Management Accounting Case Study
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hapter 3 – Measuring and Reporting Financial Position
Suggested Solutions
Discussion Questions
The typical characteristics of assets today follows from the definition in the AASB Framework:
Future economic benefits (i.e. in use or exchange)
Control over these economic benefits (i.e. legal or other)
Resulting from a past transaction or event (i.e. purchase; construction; discovery; donation)
By definition, an economic event cannot be classified as an accounting transaction unless it can be shown to affect two or more individual accounts within the balance sheet equation
Example
Other labels used for owners equity (equity) would include:
Capital
Accumulated funds (not-for-profit organisations)
Residual equity (general)
Proprietorship (sole proprietor)
Partners capital (partnership)
Shareholders funds (company)
Double entry refers to the fact that all financial / accounting transactions have a dual effect on the accounting equation (they affect two or more accounts), but always leave the equation in balance. Examples of these dual effects are listed in the answer to 3.2.
Often associated with the label double entry are the terms debit and credit which are the signs given to the changes in the account balances. However, in this textbook a discussion of these terms is not covered.
Non-current liabilities represent those obligations of the reporting entity that do not need to be settled within the longer of 12 months or the operating cycle (from acquisition of raw materials or finished products to their realisation in cash or cash equivalent)
Examples may include all or part (that extends beyond the prescribed period) of the following:
Bank loan (mortgage)
Debentures (issued)
Notes (issued)
Bills Payable
Lease Liability
Warranty Payable
Long Service Leave Payable
Retained Earnings is an equity account. The balance in retained earnings represents the undistributed profits of the reporting entity, and represents a distributable reserve.
Intangible Assets
Identifiables
Development costs
Patent
Copyright
Franchise
Trademark
Masthead
Unidentifiables
Purchased goodwill
Valuable resources are typically excluded on two grounds:
They do not next meet the definition test (i.e. control or past transaction)
They do not meet the recognition test (i.e. insufficient likelihood of the future economic benefits arising or problems with measurement reliability)
Examples:
Human resources (skilled staff) would fail the control test.
Research expenditure may fail the probability test.
(iii)
Internal goodwill would fail the measurement test.
Current refers to a period of time, normally the longer of 12 months or the operating cycle of the business (from acquisition of materials to sale of products).
Student specific (possibly – Receivables; Investments; Intangibles; Property Plant and Equipment)
Normally current assets (cash; receivables inventory) are more liquid (readily converted to cash in the normal course of business) than non-current assets (intangibles; investments; property, plant & equipment).
Goodwill conceptually represents the superior earning capacity of a business entity arising from such factors as convenient location, product or service quality, advertising and promotion, quality staff, research and development and so on.
Goodwill for accounting purposes represents the excess of the fair value of the consideration given for the purchase of a business, or assets of a business over the sum of the fair values of identifiable assets acquired.
Internally generated goodwill relates to the increment in fair value of the business arising from activities within the entity (training; marketing; research). Externally acquired goodwill represents the excess of the fair value of the consideration for a business or section of a business over and above the fair value of the identifiable net assets acquired.
Internal expenditure undertaken to enhance goodwill is not permitted to be capitalised and labelled as goodwill for two reasons. Firstly, the probability of such expenditure giving rise to future economic benefits is difficult to assess. Secondly, if such expenditure does give rise to future economic benefits, the measurement of these benefits is deemed unreliable.
However, in the case of externally acquired goodwill there is an arms length market transaction to support the probability and measurement of goodwill.
It is called the balance sheet because it represents the balances in the permanent accounts