FINALCIAL REPORTING 1( 8567)

FLNANCIAL REPORTING
Assignment no: 1

Submitted To:
sir Munir Ahmed
Class:
M.com 4th semester:

Q.1
(a) describe the conceptual frame work of accounting in detail.Also
discuss whether a conceptual framework is necessary and which
alternative system might be.
Answer:
Conceptual Framework

A conceptual framework can be defined as a system of ideas and objectives that lead
to the creation of a consistent set of rules and standards. Specifically in accounting,
the rule and standards set the the nature, function and limits of financial accounting
and financial statements.
The main reasons for developing an agreed conceptual framework are that it provides:
a framework for setting accounting standards;
a basis for resolving accounting disputes;

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Why is the Framework Necessary

unting standards were often produced that had serious defects – that is:With a sound
conceptual framework in place the FASB is able to issue consistent and useful
standards. In addition, without an existing set of standards, it isn’t possible to resolve
any new problems that emerge.The framework also increases financial statement
users’ understanding of and confidence in financial reporting and makes it easier to
compare different companies’ financial statement.In a broad sense a conceptual
framework can be seen as an attempt to define the nature and purpose of accounting.
A conceptual framework must consider the theoretical and conceptual issues
surrounding financial reporting and form a coherent and consistent foundation that
will underpin the development of accounting standards. It is not surprising that early
writings on this subject were mainly from academics.Conceptual frameworks can
apply to many disciplines, but when specific ally related to financial reporting, a
conceptual framework can be seen as a statement of generally accepted accounting
principles (GAAP) that form a frame of reference for the evaluation of existing
practices and the development of new ones. As the purpose of financial reporting is to
provide useful information as a basis for economic decision making, a conceptual
framework will form a theoretical basis for determining how transactions should be
measured (historical value or current value) and reported – how they are presented
or communicated to users.Some accountants have questioned whether a conceptual
framework is necessary in order to produce reliable financial statements. Past history
of standard setting bodies throughout the world tells us it is. In the absence of a
conceptual framework, accounting.they were not consistent with each other
particularly in the role of prudence versus accruals/matching they were also internally
inconsistent and often the effect of the transaction on the statement of financial
position was considered more important than its effect on income the
statement.standards were produced on a ‘fire fighting’ approach, often reacting to a
corporate scandal or failure, rather than being proactive in determining best
policy.Some standard setting bodies were biased in their composition (not fairly
representative of all user groups) and this influenced the quality and direction of
standards.It could be argued that the lack of a conceptual framework led to a
proliferation of ‘rules-based’ accounting systems whose main objective is that the
treatment of all accounting transactions should be dealt with by detailed specific rules
requirements. Such a system is very prescriptive and inflexible, but has the attraction
of financial statements being more comparable and consistent.By contrast, the
availability of a conceptual framework could lead to ‘principles-based’ system
whereby accounting standards are developed from an agreed conceptual basis with
specific objectives.This brings us to the International Accounting Standards Board’s
(IASB) The Conceptual Framework for Financial Reporting (the Framework), which
is in essence the IASB’s interpretation of a conceptual framework and in the process
of being up dated. The main purpose of the Framework is to:
assist in the development of future IFRS and the review of existing standards by
setting out the underlying concepts
promote harmonious of accounting regulation and standards by reducing the number
of per mitten alternative accounting treatments

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assist the prepare of financial statements in the application of IFRS , which would
include dealing with accounting transaction s for which there is not (yet ) an
accounting standard.
The Framework is also of value to auditors, and the users of financial statements, and
more generally help interested parties to understand the IASB’s approach to the
formulation of an accounting standard.
The content of the Framework can be summarized as follows:
Identifying the objective of financial statements.
The reporting entity (to be issued).
Identifying the parties that use financial statements.
The qualitative characteristics that make financial statements useful.
The remaining text of the old Framework dealing with elements of financial
statements: assets, liabilities equity income and expenses and when they should be
recognized and a discussion of measurement issues (for example, historic cost, current
cost) and the related concept of capital maintenance.
The development of the Framework over the years has led to the IASB producing a
body of world-class standards that have the following advantages for those companies
that adopt them:
IFRS are widely accepted as a set of high-quality and transparent global standards that
are in tended to achieve consistency and comparability across the world.
They have been produced in cooperation with other internationally renowned standard
setters, with the aspiration of achieving consensus and global convergence.
Companies that use IFRS and have their financial statements audited in accordance
with International Standards on Auditing (ISA) will have an enhanced status and
reputation.
The International Organization of Securities Commissions (IOSCO) recognize IFRS
for listing purposes – thus, companies that use IFRS need produce only one set of
financial statements for any securities listing for countries that are members of
IOSCO. This makes it easier and cheaper to raise finance in international markets.
Companies that own foreign subsidiaries will find the process of consolidation
simplified if all their subsidiaries use IFRS.
Companies that use IFRS will find their results are more easily compared with those
of other companies that use IFRS. This should obviate the need for any reconciliation
from local GAAP to IFRS when analysts assess comparative performance.
The IASB’s Framework for the Preparation and Presentation of Financial Statements
requires financial statements to be prepared on the basis that they comply with certain
accounting concepts, underlying assumptions and (qualitative) characteristics. Five of
these are:
Matching/accruals

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Substance over form

Prudence
Comparability
Material

(b)
A machine was purchased for Rs. 40,000 in cash. The
machine was delivered on the same day as the payment was
made. It is expected to be used over a 4 year period to make
widgets that will be scrapped. You are required to discuss
how the purchase of the machine should be recognized and
measured.

The widgets are excepted to be manufactured and sold evenly over the
4-year period ,then 10,000 should be expense in each of these
4-year.(40,000/4)=10,000.
And if the 50 %of widgets are expected to be manufactured in 1st year,and
30%of 2ndyear and 3rd&4th year 10%in each of remaining year.
1st year.
40,000*50/100=20,000
2nd year
40,000*30/100=12,000
3rd year&4th year
40,000*10/100=4,000
Then dep of the year+accumulated dep.
Then total cash 40,000-accumalated dep.

Dep for Accumu

Year T .cash Dep the Year Dep WDV

1 Year 50% 20,000 20,000 20,000

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40,000

2 Year 40,000 30% 12,000 32,000 8,000

3 Year 40,000 10% 4,000 36,000 4,000

4 Year 40,000 10% 4,000 40,000 -

Q.2
A company has inventory in hand at year -end (31dec2016)
that it expects to be able to sell in the ordinary course of
business for Rs.10,000 the cost of these inventories is 7,000.
In order to sell this inventory ,the company expects to incur
selling costs of Rs.2,000 and expects to incur further costs of
Rs.3,000 to put this inventory in to a sale able condition.
A) calculate the net realizable value .
B) Calculate any possible write -down and
C) Journalize any write-down necessary .
D) Show where the write -down would be included and
disclosed in the financial statements.

A) Netrelizeable value Cost

Estimating selling price 10,000

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Less: expected selling cost 2,000

Less: further cost 3,000
Net r. value 5,000

= Net realizable value= 5,000 answer

B)possible write-down cost

Write-down cost(inventory cost) 7,000

Less:NRV 5,000
2,000

C) Journalize write-down debit credit

2,000
2,000
D)
Financial statement year ended:
The NRV is greatherthen cost,then no adjustment will be made , the value
of inventories to aNRV that is higher then cost is not allowed since this would
effectively result in recognition of G.profit before the sale has taken place.

Q .3
A machine was purchased on 1january 2014,on which
date it was estimated to have a useful life of 5year and a nil
residual value. The carrying amount an 31 December
2015was as follows:
Cost (1/1/2014 Rs.500,000
Accumulated depreciation (200,000)

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Net carrying cost (31/12/2015) Rs. 300,000

On the 1/1/2016 the remaining economic useful life was

estimated to be 2 years.
Required:
A) calculate the effect of the change in accounting estimate
using the reallocation method.
B) Provide the necessary journals assuming that no
depreciation journal had yet been proceed for 2016.
C) Provide the necessary journals assuming that the
depreciation journal had already been processed for
2016(I.e.before the change in estimate).
Solution :

There is a change in estemate based on original estemate and there are 3year
remaining (5year -2year)remaining life has been shortened 2year.
Use the reallaction method.
Reallocation method calculation 1 2
Cost data 500,000
Accumulated dep 500,000/5*2 200,000
300,000 300,000
Remaining useful life (5year-2year)(4year-2year) 3 year 2year
Depreciation on 2015 300,000/3year 100,000
300,000/2year 150,000
Less depreciation 100,000-50,000= 50,000
Carrying amount end 2015

200,000 150,000
Depreciation future balance 200,000 150,000
50,000
0 0 0

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Dec 2015 dep =300,000

Carrying amount reduce 150,000
It means that
depreciationofcost150,000journelizedin2015(300,000-150,000)=150,000.

Based on previous estemate 100,000

Change in estemate 50,000
Total depreciation add: 150,000

b)
Journal entry proceeds for2016
Journal Debit credit
Depreciation 150,000
Depreciation of machinery 150,000
Carrying amount o/b 300,000- c o c/b150,000

C)
Depreciation already proceeds )
Debit credit
Depreciation 50,000
Accumulated machinery dep 50,000
Carrying amount o/b 300,000-carrying amount c/d 150,000-already depreciation
proceeds 100,000

Q.4
Revenue (Statement of Comprehensive Income) is Rs. 100,000.
The Opening and Closing debtors’ balances (Statement of
Financial Position) are Rs. 50,000 and Rs. 110,000 respectively.
You are required to calculate the ‘Cash Receipts from
customers’ to be disclosed in the ‘Direct method statement of
cash flow’.

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Solution:

Debtor

Opening balance 50,000 balance ?

Sales 100,000 add closing balance 110,000

150,000

Balance 110,000

This could have been calculated following cost instead.

Statement of comprehensive income 100,000

Less :increase in debtor (110,000-50,000) 60,000

Statement of the cash flow (balance) 40,000

Part of cash generated 40,000

Opening balance 50,000 balance 40,000

Sales 100,000 add :closing balanc110,000

150,000 150,000

Balance 110,000

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Q.5
Assume that a machine, with a carrying amount of Rs. 45,000
(Cost: Rs. 50,000 and accumulated depreciation: Rs. 5,000),
is given in exchange for another similar machine. The
exchange is considered to have no impact on future cash
flows (or present value thereof) of the business as a whole.

Required:
Discuss how this should be recorded in the general ledger, if
at all, assuming that:
a) The fair value of the machine given up is Rs. 30,000
(the fair value of the newly acquired machine is
unavailable);
b) The fair value of the newly acquired machine is Rs.
30,000 (the fair value of the machine given up is
unavailable); and
c) Neither the fair value of the machine given up nor the
machine acquired is available.
solution
a) Fair value Assumption

Machine No. 1 30,000 30,000

Machine No. 2 Unavail 45,000

Machine given up cost

45,000-30,000=15,000

Debt Credit

Dep 15,000

M1 15000

Machine 2 45,000

Machine 1 30,000

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Other Income 15000

b) Fair value Assumption

Machine No. 1 Unavail 45000

Machine No. 2 30,000 30000

Debt Credit

M2 30,000

Other Loss 15,000

M1 45,000

c) Fair value Assumption

Machine No. 1 Unavail 45000

Machine No. 2 Unavail 45000

Debt Credit

M2 45,000

M1 45,000

Q. 6 A customer purchases an item, on 1 April 2011, to be

paid for over a period of 3 years as follows:
On 31 March 2012 Rs. 40,000
On 31 March 2013 Rs. 50,000
On 31 March 2014 Rs. 29,700
Assume that the present value of these payments (using a
discount rate of 10%) amounts to 100,000.
All the recognition criteria are met. The company’s
year-end is 31 December.
Required: Show the related journal entries for the year
ended 31 December 2012 to 2014.

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Solution

Purchases item on 1 April 2011.

Period 3 year

Discount rate 10%

Amount 100,000

100,000/100*10=10,000

Passed the journal entries for the year ended 2012to 2014

Journal debit credit

1 april 2011

Debtor 100,000

Income sale 100,000

Sale revenue recognize at the begning of 2011

31 march

Debtors 7,500

Interest income 7,500

Intrest revenue recognized over 2011.total amount (april to dec) 9month / year

10,000*9/12=(7,500)

2012 journal

( 31march 2012)

Debit credit

Bank 40,000

Debtors 40,000

1st installment in 2012

31 December 2012

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Debtors 7,750

Intrest income 7,750

Intrest revenue recognize over the period of 2012 (amount*total year/one year period
+intrest *month/year) (10,000*3/12+7,000*9/12)=(7,750)

Debit credit

2013journal 31 march

Bank 50,000

Debtors 50,000

2nd installment in 2013

31dec 2013

Debtors 3,775

Intrest income 3,775

7000*3/12+2700*9/12

Intrest revenue recognized over the period of 2013

2014 journal

31march2014

Bank 29,700

Debtors 29,700

3rd installment in 2014

31december 2014

Debtors 675

Intrest income 675

Intrest revenue recognized over the period of 2014

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2700*3/12(675)

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