QUESTION 3: Accounting Concepts

You are a trainee accountant at "Big Four" and the managing partner of "Big Four" who is also your boss, have asked you to respond to some queries from one of the firm's clients. The questions that Mr Long, your client has, is indicated below.

REQUIRED: write a formal business letter to Mr Long to explain the following to him:

1. Mr Long needs to make a decision about the inventory system that he will be using. He has heard about a perpetual and a periodic system. He is however not sure that the differences between these inventory recording systems are. In addition, he is not sure about which system will give him the most control over his inventory and the ability to monitor his gross profit. You need to explain the difference between these systems to Mr Long and also need to explain to him which system would be best for control purposes, and why. (6 marks)

2. Mr Long is aware of the "Conceptual Framework" and knows that he needs to prepare his financial statements on the Accrual basis of accounting. He is however not sure what this is, so you need to explain this to him. In addition, Mr Long would like you to explain to him what the financial impact on his financial statements would be if he decides not to do any adjusting journal entries at the end of the financial year. (4 marks)

The remaining 2 marks will be awarded for following the formatting requirements below.

Date your letter 29 August 2020.

Address your letter to Mr Long, The Proprietor, Parties Galore, 1 Valley Road, Unley, SA, 5078. Your address for the purpose of the letter is PO Box 222 Adelaide SA 5008.

A formal business letter format is required (though there are different ways of doing this and there will be some flexibility in marking). Your letter must however use an appropriate businesslike way to begin and end your letter, and you should set out your letter with subheadings to separate each part of your letter as you address the criteria required. Included below are some suggested references that may help you in formatting your letter. You may use other Internet references if you wish.