Accounting Essay

1591 words - 7 pages

According to the Generally Accepted Accounting Principles, T-Shirts by Tommy can account for the accident is to record an extraordinary item. Using the definition from our Intermediate Accounting textbook, extraordinary events are defined as, "…events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence" (Keiso). Because of the nature of the plane crash, and the fact that these types of accidents happen very rarely, it can definitely be categorized as extraordinary. Tommy needs to estimate how much to expense for the loss of the building and other losses associated with the crash. Then he must record this item on his yearly income ...view middle of the document...

If he had lots of extra shirts in stock for spring breakers, the week that he will not be able to produce t-shirt because of the crash would not economically affect his business as much because he will still have many shirts to sell. By waiting until the push of spring break, he has greatly increased the economic effect on his business because he will be even farther behind schedule when he can start production again, and it is possible that he will not have the supply of t-shirts to meet the demand of spring break t-shirt consumers.
Second, as a small business owner, you should think about having insurance to protect yourself against events such as the one that occurred. Although, the equipment was not damaged, the building did have structural damage which if Tommy has no insurance on, will be taken as a loss. If he does have insurance, he can be reimbursed in a short time for that damage which can be put towards purchasing or renting a new space. Although Tommy, being a small business owner, may have fire and inclement weather insurance coverage, another insurance that is also used by business owners is called business interruption insurance. Business interruption insurance covers the profits you would have earned, based on your financial records, had the disaster not occurred. It also incorporates a 48 hour waiting period after the disaster occurs, which gives your company some time to recuperate. Another add-on that Tommy could get for his insurance is extra expense insurance. Extra expense insurance reimburses you for some of the money you spend to recover from the accident which helps you from having to close down the business during the time of recovery (Insurance Information Institute, paragraphs 1-6).
For the September 11 attacks, the EITF classified most of the damage not as an extraordinary event but rather to be accounted for under continuing operations. They reached this decision because they felt that terrorist attacks did not fall under the category of extraordinary events because they had happened in previous years (FASB, Pg. 5, para. 2). For this particular event, however; the accounting impact on Tommy's financial statements is that Tommy would categorize this as an extraordinary event on his company's income statement. He can make this assumption because it states clearly that it was a "combination of engine failure and unforeseen weather" and also it was clearly not a terrorist attack so it would not be characterized the same as the September 11 attacks were. It would directly lower his net income; net of taxes.
The precautions that Tommy could have taken to reduce the effects of this accident would change the accounting records for "T-shirts for Tommy". First, producing more t-shirts year round rather than increasing production right before the spring break rush would affect the financial statements. The net income for quarterly statements would change because the operating expenses would be higher for the fall and winter...

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