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3101AFE Accounting Theory and Practice Workshop Questions for Workshops 7 - 9: Trimester 2 2017 WORKSHOP 7 - Accounting Policy Choice and Presentation of Financial Statements QUESTION 1: Select the 2016 annual reports for 2 companies from the Connect 4 database (Annual report collections) available on the Library. In selecting the companies the two companies must start with the same initial as either your first name starts with or your surname starts with. List the name & ASX code for each company and the following for each company: (i) How many pages the Annual report comprises. (ii) On which page number the Statutory Financial Statements begin (iii) If the company presents a combined Profit & Loss and Other Comprehensive Income; or two separate statements in the Statutory Financial Statements. (iv) What is the proportion of 'Other Comprehensive Income' to 'Total Comprehensive Income' (v) If the company refers to 'underlying profit' or 'underlying earnings' or 'significant' earnings or any variant to statutory profit. What is/are the difference/s between this variant of earnings to statutory disclosed? (vi) If the company provides a reconciliation of underlying earnings to statutory profit. What items are included in the reconciliation? For the following parts list the amount for both 2016 and 2015 (vii) What is the $amount of Finance Leases reported in the Balance Sheet? (viii) What proportion of Total Assets does Finance Leases represent? (ix) What is the $amount of Operating Leases reported in the Notes for each time-period required to be disclosed and the total $ amount? QUESTION 2: 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 discovered, rather than recognising them in the profit or loss in the period when the error was discovered. QUESTION 3: 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? 1 QUESTION 4: 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 accounts receivable. Scenario 2: Fishtail Ltd has previously allocated costs to inventory using a weighted average costing approach. It was decided to change to a first-in-first-out inventory cost flow assumption. REQUIRED Identify, giving reasons, which of the above scenarios is a change in accounting policy and which is not a change in accounting policy. Further, you are required to describe how the above scenarios are to be accounted for. QUESTION 5: 1. The following two unrelated scenarios apply to Rabbit Ltd, whose financial year ends on 30 June 2019. Scenario 1: Rabbit Ltd has, in the past, always depreciated its factory buildings over 25 years. As a result of new information obtained by the company during the current year a decision was made to reduce the expected useful life of the buildings to 18 years. Scenario 2: During the preparation of the financial statements it was discovered that a flood occurred in the previous financial year that destroyed some raw materials which were stored offsite and that were expected to have a long useful life. The materials were uninsured. No expense was recorded in the previous year in relation to the flood damage. The material was valued at $75 000 and the expense is considered to be material and will be permitted as a deduction for tax purposes. The tax rate is 30 per cent. REQUIRED Identify which of the two scenarios outlined above is a change in accounting estimate and which is a prior period error. Also provide any necessary journal entries QUESTION 6: Indicate the impact of each of the following errors or omissions would have on the net profit, assets and liabilities of Iluka Ltd. a) Iluka Ltd purchased a new range of children's electronic games from an overseas manufacturer. The company has estimated that warranty costs will be 4% of total sales. It has not recorded any warranty expenses. Total sales for the income year ending 30 June 2014 is $640 000. b) Auditors estimate that the provision for annual leave should be $112 000 instead of the provision allowed of $90 000. c) The effective life of new equipment is 8 years whereas Iluka Ltd calculated the depreciation of the equipment over 6 years instead. The difference in the depreciation expense each year is $47 000. d) The allowance for allowance for doubtful debts has been calculated as a percentage of total sales being 2% of $230 000. However it was considered that it would be more appropriate to be a percentage of credit sales as 3% of $170 000. 2 3