Chapter 4 Solutions.docx - Chapter 4 Solutions Questions 1 B 2 D 3 B 4 A 5 A and B Exercise 1 An analysis of expenses recognized in PL can be presented

Chapter 4 Solutions.docx - Chapter 4 Solutions Questions 1...

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Chapter 4 Solutions: Questions: 1. B 2. D 3. B 4. A 5. A and B Exercise 1: An analysis of expenses recognized in PL can be presented using a classification based on either the nature of expenses or their function within the entity, whichever provides information that is reliable and more relevant (IAS 1.99). There are two different methods of presenting components of expenses: by nature or by function (note that under U.S. GAAP, there is no requirement for expenses to be classified according to their nature or function but companies normally classify expenses by function). The nature of expense method focuses on aggregating expenses within PL according to their nature (e.g., salaries and wages, depreciation, purchases of raw materials, or advertising costs). Under this method, expenses are not reallocated among various functions within the entity (e.g., production or distribution) as shown in Illustration 4.5. Page 94, Presentation of Financial Statements Exercise 2: Students must list line items that require significant judgment, which may include non-recurring items, classification of assets held for sale, valuation of intangible assets, estimated useful life used for depreciation and amortization of assets and impairment of goodwill and intangibles. Exercise 3: Reclassification adjustments arise, for example, on (a) disposal of a foreign operation, and (b) when some hedged forecast cash flow affects PL in cash flow hedges. Thus, if an entity sold its investment in a foreign operation, any unrealized gain or loss previously recognized as OCI would be reclassified to PL. Reclassification adjustments, for example, do not arise (are recognized in OCI, but are not reclassified to PL in subsequent periods) on the following items: (a) changes in revaluation surplus, and (b) re-measurement of defined benefit pension plans. Page 93, Presentation of Financial Statements Exercise 4: The objective of financial statements is to provide useful information to a wide range of users. Useful information aids users of the financial statements in making economic decisions based on the financial position, cash flows, and financial performance of the entity (IAS 1.9). Because this information is communicated through a complete set of financial statements, the standard specifically defines what is meant by a complete set of financial statements.
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