Corporate Finance Utilisation of Financial Statements

Question: Discuss about the Report for Corporate Finance of Utilisation of Financial Statements. Answer: Introduction Australian Accounting Standard has developed many standards for proper presentation and utilisation of financial statements. Thus, Presentation of Financial Statements AASB 101 which represents the format in which accounts should be formed is applicable for the reporting period after 1st January 2009. This standard was structured by the Australian Accounting Standards Board (AASB) on 16th August 2007 (Haswell and Langfieldà ¢Ã¢â€š ¬Ã‚ Smith, 2008). The purpose of this standard is to set down the basis for the appropriate presentation of financial statements for a common purpose to confirm it's inter and intra comparability with its own organisation and other organisation too (Dean and Clarke, 2005). It sets an overall requirement for the format in which financial statements should be presented and the minimum requirement to be followed by content and guidelines of their structure. Therefore the crux of application of this standard is to present a financial statement in a format that it can be used by other organisation for comparison purpose and within the entity for the same purpose. The standard is applicable to each and every organisation which is required to present financial statements in agreement with the corporate act and by the entity whose financial statement are held out for the general purpose financial statement. Part I: In the first part, the case of the consolidation of the wholly owned subsidiary is given in which Lisa Ltd has acquired Kam Ltd. with cash consideration. As per AASB 101, the financial reports of annual accounts of an organisation includes a statement of financial position at the end of the year, a statement of profit loss and other comprehensive income for the period flow statement for the period. It comprises of a statement which presents the changes in equity for the period and the notes to accounts are comprised with it including an abstract of considerable accounting policies on the basis of which accounts have been formed. The entity after formation of books of account has to disclose in the annual report that the financial statement prepared by the management concludes that they present fairly the financial position of the entity. It has also to be concluded by them that it has been compiled with Australian Accounting Standards unless the available variation is done only to present a financial statement in a fair manner (AASB, 2004). The first part includes journal entries and abstract of consolidated balance sheet. All the working and calculations which are part of it are also presented here. The working of each account has been presented to show detail working of each account. Journal Entries in the books of Lisa Ltd. For the period 1.1.2016 to 30.6.2016 Sr. No. Date Particular Dr. Amount Cr. Amount 1 1.1.2016 Fixtures Fittings A/c Dr. 60000 Inventory A/c Dr. 20000 Patent A/c Dr. 90000 To Legal Claim A/c 15000 To Business Purchase A/c 88000 To Capital Reserve A/c 113000 [Being business of Kam Ltd. acquired by accepting its all asset and liabilities at fair value and the fair value of patent has been assumed nil.] 2 1.1.2016 Business Purchase A/c Dr. 88000 To Cash 88000 [Being business of Kam Ltd. Acquired against cash.] 3 30.6.2016 Cash A/c Dr. 18000 To Inventory a/c 9000 To Surplus on sale of inventory a/c 9000 [Being 90% of inventory sold at fair value.(Refer working note.1)] 4 30.6.2016 Depreciation A/c Dr. 15000 To Fixture Fittings A/c 15000 [Being depreciation charged on fixture and fittings. (Refer working note 2.)] 5 30.6.2016 Profit loss a/c Dr. 15000 To depreciation a/c 15000 [Being depreciation transferred to profit and loss a/c.] 6 30.6.2016 Surplus on sale of inventory a/c Dr. 9000 To Profit Loss a/c 9000 [Being profit received on sale of inventory transferred to profit and loss a/c.] 7 30.6.2016 Profit Loss a/c Dr. 9000 To Capital Reserve 9000 [Being the profit earned on sale of inventory transferred to profit and loss a/c and then adjusted against capital reserve.](Refer working note 3.) Working Note.1 Calculation of profit on sale of Inventory: Sr. No. Particular Amount 1 Fair Value of Inventory sold (90% of Inventory) 18000 2 Carrying amount of Inventory 9000 3 Profit on sale (Fair value less carrying amount.) 9000 Note: As the profit is earned by Lisa Ltd. after the acquisition it will be transferred to Reserve and Surplus account. Working Note.2 Calculation of depreciation on Fixtures Fittings: Sr. No. Particular Amount 1 Fair Value of Fixture Fittings 60000 2 Years having beneficial life 2 years 3 Depreciation (Fair value/ no. of remaining years having benefit life) 30000 4 Depreciation for period of six month 15000 Working Note.3 Calculation of amount of profit adjusted with capital reserve: Sr. No. Particular Amount 1 Profit from sale of inventory 9000 2 Amount adjusted against capital reserve 9000 Note: As the goods were sold before 30.06.2016 and the inventory was accounted at the fair value rather than the carrying cost. Therefore, at the time of consolidation, the whole profit was already accounted and hence now it will be adjusted against the capital reserve. Working Note.4 Taxes: Sr. No. Particular Amount 1 Profit from sale of inventory 9000 2 Depreciation on fixture fittings for the period 15000 3 Profit/ (Loss) during the period -6000 An Abstract of Consolidated Balance Sheet of Lisa Ltd. as at 30 June 2016 Notes Amount of $ ASSETS Financial Assets Cash and cash equivalents - Trade and other receivables - Total financial assets - Non-Financial Assets Land and buildings - Property, plant and equipment - Fixtures Fittings 45,000 Intangibles 2 90,000 Inventories 3 2,000 Other - Total non-financial assets 1,37,000 Total Assets 1,37,000 LIABILITIES Non-Current Liabilities Long Term Loan - Other - Total - Current Liabilities Bank Overdraft 4 70,000 Suppliers - Others - Total 70,000 Provisions Employee provisions - Other 5 15,000 Total provisions 15,000 Total Liabilities 85,000 Net Assets 52,000 EQUITY Parent Entity Interest Contributed equity - Reserves 6 1,13,000 Deficit 7 (15,000) Total parent entity interest 98,000 Total Equity 98,000 Notes to accounts: Fixture fittings: Opening Value 60000 Depreciation (15000) Written down value 45000 Intangible Assets : Patent 90000 Inventory: Closing Stock 2000 Bank Overdraft: Balance as on 30.6.2016 70000 (As the balance of cash is negative, it has been considered as bank overdraft ) Other: Provision of Legal Claim 15000 Reserves: Capital Reserve 113000 Deficit: Profit Loss account 15000 Working Note: 1 Fixture Fittings Date Particular Amount Date Particular Amount 1.1.2016 To Business Purchase A/c 20000 30.6.2016 By Cash 18000 By Balance b/d 2000 Total 20000 Total 20000 Working Note: 2 Inventory A/c Date Particular Amount Date Particular Amount 1.1.2016 To Business Purchase A/c 20000 30.6.2016 By Cash 18000 By Balance b/d 2000 Total 20000 Total 20000 Working Note: 3 Bank Overdraft Date Particular Amount Date Particular Amount 1.1.2016 To Business Purchase A/c 88000 30.6.2016 By sale of Inventory 18000 By Balance b/d 70000 Total 88000 Total 88000 Working Note: 4 Legal Claim Date Particular Amount Date Particular Amount 30.6.2016 To Balance b/d 15000 1.1.2016 By Business PurchaseA/c 15000 Total 15000 Total 15000 Working Note: 5 Capital Reserve Date Particular Amount Date Particular Amount 30.6.2016 To Balance b/d 113000 1.6.2016 By Balance b/d 113000 (as created by purchase of Kam Ltd) Total 113000 Total 113000 Working Note: 6 Profit Loss Account Date Particular Amount Date Particular Amount 30.6.2015 To Depreciation 15000 30.6.2015 By Surplus on sale of Inventory 9000 By Balance b/d 6000 Total 15000 Total 15000 Part II: The following considerations have been taken while solving the below part: According to the Australian Accounting Standards the basis which has to be applied while the formation of books of accounts by all the entities are going concern, accounting on an accrual basis and substance over form (Sheet, 2012). The format of the statement of profit or loss account and another comprehensive income is according to AASB 101. The presentation of financial statement should be in accordance with other accounting standards which are relating to revenue such as AASB 118 relating to revenue. According to this standard, an entity requires accounting its revenue by measuring the consideration received or receivable on a fair basis (AASB, 2008). The income generated from activities which are not incidental to the functional activities of the organisation are included under the head other comprehensive income in profit or loss statement. Statement of Profit or Loss and Other Comprehensive Income Note In $'000s Income Sales 1 5,000 Expenses Cost of Sales 2 3,500 Expenses Marketing Cost 2 66 Administrative Cost 2 99 Distribution Cost 2 200 Finance Cost 3 100 Profit before Income Tax 1,035 Income Tax 4 311 Profit for the year after tax 5 725 Profit distributed as Dividend 6 10 Profit retained by the company 715 Total other comprehensive Income 0 Comprehensive profit for the year 715 Notes to Account: Note 1. Revenue Particular Amount In $'000s Sales 5000 Total 5000 Commentary Note-1 Revenue: AASB 118 has been followed in book-keeping for proceeds generated during the following transactions and events: Sales of the product. The reproduction of services. Receipt of Interest, royalty and dividend. Note 2. Expenses Particular Amount In $'000s Cost of Sales 5000 Expenses from transactions: Marketing Cost 66 Administrative Cost 99 Distribution Cost 200 Total Expenses 5365 Commentary - Note 2 Expenses: This head includes any outlay of payments needed for the generation of income. An expense is considered as part of operation system only when: It is probable that the consumption is consequential in a diminution of an asset or amplifies in the liability that has occurred. Future economic benefits whose consumption or loss can be reasonably measured. Note 3. Finance Cost Particular Amount In $'000s Finance Cost 100 Total 100 Commentary - Note 3 Finance Cost: This cost is accounted in the period in which it is incurred as an expense and to be shown as a separate head. Finance cost includes: Finance charges in respect of finance leases recognised in accordance with AASB 117 Leases are to be followed for accounting finance charges in respect of finance leases. Interest on bank overdraft (accounted as an expense in the year they are been paid). Note 4. Income Tax Particular Amount In $'000s Profit before tax 1035 Tax Rate (30%) 310.5 Total Current Tax 310.5 Note 5. Profit for the year after tax Particular Amount In $'000s Profit Before Tax 1035 Tax 311 Total 724 Note 6. Dividend Particular Amount In $'000s Dividend paid to shareholders 10 Total 10 Note 7. Surplus on sale of plant and machinery: Particular Amount In $'000s Proceeds from sale of plant and machinery 800 Carrying amount of plant and machinery 400 Surplus 400 Commentary - Note 7 Finance Cost: The above profit is a capital profit as the sale of plant and machinery is not an operation activity for the organisation. For ascertaining the cost of plant and machinery, the lower of cost or carrying the amount of plant and machinery will be considered. It has been assumed that capital gains are exempted from tax; hence no treatment has been done regarding it. Conclusion: The above two parts are solved in accordance with AASB 101. Each and every calculation has been described in a detailed manner so that it could be easily understood. The presentation of accounts is also according to AASB 101; wherever it has been not followed the reason of it has been described. The assumptions taken while solving the numerical part have been informed by way of a note. The journal entries have been explained with narrations to make it clearer. The above analysis depicts that the financial statements are an ordered presentation of the financial performance and position of the organisation. The aim of financial statement is to present data about the financial performance and cash flows of the organisation that can be utilised for making a financially viable decision by a wide range of users. The first part shows the financial position of the entity on a particular date i.e.30.06.2016 by considering the value of assets and liabilities are same is presented through this statement. The capital reserve which has been created due to consolidation with Kam Ltd shows that consolidation is beneficial for acquiring the company. The second part represent the profit of 715000$ earned by the entity for the period. It shows that the entity is financially sustainable. The capital income earned by the entity during the period has been shown separately as it does not form part of profit or loss account. References AASB, A.S., 2004. Presentation of Financial Statements. Balance Sheet. 68. P.73. AASB, A.S., 2008. Consolidated and Separate Financial Statements. Routledge. Dean, G. and Clarke, F., 2005. True and Fairand Fair ValueAccounting and Legal Willà ¢Ã¢â€š ¬Ã‚ oà ¢Ã¢â€š ¬Ã‚ theà ¢Ã¢â€š ¬Ã‚ Wisps.Abacus.41(2). Pp.i-viii. Haswell, S. and Langfieldà ¢Ã¢â€š ¬Ã‚ Smith, I., 2008. Fiftyà ¢Ã¢â€š ¬Ã‚ Seven Serious Defects in AustralianIFRS. Australian Accounting Review. 18(1). Pp.46-62. Sheet, B., 2012. General Purpose Financial Reports. Cengage learning.