Chapter 3 The dictionary defines the term provision

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IFRS Case 3–4

Requirement 1

A major difference is the format of Vodafone’s balance sheets (statements of

financial position). Under U.S. GAAP, we present current assets and liabilities before

noncurrent assets and liabilities. IAS No. 1 doesn’t prescribe the format of the balance

sheet, but balance sheets prepared using IFRS often report noncurrent items first.

Requirement 2

The dictionary defines the term provision as “a measure taken beforehand to deal

with a need or contingency.” This indicates that Vodafone’s “provisions” liabilities

Judgment Case 3–5

DEFICIENCIES:

1. Accounts receivable—if material, the allowance for uncollectible accounts

should be disclosed.

2. Note receivable—only the interest receivable of $3,000 should be classified as

a current asset. The $50,000 note receivable should be classified in the

6. Land—should be classified in the noncurrent investments category.

7. Equipment, net—should be classified in the property, plant, and equipment

category. Original cost should be disclosed along with the accumulated

depreciation to arrive at the net amount. Also, the method used to compute

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Judgment Case 3–6

Accounts receivable, net—disclosure on the face of the statement of the

allowance for uncollectible accounts, if material.

Inventories—disclosure in Accounting Policies note of the cost method used.

Also, for a manufacturer, note disclosure of the breakout of inventory into raw

Real World Case 3–7

Requirement 1

The asset classifications are (1) Current assets, (2) Property and equipment, (3)

Property under capital leases, (4) Goodwill, and (5) Other assets and deferred charges.

Requirement 2

a. Total assets = $204,751 million

Requirement 3

Walmart’s largest current asset is inventories. Walmart’s largest current liability

is accounts payable.

Requirement 4

Requirement 5

a. The company values inventories at the lower of cost or market

determined primarily by the retail method of accounting, using the

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Judgment Case 3–8

1. This is a significant event occurring after the end of the fiscal year but prior to the

issuance of the financial statements. Details of the merger should be disclosed in

Research Case 3–9

Requirement 1

Generally accepted accounting principles require the disclosure of related-party

Requirement 2

When related-party transactions occur, companies must disclose the nature of the

Requirement 3

The related-party transactions disclosure note describes transactions with limited

Requirement 4

The potential problem with related-party transactions is that their economic

substance may differ from their legal form. One of Enron’s disclosed transactions

involved the sale of dark fiber inventory to the related party in exchange for $30

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Real World Case 3–10

Requirement 3

a. Note 21 reports the following subsequent event:

On February 5, 2014, the Company entered into agreements with Green

Mountain Coffee Roasters, Inc. (“GMCR“), providing for the development and

b. The company’s auditor was Ernst and Young LLP. The firm rendered an

unqualified opinion on the company’s financial statements.

Requirement 4

a. Muhtar Kent is listed as Chairman of the Board and Chief Executive Officer.

Judgment Case 3–11

Comparative income for the first year of operations resulting from the two

alternative financing choices is illustrated below.

DEBT versus EQUITY

Comparative Income for Two Financing Alternatives

Alternative 1 Alternative 2

Income before interest and taxes $5,000,000 $5,000,000

Less: Interest -0- (1,600,000)*

We can see that Alternative 1 generated a higher net income. However, the

return on shareholders’ investment is actually higher for Alternative 2.

Alternative 2 generated a higher return for each dollar invested by shareholders.

This was made possible because the corporation was able to generate income on

borrowed funds at a higher rate than the cost of the debt. This represents financial

Analysis Case 3–12

The objective of this case is to motivate students to obtain hands-on familiarity

with an actual annual report. You may wish to provide students with multiple copies

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of the same annual report and compare responses. Another approach is to divide the

class into teams who evaluate reports from a group perspective.

Analysis Case 3–13

The objectives of this case are to motivate students to obtain hands-on familiarity

Analysis Case 3–14

Requirement 1

The balance sheet includes six asset classifications: Current assets; Property, and

Requirement 2

These assets are shown as current because the company intends to convert them

to cash in the next year or operating cycle.

Requirement 3

Accrued payroll, bonus, and employee benefits represent cash owed to employees

Requirement 4

Disclosure notes explain or elaborate upon the data presented in the financial

financial position, or cash flows of the company should be included.

Requirement 5

Straight-line.

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Case 3–14 (concluded)

Requirement 6

The company did not report subsequent events or related party transactions with

Banfield as note disclosure in the financial statements. However, in the Management

Analysis Case 3–15

Requirement 1

Segment disclosures assist in analyzing and understanding financial statements

Requirement 2

An operating segment is a component of an enterprise:

1. That engages in business activities from which it may earn revenues and incur

Requirement 3

For areas determined to be reportable operating segments, the following

disclosures are required:

1. General information about the operating segment.

Requirement 4

If Levens Co. prepares its segment disclosure according to IFRS, in addition to

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Ethics Case 3–16

Discussion should include these elements.

Facts:

The impact of following the controller’s suggestions would be to obscure

financial information by aggregating the financial data of geographic operations and

investments. Aggregation of data potentially hides the risks associated with North

Ethical Dilemma:

Should you, as staff accountant, challenge the controller’s combination of

Who is affected?

You, as a staff accountant

Controller and other managers

Who benefits and who is injured:

Company management may benefit from aggregating the data by attracting more

investors to their company and obtaining more loans from creditors than would be the

United States, some feel that those countries and their citizens are at a disadadvantage.

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Air France–KLM Case

Under U.S. GAAP, we present current assets and liabilities before noncurrent

assets and liabilities. IAS No. 1 doesn’t prescribe the format of the balance