Accounting Business Reporting for Decision Making

CHAPTER 6 Statement of profit or loss and statement of changes in equity 249

Statement of profit or loss Statement that reports on the income and expenses of an entity for a

period, and the resulting profit or loss.

Straight-line depreciation Depreciation method that results in a constant depreciation expense each

reporting period over the asset’s useful life.

Triple bottom line reporting or environmental, social and governance (ESG) reporting Reporting

on environmental, social and financial performance.

Units of production depreciation Depreciation method that results in a varying depreciation expense

each reporting period over the asset’s useful life.

APPLY YOUR KNOWLEDGE 20 marks

PART A

Nicholas Cash, the sole proprietor of Advantage Tennis Coaching (ATC), has met with his accountant to

discuss preparation of ATC’s financial statements for the year ended 31 December 2017. The following

issues were discussed.

1. St Lucia Tennis Club owes $12 000 for a junior coaching clinic held in December. St Lucia Tennis

Club has not yet been invoiced for this service. ATC has not recorded the service revenue in its

accounting information system.

2. ATC has $2000 unpaid wages as at 31 December 2017 that are not recorded in the accounting infor-

mation system.

3. ATC has unpaid utility expenses (telephone, gas and electricity) amounting to $1500 for the three

months ended 31 December 2017 that are not recorded in the accounting information system.

4. An annual membership fee of $800 was paid to National Tennis Coaching Association on 1 March
   2017. This payment was initially recorded as a prepaid membership.


5. ATC has office furniture and office equipment that cost $9700. The equipment has a zero residual

value and is depreciated over five years using the straight-line method.

Required

a. Prepare the relevant general journal adjusting entries (narrations required) for each of

the issues identified. 5 marks

b. State whether the profit, assets or liabilities would be understated, overstated or

unaffected in the absence of the adjusting entry for each of the five issues above.

Consider each issue individually. 3 marks

c. Explain the difference between cash accounting and accrual accounting for determining

profit for a reporting period. Provide an example of a transaction that would appear as

revenue for a reporting period under accrual accounting which would not appear under

cash accounting. 4 marks

PART B

JB Hi-Fi Ltd’s 2015 annual report includes governance, environmental and social statements and notes

that the company recognises the importance of all these matters to its shareholders, suppliers and cus-

tomers. Putting this into practice, JB Hi-Fi Ltd discusses its governance policies and procedures, details

the initiatives that it has to reduce the impact its business has on the environment.

Required

a. Explain your understanding of ‘triple bottom line’ reporting. Include in your discussion

three examples of JB Hi-Fi Ltd’s initiatives to reduce the impact its business

has on the environment. 5 marks

b. Your friend believes that an entity’s value is exclusively determined by its earnings and

in analysing an entity the emphasis should be on profit measures. Reply to your friend

explaining why entities would volunteer to provide their policies and practices in

relation to environmental and social matters in addition to financial performance. 3 marks