Accounting Business Reporting for Decision Making

CHAPTER 6 Statement of profit or loss and statement of changes in equity 257

6.33 Preparing an accrual-based statement   LO2, 4

Racey has prepared a statement of profit or loss for the 12-month reporting period ended 30 June

on a cash basis, showing a $43 200 profit. The cash-based statement shows the following.

Sales

Inventory purchased

Gross profit

Expenses

Salary and wages

Rent

Insurance

Advertising

Administration

Interest

$277 400

164 000

113 400

28 400

9 200

3 440

5 600

18 800

4 760

Additional information

• The accounts receivable and accounts payable balances at the start of the reporting period were
  $16 400 and $9800 respectively. At the end of the reporting period, Racey had accounts receiv-
  able of $21 200 and accounts payable of $19 760.


• The opening inventory was $32 000 and the closing inventory $38 000.


• An advertising invoice of $2960 had not been paid.


• The business has equipment that cost $40 400. It has a useful life of five years and an expected
  salvage value of $4400.


• The insurance expense represents the 12-month premium on a policy that was taken out on 30 April.
  Required
  a. Prepare an accrual-based statement of profit or loss for Racey for the period ended 30 June.
  b. As a user of financial statements, critique why accrual accounting is preferred to cash accounting
  to measure financial performance.

6.34 Recognition and classification of income   LO3, 5, 7

The following are the revenue recognition policies of Flight Centre Ltd as detailed in the company’s

2014 annual report.

Accounting policy

The group recognises revenue when:

•   The amount of revenue can be reliably measured

•   It is probable that future economic benefits will flow to the entity; and

•   Specific requirements have been met for each of the group’s activities.

Revenue is measured at the fair value of the consideration received or receivable. Revenue from

the sale of travel services is recognised as set out below.

Revenue from the sale of travel services

Revenue from the sale of travel services is recorded when travel documents are issued, consistent

with an agency relationship. Revenue relating to volume incentives is recognised at the amount

receivable when annual targets are likely to be achieved. Additional information on other revenue

accounting policies is included in note 1(f).

Critical accounting estimates, assumptions and judgments — override revenue

In addition to commission payments, FLT is eligible for override payments from its suppliers, as

included in revenue from the provision of travel. These overrides are negotiated with individual

suppliers and will typically include a combination of guaranteed payments and volume incentives.

The volume incentives are recognised at the amount receivable when annual targets are likely to

be achieved. The override revenue accrual process is inherently judgmental and is impacted by

factors which are not completely under FLT’s control. These factors include:

•   Year-end differences — as supplier contract periods do not always correspond to FLT’s financial

year, judgments and estimation techniques are required to determine anticipated future flown

revenues over the remaining contract year and the associated override rates applicable to these

forecast levels