Scenario 1

Since the start of business, the company has adopted a cash accounting basis in recording their transactions. In a construction business, there is a significant delay from the day of construction work is carried out till the day the company gets paid for the sales of the condominiums. Currently in the accounts, the company has only been recording losses as the condominiums is only expected to start sales at the end of this year.

Scenario 2

The company has been calculating depreciation of its machines using various methods. In the first two years, the company decided to use a straight-line depreciation method. In the current year, the previous Accounts Manager decided to use a reducing balance method to calculate depreciation. This inconsistency in depreciation method is causing confusion to the top-level managers.

Scenario 3

As the company has been recording continuous losses in the financial statements, the companys banker, Maybank has called-up the company and wants to setup a meeting at the end of the month. They mention that they are very concerned about the going concern status of the company and demands an explanation from company on the matter.

Scenario 4

The company has been receiving numerous calls for bookings for their new condominium units in Setapak, Kuala Lumpur. About 500 potential buyers are already willing to pay deposits to book their condominiums. The CEO is eager to show some profits for this year and is asking you if they can start recognizing these deposits as proof of sales and record the whole amount of the condominium value in its sales accounts.

For all the scenarios above, you are required to :

1. Identify the relevant accounting principles and provide a clear definition for these principles (10 marks)
2. Explain 2 importance of these principles when preparing financial statements. (10 marks)
3. Provide 2 strategies the company can adopt to improve its situation (10 marks)

Explain the impact of the companys going concern status if it continues to make losses. How will it affect the shareholders, bankers, creditors and potential buyers? (20 marks