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
Instructions 1 This case study counts as part of your group project. 2 Project Group: You must complete this assignment together with the group that you initially registered

Define the term Public Issues - Floating New Issues Under this method, issuing company directly offers to general public/institutions a fixed number of shares

according to given specialization take down an industry and investigate its managerial hierarchy to describe each of one of the managerial work level functioning

1. Describe the similarities and differences in between an ordinary annuity, an annuity due, and perpetuity.  Provide a methodical answer, including examples to demonstrate your po

Marbela Corporation's stock had a required return of 12.75% last year, when the risk-free rate was 6.4% and the market risk premium was 5.5%.  Now suppose the market risk premium d

Growth and Valuation Ratio This ratio indicates the growth potential of the firm in addition to determining the value of the firm and investment made via various investors.  T

Louis Futon Co. is currently an all-equity firm. The current market value of the company is $80 million. The corporate tax rate is 35%. What is the new value of the company if Loui

given profit margin 7%, total asset turnover is 1.94, Return on equity is 23.7%, what is the debt equity ratio

Why do some investors prefer high-dividends paying stocks? Why ,ight other investors prefer low-dividend paying stocks?

I have an assignment for my finance class. The company that i have FOR industry analysis is COSTCO WHOLESALES CORP THAT ITS STOCK IS IN DISCOUNT AND VARIETY StORES INDUSTRY. I need