The regulatory environment and financial reporting

The regulatory environment and financial reporting

You are employed in a large accounting firm which specialises in preparing general purpose financial reports for large companies that are listed on the Australian Securities Exchange (ASX). As the training manager, one of your key tasks is to prepare a regular newsletter for staff involved in the preparation of the above financial reports. The purpose of the newsletter is to keep staff updated on the latest financial reporting news, alerting staff of changes and developments that may impact their work, and provide enough information to staff to satisfy the following:

  • For staff to understand the nature of the news / change / development and its potential impact (so staff can decide whether they need to investigate further given the nature of their own work);
  • Provide directions to staff of where they can access further information on the news / change / development if they wish to (including website links where appropriate).

Required:Prepare a 2 page newsletter that identifies and summarises changes / developments and news in the financial reporting environment for the period from 1 April 2019 to 31 July 2019.

Question 2 

Financial statement presentation

Snow Gear Ltd, a manufacturing company, commenced operations on 1 July 2018. You are the company’s financial accountant.

The trial balance for the year ended 30 June 2019 has been prepared as follows:

Snow Gear Ltd 
Trial balance as at 30 June 2019
DR ($)CR ($)
Cost of goods sold860,000
Advertising expense123,000
Salaries and wages – administration staff50,000
Salaries and wages – selling and distribution staff180,000
Annual leave expense – administration staff3,000
Annual leave expense – selling and distribution staff16,000
Doubtful debts expense4,000
Depreciation expense90,000
Interest expense32,000
Other expenses36,000
Warranty expense31,000
Income tax expense375,000
Cash on hand41,000
Cash management account200,000
Trade debtors185,300
Goodwill50,000
Raw material inventory206,000
Finished goods inventory456,000
Land500,000
Buildings650,000
Accumulated depreciation – buildings20,000
Plant and equipment900,000
Accumulated depreciation – plant and equipment70,000
Patents100,000
Deferred tax asset13,000
Investment property368,000
Sales revenue2,650,000
Interest income2,500
Rental income16,000
Bank loan300,000
Trade creditors91,200
Deferred tax liability8,000
Allowance for doubtful debts2,600
Provision for annual leave19,000
Provision for warranty28,000
Accrued expenses82,000
Current tax liability380,000
Retained earnings, 1 July 20180
Dividends paid200,000
Share capital200,000
5,669,3005,669,300

Additional information:

  • In relation to ‘other expenses’ in the trial balance, 90% relates to administration, and 10% relates to selling and distribution. In relation to ‘depreciation expense’, 80% relates to selling and distribution, and 20% relates to administration.
  • Raw materials used during the year totaled $1,316,000.
  • The bank loan is repayable over 10 years ($30,000 principal each year).
  • The provision for annual leave is payable within 1 year.
  • The provision for warranty is in respect of 12-month warranties given on all products sold.
  • Share capital consists of 1,000,000 ordinary shares, fully paid to $2.00 each.
  • Snow Gear Ltd is a reporting entity.
  • In relation to the statement of financial position, where AASB 101 requires entities to disclose further sub-classifications of the minimum line items on the face of the statement or in the notes, the directors of Snow Gear Ltd want to report only the minimum line items on the face of the statement, and leave the sub-classifications to be disclosed in the notes.

Required:

  1. Prepare a memo to the directors, explaining the methods available for classifying expenses on the statement of profit or loss and other comprehensive income. The directors would also like to know which method will result in the highest profit being reported to shareholders. Finally, also advise the directors of any factors that need to be considered when selecting between the available methods. Provide references to key paragraphs in the accounting standards.
  2. To illustrate the differences in the methods discussed above, prepare the statement of profit or loss and other comprehensive income using each of the available methods, for the year ended 30 June 2019, in accordance with AASB 101. Use the single statement format. Show all workings (for example, to show how amounts in the financial statements have been calculated).
  3. Prepare the statement of financial position of Snow Gear Ltd as at 30 June 2019, in accordance with AASB 101. Notes and comparative figures are not required. Show all workings (for example, to show how amounts in the financial statements have been calculated).

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