the reducing balance method as the most appropriate method in calculating depreciation? (3 marks)

Does depreciation decrease cash in a business? Explain your answer. (5 marks)