Describe the accruals-based financial statements, Finance Basics

On 1 January 2008, a young artist called Michelangelo signed a contract with a charity named Art Angels, which supports young artists to do large projects. The agreement requires Michelangelo to paint a night sky with stars, and a day sky with cherubs and roses on the inside of the enormous dome of the building where Art Angels is housed, and stipulates a 36 month contract with a total sales value of £300,000. Michelangelo expects to spend 25 per cent of this amount on painting materials and the rent of scaffolding, spread out evenly over the 36 months. As he is rather short of cash, he receives an advance of £25,000 when signing the contract. He will receive another £25,000 at the end of the year if he has completed one third of the dome, then £50,000 at the end of the second year if he has completed two thirds of the dome, and the remaining £200,000 at the end of the third year if he has completed painting the whole dome.

((a) Calculate Michelangelo's profit or loss at the end of each year on a cash basis and on an accruals basis, assuming that Michelangelo's expectations regarding his expenses were correct and that the expenses had been paid for in cash, and assuming that he recognises revenues as he earns them in accordance with the contract.

(b) How does Michelangelo account for the difference between cash receipts and revenues in his accruals-based financial statements at the end of each year?

(c) It may seem unfair that Michelangelo will receive most of the money for the contract at the end of the three years. Explain, in no more than 200 words, what reasons Art Angels may have had to stipulate these conditions.

(d) Explain, using accounting concepts and principles, why Michelangelo should not recognise the £300,000 as revenue:

(i) at the date of signing the contract

(ii) at the end of the three year period.

Posted Date: 3/20/2013 3:03:37 AM | Location : United States







Related Discussions:- Describe the accruals-based financial statements, Assignment Help, Ask Question on Describe the accruals-based financial statements, Get Answer, Expert's Help, Describe the accruals-based financial statements Discussions

Write discussion on Describe the accruals-based financial statements
Your posts are moderated
Related Questions
Jobbers or Speculators - Stock Market 1. This is a dealer who that trades in securities in his own right like a principal. 2. He can set prices and make active the market w

Example of Capital Structure of a Company Example Company XYZ restricted has the given capital structure as:   10,000 Sh.10 ordinary shares 10,000

Lease Finance Leasing is a contract between one party called lessor as owner of asset and other called lessee whereas the lessee is provided the right to utilize the asset as

Struggling with your final year projects, terms paper writing, research paper writing, thesis writing, engineering and programming projects? Experts are available 24x7 to help you

explain any four actions or transactions by shareholders that could be harmful to the interests of debt holders (sources of conflict). estion #Minimum 100 words accepted#

Question 1: (a) (i) What are Asset shares? (ii) State the purpose of calculating Asset shares. (b) Outline the five uses of policy Asset shares? (c) Lif

Based on the example in Lesson 2, compute your quarterly interest for three years if you deposit $500 at 8 percent, compounded quarterly. Remember to divide the 8 percent by 4 to g

Floatation of New Shares Rules for floatation of new shares The company must contain an issued share capital of at least Kshs.20 M. The company must contain c

Advantages and Disadvantage of Profitability Index Advantages of profitability index a) Simple to understand and utilize. b) The part of NPV in the venture will show t

Accounting Exercise AVM 386 Fall 2014 Misty Mark, an infamous archer, decided to open an archery business called Bows and Biceps. The following is a list of transactions for Bows