Accounting Business Reporting for Decision Making

204 Accounting: Business Reporting for Decision Making

d. All entities are legally obliged to prepare general purpose financial statements.

e. The measurement system used in accounting is historical cost.

5.5 The balance sheet for Promotion Pty Ltd reveals cash on hand of $8000, accounts receivable

of $48 000, inventory measured at $50 000, and plant and equipment measured at $116 000.

The liabilities of the entity are: accounts payable $28 000, bank overdraft $32 000, and

long-term loan $180 000. Relate this information to the liquidity of the entity. LO2

5.6 An entity has total assets measured at $170 000 on the balance sheet. The entity’s liabilities

total $100 000, of which $40 000 is a bank loan. Calculate the entity’s net assets. Discuss

the entity’s financing decision. LO2

5.7 List three essential characteristics necessary to consider an item either as an asset or a

liability. LO4, 5

5.8 The Snags Software Company wants to increase its asset base by recognising its customer

list as an asset. Discuss whether this is permissible under accounting standards. LO2

5.9 JB Hi-Fi Ltd has a legal obligation to prepare and lodge financial statements. Access the

notes to JB Hi-Fi Ltd’s most recent financial statements and identify the rules and

regulations that govern the basis for the preparation of the financial statements. Compare

this with the basis for the preparation of the financial statements used by a not-for-profit

organisation of your choice. LO1

5.10 Knowing that you have some accounting experience, a friend has sought your advice

regarding a business that he intends purchasing. The balance sheet for the business shows

total assets of $120 000 and liabilities of $60 000. The selling business has provided no

notes to accompany the balance sheet. On the basis of the information provided, your

friend believes the business is worth $60 000. Advise your friend as to the accuracy

of his assessment and what questions regarding the balance sheet he should ask the

seller of the business. LO2, 9, 10

5.11 As an investor in the share market, you use the financial statements to assess the

financial condition of entities. Discuss if you would you find it more useful to have items

of property, plant and equipment valued at historical cost or fair value. LO10

5.12 Dryter Ltd, a carpet steam-cleaning business, needs to acquire new machinery. The

accountant has suggested that the entity should lease the machinery rather than take out

a loan to purchase it. When the owner inquired as to why this would be preferable, the

accountant said it was because structuring the lease in a certain way would keep the

financing ‘off-balance-sheet’. Explain the concept of ‘off-balance-sheet financing’ and

discuss why this could be the entity’s preferred option. Discuss whether you think that

leased assets and lease liabilities should appear on the balance sheet. LO4, 5

5.13 Frazier Ltd is always running short of cash, despite growing sales volumes and its current

assets exceeding its current liabilities. A review of its operations by a consultant finds

that a considerable portion of the company’s inventory is obsolete stock for which there is

limited demand. Further, many of the accounts receivable are overdue by more than 60 days.

The accounts receivable and inventory are carried at their gross amount and cost value

respectively on the balance sheet. Explain how the accounts receivable and inventory

should be valued on the balance sheet. If Frazier Ltd was to apply the correct measurement

basis, determine the effect on (1) profit and (2) assets. LO10

5.14 You are reviewing a balance sheet and notice that goodwill appears on the statement.

Relate this information to the entity’s past investing decisions. Discuss how goodwill is

measured (1) at acquisition and (2) post acquisition. LO9, 10

5.15 There are four financial statements: balance sheet, statement of profit or loss, statement

of cash flows and statement of changes in equity. Describe the information conveyed by the

balance sheet relative to that conveyed by the statement of profit or loss. LO2