Question 1
In order to manage and successfully reduce or mitigate the financial risks associated with advance payment of large amount of money to unknown supplier, it is first important to identify and understand the risks associated with this kind of transaction (Froot, Scharfstein, and Stein 1993). An advance payment, in its basic terms, is a prepaid expense from the client (in this case RTE) paid to the supplier or the vendor (Vital Office Furniture Limited) in advance for the goods and services (furniture and fittings in this case).
An advance payment is very important to the supplier as it provides the initial financial aid and shows the level of commitment of the client. However, it is very risky to the client (Bent, Nils, and Werner 2003). Some of the risks include:
i. High chances of the supplier disappearing with the advance payment, especially when the client has no track record of the supplier.
ii. Failure of the goods to be delivered as planned
iii. Poor quality risk
iv. Transportation risks such as theft or damage.
Another way of managing the advance payment risk is the Advance Payment Insurance (API), which covers such risks as failure of the supplier to deliver the goods as planned, or the supplier completely failing to deliver the goods; delivery of poor quality goods; and theft and or damage to the goods during delivery (Froot, Scharfstein, and Stein 1994).
Large cash deposits (in this case £50,000) have serious cash flow implications to the RTE. Liquidity is very essential especially in ensuring that RTE meets its short-term financial obligations. However, if this large amount is given out as advance payment to Vital Office Furniture Limited, serious risk that liabilities cannot be met as they arise, or only be met at uneconomic price, may result. To mitigate this, diversification can be employed by RTE. It needs to identify different suppliers of the required products and choose the one that requires less cash deposit. RTE can also cut down its initial requirement for the furniture and fittings. This can be achieved through arrangements to purchase these products in bits over a given period of time to avoid tying up large amounts of cash as deposit, which would otherwise be used in meeting other short-term financial obligations.
Finally, RTE needs to carry out a thorough credit check of the supplier. This would enable it ascertain the creditworthiness of Vital Office Furniture Limited and have the assurance that it is actually able to supply the required goods. This should be done before the actual transaction takes place. RTE should also perform the credit check of other suppliers and select the one with the best record.
Question 2
Every financial year, charity organizations must prepare and file financial statements and reports to ensure transparency of their financial affairs. This report therefore undertakes to outline the rationale behind the filing requirements for a charity organization while preparing annual financial statements. It details what needs to be disclosed in the statements as well as the rationale behind each section in the disclosed parts. Besides, the report outlines the users or the recipients/the groups that need to know the information contained in the reports (Charity Commission 2011).
The manner in which each and every charity maintains, prepares and reports its financial accounts largely depends on its expenditure, income, constitution as well as its gross assets. Be it as it may, charities at all time must prepare their accounts in line with the Statement of Recommended Practice (SORP) Accounting and Reporting by Charities (SORP). Unless excepted or exempt from registration, all charities should prepare annual report and avail it to the donors, founders and the financial supporters as may be requested by the founders, donors as well as by financial supporters.
The rationale behind preparing the annual report by a charity is to aid the donors in understanding what the charity plans to do, its mission or what is targets to achieve as well as what is already achieved. Its preparation is essential in that it helps a charity take stock of how well the financial year compares to the laid down aspirations and plans. It helps spell out the charity’s challenges and achievements as well as the success factors. Lastly, the report offers an avenue to outline the benefit of the charity’s activities to the public. Its users are not only the members and trustees, founders, beneficiaries, donors but the general public who might be interested in the charities activities.
In essence, the most important information that needs to be disclosed is the charity’s aims, structure, objectives, performance and activities in which it is engaged in. The information that needs to be disclosed is outlined as under.
The information regarding the charity’s voluntary income must be disclosed in the annual financial statements. The charity’s financial statement should specify the any gift and donations received, as well as any legacies. Any legacy retained as endowment should be included as resources but specifically as endowments received. The voluntary income as well should include the amounts of tax reclaimed on any amount received in form of gift aid. The voluntary income section should spell out the charity’s grants that provided major funding or those which are general in nature. Lastly, the charity’s sponsorships and subscriptions as well as donated services and gifts in kind should be disclosed under the voluntary income section.
Activities for generating funds section
This encompasses the resources that are provided by the activities of trading that typically help in raising funds for the charity. An example of such trading events could include the fireworks displays, jumble sales and concerts; any sponsorship the charity is involved in; as well as any property selling and letting activity. This information in essence helps the founders; donors as well as financial supporters come to terms with reasons for fund generation.
Charity’s investment income
The investment income section shows the founders, donors and the financial supporters the incoming resources from the charity’s investment assets. For example, the investment income comprises any rent and interest receivable, and the charity’s dividends. However, this section should not detail the unrealized and realized losses and gains.
This section should detail the resources that results from those activities that promote the charity’s objectives and aims. For instance, such resources could be the sale of services and goods as charitable activity; or letting the non-investment property in undertaking the charity’s objectives. Such information is of importance to the founders, donors and the financial supporters who may be having interest in the charity’s operations and activities due to their financial commitments.
Voluntary income generation costs
It is also pertinent that the costs associated with generating the charity’s voluntary income be spelled out in the financial reports. This should details the costs linked with for instance, donations, legacies gift in kind or core funding grants. These costs may be typified by the advertising, fundraising, marketing as well as any direct payments that are made to the agents. However, such costs should not include educational materials costs or the costs of charitable activities.
Investment management costs
These costs will enable the financial supporters or donors know the costs associated with accessing the investment advice by the charity, rent collection, portfolio management, and repair of property as well as the charity’s maintenance costs. The summation of these costs enable donors approximate the amount that should be allocated to the charity for sound investment management.
Charity’s recognized losses or gains
This helps spell out the change in the charity’s value of owned tangible assets. In a situation where the charity is operating a well defined pension scheme, then actuarial gains or losses as presented in the SoFA must be included. Also, any loss or gain that is associated with any of the charity’s investment assets should be specified under this section. Typically, the sum total of any unrealized losses and gains that stem from the revaluation of assets invested to the market value as well as the losses and gains incurred as a result of disposal of invested assets during the financial year must be spelled out for the donors and founders under section recognized losses and gains.
The charity’s assets and liabilities
This section should vividly present the charity’s total fixed assets. It shows the assets held by the charity for continued usage, its tangible assets as well as the long term investments held by the charity purposely for income generation or for financial gains. The value of such assets like for instance the charity’s building, vehicles and land is spelled out clearly under this section. The charity’s fixed asset investments, for example the unquoted and quoted shares and term deposits that are held as portfolio investment need to be stated clearly. Also, the charity’s current assets; comprising the cash, current asset investments, stock and debtor’s values must be clearly indicated for the donors to determine the liquidity of the charity or its financial health and whether it is in a position to meet its short term operation obligations. It is in order also for the charity to specify the amount of creditors that is due within a period of one year. These should of course reflect the overdrafts, loans or trade creditors incurred during the year. Basically, the values of long term creditors and provisions, pension fund liabilities/assets, restricted funds as well as endowment funds should be all stated under the charity’s assets and liabilities so that valid asset turnover paramount for reporting purposes is determined.
Question 3
Types of accounts prepared by charity
The charity accounts are usually prepared based on either the receipts and payments basis or on the accrual basis. However, the basis in which accounts are prepared is highly dependent on the income level of the charity as well as its asset turnover and its type.
Receipts and payments is simpler of the two basis of preparation. It is usually adopted by a charity that has income to a tune of £100,000 or lower in a year. Basically, it is the account that summarizes the total amount of money received and issued out by the charity for a given financial year. It also offers a detailed statement that outlines the charity’s assets and liabilities for every financial year.
The company under study carries out accrual preparation. As opposed to receipts and payments preparation basis, accruals preparation is employed by those charities with an income of well over £100,000 in a given financial year. Preparation of financial statement is however as stipulated in the SORP and must contain the statement of the charity’s financial activities, the balance sheet as well as the explanatory notes.
The major similarity between charity reporting requirements and company reporting requirements is that the report must take the true and fair view so that transparency is maintained. This is accomplished by showing both the balance sheet, statement of the financial undertakings as well as the supporting or explanatory notes. Another similarity is that both make reference to the kept accounting records. For instance, while undertaking the accounts reporting, both make use of the cash books, gift aids as well as the invoices. Another remarkable similarity is that both undertake the preparation of annual accounts and at all times, avail the accounts to the public usually on request. Besides, the reporting information of both company and charity reflect the changes in the asset and liabilities carrying values in the accounting year and make the report to the statement of performance of its assets and liabilities.
The key difference between charity reporting requirements and company reporting requirements is that in charity reporting, the share capital information is not reflected but instead have members who are guarantors other than shareholders. As with company reporting, information regarding the shareholders share value must be stated. This is usually not the case with charity reporting as there are no dividends to the founders, guarantors and donors. Therefore, it hardly contain the level of growth of shares for the financial year (SFS 2011).
Reference
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Charity Commission, 2010. Annual Return Update, 2010. Retrieved at http://www.charitycommission.gov.uk/Library/ar10notes.pdf
Charity Commission, 2011. Charity Accounts and Reports. retrieved at http://www.charitycommission.gov.uk/about_us/ogs/g015b001.aspx
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Smithson, C., 1999. “Does risk management work?” Risk, July 1999, pp 44-45.
