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F:S ex19.4 & prob 19.6

F:S ex19.4 & prob 19.6 - Solutions for Practice...

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Unformatted text preview: Solutions for Practice Questions Lecture Topic2 Practice Questions: Picker et al. Chapter 19 DQ2, DQ5, DQ 8 Exercise 19.4 Problem 19.6 DQ2 2. What are the major limitations of a statement of financial position as a source of information for users of general purpose financial statements? Refer section 19.3.1. The major limitations of a statement of financial position as a source of information about an entity’s financial position are: (a) The optional measurement of certain assets, such as property, plant and equipment at historical cost or depreciated historical cost (where the asset has a limited useful life) rather than a current value. Hence there may be a lack of comparability between the statement of financial position of one entity with the statement of financial position of another. Further, the use of cost/depreciated cost as the basis of measurement leads to the statement of financial position not giving a view of a current value of recognised assets. (b) The mandatory omission of intangible self-generated assets (such as brand names and mastheads and goodwill) from the statement of financial position as required by AASB 138 Intangible Assets. (c) The omission of various rights and obligations (such as non-cancelable operating leases) from the statement of financial position. This is particularly important as their omission results in off-balance sheet liabilities and assets that distort the reported leverage of the entity. As a consequence of these limitations, the statement of financial position of an entity does not purport to present a total picture of the real worth of the entity, nor does it purport to report all assets controlled by the entity and all the obligations of the entity. 5. What is meant by classification of expenses by nature or function? Refer section 19.4.3. Classification of expenses by nature is according to their type of expense (such as, materials used, transport costs, employee benefits, depreciation, electricity, advertising costs, finance costs). Classification by function is according to the activity involved (such as, cost of sales, selling and distribution costs, administration, and finance costs). 8. Why is a summary of accounting policies important to ensuring the understandability of financial statements to users of general purpose financial statements? Refer sections 19.7 and 19.7.1. A summary of accounting policies is important to ensuring the understandability of financial statements to users of general purpose financial statements for the following reasons: Various options exist in certain A-IFRS (such as the use of equity method or proportionate consolidation for the recognition of an interest in a jointly controlled entity, and the option to revalue property, plant and equipment as an alternative to using historical costs) and therefore it is essential that the summary of accounting policies identify which options have been adopted (where relevant). Under A-IFRS various assets of an entity (such as internally generally brand names and self-generated goodwill) and rights and obligations (such as non-cancelable operating leases) are not recognised in an entity’s statement of financial position. The summary of accounting policies helps ensure users of financial statements are aware of these omissions. Exercise 19.4 Statement of changes in equity Riley Ltd Statement of Changes in Equity for the year ended 30 June 2010 Balance at 30 June 2009 Comprehensive income for the year ended 30 June 2010 Dividends Transfers Issue of share capital Balance at 30 June 2010 Share General Revaluation Retained Total Capital Reserve Reserve Earnings $ $ $ $ $ 160 000 40 000 60 000 160 000 420 000 14 000 10 000 40 000 200 000 50 000 74 000 130 000 144 000 (110 000) (110 000) (10 000) 40 000 170 000 494 000 Problem 19.6 Preparation of a statement of financial position and statement of comprehensive income Ryan Ltd Statement of Comprehensive Income for the year ended 30 June 2010 $'000 Revenue Cost of sales Gross profit 7 360 (4 978) 2 382 Other income other income + rent received 15 Share of profits of associates 36 Selling and distributions expenses Administrative expenses (1 510) (420) Finance costs interest exp + other borrowing exp (80) Profit before tax 423 Income tax expense Profit for year Other comprehensive income: (141) 282 Revaluation of available-for-sale investments 23 Related income tax (8) Other comprehensive income Total comprehensive income 15 297 Explanations Other income comprises rent received $9 000 + other income $6 000 = $15 000. Selling and distribution expenses comprises distribution expenses $143 000 + sales and marketing expenses $1 367 000 = $1 510 000. Finance costs comprise interest paid $74 000 + other borrowing expenses $6 000 = $80 000. ...
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