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ACCT1101 Lecture Notes - Lecture 5: Income Statement, Accounts Receivable

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29 May 2018
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ACCT1101
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Lecture5Assets:
• Allassetsareexpectedtoreturnsomefutureeconomicbenefitsforabusiness
• Thisfutureexpectedeconomicbenefitscanchangeinlightofchargingbusiness
circumstances
• Thefinancialstatementsmustreflectsthechangeinfutureexpectedeconomicbenefits
• Businessesneedtogivethemostappropriateassetvaluesinthefinancialstatements,so
itsuserscanmakethebestfinancialdecisionsabouttheentity.
AssetMeasurement:
Thereareavarietyofwaystovalueanasset:
15. Historiccost‐thisisessentialoriginalcost(plusassociatedcosts)
16. Carryingamount:Depreciatedoramortisedvalueandtheimpairedvalue(byfactors
thatreducethevalueofanasset)
17. Fair value: the current market value (less disposal costs) which may mean a
revaluationupwards(optional),ordownwardsfromhistoriccostorcarryingamount.
18. Presentvalue:basedonfutureeconomicbenefits
Allmeasurementsapartfromhistoriccostinvolveestimation.
Impairment(AASB136)
Thebasicprincipleofimpairmentisthatanassetmaynotbecarriedonthestatementof
financialposition(balancesheet)aboveitsrecoverable.
Thereforeimpairmentoccursifnetcarryingamount>recoverableamount
Anyimpairmentisthenallocatedtotheasset(i.e.deductedfromitsstatementoffinancial
positionvalue),andanyimpairmentisthenallocatedtotheasset(i.edeductedfromits
statementoffinancialpositionvalue),andtheimpairmentlossrecognisedintheincome
statementwhichisa"non‐cash"expense(i.edepreciation)Examplesofimpaired
assets:
• Atangibleassetwrittendownbelowitscarryingamountbecauseorareductionin
estimatedfutureeconomicbenefitsordeteriorationofphysicalstate.
• Accountsreceivablewrittendowninvaluebyaprovisionfordoubtfuldebtsorforbad
debts
• Inventorywrittendownbelowcostbecauseitcanonlybesoldatareducedprice(covered
byAASB102)
• Propertyinvestmentswrittendowninvaluebecauseofadecreaseinretailyields.
CarryingAmount:
Thewayofcalculatingthecarryingamountofanassetwilldependonthenatureofeach
asset
Examples:
• Somenon‐currentassetswithanfinitelifewillhaveacarryingamountcalculatedasinitial
costlessaccumulateddepreciation/amortisation.
• Acurrentassetsuchasinventorywillbevaluedbysomeinventorymethod,basedon
original(historic)cost.
• Anintangibleassetsuchasgoodwillbecalculatedaspricepaidforcompanyacquiredless
fairnetassetvaluedofthatcompany.Otherintangibleassetsarevalueddifferently.
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• Anon‐currentassetwithaninfinitelifesuchaslandmayretainitsoriginal(historic)cost,or
berevalued.
Recoverableamount:
Higherofasset'sfairvalueorvalueinuse
Fairvalue=Netsellingamount(i.e.priceitcanbesoldfor)lessanycostsofdisposalValuein
use=Estimated(presentvalueof)cashflowsexpectedtoarisefromthecontinuinguseofan
assetandfromdisposalattheendofitsusefullife
Example:ahouseisusedasabusiness.Itsvalueinuseifitsusedforabedandbreakfastwillbe
futurecashflowsfromcustomersforthenext20yearslessrunningcostspluseventualdisposal
value.
Threestepstoimpairment
• Determineifassetmeetstheimpairmenttest
• Determinerecoverableamount(determinenetsellingpriceofasset/calculatevalueinuse
ofasset)
• Determineifassetneedstobewrittendowninvaluei.e.impaired.
FinancialEffectofImpairment
Impairmentcanbeofanyamount;itcanbealargedollarvalue,itcanevenbereversed
e.g.ifmarketimprovedmarketconditionsindicatedimprovedeconomicbenefitsfromanasset.
•Impairmentcanturnacompany'sprofitintoaloss
•Thismudbetakenintoaccountwhenanalysingfinancialstatements,foruseddecision
making.
Inventory
InventorySystems
•Asystemneedstorecordinventoryquantityandvalue:therearetwomainsystems:
•ThePerpetualsystem:usedtoestablishinventoryforeveryitemaftereverypurchaseand
sale/use
• The Periodic system: used to establish the cost of goods sold (income statement) and
Inventoryvalue(statementoffinancialposition)attheyearendinthefinancialstatements.
InventoryValue
Withintheperpetualinventorysystemamethodisneededtorecordinventoryvalue,forevery
itemofinventoryacompanyhas:
•Therearetwomainmethods;WeightedAverageCostandFirstInFirstOut
•Thebusinesscanchooseeithermethod
•Thisisanotherexampleofestimation
•Wheninventorypurchasepriceschangeovertime,eachmethodwillgiveadifferent
inventoryvalue.ThiswillresultinadifferentCOGSvalueandhencedifferentprofitinthe
incomestatement.Itwillalsoresultinadifferentinventoryassetvalueinthestatementof
financialposition
Inventory
• AASB 102 "Inventories" and the Corporations Act requires that inventory is valued on the
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Related Questions

You are the CFO for Jones company (reporting using IFRS) andmust reconcile your financial statements for the years ending 2008,2009, and 2010 to U.S. GAAP (The Income Statement and StatementStockholders’ Equity). You have identified the following 4 areaswhere there are differences between IFRS and U.S. GAAP at variousdates. Be sure to consider the cumulative effects of prior yeartransactions for each year.

Intangible Assets (Impairment)

As part of a business combination in January 2005, the companyacquired a brand for $10,000,000. The brand is classified as anintangible asset with a 10 year useful life. At year-end 2008, thebrand is determined to have a selling price of $5,500,000 with zerocost to sell. Expected future cash flows from continued use of thebrand are $6,200,000 (undiscounted) and the present value of futurecash flows is 5,700,000

Research and Development Costs

The company incurred research and development costs of $500,000in 2008. Of this amount, 70% related to development activitiessubsequent to the point at which criteria had been met that anintangible asset existed. The development costs were completed atthe end of 2008 and will be amortized over 10 years beginning2009.

Property Plant and Equipment

On January 1, 2009 a building that had an original cost of$5,000,000 and (Purchase date January 1 2004) and was beingdepreciated over 25 years was determined to have a fair value of$6,000,000. The company uses the revaluation model for suchassets.

Sale Leaseback

On January 1, 2005 the company realized a gain on a salesleaseback of $1,000,000. The term of the lease (starting the dateof the sale) is 20 years.

1. Creditors' claims on the assets of a company are called: (Points : 2)
 
Net losses
Expenses
Revenues
Equity
Liabilities
 
2. The primary objective of financial accounting is: (Points : 2)
 
To serve the decision-making needs of internal users
To provide financial statements to help external users analyze and interpret an organization's activities
To monitor and control company activitiesTo provide information on both the costs and benefits of managing products and services
To know what, when and how muchto produce
 
3. Assets created by selling goods and services on credit are: (Points : 2)
 
Accounts payable
Accounts receivable
Liabilities
Expenses
 
4. The debt ratio is used: (Points : 2)
 
To measure the amount of equity relative to the expenses
To reflect the risk associated with a company's debts
Only by banks when a business applies for a loan
To determine how much debt a firm should pay off
 
5. Net Income: (Points : 2)
 
Decreases equity
Represents the amount of assets owners put into a business
Equals assets minus liabilities
Is the excess of revenues over expenses
Represents the owners' claims against assets
 
6. Internal users of accounting information include: (Points : 2)
 
Shareholders
Customers
Creditors
Government regulators
Line Supervisor
 
7. Risk is: (Points : 2)
 
Net income divided by average total assets
The reward for investment
The uncertainty about the expected return that will be earned from an investment
Unrelated to expected return
 
8. An example of an operating activity is: (Points : 2)
 
Paying wages
Purchasing office equipment
Borrowing money from a bank
Selling stock
Paying off a loan
 
9. Which accounting assumption assumes that all accounting information is reported monthly or yearly? (Points : 2)
 
Business entity assumption
Monetary unit assumption
Value assumption
Cost assumption
Time period assumption
 
10. Distributions of assets by a business to its stockholders are called: (Points : 2)
 
Dividends
Expenses
Assets
Retained earnings
Net Income

Case 4-1 Bessrawl Corporation

Bessrawl Corporation is a U. S.- based company that prepares itsconsolidated financial statements in accordance with U. S. GAAP.The company reported income in 2011 of $1,000,000 and stockholders’equity at December 31, 2014, of $8,000,000. The CFO of Bessrawl haslearned that the U. S. Securities and Exchange Commission isconsidering giving U. S. companies the option of using either U. S.GAAP or IFRS in preparing consolidated financial statements. Thecompany wishes to determine the impact that a switch to IFRS wouldhave on its financial statements and has engaged you to prepare areconciliation of income and stockholders’ equity from U. S. GAAPto IFRS. You have identified the following six areas in whichBessrawl’s accounting principles based on U. S. GAAP differ fromIFRS. 1. Inventory 2. Property, plant and equipment 3. Intangibleassets 4. Research and development costs 5. Sale and leasebacktransaction Bessrawl provides the following information withrespect to each of these accounting differences.

Inventory: at year-end 2014, inventory had a historical cost$250,000, a replacement cost of $180,000, a net realizable value of$190,000, and a normal profit margin of 20%.

Property, plant and equipment: the company acquired a buildingat the beginning of 2013 at a cost of $2,750,000. The building hasan estimated useful life of 25 years, an estimated residual valueof $250,000 and is being depreciated on straight-line basis. At thebeginning of 2014, the building was appraised and determined tohave a fair value of $3,250,000. There is no change in estimateduseful life or residual value. In a switch to IFRS, the companywould use the revaluation model in IAS 16 to determine the carryingvalue of property, plant, and equipment subsequent toacquisition.

Intangible assets: As part of a business combination in 2011,the company acquired a brand with a fair value of $40,000. Thebrand is classified as an intangible asset with an indefinite life.At year-end 2014, the brand is determined to have a selling priceof $35,000 with zero cost sell. Expected future cash flows fromcontinued use of the brand are $42,000 and the present value of theexpected future cash flows is $34,000.

Research and development costs: the company incurred researchand development costs of $200,000 in 2014. Of this amount, 40%related to development activities subsequent to the point at whichcriteria had been met indicating that an intangible asset existed.As of the end of 2014, development of the new product had not beencompleted.

Sale and leaseback transaction: in January 2012, the companyrealized a gain on the sale-and-leaseback of an office building inthe amount of $150,000. The lease is accounted for as an operatinglease, and the term of the lease is five years.

Required: prepare reconciliation schedule to convert2014 income and December 31, 2014 stockholders’ equity from a U.S.GAAP basis to IFRS. Ignore taxes. Prepare a note to explain eachadjustment made in the reconciliation schedule.