BAC6021 Financial Reporting Questions & Solutions

Introduction - BAC6021 Financial Reporting

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As per this assignment our major learning objective is to understand the conceptual framework of financial reporting (ISAB) and learning how to analyze the financial statements of companies and thus to achieve those objective this assignment consist of 3 major question which will helps to achieve those objectives.

Question 1) The need of financial statements information in terms of each user is as follows

1. a) Creditors: These are the person uses information to know about the ability of firm to repay the credit/loan amount, thus financial statement helps in knowing about financial soundness of any firm.
2. b) Investors: As if a person wants to invest his/her money in anything whether its business or it’s on some stocks or something, the first thing he/she will do is to check the financial soundness of the company by using financial statements. (Users of Accounting Information (Internal and External Users Explained), 2021).
3. c) Management: Financial accounts tells everything about business and as management role is to find whether business is profitable or not, it needs to go through financial statements.
4. d) Owners: These are the core person of the organization as they provide funds to the organization, they have the curiosity to know about all happening in their business and to know about it, thus financial statements helps them to do so.
5. e) Government: There is a need of financial information by gov. at the time of tax payment to determine whether firm has paid payable amount or not (Bragg and Bragg, 2021).

Question 3) Before stating the example let us brief about the events the events are as follows 

a) Adjusting Events ;

This is the type of event which provides us the evidence of those conditions which existed at the end of reporting period.

This types of events needs adjustments and even companies are required to adjust their statements as per the events (ACCA FA (F3) Notes: F4a. Event after the reporting period | aCOWtancy Textbook, 2021).

b) Non- Adjusting Events

This is the type of event which provides us the indicative information about the conditions that arose after the end of reporting period.

This type of event do not result in adjustment to the financial statements but should be disclosed as they can impact the evaluation/decision making process (IAS 10 Events after the Reporting Period, 2021).

Example of Adjusting Events:

It is related to IAS37 Provisions, Contingents Liabilities & Contingent Assets as it the liability pertaining to the below example might be recorded in statements of financial books and if not recognized the liability might be adjusted as per the above provision.

Settlement of litigation against the entity after the reporting date, as those events may provide evidence about the existed and the amount of liability pertaining at described date (IAS 10 Events After The Reporting Period (Balance Sheet Date) | Simplified, 2021).

Example of Non-adjusting Events:

Any company or firm plans to buy/purchase or sale major assets for its company for any reasons might be new techniques or anything else. 

1) The four main characteristics of Public Sector ( not for profit organization) relating to Local Refuse Collection Department can be as follows :

Health

 As this department know the causes and impact pertaining if not handles the things in a right manner as it is associated directly with health.

No Hidden Benefit

This is one of the department of gov. which has no hidden benefit associated and has only sole purpose to serve the nation.

Employment

Helps in generating employment opportunities for the local people & other people who finds difficulty in earning for their living & finding jobs ; thus this sector/department helps in giving them jobs which in turns also reduces unemployment.

Green Environment

Primary characteristics of this type of department is to give nation a green and healthy environment for living.

Question 3) The possible ‘new” operational decisions that were taken during the year that have caused the changes in results are as follows

1. Increased in inventory: There is purchase of stocks in company due to which there is decrease in cash in company accounts.
2. Increase in Payable: There is increase in payable in company, which indicates that the company is purchasing more products on credit from different dealers (What Is "Due From Shareholder" on a Balance Sheet?, 2021).
3. Increase in Receivable : There is increase in receivables in company, which indicates that company is paying its payable amount to the people during the year and it also represents that cash outflow is happening in that year (Operational Decision - an overview | ScienceDirect Topics, 2021).

After analyzing the statement of cash flow , as per following cases; the following interpretation could be made as follows :

A new supplier looking to offer credit to Teckies Plc

After analyzing the financial statement i.e. Cash flow statement, it could be seen that company is clearing it debts on time and even after subtracting the expenses, it can be found that company has good amount of cash in hand; which also signifies that company capacity is good and thus the chances of loss and uncertainty automatically decreases (Importance of Cash Flow Statement with Example, 2021).

Thus as a new supplier; I would definitely team-up with Teckies Plc.

A bank who has received a request for a loan (from Teckies Plc)

= After analyzing the financial statement i.e. Cash flow statement, it could be seen that company is receiving the payments from the debtors which indicates that there is a good amount of inflow of cash in a year and even if we analyze the statement we can also see that the remaining amount of cash at hand is also available and finally as a bank perspective it can be said that the repayment of a loan taken out of years ago will result in a significant cash outlay and thus the cash flow statement act as a medium to have a full overview of the company as banks need to carefully consider how company uses its cash resources to know how company gonna repay loan amount(Controller, 2021).

 Thus, as a bank I would definitely team-up with Teckies Plc.

 A potential new shareholder looking to invest in shares in Teckies Plc

After analyzing the financial statement i.e. Cash flow statement, it could be seen that company has paid dividends to its shareholders which shows that Teckies Plc is returning profits to its shareholders, even the ratio of payable and receivables is good as in terms of payable; the company is paying is debts on timely basis and in terms of receivable; the firm is getting its amount from the debtors, overall it can be said that firm cash flow status is in sound condition (Why is the Cash Flow Statement Important to Shareholders and Investors?, 2021).

 If we talk about shareholders perspective then we all know investors and shareholders wants to know how much return they would get from their investment, even wants to have the historic cash flow status of the firm as it would also help them to make decision even on same hand it also helps to know about the financial position of the firm and thus in short cash flow forecasting helps in easily determining the things on timely and on accurate basis.

 Thus, as a bank I would definitely team-up with Teckies Plc.

Question 4) As per the given financial statements , following pre-assumption values can be as follows

Interpretation:

In this the listed amount is chosen based on the given data and analyzing the financial information provided in the question.

Fair value above Carrying value $ 1,687

In this question the value of PPE (Property, Plant & Equipment can be as follows:

Calculation of PPE
Amount $
F.V as on 1st July 2020	22500
Book Value as on 1st July 2020
Closing Balance Value	18500
Opening B.V	23125
Less: Depreciation	-2313	20813
Total	1687.5

Interpretation:

As per the given data we have used $22500 as a fair value for Property Plant & Equipment as on date 1^st July 2020, and then we have used the book value as on date 1^st July 2020 and then calculated the opening B.V in working notes and then deducted the Opening B.V with depreciation charges i.e. $2313 (which is also calculated in working notes) thus resulting $20813 and then deducted the F.V as on 1^st July 2020 with resulting amount and thus final PPE amount is $1687.5 (Dichev, 2008).

Impairment Value $ 500

In this the listed amount is chosen based on the given data and analyzing the financial information provided in the question.

Fair Value of NCI $ 5,000

Thus, $5000, is the fair value of NCI at the time of acquisition of Son Ltd.

The Consolidated Statement of Financial Position for the group can be formulated as follows:

Consolidated Balance Sheet
(as on 31/12/2020)
Particulars	Amount ($)
Assets
Non-Current Assets
Property, Plant & Equipment (PPE)	85500
Goodwill	4813
Current Assets (CA)	15440
Total Assets	105753
Equity & Liabilities
Equity
Share capital $1 each	21400
Other equity	57127
Liabilities
Non-Current Liability (NCI)	6726
10% Loan	13000
Current liability (CL)	7500
Total Equity & Liabilities	105753

Interpretation:

Consolidation balance sheet is created by using the prescribed data provided in the question and some of the required data is calculated to have a clear view or to complete the statement as on 31^st December 2020(Stern, 1997).

Working Notes( for balance sheet)
1	PPE =	(65500+2000)	85500
2	CA=	(10500+5500-500-60)	15440
3	Share capital ($1) =	(20000+1400)	21400
4	10% Loan =	(10000+3000)	13000
5	CL=	(5500+2500-500)	7500

Major Calculations

Calculation of INA
Amount (000s)	Amount (000s)	Amount (000s)
D.O.C($)	P.A.C($)	D.O.C($)
Share capital	8000	8000
Reserve & Surplus	4000	6500	10500
12000	6500
Revolution of
PPE	1687
Depreciation	-187
Unrealized Profit on Stock	-60
13687	6253

Amount $
Peter Plc @70%	4377
NCI	1876

Interpretation:

In this the data at the time of merger is taken and data as after changes are taken to formulate the INA for the company (Dichev, 2008).

Calculation of Goodwill
Amount $
Investment	14000
Add: NCI @F.V	5000
Less:I.N.A	-13687
Goodwill	5313
Less: Impairment @500	-500
Total Goodwill	4813

Interpretation:

In this the data at the time of merger is taken and data as after changes are taken to formulate the goodwill for the company as on 31^st December 2020 even in this the amount of Impairment is deducted to have an exact goodwill amount pertaining on 31^st December 2020(Stern, 1997).

Calculation of NCI
On Acq Date	5000
Post Acquiring Changes	1876
Less: Goodwill Impairment	-150
Total	6726

Interpretation:

In this the amount at the date of acquisition is used and the amount after acquisition is calculated and then used to formulate the amount of NCI for the firm, even in this the amount of Impairment is deducted to have an exact NCI amount pertaining on 31^st December 2020.

Calculation of Other Equities
Amount $
Securities Premium
Opening	3000
New issue	12600
Retained Earning	37500
Add: Post Acq Changes	4377
Less: Goodwill Impaired	-350
Total	57127

 Interpretation:

 To formulate the amount of other securities factors like opening share premium is used and retained earning amount as on 31^st December is used and then post acquiring changes is added and then at last good impairment amount is subtracted to have a final amount.

Calculation of Additional Depreciation
Amount $
F.V of PPE on 1st July 2020	22500
Depreciation	2500
Depreciation Charged	2313
Total Additional Depreciation	187

Interpretation:

In this simply the amount of depreciation for 5 months and the charged depreciation is used and subtracted from each other to know the additional depreciation pertaining as on 31^st December (Dichev, 2008).

Working Notes
Amount $
1	Unrealized Profit on Stock	(300*25/125)	60
2	Goodwill Impairment	(500*30%)	150
3	Depreciation	(23125*0.5/5)	2313
4	Opening B.V	(18500/4*5)	23125
5	Depreciation	(22500/4.5*0.5)	2500

Conclusion:

 As we can see in this assignment we have 3 questions in which one of those question revolves around the conceptual framework for financial reporting (ISAB) and the other revolves around the analysis of cash flow statements and discussing the role and need of cash flow statement as for different kinds of users associated with the business and the last question revolves around the creation and formulation of consolidated statements and thus after formulation and answering to those questions , the basic framework of understanding is achieved and thus the learning objective is fulfilled.

References

• Accounting Simplified. 2021. IAS 10 Events After The Reporting Period (Balance Sheet Date) | Simplified. Available at: <https://accounting-simplified.com/ifrs/ias-10-events-after-the-reporting-period/>.
• Acowtancy.com. 2021. ACCA FA (F3) Notes: F4a. Event after the reporting period | aCOWtancy Textbook. Available at: <https://www.acowtancy.com/textbook/acca-fa/f4-events-after-the-reporting-period/event-after-the-reporting-period/notes>.
• Bragg, S. and Bragg, S., 2021. Users of financial information — AccountingTools. AccountingTools. Available at: <https://www.accountingtools.com/articles/2018/1/26/users-of-financial-information>.
• Controller, C., 2021. What do Banks look at when Extending Credit to a Business? | Complete Controller. Complete Controller | America's Bookkeeping Experts. Available at: <https://completecontroller.com/what-do-banks-look-at-when-extending-credit-to-a-business/>.
• Dichev, I., 2008. On the Balance Sheet-Based Model of Financial Reporting. Accounting Horizons, 22(4), pp.453-470.
• Guru99.com. 2021. Importance of Cash Flow Statement with Example. Available at: <https://www.guru99.com/cash-flow-report.html>.
• Icaew.com. 2021. IAS 10 Events after the Reporting Period. Available at: <https://www.icaew.com/technical/financial-reporting/ifrs/ifrs-standards/ias-10-events-after-the-reporting-period-previously-events-after-the-balance-sheet-date>.
• iEduNote.com. 2021. Users of Accounting Information (Internal and External Users Explained). Available at: <https://www.iedunote.com/users-of-accounting-information>.
• Kotak Securities®. 2021. Why is the Cash Flow Statement Important to Shareholders and Investors?. Available at: <https://www.kotaksecurities.com/ksweb/articles/why-is-the-cash-flow-statement-important-to-shareholders-and-investors>.
• Sciencedirect.com. 2021. Operational Decision - an overview | ScienceDirect Topics. Available at: <https://www.sciencedirect.com/topics/engineering/operational-decision>.
• Small Business - Chron.com. 2021. What Is "Due From Shareholder" on a Balance Sheet?. Available at: <https://smallbusiness.chron.com/due-shareholder-balance-sheet-69165.html>.
• Stern, E., 1997. Crisis and Learning: A Conceptual Balance Sheet. Journal of Contingencies and Crisis Management, 5(2), pp.69-86.