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financial accounting

Questions and Answers of Financial Accounting

On 1 July 2020 Anglesea acquired a 70 per cent interest in Bells Ltd at a cost of $1 000 000, and Bells Ltd acquired an 80 per cent interest in Torquay Ltd at a cost of $750 000. Both payments
If an entity has shares in another organisation, when would that other organisation be considered to be an ‘associate’?
If equity investments are held as current assets, how can they be measured?
If an entity has shares in another organisation, when would that other organisation be considered to be an ‘associate’?
Explain the cost method and the fair value method of accounting.
Will the accounting adjustments required by the equity method of accounting be performed in the investor’s own separate accounts, or by way of consolidation adjustments within a consolidation
If a dividend is received from pre-acquisition earnings of an investee, how would this dividend be treated if:a. The cost method is used by the investor?b. The fair value method is used by the
What is a ‘joint arrangement’, and what are the two broad types of joint arrangements?
Do you believe that the cost method or the fair value method is more appropriate for measuring equity securities? Explain your answer.
When eliminating the investment in a subsidiary against the pre-acquisition capital and reserves of a subsidiary for the purposes of presenting consolidated financial statements, should both direct
Maroubra Ltd holds 70 per cent of the ownership equity of Coogee Ltd and Coogee Ltd holds 80 per cent of the ownership equity of Clovelly Ltd. During the financial year the following dividends are
Consider the example in Figure 28.7 and assume that ownership interest (the percentages shown) is representative of the capacity to control the various entities.RequiredDetermine which of the
A Ltd has a 60 per cent interest in B Ltd and B Ltd has an 80 per cent interest in C Ltd. Both acquisitions were made in 2020. During the financial year ending 30 June 2023, A Ltd paid a dividend of
If an intermediate parent acquires a subsidiary and, in doing so, purchases goodwill, then how will any impairment of that goodwill be treated when working out the non-controlling interest in profits
When calculating the non-controlling interest in the post-acquisition profits of a subsidiary, is the calculation based upon the non-controlling interests’ direct ownership interests?
What is the difference in the consolidation accounting approach used for sequential and non-sequential acquisitions?
How is ‘profit’ defined for accounting purposes?
What does ‘other comprehensive income’ represent?
What does ‘total comprehensive income’ represent, and in which financial statement shall it be presented?
If an entity were to discover that an expense of a prior period was omitted (perhaps as the result of a genuine mistake), should it record the error by increasing the expenses in the period in which
What is a ‘reclassification adjustment’ as it relates to profit or loss and other comprehensive income?
If it is discovered that certain expenses that should have been recognised in a previous period were omitted (there was a ‘prior period error’), should the correction of this prior period error
What items must be recorded on the face of the statement of changes in equity?
What is the role of the statement of changes in equity?
When reviewing the financial statements and supporting notes of a reporting entity, is it possible to find out about all of the individual types of expenses and income that the entity has incurred or
List some of the expenses and income that must be disclosed according to AASB 101. Do these items have to be disclosed in the body of the statement of profit or loss and other comprehensive income,
Does the statement of profit or loss and other comprehensive income provide a reconciliation of opening and closing retained earnings? If not, where can such a reconciliation be found?
When is it permissible for a reporting entity to treat expenses directly as a reduction to retained earnings, rather than including them as part of the period’s profit or loss?
What is the role of the statement of changes in equity and how does it complement the disclosures made within the statement of profit or loss and other comprehensive income?
You are to consider the following two scenarios:Scenario 1 Fishtail Ltd has changed its basis of calculating doubtful debts from 2.5 per cent of gross accounts receivable to 4.0 per cent of gross
In an article that appeared in The Age on 17 March 2011 (‘Billabong downgrades profit forecast after quake’ by Jared Lynch), it was stated that:Shares in surfwear retailer Billabong fell
On 30 June 2023, the end of the current reporting period, Cairns Ltd made a decision, using the information obtained over the past few years, to revise the useful life of an item of plant acquired
Do you consider financial reporting practices used by private-sector, profit-seeking entities to be applicable to government departments? Explain your answer.
The following two unrelated scenarios apply to Rabbit Ltd, whose financial year ends on 30 June 2023.Scenario 1 Rabbit Ltd has, in the past, always depreciated its factory buildings over 25 years. As
Do you agree with the view that a company which reports substantial profits within its statement of profit or loss and other comprehensive income is a ‘good company’? Clearly explain your answer.
Provide an argument explaining why expenses that were inadvertently omitted in a previous year should be debited directly to retained earnings in the following period in which the error is
Even though reporting entities are required to comply with accounting standards, are they also allowed to highlight and discuss other measures of ‘profits’ that are prepared in a way that is not
In an article that appeared in The Australian Financial Review on 11 December 2010 (‘Qantas filings damning of Rolls-Royce’, by Andrew Cleary), it was stated that:Filings lodged with the Federal
On 30 June 2023, the end of the current reporting period, Kirk Ltd made a decision, using the information obtained over the past few years, to revise the useful life of its building acquired five
Noosa Ltd manufactures quality surf clothing. In the 2023 financial year, it reports a profit before tax of $500 000 and an income tax expense of $190 000.REQUIREDConsider each of the following items
During 2020, Point Addis Ltd commenced the construction of a windfarm for its own use. During the reporting period ending 30 June 2023, a change in accounting standards means that the directors are
Within AASB 101 there is a prohibition on disclosing ‘extraordinary items’. Provide an assessment of the merits of this prohibition.
Consider the following extract from an article that appeared in The Sunday Times (Perth) on 6 September 2015 (‘Robots to take up jobs’, by Annabel Hennessy)Perth should prepare for a robot job
What is a ‘cash-settled share-based payment transaction’?
Cottesloe Ltd has granted its managing director 50 000 share options conditional upon him remaining with the company for a further five years. In addition, the share price must increase by 50 per
Prior to the release of AASB 2, many reporting entities failed to recognise the share options being provided to senior executives. Why?
On 1 July 2023, Supplyco Ltd provides Grove Ltd with some inventory, which has a fair value of $200 000. In exchange for the inventory, Grove Ltd provides Supplyco Ltd with 20 000 shares in Grove
Identify the implications the following have for the preparation of a statement of cash flows and accompanying notes:1. The sale of a non-current asset2. An increase in a provision for long-service
Pursuant to AASB 107, apart from the statement of cash flows, what other disclosures must be made?
Fremantle Ltd provides you with the following information:REQUIREDDetermine how much cash has been received from customers during the year? Sales for the year $400 000 Discounts provided during the
For an equity-settled share-based payment transaction with employees, how should the cost of the associated employment benefits be determined?
How are share-based transactions to be measured?
What are three broad categories of disclosures required by AASB 2?
Will a liability be recognized in relation to a cash-settled share-based payment transaction and, if so, does the liability need to be remeasured at the end of each reporting period?
How would an entity determine the fair value of a share-based transaction when the other party to the transaction is a supplier of goods?
How would an entity determine the fair value of a share-based transaction when the other party to the transaction is an employee providing their services?
If an employee is provided with share options that will not vest for five years, when will the expense related to the granting of the share options be recognised?
Do equity-settled share-based payment transactions or cash-settled share-based payment transactions lead to the recognition of liabilities? If liabilities are recognised, do they need to be restated
If no share options of a similar nature were being traded on a securities exchange, what factors would be considered by an options pricing model when trying to place a fair value on options?
If an organisation has engaged in some equity-settled share-based payment transactions with senior managers, and a number of share options are outstanding at the end of the reporting period, then
In what circumstances would equity instruments associated with a share-based payment transaction be measured at their intrinsic value?
If the fair value of equity instruments changes in the course of a vesting period, will this have implications for the measurement of the value of those instruments?
Why could the release of AASB 2 have had an economic impact on reporting entities?
What is a ‘temporary difference’ and why does it arise?
How is the tax base of an asset determined?
Why would a profitable company potentially not have any income tax payable to the relevant taxation authority?
How is the tax base of a liability determined?
What is a ‘deferred tax asset’, and when would it arise?
How do you determine the income tax expense of a company for accounting purposes?
What is a ‘deferred tax asset’, and when would it arise?
How does a company calculate its current liability ‘income tax payable’?
Would incurring a loss for tax purposes lead to the recognition of a tax-related asset in the financial statements? Why?
What is the rationale for recognising a deferred tax asset or a deferred tax liability?
What is the justification for recognising a deferred tax asset because an entity has unused tax losses?
Explain why a temporary difference relating to employee benefits obligations for long-service leave creates a deferred tax asset.
Will the existence of unused tax losses always lead to the recognition of a deferred tax asset?
How will a change in the tax rate impact the balances of deferred tax assets and deferred tax liabilities? Should any such change be reflected in the reported profit of the reporting entity when the
Can deferred tax assets be offset against deferred tax liabilities?
Identify some disclosures that a reporting entity has to make with respect to the impacts of taxation on its financial performance and financial position.
A company has a depreciable non-current asset that cost $300 and has a carrying amount of $200. For tax purposes, accumulated depreciation amounts to $180.REQUIREDa. Assuming that the tax rate is 30
A company recognises a liability of $300 for accrued product warranty costs. As is the case for many accrued expenses, the Australian Taxation Office (ATO) does not treat the expenses as deductible
A company has prepaid rent with a carrying amount of $400 000. A tax deduction was obtained at the time the rent was paid.REQUIREDa. Assuming that the tax rate is 30 per cent, what is the amount of
Main Beach Ltd has a depreciable asset with a carrying amount of $200 000 and a tax base of $120 000 if the asset were sold immediately (which reflects the effects of indexation for capital gains tax
Do the liabilities and assets that are generated by using the ‘balance sheet method’ of accounting for tax appear to be consistent with the definition and recognition criteria of assets and
Is it possible that the recognition of deferred tax assets associated with unused tax losses could be used as a means of ‘earnings management’? Explain your answer.
Fitzgibbons Ltd has an item of machinery that cost $1 200 000 and has accumulated depreciation of $400 000. The company decides to switch to a revaluation model for machinery. The fair value of the
Elwood Ltd has the following deferred tax balances as at 30 June 2023: Deferred tax asset $1 000 000Deferred tax liability $800 000The above balances were calculated when the tax rate was 30 per
Identify and describe the three types of activities that are reported in the statement of cash flows. Why do you think that AASB 107 would require such a breakdown?
What is the role of the statement of cash flows?
The statement of cash flows provides information about movements in ‘cash’ and ‘cash equivalents’. What do we mean by ‘cash equivalents’?
Define ‘cash and cash equivalents’ for the purposes of a statement of cash flows.
The statement of cash flows separates the total cash flows of a reporting entity into three classifications of cash flows. What are these three classifications?
Would the cash flows from operating activities be greater if the balance of accounts receivable increases, or decreases, across the reporting period?
Is cash-flow data more ‘reliable’ than profit-related data? Explain your answer.
Which form of information is more useful for evaluating the financial performance and position of a reporting entity: cash-flow data or information about accounting profits? Explain your answer.
Discuss the practical difficulties in preparing a statement of cash flows pursuant to AASB 107 and critically appraise its value to the statutory accounts.
Why is a reconciliation of the profit for a year to the cash flows from operating activities often provided within the notes that accompany an organisation’s financial statements? Why is it useful?
How is depreciation expense reported within the statement of cash flows?
Why is it often considered that the statement of cash flows is more difficult for managers and their accountants to manipulate in comparison to information that is reported in the income statement
If the closing balance of accounts receivable is greater than the opening balance, will cash flows from customers be greater or less than the reported sales revenue?

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