Accounting Business Reporting for Decision Making

CHAPTER 5 Balance sheet 199

Public accountability Entities with securities, debt or equity, traded in a public market or entities that

hold assets in a fiduciary capacity as their main business activity.

Receivables Cash the entity expects to receive from parties that owe it money.

Recognition Recording items in the financial statements with a monetary value assigned to them.

Recoverable amount Higher of an asset’s expected fair value (less costs of disposal) and value

in use.

Relevant Information that is of value to users in making and evaluating decisions about the allocation

of scarce resources.

Reporting entity An entity with users who rely in the information in general purpose financial

statements to meet their information needs.

Reserves Equity accounts that originate in a variety of ways including asset revaluations (revaluation

surplus), transfers of profits (general reserve) or movements in exchange rates (foreign currency

translation reserve).

Retained earnings Cumulative profits made by the entity that have not been distributed as dividends

or transferred to reserve accounts.

Secured debt Debt with a priority claim on the entity’s assets in the event of the entity’s demise.

Share capital Funds contributed to a company by the owners.

Special purpose financial statements Financial statements intended to meet the specialised

information needs of users who have the authority to obtain the information to meet those needs.

Trade payables (trade creditors or accounts payable) Amounts owed to suppliers for the purchase

of goods or services.

Trade receivables (trade debtors or accounts receivable) Amounts due from customers for the sale

of goods or services.

Value in use Present value of the cash flows that an entity expects to derive from the continuing use

of an asset and its ultimate disposal.

APPLY YOUR KNOWLEDGE 22 marks

Australia’s largest book retailers, REDgroup Retail, collapsed on 17 February 2011. REDgroup Retail

owned 103 Angus & Robertson bookshops and 26 Borders stores in Australia. Subsequent to the

collapse, one Borders outlet and 37 Angus & Robertson branches were closed, making 321 staff

redundant.

Subsequent to the announcement of financial difficulties of REDgroup Retail, Borders and Angus &

Robertson bookstores refused to honour the face value of gift vouchers. Customers attempting to use gift

vouchers were being told they had to spend double the value of each voucher.

Required

a. Explain the initial recording that Borders should prepare when a customer purchases

a book gift voucher for $100 cash. 3 marks

b. Using the definition and recognition of financial report elements contained in the

Conceptual Framework, discuss why you have suggested the particular recording. 8 marks

c. Explain the recording that Borders would prepare when a customer redeems their

$100 gift voucher by using it to purchase $100 worth of books. The cost price of the

books that the customer purchased is $40. 6 marks

d. It was reported in the financial press that REDgroup Retail had a total of $6.4 million in

cash, and inventory on hand of $119.9 million when it collapsed. Further, it had employee

benefits (amounts owed to employees for annual leave) of $7.8 million and unsecured

creditors of $44 million. Using the Conceptual Framework, explain the essential

characteristics that categorise amounts owed to employees for annual leave as a liability. 5 marks