TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 13.1 (Time 20–25 minutes)
Purpose—to provide the student with the opportunity to define a liability, to distinguish between current
CA 13.2 (Time 15–20 minutes)
Purpose—to provide the student with three situations that require the application of judgment about the
CA 13.3 (Time 30–40 minutes)
Purpose—to provide the student with a comprehensive case covering refinancing of short-term debt.
CA 13.4 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to comment on the proper treatment in the
CA 13.5 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to specify the conditions by which a contingent
CA 13.6 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to discuss how product warranty costs and the fact
that a company is being sued should be reported.
CA 13.7 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to examine the ethical issues related to estimates
for bad debts and warranty obligations.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 13.1
(a) A liability is defined as a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources embodying
economic benefits. In other words, it is an obligation to transfer some type of resource in the future
as a result of a past transaction.
(d) Theoretically, liabilities should be measured by the present value of the future outlay of cash
required to liquidate them. But in practice, current liabilities are usually recorded in accounting
records and reported in financial statements at their maturity value. Because of the short time
(f) The item compensation to employees might include:
1. Since the notes payable are due in less than one year from the reporting date, they would
generally be reported as a current liability. The only situation in which this short-term obligation
could possibly be excluded from current liabilities is if Rodriguez Corp. intends to refinance it. For
those notes to qualify for exclusion from current liabilities, the company must meet the following
criteria:
(1) It must intend to refinance the obligation on a long-term basis, and
CA 13.2 (Continued)
2. Generally, deposits from customers would be classified as a current liability. However, the
classification of deposits as current or non-current depends on the time involved between the date
3. Salaries payable is an accrued liability which in almost all circumstances would be reported as a
CA 13.3
(a) No. IFRS indicate that refinancing a short–term obligation on a long–term basis also requires that a
company have an unconditional right as of the reporting date to defer settlement of the liability for at
least 12 months after the reporting date.
CA 13.4
Because the casualty occurred subsequent to the reporting date, it meets the criteria of a contingent
liability; that is, an asset had not been impaired or a liability incurred at the reporting date. Contingent
liabilities are not be accrued by a charge to expense due to the explosion. However, because it had
CA 13.5
(a) Three conditions must exist before a provision is recorded:
1. A company has present obligation (legal or constructive) as a result of a past event.
(b) When some amount within the range appears at the time to be a better estimate than any other
amount within the range, that amount is accrued. When no amount within the range is a better
(c) The following disclosure in the notes is required:
CA 13.6
Part 1. For Product Grey, the estimated product warranty costs should be accrued by a charge to
expense and a credit to a liability because the following conditions were met:
1. A company has a present obligation (legal or constructive) as a result of a past event;
2. It is probable that an outflow of resources embodying economic benefits will be required to
Part 2. The probable judgment (£1,000,000) should be accrued by a charge to expense and a credit to
a liability because the following conditions were met.
1. A company has a present obligation (legal or constructive) as a result of a past event.
Constantine should disclose in its financial statements or notes the following:
The amount of the suit (£4,000,000).
CA 13.7
(a) No, Hamilton should not follow his owner’s directive if his (Hamilton’s) original estimates are
reasonable.
(b) Rich Clothing Store benefits in lower rental expense. The Dotson Company is harmed because the
FINANCIAL REPORTING PROBLEM
(a) M&S’s short-term borrowings were £297.5 million at April 2, 2016.
2016
£m
Current
(b) 1. Working capital = Current assets less current liabilities.
While M&S’s working capital and current ratios are low, this may not
indicate a weak liquidity position. Many large companies carry relatively
FINANCIAL REPORTING PROBLEM (Continued)
(c) 26 Contingencies and commitments
A. Capital commitments
2016
£m
Software capital commitments
Commitments in respect of properties in the course of
146.3
B. Other material contracts
In the event of a material change in the trading arrangements with
C. Commitments under operating leases
The Group leases various stores, offices, warehouses and equipment
2016
Total future minimum rentals payable under non–cancellable
operating leases are as follows:
Within one year
311.3
Later than one year and not later than five years
1,108.4
Later than five years and not later than ten years
1,099.4
Later than ten years and not later than 15 years
542.8
Later than 15 years and not later than 20 years
Later than 20 years and not later than 25 years
Later than 25 years
970.3
Total
4,609.9
COMPARATIVE ANALYSIS CASE
(a) The working capital position of the two companies is as follows:
adidas
Current assets ……………………………….. € 7,497
COMPARATIVE ANALYSIS CASE (Continued)
(b) The overall liquidity of both companies is good as indicated from the
ratio analysis provided below (all computations in millions). Note that
Puma’s cash coverage ratios are negative. This is due to a build up
inventories in 2015, which can be followed using the inventory
turnover ratio.
adidas
Puma
Current cash debt
€1,090
= .22
€–37.1
= <0
coverage
€5,364 + €4,378
€880.0 + €822.6
2
2
Cash debt
€–37.1
= <0
coverage
2
= 1.40
= 1.91
€880.0
Acid-test
ratio
Accounts receivables
€16,915
= 8.47
€3,387.4
= 7.27
turnover
€2,049 + €1,946
€483.1 + €449.2
2
2
2
COMPARATIVE ANALYSIS CASE (Continued)
(c) adidas discusses its contingencies in the following notes:
38 Commitments and contingencies
Dec. 31, 2015
Dec. 31, 2014
Within 1 year
982
836
Between 1 and 5 years
2,593
2,590
After 5 years
2,204
1,766
Total
5,779
Litigation and other legal risks
The Group is currently engaged in various lawsuits resulting from the
normal course of business, mainly in connection with distribution
agreements as well as intellectual property rights. The risks regarding
these lawsuits are covered by provisions when a reliable estimate of the
amount of the obligation can be made / SEE NOTE 20. In the opinion of
COMPARATIVE ANALYSIS CASE (Continued)
not have any material influence on the assets, liabilities, financial
position and profit or loss of the Group.
28 Leasing and service arrangements
Operating leases
The Group leases primarily retail stores as well as offices, warehouses
Future minimum lease payments for minimum lease durations on a
nominal basis are as follows:
Minimum lease payments for operating leases (€ in millions)
Dec. 31, 2015
Dec. 31, 2014
Within 1 year
516
476
Between 1 and 5 years
959
After 5 years
Total
The Group also leases various premises for administration and
warehousing which are classified as finance leases.
The net carrying amount of these assets of €8 million and
COMPARATIVE ANALYSIS CASE (Continued)
Minimum lease payments for finance leases in 2015 include land
leases with a remaining lease term of 97 years. The minimum lease
Minimum lease payments for finance leases (€ in millions)
Dec. 31, 2015
Dec. 31, 2014
Lease payments falling due:
Within 1 year
3
3
Between 1 and 5 years
3
5
After 5 years
12
11
Total minimum lease payments
There of falling due:
Within 1 year
3
3
Between 1 and 5 years
3
4
After 5 years
3
3
Service arrangements
The Group has outsourced certain logistics and information technology
functions, for which it has entered into long-term contracts. Financial
commitments under these contracts mature as follows:
Financial commitments for service arrangements (€ in millions]
Dec. 31, 2015
Dec. 31, 2014
Within 1 year
Between 1 and 5 years