Wings Ltd is an airline services company with a plant near Sydney Airport and service centres in several states. It provides meals, serviettes and other food-related items, cleaning, interior maintenance and several other services to various airlines. The company has been fairly successful, though recessions and the deregulation of air services have put significant pressure on its operations. When the company began in the late 1970s, it had a relatively weak financial position (mainly because of borrowing to get set up) and its financial performance, while satisfactory, has not enabled it to reduce its debt load very much. It seems that every time the company gets a little ahead, new equipment must be purchased or new product lines developed, and the company finds itself borrowing again.

A recent year provides a good example. The company’s accrual profit was $1 88 000 and its cash profit was $241 000. (The difference resulted because of a depreciation expense of $96 000 and uncollected revenue being $43 000 higher at the end of the year than at the beginning. In the company’s financial statements, the phrase ‘net profit for the year’ was used to describe the accrual profit and ‘cash generated by operations’ described the cash profit.) The general manager had looked forward to using some of the cash to pay debts, but late in the year the company had to buy new food-handling and wrapping equipment for $206000 to meet revised standards announced by its airline customers. Therefore, the company ended up only a few thousand dollars ahead in cash, not enough to make much of a dent in its debts.

The general manager has a regular half-yearly meeting with the company’s external auditor to discuss accounting and auditing issues. After the above results were known, the general manager phoned the auditor and made the following comments: ‘I thought I’d ask you to think about a few things before our meeting next week. When it comes to our accounting, I think the company has too many masters and too many measures. What I mean is first that too many people are concerned with what our financial statements say. Why can’t we just prepare financial statements that meet my needs as general manager? Why do we have to worry about all the other people outside the company? Sometimes I’m not even sure who all those other people are, since you accountants and auditors often just talk about “users” without being too clear what you mean. Also, I’m confused by the existence of both a “net profit” figure and a “cash generated by operations” figure in our financial statements. Why can’t we just have one or the other to measure our performance?’

The general manager raised issues that will be addressed frequently as this book develops your understanding. But for now, what would you say to the general manager?

Answer rating: 100% (QA)

I would explain to the general manager that financial statements are prepared for both int... View the full answer