Corporate Finance : Utilisation of Financial Statements

Therefore the crux of application of this standard is to present a financial statement in a format that it can be used by other organisation for comparison purpose and within the entity for the same purpose. The standard is applicable to each and every organisation which is required to present financial statements in agreement with the corporate act and by the entity whose financial statement are held out for the general purpose financial statement.

Part I:

In the first part, the case of the consolidation of the wholly owned subsidiary is given in which Lisa Ltd has acquired Kam Ltd. with cash consideration. As per AASB 101, the financial reports of annual accounts of an organisation includes a statement of financial position at the end of the year, a statement of profit & loss and other comprehensive income for the period flow statement for the period. It comprises of a statement which presents the changes in equity for the period and the notes to accounts are comprised with it including an abstract of considerable accounting policies on the basis of which accounts have been formed.

The entity after formation of books of account has to disclose in the annual report that the financial statement prepared by the management concludes that they present fairly the financial position of the entity. It has also to be concluded by them that it has been compiled with Australian Accounting Standards unless the available variation is done only to present a financial statement in a fair manner (AASB, 2004).

The first part includes journal entries and abstract of consolidated balance sheet. All the working and calculations which are part of it are also presented here. The working of each account has been presented to show detail working of each account.

Journal Entries in the books of Lisa Ltd. For the period 1.1.2016 to 30.6.2016
Sr. No.	Date	Particular	Dr. Amount	Cr. Amount
1	1.1.2016	Fixtures & Fittings A/c Dr.	60000
		Inventory A/c Dr.	20000
		Patent A/c Dr.	90000
		To Legal Claim A/c		15000
		To Business Purchase A/c		88000
		To Capital Reserve A/c		113000
		[Being business of Kam Ltd. acquired by accepting its all asset and liabilities at fair value and the fair value of patent has been assumed nil.]
2	1.1.2016	Business Purchase A/c Dr.	88000
		To Cash		88000
		[Being business of Kam Ltd. Acquired against cash.]
3	30.6.2016	Cash A/c Dr.	18000
		To Inventory a/c		9000
		To Surplus on sale of inventory a/c		9000
		[Being 90% of inventory sold at fair value.(Refer working note.1)]
4	30.6.2016	Depreciation A/c Dr.	15000
		To Fixture & Fittings A/c		15000
		[Being depreciation charged on fixture and fittings. (Refer working note 2.)]
5	30.6.2016	Profit & loss a/c Dr.	15000
		To depreciation a/c		15000
		[Being depreciation transferred to profit and loss a/c.]
6	30.6.2016	Surplus on sale of inventory a/c Dr.	9000
		To Profit & Loss a/c		9000
		[Being profit received on sale of inventory transferred to profit and loss a/c.]
7	30.6.2016	Profit & Loss a/c Dr.	9000
		To Capital Reserve		9000
		[Being the profit earned on sale of inventory transferred to profit and loss a/c and then adjusted against capital reserve.](Refer working note 3.)

Working Note.1

Calculation of profit on sale of Inventory:

Sr. No.	Particular	Amount
1	Fair Value of Inventory sold (90% of Inventory)	18000
2	Carrying amount of Inventory	9000
3	Profit on sale (Fair value less carrying amount.)	9000

Note: As the profit is earned by Lisa Ltd. after the acquisition it will be transferred to Reserve and Surplus account.

Working Note.2

Calculation of depreciation on Fixtures & Fittings:

Sr. No.	Particular	Amount
1	Fair Value of Fixture & Fittings	60000
2	Years having beneficial life	2 years
3	Depreciation (Fair value/ no. of remaining years having benefit life)	30000
4	Depreciation for period of six month	15000

Working Note.3

Calculation of amount of profit adjusted with capital reserve:

Sr. No.	Particular	Amount
1	Profit from sale of inventory	9000
2	Amount adjusted against capital reserve	9000

Note: As the goods were sold before 30.06.2016 and the inventory was accounted at the fair value rather than the carrying cost. Therefore, at the time of consolidation, the whole profit was already accounted and hence now it will be adjusted against the capital reserve.

Working Note.4

Taxes:

Sr. No.	Particular	Amount
1	Profit from sale of inventory	9000
2	Depreciation on fixture & fittings for the period	15000
3	Profit/ (Loss) during the period	-6000

An Abstract of Consolidated Balance Sheet of Lisa Ltd.
as at 30 June 2016
		Notes	Amount of $
ASSETS
Financial Assets
Cash and cash equivalents	-
Trade and other receivables	-
Total financial assets	-
Non-Financial Assets
Land and buildings	-
Property, plant and equipment	-
Fixtures & Fittings	45,000
Intangibles	2	90,000
Inventories	3	2,000
Other	-
Total non-financial assets	1,37,000
Total Assets		1,37,000
LIABILITIES
Non-Current Liabilities
Long Term Loan	-
Other	-
Total	-
Current Liabilities
Bank Overdraft	4	70,000
Suppliers	-
Others	-
Total	70,000
Provisions
Employee provisions	-
Other	5	15,000
Total provisions		15,000
Total Liabilities			85,000
Net Assets		52,000
EQUITY
Parent Entity Interest
Contributed equity		-
Reserves	6	1,13,000
Deficit	7	(15,000)
Total parent entity interest		98,000
Total Equity			98,000

Notes to accounts:

1. Fixture & fittings:

Opening Value 60000

Depreciation (15000)

Written down value 45000

2. Intangible Assets :

Patent 90000

3. Inventory:

Closing Stock 2000

4. Bank Overdraft:

Balance as on 30.6.2016 70000

(As the balance of cash is negative, it has

been considered as bank overdraft )

5. Other:

Provision of Legal Claim 15000

6. Reserves:

Capital Reserve 113000

7. Deficit:

Profit & Loss account 15000

Working Note: 1

Fixture & Fittings

Date	Particular	Amount	Date	Particular	Amount
1.1.2016	To Business Purchase A/c	20000	30.6.2016	By Cash	18000
			By Balance b/d	2000
	Total	20000		Total	20000

Working Note: 2

Inventory A/c

Date	Particular	Amount	Date	Particular	Amount
1.1.2016	To Business Purchase A/c	20000	30.6.2016	By Cash	18000
			By Balance b/d	2000
	Total	20000		Total	20000

Working Note: 3

Bank Overdraft

Date	Particular	Amount	Date	Particular	Amount
1.1.2016	To Business Purchase A/c	88000	30.6.2016	By sale of Inventory	18000
			By Balance b/d	70000
	Total	88000		Total	88000

Working Note: 4

Legal Claim

Date	Particular	Amount	Date	Particular	Amount
30.6.2016	To Balance b/d	15000	1.1.2016	By Business PurchaseA/c	15000
	Total	15000		Total	15000

Working Note: 5

Capital Reserve

Date	Particular	Amount	Date	Particular	Amount
30.6.2016	To Balance b/d	113000	1.6.2016	By Balance b/d	113000
			(as created by purchase of Kam Ltd)
	Total	113000		Total	113000

Working Note: 6

Profit & Loss Account

Date	Particular	Amount	Date	Particular	Amount
30.6.2015	To Depreciation	15000	30.6.2015	By Surplus on sale of Inventory	9000
			By Balance b/d	6000
	Total	15000		Total	15000

Part II:

The following considerations have been taken while solving the below part:

According to the Australian Accounting Standards the basis which has to be applied while the formation of books of accounts by all the entities are going concern, accounting on an accrual basis and substance over form (Sheet, 2012). The format of the statement of profit or loss account and another comprehensive income is according to AASB 101.

The presentation of financial statement should be in accordance with other accounting standards which are relating to revenue such as AASB 118 relating to revenue. According to this standard, an entity requires accounting its revenue by measuring the consideration received or receivable on a fair basis (AASB, 2008). The income generated from activities which are not incidental to the functional activities of the organisation are included under the head other comprehensive income in profit or loss statement.

Statement of Profit or Loss and Other Comprehensive Income
		Note	In $'000s
Income
Sales	1	5,000
Expenses
Cost of Sales	2	3,500
Expenses
Marketing Cost	2	66
Administrative Cost	2	99
Distribution Cost	2	200
Finance Cost	3	100
Profit before Income Tax		1,035
Income Tax	4	311
Profit for the year after tax	5	725
Profit distributed as Dividend	6	10
Profit retained by the company		715
Total other comprehensive Income			0
Comprehensive profit for the year			715

Notes to Account:

Note 1. Revenue

Particular	Amount
	In $'000s
Sales	5000
Total	5000

Commentary Note-1 Revenue:

AASB 118 has been followed in book-keeping for proceeds generated during the following transactions and events:

• Sales of the product.
• The reproduction of services.
• Receipt of Interest, royalty and dividend.
  

Note 2. Expenses

Particular	Amount
	In $'000s
Cost of Sales	5000
Expenses from transactions:
Marketing Cost	66
Administrative Cost	99
Distribution Cost	200
Total Expenses	5365

Commentary - Note 2 Expenses:

This head includes any outlay of payments needed for the generation of income. An expense is considered as part of operation system only when:

• It is probable that the consumption is consequential in a diminution of an asset or amplifies in the liability that has occurred.
• Future economic benefits whose consumption or loss can be reasonably measured.

Note 3. Finance Cost

Particular	Amount
	In $'000s
Finance Cost	100
Total	100

Commentary - Note 3 Finance Cost:

This cost is accounted in the period in which it is incurred as an expense and to be shown as a separate head. Finance cost includes:

Finance charges in respect of finance leases recognised in accordance with AASB 117 Leases are to be followed for accounting finance charges in respect of finance leases.

Interest on bank overdraft (accounted as an expense in the year they are been paid).

Note 4. Income Tax

Particular	Amount
	In $'000s
Profit before tax	1035
Tax Rate (30%)	310.5
Total Current Tax	310.5

Note 5. Profit for the year after tax

Particular	Amount
	In $'000s
Profit Before Tax	1035
Tax	311
Total	724

Note 6. Dividend

Particular	Amount
	In $'000s
Dividend paid to shareholders	10
Total	10

Note 7. Surplus on sale of plant and machinery:

Particular	Amount
	In $'000s
Proceeds from sale of plant and machinery	800
Carrying amount of plant and machinery	400
Surplus	400

Commentary - Note 7 Finance Cost:

The above profit is a capital profit as the sale of plant and machinery is not an operation activity for the organisation. For ascertaining the cost of plant and machinery, the lower of cost or carrying the amount of plant and machinery will be considered.

It has been assumed that capital gains are exempted from tax; hence no treatment has been done regarding it.

Conclusion:

The above two parts are solved in accordance with AASB 101. Each and every calculation has been described in a detailed manner so that it could be easily understood. The presentation of accounts is also according to AASB 101; wherever it has been not followed the reason of it has been described. The assumptions taken while solving the numerical part have been informed by way of a note. The journal entries have been explained with narrations to make it clearer. The above analysis depicts that the financial statements are an ordered presentation of the financial performance and position of the organisation. The aim of financial statement is to present data about the financial performance and cash flows of the organisation that can be utilised for making a financially viable decision by a wide range of users.

The first part shows the financial position of the entity on a particular date i.e.30.06.2016 by considering the value of assets and liabilities are same is presented through this statement. The capital reserve which has been created due to consolidation with Kam Ltd shows that consolidation is beneficial for acquiring the company. The second part represent the profit of 715000$ earned by the entity for the period. It shows that the entity is financially sustainable. The capital income earned by the entity during the period has been shown separately as it does not form part of profit or loss account.

References

AASB, A.S., 2004. Presentation of Financial Statements. Balance Sheet. 68. P.73.

AASB, A.S., 2008. Consolidated and Separate Financial Statements. Routledge.

Dean, G. and Clarke, F., 2005. ‘True and Fair’and ‘Fair Value’—Accounting and Legal Will‐o’‐the‐Wisps. Abacus. 41(2). Pp.i-viii.

Haswell, S. and Langfield‐Smith, I., 2008. Fifty‐Seven Serious Defects in ‘Australian’IFRS. Australian Accounting Review. 18(1). Pp.46-62.

Sheet, B., 2012. General Purpose Financial Reports. Cengage learning.