ACCT2005 Financial Accounting for Annual Report of ABC Limited

Case Study for Annual Report Assignment

The following details are taken from the accounting records of the company as at 30 June 2017:

a. Includedin the amount of ‘Expenses’ in the trial balance provided above are:

• Costof sales $21,490,000
• $9,430,000for employee This includes annual leave expense of $783,000. The balance of the provision for annual leave at 30 June 2016 was $1,230,000.
• Generaloperating expenses of $4,560,000.
• Extraordinaryexpense of $2,400,000 for strategic In July 2016 the directors decided that it would be useful to have external parties undertake a review of company operations, procedures and policies and to provide some suggestions to improve profitability. Under this strategic review:

• • $1,150,000 was paid to the company auditors to conduct an analysis ofvarious aspects of the 
  • $850,000 was paid to FutureInc Ltd to prepare a report on future trends inthe company’s 
  • $400,000was paid to LookForTomorrow Ltd to make suggestions on improvements to the company’s store fronts and store layouts to attract more customers and sales. 
• Interestpaid of $267,000.
• $1,500gift to an employee of the company who competed in the Olympic Games in Rio in 2016 to help with their travel 
• Depreciationexpense for shop furniture and fittings $747,000.
• Depreciationexpense for equipment $487,000.
• Depreciation expensefor buildings of $340,000.
• Warranty expense of $1,290,000. The balance of the provision for warranty at 30June 2016 was $690,000. Of the balance of this provision at 30 June 2017 65% is expected to be used by 30 June 
• Doubtfuldebts expense for the period of $1,492,000.
• $815,000payment to auditors for audit of company 
• Thecarrying amount of the shop furniture and fittings sold in March 2017 of $740,000. (This is comprised of cost of $2,250,000 less accumulated depreciation to date of sale of $1,510,000).

(Note: This does not detail all expenses included in the total of ‘Expenses’ in the trial balance above. You should classify any remaining expenses as ‘other’ or ‘miscellaneous’) 

• Interestearned during the period of $1,250 from cash held at Interest is accrued and paid to the company on 31 December and 30 June each year.
• Rentrevenue of $83,400 from building space rented out to other The balance of prepaid rent in the trial balance relates to this.
• Proceeds from the sale of non-current assets. On 1 March 2017 the companyreceived $865,000 from the sale of shop furniture and fittings that were replaced as part of the upgrade recommended by Look For Tomorrow 

• Customers could return within 1 week of purchase for a refund without anyreason – providing the returned product was in ‘new’
• The warranty period for these products would be extended from 1 year to 2

This has resulted in a 500% reduction in sales returns but an increase of more than 20% in warranty expenses due to the extension of warranty period.

• 2,500,000 fully paid ordinary shares at an issue price of $1.10 issued on 1September Share issue costs paid in relation to this issue were $23,000.
• 1,500,000 fully paid ordinary shares at an issue price of $1.60 issued on 1January 2016. The terms of the issue required $1.00 to be paid on application, with the remaining $0.60 due when called. A first and final call was made on 10 September 2016. All call monies were received by 1 October. Share issue costs paid in relation to this issue were $16,000.

Unless otherwise indicated the following events/transactions are not reflected in the trial balance above. You will need to make appropriate adjustments if required. 

• Nobalance date adjustment had been made in relation to interest accrued on the loan from WBank.
• The company uses diminishing balance method to depreciate its equipment anddepreciation for previous periods has been calculated using diminishing balance However the chief accountant has noticed that the depreciation expense for this year (i.e. for year ending 30 June 2017) in relation to equipment had been calculated by the assistant accountant at straight line on cost using an incorrect percentage/rate. This has resulted in the depreciation expense (included in the trial balance figures) in relation to equipment being overstated by $260,000.

You should assume that the company is a reporting entity and that the date the annual report (including the financial report) is authorised for issue is the 21 August 2017.

Statement of equity:

Summary of significant accounting policies-

The consolidated financial statement of ABC limited is prepared in accordance with Australian Accounting standard Borad101. The standard is in accordance with International Financial reporting standard that is issued by the international standard board. At the end of the financial year 2016, the consolidated financial statement of ABC limited is prepared in accordance with the requirement of

• Australian Accounting standard board 101
• Is prepared as a going concern

In accordance with the AASB 101, the preparation is not applicable to content and structure condensed in the interim financial statements. ABC limited is a profit making entity and the terminology is suitable to be used. There are three different paragraphs that have been referred with and statements bare pre3eparesd in accordance with the AASB 101.

In Paragraph 54 of AAASB 101, the items are included that are sufficiently different in nature or function. According to this paragraph, there are several items that have to be included in the financial statements. The items are deferred tax assets and liabilities along with the current tax assets and liabilities as defined by AASB 112 of the income tax. Many other items are also included in the preparation of balance sheet. Income statement has been prepared in accordance with the paragraph 81(A) to 82. In addition to the paragraph 85 requirement.

In addition to the requirement of Australian accounting standard in preparation of profit and loss statement, it has been prepared by referring to the AASB 101. The statement have been prepared in accordance with paragraph 81 (A) and 82.It is required to include tax expense, revenue and finance cost. For the relevanvcce3 of understanding the financial position of the company, it is required to present subtotals, additional line items and headings in the income statement.

Paragraph 106 of AASB 101 has been used in preparing the statement of changes in equity. As per the requirement of paragraph 10, the statements of changes in equity have been prepared. The items used in preparing the statement of changes in equity of ABC limited involve the items of comprehensive income. In accordance with AASB 108, each component of equity is recognized as per AASB 102.

Notes to Financial statements:

Cash and cash equivalent- Cash and cash equivalent are subjected to some significant changes risk of change in value and they comprise of cash at bank, cash in hand and all short-term deposits that are readily converted into amount of cash. The component has been mentioned in accordance with paragraph 54.

Financial guarantee- Financial guarantee are recognized as financial liability and as in accordance with paragraph 54 of AASB 101. Valuation of financial lioability is done at subsequently higher price and at fair value.

Depreciation- Depreciation of assets of ABC limited is calculated over the estimated useful life of assets. With respected to internally constructed assets, depreciation are calculated from the date of acquisition. Under finance lease, ABC limited will obtain the life of assets. Useful lives of assests are revalued annually. It has been mentioned in accordance with the Para 81(A)(c).

Finance costs-Finance cost is calculated using the effective interest method and is comprised of interest that is payable on borrowing. The interest rate that is applicable to ABC limited is used for calculating the cost of borrowing. Note 8 of the financial statement depict finance cost and it is valuated according to the paragraph 82 of AASB 101.

Provision on legal claim- This comprised of cost that is required in addressing the potential legal claim of ABC limited. This is the component of income statement that is mentioned accordance with AASB 101 in paragraph 81(1)(c). Some of the other components are represented in the income statement under same paragraph in the note 5, note 4 and note 6.

Tax expense- ABC limited is paying expected amount of tax that is payable in the year 2016. At the balance sheet, tax amount6 is substantially enacted and the tax payable in previous year is adjusted to tax amount of that year. The amount of tax that is payable is mentioned and depicted according to the paragraph 82 of AASB 101.

Post balance date events- There would be material impact of date of any other report on consolidated financial statements.

Notes : 

1

Declaration by directors:

ABC limited in accordance with the directors’ resolution declares that:

• Financial report of ABC limited complies with the International Financial reporting standard.
• Australian accounting standards that are applicable aligns with the financial statements components.
• Report of management as per the directors’ best knowledge includes financial position and business development and fair value performance.
• A true and fair view of liabilities, assets and financial position, profit and loss statement is clearly depicted in the financial statements.

Director report:

The business portfolio of ABC limited is generating cash over time and the main reasons are its strong corporate governance principles complying with ASX principles. The main focus of company is managing the cash flow and reduces the cost. It is sought by ABC limited for maintaining strong balance sheet so that they provide the shareholders with strong return.

A net total revenue of $ 522822400 is generated by the company in the financial year 2016. Company ha s made payment of $ 74000 to the suppliers and the amount payable by company as an employee expense stood at $ 8647000. The financial statement of ABC limited is clearly depicting dividend payment of amount $ 412500 to the shareholders. Retained earnings of ABC limited in financial year 2016 at $ 9101050. $ 4600000 is the amounts that have been transferred to general reserves. The value of paid up share capital of ABC limited as on 30^th June, 2016 stood at 4250000. Compared to previous year, the amounts of retained earnings have increased.

One of the important aspects for the business operation is the well being of economic. Operational activities are carried out by organization by committing to strong fundamentals and good prospects. In order to provide satisfactory return to the shareholder4s of the company, ABC limited should need to put some efforts. With the help of financial discipline and managing the diversified portfolio in an exceptional way, organization will meet its primary objective of providing shareholders with the satisfactory return. Each division of organization is overseen by divisional board of directors. One of the key focuses of organization development of operational management and strong management capability. The annual report of the organization also outlines the risks and operations in addition to summarizing the prospects. In is required by users of financial statement to read such review along with the financial statements.

Relevant changes in state of affairs of ABC limited:

• As compared to the revenue generated in the previous year of $ 4300000, reve3nue generated from ordinary activities stood at $ 52822400.
• The value of retained earnings has increase as compared to previous year and the amount stands at $ 9097165.
• Totals assets valuation has also increased to $ 28243320 compared to value in previous year of $ 8094209.
• Shareholder4s have received higher amount of dividend per share in this year at the rate of $ 2.54 per share.
• Amount of profit also includes tax impairment and the value is up from previous year at $ 5368 615.

Auditor’s indemnification:

Auditor of company is KPMG and in terms of engagement with the auditors, it has been agreed by the organization several liabilities to the parties concerned attributing from the audit engagement. Nonetheless, any act resulting from the activities of KPMG would not be extended to indemnity.

Corporate governance:

In an attempt to recognize the needs of corporate behavior and standards of accountability, the directors of ABC limited have complied with the recommendations and principles of corporate governance as listed on Australian stock exchange.

Environmental performance and regulations:

There are various authorities of Australia that regulates the activities of organization that bare subjected to environmental regulation. Some of the activities that are regulated by providing the licenses are hazardous material, carrying of waste and water, disposal of waste and other environmental concerns. During its year of operation, organization has not breached any conditions of generating licenses.

Auditors report:

Reporting of the financial results:

The accompanying financial report of ABC limited is audited by KPMG and the financial statements comprise of consolidated income statement, statement of equity and statement of financial position or balance sheet dated 30^th June, 2016. The report comprise of declaration by directors in addition to explanatory information and summarizing and examination of significant accounting policies of organization.

Responsibility of auditors:

Expressing opinion on the financial statements of the organization is the responsibility of auditors. Auditing of the statements of ABC limited by KPMG has been conducted in accordance with the Australian Accounting standards. Auditors are required to obtain reasonable assurance regarding the financial statements of organization that it is free from any material misstatements. Evidence of audit relating to the amount depicted in the financial report and the disclosure presented in conducting the audit has been obtained by performing several auditing procedures. Based on the selected procedures, the auditors have formed their judgment. Assessment of the financial risk of the statements and the data presented that might result in occurrence of fraud and error is the main objective of carrying out auditing of the organization. Regarding the internal control ineffectiveness of the organization, an auditor does not make any opinion. However, internal control is considered for assessment of risks that is regarded significant for financial report preparation and designing the audit procedures.

The financial statements of ABC limited has been audited by auditors and this involve comprehensive income statement, balance sheet and statement of changes in equity for the year ended 2016. Moreover, auditors have audited the declaration made by directors and the remuneration report.

While conducting the audit, several tasks has been done such as evaluating the appropriateness of the procedures of audit and reasonable of the accounting estimates. The overall presentation of financial report of ABC limited has also been evaluated by auditors. It is assessed that auditors for providing the audit opinion have found sufficient and appropriate audit evidence.

Assessing material misstatement risks:

The auditors have arrived at audit opinion by consideration the changes that have been witnesses on operations carried out on year to year.

Valuation of assets:

The values of portfolio of assets have been affected by change in the price and market volatility. The assessment of estimated future cash flow of cash generating unit of the assets is used for revaluating the value of property, plant and equipment along with intangible assets. Value of property, equipment and plant at end of financial year 2016 stood at $ 2284000. One of the key area of judgment is cash generating unit. It is required to apply some key inputs for arriving at relevant judgment as determining the future cash flow is inherently difficult. The value of materiality of audit report of ABC limited stood at 4 AUS 8 million.

Following key procedures have been performed by auditors:

1. Evaluation of the forecasted price of assets impairment of organization is done by comparing the input with data available in the market and benchmarks that are externally available.
2. Testing of the key controls have been performed for asset valuation of organization and several terms and items involved in impairment and reversal of assets are also involved.
3. Auditors have compared the prices of commodity, inflation rates along with risks by making use of authentic and reliable data available in the market.
4. Within the business model, the competency and objectivity of experts responsible for producing reserve statement have been evaluated. Consideration of personal qualification and experience is done for making such evaluation.

Opinion of auditors:

According to the opinion of KPMG, the financial report of ABC limited is prepared in accordance with Australian Accounting standard board (AASB 101) and followings are included:

• Compliance with the Australian Accounting boards 101.
• ABC limited financial position represents a true and fair view as on 30^thJune, 2016.

Reference:

Giles, R., 2014. Finance & Accounting New 4th Edition. Lulu. com.

Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.