ACC00724 Accounting for Managers Assignment 1 Answer
QUESTION 1 (10 Marks)
- Prepare a statement of changes in equity for the period and determine the amount of profit (loss) made by the business during the period of its first few weeks of existence, assuming that the owner had invested an additional $20,000 into the business just before the above amounts were calculated by the book-keeper. (must show your calculations) (3 marks)
|Statement of Changes in Equity|
|Capital Invested as on 1 April 2019||$1,00,000.00|
|Add: Additions during the period||$20,000.00|
|Add: Profit during the year||$30,000.00|
|Less: Drawings made during the period||-$36,000.00|
|Capital At the end of the period||$1,14,000.00|
- Why is it that, in an entity’s financial statements, assets leased by an entity are sometimes shown on that entity’s balance sheet even though those assets are not legally owned? Explain. You should disclose the source of your information by referencing and support your statements by research and readings. (3 marks)
According to the new IFRS 16 – Leases, issued by IASB, all the leases except for some short-term leases or leases of low-value assets all leases that the lessee has entered into have to be recorded on the balance sheet. Earlier IAS 17 required the lessee to classify the leases into operational lease or financial lease and only the financial leases were recorded on the balance sheet, operation leases were off the balance sheet. The accounting for lessor remains the same.
Thus all leases except for the leases, which are with the lease duration of less than 12months or are of low value, taken to be USD 5,000 are only exempt from reporting on the balance sheet for the lessee (Maali, 2018).
Any lease has 2 elements the right-to-use asset and the lease rentals/liability, if there is a lease contract the lessee is required to identify the underlying asset and account for the lease in the balance sheet with the value of the underlying asset as the assets in the balance sheet and the leased rentals/instalments payable in relation to the lease as liabilities.
The lease asset is shown in the balance sheet even if it is not legally owned because the right to use the asset is transferred to the lessee, who is entitled to all the benefits from the asset, maintenance of the asset, etc. Thus even though the lessee is not the owner of the asset he has all the right relating to the asset and hence the IFRS 16/ AASB 16 requires that they should be recorded in the balance sheet.
QUESTION 2 (10 Marks)
- What are the limitations of a statement of cash flows? Explain. You must disclose the source of your information by referencing and support your statements by readings and research. (4 marks)
The cash flows present the cash transactions carried out in the business and classifies them as operating, investing and financing. Thus it gives the detailed information of the cash receipts and expenditures in the business. However, there are certain limitations of cash flow statement. These are as follows:
- It does not disclose the net income for the period: The cash flow statement records only the cash transactions and since most of the business use accrual basis of accounting, the statement fails to disclose the profit or loss during the period.
- Does not disclose the liquidity of the business properly: the liquidity of the business depends not only on the cash balance but also on the assets that can be quickly converted into cash and are cash equivalents. The cash flow statement excludes these assets and hence does not present the true picture of the liquidity of the business.
- Discloses the cash position at the end of the period: the cash flow statement presents the position of the cash at the end of the period and hence does not help in managing cash for day to day activities.
- Difference in the profit and cash flow from operations: there are huge differences between the cash flows and net profit of the business, thus decision making on the basis of cash flow statement is very difficult because the companies Act may not allow certain transaction on the basis of the accounting profit. Like there are no dividends and taxes if there are no profits in the income statement even though there may be huge cash flows from operations.