All changes in equity during a period except those resulting from investments by owners and...

All changes in equity during a period except those resulting from investments by owners and distributions to owners .

Includes :all revenues and gains, expenses and losses

reported in net income, and

all gains and losses that bypass net income but affect equity.

Other Reporting Issues

Comprehensive Income

LO 9 Explain how to report other comprehensive income.

Other Comprehensive Income

Unrealized gains and losses on available-for-sale securities.Translation gains and losses on foreign currency.Plus others

+

Reported in Equity




Income Statement

Two approaches to reporting Comprehensive Income:

.1A second income statement.

.2A combined statement of comprehensive income.



Other Reporting IssuesIllustration 4-21


Two-statement format: Comprehensive Income




Illustration 4-22


Combined statement format: Comprehensive Income


Statement of Changes in Equity


Required, in addition to a statement of comprehensive

income .

Generally comprised of

share capital—ordinary ,

share premium—ordinary ,

retained earnings, and the

accumulated balances in other comprehensive

items.




Reports the change in each equity account and in total

equity for the period .

.1Comprehensive income for the period.

.2Contributions (issuances of shares) and distributions

(dividends) to owners.

.3Reconciliation of the carrying amount of each component

of equity from the beginning to the end of the period.


Illustration 4-23




Illustration 4-24



Regardless of the display format used, V. Gill reports the accumulated other comprehensive income of $90,000 in the equity section of the statement of financial position as follows.

Inventory CostingInventory Costing

“First-In-First-Out (FIFO)”Illustration 6-5

SO 2 Explain the accounting for inventories and apply the inventory cost flow methods.

Answer on notes page


“First-In-First-Out (FIFO)”Illustration 6-5


(a) COST OF GOODS AVAILABLE FOR SALE Date Explanation Units Unit Cost Total Cost March 1 Beginning Inventory 1,500 $ 7 $ 10,500 5 Purchase 3,500 8 28,000 13 Purchase 4,000 9 36,000 21 Purchase 2,000 10 20,000 26 Purchase 2,000 11 22,000 Total 13,000 $116,500 (b) FIFO (1) Ending Inventory (2) Cost of Goods Sold

Date

Units Unit

Cost Total

Cost Cost of goods available for sale

$116,500

March 26 2,000 $11 $22,000 Less: Ending inventory

32,000 21 1,000 10 10,000

3,000* $32,000 Cost of goods sold $ 84,500

*13,000 – 10,000 = 3,000

Proof of Cost of Goods Sold Date

Units

Unit Cost

Total Cost

March 1 1,500 $ 7 $10,500 5 3,500 8 28,000 13 4,000 9 36,000 21 1,000 10 10,000

10,000 $84,500

“Average Cost”


Illustration 6-8


Answer on notes page



“Average Cost”Illustration 6-8

SO 3 Explain the financial effects of the inventory cost flow assumptions.


Illustration 6-9Financial Statement and Tax Effects

Income

Statement

Effects

SO 3 Explain the financial effects of the inventory cost flow assumptions.


Tax EffectsIn a period of inflation :

FIFO - inventory and net income higher.

AVERAGE Cost - lower income taxes.

Lower-of-Cost-or-Net Realizable Value


SO 4 Explain the lower-of-cost-or-net realizable value basis of accounting for inventories.

When the value of inventory is lower than its cost

Companies can “write down” the inventory to its net

realizable value in the period in which the price

decline occurs .

Net realizable value refers to the net amount that a

company expects to realize (receive) from the sale of

inventory.


Illustration: Assume that Ken Tuckie TV has the following lines of merchandise with costs and market values as indicated.

Illustration 6-10

Lower-of-Cost-or-Net Realizable Value

SO 4 Explain the lower-of-cost-or-net realizable value basis of accounting for inventories.

Cost

NRV

Lower -of-Cost -or-NRV

Cameras Minolta W1,360,000 W1,248,000 W1,248,000 Canon 900,000 912,000 900,000 Total 2,260,000 2,160,000 Light meters Vivitar 1,500,000 1,380,000 1,380,000 Kodak 1,610,000 1,890,000 1,610,000 Total 3,110,000 3,270,000 Total inventory W5,370,000 W5,430,000 W5,138,000

Illustration of LCNRV: Regner Foods computes its inventory at LCNRV.

LO 1 Describe and apply the lower-of-cost-or-net realizable value rule.

Illustration 9-3

Lower-of-Cost-or-Net Realizable ValueLower-of-Cost-or-Net Realizable Value

9-21

Cost of goods sold (before adj. to NRV) $ 108,000

Ending inventory (cost) 82,000

Ending inventory (at NRV) 70,000

Inventory

12,000

Loss due to decline to NRV 12,000

Inventory

12,000

Cost of goods sold 12,000

LossMethodLoss

Method

COGSMethodCOGSMethod


Recording Net Realizable Value Instead of Cost


COGS LossMethod Method

Current assets:

Inventory 70,000$ 70,000$

Prepaids 20,000 20,000

Accounts receivable 350,000 350,000

Cash 100,000 100,000

Total current assets 540,000 540,000

Statement of Financial Position Presentation



Partial Statement


Sales 200,000$ 200,000$

Cost of goods sold 108,000 120,000

Gross profit 92,000 80,000

Operating expenses:

Selling 45,000 45,000

General and administrative 20,000 20,000

Total operating expenses 65,000 65,000

Other income and expense:

Loss due to NRV on inventory 12,000 -

Interest income 5,000 5,000

Total other (7,000) 5,000

Income from operations 20,000 20,000

Income tax expense 6,000 6,000

Net income 14,000$ 14,000$

Income Statement Presentation

LO 1


9-24

Use of an Allowance



Instead of crediting the Inventory account for net realizable

value adjustments, companies generally use an

allowance account.

Allowance to reduce inventory to NRV

12,000

Loss due to decline to NRV 12,000LossMethodLoss

Method


Current assets:

Inventory 70,000$ 82,000$

Allowance to reduce inventory (12,000)

Inventory at NRV 70,000

Prepaids 20,000 20,000

Accounts receivable 350,000 350,000

Cash 100,000 100,000

Total current assets 540,000 540,000

Statement of Financial Position Presentation



Partial Statement

23-26

Income

Statement

Transactions

Operating Activities

Changes in Investments and

Long-Term Asset Items

Investing Activities

Changes in Long-Term

Liabilities and Stockholders’

Equity

Financing Activities

Classification of Cash FlowsClassification of Cash Flows

LO 2 Identify the major classifications of cash flows.

IFRS allows some flexibility regarding

the classification of certain items such as

interest, dividends, and taxes.

23-27



23-28

Illustration 23-1 Classification of Typical Cash Inflows and Outflows


LO 2

23-29

Format of the Statement of Cash FlowsFormat of the Statement of Cash Flows

Presentation:

.1Operating activities .

.2Investing activities.

.3Financing activities.

Direct Method

Indirect Method

Report inflows and outflows from investing and financing

activities separately.


23-30

First Example - 2010First Example - 2010

Illustration: Tax Consultants Inc. started on January 1, 2010,

when it issued 60,000 shares of $1 par value common stock

for $60,000 cash. The company rented its office space,

furniture, and equipment, and performed tax consulting

services throughout the first year.

The comparative statements of financial position at the

beginning and end of the year 2010 appear in Illustration 23-3.

Illustration 23-4 shows the income statement and additional

information for Tax Consultants.


23-31


Illustration 23-3Illustration 23-3Comparative Statementsof Financial Position, Tax Consultants Inc., Year 1

Illustration 23-4Income Statement, Tax Consultants Inc., Year 1

23-32


Step 1: Determine the Change in CashIllustration 23-3


23-33

Deducts operating cash disbursements from operating cash receipts.

LO 4 Contrast the direct and indirect methods of calculating net cash flow from operating activities.

“Net cash provided by operating activities” is the equivalent of cash basis net income.

Illustration 23-6


Direct Method

23-34 LO 4

Illustration 23-6


Accounts Receivable

1/1/10 Balance 0

Revenues 125,000

Receipts from customers 89,000

12/31/10 Balance 36,000

Direct Method

Illustration 23-7

23-35


Accounts Payable

1/1/10 Balance 0

Operating expenses 85,000

12/31/10 Balance 5,000

Payments for expenses 80,000

Illustration 23-6

Direct Method

LO 4

23-36


Income Tax Payable

1/1/10 Balance 0

Tax expense 6,000

12/31/10 Balance 0

Payments for taxes6,000

Illustration 23-6

Direct Method

LO 4

23-37


Indirect Method

LO 4

Illustration 23-8Computation of Net CashFlow from Operating Activities, Year 1—Indirect Method

Common adjustments to Net Income (Loss):

Depreciation and amortization expense.

Gain or loss on disposition of long-term assets.

Change in current assets and current liabilities.

23-38


Step 3: Determine Net Cash Flows from Investing and Financing Activities

Illustration 23-3

No long-term assets, thus no investing activities.

LO 5 Determine net cash flows from investing and financing activities.

23-39



Illustration 23-3


Purchase of common stock for $60,000 (Financing).

23-40


Net income of $34,000 (Operating).

Dividends paid of $(14,000) (Financing).



Illustration 23-3

23-41


Statement of Cash Flows - 2010Illustration 23-9

LO 6 Prepare a statement of cash flows.

23-42

23-43

23-44

23-45

23-46

23-47

9-48

Accounted for in the period of change and future

periods (change in estimate).

No restatement of prior years depreciation expense.

Revising Periodic Depreciation

Depreciation

9-49

Illustration: Arcadia HS, purchased equipment for €510,000

which was estimated to have a useful life of 10 years with a

residual value of €10,000 at the end of that time. Depreciation

has been recorded for 7 years on a straight-line basis. In 2017

(year 8), it is determined that the total estimated life should be

15 years with a residual value of €5,000 at the end of that time.

No Entry Required

Questions:

What is the journal entry to correct prior

years’ depreciation expense?

Calculate the depreciation expense for

2017.

Depreciation

9-50

Equipment €510,000

Property, Plant, and Equipment

Accumulated depreciation 350,000

Net book value (NBV) €160,000

Balance Sheet (Dec. 31, 2016)

After 7 years

Equipment cost €510,000

residual value - 10,000

Depreciable base 500,000

Useful life (original) 10 years

Annual depreciation € 50,000 x 7 years = €350,000

First, establish NBV at date of change in

estimate.

First, establish NBV at date of change in

estimate.

Depreciation

9-51

Net book value €160,000

residual value (new) 5,000

Depreciable base 155,000

Useful life remaining 8 years

Annual depreciation € 19,375

Depreciation Expense calculation

for 2017.

Depreciation Expense calculation

for 2017.

Depreciation expense 19,375


Journal entry for 2017 and future years.

Depreciation After 7 years

Slide 9-52

IFRS allows revaluation of plant assets to fair value

If revaluation is used, it must be applied to all assets in

a class of assets.

Assets that are experiencing rapid price changes must

be revalued on an annual basis, otherwise less

frequent revaluation is acceptable.

Revaluation of Plant AssetsRevaluation of Plant Assets

SO 4 Describe the procedure for revising periodic depreciation.

Slide 9-53

Illustration: Pernice Company applies revaluation to plant assets with a carrying value of $1,000,000, a useful life of 5 years, and no residual value. Pernice makes the following journal entries in year 1, assuming straight-line depreciation.

Depreciation expense 200,000




After this entry, Pernice’s plant assets have a carrying amount of $800,000 ($1,000,000 - $200,000).

Slide 9-54

Illustration: At the end of year 1, independent appraisers determine that the asset has a fair value of $850,000. To report the plant assets at fair value, Pernice makes the following entry.


Plant assets 150,000


Revaluation surplus is an example of an item reported as other comprehensive income

Revaluation surplus 50,000

Slide 9-55

Pernice now reports the following information in its statement of financial position at the end of year 1.



$850,000 is the new basis of the asset. Pernice reports depreciation expense of $200,000 in the income statement and $50,000 in other comprehensive income. Depreciation in year 2 will be $212,500 ($850,000 / 4).

Illustration 9-18

Slide 9-56

Operating leases

An entity leases an asset from another entity. The fair value of the asset is $200,000,

and the lease rentals are $36000, payable yearly. The first payment is made on the

delivery of the asset. The unguaranteed residual value of the asset after the six-year

lease period is $4,000. The implicit interest rate in the lease is 4.8 % (approximately),

and the present value of the minimum lease payment is $193872.

Required

Show how this lease would be accounted for in the accounts of the lessee.

Slide 9-57

Operating leases

Payment Balance Finance charge Payment Lease liability1 193872 0 -36000 1578722 157872 7578 -36000 1294503 129450 6214 -36000 996634 99663 4784 -36000 684475 68447 3285 -36000 357336 35733 267 -36000 0

22128 -216000

1715

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All changes in equity during a period except those resulting from investments by owners and...

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