UK Cost of Goods Sold Reclassification (Improve Income Statement)

[kosie88]

Hi everyone,

I'm a rather new accountant and trying to explore methods to improve the income statement figures that make sense and is legal.

So my client is a retail company that holds inventory, there is a huge director's loan on the balance sheet at the moment and the company is owned by 1 sole director as a limited company.

Is it possible to allocate/reclassify a fixed percentage of Cost of Goods Sold each month to offset the director's loan if we have the director's consent?

Is such accounting treatment usual and how would an auditor interpret such treatment?

 

[kirby]

The director's loan is a loan where the director owes money to the company or is a loan where the company owes money
to the director?

 

[kosie88]

The director's loan is a loan where the director owes money to the company or is a loan where the company owes money
to the director?

Hi Kirby, the director's loan is a loan that the company owes the director.

 

[kirby]

To your questions:
Is such an accounting treatment usual? No
How would an auditor interpret such treatment? - By recommending removing the entries you posted for this

But let's say you did this and you had a conversation with the director
You: I posted entries to DR your Director Loan Payable and CR Cost of Goods Sold
Director: Well will I receive more cash from that entry?
You: No, well actually this will cost you cash.
Director: Why
You: Because this increases profit, which will be taxable to the company and you, without increasing the cash brought in. Oh and also the company now owes you less on its loan payable to you even though it never repaid you in cash.

--And I will let you guess the Director's next words to you...

 

[kosie88]

To your questions:
Is such an accounting treatment usual? No
How would an auditor interpret such treatment? - By recommending removing the entries you posted for this

But let's say you did this and you had a conversation with the director
You: I posted entries to DR your Director Loan Payable and CR Cost of Goods Sold
Director: Well will I receive more cash from that entry?
You: No, well actually this will cost you cash.
Director: Why
You: Because this increases profit, which will be taxable to the company and you, without increasing the cash brought in. Oh and also the company now owes you less on its loan payable to you even though it never repaid you in cash.

--And I will let you guess the Director's next words to you...

Thanks so much for the analysis ....To be honest I know this is an unusual treatment and probably a method that would raise questions from different 3rd parties.

I'm actually trying to explore possibilities/ways to improve the company's incomes statement figures so that the company may have a chance to get a bank loan.

The sole director / shareholder is open to any legal methods in making this possible...Right now, the NAV on paper is negative as there's a huge director's loan which is made up of the following:

1. Initial investment/capital injection
2. all additional capital injection

The company has a good amount of "carried forward loss" from previous years which will probably make the company not taxable for another 3-5 years based on the current economic trend in Hong Kong...

This company is a simple B2C retail company, where they purchase packaged goods from wholesaler/importer and sell to end user directly.
There seems to be very limited areas to play around with the numbers.

Do you know of any places with resources/ideas about making income statements look better?

I've just taken on this client from a previous finance manager and man the amount of crap that needs to be scooped up is unreal. But just trying to get the job done!