IFA1 Lecture 4 <ul><li>Chapter 9 </li></ul><ul><li>Inventories </li></ul><ul><li>Chapter 10 </li></ul><ul><li>Financial in...
Chapter 9   Inventories <ul><li>Financial Accounting and Reporting -  </li></ul><ul><li>A Global Perspective (third editio...
Major topics <ul><li>1 Classification </li></ul><ul><li>2 Recording systems </li></ul><ul><li>3 Costing systems </li></ul>...
Introduction <ul><li>Inventories play a critical role in the operating cycle of many organizations </li></ul><ul><li>As lo...
Figure 9.1  Inventories majors issues Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition , I...
1 Classification of inventories <ul><li>Definition from IAS 2  (revised 2003, § 6) : ‘inventories are assets: </li></ul><u...
Figure 9.2  Classification of inventories Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition...
Classification of inventories <ul><li>The six inventory types shown are shown in three grades of tinting:  </li></ul><ul><...
Table 9.1  Main categories of inventories Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition...
2 Inventory recording systems <ul><li>Chapter 2 introduced two methods to report inventory movements: </li></ul><ul><ul><l...
Perpetual (or permanent) inventory system Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition...
Illustration  Borodine Company Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition , ISBN 1-4...
Perpetual (or permanent) inventory system Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition...
Periodic inventory system Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition , ISBN 1-4080-2...
Periodic inventory system Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition , ISBN 1-4080-2...
Figure 9.3  Recording of inventory - impact on the financial statements Use with  Financial Accounting and Reporting: A Gl...
Comparison of recording Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition , ISBN 1-4080-211...
Comparison <ul><li>The periodic system provides weaker controls on such things as misuse, pilferage or shrinkage (See deve...
Figure 9.4  Inventories in the income statement by nature Use with  Financial Accounting and Reporting: A Global Perspecti...
3 Costing inventories (figure 9.5) Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition , ISBN...
4 Illustration  Glinka Company <ul><li>1 st  purchase: 10 units are purchased and are recorded for an acquisition cost of ...
Table 9.3  Cost of consumption and value of remaining inventory Use with  Financial Accounting and Reporting: A Global Per...
Table 9.4  Impact on income statement Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition , I...
Table 9.5  Impact on net income and ending inventory Use with  Financial Accounting and Reporting: A Global Perspective,  ...
Table 9.6  Impact on cash flow Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition , ISBN 1-4...
5 Decline in value (end of year adjustments) <ul><li>Rule of  ‘ lower of cost or market ’ </li></ul><ul><li>Illustration: ...
Figure 9.6  End-of-year adjustments Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition , ISB...
6 Income statement by nature and income statement by function <ul><li>Expenses in the income statement can be classified e...
Table 9.7  Moussorgski: Data Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition , ISBN 1-408...
Table 9.8  Income statement by nature and by function Use with  Financial Accounting and Reporting: A Global Perspective, ...
7 Financial statements analysis <ul><li>Two metrics : </li></ul><ul><li>Inventory turnover: number of times the inventory ...
Table 9.9  Formulae for the calculation of the Inventory turnover in the income statement by nature Use with  Financial Ac...
Real-life example  Inventory ratios: Toray Industries (Japan - 2008/09) Use with  Financial Accounting and Reporting: A Gl...
Chapter 10   Financial instruments in the balance sheet and fair value accounting <ul><li>Financial Accounting and Reporti...
Major topics <ul><li>1 Definitions financial assets and liabilities </li></ul><ul><li>2 Cash and cash equivalents </li></u...
1 Definition of financial assets and liabilities  (IAS 32, IASB 2008a: § 11) <ul><li>Financial instruments: ‘any contract ...
Definition of financial assets and liabilities  (IAS 32, IASB 2008a: § 11) <ul><li>Financial liability: any liability that...
Financial instruments in assets  (IAS 39, IASB 2008b: § 9) <ul><li>Financial asset held ‘at fair value through profit or l...
Table 10.1  Subsequent measurement of financial assets   Use with  Financial Accounting and Reporting: A Global Perspectiv...
2 Cash and cash equivalents <ul><li>Definitions (IAS 7, IASB 1992) </li></ul><ul><li>Cash comprises  </li></ul><ul><ul><li...
3 Financial asset and liability at fair value through profit or loss  ( IAS 39, IASB 2008b: § 9 ) <ul><li>A financial asse...
Table 10.3  Data of Mozart Company’s current investment example   Use with  Financial Accounting and Reporting: A Global P...
Figure 10.1  Accounting for current investments – Year X1 Use with  Financial Accounting and Reporting: A Global Perspecti...
Figure 10.2  Accounting for current investments – Quarter 1 of X2 Use with  Financial Accounting and Reporting: A Global P...
Reporting financial asset at fair value through profit or loss Use with  Financial Accounting and Reporting: A Global Pers...
4 Held-to-maturity financial assets   <ul><li>Non-derivative financial assets with fixed or determinable payments and fixe...
5 Accounts receivable <ul><li>Application of the non offsetting principle to accounts receivable </li></ul><ul><li>Subsidi...
Figure 10.3  Different categories of claims Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Editi...
Figure 10.4  Doubtful accounts receivable   Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Editi...
Collectibility of receivables <ul><li>   Identification of doubtful or disputed accounts (see Figure 10.4) </li></ul><ul>...
Collectibility of receivables <ul><li>   Recording of a provision expense corresponding to the probability of uncollectib...
Figure 10.5  Doubtful accounts – Year X1 Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition ...
Figure 10.6  Doubtful accounts - Year X2 Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition ...
Figure 10.7  Doubtful accounts - Year X3 Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Edition ...
Impact on income of each of the year’s entries Use with  Financial Accounting and Reporting: A Global Perspective,  3rd Ed...
Reporting accounts receivable (1/2)   Brückner example – Year X2 Use with  Financial Accounting and Reporting: A Global Pe...
Reporting accounts receivable (2/2)   Brückner example – Year X2 Use with  Financial Accounting and Reporting: A Global Pe...
6  Recording of a sales return with direct cancellation (method 1, figure 10.9) Use with  Financial Accounting and Reporti...
Recording of a sales return with use of a contra-account (method 2, figure 10.10) Use with  Financial Accounting and Repor...
7 Available-for-sale financial assets <ul><li>Non-derivative financial assets that [either] are [formally] designated as a...
8 Financial statement analysis <ul><li>Average days of sales  (in receivables) (or  Average collection period ) or  Days S...
Real-life example :   Ericsson (Sweden – IFRS – 2008) Use with  Financial Accounting and Reporting: A Global Perspective, ...
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Lecture 4 ifa1_2011[1](2)

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Lecture 4 ifa1_2011[1](2)

  1. 1. IFA1 Lecture 4 <ul><li>Chapter 9 </li></ul><ul><li>Inventories </li></ul><ul><li>Chapter 10 </li></ul><ul><li>Financial instruments in the balance sheet and fair </li></ul><ul><li>value accounting </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  2. 2. Chapter 9 Inventories <ul><li>Financial Accounting and Reporting - </li></ul><ul><li>A Global Perspective (third edition) </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  3. 3. Major topics <ul><li>1 Classification </li></ul><ul><li>2 Recording systems </li></ul><ul><li>3 Costing systems </li></ul><ul><li>4 Illustration Glinka </li></ul><ul><li>5 Decline in value </li></ul><ul><li>6 Income statement format </li></ul><ul><li>7 Financial statement analysis </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  4. 4. Introduction <ul><li>Inventories play a critical role in the operating cycle of many organizations </li></ul><ul><li>As long as a product has not been sold, all costs attached to it are withheld from the income statement </li></ul><ul><li>Inventories are still a reporting issue (despite the ‘ just in time ’ ) </li></ul><ul><li>Definition of costs attached to inventories </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  5. 5. Figure 9.1 Inventories majors issues Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  6. 6. 1 Classification of inventories <ul><li>Definition from IAS 2 (revised 2003, § 6) : ‘inventories are assets: </li></ul><ul><ul><ul><li>held for sale in the ordinary course of business; </li></ul></ul></ul><ul><ul><ul><li>in the process of production for such sale; or </li></ul></ul></ul><ul><ul><ul><li>in the form of materials or supplies to be consumed in the production process or in the rendering of services’ </li></ul></ul></ul><ul><li>Different types of inventories (see figure 9.2) </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  7. 7. Figure 9.2 Classification of inventories Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  8. 8. Classification of inventories <ul><li>The six inventory types shown are shown in three grades of tinting: </li></ul><ul><ul><li>From dark blue for inventories of goods closest to the customer </li></ul></ul><ul><ul><li>to light blue for inventories in the process of transformation that will eventually, but certainly, turn into sellable products </li></ul></ul><ul><ul><li>to grey to reflect the fact these last two categories of inventories are not potentially sellable in the condition in which they are held </li></ul></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  9. 9. Table 9.1 Main categories of inventories Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  10. 10. 2 Inventory recording systems <ul><li>Chapter 2 introduced two methods to report inventory movements: </li></ul><ul><ul><li>purchases recorded in the balance sheet and transferred to the income statement or, </li></ul></ul><ul><ul><li>purchases recorded in the income statement and transferred to the balance sheet </li></ul></ul><ul><li>Two systems: </li></ul><ul><ul><li>Perpetual (or permanent) inventory system </li></ul></ul><ul><ul><li>Periodic inventory system </li></ul></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  11. 11. Perpetual (or permanent) inventory system Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding A continuous record of changes in inventory (entries as well as withdrawals) is maintained in the Inventory account
  12. 12. Illustration Borodine Company Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding Basic data
  13. 13. Perpetual (or permanent) inventory system Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding The fundamental inventory equation is used to calculate the ending inventory as follows:
  14. 14. Periodic inventory system Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding Basis of the system: required periodic (annual) physical counting to establish the quantities in the ending inventory so that they can be valued
  15. 15. Periodic inventory system Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding The fundamental inventory equation is expressed as follows
  16. 16. Figure 9.3 Recording of inventory - impact on the financial statements Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  17. 17. Comparison of recording Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding <ul><li>The ending inventory value, 300 CU, is the same under either method </li></ul><ul><li>Both methods provide the same cost of goods sold (or cost of goods consumed) </li></ul>
  18. 18. Comparison <ul><li>The periodic system provides weaker controls on such things as misuse, pilferage or shrinkage (See developments on differences between physical and accounting inventory count in Appendix 9.1) </li></ul><ul><li>See a comparison in Appendix 9.2 </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  19. 19. Figure 9.4 Inventories in the income statement by nature Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  20. 20. 3 Costing inventories (figure 9.5) Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  21. 21. 4 Illustration Glinka Company <ul><li>1 st purchase: 10 units are purchased and are recorded for an acquisition cost of 10 CU per unit </li></ul><ul><li>2 nd purchase: 10 units are purchased and are recorded for an acquisition cost of 12 CU per unit </li></ul><ul><li>15 units are sold at the end of the period for a unit selling-price of 18 CU per unit </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  22. 22. Table 9.3 Cost of consumption and value of remaining inventory Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  23. 23. Table 9.4 Impact on income statement Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  24. 24. Table 9.5 Impact on net income and ending inventory Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding Impact on income and ending inventory of the three methods in the context of rising or falling costs of acquisition See some other LIFO considerations in Appendix 9.3
  25. 25. Table 9.6 Impact on cash flow Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding <ul><li>No impact of the valuation methods on cash flow before tax </li></ul><ul><li>Impact on the tax expense </li></ul><ul><li>Impact on the cash flow after tax </li></ul>
  26. 26. 5 Decline in value (end of year adjustments) <ul><li>Rule of ‘ lower of cost or market ’ </li></ul><ul><li>Illustration: Glazunov Company </li></ul><ul><ul><ul><li>Purchase: 1,000 products (unit cost of acquisition: 20 CU ) </li></ul></ul></ul><ul><ul><ul><li>Market unit price of these products drops to 15 CU </li></ul></ul></ul><ul><ul><ul><li>The company still holds 100 units in inventory at the end of the accounting period </li></ul></ul></ul><ul><ul><ul><li>A provision for loss of value of inventory must be recorded. It amounts to (20 – 15) x 100 = 500 CU </li></ul></ul></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  27. 27. Figure 9.6 End-of-year adjustments Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  28. 28. 6 Income statement by nature and income statement by function <ul><li>Expenses in the income statement can be classified either by nature or by function </li></ul><ul><li>In Chapter 5, illustration of how to go from one presentation to the other for Brahms company, a retailer </li></ul><ul><li>Moussorgski Company: illustration of the passage from one presentation to the other for a manufacturing company </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  29. 29. Table 9.7 Moussorgski: Data Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  30. 30. Table 9.8 Income statement by nature and by function Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding The operating income is mechanically exactly the same under both approaches
  31. 31. 7 Financial statements analysis <ul><li>Two metrics : </li></ul><ul><li>Inventory turnover: number of times the inventory ‘ turns ’ during the accounting period </li></ul><ul><li>Average days of inventory available: inverse of the turnover ratio </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  32. 32. Table 9.9 Formulae for the calculation of the Inventory turnover in the income statement by nature Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  33. 33. Real-life example Inventory ratios: Toray Industries (Japan - 2008/09) Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  34. 34. Chapter 10 Financial instruments in the balance sheet and fair value accounting <ul><li>Financial Accounting and Reporting - </li></ul><ul><li>A Global Perspective (third edition) </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  35. 35. Major topics <ul><li>1 Definitions financial assets and liabilities </li></ul><ul><li>2 Cash and cash equivalents </li></ul><ul><li>3 Financial assets and liabilities at fair value through profit and loss </li></ul><ul><li>4 Held-to-maturity financial assets </li></ul><ul><li>5 Accounts receivable </li></ul><ul><li>6 Recording a sales return </li></ul><ul><li>7 Available-for-sale financial assets </li></ul><ul><li>8 Financial statement analysis </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  36. 36. 1 Definition of financial assets and liabilities (IAS 32, IASB 2008a: § 11) <ul><li>Financial instruments: ‘any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity’ </li></ul><ul><li>Financial assets: </li></ul><ul><ul><li>Cash; </li></ul></ul><ul><ul><li>An equity instrument of another entity; </li></ul></ul><ul><ul><li>A contractual right: (i) to receive cash or another financial asset from another entity; or (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity; or </li></ul></ul><ul><ul><li>A contract that will or may be settled in the entity’s own equity instruments and is: (i) a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or (ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments </li></ul></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  37. 37. Definition of financial assets and liabilities (IAS 32, IASB 2008a: § 11) <ul><li>Financial liability: any liability that is: </li></ul><ul><ul><li>A contractual obligation: (i) to deliver cash or another financial asset to another entity; or (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity; or </li></ul></ul><ul><ul><li>A contract that will or may be settled in the entity’s own equity instruments and is: (i) a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or (ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments </li></ul></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  38. 38. Financial instruments in assets (IAS 39, IASB 2008b: § 9) <ul><li>Financial asset held ‘at fair value through profit or loss’ [i.e., held for trading or sale, and for which latent (potential or unrealized) gains or losses are transferred to the income statement on the basis of the fair value on the closing date] </li></ul><ul><li>Held-to-maturity investments </li></ul><ul><li>Loans and receivables </li></ul><ul><li>Available-for-sale financial assets </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  39. 39. Table 10.1 Subsequent measurement of financial assets Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  40. 40. 2 Cash and cash equivalents <ul><li>Definitions (IAS 7, IASB 1992) </li></ul><ul><li>Cash comprises </li></ul><ul><ul><li>cash on hand (coins and currency available) </li></ul></ul><ul><ul><li>demand deposits (deposits in bank accounts that are available on demand) </li></ul></ul><ul><li>Cash equivalents: short-term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  41. 41. 3 Financial asset and liability at fair value through profit or loss ( IAS 39, IASB 2008b: § 9 ) <ul><li>A financial asset or financial liability at fair value through profit or loss is a financial asset or financial liability that meets either of the following conditions: </li></ul><ul><ul><li>(a) It is classified as held for trading. A financial asset or financial liability is classified as held for trading if (i) it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term , (ii) on initial recognition it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or (iii) it is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument) </li></ul></ul><ul><ul><li>(b) Upon initial recognition it is designated by the entity as at fair value through profit or loss (…) </li></ul></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  42. 42. Table 10.3 Data of Mozart Company’s current investment example Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  43. 43. Figure 10.1 Accounting for current investments – Year X1 Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  44. 44. Figure 10.2 Accounting for current investments – Quarter 1 of X2 Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  45. 45. Reporting financial asset at fair value through profit or loss Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  46. 46. 4 Held-to-maturity financial assets <ul><li>Non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity (…) (IAS 39: § 9) </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  47. 47. 5 Accounts receivable <ul><li>Application of the non offsetting principle to accounts receivable </li></ul><ul><li>Subsidiary ledgers </li></ul><ul><li>Collectibility of receivables (see Figure 10.3) </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  48. 48. Figure 10.3 Different categories of claims Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  49. 49. Figure 10.4 Doubtful accounts receivable Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  50. 50. Collectibility of receivables <ul><li> Identification of doubtful or disputed accounts (see Figure 10.4) </li></ul><ul><li> Evaluation of the probability of uncollectibility </li></ul><ul><ul><li>Global estimation (percentage of sales or percentage of receivables </li></ul></ul><ul><ul><li>Specific write down or write-off (aging analysis) </li></ul></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  51. 51. Collectibility of receivables <ul><li> Recording of a provision expense corresponding to the probability of uncollectibility (see Figures 10.5, 10.6 and 10.7) </li></ul><ul><li> Recording a bad debt expense corresponding to a specifically identified uncollectible receivable </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  52. 52. Figure 10.5 Doubtful accounts – Year X1 Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  53. 53. Figure 10.6 Doubtful accounts - Year X2 Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  54. 54. Figure 10.7 Doubtful accounts - Year X3 Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  55. 55. Impact on income of each of the year’s entries Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  56. 56. Reporting accounts receivable (1/2) Brückner example – Year X2 Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  57. 57. Reporting accounts receivable (2/2) Brückner example – Year X2 Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  58. 58. 6 Recording of a sales return with direct cancellation (method 1, figure 10.9) Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  59. 59. Recording of a sales return with use of a contra-account (method 2, figure 10.10) Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  60. 60. 7 Available-for-sale financial assets <ul><li>Non-derivative financial assets that [either] are [formally] designated as available for sale, or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss (IAS 39: § 9) </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  61. 61. 8 Financial statement analysis <ul><li>Average days of sales (in receivables) (or Average collection period ) or Days Sales Outstanding [DSO]) = (Average accounts receivable/Net sales)  365 days </li></ul><ul><li>Receivables turnover = Net sales/Average accounts receivable </li></ul>Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding
  62. 62. Real-life example : Ericsson (Sweden – IFRS – 2008) Use with Financial Accounting and Reporting: A Global Perspective, 3rd Edition , ISBN 1-4080-2113-2 © 2010 H. Stolowy, M. J. Lebas and Y. Ding

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