Professional Documents
Culture Documents
9.
Why would an accounting estimate change and how is the change accounted
for?
PRACTICE QUESTIONS
QUESTION 12.1:
DEER LTD
NOTE: This solution is only one possibility. Students may use alternative or
average base amounts.
DEER LTD
1.
Unrecorded creditors invoices
These invoices understate Expenses (purchases and service related expenses) and
Accounts Payable by $62 150.
Base Amount
Profit before tax
Payables (current)
$352 000
316 000
Error as % of base
17.7%
19.7%
As the error is greater than 10% of both base amounts it is material and must be
adjusted.
If the invoices all relate to purchases within a perpetual inventory system the accounts
affected are Inventories (current asset) and Accounts Payable (current liability) and
there will be nil profit effect.
2.
These invoices understate both Sales Revenue and Accounts Receivable by $50 000.
Additionally, Cost of goods sold (expense) is understated and Inventory (current
asset) is overstated by $36 000. The profit effect is $14 000 ($50 000 - $36 000).
Base Amount
Profit before tax
Sales Revenue
Receivables (current)
Inventory (current)
$352 000
3 600 000
621 000
345 000
Error as % of base
4.0%
1.4%
8.1%
10.4%
The omitted invoices are material in relation to inventories and should be adjusted.
The adjustment will increase Bad Debts expense by $89 120 and decrease Accounts
Receivable by $89 120.
Base Amount
Profit before tax
Receivables (current)
$352 000
621 000
Error as % of base
25.3%
14.4%
The overstatement is material in relation to both base amounts and must be adjusted.
4.
This is not material in amount but under the requirements of AASB 124 Related Party
Disclosures (paragraphs Aus1.9, Aus29.8 and Aus29.8.1), information relating to
loans made to directors (or key management personnel) is deemed to be material
irrespective of quantum or nature and therefore this loan must be disclosed in the
notes to the financial statements.
5.
As the default requires Deer Ltd to pay the outstanding amount both non-current
liabilities and expenses are understated by $256 000.
Base Amount
Profit before tax
Equity
$352 000
715 000
Error as % of base
72.7%
35.8%
The amount ($10 000) is not material in relation to any appropriate base amount.
However, given the existence of the loan agreement requiring the maintenance of a
2:1 current ratio then the misclassification may be material in nature. Thus the ratio
must be recalculated as follows:
Current Assets
+ Sales invoices
- Inventories
- Doubtful debts
$478 000
62 150
10 000
_______
550 150
The error understates depreciation expense and overstates the carrying amount of
vehicles by $1 250.
Base Amount
Profit before tax
Equity
$352 000
715 000
Error as % of base
0.36%
0.17%
QUESTION 12.3:
YAK LTD
YAK LTD
The significant variances between the provision for warranty and the actual repairs in
the two years indicate that either the policy of using a percentage of net credit sales as
a means of estimating warranty costs is not appropriate, or the percentage used is not
adequate. The company needs to look at changing either its policy or perhaps simply
increasing the percentage used. Past claims as a percentage of past net credit sales
should provide a reliable measure. If a new percentage is adopted it will be applied
prospectively (from 2015-16 on) according to AASB 108 paragraph 36.
If the variance for 2014-15 was due to an error in calculation then, providing it is
material, the figures for 2014-15 should be retrospectively corrected (according to
AASB 108 paragraph 42) by the following entry:
$
$
Retained earnings (1 July 2015)
Dr
8 000
Provision for Warranty
Cr
8 000
Additionally, this would indicate that the variance in 2013-14 may be a one-off
aberration.
QUESTION 12.4:
CAMEL LTD
CAMEL LTD
Classification of after reporting period events
Assuming all events are material by reason of size and nature:
Date
17 July 2013
Classification
Non-Adjusting
Justification
The storm which caused the loss of the fishing
fleet and the uninsured loss of profits occurred
after the end of the reporting period and
impacts on future conditions.
19 July 2013
Adjusting
29 August 2013
Non-Adjusting
2
3
4
5
6
3 187 000
60 000
1 300 000
4 547 000
$ 6 459 500
998 520
160 000
1 158 520
8
9
240 000
400 000
640 000
$1 798 520
Net assets
EQUITY
Share capital
Retained earnings
Total equity
$ 298 080
644 420
970 000
1 912 500
$ 4 660 980
10
4 085 500
575 480
$ 4 660 980
Share
capital
$ 4 085 500
Retained
earnings
$ 275 000
Total
$ 4 360 500
$ 4 085 500
500 480
(200 000)
$ 575 480
500 480
(200 000)
$ 4 660 980
EARTH LTD
Notes to and forming part of the financial statements
for the year ending 30 June 2013
Note 1. Summary of significant accounting policies
Statement of compliance
The financial statements are general purpose financial statements which have been
prepared in accordance with the requirements of the Corporations Act 2001,
Australian Accounting Standards which include Australian equivalents to
International Financial Reporting Standards (AIFRSs) and AASB Interpretations.
Compliance with AIFRSs ensures the financial statements and notes comply with
International Financial Reporting Standards.
Basis of preparation
The financial statements have been prepared on the historical cost basis, except where
stated otherwise.
Various accounting policies details need to be provided, including details required by
AASB 101 paragraph 122 (management judgements made in applying accounting
polices) and paragraph 125 (sources of estimation uncertainty).
Note 2. Trade and other receivables
Accounts receivable
Allowance for impairment of receivables
Prepaid expenses
Note 3. Inventories
Raw materials
Work in progress
Finished goods
$ 651 020
(10 000)
641 020
3 400
644 420
$x
x
x
970 000
Balance
Accumulated depreciation
Land &
buildings
Plant &
equipment
Total
$ 1 750 000
(207 000)
1 543 000
$ 1 716 000
(72 000)
1 644 000
$ 3 466 000
(279 000)
3 187 000
Note 6. Investments
10% Telstra bonds - at cost
Note 7. Trade and other payables
Accounts payable
Accrued expenses
Dividends
$ 100 000
(40 000)
60 000
$1 300 000
$ 790 000
8 520
200 000
998 520
$ 240 000
$ 400 000
$ 4 086 000
(500)
4 085 500
$ 56 000
19 000
75 000
$ 1 500 000
1 500 000
3 000 000
10
2.
What is the concept of cash used in the preparation of the statement of cash
flows? Why is defining cash important?
The concept of cash adopted by AASB 107 covers both cash and cash equivalents.
Note the definitions of cash and cash equivalents in the standard. Note also from
paragraph 8 of the standard that certain borrowings (e.g. bank overdrafts) may be
included in the definition of cash equivalents if they are repayable on demand and
form an integral part of the entitys cash management function.
The definition of cash and cash equivalents is important, as an item included in this
concept cannot generate a cash flow and therefore is not reported in the statement of
cash flows. That is, increasing a bank balance with funds from a short-term bank bill
doesnt generate a cash flow, whereas decreasing a bank account to purchase
machinery is a cash flow.
4.
Why are gross cash flows required to be reported under the cash flow
standard? In what circumstances can net flows be reported?
Gross cash flows are required under AASB 107 paragraphs 18 and 21 and the direct
method of reporting operating cash flows is recommended. It is felt that the netting of
cash flows increases the possibility of loss of information. Paragraph 13 states that
reporting specific components of historical cash flows provides a useful basis for
forecasting future cash flows. It is considered that the gross flows approach is a more
informative method of presentation than that which discloses only the net amount of
cash flows with no indication of inflows/outflows of individual items of operating
activities. Nevertheless, net cash flows can be reported for investing and financing
activities as discussed in paragraphs 22 to 24.
11. A student of accounting, after studying the appendix to AASB 107, was
confused. Long-term borrowings are recognised as a financing activity of an
entity, yet interest paid is included in cash flow from operations. After some
consideration the student concluded, Since interest expense is regarded as a
financial expense, interest paid should be treated as part of the financing
activities of an entity, and be classified in the statement of cash flows
accordingly. Would you support the conclusion reached by the student?
Explain why or why not.
Since interest is being paid on long-term borrowings that were initially reported as a
financing cash inflow, then the conclusion reached by the student is a valid one. The
standard itself is unclear on the reporting of interest paid. See paragraphs 31-33 of the
standard. The classification of interest as a financing activity would also assist users
for financial analysis purposes. But, carefully consider the definitions of operating
activities, investing activities, and financing activities in paragraph 6. Does interest
paid satisfy any of these definitions? Clearly, if interest is not a financing activity it
will have to be an operating activity, as shown by the definition of operating
activities.
Similar comments apply to the treatment of dividends paid on shares. Are they to be
regarded as operating activities or financing activities? The standard permits either
treatment (para. 34).
12
QUESTION 14.6
BURRUP LTD
BURRUP LTD
Statement of Cash Flows
for the year ended 30 June 2015
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from operations
Rent received
Income tax paid
Net cash from operating activities
$436 000
(413 000)
23 000
14 000
(7 500)
$29 500
(90 000)
20 000
80 000
(20 000)
80 000
19 500
20 000
$39 500
$28 000
40 000
5 000
9 500
(43 000)
(70 000)
60 000
$29 500
13
Workings
Received
From
Customers
$436 000
Payments
to
suppliers
of goods
$374 000
Payments
for
services
$39 000
= Sales
= $485 000
Cost of
Sales
Begin
accounts
+ rec'able
+ $77 000
Begin
=
- invent.
= $365 000 - $80 000
= Expense
= $39 000*
Begin
accrued
+ expenses
+
0
Ending
accounts
- rec'able
- $120 000
Discount
+ allowed
- $1500
Bad
- debts
- $4500
Ending
Begin
accounts
Ending
accounts
+ payable
+ $60 000
- payable
-0$120 000
+ invent.
+ $150 000
Ending
accrued
- expenses
0
Begin.
prepaid
- expenses
0
Disc
- recd.
- $1 000
Ending
prepaid
+ expenses
+
0
Retained Earnings
30 000 30/6/14
17 500 30/6/15
47 500
Balance b/d
Profit
7 500
17 000
24 500
35 000
75 000
110 000
30 000
10 000
40 000
19 500
28 000
47 500
14
QUESTION 14.9
MANJIMUP LTD
MANJIMUP LTD
Statement of Cash Flows
for the year ended 30 June 2014
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Cash used in operations
Income taxes paid
Net cash from operating activities
Cash flows from investing activities
Payment for plant and machinery
Proceeds from sale of furniture
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of shares
Dividends paid
Net cash provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
[o/draft - petty cash]
Cash and cash equivalents at end of period
$94 362
(97 311)
(2 949)
(1 743)
$(4 692)
(9 300)
950
(8 350)
10 000
(4 000)
6 000
(7 042)
(1 365)
$(8 407)
Note 1:
Note 2:
$7 589
3 075
500
(50)
1 000
(4 438)
(12 031)
(337)
$(4 692)
15
Payments
to suppliers
of goods
$47 368
Payments
For
Services
$49 943
Begin
accnts
+ rec'able
+ $6 537
Cost of
sales
Begin
=
- invent
= $35 000 - $18 258
= Expense
= $49 943
Begin.
accrued
+ expenses
+
0
Ending
Accnts
- rec'able
- $10 975
- $1 200
Ending
+ invent.
+ $30 289
Begin
accts
+ payable
+ $6 253
Bad
debts
Ending
accts
- payable
- $5 916
Ending
Begin
Ending
accrued
prepaid
prepaid
expenses - expenses + expenses
0
0
+
0
Balance c/d
39 200
39 200
39 200
Furniture
5 000 30/6/14
30/6/14
Carry amount
furniture sold
Balance c/d
5 000
1 100
3 900
5 000
1 450
250
1 700
16
21/10/14 Cash
21/10/14 Overprovision
30/6/14 Balance c/d
Share Capital
45 000 30/6/13
Retained Earnings
4 000 30/6/13
2 500 30/6/14
5 471
11 971
$7 000
Balance b/d
Issue for plant
Cash issue
30 000
5 000
10 000
45 000
Balance b/d
Profit
4 382
7 589
45 000
3 000
4 000
11 971
17