Question 2 [15 marks]

Financial statement presentation

Snow Gear Ltd, a manufacturing company, commenced operations on 1 July 2018. You are the companys financial accountant.

The trial balance for the year ended 30 June 2019 has been prepared as follows:

Snow Gear Ltd
Trial balance as at 30 June 2019
		DR ($)	CR ($)
Cost of goods sold		860,000
Advertising expense		123,000
Salaries and wages - administration staff		50,000
Salaries and wages - selling and distribution staff		180,000
Annual leave expense - administration staff		3,000
Annual leave expense - selling and distribution staff		16,000
Doubtful debts expense		4,000
Depreciation expense		90,000
Interest expense		32,000
Other expenses		36,000
Warranty expense		31,000
Income tax expense		375,000
Cash on hand		41,000
Cash management account		200,000
Trade debtors		185,300
Goodwill		50,000
Raw material inventory		206,000
Finished goods inventory		456,000
Land		500,000
Buildings		650,000
Accumulated depreciation - buildings			20,000
Plant and equipment		900,000
Accumulated depreciation - plant and equipment			70,000
Patents		100,000
Deferred tax asset		13,000
Investment property		368,000
Sales revenue			2,650,000
Interest income			2,500
Rental income			16,000
Bank loan			300,000
Trade creditors			91,200
Deferred tax liability			8,000
Allowance for doubtful debts			2,600
Provision for annual leave			19,000
Provision for warranty			28,000
Accrued expenses			82,000
Current tax liability			380,000
Retained earnings, 1 July 2018			0
Dividends paid		200,000
Share capital		________	2,000,000
		5,669,300	5,669,300

Additional information:

• In relation to other expenses in the trial balance, 90% relates to administration, and 10% relates to selling and distribution. In relation to depreciation expense, 80% relates to selling and distribution, and 20% relates to administration.
• Raw materials used during the year totalled $1,316,000.
• The bank loan is repayable over 10 years ($30,000 principal each year).
• The provision for annual leave is payable within 1 year.
• The provision for warranty is in respect of 12-month warranties given on all products sold.
• Share capital consists of 1,000,000 ordinary shares, fully paid to $2.00 each.
• Snow Gear Ltd is a reporting entity.
• In relation to the statement of financial position, where AASB 101 requires entities to disclose further sub-classifications of the minimum line items on the face of the statement or in the notes, the directors of Snow Gear Ltd want to report only the minimum line items on the face of the statement, and leave the sub-classifications to be disclosed in the notes.

Required:

i) Prepare a memo to the directors, explaining the methods available for classifying expenses on the statement of profit or loss and other comprehensive income. The directors would also like to know which method will result in the highest profit being reported to shareholders. Finally, also advise the directors of any factors that need to be considered when selecting between the available methods. Provide references to key paragraphs in the accounting standards.

ii) To illustrate the differences in the methods discussed above, prepare the statement of profit or loss and other comprehensive income using each of the available methods, for the year ended 30 June 2019, in accordance with AASB 101. Use the single statement format. Show all workings (for example, to show how amounts in the financial statements have been calculated).

iii) Prepare the statement of financial position of Snow Gear Ltd as at 30 June 2019, in accordance with AASB 101. Notes and comparative figures are not required. Show all workings (for example, to show how amounts in the financial statements have been calculated).