ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Analysis
Profit margin on sales = Net income ÷ Net sales
Integral approach:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Net income (Loss)
$100,000
$187,500
$687,500
$150,000
Net sales
480,000
Discrete approach:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$(74,000)
$97,500
$1,077,500
$24,000
Principles
The concept underlying the integral approach is that an individual quarter
is part of a larger time interval about which we have more information. In
this problem, for example, we know that sales are seasonal. So, we know
PROFESSIONAL RESEARCH
(a) According to FASB ASC 235–10–50:
50-3 Disclosure of accounting policies shall identify and describe the
accounting principles followed by the entity and the methods of
applying those principles that materially affect the determination of
(b) According to FASB ASC 235-10–50.
Examples of Disclosures
50-4 Examples of disclosures by an entity commonly required with
respect to accounting policies would include, among others, those
relating to the following:
a. Basis of consolidation
PROFESSIONAL SIMULATION
Note: This assignment is available on the Kieso website.
Analysis
The current-ratio increase is a favorable indication as to solvency, but
alone tells little about the going-concern prospects of the client. From this
The increase in the ratio of property, plant, and equipment to stockholders’
equity cannot alone tell anything about either solvency or going-concern
prospects. There is no way to know the amount and direction of the
changes in the two items. If assets increased, one must know whether the
new assets are immediately productive or need further development. A
reduction in stockholders’ equity at this point would cause much concern
for the creditors of this client.
PROFESSIONAL SIMULATION (Continued)
The 32–percent increase in earnings per common share, which is identical to
the percentage increase in net income, is an indication that there has probably
been no change in the number of shares of common stock outstanding.
This in turn indicates that financing was not obtained through the issuance
of common stock. It is not possible to reach conclusions about solvency and
going-concern prospects without additional information about the nature
and extent of financing.
Explanation
The creditors will probably ask for the information listed below to overcome
the limitations inherent in the ratios discussed above and to obtain more
evidence to support the conclusions drawn from them.
1. Additional ratios and other comparative data may be requested. They
are likely to include such items as the following:
2. The creditors will probably want explanations for the changes in ratios
during the current year. The client should be prepared to respond
to questions about the age and collectibility of the receivables, the
PROFESSIONAL SIMULATION (Continued)
3. The creditors may also ask for ratios and related information for
several recent years. These data may demonstrate trends and can be
compared to data for other companies and for the industry.
Although a quick evaluation of a reporting entity can be made using only a
IFRS CONCEPTS AND APPLICATION
IFRS24-1
The IFRS standards addressing related party disclosures are: IAS 1 (“First
IFRS24-2
There are two types of subsequent events:
(1) Those which affect the financial statements directly and should
be recognized therein through appropriate adjustments.
(2) Those which do not affect the financial statements directly and
(a) Probably adjust the financial statements directly.
(b) Disclosure.
IFRS24-3
(1) Net income will decrease by $10,000 ($160,000 –$170,000) as a result
(2) The flood loss ($80,000) is an event that provides evidence about
conditions that did not exist at the statement of financial position date
IFRS24-4
(a) The issuance of ordinary shares is an example of a subsequent event
which provides evidence about conditions that did not exist at the
(b) The changed estimate of income taxes payable is an example of a
subsequent event which provides additional evidence about conditions
that existed at the statement of financial position date. The income tax
IFRS24-5
1.
(a)
4.
(b)
7.
(c)
10.
(c)
2.
(c)
5.
(c)
8.
(c)
11.
(a)
IFRS24-6
Interim reports are unaudited financial statements normally prepared four
times a year. A complete set of interim financial statements is often not
provided because this information is not deemed crucial over a short period
of time; the income figure has much more relevance to interim reporting.
The accounting problems related to the presentation of interim data are as
follows:
IFRS24-7
A company records losses from inventory write-downs in an interim period
IFRS24-8
While U.S. GAAP has a preference for the integral approach, IFRS leans
IFRS24-9
(a) 1. The company should report its quarterly results as if each interim
period is discrete.
IFRS24-9 (Continued)
Sales revenue $60,000,000
Cost of goods sold 36,000,000
(b) The financial information to be disclosed to its shareholders in its
quarterly reports as a minimum include:
1. Statement that the same accounting policies and methods of
computation are followed in the interim financial statements as
compared with the most recent annual financial statements or, if
4. The nature and amount of changes in accounting policies and
estimates of amounts previously reported.
5. Issuances, repurchases, and repayments of debt and equity
securities.
IFRS24-9 (Continued)
10. Other material events subsequent to the end of the interim period
that have not been reflected in the financial statements for the
interim period.
IFRS24–10
(a) According to IAS 1, paragraph 117, “An entity shall disclose in the
summary of significant accounting policies:
(b) A few examples taken from IAS 1:
• Paragraph 118: It is important for an entity to inform users of the
measurement basis or bases used in the financial statements.
• Paragraph 124: Some of the disclosures made in accordance
with paragraph 122 are required by other IFRSs. For example,
IAS 27 requires an entity to disclose the reasons why the entity’s
ownership interest does not constitute control, in respect of an
investee that is not a subsidiary even though more than half of
IFRS24–11
(a) The specific items M&S discusses in Note 1 are basis of preparation;
accounting convention; basis of consolidation; subsidiaries; revenue;
(b) M&S reported segments for its UK and International Operations. UK was