CHAPTER 2 Financial Statements: A Window on an Entity EXERCISES E2-1. Assets = Liabilities + Owners Equity Situation 1 $425,000 $236,000 $189,000 Situation 2 1,350,000 730,000 620,000 Situation 3 200,000 50,000 150,000 Situation 4 420,000 70,000 350,000 E2-3. Current assets are assets that will be used up, sold, or converted to cash within one year or one operating cycle. Current liabilities will be paid or satisfied within one year or one operating cycle. It s assumed below that the period to be applied is one year. a. Current asset, since the inventory is expected to be sold within one year. b. Current liability, since these amounts must be paid within 60 days. c. Current asset, since the amount is expected to be collected in less than one year. d. Non-current asset, since the machines will be used for more than one year unless there is an expectation that they will be replaced or sold within the year. e. Non-current asset, since machines are used over more than one period. An exception would be if there is an expectation that it will be sold soon. f. Current liability, since the bank loan might have to be paid at any time. Even if it s expected that the loan won t have to be repaid within a year, the loan would be classified as current because it might have to be repaid. g. Non-current asset, since we know it won t be realized in cash in the next year. h. Non-current liability, since it won t be settled within a year. E2-5 Speers Ltd. Income Statement For the year ended December 31, 2013 Revenue $4,500,000 Expenses 3,750,000 Net Income $ 750,000 Speers Ltd. Statement of Comprehensive Income 1 For the year ended December 31, 2013 Net Income $750,000
Other Comprehensive Income 75,000 Comprehensive Income $825,000 E2-7. Retained Earnings August 1, 2010 $ - August 1, 2011 $97,50 0 August 1, 2012 $261,5 00 + Net Income 97,500 Net Income 189,000 Net Income 225,00 0 - Dividends - Dividends (25,000) Dividends (40,000) Retained Earnings July 31, 2011 $97,500 July 31, 2012 $261,50 0 July 31, 2013 $446,5 00 Minden Corporation Statement of Retained Earnings For the year ended July 31, 2013 Retained Earnings, August 1, 2012 $ 261,500 Net income for the year 225,000 Less dividends (40,000) Retained Earnings, July 31, 2013 $ 446,500 Note: The fact each shareholder invested $50,000 each is irrelevant because it s included in the commons shares account not retained earnings. E2-9 a. Operating b. Operating c. Operating d. Financing e. Operating f. Investing g. Financing E2-11 Selkirk Corporation Summarized Income Statement and Balance Sheets For December 31, 2014 2013 2012 Revenues $478,000 $412,500 $375,000 2 Expenses 327,000 290,000 297,000 Net income 151,000 122,500 78,000 Retained earnings at the beginning
of the year 165,500 68,000 0 Dividends declared during the year 129,000 25,000 10,000 Retained earnings at the end of the year 187,500 165,500 68,000 Capital stock at the end of the year 180,000 150,000 100,000 Liabilities at the end of the year 300,000 280,000 225,000 Assets at the end of the year 667,500 595,500 393,000 E2-13. a. Operating cash outflow, since inventory is part of operating activities. b. Financing or operating (IFRS allows both) cash outflow. Dividends are a payment to equity investors. c. Financing cash inflow, since the proceeds are received from a lender. d. Investing cash outflow since a long-term asset increases. (If the furniture were purchased for resale it would be an operating item. However, since it was purchased to decorate an office the amount is an investing activity.) e. Investing cash inflow since a long-term asset decreases. This assumes that Argentia isn t a vehicle dealer (in which case the amount would be an operating item). The assumption seems reasonable given the amount received for the four delivery trucks. f. Financing cash inflow since common shares increases. g. Operating cash inflow since it s a cash receipt from providing goods/services to clients. h. Operating cash outflow since it s an increase in a current asset for an expense that contributes to revenue E2-15 Dugald Ltd. Statement of Cash Flows For the year ended December 31, 2015 Cash from Operations $658,000 Cash used for Investing Activities* (355,000) Cash from Financing Activities** (35,000) Increase in Cash During 2015 268,000 Cash on December 31, 2014 125,000 Cash on December 31, 2015 $393,000 *Cash from investing activities = Sale of computer equipment: 125,000 Purchase of marketable securities: 480,000 3
**Cash from financing activities = New bank loan: 300,000 - Repayment of mortgage: 335,000 E2-17 Balance Sheet (B/S); Income Statement (I/S); Statement of Retained Earnings/Statement of Shareholders Equity (SSE); Statement of Cash Flow (C/F) a. Amounts owed by customers (accounts receivable) (B/S) b. Depreciation expense (I/S) c. Common shares (B/S) d. Services owed to customers (unearned revenue) (B/S) e. Delivery vehicles (B/S) f. Cash from operations (C/F) g. Dividends paid (C/F) if they were paid and declared in the same period (SSE) h. Cost of inventory sold to customers during the year (cost of sales) (I/S) E2-19. a. Sussex Ltd. Income Statement For the Year Ended September 30, 2013 Revenue $495,000 Cost of Sales 34,000 Gross Margin 461,000 Expenses Depreciation expense $22,50 0 General and administrative expenses 139,00 0 Interest expense 27,000 Marketing and promotion expense 15,000 Research expense 50,000 Salaries and wage expense 97,500 Selling expenses 35,000 Income tax expense 41,000 427,000 Net Income $34,000 b. Net income is $34,000. c. Gross margin is $461,000. d. Gross margin percentage is 93% ($461,000/$495,000)) 4 E2-21.
Lunenberg Ltd. Income Statement Prepared Using the Cash Basis of Accounting Cash collected from customers $206,500 Amounts paid to suppliers (60,725) Amount paid to employees = $30,625 +1,750 (32,375) Income taxes (13,125) Cash basis net income $ 100,275 Lunenberg Ltd. Income Statement Prepared Using the Accrual Basis of Accounting Revenue ($206,500+19,600) $226,100 Cost of Supplies ($60,725 + 14,175 4,900) (70,000) Wages expense ($30,625 + 3,850 1,750) (32,725) Depreciation expense (7,000) Income taxes (13,125) Accrual basis net income $103,250 The two bases of accounting provide different results because expenses and revenues are recognized in different periods. The calculation of the cost of supplies under the accrual system is tricky. The $4,900 of supplies on hand isn t expensed because it was on hand (and therefore an asset) at the end of the period. Advances paid to employees are not reflected in the accrual income statement because it s for work that will be done in the future. Therefore, the amount is classified as an asset until the work is provided. 5 PROBLEMS P2-1. Auberndale Ltd. Balance Sheets As at December 31 (in thousands of dollars) 2014 2013 2012 Current Assets Cash $ 3,570 $ 5,856 $ 1,428 Accounts Receivable 11,067 9,996 8,925 Inventory 19,635 15,708 14,280 Prepaid Assets 1,071 357 714 Total Current Assets 35,343 31,917 25,347 Land 4,463 4,463 4,462 Plant & Equipment 26,775 24,633 21,777 Accumulated Depreciation (13,209) (11,067) (9,639) Other Assets 1,643 2,925 3,656 Total Non-Current Assets 19,672 20,954 20,256 Total Assets $55,015 $52,871 $45,603 Current Liabilities
Accounts Payable $10,710 $10,352 $8,211 Bank Loan Payable 1,193 3,084 1,428 Total Current Liabilities 11,903 13,436 9,639 Mortgage Payable 6,069 7,065 7,854 Total Liabilities 17,972 20,501 17,493 Shareholders Equity Common Shares 6,784 6,144 6,069 Retained Earnings 30,259 26,226 22,041 Total Shareholders Equity 37,043 32,370 28,110 Total Liabilities and Shareholders Equity $55,015 $52,871 $45,603 Auberndale Ltd. Income Statement For the Year Ended December 31 (in thousands of dollars) 2014 2013 2012 Sales Revenue $89,250 $80,325 $73,185 Cost of Goods Sold 62,474 55,335 49,979 Gross Margin 26,776 24,990 $23,206 Expenses 1 Selling 11,067 9,818 8,925 Administrative 5,355 4,998 4,820 Amortization 2,321 1,785 1,428 Interest 893 1,356 1,428 Total Expenses 19,636 17,957 16,601 Income Before Income Taxes 7,140 7,034 6,605 Income Taxes 2,714 2,456 2,057 Net Income $4,426 $4,578 $4,548 Auberndale Ltd. Statement of Retained Earnings For the Year Ended December 31 (in thousands of dollars) 2014 2013 2012 Retained Earnings, Beginning of year $26,226 $22,041 $17,850 Net Income 4,426 4,578 4,548 Dividends 393 393 357 Retained Earnings, End of year $30,259 $26,226 $22,041 b. It s difficult to make much of an assessment of a loan application when virtually nothing is known about the prospective borrower. The financial statements tell us that Auburndale Ltd. has been profitable over the last three years and the profits have been stable. However, sales have increased significantly over the three years but profits haven t kept up. There is no dramatic proportional change in any of the expenses so a more detailed examination of the individual expenses is needed to understand the decline in profitability. The gross margin
percentage has declined very slightly over the three years (30% in 2014, 31.1% in 2013, and 31.7% in 2012). The liquidity position of Auburndale seems reasonable, with a lot more current assets than liabilities. Also, Auburndale Ltd. doesn t appear to have an excessive amount of debt. Ratios such as the current ratio and debt-to-equity ratio could be calculated to support these comments. Different conclusions are possible. Any conclusion that is drawn should be supported by the explanation provided. At best only a preliminary conclusion can be drawn because there are many unanswered questions. Additional information includes: What business is Auburndale Ltd. in? What will the money be used for? How long will the loan be for? What are projected cash flows for the term of the loan? When is the loan to be paid off? What assets are available as collateral? What are their market values? Are there any changes expected in the near future that will change the nature or performance of the business? 2 If cash is needed for investment why are dividends being paid? Why has profit decreased somewhat when sales have increased 11.1% from 2012 to 2014? Why has the gross margin percentage been decreasing? Why has inventory increased by so much? Anticipated growth, expansion, or inventory that can t be used? Who are the managers and what is known about them? Other points can be raised. P2-3 Hanmer Ltd Statement of Income For the year ended December 31, 2013 2012 Revenue $3,160,000 $2,851,000 Cost of Sales 1,200,000 1,040,000 Gross Margin 1,960,000 1,811,000
Expenses Advertising and promotion 270,000 250,000 General and Admin 321,000 301,000 Miscellaneous 52,000 64,000 Rent 58,000 55,000 Salaries, wages and commissions 485,000 450,000 Utilities 15,800 15,200 Income taxes 187,500 148,000 Total Expenses 1,389,300 1,283,200 Net Income $570,700 $527,800 b) Gross Margin % 62.0% 63.5% c) Revised Gross Margin $2,006,600 Revised Net Income $ 617,300 Calculation of revised gross margin and net income is based on rounded gross margin of 63.5%. Revised GM = $3,160,000 0.635 P2-5 To qualify as an asset according to IFRS, the following criteria must be satisfied: Provide future benefit 3 Be reasonably measurable Entity has control or use of asset to make money Result of a past transaction a. Parts used to make computers are assets because they were purchased at one point in time (arise from a past transaction), the cost of the parts is determinable (from invoices from suppliers), are controlled by the entity (they are used by the company in a way it deems appropriate), and will provide a future benefit (by being built into computers that will be sold). b. Large sign outside the facility with the company s name is an asset as it was purchased at one point in time (arises from a past transaction), is controlled by the entity, provides a future benefit (it informs potential customers of the entity s location and provides advertising) and the cost of the sign is measureable. c. Defective parts that must be disposed of aren t assets because they provide no future benefit since they can t be sold or included in computers that will be sold (in other words, they re
garbage (or perhaps can generate a small amount as scrap). The defective parts are under the control of the entity, they re cost can be determined, and they arise from a past transaction but they aren t assets because they have no future benefit. d. A building is an asset as the entity has control of its use, it s the result of a past transaction as it would have been purchased at one time, it provides a future benefit in that the company can use it to run its operations and perform tasks that will ultimately create revenue, and its cost can be determined. e. Insurance paid in advance is an asset because it arises from a past transaction (it was purchased), is under the control of the entity (the entity would be the beneficiary should anything happen to the facility), the cost of the policy is easily determined, and it provides a future benefit (the entity is protected in the event of theft or fire and will recover amounts lost). f. Money owed by customers is an asset because it s the result of a past transaction (the customer made a purchase), the entity has control over the rights to receive this money, the amount owed is measureable, and it provides a future benefit as the company is entitled to receive cash. P2-7. a. Nathan Reed Balance Sheet Assets Liabilities and Owners Equity Cash $ 844 Accounts payable $ 200 Accounts receivable 750 Bank loan 2,000 Computer 1,200 Total liabilities 2,200 Car 1,800 Personal property 6,000 Owners equity 8,394 Total assets $ 10,594 Total liabilities and owners equity $ 10,594 This balance sheet is prepared on the following assumptions and rationale. However, there are other reasonable assumptions that could be made for this statement. i. Cash can be used to buy things that Nathan needs; thus will be a future benefit to him. 4
ii. The used car is a benefit for Nathan because he can use it to drive around and do things. He purchased it three years ago and estimates it s going to be useful for another two years. The car is depreciating at $900 a year ($4,500/5) or Nathan is using up $900 of value from the car each year; thus, the car net value is $1,800 (two years left). This amount, however, doesn t represent the amount Nathan could obtain by selling the car. iii. Nathan has the right to receive $750 from the social group; this right is a benefit to Nathan. iv. Nathan has an obligation to give up $2,000 of his cash asset sometime in the future; this obligation increases Nathan s liabilities. v. The computer purchased is a benefit to Nathan because he will be able use it for personal use and school, so it s an asset. The $700 he paid decreased his cash but this amount was paid several months ago before his bank balance was determined, therefore it has no effect on his current bank balance. The total debt was $500 at purchase time six months ago. He has paid $300 for the six months period. He still has a current obligation to pay $200 over the next four months, which is a liability. The amount shown for the computer doesn t give an indication of how much it could be sold for or would cost to replace. vi. The cost of his personal property was $6,000 which benefits Nathan in many different ways, thus increase in his assets. There is no information given to when he has purchased these items or how long these items will be benefit to him. Nathan s equity in his assets is determined by subtracting the amount of liabilities from the amount of assets. b. One possible response: alternate assumptions and viewpoints are possible. The art school would use the information in the balance sheet to assess whether Nathan requires financial assistance to attend the school, since the amount of the scholarship is based on their perception of his financial need. The balance sheet does provide information on his current financial position. The cash inflow from the collection of the account receivable will increase
the cash balance to $1,594. The computer won t provide cash, but it does probably indicate that Nathan s computing needs are met for the duration of his program. The school may view the car as a luxury and suggest that it be sold to provide cash. The personal possessions really don t indicate much relevant information because we don t know their age or condition. One might assume that they could not be sold for a significant amount of cash and that the books are not relevant to the art program. The response of the art school to Nathan s financial obligations depends on whether they are aware of the repayment arrangements that he has made. Without additional information, it appears that Nathan will be required to pay $2,200 in the near future. In fact, only the $200 must be paid before graduation and will be paid off in 4 months. The point illustrates the need to ask questions to avoid being misled. 5 It s really not helpful to consider that Nathan has $8,394 in equity, particularly since no adjustment has been made to reflect the fact that the computer is six months old. The value of his personal possessions is questionable. c. The important thing to understand in this question is the balance sheet doesn t tell the whole story and to make informed decisions a user should search or inquire to obtain more information. Many additional items of information would be helpful. The balance sheet only indicates his current financial position, but don t indicate expected cash receipts and payments during the time he is a student. This balance sheet also doesn t indicate the cash value of the assets, which could be relevant. The school would want to know what expenses Nathan would incur. They would already be aware of the school-related costs such as tuition, books, and art supplies. They would also need to know his budget for accommodation, food, clothing, transportation, and other expenses. They would also ask about any income that he
expects to earn during the duration of the degree, as well as what financial support is expected from other sources such as family members or other scholarships. P2-9. a. Louis Davis Dental Practice Balance Sheet Assets Liabilities and Owners Equity Cash $ 4,750 Accounts payable $ 12,000 Accounts receivable 19,000 Wages payable 2,500 Supplies 750 Bank loan 10,000 Furniture 13,200 Total liabilities 24,500 Equipment 33,333 Owners equity 46,533 Total assets $71,033 Total liabilities and Owners equity $ 71,033 i. Equipment: This equipment has and is providing a benefit to the practice by providing the resources needed to do his work. Two thirds of the estimated life of this asset has been used up leaving a current benefit of one third of the life of the assets (1/3 x 100,000), thus there is a current benefit value of the asset of $33,333 not used up. This isn t the same as the market value of the equipment. These are resources that belong to the practice so the amount is also reflected on the right-hand side of the balance sheet in either equity or liabilities. ii. Furniture: This furniture has and is providing a benefit to Louis and his dentist practice. Forty percent of the estimated life of this asset has been used up leaving a current benefit of sixty percent of the life of the assets (.6 x 22,000), thus there is a current benefit value of the asset of $13,200 not used up. Again, the amount isn t the same as the market value. These are resources that belong to the practice so the amount is also reflected on the right-hand side of the balance sheet in either equity or liabilities. iii. Accounts receivable: Louis has a right to receive $19,000, which is an asset. 6 iv. Accounts payable: This represents an obligation for Louis to give up $12,000 in cash in future, which is a liability.
v. Cash: Cash can be used to buy things the practice needs and thus provides future benefits. vi. Wages payable: This is a liability for Louis to pay $2,500 in cash in two weeks. vii. Bank loan: This is liability for Louis to pay $10,000 in the future. viii. Supplies: These supplies will be used to provide services to customers and so is an asset to the practice. b. One possible response: alternative interpretations are possible. The judge would use the information in the balance sheet to determine Louis wealth in the practice. The balance sheet seems to indicate that his equity in the business is worth $46,533, but that is likely to be very misleading. The equipment and furniture are likely to be worth a different amount than what is reported on the balance sheet. The value on the balance sheet is the net book value of the furniture and equipment and represents an amount of how an asset has provided benefit to the business not what the asset can be sold for or value of asset. An appraisal of the equipment and furniture would provide more relevant information to determining value and selling price. The balance sheet also doesn t capture Louis value to the practice. c. The important thing to understand in this question is that the balance sheet doesn t tell the whole story and to make informed decisions a stakeholder should search or inquire to obtain the information they require. (An important step in this process is understanding the information being received.) Many additional pieces of information would be helpful. The balance sheet indicates the current financial position of the business, but doesn t reflect the value that has been created by building a reputation, the value of the patient list and location, and the value of Louis to the practice. We would also like to know how much cash has been taken out of the business this year since Louis might have anticipated the purpose of the information request and skimmed off assets to reduce the appearance of wealth and obtain a lower settlement. We might wonder if he expects to collect 100% of the accounts receivable,
whether he has done work for anyone that he has not included in accounts receivable because they haven t been billed, or if he has done any work for cash or on a barter basis that hasn t been recorded. P2-11 Belinda s Cart Business Income Statement for November Cash Basis Accrual Basis Revenue ($4,150+1,000) $5,150 ($4,150+700) $4,850 Cost of Sales 2,500 1,750 Gross Margin 2,650 3,100 7 Expenses Wages 850 (850-150+200) 900 Mall Rent 500 (500/2) 250 Advertising 75 1,350 1,225 Net Income $1,300 $1,875 Differences between the cash and accrual method are a result of: Credit sales which are included under the accrual method, but not under the cash method Cash collected from prior months sales, which are included under the cash method and not the accrual method Supplies purchased but not sold, which are included under the cash method but not the accrual method Supplies sold but not paid for, which are included under the accrual method but not the cash method Wages paid for prior months work are included under the cash method but not the accrual method Wages not paid but owed for work in November are included under the accrual method but not the cash method Mall rent (fees paid for operating the cart) are fully included under the cash method, but only partially included under the accrual method ($500 rent was paid for 2 months = $250 per month) Advertising was done in November but paid until December is included under the accrual method but not the cash method
P2-13 Balance Sheet as of September 30 Assets Liabilities and Shareholder s Equity Cash $ 4,000 Bank loan $ 8,000 Accounts receivable 1,200 Accounts payable 2,100 Inventory 5,000 Unearned revenue 1,000 Furniture & Fixtures 9,000 Common shares 4,000 Retained Earnings 4,100 $19,200 $19,200 Asset Side: Liability and Shareholder's Equity Side -Add furniture and fixtures -Remove accounts receivable -Remove accounts payable -Subtract dividends from retained earnings (retained earnings = net income dividend = $5,200 - $1,100) -Add accounts receivable -Add accounts payable 8 -Remove dividend paid -Add customer deposit -Add cash received for deposits P2-15. Transactio n Revised current ratio Effect on the current ratio Revised debttoequity ratio Effect on the debt-toequity ratio Revised current assets $1,200,00 0 Revised
current liabilities $960,000 Revised total liabilities $2,000,00 0 Revised Total equities $1,250,000 1 Purchase of inventory for $50,000 cash. The inventory isn t expected to be sold until after the year end. 1.25 No effect 1.60 No effect 1,200,000 960,000 2,000,000 1,250,000 2 Bonuses of $60,000 cash are paid to senior managers. (This one is tricky. The bonus is an expense so be sure to consider the effect of the transaction on net income and the resulting impact on equity.)
1.19 Decrease 1.68 Increase 1,140,000 960,000 2,000,000 1,190,000 3 Dividends of $50,000 are declared and will be paid after the year end. (Once the 1.19 Decrease 1.71 Increase 1,200,000 1,010,00 0 2,050,000 1,200,000 9 dividends have been declared they become a liability called dividends payable.) 4 Repayment of $150,000 on a longterm loan. 1.30 Increase 1.48 Decrease 1,050,000 * 810,000 1,850,000 1,250,000 5 A $55,000 loan is arranged and the cash obtained. The loan must be repaid in 90 days. 1.24 Decrease 1.64 Increase 1,255,000 1,015,00 0 2,055,000 1,250,000 *Assumes the amount was classified as the current portion of the long-term loan. P2-17. Sudbury Ltd. Balance Sheet As of December 31, 2014
ASSETS LIABILITIES AND SHAREHOLDERS EQUITY Current Assets Current Liabilities Cash $4,000 Accounts payable $17,600 Accounts receivable 32,000 Accrued liabilities 7,360 Inventory 48,000 Salary and wages payable 2,400 Prepaid assets 8,320 Income taxes payable 3,200 Income taxes recoverable 4,960 Deposits from customers 4,000 Loan to customer 4,000 Current portion of mortgage payable 8,000 Other current assets 1,600 Total current assets 102,880 Total current liabilities 42,560 Property, plant and equipment 320,000 Mortgage payable 200,000 Accumulated depreciation (120,000) Total liabilities 242,560 Property, plant and equipment (net) 200,000 Investments in shares 40,000 Common shares 240,000 Patents 192,000 Retained earnings 60,070 10 Other non-current assets 12,000 Accumulated other comprehensive income 4,250 Total shareholders equity 304,320 Total assets $546,880 Total liabilities and shareholders equity $546,880 Sudbury, Ltd. Income Statement For the period ending December 31, 2014 Sales $480,000 Interest revenue 3,520 Total revenue 483,520 Expenses: Cost of sales 152,000 Promotion and advertising 12,000 Depreciation 33,600 Income tax 5,200 Interest 16,800 General and administrative 44,000 Salaries and wages 67,200 Other 8,000 Research costs 122,000 Fire loss 12,000 Total expenses 472,800 Net Income (loss) $10,720 Sudbury, Ltd. Statement of Other Comprehensive Income For the period ending December 31, 2014 Net Income $10,720 Other Comprehensive Income 2,100 Comprehensive Income 12,820 Sudbury Ltd. Statement of Retained Earnings
For the period ending December 31, 2014 Retained earnings January 1, 2014 $53,350 Net income 10,720 Less dividends (4,000) Retained earnings December 31, 2014 $60,070 P2-19. 11 Note: The financial statements in Exhibit 2.5 are based on the format described in the IFRS. The exhibit originally used the statements of Pernod Ricard SA but permission to use them wasn t obtained so they were replaced. The company name used in this problem wasn t changed to reflect the change in the text. IFRS SA Balance Sheet As of June 30, 2008 2007 2008 2007 Cash and cash equivalents 842 766 Current provisions 574 710 Current derivative instruments 38 102 Operating payables 3,300 3,548 Other current assets 390 290 Income taxes payable 206 396 Income taxes receivable 96 182 Other current liabilities 260 282 Operating receivables 2,292 2,456 Other current financial liabilities 1,900 750 Inventories 7,434 7,128 Current derivative instruments 54 32 Total current assets 11,092 10,924 Total current liabilities 6,294 5,718 Non-current assets Non-current provisions 934 1,068 Intangible assets 14,276 15,672 Provisions for pensions and other long-term employee benefits 956 1,546 Goodwill 6,406 6,954 Future income taxes 4,256 4,652 Property, Plant and Equipment 3,216 3,350 Bonds 4,704 5,022 Biological assets 132 120 Non-current derivative instruments 418 146 Other non-current financial assets 290 242 Other non-current financial liabilities 6,106 7,876 Investments in associates 6 4 17,374 20,310 Deferred tax assets 1,444 1,678 Total non-current assets 25,770 28,020 Shareholders' equity Share capital 682 680 Additional paid-in capital 4,130 4,106 Retained earnings and currency adjustments 6,350 6,132 Net profit attributable to equity holders of the parent 1,678 1,662 Shareholders' equity of the parent 12,840 12,580 Minority interests 354 336 Total shareholders equity 13,194 12,916 Total assets 36,862 38,944 Total liabilities and equity 36,862 38,944 The IFRS balance sheet is simply tipped over when compared with the traditional approach Canadian format. On the asset side, fixed assets are on the top and current assets on the bottom.
The more common arrangement is to have more liquid assets at the top. By placing these assets on top, users may focus on the more significant component of the asset pool. On the liabilities and equities side of the balance sheet, the equities are first instead of the more common situation of liabilities on top. Also, the most current year s figures are also placed on the right instead of the left. This format is used in Europe. It s hard to make a case that format makes a difference. A 12 stakeholder with even a small amount of sophistication should be able to adapt to this somewhat different format. There is certainly no more information in the revised statement than in the one presented by the company. Different formats may cause stakeholders to focus on different aspects of the statement. P2-21. a. Transaction Amount Classification Cash from shareholders $450,000 Financing Mortgage 150,000 Financing Purchase office building 500,000 Investing Cash from customers 600,000 Operating Cash paid for operating expenses 360,000 Operating Dividends paid 80,000 Financing or investing b. Markham Ltd. Statement of Cash Flows For the year ended August 31, 2013 Cash provided by operating activities Cash collected from customers $600,000 Cash paid for operating expenses (360,000) Cash provided by operating activities 240,000 Cash provided (used) by investing activities Purchase of office building (500,000) Cash provided (used) by financing activities Investment by shareholders 450,000 Borrowed from lender 150,000 Dividends paid (80,000) Cash provided by financing activities 520,000 Increase in cash during the year $260,000
c. The income statement and the statement of cash flows provide very different information. For example, it s impossible to determine from the information given whether the company earned a profit in this period. However, we do know that the operating activities of the company generated a positive cash flow, which is a positive sign. This means that Markham s regular business activities generate cash which can be used for investment and financing (dividends, repayment of debt) purposes. What we don t know is whether that was accomplished because selling price was much higher than cost or because the company increased current liabilities and decreased current assets. We can also see that the financing of the investment in the building was accomplished by an investment by the owners and a large loan. While it s possible to see some of this information from the balance sheet, the key attribute of the cash flow statement is its focus on cash instead of on accrual accounting. The 13 income statement doesn t focus on cash flows so net income doesn t necessarily correspond to the amount of cash the company generated. So net income could be significantly different from cash from operations because of how revenue is recognized and/or because of the terms of transactions (e.g. the company might provide customers with long-term financing on purchases). 14 P2-23.. Economic Event Net income on the cash basis Net income on the accrual basis a. Leon s sells merchandise to a customer on credit. No No cash involved
Yes Sale has been completed b. Leon s collects cash for goods that were sold last year. Yes Cash is collected No Sale was in previous period c. Inventory Leon s paid for last year is sold in the current year. No No cash involved Yes Expense matched to sale d. Dividends are declared and paid to shareholders. No Dividends are not an expense No Dividends are not an expense e. Leon s purchased and paid for inventory in the current period but the inventory is unsold as of the year-end. Yes Cash paid out No Inventory is an asset until sold f. Leon s depreciates a delivery truck. No No cash involved Yes Matching expense to revenue earned P2-25. a. (Note: in the problem in the textbook the sum of the what it cost column is incorrect. The correct total should be $12,050) Personal Balance Sheets Cost Replacement Cost Selling Price
Assets: Cash $ 1,100 $ 1,100 $1,100 Owed by employer 800 800 800 Television 500 650 225 Computer 1,200 900 300 Furniture 3,200 3,800 1,700 Books 750 875 300 Clothes 1,600 1,950 300 Stereo 900 1,100 700 Jewellery 500 625 300 Art 300 500 500 Other 1,000 1,200 750 Total assets $11,850 $13,500 $6,975 Liabilities: Student Loans $ 7,500 $ 7,500 $ 7,500 Loans from parents 3,000 3,000 3,000 Total Liabilities $10,500 $10,500 $10,500 15 My Equity $1,350 $3,000 ($ 3,525) Total Liabilities and Equity $11,850 $13,500 $ 6,975 b. Each balance sheet gives different information and serves different purposes. The cost based balance sheet tells a reader the amount of money the student has invested in his or her personal life. The investment is simply the dollar amount spent. By deducting liabilities from the amount invested the student can get an idea of his or her interest, or equity, in the personal assets. In this case the student has a $1,300 interest in the assets. The remaining amount ($11,850 - $1,350) represents the interest of creditors. Other than this type of analysis, it s difficult to identify a specific use for this cost-based information for assets. The liabilities do provide useful information (give an indication of the amount of money the student owes, which might help the student assess how much additional borrowing the he or she could support, whether a part-time job is needed, and so on). The cash and amount due from the employer give information about the liquidity of the student the amount of cash and near cash the student has to meet his or her needs. Note that the information about liquid
assets (cash and amounts owed) and liabilities is common to all the statements. The second balance sheet, based on replacement cost, gives an indication of what it would cost to replace the assets owned by the student. The asset side of the balance sheet will be useful for determining the amount of insurance the student would require for his or her belongings. A problem with replacement cost measures is the difficulty with finding replacement costs for items that are no longer available. For example, what is the replacement cost for a 15 year old TV? The third balance sheet, based on selling price, gives a measure of the financial position of the student should he or she decide to sell off all the assets. In that case, the student would actually still owe money to creditors because selling off the assets would generate $6,975 in cash whereas the student owes $10,500 for student loans and to parents. This is why the equity of the student is negative. A major difficulty with this statement is determining the actual amount that could be obtained by selling the assets. The amounts shown (except for cash and amount owed by employers) are guesses. The actual amount could deviate significantly because actual prices will depend on the condition of the goods, market conditions, alternatives available to buyers, and the urgency of the seller. The student might find this statement useful if he/she was desperate for cash and needed to know how much could be raised. Note the appliances are not included in any of the balance sheets. The reason is that they are owned by the apartment building, not the tenant. However, information about the appliances might be relevant for some uses, like determining the amount of insurance you need. c. Actually, none of these balance sheets exactly fit the requirements of IFRS although the one closest is the one based on cost. As noted in the chapter, the basis for recording under IFRS is the transaction value, in the case of the assets listed above, the cost or amount paid for them
(although IFRS does allow net realizable value to be used for certain capital assets). Cash is recorded at its nominal amount and the amount owed by the employer is stated at the owed 16 amount. The liabilities would be stated at the amounts owed. However, according to IFRS, most of these assets should be depreciated to reflect their usage. Depreciation isn t reflected in any of the balance sheets. d. It s rarely possible with accounting information to make a statement about which information is best. Best must be assessed in relation to the purpose of the information. Different information is required for different decisions. 17