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financial accounting

Questions and Answers of Financial Accounting

An organisation might have generated significant profits for the past five years but nevertheless continue to report negative cash flows from operations. How is this possible?
Sunshine Beach Ltd started the accounting period with a liability for accrued wages of $50 000. Wages expense for the year was $780 000 and the closing balance of accrued wages was $65 000. How much
The sales for an organisation within an accounting period were $340 000, opening accounts receivable was $40 000, and closing accounts receivable was $15 000. There were no doubtful debts expenses
Rottnest Ltd has provided you with the following information:REQUIREDAssuming that accounts payable relate only to the purchase of inventory, you are to determine the cash payments made to suppliers
Margaret River Ltd provides you with the following information about its property, plant and equipment:REQUIREDYou are to determine how much cash has been received from the disposal of property,
The balances in the accounts of XYZ at 30 June 2023 and 30 June 2024 are:Other InformationShare capital is increased by the bonus issue of 20 000 shares for $1.00 each out of retained earnings. Plant
Following are extracts from the accounting records of S Ltd at 30 June 2024:Additional informationDuring the year, land with a fair value of $240 000 is acquired through the issue of 240 000 fully
Pty Ltd is a manufacturer of tennis equipment and fashion wear. The statement of financial position as at 30 June 2024 and details of expenses and revenues for the year ending 30 June 2024 are as
Cabarita Ltd is involved in manufacturing swimming pool accessories. Cabarita Ltd’s statements of financial position for the years ending 30 June 2023 and 30 June 2024 are presented below.Cabarita
What might motivate an organisation to present interest expense as part of cash flows from financing activities, rather than as part of operating activities?
In a newspaper article of 6 August 2018 entitled ‘FAANGs have lost their bite’, by Libby Koch and David Koch (in The Advertiser), it was stated that profit is an accounting number that managers
If cash flows from operations as reported by an organisation were, for the past five years, well above reported profits, would this be an issue of concern?
Because exploration and mining activities are inherently risky and uncertain, all exploration and evaluation expenditures should be expensed as incurred.’REQUIREDEvaluate this statement.
Would it be permissible for a company operating in the extractive industries to write off all exploration and evaluation expenditure, regardless of the ultimate success of a site?
For depreciable assets used in a particular area of interest, what factors would you consider in determining the depreciation period (useful life) of the asset?
When would you use time as the basis for amortising pre-production costs incurred in a mining venture
If circumstances suggest that carried forward (capitalised) exploration and evaluation expenditure exceeds their recoverable amount, what should be done?
What factors might indicate that exploration and evaluation assets have been impaired such that an associated impairment loss should be recognised
Does AASB 6 address issues associated with how to account for expenditure once an organisation has moved beyond the exploration and evaluation phase?
Once it is determined that it is technically feasible and commercially viable to extract resources, how shall the pre-existing exploration and evaluation expenditure be treated?
Would you expect the profits of an entity using the full-cost method of accounting (permitted in the USA but not in Australia) to be higher or lower than the profits of an entity that uses the
Generally speaking, what costs should be included in the cost of inventory of an entity involved in the extractive industries? Explain your answer.
Assume that a company is not legally required to restore the land after it has ceased mining. Nevertheless, it has determined that it will restore the land because ‘it is the right thing to do’.
If a decision is made to abandon an area of interest, how should any pre-production costs in respect of that area be treated?
Does the available evidence suggest that measuring various pre-production expenditures at current value/fair value would provide information that satisfies the usual cost–benefit test?
Would the choice between historical cost and fair value have implications for the potential volatility of reported profits or losses
What sort of non-financial disclosures might organizations in the extractive industries make?
If an entity is considering revaluing its exploration and evaluation assets, would the revaluation increase the ‘relevance’ of the information from the perspective of the readers of the financial
Mining operations will typically create various forms of damage to the natural environment, and that environment will need to be restored/rehabilitated at the cessation of the mining activities. When
Is an entity in the extractive industries required to separately disclose information about exploration and evaluation assets?
In respIect of a provision for future restoration expenditure, what disclosures shall b made in the financial reports
If an organization expenses all exploration and evaluation expenditure as incurred, would the related financial reports provide ‘relevant’ information?
When can the costs incurred in the exploration and evaluation phases of operations be carried forward as assets?
Generally speaking, when should an organisation in the extractive industries recognise revenue?
Organisations within the extractive industries will ultimately generate inventory. Will the ‘costs of inventory’ include costs that were incurred in the initial exploration and evaluation phases
When should a company in the extractive industries start accounting for its restoration costs?
According to the US experience, what would have motivated firms to lobby against the abolition of the fullcost method?
What are the five broad phases of activities undertaken by organisations within the extractive industries?
What are the ‘extractive industries’?
Define ‘area of interest’.
What is long-service leave and what is meant by: a preconditional period; a conditional period; and an unconditional period?
Why do some employers provide their employees with shares or options to buy shares in the organisation?
In relation to superannuation entitlements from a defined benefit plan, how do we determine the related expense to be recorded by the reporting entity?
Some employers will pay out employees for any unused sick-leave entitlements if they leave the organisation, whereas in other organisations employees forfeit this entitlement when they leave. Explain
Explain the difference between a defined benefit plan and a defined contribution plan. Which plan poses more of a challenge to the accountant, and why?
On 1 July 2023, Flyer Ltd decides to lease an aeroplane from Finance Ltd. The term of the lease is 20 years. The implicit interest rate in the lease is 10 per cent. It is expected that the aeroplane
Classic Malibu Ltd decides to lease some machinery from Noosaville Ltd on the following terms:Date of entering lease: 1 July 2023.Duration of lease: 10 years.Life of leased asset: 10
Determine for each of the following arrangements the manner in which the relevant lease should be classified by the lessor pursuant to IFRS 16/AASB 16. Give reasons for your answers.1. Company A
Explain why the release of IFRS 16, and subsequently AASB 16, might have been expected to influence a number of agreements organisations may have negotiated with lenders, or with their senior
Consider the following two illustrative examples, which involve a fibre optic cable (and which were discussed within IASB, October 2015), and determine for each example whether:There is an
On 1 July 2023, Iselin Ltd signs a non-cancellable agreement to lease a building from Weber Ltd. The lease agreement requires seven annual payments of $375 000, with the first payment being made on
In IASB (2016b) it is stated:The IASB acknowledges that the change in lessee accounting (brought about by the release of IFRS 16) might have an effect on the leasing market if companies decide to buy
According to IASB (2016a), the implementation of IFRS 16 is expected to:1. Improve comparability between companies that lease assets and companies that borrow to buy assets, and2. Create a more level
In a newspaper article that appeared in The Australian Financial Review on 21 March 2019 entitled ‘$100b of lease liabilities head for balance sheets’ (by Vesna Poljak, p. 17), it was reported
Gregory Ltd enters into a non-cancellable five-year lease agreement with Sanders Ltd on 1 July 2023. The lease is for item of machinery that, at the inception of the lease, has a fair value of
When a lessor leases an asset to a lessee, will the underlying asset appear in the balance sheet of the lessor and will the lessor depreciate the underlying asset?
What are initial direct costs and how are lessees and lessors required to account for them?
Why would the carrying amount of a lease asset typically reduce more quickly than the carrying amount of a lease liability?
Leoni Ltd has entered into a number of agreements as identified below:AGREEMENT 1 Leoni Ltd has signed a contract to lease a truck for a non-cancellable term of 12 months. There is an option to
How shall the lessee and lessor account for a residual value guarantee if it exists?
When a lessee recognises a lease, why are the expenses associated with the lease generally higher in the earlier years of the lease?
When a lease transaction is to be capitalised, how do we determine the value of the leased asset, and the lease liability?
Capetown Ltd started business at the commencement of the current financial year. The company manufactures rugby balls. Costs did not fluctuate during the year. The following information is available
The following list relates to expenditure incurred by Warm Buttered Ltd for the year ended 30 June 2022. Warm Buttered Ltd makes a standard, one-size-fits-all hat.Other informationA total of 10 000
Horan Ltd has the following inventory transactions for the year ending 30 June 2022. All inventory items are identical.Horan Ltd sells 8000 units during the year, and has periodic system to record
Lynch Ltd has some inventory of wet-suits on hand at 30 June 2022. Costs for making the wet-suits comprise material worth $10 000, labour of $8000 and factory overheads applied on the basis of normal
Explain the difference between absorption and direct costing.
What disclosures need to be made with respect to reported inventory?
Assuming that costs of inventory are rising over time, you are required to determine which of either the firstin, first-out (FIFO) or the weighted-average cost approach will generate the highest cost
What is a ‘standard cost’? According to AASB 102, when may standard costs be used to assign costs to inventory?
If inventory was written down from cost to net realisable value, which financial accounts would be affected? Further, if subsequently it was determined that the organisation could in fact sell the
Moondoggie Ltd holds four lines of inventory. The total production costs of each item are shown below. Apart from the production costs, estimates of future packaging costs and transportation costs
AASB 102 prohibits the use of the LIFO method. What is the argument against the use of LIFO?
Shelley Ltd starts selling bowling balls in 2021. Although each ball looks the same, the unit cost of manufacture (which is done in batches) has fluctuated during the period. Shelley Ltd adopts a
If a company declares a final dividend to shareholders, under what conditions would such a dividend declaration create a liability that would be required to be disclosed in the statement of financial
Tamarama Ltd issues 1 million redeemable preference shares of $2.00 each on 1 July 2023. The shares offer a rate of return of 7 percent per annum. The shares are later redeemed at the option of the
Define a financial asset, a financial liability and an equity instrument.
What is a primary financial instrument? Provide some examples?
What is a ‘hedging arrangement’ and why might an organisation enter a hedging arrangement?
What is a derivative financial instrument? Provide some examples.
What is a ‘compound financial instrument’, and how is the debt component of a compound financial instrument determined?
What is a call option and what is a put option?
1. What are the three general approaches to measuring financial assets that are identified within AASB 9?2. What factors influence what measurement approach shall be used for a financial asset
Should impairment testing be undertaken for financial instruments that are measured at amortised cost?
Would physical assets (such as inventories, property, plant and equipment) be considered to be financial assets? Why?
How would you determine the debt component and the equity component of a compound financial instrument?
Do you think that a reporting entity would prefer to classify a financial instrument as debt or equity? Why?
An organisation has just acquired some inventory from an overseas supplier and the amount payable is denominated in a foreign currency. What risks does this transaction expose the organisation to,
What is a ‘hedge’ and what is its purpose?
What disclosures must be made, pursuant to AASB 132, in the period following a set-off of assets and liabilities?
Why would companies perform a set-off of assets and liabilities?
Would prepayments be considered to be financial instruments? Why?
Is there a consequence for reported profit or loss if a particular financial instrument, for example, a preference share, is designated as debt rather than equity? Explain the consequence.
What does mark to market mean?
Explain what a set-off of assets and liabilities is.
When does a ‘right of set-off’ exist?
On 1 November 2022, Long Ltd enters a contract to buy inventory from an overseas supplier, with the inventory to be delivered in six months’ time. A sum of US$1 000 000 is payable on delivery of
Reef Ltd wants to sell its portfolio of shares given that the market appears to be at a ‘high point’. However, there are restrictions in place which mean that it must wait for one month before it
AASB 132 requires that when determining whether a financial instrument is debt or equity consideration should be given to the economic substance of the instrument, rather than simply its legal form.
Explain how an interest rate swap operates.

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