Elements‌‌of‌‌Financial‌‌Statements‌ ‌

AD1102‌‌Financial‌‌Accounting‌‌ ‌ Financial‌‌position‌‌(Balance‌‌Sheet)‌ ‌
‌ Asset‌‌(A)‌ ‌ A‌‌present‌‌economic‌‌resource‌‌controlled‌‌by‌‌the‌‌entity‌‌as‌‌a‌‌

Lecture‌‌1‌ ‌ result‌‌of‌‌past‌‌events.‌‌An‌‌economic‌‌resource‌‌is‌‌a‌‌right‌‌that‌‌
has‌‌the‌‌potential‌‌to‌‌produce‌‌economic‌‌benefits.‌ ‌
- Business‌‌→‌‌Exchange‌‌of‌‌goods,‌‌service‌‌and‌‌money‌‌on‌‌an‌‌arm’s‌‌length‌‌basis‌‌that‌‌ Liability‌‌(L)‌ ‌ A‌‌present‌‌obligation‌‌to‌‌transfer‌‌an‌‌economic‌‌resource‌‌as‌‌a‌‌
results‌‌in‌‌mutual‌‌benefit‌‌or‌‌profit‌‌for‌‌both‌‌parties‌‌involved.‌ ‌ result‌‌of‌‌past‌‌events‌ ‌
- People‌‌trade‌‌→‌‌to‌‌create‌‌value‌ ‌
‌ Equity‌‌(SE)‌ A‌‌residual‌‌interest‌‌in‌‌the‌‌assets‌‌of‌‌the‌‌entity‌‌after‌‌deducting‌‌
all‌‌its‌‌liabilities‌ ‌
Types‌‌of‌‌Business‌‌Activities‌ ‌
1) Financing‌‌activities‌ ‌ Financial‌‌performance‌‌(Income‌‌Statement)‌ ‌
a) Owners‌‌→‌‌Owners’‌‌investment‌‌&‌‌Distribution‌‌of‌‌profits‌ ‌
b) Creditors‌‌→‌‌Borrowings,‌‌repayment‌‌of‌‌loans‌‌and‌‌interests‌ ‌ Income‌‌(Y)‌ ‌ ↑A‌‌=‌‌↓L‌‌+‌‌↑SE‌ ‌
‌
Expense‌‌(E)‌ ‌ ↓A‌‌=‌‌↑L‌‌+‌‌↓SE‌ ‌
2) Investing‌‌activities‌ ‌
→‌‌Suppliers‌‌(others)‌‌→‌‌Purchase‌‌(and‌‌sale)‌‌of‌‌LT‌‌resources‌ ‌ ‌
‌
3) Operating‌‌activities‌ ‌
a) Customers‌‌→‌‌Sale‌‌of‌‌g&s‌ ‌ The‌‌Accounting‌‌Equation‌ ‌
b) Suppliers‌‌→‌‌Incurring‌‌cost‌‌of‌‌providing‌‌g&s‌ ‌
- COG‌ ‌ A‌‌=‌‌L‌‌+‌‌SE‌ ‌
- Salary,‌‌rental,‌‌advertising,‌‌etc‌ ‌ ‌
‌
Financial‌‌reporting‌‌→‌‌provide‌‌financial‌‌info‌‌about‌‌the‌‌reporting‌‌entity‌‌(useful‌‌to‌‌existing‌‌and‌‌ Share‌‌capital‌‌+‌‌Retained‌‌
earnings‌‌(RE)‌‌=‌‌SE‌ ‌
potential‌‌investors,‌‌lenders‌‌and‌‌other‌‌creditors)‌‌in‌‌making‌‌decisions‌‌about‌‌providing‌‌resources‌‌
to‌‌the‌‌entity‌ ‌ Share‌‌capital‌‌→‌‌funds‌‌invested‌‌by‌‌the‌‌owners‌ ‌
‌ RE‌‌→‌‌passed‌‌cumulative‌‌profits‌‌(not‌‌paid‌‌out‌‌as‌‌dividends‌‌to‌‌owners)‌ ‌
Fundamental‌‌Qualitative‌‌Characteristics‌‌of‌‌Useful‌‌Financial‌‌Information‌ ‌ ‌
1) Relevance‌ ‌ Beginning‌‌RE‌‌+‌‌Net‌‌Income‌‌-‌‌
a) Predictive‌‌value/‌‌confirmatory‌‌value‌ ‌ Dividends‌‌=‌‌Ending‌‌RE‌ ‌
b) Materiality‌ ‌ ‌
‌
2) Faithful‌‌Representation‌ ‌ Y‌‌-‌‌E‌‌=‌‌Net‌‌Y‌ ‌
a) Complete‌ ‌ ‌
b) Neutral‌ ‌
Beginning‌‌RE‌‌+‌‌Revenue‌‌-‌‌E‌‌-‌‌
c) Free‌‌from‌‌error‌ ‌ Dividends‌‌=‌‌Ending‌‌RE‌ ‌
‌
‌
Enhancing‌‌Qualitative‌‌Characteristics‌‌of‌‌Useful‌‌Financial‌‌Information‌ ‌
1) Comparability‌ ‌ Financial‌‌Statements‌ ‌
1) Statement‌‌of‌‌Financial‌‌Position‌‌/‌‌Balance‌‌Sheet‌‌→‌‌reports‌‌the‌‌A,‌‌L,‌‌SE‌‌at‌‌a‌‌specific‌‌date‌ ‌
2) Verifiability‌‌ ‌
3) Timeliness‌ ‌ ‌
4) Understandability‌ ‌ 2) Statement‌‌of‌‌Profit/Loss‌‌(Financial‌‌performance)→‌‌reports‌‌the‌‌results‌‌of‌‌operations‌‌for‌‌a‌‌
specific‌‌period‌‌of‌‌time‌ ‌
‌

‌ ‌
 3) Statement‌‌of‌‌changes‌‌in‌‌equity‌‌→‌‌reports‌‌the‌‌changes‌‌in‌‌equity‌‌for‌‌a‌‌specific‌‌period‌‌of‌‌ ‌
time‌ ‌
4) Statement‌‌of‌‌cash‌‌flows‌‌→‌‌reports‌‌the‌‌cash‌‌receipts‌‌and‌‌payments‌‌for‌‌a‌‌specific‌‌period‌‌ Lecture‌‌2‌ ‌
of‌‌time‌‌ ‌‌

Double‌‌Entry‌‌System‌ ‌
→‌‌Accounting‌‌process‌‌of‌‌recording‌‌the‌‌dual‌‌effect‌ ‌
→‌‌An‌‌economic‌‌event/‌‌transaction‌‌always‌‌has‌‌a‌‌dual‌‌effect‌‌on‌‌the‌‌basic‌‌accounting‌‌eqn‌ ‌
‌
✓Debits‌‌(Dr)‌‌must‌‌always‌‌=‌‌Credits‌‌(Cr)‌ ‌
LHS‌‌=‌‌RHS‌ ‌
‌
A‌ ‌=‌ ‌L‌‌+‌‌SE‌ ‌
‌(investing)‌ ‌(financing)‌ ‌
A‌‌→‌‌carry‌‌Dr‌‌balances‌ L‌‌&‌‌SE‌‌carry‌‌Cr‌‌balances‌ ‌
Dr‌‌for‌‌↑‌ Cr‌‌for‌‌↑‌ ‌
Cr‌‌for‌‌↓‌ Dr‌‌for‌‌↓‌ ‌

‌
‌
Cash‌‌accounting‌‌vs‌‌Accrual‌‌accounting‌ ‌
Cash‌‌accounting‌ ‌

Accrual‌‌accounting‌ ‌
Records‌‌only‌‌cash‌‌transactions‌‌(cash‌‌ Records‌‌events‌‌in‌‌the‌‌period‌‌in‌‌which‌‌they‌‌
receipts‌‌and‌‌cash‌‌payments).‌ ‌ occur,‌‌regardless‌‌of‌‌when‌‌cash‌‌receipts‌‌or‌‌
→‌‌Cash‌‌receipts‌‌are‌‌treated‌‌as‌‌revenues‌ ‌ payments‌o ‌ ccur.‌ ‌
→‌‌Cash‌‌payments‌‌are‌‌handled‌‌as‌‌expenses‌ ‌ ‌
+ More‌‌accurate‌‌picture‌‌of‌‌a‌‌company’s‌‌
profitability‌ ‌
‌
+ Helps‌‌investors,‌‌creditors‌‌and‌‌others‌

‌ ‌
 to‌‌better‌‌assess‌‌the‌‌operating‌‌result‌‌of‌‌
a‌‌company‌‌&‌‌make‌‌more‌‌informed‌‌
judgements‌‌concerning‌‌its‌‌profitability‌‌
and‌‌earnings‌‌potential‌ ‌
‌
To‌‌apply‌‌accrual‌‌accounting:‌ ‌
☆ ‌‌Time-period‌‌concept‌ ‌
☆ ‌‌Revenue‌‌recognition‌‌principle‌ ‌
‌

Categories‌‌of‌A
‌ djusting‌‌Entries‌ ‌
1) Deferrals‌‌→‌‌cash‌‌received/paid‌‌in‌‌advance‌‌before‌‌revenues/expenses‌‌are‌‌
earned/incurred‌ ‌
1‌‌June‌‌20X8‌ Dr‌‌Prepaid‌‌rent‌ ‌
‌Cr‌‌Cash‌ ‌
30‌‌June‌‌20X8‌‌ ‌Dr‌‌Rent‌‌expense‌ ‌
‌Cr‌‌Prepaid‌‌rent‌ ‌
(Prepaid‌‌rent‌‌cancels‌‌out‌‌each‌‌other)‌ ‌
E.g‌‌unearned‌‌revenue‌ ‌
‌
2) Accruals‌‌→‌‌revenues/expenses‌‌earned/incurred‌‌but‌‌yet‌‌to‌‌receive/pay‌‌cash‌ ‌
E.g‌‌accrued‌‌salary‌ ‌ ‌
‌ ‌
Expenses‌‌/‌‌Loss‌ ‌
3) Depreciation‌‌expense‌‌=‌‌(allocation‌‌of‌‌cost‌‌over‌‌asset‌‌divided‌‌by‌‌estimated‌‌useful‌‌life)‌ ‌
‌‌ →‌‌Arise‌‌in‌‌the‌‌course‌‌of‌‌ordinary‌‌activities‌‌of‌‌an‌‌entity‌ ‌
E.g‌‌COGS‌ ‌
‌
→‌‌May‌‌or‌‌may‌‌not‌‌arise‌‌in‌‌the‌‌course‌‌of‌‌ordinary‌‌activities‌‌of‌‌an‌‌entity‌ ‌
E.g‌‌Loss‌‌on‌‌disposal‌‌of‌‌PPE‌‌(when‌‌consideration‌‌received‌‌is‌‌less‌‌than‌‌its‌‌book‌‌value‌‌(BV)‌ ‌
E.g‌‌An‌‌unfavourable‌‌settlement‌‌of‌‌a‌‌law‌‌suit,‌‌etc.‌ ‌
‌
↓A‌‌=‌‌↑L‌‌+‌‌↓SE‌ ‌
As‌‌SE‌‌↓‌‌→‌‌Share‌‌Capital‌‌(NC)‌‌+‌‌RE‌‌↓‌‌=‌‌Div‌‌(NC)‌‌+‌‌Reserves‌‌↓‌ ‌
*NC‌‌=‌‌No‌‌change‌ ‌
‌
Recognise‌‌an‌‌expense:‌ ‌
● At‌‌the‌‌same‌‌time‌‌as‌ ‌
○ Initial‌‌recognition‌‌of‌‌a‌‌liability‌ ‌
○ E.g‌‌recognising‌‌interest‌‌expense‌‌and‌‌rent‌‌payable‌‌when‌‌it‌‌is‌‌due‌ ‌
‌
● The‌‌increase‌‌in‌‌the‌‌carrying‌‌amount‌‌of‌‌a‌‌liability‌ ‌

‌ ‌
 ○ E.g‌‌recognising‌‌an‌‌interest‌‌expense‌‌when‌‌there‌‌is‌‌an‌‌increase‌‌in‌‌a‌‌loan‌‌payable‌‌
due‌‌to‌‌interest‌‌accrued‌ Lecture‌‌3‌ ‌
‌
Carrying‌‌amount‌‌=‌‌original‌‌purchase‌‌price‌‌-‌‌accumulated‌‌depreciation‌ ‌
‌
● Derecognition‌‌of‌‌an‌‌asset‌ ‌
Accounting‌‌Cycle‌ ‌
○ E.g‌‌loss‌‌of‌‌sale‌‌on‌‌PPE‌ ‌ →‌‌Business‌‌transactions‌ ‌
‌ →‌‌Recording‌‌phase‌ ‌
● Decrease‌‌in‌‌the‌‌carrying‌‌amount‌‌of‌‌an‌‌asset‌ ‌ →‌‌Record‌‌journal‌‌entries‌ ‌
○ E.g‌‌recognise‌‌cost‌‌of‌‌inventory‌‌sold‌ ‌ →‌‌Post‌‌to‌‌general‌‌ledger‌ ‌
‌ →‌‌Prepare‌‌unadjusted‌‌Trial‌‌Balance‌ ‌
→‌‌Adjusting‌‌phase‌ ‌
‌ →‌‌Prepare‌‌adjusting‌‌entries‌‌&‌‌adjusted‌‌T/B‌ ‌
→‌‌Prepare‌‌financial‌‌statements‌ ‌
→‌‌Closing‌‌phase‌ ‌
→‌‌Close‌‌the‌‌books‌‌for‌‌current‌‌period‌ ‌
→‌‌Open‌‌the‌‌books‌‌for‌‌next‌‌period‌ ‌
‌
What‌‌is‌‌the‌‌trial‌‌balance‌‌(T/B)?‌ ‌
- List‌‌of‌‌all‌‌company‌‌accounts‌‌and‌‌balances‌‌taken‌‌from‌‌ledger‌ ‌
- Ensures‌‌total‌‌debits‌‌posted‌‌to‌‌ledger‌‌equal‌‌total‌‌credits‌‌posted‌ ‌
‌
Closing‌‌Entries‌ ‌
- Closing‌‌the‌‌books‌ ‌
- To‌‌prepare‌‌the‌‌accounts‌‌for‌‌next‌‌period’s‌‌transactions‌ ‌
- set‌‌the‌‌temporary‌‌accounts‌‌(revenue,‌‌expense,‌‌dividend)‌‌back‌‌to‌‌0‌‌at‌‌the‌‌end‌‌of‌‌
the‌‌period‌ ‌
- Transfer‌‌the‌‌revenue,‌‌expense‌‌and‌‌dividend‌‌balances‌‌to‌r‌ etained‌‌earnings‌ ‌
- Temporary‌‌accounts:‌‌revenue,‌‌expense,‌‌dividend‌ ‌
- Permanent‌‌accounts:‌‌assets,‌‌liabilities‌‌and‌‌equity‌ ‌
‌
Accounting‌‌information‌‌is‌‌used‌‌to‌‌reflect‌‌economic‌‌reality.‌‌But‌‌why‌‌things‌‌may‌‌still‌‌go‌‌wrong?‌ ‌
‌
Factors‌‌affecting‌‌quality‌‌of‌‌accounting‌‌information:‌ ‌
1. Subjectivity‌ ‌
2. Judgment‌ ‌
3. Uncertainty‌‌of‌‌future‌‌events‌ ‌
4. Risk‌‌-‌‌management‌‌incentives‌‌(F/S‌‌are‌‌prepared‌‌by‌‌management‌‌who‌‌may‌‌be‌‌biased)‌ ‌
- E.g‌‌they‌‌may‌‌be‌‌incentivise‌‌to‌‌report‌‌a‌‌higher‌‌income‌‌if‌‌compensation‌‌package‌‌
tied‌‌to‌‌reported‌‌income‌‌figure‌ ‌
‌
‌

‌ ‌
 - Entity’s‌‌promise‌‌to‌‌transfer‌‌goods‌‌or‌‌services‌‌is‌‌separately‌‌identifiable‌‌from‌‌other‌‌
Lecture‌‌4‌ ‌ promises‌‌in‌‌the‌‌contract‌ ‌
ii)‌‌If‌‌not‌‌distinct‌ ‌
Income‌‌=‌‌Revenue‌‌+‌‌Gains‌ ‌
- If‌‌goods‌‌or‌‌services‌‌are‌‌bundled,‌‌OR‌ ‌
‌
- Goods‌‌or‌‌services‌‌provided‌‌significantly‌‌modifies‌‌or‌‌customises‌‌other‌‌goods‌‌or‌‌service‌‌
Income‌ ‌
in‌‌the‌‌contract,‌‌OR‌ ‌
- Increase‌‌in‌‌economic‌‌benefits‌ ‌
- Goods‌‌or‌‌services‌‌highly‌‌dependant‌‌on‌‌or‌‌inter-related‌‌with‌‌other‌‌goods‌‌or‌‌services‌‌in‌‌
- Encompasses‌‌both‌‌revenue‌‌&‌‌gains‌ ‌
the‌‌contract‌ ‌
‌
Step‌‌3:‌‌Determine‌‌transaction‌‌price‌ ‌
Revenue‌ ‌ ‌
- Is‌‌income‌‌arising‌‌in‌‌the‌‌course‌‌of‌‌an‌‌entity’s‌‌ordinary‌‌activities‌‌(from‌‌the‌‌core‌‌business‌‌of‌‌ Step‌‌4:‌‌Allocate‌‌transaction‌‌price‌‌to‌‌separate‌‌performance‌‌obligations‌ ‌
company)‌ ‌ ‌
- Referred‌‌to‌‌as‌‌sales,‌‌fees,‌‌interest,‌‌dividends,‌‌rent‌‌etc‌ ‌ Step‌‌5:‌‌Recognise‌‌revenue‌‌when‌‌each‌‌performance‌‌obligation‌‌is‌‌satisfied‌‌(customer‌‌obtains‌‌
‌ control)‌ ‌
Gains‌ ‌ i)‌‌Over‌‌time‌ ‌
- Represents‌‌other‌‌items‌‌that‌‌meet‌‌the‌‌definition‌‌of‌‌income‌ ‌ - Customer‌‌simultaneously‌‌receives‌‌and‌‌consumes‌‌all‌‌of‌‌the‌‌benefits‌‌provided‌‌by‌‌the‌‌
- Normally‌‌does‌‌not‌‌involve‌‌an‌‌“earning‌‌process”‌ ‌ entity‌ ‌
‌ - Entity’s‌‌performance‌‌creates‌‌or‌‌enhances‌‌an‌‌asset‌‌that‌‌the‌‌customer‌‌controls‌‌as‌‌the‌‌
Importance‌‌of‌‌revenue‌‌→‌‌there’s‌‌demand‌‌for‌‌company’s‌‌g&s‌‌→‌ ‌profits‌‌→‌‌company‌‌viable‌‌in‌‌ asset‌‌is‌‌created,‌‌OR‌ ‌
the‌‌LR‌‌→‌‌instills‌‌confidence‌‌in‌‌stakeholders‌‌→‌‌more‌‌likely‌‌to‌‌support‌‌company‌ ‌ - Entity’s‌‌performance‌‌does‌‌not‌‌create‌‌an‌‌asset‌‌with‌‌an‌‌alternative‌‌use‌‌to‌‌the‌‌entity‌‌and‌‌
‌ the‌‌entity‌‌has‌‌an‌‌enforceable‌‌right‌‌to‌‌payment‌‌for‌‌performance‌‌completed‌‌to‌‌date‌ ‌
To‌‌increase‌‌profits‌‌(expenses-‌‌revenue)‌‌→‌‌cut‌‌costs‌‌but‌‌may‌‌lead‌‌to‌‌losses‌‌due‌‌to‌‌shutdown‌‌of‌‌ ii)‌‌Point‌‌in‌‌time‌
production‌ ‌ ‌
‌ Sales‌‌on‌‌Credit‌‌(on‌‌account)‌ ‌
Revenue‌‌recognition‌ ‌ ● Allows‌‌customers‌‌to‌‌pay‌‌for‌‌their‌‌purchases‌‌at‌‌a‌‌later‌‌date‌ ‌
- An‌‌entity‌‌shall‌‌recognise‌‌revenue‌‌when‌‌promised‌‌g&s‌‌are‌‌transferred‌‌to‌‌customer‌‌ ‌ ● It‌‌is‌‌a‌‌kind‌‌of‌‌financing‌‌(determined‌‌by‌‌a‌‌number‌‌of‌‌factors)‌ ‌
- in‌‌an‌‌amount‌‌that‌‌reflects‌‌the‌‌consideration‌‌to‌‌which‌‌the‌‌company‌‌expects‌‌to‌‌be‌‌entitled‌‌ ○ Customers’‌‌credit‌‌worthiness‌ ‌
in‌‌exchange‌‌for‌‌those‌‌g&s.‌ ‌ ○ Industry‌‌practices‌ ‌
‌ ● Benefits‌‌vs‌‌Costs‌‌(Lecture‌‌5)‌ ‌
Steps‌‌to‌‌revenue‌‌recognition‌ ‌ ‌
‌ - Customers‌‌may‌‌be‌‌offered‌‌a‌‌sales‌‌discount‌‌to‌‌encourage‌‌them‌‌to‌‌make‌‌early‌‌payment‌‌
Step‌‌1:‌‌Identify‌‌contract‌‌with‌‌the‌‌customer‌‌-‌‌identify‌‌only‌‌if‌‌fall‌‌within‌‌5‌‌criteria‌‌of‌‌SFRS‌‌(I)‌‌15:9‌‌:‌ ‌ for‌‌their‌‌purchases‌ ‌
1. All‌‌parties‌‌approve‌‌and‌‌commit‌‌to‌‌satisfying‌‌their‌‌obligations‌ ‌ - Prompt‌‌or‌‌early‌‌payment‌‌discount‌ ‌
2. Rights‌‌of‌‌each‌‌party‌‌specified‌ ‌ - What‌‌may‌‌appear‌‌on‌‌the‌‌invoice‌‌as‌‌the‌‌payment‌‌terms‌‌is‌‌:‌‌2/10,‌‌n/30‌ ‌
3. Payment‌‌terms‌‌can‌‌be‌‌identified‌ ‌ - 2‌‌is‌‌the‌‌percentage‌‌of‌‌discount‌‌if‌‌payment‌‌made‌‌within‌‌discount‌‌period‌ ‌
4. Commercial‌‌substance‌‌present‌ ‌ - 10‌‌is‌‌the‌‌number‌‌of‌‌days‌‌in‌‌discount‌‌period‌‌ ‌
5. Probable‌‌that‌‌consideration‌‌will‌‌be‌‌collectable‌ ‌ - n‌‌is‌‌otherwise‌‌full‌‌sales‌‌amount‌‌is‌‌due‌ ‌
‌ - 30‌‌is‌‌the‌‌days‌‌of‌‌credit‌‌period‌‌(payment‌‌due‌‌after‌‌date‌‌of‌‌sale)‌ ‌
Step‌‌2:‌‌Identify‌‌separate‌‌performance‌‌obligations‌‌in‌‌contract‌ ‌ ‌
i)‌‌If‌‌distinct‌ ‌ If‌‌payment‌‌received‌‌before‌‌discount‌‌period‌‌ If‌‌payment‌‌received‌‌after‌‌discount‌‌period‌‌
- Customer‌‌can‌‌benefit‌‌from‌‌goods‌‌or‌‌service‌‌on‌‌its‌‌own‌‌or‌‌in‌‌combination‌‌with‌‌other‌‌ ends‌ ‌ ends‌ ‌
resources‌‌that‌‌are‌‌readily‌‌available,‌‌AND‌ ‌
Dr‌‌Cash‌ ‌ Dr‌‌Cash‌ ‌

‌ ‌
 Dr‌‌Ar‌ ‌
‌Cr‌‌AR‌ ‌ ‌ r‌‌AR‌ ‌
C
‌Cr‌‌Revenue‌ ‌ ‌Cr‌‌GST‌‌payable‌ ‌
‌Cr‌‌Revenue‌ ‌
‌
Sales‌‌paid‌‌by‌‌Credit‌‌Card‌ ‌
● Companies‌‌accept‌‌cc‌‌to:‌ ‌
○ Increase‌‌sales‌ ‌
Interest‌‌Income‌ ‌
○ Avoid‌‌providing‌‌credit‌‌directly‌‌to‌‌customers‌ ‌ - When‌‌an‌‌entity‌‌lends‌‌money‌‌to‌‌a‌‌3rd‌‌party‌‌→‌‌loan‌‌receivable‌‌recorded‌ ‌
○ Avoid‌‌losses‌‌due‌‌to‌‌bad‌‌debts‌ ‌ - Loan‌‌receivable‌‌→‌‌financial‌‌asset‌‌→‌‌held‌‌to‌‌collect‌‌contractual‌‌CFs‌‌→‌‌payments‌‌of‌‌
○ Receive‌‌quicker‌‌payments‌ ‌ principal‌‌&‌‌interest‌ ‌
‌ - Loan‌‌receivable‌‌is‌‌initially‌‌recorded‌‌at‌‌fair‌‌value‌‌(FV)‌‌→‌‌then‌‌at‌‌amortised‌‌cost‌ ‌
Bad‌‌debts‌‌refer‌‌to‌‌loans‌‌or‌‌outstanding‌‌balances‌‌owed‌‌that‌‌are‌‌no‌‌longer‌‌deemed‌‌recoverable‌‌ ‌
and‌‌must‌‌be‌‌written‌‌off.‌‌ ‌ 1‌‌Jan‌‌20X1‌ ‌
‌ Dr‌‌Loan‌‌Receivable‌ ‌
Dr‌‌Cash‌ ‌ ‌Cr‌‌Cash‌ ‌
Dr‌‌Credit‌‌card‌‌expense‌‌‌-‌‌contra‌‌revenue‌‌or‌‌a‌‌selling‌‌expense‌ ‌ ‌
‌Cr‌‌Revenue‌ ‌ 31‌‌Dec‌‌20X1‌ ‌
‌ Dr‌‌Interest‌‌Receivable‌ ‌
Sales‌‌with‌‌Right‌‌of‌‌Return‌ ‌ ‌Cr‌‌Interest‌‌Income‌ ‌
- An‌‌entity‌‌can‌‌grant‌‌the‌‌customer‌‌right‌‌to‌‌return‌‌product‌‌for‌‌numerous‌‌reasons‌‌(e.g‌‌ ‌
customer‌‌dissatisfaction‌‌with‌‌the‌‌product)‌ ‌ Licensing‌‌of‌‌Investment‌‌Property‌‌(IP)‌
- On‌‌return,‌‌customer‌‌can‌‌receive‌‌full‌‌or‌‌partial‌‌refund‌‌of‌‌any‌‌consideration‌‌paid‌ ‌ License:‌‌establishes‌‌a‌‌customer’s‌‌right‌‌to‌‌the‌‌IP‌‌of‌‌the‌‌entity‌ ‌
- Credit‌‌against‌‌any‌‌amount‌‌owed‌‌or‌‌to‌‌be‌‌owed‌‌to‌‌entity‌ ‌ ‌
- Another‌‌product‌‌in‌‌exchange‌ ‌ Income‌‌earned‌‌from‌‌the‌‌licensing‌‌of‌‌its‌‌IP‌‌is‌‌revenue‌‌for‌‌the‌‌entity‌‌and‌‌is‌‌sometimes‌‌called‌‌
‌ royalty.‌ ‌
Entity‌‌to‌‌recognise:‌ ‌ ‌
- Revenue‌‌in‌‌the‌‌amount‌‌of‌‌consideration‌‌entity‌‌to‌‌be‌‌entitled‌ ‌ Dr‌‌AR‌ ‌
- A‌‌refund‌‌liability‌‌to‌‌recognise‌‌the‌‌expected‌‌return‌ ‌ ‌Cr‌‌Licensing‌‌Income‌ ‌
- An‌‌asset‌‌for‌‌its‌‌right‌‌to‌‌recover‌‌from‌‌customer‌‌the‌‌product‌‌sold‌ ‌
- Credit‌‌refund‌‌liability‌‌is‌‌the‌‌worth‌‌of‌‌goods‌‌expected‌‌to‌‌be‌‌returned‌ ‌
‌ ‌
Dr‌‌AR‌ ‌
‌Cr‌‌Revenue‌ ‌
‌Cr‌‌Refund‌‌liability‌ ‌ Dividend‌‌Income‌‌ ‌
‌
Dr‌ ‌COGS‌ ‌ NOT‌‌SE‌ ‌
Dr‌‌Recoverable‌‌Asset‌‌‌[(COGS‌‌x‌‌worth‌‌of‌‌goods‌‌return)/‌‌AR]‌ ‌ ‌
‌Cr‌‌Inventory‌ ‌ Dividends:‌‌are‌‌distribution‌‌of‌‌profits‌‌to‌‌the‌‌shareholders‌ ‌
‌ ‌
Collection‌‌on‌‌behalf‌‌of‌‌3rd‌‌parties‌ ‌ 31‌‌March‌‌20X1‌ ‌
- During‌‌a‌‌sales‌‌transaction‌‌an‌‌entity‌‌may‌‌collect‌‌cash‌‌on‌‌behalf‌‌of‌‌a‌‌3rd‌‌party‌ ‌ Dr‌‌Dividend‌‌Receivable‌ ‌
- amount‌‌collected‌‌is‌‌not‌‌entity’s‌‌revenue‌ ‌ ‌Cr‌‌Dividend‌‌Income‌ ‌
- to‌‌be‌‌treated‌‌as‌‌a‌‌payable‌‌to‌‌the‌‌3rd‌‌party‌ ‌ ‌
‌ 30‌‌April‌‌20X1‌ ‌
- E.g‌‌GST‌‌(third‌‌party‌‌is‌‌government)‌ ‌ Dr‌‌Cash‌ ‌

‌ ‌
‌Cr‌‌Dividend‌‌Receivable‌ ‌
Lecture‌‌5‌ ‌
‌ Receivables‌ ‌
- Monetary‌‌claims‌‌against‌‌others‌ ‌
- Acquired‌‌mainly‌‌by:‌ ‌
- Selling‌‌g&s‌‌(AR)‌ ‌
- Lending‌‌$$‌‌(Notes‌‌Receivable)‌ ‌
- 2‌‌major‌‌types:‌ ‌
- AR/‌‌trade‌‌receivables‌ ‌
- Notes‌‌receivables/non-trade‌‌receivables‌ ‌

Accounts/Trade‌‌Receivables‌ ‌
- Amounts‌‌collectible‌‌from‌‌customers‌ ‌
- Classified‌‌as‌‌current‌‌assets‌‌(CA)‌ ‌
AR‌‌in‌‌General‌‌Ledger‌ ‌
● Control‌‌account:‌‌summarises‌‌total‌‌amount‌‌due‌‌from‌‌all‌‌customers‌ ‌
● Subsidiary‌‌ledger:‌‌provides‌‌details‌‌of‌‌AR‌‌balance‌‌(separate‌‌account‌‌for‌‌each‌‌customer)‌ ‌
‌
Selling‌‌on‌‌Credit‌ ‌
Benefits‌ ‌ Costs‌‌ ‌

+ Customers‌‌that‌‌do‌‌not‌‌have‌‌cash‌‌ - Company‌‌cannot‌‌collect‌‌from‌‌some‌‌
available‌‌can‌‌buy‌‌on‌‌credit‌ ‌ customers‌‌(Impairment‌‌loss‌‌of‌‌AR/‌‌
+ Sales‌‌and‌‌profits‌‌increase‌ ‌ Uncollectible‌‌account‌‌expense/‌‌
Doubtful-account‌‌expense/‌‌ ‌
Bad-debt‌‌expense)‌ ‌
‌
2‌‌methods‌‌to‌‌Account‌‌for‌‌Impairment‌ ‌
1. Allowance‌‌Method‌ ‌
2. Direct‌‌Write-off‌‌Method‌ ‌
‌
1. Allowance‌‌Method‌‌(Preferred)‌ ‌
➔ AR‌‌is‌‌reported‌‌at‌‌Net‌‌Realisable‌‌Value‌‌(NRV)‌‌(AR‌‌-‌‌Allowance‌‌for‌‌impairment)‌ ‌
➔ Contra-account‌‌to‌‌AR‌ ‌
➔ Shows‌‌amount‌‌of‌‌receivables‌‌expected‌‌not‌‌to‌‌be‌‌collected‌
‌
In‌‌P/L,‌‌an‌‌impairment‌‌loss‌‌on‌‌AR‌‌is‌‌recognised‌‌as‌‌an‌‌expense‌ ‌
‌
Dr‌‌Impairment‌‌of‌‌AR‌ ‌
‌Cr‌‌Allowance‌‌for‌‌impairment‌‌of‌‌AR‌ ‌
‌
Writing‌‌off‌‌uncollectible‌‌amounts‌ ‌

‌ ‌
 - When‌‌it‌‌is‌‌clear‌‌that‌‌a‌‌specific’s‌‌customer’s‌‌AR‌‌will‌‌be‌‌uncollectible,‌‌the‌‌amounts‌‌owed‌‌ - Spot‌‌exchange‌‌rate‌‌on‌‌date‌‌of‌‌transaction‌ ‌
should‌‌be‌‌removed‌‌from‌‌the‌‌AR‌‌account‌‌and‌‌charged‌‌to‌‌the‌‌Allowance‌‌for‌‌impairment‌‌ Dr‌‌AR‌ ‌
AR‌‌account‌ ‌ ‌Cr‌‌Revenue‌ ‌
‌‌ ‌
Dr‌‌Allowance‌‌for‌‌impairment‌‌of‌‌AR‌‌(Expense)‌ ‌ 2. At‌‌B/S‌‌Date‌ ‌
‌Cr‌‌AR‌ ‌ →‌‌For‌‌monetary‌‌items,‌‌use‌‌closing‌‌exchange‌‌rate‌ ‌
‌ ‌
- Write‌‌off‌‌has‌‌no‌‌impact‌‌on‌‌profit/loss‌‌statement‌‌and‌‌balance‌‌sheet‌ ‌ Gain:‌ ‌
‌ Dr‌‌AR‌ ‌
‌ ‌Cr‌‌Exchange‌‌Gain‌‌(P/L)‌ ‌
2. Direct‌‌Write-off‌‌Method‌ ‌ ‌
➔ Waits‌‌until‌‌a‌‌specific‌‌amount‌‌is‌‌uncollectible‌‌to‌‌record‌‌the‌‌expense‌ ‌ Loss:‌ ‌
➔ Inferior‌‌to‌‌Allowance‌‌Method‌‌as‌‌write‌‌off‌‌only‌‌when‌‌receivable‌‌is‌‌confirmed‌‌uncollectible‌‌ Dr‌‌Exchange‌‌Loss‌ ‌
(fails‌‌to‌‌take‌‌into‌‌account‌‌possibility‌‌of‌‌impairment‌‌at‌‌B/S)‌ ‌ ‌Cr‌‌AR‌ ‌
◆ Receivables‌‌reported‌‌at‌‌full‌‌amount‌‌(>‌‌what‌‌biz‌‌supposed‌‌to‌‌collect)‌ ‌ ‌
◆ Assets‌‌overstated‌‌on‌‌B/S‌ ‌ 3. Settlement‌‌Date‌ ‌
‌ →‌‌For‌‌monetary‌‌items‌ ‌
Dr‌‌Allowance‌‌for‌‌impairment‌‌of‌‌AR‌ ‌ Dr‌‌Cash‌ ‌
‌Cr‌‌AR‌ ‌ ‌Cr‌‌AR‌ ‌
‌ ‌Cr‌‌Exchange‌‌Gain‌‌(P/L)‌ ‌
‌
Evaluating‌‌Effectiveness‌‌of‌‌Receivables‌‌Management‌ ‌ ‌
1. Receivables‌‌Turnover‌‌Ratio‌‌=‌‌Net‌‌sales‌‌revenue‌‌/‌‌Average‌‌net‌‌receivables‌ ‌
→‌S ‌ hows‌‌the‌‌number‌‌of‌‌times‌‌during‌‌a‌‌period‌‌that‌‌the‌‌average‌‌AR‌‌balance‌‌is‌‌collected‌ ‌
→‌‌>‌‌the‌‌better‌ ‌
‌
‌
2. Average‌‌Collection‌‌Period‌‌=‌‌365‌‌/‌‌Receivables‌‌Turnover‌‌Ratio‌ ‌
→‌‌Approximation‌‌of‌‌the‌‌number‌‌of‌‌days‌‌the‌‌average‌‌AR‌‌balance‌‌is‌‌outstanding‌ ‌
→‌‌<‌‌the‌‌better‌ ‌
‌
Foreign‌‌Currency‌‌Transactions‌ ‌
- Occurs‌‌when‌‌an‌‌entity‌‌enters‌‌into‌‌a‌‌transaction‌‌which‌‌is‌‌dominated‌‌by‌‌a‌‌currency‌‌other‌‌
than‌‌its‌‌functional‌‌currency‌ ‌
E.g‌‌Functional‌‌currency:‌‌SGD,‌‌sold‌‌goods‌‌in‌‌USD‌ ‌
‌
Exchange‌‌rate‌‌to‌‌use:‌ ‌
3‌‌dates:‌ ‌
1. On‌‌initial‌‌recognition‌ ‌
2. At‌‌B/S‌‌date‌ ‌
- Monetary‌‌items‌‌(cash,‌‌AR,‌‌AP,‌‌loans,‌‌etc)‌ ‌
3. Settlement‌‌Date‌ ‌
‌
1. Initial‌‌Recognition‌ ‌
→‌‌Translate‌‌foreign‌‌currency‌‌into‌‌functional‌‌currency‌‌using:‌ ‌

‌ ‌
 Beginning‌‌Inventory‌‌+‌‌total‌‌purchases‌‌+‌‌freight‌‌in‌‌-‌‌purchase‌‌discounts‌‌-‌‌purchase‌‌returns‌‌-‌‌
Lecture‌‌6‌ ‌ COGS‌‌=‌‌Ending‌‌Inventory‌ ‌
‌
Freight-in‌‌is‌‌the‌‌cost‌‌of‌‌having‌‌goods‌‌or‌‌materials‌‌delivered‌‌to‌‌a‌‌business‌‌for‌‌manufacture‌‌or‌‌
Inventories‌ ‌ resale.‌ ‌
‌
- Assets‌‌held‌‌for‌‌sale‌‌in‌‌the‌‌ordinary‌‌course‌‌of‌‌business;‌‌or‌ ‌ Things‌‌included‌‌in‌‌Cost‌‌of‌‌inventories‌ ‌
- In‌‌the‌‌process‌‌of‌‌production‌‌for‌‌such‌‌sales;‌‌or‌ ‌ 1. All‌‌costs‌‌of‌‌purchase‌ ‌
- In‌‌the‌‌form‌‌of‌‌materials‌‌or‌‌supplies‌‌to‌‌be‌‌consumed‌‌in‌‌the‌‌production‌‌process‌‌or‌‌in‌‌the‌‌ 2. Costs‌‌of‌‌conversion‌ ‌
rendering‌‌of‌‌services‌ ‌ 3. Any‌‌other‌‌costs‌‌e.g‌‌transport‌‌etc‌ ‌
‌ ‌
‌
Inventory‌‌Costing‌‌Methods‌ ‌
3‌‌forms‌‌of‌‌inventories‌ ‌
1. Raw‌‌materials‌ ‌ Specific‌‌ ● Traces‌‌the‌‌flow‌‌of‌‌each‌‌and‌‌every‌‌unit‌‌of‌‌inventory‌ ‌
2. Work‌‌in‌‌progress‌ ‌ Identification‌‌ ‌
3. Finished‌‌Goods‌ ‌ Method‌ ‌ - Time‌‌&‌‌effort‌‌needed‌‌to‌‌track‌‌all‌‌purchase‌‌costs‌‌for‌‌each‌‌item‌‌
of‌‌inventory‌ ‌
‌
Sale‌‌and‌‌COGS‌ ‌ ● Generally,‌‌only‌‌practical‌‌unique‌‌items‌‌of‌‌inventory‌‌e.g‌‌
custom-made‌‌items,‌‌or‌‌items‌‌of‌‌high‌‌value‌ ‌
2‌‌aspects‌‌to‌‌every‌‌sales‌‌transaction‌ ‌
First‌‌in‌‌-‌‌First‌‌Out‌‌ ● Assumes‌‌items‌‌that‌‌are‌‌purchased/produced‌‌first‌‌→‌‌sold‌‌first‌ ‌
1. Revenue‌‌recognition‌ ‌ Method‌‌(FIFO)‌ ‌ ‌
2. Expense‌‌recognition‌ ‌ ● Items‌‌remaining‌‌in‌‌inventory‌‌→‌‌most‌‌recently‌‌
‌ purchased/produced‌ ‌
When‌‌inventories‌‌are‌‌sold,‌‌the‌‌carrying‌‌amount‌‌of‌‌those‌‌inventories‌‌shall‌‌be‌‌recognised‌‌as‌‌an‌‌ ‌
expense‌‌in‌‌the‌‌period‌‌of‌‌the‌‌sale.‌ ‌ ● COGS‌‌on‌‌income‌‌statement‌‌will‌‌include‌‌oldest‌‌costs‌ ‌
Dr‌‌COGS‌ ‌ ‌
● Ending‌‌inventory‌‌on‌‌B/S‌‌will‌‌include‌‌most‌‌recent‌‌costs‌ ‌
‌Cr‌‌Inventory‌ ‌
‌
‌ ● For‌‌restaurant‌‌inventories‌ ‌
Inventory‌‌Recording‌ ‌ ‌
Method:‌ ‌
Perpetual‌‌Inventory‌‌System‌ ‌ Periodic‌‌Inventory‌‌System‌ ‌ - Find‌‌the‌‌ending‌‌inventory‌‌units‌‌→‌ (‌ beginning‌‌inventory‌‌+‌‌total‌‌
purchases)‌‌-‌‌total‌‌sales‌‌=‌‌ending‌‌inventory‌‌units‌ ‌
● Continually‌‌updates‌‌the‌‌accounting‌‌ ● No‌‌up‌‌to‌‌date‌‌inventory‌‌record‌‌is‌‌kept‌‌ - Ending‌‌inventory‌‌units‌‌times‌‌the‌‌unit‌‌cost‌‌for‌‌the‌‌latest‌‌
records‌‌for‌‌each‌‌transaction‌‌relating‌‌ during‌‌the‌‌year‌ ‌
inventory‌ ‌
to‌‌purchase/‌‌sale‌ ‌ ‌
‌ ● Need‌‌a‌‌physical‌‌count‌‌of‌‌inventory‌‌at‌‌ ‌
● At‌‌any‌‌point‌‌in‌‌time,‌‌we‌‌can‌‌find‌‌out‌‌ year-end‌‌to‌‌determining‌‌the‌ ‌ - For‌‌COGS,‌ ‌
the‌‌COGS‌‌(reflected‌‌in‌‌income‌‌stated)‌‌ ○ Inventory‌‌balance‌ ‌ - Take‌‌total‌‌sales‌‌unit‌‌times‌‌the‌‌unit‌‌cost‌‌of‌‌the‌‌oldest‌‌inventory‌ ‌
and‌‌ending‌‌inventory‌‌(reflected‌‌in‌‌B/S)‌ ○ COGS‌ ‌
‌ ‌ The‌‌Weighted‌‌ ● Determines‌‌the‌‌cost‌‌of‌‌each‌‌item‌‌using‌‌a‌‌weighted‌‌average‌‌of‌‌
+ Cheap‌‌and‌‌easy‌‌to‌‌track‌‌→‌‌widely‌‌ Average‌‌Method‌ ‌ the‌‌cost‌‌similar‌‌interchangeable‌‌items‌‌for‌‌each‌‌period.‌ ‌
Beginning‌‌Inv‌‌+‌‌Purchase‌‌-‌‌Ending‌‌Inv‌‌=‌‌
adopted‌ ‌ ‌
COGS‌ ‌
● For‌‌raw‌‌materials‌ ‌
‌ ‌

‌ ‌
 Measuring‌‌Efficiency‌‌in‌‌Inventory‌‌Management‌ ‌
● E.g‌‌$550/200kg‌‌=‌‌$2.75‌‌(use‌‌$2.75‌‌to‌‌times‌‌the‌‌weight‌‌of‌‌
‌
inventory‌‌sold)‌ ‌
‌ Gross‌‌profit‌‌margin‌‌=‌‌Gross‌‌profit‌‌/‌‌Net‌‌sales‌ ‌
Method:‌ ‌
- Find‌‌total‌‌costs‌‌of‌‌beginning‌‌inventory‌‌and‌‌purchases‌ ‌ Gross‌‌profit‌‌=‌‌Revenue‌‌-‌‌COGS‌ ‌
- Divide‌‌the‌‌total‌‌costs‌‌by‌‌the‌‌total‌‌units‌ ‌
↑‌‌ratio‌‌→‌‌↑‌‌markup‌‌a‌‌business‌‌is‌‌able‌‌to‌‌achieve‌‌on‌‌the‌‌products‌ ‌
- Use‌‌the‌‌average‌‌weighted‌‌cost‌‌times‌‌the‌‌ending‌‌inventory‌‌ ‌
units‌‌((beginning‌‌inventory‌‌+‌‌total‌‌purchases)‌‌-‌‌total‌‌sales)‌ ‌ High‌‌Gross‌‌Profit‌‌Margin‌ ‌
‌ suggests‌ ‌
**‌‌FIFO‌‌&‌‌Weighted‌‌Average‌‌methods‌‌use‌‌→‌‌accounting‌‌cost‌‌flow‌‌ - Premium‌‌on‌‌quality‌‌products‌ ‌
assumption‌ ‌
→‌‌actual‌‌physical‌‌flow‌‌of‌‌inventory‌‌items‌‌may‌‌be‌‌diff‌ ‌ - Good‌‌inventory‌‌management‌‌=‌‌healthy‌‌margin‌ ‌
‌
‌
Low‌‌Gross‌‌Profit‌‌Margin‌ ‌
Inventory‌‌costing‌‌method‌‌under‌‌different‌‌prices‌ ‌
suggests‌ ‌
1. Constant‌‌price‌‌-‌‌both‌‌no‌‌difference‌ ‌ - Price‌‌competition‌ ‌
‌
- Inefficient‌‌inventory‌‌management‌ ‌
2. Inflation‌ ‌
‌
‌ COGS‌ ‌ Net‌‌Income‌ ‌ Taxes‌ ‌ Assets‌ ‌
Inventory‌‌turnover‌‌=‌‌COGS‌‌/‌‌Average‌‌inventory‌ ‌
FIFO‌ ‌ Lower‌ ‌ Higher‌ ‌ Higher‌ ‌ Higher‌ ‌ →‌‌measures‌‌how‌‌frequently‌‌inventory‌‌is‌‌sold‌ ‌
↑‌‌ratio‌‌→‌‌↑‌‌efficiency‌‌in‌‌inventory‌‌management‌ ‌
Weighted‌‌ Higher‌ ‌ Lower‌ ‌ Lower‌ ‌ Lower‌ ‌ ↑‌‌ratio‌‌→‌‌↓‌‌investment‌‌in‌‌inventory‌‌for‌‌a‌‌given‌‌level‌‌of‌‌sales‌ ‌
Average‌ ‌
‌ Average‌‌holding‌‌period‌‌(in‌‌days)‌‌=‌‌365‌‌/‌‌inventory‌‌turnover‌ ‌
→‌‌measures‌‌the‌‌average‌‌number‌‌of‌‌days‌‌it‌‌takes‌‌to‌‌convert‌‌inventory‌‌into‌‌sales‌ ‌
3. Deflation‌ ‌ ↓‌‌the‌‌better‌ ‌
‌ COGS‌ ‌ Net‌‌Income‌ ‌ Taxes‌ ‌ Assets‌ ‌

FIFO‌ ‌ Higher‌ ‌ Lower‌ ‌ Lower‌ ‌ Lower‌ ‌

‌
Weighted‌‌
Average‌ ‌
Lower‌ ‌ Higher‌ ‌ Higher‌ ‌ Higher‌ ‌
‌
‌
Inventory‌‌Valuation‌‌(Lower‌‌of‌‌Cost‌‌&‌‌NRV)‌ ‌
- Inventories‌‌→‌‌damaged‌‌wholly/partially‌‌or‌‌selling‌‌price‌‌↓‌‌till‌‌cost‌‌unrecoverable‌‌→‌‌
written‌‌down‌‌to‌‌NRV‌ ‌
- To‌‌determine‌‌the‌‌NRV‌‌of‌‌inventory‌‌→‌‌estimates‌‌of‌‌NPV‌‌→‌‌made‌‌based‌‌on‌‌most‌‌reliable‌
info‌‌available‌ ‌
- Write-down‌‌of‌‌inventory‌‌→‌‌recognised‌‌as‌‌an‌‌expense‌‌(COGS)‌‌in‌‌the‌‌period‌‌the‌‌
write-down‌‌or‌‌loss‌‌occurs.‌ ‌
‌
Impact‌‌of‌‌Inventory‌‌Errors‌ ‌
Overstating‌‌the‌‌value‌‌of‌‌ending‌‌inventory‌‌→‌‌understate‌‌COGS‌‌→‌‌overstate‌‌gross‌‌profit‌‌and‌‌net‌‌
income‌ ‌
‌

‌ ‌
Lecture‌‌7‌ ‌ to‌‌be‌‌capable‌‌of‌‌operating‌‌in‌‌the‌‌
manner‌‌intended‌‌by‌‌management‌ ‌
- Only‌‌maintains‌‌or‌‌restores‌‌working‌‌
order‌ ‌
- Initial‌‌estimate‌‌of‌‌cost‌‌at‌‌end‌‌of‌‌life‌‌‌(e.g‌‌ - Cost‌‌is‌‌an‌‌expense‌ ‌
dismantling‌‌costs,‌‌restoration‌‌costs)‌ ‌
Property,‌‌Plant‌‌&‌‌Equipment‌‌(PPE)‌ ‌ →‌‌We‌‌capitalise‌‌the‌‌purchase‌‌price,‌‌directly‌‌
attributable‌‌cost‌‌and‌‌initial‌‌estimate‌‌of‌‌end‌‌cost‌‌
→‌‌tangible‌ ‌
during‌‌the‌‌period‌‌where‌‌asset‌‌is‌‌purchased‌‌
→‌‌long-term‌ ‌
and‌‌asset‌‌is‌‌ready‌‌for‌‌use‌‌as‌‌intended‌‌by‌‌
- Non-current‌‌asset‌‌(Non‌‌CA)‌ ‌
management‌ ‌
- Fixed‌‌asset‌ ‌
→‌‌Once‌‌the‌‌asset‌‌is‌‌ready‌‌for‌‌use‌‌in‌‌the‌‌
- Expected‌‌to‌‌be‌‌used‌‌for‌‌more‌‌than‌‌one‌‌accounting‌‌period‌ ‌
business,‌‌we‌‌cease‌‌capitalisation‌‌of‌‌initial‌‌cost‌‌
‌
until‌‌the‌‌end‌‌of‌‌asset‌‌life‌ ‌
2‌‌issues‌ ‌
1. Recognition‌ ‌ Dr‌‌Machine‌‌‌(inclusive‌‌of‌‌installation‌‌cost‌‌etc‌‌ Subsequent‌‌cost‌‌expensed‌‌<‌‌subsequent‌‌
2. Measurement‌‌(Valuation)‌ ‌ info‌‌given)‌ ‌ cost‌‌capitalised‌ ‌
‌ ‌‌Cr‌‌Cash‌,‌‌other‌‌payables‌‌etc‌ ‌
Recognition‌‌of‌‌PPE‌ ‌
‌
● Recognise‌‌PPE‌‌as‌‌an‌‌asset‌‌IF‌‌and‌‌ONLY‌‌IF:‌ ‌
○ It‌‌is‌‌probable‌‌that‌‌future‌‌economic‌‌benefits‌‌associated‌‌with‌‌the‌‌item‌‌will‌‌flow‌‌to‌‌ Depreciation‌ ‌
entity‌‌AND‌ ‌ - An‌‌expense‌‌in‌‌the‌‌P/L‌‌statement‌ ‌
○ Cost‌‌of‌‌the‌‌item‌‌can‌‌be‌‌measured‌‌reliably‌ ‌ - Is‌‌a‌‌systematic‌‌allocation‌‌of‌‌the‌‌cost‌‌of‌‌an‌‌asset‌‌less‌‌its‌‌residual‌‌value‌‌over‌‌its‌‌estimated‌‌
‌ useful‌‌life‌ ‌
Measurement‌‌of‌‌PPE‌ ‌ - It‌‌should‌‌begin‌‌when‌‌asset‌‌is‌‌avail‌‌for‌‌use‌ ‌
● Measure‌‌at‌‌its‌‌cost‌ ‌ - It‌‌is‌‌an‌‌estimate‌ ‌
○ 2‌‌Measurements:‌ ‌ ‌
- It‌‌is‌‌NOT‌‌a‌‌valuation‌‌process/‌‌a‌‌fund‌‌to‌‌replace‌‌assets‌ ‌
■ Initial‌‌Measurement‌ ‌
■ Subsequent‌‌Measurement‌ ‌ ‌
‌ Accumulated‌‌Depreciation‌ ‌
‌ - Is‌‌the‌‌cumulative‌‌amount‌‌of‌‌depreciation‌‌charged‌‌since‌‌the‌‌initial‌‌recognition‌‌and‌‌
measurement‌‌of‌‌an‌‌asset‌ ‌
Initial‌‌Measurement‌ ‌ Subsequent‌‌Measurement‌ ‌ - Contra-asset‌‌on‌‌B/S‌‌→‌‌it‌‌appears‌‌on‌‌asset‌‌side‌‌but‌‌as‌‌a‌‌deduction‌‌from‌‌PPE‌‌→‌‌↓‌‌asset‌ ‌
‌
Models‌‌of‌‌acquisition:‌ ‌ Subsequent‌‌Cost:‌ ‌
Dr‌‌Depreciation‌‌Expense‌ ‌
● Purchase‌ ‌ ● Cost‌‌incurred‌‌after‌‌initial‌‌recognition‌‌
of‌‌the‌‌asset‌ ‌ ‌Cr‌‌Accumulated‌‌Depreciation‌ ‌
● Self-constructed‌‌assets‌‌(not‌‌covered)‌ ‌
● Can‌‌be‌‌capital‌‌expenditure‌‌or‌‌an‌‌ ‌
● Exchange‌‌of‌‌old‌‌asset‌‌for‌‌new‌‌asset‌‌
expense‌ ‌ Calculation‌‌of‌‌Depreciation‌ ‌
(not‌‌covered)‌ ‌ ● Impacts‌‌statement‌‌of‌‌P/L‌‌&‌‌B/S‌ ‌ 1. Cost‌ ‌
2. Estimated‌‌useful‌‌life‌ ‌
Purchased‌‌asset:‌ ‌ Capital‌‌expenditure‌‌(added‌‌to‌‌PPE)‌ ‌
3. Estimated‌‌residual‌‌value‌ ‌
- Purchase‌‌price‌ ‌ - Increases‌‌capacity‌‌or‌‌extends‌‌useful‌‌
life‌‌or‌‌improves‌‌quality‌‌of‌‌finished‌‌ ‌
- Directly‌‌attributable‌‌costs‌(‌ cost‌‌directly‌‌
product‌ ‌ Factors‌‌determining‌‌asset‌‌useful‌‌life‌ ‌
attributable‌‌to‌‌bring‌‌the‌‌assets‌‌to‌‌the‌‌
- Cost‌‌is‌‌added‌‌to‌‌asset‌ ‌ 1. Expected‌‌usage‌‌of‌‌asset‌ ‌
location‌‌and‌‌condition‌‌necessary‌‌for‌‌it‌‌
‌ 2. Expected‌‌physical‌‌wear‌‌&‌‌tear‌ ‌
Expense‌‌(to‌‌P/L‌‌statement)‌ ‌ 3. Technical‌‌or‌‌commercial‌‌obsolescence‌‌ ‌
- Related‌‌to‌‌day‌‌to‌‌day‌‌servicing‌ ‌ 4. Legal‌‌or‌‌similar‌‌limits‌ ‌

‌ ‌
 ‌ - Carried‌‌at‌‌cost‌‌less‌‌any‌‌accumulated‌‌depreciation‌‌and‌‌accumulated‌‌impairment‌‌loss‌ ‌
‌ ‌
Residual‌‌value‌‌of‌‌an‌‌asset‌‌(Scrap‌‌Value/‌‌Salvage‌‌Value)‌ ‌ 2. Revaluation‌‌model‌ ‌
● Estimated‌‌amount‌‌that‌‌an‌‌entity‌‌→‌‌receive‌‌from‌‌disposal‌‌of‌‌asset‌ ‌ - Carried‌‌at‌‌revalued‌‌amount,‌‌being‌‌its‌‌fair‌‌value‌‌at‌‌the‌‌date‌‌of‌‌revaluation,‌‌less‌‌any‌‌
‌ subsequent‌‌accumulated‌‌depreciation‌‌and‌‌subsequent‌‌accumulated‌‌impairment‌‌loss‌ ‌
Depreciation‌‌Amount‌‌=‌‌Asset‌‌cost‌‌-‌‌Residual‌‌Value‌ ‌ ‌
‌ PPE‌‌whose‌‌FV‌‌can‌‌be‌‌measured‌‌reliably‌ ‌
→‌‌revaluation‌‌made‌‌→‌‌sufficient‌‌regularity‌‌→‌‌carrying‌‌amount‌‌does‌‌not‌‌differ‌‌significantly‌‌from‌‌
Common‌‌Depreciation‌‌Methods‌ ‌
FV‌ ‌
Straight‌‌line‌‌method‌ ‌ - Constant‌‌allocation‌ ‌ ‌
- Equal‌‌amount‌‌allocated‌‌to‌‌each‌‌period‌ ‌ If‌‌PPE‌‌is‌‌revalued‌‌→‌‌asset’s‌‌carrying‌‌amount‌‌→‌‌↑‌‌/‌‌↓‌ ‌
- Depreciation‌‌ceases‌‌when‌‌the‌‌carrying‌‌amount‌‌ If‌‌↑‌‌→‌‌↑‌‌credited‌‌directly‌‌to‌‌equity‌‌under‌‌revaluation‌‌surplus/‌‌revaluation‌‌reserve‌ ‌
of‌‌the‌‌asset‌‌reaches‌‌RV‌ ‌ The‌‌↑‌‌→‌‌recognised‌‌in‌‌P/L‌‌to‌‌the‌‌extent‌‌→‌‌reserves‌‌revaluation‌‌↓‌‌of‌‌the‌‌same‌‌asset‌‌previously‌‌
‌ recognised‌‌in‌‌P/L‌ ‌
● For‌‌assets‌‌that‌‌are‌‌used‌‌evely‌‌over‌‌its‌‌useful‌‌
‌
life‌‌e.g‌‌computer‌ ‌
‌ Revaluation‌‌Reserve‌ ‌
Depreciation‌‌=‌‌(Cost-RV)‌‌/‌‌Useful‌‌life‌ ‌ - Part‌‌of‌‌shareholders’‌‌funds‌ ‌
- Cannot‌‌have‌‌a‌‌debit‌‌balance‌ ‌
Units‌‌of‌‌production‌‌method‌ ‌ ● For‌‌assets‌‌that‌‌wear‌‌out‌‌because‌‌of‌‌use‌‌e.g‌‌ - Movement‌‌is‌‌shown‌‌as‌‌part‌‌of‌‌OCI‌ ‌
coal‌‌mine‌ ‌ ‌
‌
Impairment‌‌of‌‌Asset‌ ‌
Depreciation‌‌Expense‌‌=‌‌Unit‌‌Production‌‌Rate‌‌x‌‌Units‌‌
Produced‌ ‌ - When‌‌there‌‌is‌‌evidence‌‌of‌‌lack‌‌of‌‌recoverability‌‌of‌‌the‌‌carrying‌‌amount‌‌of‌‌an‌‌asset‌ ‌
- Only‌‌check‌‌for‌‌impairment‌‌is‌‌an‌‌impairment‌‌event‌‌has‌‌occurred‌‌otherwise‌‌not‌‌
Diminishing‌‌balance‌‌ ● For‌‌assets‌‌that‌‌generate‌‌more‌‌benefits‌‌in‌‌the‌‌ required‌‌to‌‌do‌‌so‌ ‌
(accelerated‌‌allocation‌‌ early‌‌part‌‌of‌‌its‌‌useful‌‌life‌‌e.g‌‌delivery‌‌van‌ ‌ - An‌‌asset‌‌is‌‌impaired‌‌when:‌ ‌
method/declining‌‌method)‌ ‌ Carrying‌‌amount‌‌>‌‌Recoverable‌‌value‌ ‌
‌
Double‌‌Declining‌‌Balance‌ ‌ =‌‌Beginning‌‌Book‌‌Value‌‌x‌‌2/Useful‌‌life‌‌in‌‌years‌ ‌ Recording‌‌impairment‌‌loss‌ ‌
- Asset‌‌recorded‌‌at‌‌historical‌‌cost‌‌→‌‌expense‌‌in‌‌P/L‌ ‌
‌
- Asset‌‌recorded‌‌at‌‌revalued‌‌amount‌‌ ‌
Depreciation‌‌for‌‌partial‌‌year:‌ ‌
1.‌‌Adjust‌‌against‌‌revaluation‌‌reserve‌
Full‌‌year‌‌depreciation‌‌x‌‌fraction‌‌of‌‌year‌‌asset‌‌held‌ ‌
2.‌‌Balance‌‌to‌‌P/L‌ ‌
‌
‌
Changes‌‌in‌‌depreciation‌‌estimates‌ ‌
Dr‌‌Impairment‌‌Expense/Revaluation‌‌Reserve‌ ‌
Assuming‌‌straight‌‌line‌‌depreciation‌‌method:‌ ‌
‌Cr‌‌Accumulated‌‌Impairment‌ ‌
Depreciation‌‌=‌‌(BV-‌‌New‌‌RV)‌‌/‌‌(New‌‌useful‌‌life)‌ ‌
‌
‌
Derecognition‌ ‌
BV‌‌is‌‌the‌‌carrying‌‌amount‌ ‌
● The‌‌removing‌‌of‌‌PPE‌‌from‌‌company’s‌‌books‌ ‌
‌
● Occurs‌‌when‌‌an‌‌asset‌‌is‌‌no‌‌longer‌‌required‌‌by‌‌the‌‌company‌ ‌
Depreciation‌‌for‌‌tax‌‌purposes‌ ‌
‌
- Tax‌‌rules‌‌may‌‌have‌‌→‌‌specific‌‌treatment‌‌for‌‌specific‌‌assets‌ ‌
Step‌‌1.‌‌Bring‌‌depreciation‌‌up‌‌to‌‌date‌‌by‌ ‌
→‌‌alternative‌‌depreciation‌‌methods‌‌(capital‌‌allowance)‌ ‌
- Recording‌‌depreciation‌‌expense‌‌up‌‌to‌‌date‌‌of‌‌disposal‌ ‌
‌
- Updating‌‌the‌‌asset’s‌‌final‌‌BV‌ ‌
Measurement‌‌models‌‌for‌‌PPE‌ ‌
‌
1. Cost‌‌model‌ ‌

‌ ‌
 To‌‌derecognise:‌ ‌
Dr‌‌Accumulated‌‌Depreciation‌ ‌
- Close‌‌asset‌‌and‌‌its‌‌related‌‌accumulated‌‌depreciation,‌‌accumulated‌‌impairment‌‌&‌‌
Dr‌‌Loss‌‌on‌‌scrap‌‌of‌‌PPE‌ ‌
revaluation‌‌reserve‌‌accounts‌‌(make‌‌balance‌‌=‌‌0)‌ ‌
‌Cr‌‌PPE‌ ‌
‌
3) Asset‌‌sold‌‌before‌‌it‌‌is‌‌fully‌‌depreciated‌ ‌
Journal‌‌entry‌‌disposal‌‌of‌‌a‌‌PPE‌‌being‌‌impaired‌ ‌
Dr‌‌Cash‌ ‌
Dr‌‌Cash‌ ‌
Dr‌‌Accumulated‌‌Depreciation‌ ‌
Dr‌‌Accumulated‌‌depreciation‌ ‌
‌Cr‌‌Gain‌‌on‌‌sale‌‌of‌‌PPE‌ ‌
Dr‌‌Accumulated‌‌impairment‌ ‌
‌Cr‌‌PPE‌ ‌
Dr‌‌Loss‌‌on‌‌Disposal‌ ‌
‌Cr‌‌PPE‌ ‌ ‌
‌ ‌
Return‌‌of‌‌Assets‌‌=‌‌Net‌‌Income‌‌/‌‌Total‌‌Assets‌ ‌

IN‌‌SUM‌ ‌ →‌‌measures‌‌company’s‌‌ability‌‌to‌‌turn‌‌assets‌‌into‌‌profit‌ ‌
→‌‌Useful‌‌for‌‌comparing‌‌within‌‌industry‌ ‌
Revaluation:‌ ‌ ↓‌‌ratio‌‌compared‌‌to‌‌industry‌‌→‌‌competitors‌‌operating‌‌>‌‌efficiently‌ ‌
1) Increase‌‌in‌‌carrying‌‌amount:‌ ‌
‌
Dr‌‌Asset‌ ‌ ‌
‌Cr‌‌Reserve‌ ‌
2) Decrease‌‌in‌‌carrying‌‌amount:‌ ‌ Fixed‌‌Asset‌‌Turnover‌‌=‌‌Revenue‌‌/‌‌Average‌‌Fixed‌‌Assets‌ ‌
Dr‌‌Loss‌‌on‌‌Revaluation‌ ‌
→‌‌measures‌‌how‌‌efficiently‌‌an‌‌entity‌‌generates‌‌sales‌‌from‌‌each‌‌dollar‌‌of‌‌fixed‌‌asset‌ ‌
‌Cr‌‌Asset‌ ‌ ↑‌‌ratio‌‌→‌‌assets‌‌are‌‌more‌‌productive‌ ‌
‌ ↑‌‌ratio‌‌→‌‌entity’s‌‌ability‌‌to‌‌generate‌‌revenue‌‌from‌‌its‌‌investment‌‌in‌‌fixed‌‌assets‌ ‌
Impairment‌‌Test***:‌ ‌
‌
‌
If‌‌carrying‌‌amount‌‌<‌‌recoverable‌‌amount,‌‌do‌‌nothing.‌ ‌
‌
If‌‌carrying‌‌amount‌‌>‌‌recoverable‌‌amount,‌‌difference‌‌between‌‌them‌‌will‌‌be‌‌the‌‌impairment‌‌
Intangible‌‌Assets‌‌(IA)‌ ‌
loss.‌‌Record‌‌it‌‌as:‌ ‌ 1. Identifiability‌ ‌
Dr‌‌Impairment‌‌Expense‌ ‌ When‌‌it‌ ‌
‌Cr‌‌Accumulated‌‌Impairment‌ ‌ ● Is‌‌separate‌‌from‌‌the‌‌entity‌‌and‌‌can‌‌be‌‌sold,‌‌transferred,‌‌licensed,‌‌rented‌‌or‌‌
‌ exchanged‌ ‌
Carrying‌‌amount:‌ ‌ ● Arises‌‌from‌‌contractual‌‌or‌‌legal‌‌rights‌ ‌
1) If‌‌no‌‌prior‌‌impairment‌‌:‌C ‌ A‌‌=‌‌cost‌‌-‌‌acc‌‌depreciation‌ ‌ ‌
2) If‌‌there‌‌is‌‌prior‌‌impairment‌‌:‌C‌ A‌‌=‌‌cost‌‌-‌‌acc‌‌depreciation‌‌-‌‌acc‌‌impairment‌‌losses‌ ‌ 2. Control‌ ‌
Recoverable‌‌amount‌‌is‌‌the‌‌Higher‌‌of:‌ ‌ Entity‌‌must‌‌have‌‌the‌‌power‌‌to‌ ‌
1) FV‌‌less‌‌costs‌‌to‌‌sell‌ ‌ ● Obtain‌‌future‌‌economic‌‌benefits‌‌flowing‌‌from‌‌the‌‌underlying‌‌resource‌ ‌
2) Value‌‌in‌‌use‌ ‌ ● To‌‌restrict‌‌the‌‌access‌‌of‌‌others‌‌to‌‌those‌‌benefits‌ ‌
‌ ○ Normally‌‌from‌‌legal‌‌rights‌‌enforceable‌‌in‌‌court‌‌though‌‌not‌‌a‌‌necessary‌‌
Derecognition:‌ ‌ condition‌‌for‌‌control‌ ‌
1) Fully‌‌depreciated‌‌asset:‌ ‌ ‌
Dr‌‌Accumulated‌‌Depreciation‌ ‌ 3. Future‌‌Economic‌‌Benefits‌ ‌
‌Cr‌‌PPE‌‌(specify‌‌which‌‌PPE)‌ ‌ ● Flowing‌‌from‌‌an‌‌IA‌‌may‌‌include‌ ‌
2) Not‌‌fully‌‌depreciated‌‌asset:‌ ‌ ○ Revenue‌‌from‌‌sale‌‌of‌‌g&s‌ ‌
○ Cost‌‌savings‌ ‌

‌ ‌
 ○ Other‌‌benefits‌‌resulting‌‌from‌‌use‌‌of‌‌asset‌‌by‌‌the‌‌entity‌ ‌ Recognition‌‌of‌‌IA‌ ‌
‌ ● Recognise‌‌an‌‌IA‌‌when‌‌it‌‌meets‌ ‌
Types‌‌of‌‌intangible‌‌assets:‌ ‌ ○ The‌‌definition‌‌of‌‌an‌‌IA‌‌&‌ ‌
1) Patents‌‌-‌‌finite‌‌useful‌‌life‌ ‌ ○ Recognition‌‌criteria‌ ‌
2) Copyright‌‌-‌‌finite‌‌useful‌‌life‌ ‌ →‌‌IA‌‌shall‌‌be‌‌recognised‌‌IF‌‌and‌‌ONLY‌‌IF:‌ ‌
3) Franchises‌‌and‌‌Licenses‌‌-‌‌finite‌‌life‌ ‌ - It‌‌is‌‌probable‌‌that‌‌the‌‌expected‌‌future‌‌economic‌‌benefits‌‌that‌‌are‌‌
4) Patent‌‌/‌‌Trademarks‌‌-‌‌indefinite‌‌useful‌‌life‌ ‌ attributable‌‌to‌‌the‌‌asset‌‌will‌‌flow‌‌to‌‌the‌‌entity;‌‌and‌ ‌
‌ - The‌‌cost‌‌of‌‌the‌‌asset‌‌can‌‌be‌‌measured‌‌reliably‌ ‌
‌
Acquisition‌‌of‌‌IA‌ ‌
Measurement‌‌of‌‌IA‌ ‌
Purchased‌‌Goodwill‌ ‌ - Excess‌‌paid‌‌for‌‌purchasing‌‌a‌‌company‌‌over‌‌sum‌‌of‌‌FV‌‌less‌‌ An‌‌IA‌ ‌
liabilities‌ ‌ ● Measured‌‌initially‌‌at‌‌cost‌ ‌
- Has‌‌indefinite‌‌useful‌‌life‌ ‌ ● Cost‌‌=‌‌Purchase‌‌price‌‌+‌‌any‌‌necessary‌‌cost‌‌incurred‌ ‌
‌ ‌
Goodwill‌‌=‌‌Purchase‌‌price‌‌-‌‌FV‌‌of‌‌co.‌ ‌ Amortization‌‌(Similar‌‌to‌‌Depreciation):‌ ‌
FV‌‌of‌‌Co.‌‌=‌‌Assets‌‌-‌‌Liabilities‌ ‌
- Intangible‌‌Asset‌‌with‌‌finite‌‌useful‌‌life‌‌is‌‌amortised‌‌on‌‌a‌‌systematic‌‌basis‌‌over‌‌its‌‌useful‌‌
‌
Bargain‌‌purchase‌‌(-ve‌‌goodwill)‌ ‌ life‌ ‌
● Payment‌‌made‌‌is‌‌<‌‌FV‌‌of‌‌net‌‌asset‌ ‌ - Intangible‌‌Asset‌‌with‌‌indefinite‌‌useful‌‌life‌‌is‌‌not‌‌amortised‌ ‌
● Shown‌‌as‌‌gain‌‌in‌‌P/L‌‌in‌‌year‌‌of‌‌acquisition‌ ‌ ‌
IA‌‌impaired‌‌when‌‌CA‌‌>‌‌Recoverable‌‌value‌ ‌
Internally‌‌generated‌ ‌ EXAMPLES‌ ‌ ‌
Goodwill‌ ‌
- Unidentifiable‌‌(does‌‌not‌‌meet‌‌definition‌‌of‌‌IA)‌ ‌
- Should‌‌not‌‌be‌‌recognised‌‌as‌‌an‌‌asset‌ ‌ ‌
‌
Brand‌‌etc‌ ‌
- Identifiable‌‌but‌‌cost‌‌incurred‌‌→‌‌can’t‌‌be‌‌distinguished‌‌from‌‌
cost‌‌of‌‌developing‌‌biz‌‌as‌‌a‌‌whole‌‌→‌‌should‌‌not‌‌be‌‌
recognised‌‌as‌‌IA‌ ‌
‌
R&D‌ ‌
- Research‌‌cost‌‌to‌‌be‌‌expensed‌ ‌
- Development‌‌cost‌‌→‌‌capitalised‌ ‌
- Technical‌‌feasibility‌‌of‌‌completing‌‌IA‌ ‌
- Entity’s‌‌intention‌‌to‌‌complete‌‌IA‌ ‌
- Ability‌‌to‌‌use/sell‌‌IA‌ ‌
- Cost‌‌of‌‌IA‌‌→‌‌measured‌‌reliably‌ ‌
‌
Internally‌‌generated‌‌goodwill:‌ ‌
- Research‌‌cost‌‌to‌‌be‌‌expensed‌ ‌
- Development‌‌cost‌‌can‌‌be‌‌capitalised‌‌if‌‌6‌‌recognition‌‌criteria‌‌are‌‌met‌ ‌
‌
2‌‌issues‌‌of‌‌IA‌ ‌
1. Recognition‌ ‌
2. Measurement‌‌(Valuation)‌ ‌
‌

‌ ‌
Lecture‌‌8‌ ‌ At‌‌B/S‌‌Date‌ ‌ ●
●
Mark‌‌to‌‌market‌‌(CA‌‌↑‌‌/‌‌↓)‌ ‌
Unrealised‌‌gain/loss‌‌to‌‌P/L‌ ‌
●
●
Mark‌‌to‌‌market‌ ‌
Unrealised‌‌holding‌‌gain/loss‌‌
‌ to‌‌FV‌‌Reserve‌ ‌
‌
Dr‌‌Investment‌‌in‌‌FVPL‌ ‌
Financial‌‌Asset‌ ‌ ‌Cr‌‌Unrealised‌‌gain‌‌on‌‌FVPL‌ ‌
Dr‌‌Investment‌‌in‌‌FVOCI‌ ‌
‌Cr‌‌FV‌‌Reserve‌ ‌
Any‌‌asset‌‌that‌‌is‌ ‌
● Cash‌ ‌ On‌‌Disposal‌ ‌ ● Realised‌‌gain/loss‌‌to‌‌P/L‌ ‌ ● Realised‌‌gain/loss‌‌to‌‌FV‌‌
‌ Reserve‌‌(under‌‌equity)‌ ‌
● Equity‌‌instrument‌‌of‌‌another‌‌entity‌‌(shares/stock)‌ ‌
Dr‌‌Cash‌ ‌ ● FV‌‌Reserve‌‌balance‌‌closed‌‌
● Contractual‌‌right‌‌to‌‌→‌‌receive‌‌cash/‌‌another‌‌financial‌‌asset‌‌from‌‌another‌‌entity‌ ‌ to‌‌RE‌ ‌
‌ ‌Cr‌‌Investment‌‌in‌‌FVPL‌ ‌
‌
An‌‌entity‌‌recognises‌‌a‌‌financial‌‌asset/‌‌financial‌‌liability‌‌in‌‌its‌‌B/S‌‌when‌‌and‌‌ONLY‌‌when‌‌the‌‌ ‌Cr‌‌Realised‌‌gain‌‌on‌‌sale‌‌of‌‌FVPL‌ ‌ Dr‌‌Investment‌‌in‌‌FVOCI‌ ‌
entity‌‌becomes‌‌a‌‌party‌‌to‌‌the‌‌contractual‌‌provisions‌‌of‌‌the‌‌instrument‌ ‌ ‌Cr‌‌FV‌‌Reserve‌ ‌
‌ Sale‌ ‌
‌ Dr‌‌Cash‌ ‌
Classification‌‌of‌‌Financial‌‌Assets‌ ‌ ‌Cr‌‌Investment‌‌in‌‌FVOCI‌ ‌
Closing‌‌to‌‌Retained‌‌Earnings‌ ‌
Debt‌‌Instruments‌ ‌ E.g‌‌bonds,‌‌loans‌‌receivable‌‌etc‌ ‌ Dr‌‌FV‌‌Reserve‌ ‌
‌Cr‌‌Retained‌‌Earnings‌ ‌
Derivatives‌ ‌ E.g‌‌futures,‌‌options‌‌etc‌ ‌
‌
Equity‌‌Instruments‌ ‌ E.g‌‌investments‌‌in‌‌shares‌ ‌ Investing‌‌Activities‌ ‌
● Fair‌‌Value‌‌through‌‌Profit‌‌or‌‌Loss‌‌(FVPL)‌‌→‌‌default‌‌option‌ ‌
○ Held‌‌to‌‌collect‌‌contractual‌‌cashflows‌‌that‌‌are‌‌solely‌‌

‌
payment‌‌of‌‌principal‌‌and‌‌interest,‌‌and‌‌to‌‌sell‌ ‌ Associated‌‌Companies‌ ‌
● Fair‌‌Value‌‌through‌‌Other‌‌Comprehensive‌‌Income‌‌(FVOCI)‌‌→‌‌ ● An‌‌entity‌‌over‌‌which‌‌an‌‌investor‌‌has‌‌significant‌‌influence‌‌over‌‌operations‌ ‌
irrevocable‌‌option‌‌→‌‌once‌‌choice‌‌→‌‌made‌‌→‌‌no‌‌reclassification‌‌ ● Investor‌‌→‌‌influence‌‌entity’s‌‌operations:‌ ‌
in‌‌subsequent‌‌periods‌ ‌ ○ Representation‌‌on‌‌board‌‌of‌‌directors‌ ‌
○ ‌Fail‌‌to‌‌meet‌‌amortized‌‌or‌‌FVOCI‌‌criteria‌
○ Participation‌‌in‌‌policy‌‌decisions‌ ‌
‌
● Investor‌‌typically‌‌holds‌‌20-50%‌‌of‌‌voting‌‌shares‌ ‌
‌‌ ● Possible‌‌→‌‌significant‌‌influence‌‌if‌‌holds‌‌<‌‌than‌‌20%‌‌too‌ ‌
‌ ● Under‌‌non-Current‌‌assets‌‌B/S‌ ‌
‌ Fair‌‌Value‌‌through‌‌Profit‌‌or‌‌Loss‌‌ Fair‌‌Value‌‌through‌‌Other‌‌ ● Board‌‌of‌‌directors‌‌→‌‌appointed‌‌by‌‌shareholders‌‌to‌‌oversee‌‌activities‌‌of‌‌co.‌ ‌
(FVPL)‌ ‌ Comprehensive‌‌Income‌‌(FVOCI)‌ ‌ ‌
Appears‌‌as‌‌Current‌‌Asset‌‌in‌‌B/S‌ ‌ Appears‌‌in‌‌Non‌‌Current‌‌assets‌‌in‌ Accounting‌‌for‌‌investment‌‌in‌‌associates‌ ‌
B/S‌ ‌ ➔ Equity‌‌method‌ ‌
◆ Investment‌‌account‌‌is:‌ ‌
Upon‌‌ ● At‌‌FV‌ ‌ ● FV‌ ‌ ◆ Recorded‌‌at‌‌cost‌ ‌
Recognition‌ ‌ ● Transaction‌‌costs‌‌to‌‌be‌‌ ● Transaction‌‌costs‌‌ ◆ Subsequently‌‌adjusted‌‌to‌‌record‌‌proportionate‌ ‌↑‌‌/‌‌↓‌‌in‌‌net‌‌assets‌‌of‌‌associated‌‌
expensed‌ ‌ (capitalized)‌ ‌ co.‌ ‌
‌
‌ Net‌‌assets‌‌=‌‌Assets‌‌-‌‌Liabilities‌‌=‌‌Owners’‌‌equity‌‌ ‌
Dr‌‌Investment‌‌in‌‌FVPL‌ ‌
Dr‌‌Transaction‌‌Cost‌‌(Expensed)‌ ‌ Dr‌‌Investment‌‌in‌‌FVOCI‌ ‌ ‌
‌Cr‌‌Cash‌ ‌ ‌Cr‌‌Cash‌ ‌ Initial‌‌Recognition:‌ ‌
Dr‌‌Investment‌‌in‌‌Associated‌‌Company‌ ‌

‌ ‌
 ‌Cr‌‌Cash‌ ‌
‌
Investment‌‌Property‌‌(IP)‌ ‌
Balance‌‌Sheet‌‌date‌‌(Recognition‌‌of‌‌income):‌ ‌ ● Property‌‌land/building‌‌held‌‌by‌‌owner‌‌to‌‌earn‌‌rental‌‌&/or‌‌capital‌‌appreciation‌ ‌
Dr‌‌Investment‌‌in‌‌Associated‌‌Company‌ ‌ ● For‌‌investment‌‌purposes‌‌NOT‌‌for‌‌use‌‌in‌‌company’s‌‌business‌ ‌
‌Cr‌‌Income‌‌from‌‌investment‌‌in‌‌associate‌ ‌ ‌
‌ Measurement‌‌of‌‌IP‌ ‌
Dividend‌‌paid:‌ ‌ Cost‌‌Model‌ ‌
Dr‌‌Cash‌ ‌ ● Cost‌‌less‌‌accumulated‌‌depreciation‌‌less‌‌accumulated‌‌impairment‌ ‌
‌Cr‌‌Investment‌‌in‌‌Associated‌‌Company‌ ‌ ● Accounting‌‌treatment‌‌similar‌‌to‌‌PPE‌ ‌
‌ ● FV‌‌disclosed‌‌in‌‌notes‌‌to‌‌financial‌‌statement‌ ‌
Sale‌‌/‌‌Disposal:‌ ‌ ‌
Dr‌‌Cash‌ ‌ Derecognition‌ ‌
‌Cr‌‌Investment‌‌in‌‌Associated‌‌Company‌ ‌ Gain/loss‌‌=‌‌Net‌‌disposal‌‌proceeds‌‌-‌‌Carrying‌‌amount‌ ‌
‌Cr‌‌Gain‌‌on‌‌sale‌‌in‌‌investment‌ ‌ ‌
‌ FV‌‌Model‌ ‌
● On‌‌reporting‌‌date‌‌IP‌‌marked‌‌to‌‌FV‌‌ ‌
● Gain‌‌or‌‌loss‌‌from‌‌change‌‌in‌‌FV‌‌recorded‌‌in‌‌P/L‌ ‌
Non-Controlling‌‌Interest‌‌(NCI)‌ ‌ ● FV‌‌→‌‌based‌‌on‌‌transacted‌‌prices‌‌or‌‌discounted‌‌CF‌ ‌
- also‌‌known‌‌as‌‌a‌‌minority‌‌interest‌ ‌ ● Impairment‌‌of‌‌assets‌‌→‌‌not‌‌applicable‌ ‌
‌
- is‌‌an‌‌ownership‌‌position‌‌wherein‌‌a‌‌shareholder‌‌owns‌‌less‌‌than‌‌50%‌‌of‌‌outstanding‌‌
shares‌‌and‌‌has‌‌no‌‌control‌‌over‌‌decisions‌ ‌ On‌‌purchase:‌ ‌
- are‌‌measured‌‌at‌‌the‌‌net‌‌asset‌‌value‌‌of‌‌entities‌‌and‌‌do‌‌not‌‌account‌‌for‌‌potential‌‌voting‌‌ Dr‌‌Investment‌‌Property‌‌(Specify‌‌name)‌ ‌
rights.‌ ‌ ‌Cr‌‌Cash‌ ‌
‌
Reporting‌‌date:‌ ‌
Subsidiary‌‌Companies‌ ‌ Dr‌‌Investment‌‌Property‌‌(for‌‌gain,‌‌opposite‌‌for‌‌loss)‌ ‌
‌Cr‌‌FV‌‌gain/loss‌‌of‌‌IP‌ ‌
● An‌‌entity‌‌→‌‌investors‌‌controls‌‌>‌‌50%‌‌of‌‌voting‌‌shares‌ ‌
○ Investor‌‌→‌‌parent‌ ‌ ‌
■ Controls‌‌entity’s‌‌operations‌ ‌
■ Can‌‌elect‌‌majority‌‌of‌‌board‌‌members‌ ‌
‌
○ Investee‌‌→‌‌subsidiary‌ ‌
Consolidation‌ ‌
- Method‌‌of‌‌combining‌‌financial‌‌statements‌‌of‌‌2‌‌or‌‌>‌‌subsidiaries‌‌with‌‌parent‌ ‌
+ Gives‌‌better‌‌perspective‌‌on‌‌total‌‌operations‌‌as‌‌a‌‌single‌‌economic‌‌unit‌ ‌
- Combine‌‌all‌‌A,‌‌L,‌‌Y‌ ‌&‌‌E‌ ‌
- Eliminate‌‌all‌‌intercompany‌‌transactions‌ ‌
‌
Non‌‌controlling‌‌interests‌ ‌
● Portion‌‌of‌‌the‌‌net‌‌assets‌‌in‌‌a‌‌subsidiary‌‌that‌‌is‌‌not‌‌controlled‌‌by‌‌the‌‌parent:‌ ‌
● (1-xx%‌‌stake)*FV‌‌of‌‌the‌‌net‌‌assets‌ ‌
‌

‌ ‌
Lecture‌‌9‌ ‌ →‌‌indicates‌‌profitability‌‌relative‌‌to‌‌invested‌‌capital‌ ‌
>‌‌ROA‌‌better‌‌→‌‌earn‌‌more‌‌from‌‌less‌‌investment‌ ‌
Capital‌‌Structure‌ ‌
Effectiveness‌‌of‌‌investing‌‌Shareholders’‌‌Money‌ ‌
‌ Return‌‌on‌‌Equity‌‌(ROE)‌‌=‌‌NI‌‌/‌‌Avg‌‌SE‌ ‌
‌ 2‌‌Main‌‌Sources‌‌of‌‌Financing‌ ‌ ‌
→‌‌indicates‌‌how‌‌profitable‌‌a‌‌co.‌‌is‌‌relative‌‌to‌‌its‌‌SE‌ ‌
‌ Equity‌‌Financing‌ ‌ Debt‌‌Financing‌ ‌ →‌‌NI‌‌→‌‌before‌‌common‌‌dividends‌‌but‌‌after‌‌preferred‌‌dividends‌ ‌
‌ ‌ ‌
1. Owners‌‌contribution‌ ‌ ● Co‌‌borrow‌‌funds‌‌→‌‌repay‌‌ Debt‌‌Financing‌ ‌
2. RE‌ ‌ with‌‌interest‌ ‌ - Company‌‌obtains‌‌funds‌‌in‌‌exchange‌‌for‌‌an‌‌obligation‌‌to‌‌repay‌‌the‌‌borrowed‌‌funds‌‌in‌‌the‌‌
future.‌ ‌
Examples‌ ‌ ● Issue‌‌share‌‌capital‌ ‌ ● Bank‌‌loans‌ ‌
‌
● RE‌ ‌ ● Accounts‌‌payable‌ ‌
Sources‌‌of‌‌debt‌‌financing‌ ‌
Advantages‌ ‌ + Co‌‌has‌‌no‌‌legal‌‌obligation‌‌ + No‌‌dilution‌‌of‌‌existing‌‌ 1. Trade‌‌payable‌ ‌
to‌‌repay‌‌equity‌‌&‌‌distribute‌‌ shareholders’‌‌ownership‌ ‌ 2. Issue‌‌of‌‌bonds‌‌ ‌
profits‌ ‌ + Co‌‌benefits‌‌if‌‌returns‌‌from‌‌ 3. LT/ST‌‌notes‌‌payable‌ ‌
+ Profits‌‌→‌‌reinvested‌‌ ‌ use‌‌of‌‌borrowed‌‌funds‌‌>‌‌ ‌
interest‌‌cost‌ ‌

Disadvantages‌ ‌ - Dilution‌‌of‌‌existing‌‌ - Solvency‌‌risk‌‌(inability‌‌to‌‌

shareholders’‌‌ownership‌ ‌ repay‌‌debts)‌ ‌ Liabilities‌ ‌
‌ ● Present‌‌obligations‌‌of‌‌the‌‌enterprise‌‌arising‌‌from‌‌past‌‌events,‌‌settlement‌‌of‌‌which‌‌is‌‌
Source‌‌of‌‌financing‌‌depends‌‌on‌ ‌ expected‌‌to‌‌results‌‌in‌‌an‌‌outflow‌‌from‌‌enterprise‌‌of‌‌resources‌‌embodying‌‌economic‌‌
➔ Nature‌‌of‌‌biz‌ ‌ benefits‌ ‌
➔ Financial‌‌strength‌ ‌ ‌
➔ Industry‌‌it‌‌operates‌‌in‌ ‌ Types‌‌of‌‌liabilities‌ ‌
‌ 1. Payables‌ ‌
Ratios‌‌to‌‌Assess‌‌Co’s‌‌Solvency‌ ‌ When‌‌machine‌‌is‌‌purchased‌ ‌
D/E‌‌ratio‌‌=‌‌Total‌‌Debt‌‌/‌‌SE‌ ‌ Dr‌‌Machine‌ ‌
‌ ‌Cr‌‌Other‌‌payables‌ ‌
→‌‌indicates‌‌proportion‌‌of‌‌debt‌‌&‌‌equity‌‌used‌‌to‌‌finance‌‌co’s‌‌assets‌ ‌ ‌
>‌‌ratio‌‌→‌‌implication‌‌on‌‌co’s‌‌→‌‌credit‌‌rating‌‌&‌‌ability‌‌to‌‌repay‌‌debts‌ ‌ When‌‌payment‌‌is‌‌made‌ ‌
Dr‌‌Other‌‌payables‌ ‌
Times‌‌interest‌‌earned‌‌=‌‌(NI‌‌+‌‌Interest‌‌exp‌‌+‌‌Tax‌‌exp)‌‌/‌‌Interest‌‌exp‌ ‌
‌ ‌Cr‌‌Cash‌ ‌
→‌‌measure‌‌of‌‌co’s‌‌ability‌‌to‌‌meet‌‌its‌‌debt‌‌obligations‌‌&‌‌indicates‌‌no.‌‌of‌‌time‌‌co.‌‌can‌‌cover‌‌its‌‌ ‌
interest‌‌expense‌‌with‌‌its‌‌avail‌‌net‌‌earnings‌ ‌ 2. 3rd‌‌collection‌ ‌
>‌‌ratio‌‌=‌‌greater‌‌protection‌‌to‌‌creditors‌ ‌ Dr‌‌Cash‌ 107‌ ‌
‌ ‌Cr‌‌GST‌‌Payable‌ 7‌ ‌
‌ ‌Cr‌‌Revenue‌ 100‌ ‌
‌
Effectiveness‌‌of‌‌investing‌‌Co’s‌‌funds‌ ‌ Dr‌‌GST‌‌Payable‌ 7‌ ‌
Return‌‌on‌‌Assets‌‌(ROA)‌‌=‌‌NI‌‌/‌‌Avg‌‌total‌‌assets‌ ‌
‌ ‌Cr‌‌Cash‌ 7‌ ‌
→‌‌indicates‌‌how‌‌profitable‌‌a‌‌co.‌‌is‌‌relative‌‌to‌‌its‌‌total‌‌assets‌ ‌ ‌
‌

‌ ‌
 3. Receipts‌‌in‌‌advance‌ ‌ ‌
i)‌‌Security‌‌deposit‌‌→‌‌amounts‌‌received‌‌from‌‌a‌‌3rd‌‌party‌‌generally‌‌is‌‌a‌‌guarantee‌‌against‌‌ Contingent‌‌Liability‌ ‌
an‌‌act‌‌or‌‌deed‌‌that‌‌they‌‌are‌‌expected‌‌to‌‌do‌‌or‌‌not‌‌do‌‌in‌‌the‌‌future‌ ‌ - A‌‌possible‌‌obligation‌‌which‌‌will‌‌be‌‌known‌‌upon‌‌the‌‌outcome‌‌of‌‌uncertain‌‌future‌‌events‌‌
→‌‌can‌‌be‌‌refundable‌‌or‌‌not,‌‌depending‌‌on‌‌terms‌‌of‌‌transaction‌ ‌ not‌‌within‌‌the‌‌company’s‌‌control‌ ‌
→‌‌intended‌‌as‌‌a‌‌measure‌‌of‌‌security‌‌for‌‌the‌‌recipient‌‌and‌‌can‌‌also‌‌be‌‌used‌‌for‌‌payment‌‌ - A‌‌present‌‌obligation‌‌not‌‌recognised‌‌because‌‌of‌‌failure‌‌to‌‌meet‌‌the‌‌recognition‌‌criteria‌‌for‌‌
of‌‌damaged‌‌/‌‌lost‌‌property‌ ‌ liabilities‌ ‌
‌ - Contingent‌‌liabilities‌‌are‌‌never‌‌recognised‌‌but‌‌may‌‌need‌‌to‌‌be‌‌disclosed‌‌(if‌‌not‌‌remote)‌ ‌
Dr‌‌Cash‌ 100‌ ‌ Ie.‌‌Being‌‌sued,‌‌lawyers‌‌expect‌‌to‌‌lose‌‌the‌‌case,‌‌but‌‌the‌‌amount‌‌of‌‌payment‌‌cannot‌‌be‌‌
‌Cr‌‌Security‌‌Deposit‌‌Refundable‌ 100‌ ‌ estimated.‌ ‌
‌ - If‌‌able‌‌to‌‌be‌‌estimated,‌‌it‌‌will‌‌be‌‌treated‌‌as‌‌a‌‌provision‌ ‌
Dr‌‌Security‌‌Deposit‌‌Refundable‌ 100‌ ‌ ‌
‌Cr‌‌Cash‌ 100‌ ‌ Contingent‌‌Assets‌ ‌
‌ - A‌‌possible‌‌asset‌‌which‌‌will‌‌be‌‌known‌‌only‌‌upon‌‌the‌‌outcome‌‌of‌‌uncertain‌‌future‌‌events‌‌
Forfeited‌‌deposit‌ ‌ not‌‌within‌‌the‌‌co’s‌‌control‌ ‌
Dr‌‌Security‌‌Deposit‌‌Refundable‌ 100‌ ‌ - Contingent‌‌assets‌‌are‌‌never‌‌recognised,‌‌but‌‌may‌‌have‌‌to‌‌be‌‌disclosed‌‌(if‌‌not‌‌remote)‌ ‌
‌Cr‌‌Other‌‌income‌ 100‌ ‌ Ie.‌‌Sue,‌‌lawyers‌‌expect‌‌to‌‌win‌‌the‌‌case,‌‌but‌‌the‌‌amount‌‌of‌‌$‌‌cannot‌‌be‌‌estimated.‌ ‌
‌ - If‌‌gain/income‌‌is‌‌virtually‌‌certain,‌‌an‌‌asset‌‌exists,‌‌and‌‌should‌‌be‌‌recognised.‌ ‌
ii)‌‌Unearned‌‌Revenue‌ ‌ ‌
Dr‌‌Cash‌ ‌
‌Cr‌‌Unearned‌‌Revenue‌ ‌
‌ Bonds‌ ‌
Dr‌‌Unearned‌‌Revenue‌ ‌
Par‌‌bond‌ ‌
‌Cr‌‌Revenue‌ ‌
‌ - Issue‌‌price‌‌=‌‌face‌‌value‌ ‌
- Coupon‌‌rate‌‌=‌‌market‌‌rate‌ ‌
4. Provisions‌‌&‌‌Contingencies‌ ‌
● Provision‌ ‌ ‌
Premium‌‌bond‌ ‌
○ Is‌‌a‌‌liability‌‌of‌‌of‌‌uncertain‌‌timing‌‌or‌‌amount‌ ‌
- Issue‌‌price‌‌>‌‌face‌‌value‌ ‌
‌
Provision‌‌recognised‌‌ONLY‌‌IF‌ ‌ - Coupon‌‌rate‌‌>‌‌market‌‌rate‌ ‌
‌
● These‌‌is‌‌a‌‌present‌‌obligation‌‌as‌‌a‌‌results‌‌of‌‌past‌‌events;‌ ‌
● Probable‌‌outflow‌‌of‌‌resources;‌‌and‌ ‌ Discount‌‌bond‌ ‌
- Issue‌‌price‌‌<‌‌face‌‌value‌ ‌
● Reliable‌‌estimates‌ ‌
- Coupon‌‌rate‌‌<‌‌market‌‌rate‌ ‌
‌E.g‌‌warranty‌ ‌
‌ ‌
Journal‌‌Entry‌ ‌
Recorded‌‌at‌‌time‌‌of‌‌recognising‌‌revenue,‌‌based‌‌on‌‌reliable‌‌estimates‌ ‌
Dr‌‌Warranty‌‌Expense‌ 100‌ ‌ Par‌ ‌
Dr‌‌Cash‌ 100000‌ ‌
‌Cr‌‌Provision‌‌for‌‌Warranty‌ 100‌ ‌
‌Cr‌‌Bond‌‌payable‌ 100000‌ ‌
When‌‌expense‌‌is‌‌incurred‌‌on‌‌the‌‌warrantied‌‌product‌ ‌
Dr‌‌Provision‌‌for‌‌warranty‌ 30‌ ‌ ‌
Dr‌‌Interest‌‌Expense‌ 5000‌ ‌
‌Cr‌‌Cash‌ 30‌ ‌
‌ ‌Cr‌‌Cash‌ 5000‌ ‌
‌
If‌‌no‌‌expense‌‌or‌‌less‌‌than‌‌expected‌‌expense‌‌is‌‌incurred‌‌on‌‌the‌‌warrantied‌‌product‌ ‌
Dr‌‌Bond‌‌payable‌ 100000‌ ‌
Dr‌‌Provision‌‌for‌‌warranty‌ ‌
‌Cr‌‌Other‌‌Income‌ ‌ ‌Cr‌‌Cash‌ 100000‌ ‌
‌

‌ ‌
Discount‌ ‌
Dr‌‌Cash‌ 87566‌ ‌
Time‌‌Value‌‌of‌‌Money‌ ‌
‌Cr‌‌Bond‌‌payable‌ 87566‌ ‌
‌
Dr‌‌Interest‌‌Expense‌ 8757‌ ‌
‌Cr‌‌Cash‌ 5000‌ ‌
‌Cr‌‌Bond‌‌Payable‌ 3757‌ ‌
‌
(After‌‌bond‌‌payable‌‌=‌‌100000)‌ ‌
Dr‌‌Bond‌‌Payable‌ 100000‌ ‌
‌Cr‌‌Cash‌ 100000‌ ‌
‌
Premium‌ ‌
Dr‌‌Cash‌ 105657‌ ‌
‌Cr‌‌Bond‌‌Payable‌ 105657‌ ‌
‌
Dr‌‌Interest‌‌Expense‌ 3170‌ ‌
Dr‌‌Bond‌‌Payable‌ 1830‌ ‌
‌Cr‌‌Cash‌ 5000‌ ‌
‌
(After‌‌bond‌‌payable‌‌=‌‌100000)‌ ‌
‌
Dr‌‌Bond‌‌Payable‌ 100000‌ ‌
‌
‌Cr‌‌Cash‌ 100000‌ ‌
‌
Retiring‌‌bonds‌‌before‌‌maturity‌ ‌
If‌‌gain,‌‌it‌‌will‌‌be‌‌credited.‌ ‌
Leases‌ ‌
If‌‌loss,‌‌it‌‌will‌‌be‌‌debited.‌ ‌ ● A‌‌contract‌‌granting‌‌use‌‌or‌‌occupation‌‌of‌‌property‌‌during‌‌a‌‌specified‌‌period‌‌in‌‌exchange‌‌
‌ for‌‌a‌‌specified‌‌rent‌ ‌
● A‌‌contract‌‌that‌‌conveys‌‌to‌‌the‌‌customer‌‌(lessee)‌‌the‌‌right‌‌to‌‌control‌‌the‌‌use‌‌of‌‌an‌‌
identified‌‌asset‌‌for‌‌an‌‌agreed‌‌period‌‌of‌‌time‌‌in‌‌exchange‌‌for‌‌consideration‌ ‌
‌
Lessor‌‌→‌‌legal‌‌owner‌‌of‌‌property‌‌→‌‌rents‌‌&‌‌collects‌‌lease‌‌rental‌ ‌
Lessee‌‌→‌‌user‌‌of‌‌property‌‌→‌‌pays‌‌rent‌ ‌
‌
Start‌‌of‌‌lease‌‌term:‌ ‌
Dr‌‌Right-of-use‌‌asset‌‌(Lease‌‌asset)‌ ‌
‌Cr‌‌Lease‌‌Payable‌ ‌
‌Cr‌‌Cash‌‌/‌‌AP‌ ‌
‌Cr‌‌Provision‌ ‌
‌
During‌‌lease‌‌term:‌ ‌
Dr‌‌Lease‌‌Payable‌ ‌
Dr‌‌Interest‌‌Payable‌ ‌
‌Cr‌‌Cash‌‌(ALP)‌ ‌

‌ ‌
 ‌
Dr‌‌Depreciation‌‌expense‌ ‌ Lecture‌‌10‌ ‌
‌Cr‌‌Accumulated‌‌Depreciation‌ ‌
Equity‌‌Financing‌ ‌
‌
● From‌‌share‌‌capital‌‌&‌‌undistributed‌‌RE‌ ‌
Optional‌‌exemption:‌ ‌
Dr‌‌Rental‌‌Expense‌ ‌ ● SE‌ ‌
‌Cr‌‌Cash‌‌/‌‌AP‌ ‌ ● Share‌‌capital‌‌raised‌‌from‌‌issuing‌‌of‌‌shares‌ ‌
‌
‌
‌

Deferred‌‌Tax‌ ‌ Classes‌‌of‌‌Share‌ ‌

Tax‌‌is‌‌an‌‌expense‌ ‌ Ordinary‌‌Shares‌ ‌ Preference‌‌Shares‌ ‌

‌
● Owners‌‌of‌‌the‌‌corporation‌ ‌ ● Have‌‌certain‌‌adv‌‌>‌‌ordinary‌‌shares‌ ‌
Deferred‌‌Tax‌‌Liability‌‌(in‌‌B/S)‌ ‌
● Right‌‌to‌‌vote‌ ‌ ● E.g‌‌receiving‌‌dividends‌‌first‌ ‌
● Represents‌‌a‌‌tax‌‌expense‌‌relating‌‌to‌‌the‌‌current‌‌period‌‌but‌‌not‌‌currently‌‌payable‌ ‌ ● Right‌‌to‌‌dividends‌ ‌ ● May‌‌have‌‌right‌‌to‌‌vote‌ ‌
● Occurs‌‌because‌‌of‌‌temporary‌‌differences‌‌→‌‌which‌‌arise‌‌when‌‌income‌‌and‌‌expenses‌‌are‌‌ ● On‌‌liquidation‌‌right‌‌to‌‌receive‌‌ ● May‌‌have‌‌right‌‌to‌‌dividends‌ ‌
recognised‌‌in‌‌different‌‌periods‌‌under‌‌accounting‌‌and‌‌tax‌‌rules‌ ‌ proportionate‌‌share‌‌of‌‌net‌‌assets‌‌ ● On‌‌liquidation‌‌may‌‌have‌‌right‌‌to‌ ‌
E.g‌‌tax‌‌expense‌‌=‌‌70,‌‌tax‌‌payable‌‌=‌‌64‌‌→‌‌deferred‌‌tax‌‌liability‌‌=‌‌6‌‌→‌‌payable‌‌in‌‌future‌ ‌ remaining‌ ‌ receive‌‌proportionate‌‌share‌‌of‌‌net‌‌
‌ assets‌‌remaining‌‌before‌‌ordinary‌‌
shareholder‌ ‌
Deferred‌‌Tax‌‌Asset‌‌(in‌‌B/S)‌ ‌
● Occurs‌‌when‌‌tax‌‌paid/payable‌‌is‌‌>‌‌tax‌‌expense‌‌recorded‌‌in‌‌the‌‌accounts‌ ‌ With‌‌or‌‌without‌‌par‌‌value‌ ‌
● Occurs‌‌because‌‌of‌‌TD‌ ‌ ● Share‌‌issued‌‌>‌‌Par‌‌value‌‌→‌‌premium‌ ‌
E.g‌‌tax‌‌expense‌‌=‌‌60,‌‌tax‌‌payable‌‌=‌‌70‌‌→‌‌deferred‌‌tax‌‌asset‌‌=‌‌10‌‌→‌‌recoverable‌‌in‌ ‌ ● Share‌‌issued‌‌<‌‌Par‌‌value‌‌→‌‌discount‌ ‌
future‌ ‌ **‌‌No‌‌par‌‌value‌ ‌
‌ ‌
In‌‌P/L:‌ ‌ ‌
Net‌‌profit‌‌before‌‌tax‌ ‌ Issues‌‌of‌‌shares‌‌to‌‌raise‌‌capital/IPO‌ ‌
- Tax‌‌expense‌ ‌ Dr‌‌Cash‌‌ ‌
=‌‌Profit‌‌after‌‌tax‌‌(RE)‌ ‌ ‌Cr‌‌Share‌‌Capital‌ ‌
‌ ‌

‌ Issue‌‌of‌‌shares‌‌-‌‌Rights‌‌Issue‌ ‌
● Issuing‌‌rights‌‌to‌‌a‌‌company’s‌‌existing‌‌shareholders‌‌to‌‌buy‌‌a‌‌proportional‌‌number‌‌of‌‌
additional‌‌shares‌‌at‌‌a‌‌given‌‌price‌‌within‌‌a‌‌fixed‌‌period‌ ‌
‌
No‌‌journal‌‌entry‌‌on‌‌announcement‌‌of‌‌rights‌ ‌
When‌‌shares‌‌are‌‌distributed‌ ‌
Dr‌‌Cash‌ ‌
‌Cr‌‌Share‌‌Capital‌ ‌
‌
Share‌‌split‌ ‌
● Splits‌‌the‌‌share‌‌by‌‌increasing‌‌the‌‌number‌‌of‌‌ordinary‌‌shares‌‌when‌‌the‌‌market‌‌price‌‌
becomes‌‌too‌‌expensive‌‌for‌‌investors‌ ‌
● **‌‌share‌‌split‌‌does‌‌not‌‌change‌‌any‌‌account‌‌in‌‌the‌‌B/S‌ ‌

‌ ‌
 ● Only‌‌the‌‌number‌‌of‌‌shares‌‌will‌‌↑‌‌/‌‌↓‌ ● Co.‌‌have‌‌no‌‌obligation‌‌to‌‌pay‌‌dividends,‌‌esp‌‌if‌‌they‌‌need‌‌funds‌ ‌
‌ ● To‌‌pay‌‌cash‌‌dividends,‌‌co‌‌needs‌‌to‌‌have‌‌enough‌ ‌
Share‌‌Buyback‌‌(Repurchase)‌ ‌ ○ RE‌ ‌
● Co‌‌buying‌‌their‌‌own‌‌shares‌ ‌ ○ Cash‌ ‌
● Effect‌‌of:‌ ‌ Dividend‌‌is‌‌deducted‌‌from‌‌RE‌ ‌
○ ↓‌‌no.‌‌of‌‌outstanding‌‌shares‌ ‌ ‌
○ ↓‌‌equity‌ ‌
Type‌‌of‌‌Dividends‌ ‌
● Co.‌‌buyback‌‌own‌‌shares‌‌to:‌ ‌
○ Return‌‌cash‌‌to‌‌shareholders‌ ‌ Interim‌‌Dividends‌ ‌ Final‌‌Dividends‌ ‌
○ ↑‌‌EPS‌ ‌
○ ↓‌‌no.‌‌of‌‌shares‌‌outstanding‌ ‌ ● Declared‌‌before‌‌year‌‌end‌ ‌ ● Declared‌‌after‌‌year‌‌end‌ ‌
○ ↓‌‌hostile‌‌takeover‌‌chances‌ ‌ ● Declared‌‌by‌‌board‌‌of‌‌directors‌ ‌ ● Proposed‌‌by‌‌board‌‌of‌‌directors‌ ‌
● Approved‌‌by‌‌shareholders‌‌of‌‌co‌ ‌
○ To‌‌signal‌‌that‌‌management‌‌→‌‌believes‌‌that‌‌shares‌‌are‌‌undervalued‌ ‌
Share‌‌buyback‌‌-‌‌cancelled‌‌immediately‌ ‌ Dividend‌‌Declared‌‌Date‌ ‌ Dividend‌‌Approval‌‌Date‌ ‌
Dr‌‌Share‌‌Capital‌ ‌ Dr‌‌Dividend‌ ‌ Dr‌‌Final‌‌Dividend‌ ‌
‌Cr‌‌Cash‌ ‌ ‌Cr‌‌Dividend‌‌Payable‌ ‌ ‌Cr‌‌Dividend‌‌Payable‌ ‌
‌ ‌ ‌
Share‌‌Buyback‌‌-‌‌Treasury‌‌shares‌ ‌ Dividend‌‌Payment‌‌Date‌ ‌ Dividend‌‌Paid‌‌in‌‌Cash‌ ‌
Dr‌‌Dividend‌‌Payable‌ ‌ Dr‌‌Dividend‌‌Payable‌ ‌
● Co’s‌‌own‌‌shares‌‌of‌‌the‌‌market‌‌are‌‌not‌‌cancelled‌ ‌ ‌Cr‌‌Cash‌ ‌ ‌Cr‌‌Cash‌ ‌
● Treasury‌‌shares‌‌may‌‌be‌‌sold‌‌by‌‌the‌‌company‌‌in‌‌the‌‌future‌ ‌
● On‌‌resale‌‌→‌‌share‌‌deficit/excess‌‌over‌‌price‌‌paid‌‌is‌‌Dr/Cr‌‌to‌‌share‌‌capital‌ ‌ ‌
● No‌‌gain/loss‌‌on‌‌sale‌ ‌ Scrip‌‌Dividends‌ ‌
● No‌‌dividend‌‌paid‌‌on‌‌treasury‌‌shares‌ ‌ Dr‌‌Dividends‌‌payable‌ ‌
‌ ‌Cr‌‌Cash‌ ‌
Share‌‌buyback‌‌-‌‌held‌‌as‌‌treasury‌‌shares‌ ‌ ‌Cr‌‌Share‌‌capital‌ ‌
Dr‌‌Treasury‌‌shares‌ ‌ ‌
‌Cr‌‌Cash‌ ‌ Bonus‌‌Shares‌ ‌
‌ ● Free‌‌shares‌‌issued‌‌by‌‌co‌ ‌
Selling‌‌of‌‌treasury‌ ‌ ● Must‌‌be‌‌approved‌‌by‌‌shareholders‌ ‌
Dr‌‌Cash‌ ‌ ● Has‌‌no‌‌impact‌‌on‌‌share‌‌capital‌‌as‌‌only‌‌no.‌‌of‌‌shares‌‌↑‌ ‌
Dr‌‌Treasury‌‌shares‌ ‌ ● Rewards‌‌shareholders‌‌but‌‌conserve‌‌cash‌ ‌
‌Cr‌‌Share‌‌Capital‌ ‌ ‌
‌ No‌‌journal‌‌entry‌‌to‌‌record‌‌issue‌‌of‌‌bonus‌‌shares‌ ‌
‌ No.‌‌of‌‌shares‌‌↑‌ ‌
Ratios‌ ‌ ‌
‌
Earnings‌‌Per‌‌Share‌ ‌
EPS‌‌=‌‌NI‌‌/‌‌No.‌‌of‌‌shares‌‌outstanding‌ ‌ Dividend‌‌Yield‌‌Ratio‌‌=‌‌DPS‌‌/‌‌Market‌‌price‌‌per‌‌share‌ ‌
→‌‌indicates‌‌a‌‌co’s‌‌profitability‌‌per‌‌share‌ ‌ →‌‌measures‌‌the‌‌return‌‌an‌‌investor‌‌could‌‌receive‌‌on‌‌a‌‌co’s‌‌share‌‌at‌‌current‌‌market‌‌price‌ ‌
↓‌‌dividend‌‌yield‌‌→‌‌growth‌‌oriented‌‌co‌ ‌
‌
Dividend‌‌Payout‌‌Ratio‌‌=‌‌Dividends‌‌/‌‌NI‌ ‌
→‌‌indicates‌‌the‌‌portion‌‌of‌‌current‌‌earnings‌‌paid‌‌to‌‌owners‌‌in‌‌the‌‌form‌‌of‌‌dividends‌ ‌
Dividends‌ ‌ ‌
Market‌‌value‌ ‌
● Are‌‌distribution‌‌of‌‌profits‌‌to‌‌the‌‌owners‌‌of‌‌the‌‌co‌ ‌
- The‌‌price‌‌a‌‌person‌‌can‌‌buy/sell‌‌a‌‌share‌ ‌

‌ ‌
 - Depends‌‌on‌‌co’s‌‌net‌‌I,‌‌financial‌‌position,‌‌future‌‌prospects‌‌etc‌ ‌
‌ Lecture‌‌11‌ ‌
Market‌‌capitalisation‌‌=‌‌share‌‌market‌‌price‌‌x‌‌no.‌‌of‌‌shares‌‌outstanding‌ ‌
‌
Book‌‌Value‌‌(BV)‌‌=‌‌Total‌‌SE‌‌/‌‌No.‌‌of‌‌shares‌‌Outstanding‌ ‌ Cash‌‌Flow‌‌Statements‌ ‌
→‌‌owner’s‌‌equity‌‌per‌‌each‌‌ordinary‌‌share‌ ‌
➔ Reports‌‌how‌‌co‌‌generates‌‌and‌‌uses‌‌its‌‌cash‌ ‌
BV‌‌not‌‌equal‌‌MV‌ ‌
➔ Presents‌c ‌ ash‌‌inflows‌‌and‌‌outflows‌‌from‌‌ ‌
BV‌‌→‌‌recorded‌‌at‌‌historical‌‌cost‌ ‌
1.‌‌Operating‌ ‌

‌ 2.‌‌Investing‌‌ ‌
3.‌‌Financing‌‌activities‌ ‌
➔ Enables‌‌us‌‌to‌‌access‌‌how‌‌much‌‌co’s‌‌reported‌‌net‌‌I‌‌is‌‌cash‌ ‌
‌ ‌
CFs‌‌from‌‌Operating‌‌activities‌ ‌
‌
OCF‌‌Ratio‌‌=‌‌CF‌‌from‌‌operations‌‌/‌‌Current‌‌Liabilities‌ ‌
→‌‌indicator‌‌of‌‌the‌‌ability‌‌of‌‌co‌‌to‌‌pay‌‌maturing‌‌liabilities,‌‌interest‌‌and‌‌dividends‌ ‌
→‌‌indicator‌‌of‌‌liquidity‌‌of‌‌co‌ ‌
‌
CFs‌‌from‌‌Investing‌‌activities‌ ‌
→‌r‌ epresent‌‌the‌‌extent‌‌to‌‌which‌‌expenditures‌‌have‌‌been‌‌made‌‌for‌‌resources‌‌intended‌‌to‌‌
generate‌‌future‌‌I‌‌&‌‌Cfs‌ ‌
→‌‌indicate‌‌how‌‌much‌‌of‌‌the‌‌CFs‌‌is‌‌non-recurring‌‌(one-off)‌ ‌
‌
CFs‌‌from‌‌Financing‌‌activities‌ ‌
→‌u‌ seful‌‌in‌‌predicting‌‌claims‌‌on‌‌future‌‌CFs‌‌by‌‌providers‌‌of‌‌capital‌‌to‌‌the‌‌enterprise‌ ‌
→‌‌provides‌‌info‌‌on‌‌how‌‌investing‌‌activities‌‌are‌‌being‌‌financed‌ ‌
‌
‌
‌ Indirect‌‌Method‌ ‌ Direct‌‌Method‌ ‌

Operating‌‌ Pre-tax‌‌income‌ ‌ Cash‌‌collected‌‌from‌‌customers‌ ‌

activities‌ ‌ Add:‌‌Non‌c‌ ash‌‌items‌‌(depreciation,‌‌
loss‌‌on‌‌disposal),‌‌Interest‌‌expense‌ ‌
Less:‌‌Interest‌‌income,‌‌dividend‌‌
income,‌‌Gain‌‌on‌‌sale,‌‌Gain‌‌on‌‌
disposal‌ ‌
Change‌‌in‌‌working‌‌capital‌ ‌
Add:‌‌↑‌‌in‌‌liabilities,‌‌↓‌‌in‌‌assets‌ ‌
Less:‌‌↓‌‌in‌‌liabilities,‌‌↑‌‌in‌‌assets‌ ‌
Add:‌‌Interest‌‌received,‌‌dividends‌‌
received‌ ‌
Less:‌‌Interest‌‌paid,‌‌dividends‌‌paid‌ ‌
Less:‌‌Cash‌‌payments‌‌to‌‌suppliers‌ ‌
Less:‌‌Cash‌‌payments‌‌to‌‌employees‌ ‌
Less:‌‌Interest‌‌paid‌ ‌
Less:‌‌Income‌‌taxes‌‌paid‌ ‌
_____________________________‌ ‌
Cash‌‌flow‌‌from‌‌operating‌‌activities‌ ‌
‌
‌
Collections‌‌from‌‌customers‌‌=‌‌revenue‌‌
+‌‌↓‌‌in‌‌AR‌‌-‌‌impairment‌‌loss‌ ‌
Payments‌‌to‌‌suppliers‌‌=‌‌COGS‌‌-‌‌↓‌‌in‌‌
inventory‌‌+‌‌↓‌‌in‌‌AP‌ ‌

‌ ‌
 Bank‌‌balance:‌ ‌
____________________________‌ ‌ Operating‌‌expense‌‌=‌‌operating‌‌
expense‌‌+‌i‌ncrease‌‌in‌‌accrued‌‌payable‌ ‌ Add:‌‌Deposits‌‌in‌‌transit‌‌=‌‌book‌‌deposit‌‌-‌‌(bank‌‌deposit‌‌-‌‌note‌‌collected)‌ ‌
Cash‌‌flow‌‌from‌‌operating‌‌activities‌ ‌
‌ Less:‌‌Outstanding‌‌cheques‌‌=‌‌(book‌‌cheque‌‌-‌‌error)‌‌-‌‌(bank‌‌cheque‌‌-‌‌service‌‌charge‌‌-‌‌total‌‌
‌
‌ outstanding‌‌check)‌ ‌
Depreciation‌‌=‌‌ending‌‌acc‌‌dep‌‌-‌‌
Add‌‌/‌‌Less:‌‌Bank‌‌errors‌ ‌
(starting‌‌acc‌‌dep‌‌-‌‌sale‌‌of‌‌equipment’s‌‌
‌
acc‌‌dep)‌ ‌
Book‌‌balance:‌ ‌
Income‌‌tax‌‌paid‌‌in‌‌cash‌‌=‌‌starting‌‌tax‌‌
Add:‌‌Bank‌‌collections,‌‌interest‌‌income,‌‌EFT‌‌receipts‌‌(inflow‌‌of‌‌money)‌ ‌
payable‌‌+‌‌income‌‌tax‌‌expense‌‌-‌‌
Less:‌‌Service‌‌charge,‌‌NSF‌‌cheques,‌‌Payments‌‌(outflow‌‌of‌‌money)‌ ‌
ending‌‌tax‌‌payable‌ ‌
Add‌‌/‌‌Less:‌‌Bank‌‌errors‌ ‌
Investing‌‌ Add:‌‌Interest‌‌income‌‌(from‌‌ ‌ ‌
activities‌ ‌ investments‌‌only),‌‌Sale‌‌of‌‌investment‌ ‌ All‌‌items‌‌on‌‌the‌‌book‌‌side‌‌need‌‌to‌‌have‌‌journal‌‌entry.‌‌If‌‌an‌‌item‌‌is‌‌added,‌‌debit‌‌cash.‌‌If‌‌an‌‌item‌‌
Less:‌‌Purchase‌‌of‌‌PPE‌‌(investment‌‌ is‌‌subtracted,‌‌credit‌‌cash.‌ ‌
related)‌‌,‌‌purchase‌‌of‌‌investment‌ ‌ ‌
____________________________‌ ‌ Dr‌‌Cash‌ ‌
Cash‌‌flow‌‌from‌‌investing‌‌activities‌ ‌ ‌Cr‌‌Bank‌‌collection‌ ‌
‌Cr‌‌Interest‌‌income‌ ‌
Financing‌‌ Add:‌‌Sale‌‌of‌‌equity,‌‌debt‌‌financing‌ ‌ ‌ ‌Cr‌‌EFT‌‌receipt‌ ‌
activities‌ ‌ Less:‌P
‌ urchase‌‌of‌‌treasury‌‌stock‌ ‌ ‌Cr‌‌Book‌‌error(if‌‌any)‌ ‌
‌ ‌
‌
Quality‌‌of‌‌income‌‌(QOI)‌ ‌
1. Ability‌‌of‌‌current‌‌I‌‌to‌‌forecast‌‌future‌‌I‌ ‌ Dr‌‌Bank‌‌service‌‌charge‌ ‌
2. Proportion‌‌of‌‌current‌‌I‌‌in‌‌cash‌ ‌ Dr‌‌AR‌ ‌
Dr‌‌Insurance‌‌expense‌ ‌
‌
Dr‌‌Book‌‌error(if‌‌any)‌ ‌
QOI‌‌ratio‌‌=‌‌Cash‌‌flows‌‌from‌‌operating‌‌activities‌‌/‌‌Net‌‌I‌ ‌ ‌Cr‌‌Cash‌ ‌
→‌‌measures‌‌the‌‌portion‌‌of‌‌net‌‌I‌‌that‌‌was‌‌generated‌‌in‌‌cash‌ ‌ ‌
>‌‌ratio‌‌→‌‌co‌‌able‌‌to‌‌meet‌‌operating‌‌and‌‌other‌‌cash‌‌needs‌‌for‌‌operations‌ ‌
>‌‌the‌‌better‌ ‌
Ratio‌‌↓‌‌→‌‌earning‌‌growing‌‌faster‌‌than‌‌operating‌‌CFs‌ ‌ ‌
‌
Analysis‌‌of‌‌CFs‌ ‌
Liquidity‌‌ratios‌ ‌
Current‌‌ratio‌‌=‌‌Current‌‌assets‌‌/‌‌Current‌‌liabilities‌ ‌
>‌‌the‌‌better‌ ‌

Quick‌‌ratio‌‌=‌‌(Current‌‌Assets‌‌-‌‌Inventory‌‌-‌‌Prepayments)‌‌/‌‌Current‌‌liabilities‌ ‌
>‌‌the‌‌better‌ ‌

Cash‌‌ratio‌‌=‌‌Cash‌‌/‌‌Current‌‌Liabilities‌ ‌

Operating‌‌cash‌‌flow‌‌ratio‌‌=‌‌Operating‌‌CFs‌‌/‌‌current‌‌liabilities‌ ‌
‌
‌
Bank‌‌Reconciliation‌ ‌

‌ ‌
Chapter‌‌12‌ ‌
Financial‌‌Statements‌‌Analysis‌ ‌
‌
‌
Horizontal‌‌Analysis‌ ‌ ➢ Analysis‌‌of‌‌individual‌‌accounts‌‌e.g‌‌revenue,‌‌expenses,‌‌net‌‌
I‌‌on‌‌B/S‌‌over‌‌a‌‌series‌‌of‌‌time‌ ‌
➢ Dollar‌‌change/‌‌%‌‌change‌ ‌
➢ Expressed‌‌as‌‌percentage‌‌change‌‌over‌‌a‌‌base‌‌year‌ ‌

Ratio‌‌Analysis‌ ‌

Vertical‌‌Analysis‌ ‌ - Shows‌‌the‌‌relationship‌‌of‌‌financial‌‌statement‌‌items‌‌relative‌‌
to‌‌a‌‌total,‌‌which‌‌is‌‌the‌‌100%‌‌figure‌ ‌
- Expressed‌‌as‌‌%‌‌of‌‌the‌‌base‌ ‌
Base‌‌of‌‌income‌‌statement:‌‌Total‌‌revenue‌ ‌
Base‌‌of‌‌balance‌‌sheet:‌‌total‌‌assets‌ ‌

‌
Other‌‌ratios:‌ ‌

‌ ‌
Debt‌‌ratio‌‌=‌‌Total‌‌Liabilities‌‌/‌‌Total‌‌Asset‌ ‌
Return‌‌on‌‌sales‌‌=‌‌Operating‌‌income‌‌/‌‌Revenue‌ ‌
Asset‌‌Turnover‌‌=‌‌Net‌‌Sales‌‌/‌‌Average‌‌Total‌‌Assets‌ ‌
Assets-to-Equity‌‌=‌‌Shareholders’‌‌Equity‌‌/‌‌Total‌‌Asset‌ ‌
‌
ROE‌‌=‌‌profit‌‌margin‌‌x‌‌asset‌‌turnover‌‌x‌‌financial‌‌leverage‌ ‌
ROA‌‌=‌‌Net‌‌income‌‌/‌‌Average‌‌total‌‌assets‌‌=‌‌Profit‌‌margin‌‌x‌‌Asset‌‌turnover‌ ‌
Cash‌‌Conversion‌‌cycle‌‌=‌‌Receivable‌‌days‌‌+‌‌Inventory‌‌days‌‌-‌‌Payable‌‌days‌ ‌
‌
Solvency:‌‌long‌‌term,‌‌Liquidity:‌‌short‌‌term‌ ‌
‌
Limitations‌‌of‌‌Ratio‌‌Analysis‌ ‌

- Does‌‌not‌‌identify‌‌prob‌ ‌
- Evaluate‌‌ratios‌‌in‌‌light‌‌of‌‌factors,‌‌biz‌‌models‌‌&‌‌strats‌ ‌
- Legislation,‌‌international‌‌affairs‌‌etc‌‌can‌‌turn‌‌profits‌‌→‌‌losses‌ ‌
- FS‌‌no.‌‌are‌‌→‌‌result‌‌of‌‌significant‌‌judgement‌‌→‌‌often‌‌rely‌‌→‌‌estimates‌‌and‌‌
assumptions‌ ‌
‌
‌
Red‌‌Flags‌‌in‌‌FS‌‌Analysis‌ ‌
● Earnings‌‌probs‌ ‌
● ↓‌‌CFs‌ ‌
● Too‌‌much‌‌debt‌ ‌
● Inability‌‌to‌‌collect‌‌receivables‌ ‌
● Build‌‌up‌‌of‌‌inventories‌ ‌
● Trends‌‌of‌‌sales,‌‌inventory‌‌and‌‌receivables‌ ‌
‌