ACC203: Financial Accounting Assignment Solution- Statement of Cash Flow

Statement of Cash Flow

Task Details:

Question 1

This research question consists of a case study: You are a graduate accountant working for Gray and Associates a public accounting firm. The address of the firm is 777 South Terrace, Adelaide SA 5000. The manager of your firm, Mrs Bella Cans has asked you to draft a letter in response to an email received from a client – Mr Lukas Clown, the managing director of Minner Ltd, raising a number of issues regarding his company.

Re: Accounting Issues: Year Ending 30 June 2015

From: Lukas Clown (L.Clown@Minnerlimited.com.au)

Sent: Monday, 14th December 2015

To: Bella Cans (Bella.cans@Grayassociates.com.au)

Dear Bella

Thank you for your phone call this morning, as discussed I am emailing below the accounting issues we briefly discussed.

To assist us in our decision making process could you please make sure you reference any relevant sources relating to your advice, for example AASBs, Corporations Act, and relevant websites. We are running a successful business; however we are experiencing cash -flow problems at the moment. Therefore, instead of buying a new welding machine, we are considering leasing one. Our accountant tells us that if we do go with the leasing option, the accounting for the transaction would be very different. But the Board thinks that we just need to expense the lease payment the same as we do for other expenses like electricity and insurance. Is that the case or is our accountant correct? Could you please explain this so the Board (most of them are not accountants) can understand this.

Minner Limited is seeking a large sum of money to invest in a couple of large projects and was considering issuing a prospectus offering shares to the public. Brad Condor, the finance director suggested we issue debentures instead. He says it is cheaper than issuing shares and that all costs of issuing debentures, unlike shares, would be expensed. Is this correct? Also, how is it cheaper than increasing share capital? Is there any other alternative that we should consider?

Please respond by letter (not email) as I would like to present this to the Board. I look forward to hearing from you in the near future.

Regards

L Clown

Lukas Clown

Managing Director, Minner Ltd

Level 6, 510 King William Street

Adelaide SA 5000

Question 2

Prepare a Statement of Cash Flow

The statements of financial position of Wavehigh Ltd as at 30 June 2017 and 30 June 2016 are presented below:

Examination of the company’s general ledger accounts revealed the following:

1. The following depreciation expense was recorded during the year: buildings $13,200; and equipment $20,900.
2. Investments with a cost of $90,000 were sold for $120,000.
3. Land was purchased for $129,000 with payment consisting of $39 000 cash and a loan payable for $90,000 due on 29 August 2018.
4. Sales for the period were $573,600; cost of sales amounted to $225,300; other expenses (excluding depreciation, carrying amount of investments sold, interest, and bad debts) amounted to $112,400.
5. Bad debts of $3,500 were written off.
6. Income tax paid during the year was $73,200.
7. Interest expense and interest paid were $40,000.
8. The bank overdraft is an integral part of the company’s cash management function.

Required:

• Prepare a Statement of Cash Flows for the year ending 30 June 2017 including a note on disclosure to reconcile net cash flows from operating activities.
• Prepare any other notes required by AASB 107.

Question 3:

Accounting for PPE

Plank Ltd. is the owner of Truckers’ Tractors. An extract of the company’s final trial balance on 30 June 2017 (end of the reporting period) showed the following:

Additional information

Truckers’ Tractors calculates depreciation to the nearest month using straight-line depreciation for all assets except the Welding Machine, which is depreciated at 30% on the diminishing balance method.

Required:

1. Prepare general journal entries (narrations are required) to record the transactions and events in the books of Plank for the year ended 30 June 2018.
2. Lumus Ltd. offered Plank Ltd. on 5th of April two trailers with a fair value of $48,250 in exchange for Tractor 5. The trailers originally cost Lumus $60,500 and had a carrying value of $45,350 at the date of offer. The fair value of Tractor 5 was $50,200. If Plank Ltd. accepts the exchange offer, what amount would the business use to record the acquisition of the trailers? Why? Justify your answer by reference to the requirements of AASB 116 relating to the initial recognition of a property, plant and equipment item.

Please Note:

• The assignment must be completed individually and submitted electronically on the portal before the due date.
• Please make sure you follow the guidelines noted especially those relating to the presentation of written work, late assignment policy and academic integrity.
• The assignment must be submitted as a single word document. You are not allowed to submit any spreadsheets.

1. Draft of Mrs. Bella Cans’s reply letter

Our Ref: BC GA 1

Your reference: Accounting Issues: Year Ending 30 June 2015, dated 14th December 2015 15 January 2016

Mr. Lukas Clown (L.Clown@Minnerlimited.com.au)

Managing Director, Minner Ltd Level

6, 510 King William Street

Adelaide SA 5000

Dear Lukas Clown

Thank you for giving us the opportunity to provide you suggestions with respect to two issues namely acquisition of welding machine and acquiring finance in the background of the cash-flow problem your company is currently facing. I would like to state the following in this regard and do hope the same would assist you to take decisions regarding the said issues.

1. Acquisition of welding machine – purchase or lease

The concern of your accountant as regards accounting for the transaction in case of lease is not unfounded, rather quite practical. On 16 th May 2012 the International Accounting Standard Board (IASB) and the Financial Accounting Standard Board (FASB) have published a revised Exposure Draft incorporating the changes to be effected to accounting for lease and invited public comment on the same. The new standard is named IFRS 16 and will see the light of the day in January 2016 (FASB 2013). The objective of this initiative is to improve transparency about leverage, how the reporting entities use the assets in their operations and the degree of risks the lease agreements expose the firm to.

Many organizations do enter into lease agreements as a necessary activity. Majority of such leases are not reported in the balance sheets of the lessees. For many companies the amount of leases is quite big. The current accounting standard requires the lessee to classify its leases as capital leases for lease of assets taken for entire life of the assets, and operating lease for assets taken on lease for a certain number of years. The accounting for these two types of lease is also different.

Under the new standard all leases will have to be treated as financial lease (IFRS 2016). The new standard requires the lessee to recognize the assets and liabilities in respect of the liabilities and obligations arising out of the lease. In response to the concerns expressed by the stake holders about the different kinds of leases with different economics, the IASB and the FASB have taken a dual approach as regards recognition, measurement, presentation of expenses and cash-flows created from lease. For real estate assets taken on lease the lessee is required to adopt straight line method to record lease expenses in its Profit &n Loss account. In case of other assets the lessee has to report amortization of assets separately from lease liability interest in the Income statement. It is also proposed by the IASB and the FASB that the reporting entity should make disclosures in the financial statement so that the users of the report can get sufficient information as to amount, timing, and uncertainty about cash flows arising from leases. Experts opine that addressing the changes in lease accounting will pose a challenge to most of the companies (PWC 2014).

So Lukas, from the above it is clear that what your accountant apprehended is quite true. But at the same time I would like to emphasis that there are other financial criteria for determining purchase or lease of assets apart from the accounting difficulties as mentioned above.

2. Sources of large finance – issue of shares, issue of debentures or other alternative

At the outset I would say that the opinion of your finance director Brad Candor is well informed. Since your company is contemplating a big amount of fund, you must go for long term finance instead of short term. Long term debt is commonly sourced as loan from banks or as issue of debentures to the public (eFinance Management 2014). The debenture holders are paid interest on a fixed or floating rate. This interest expenses are tax deductible. A company is eligible to claim interest on debenture as an expense against profit. But dividends are paid to holders of equity or preference shares out of net profit after tax. Thus issue of debentures results in tax benefit to the issuing company, no such benefit results from issue of shares. This tax benefit ultimately lowers the cost of finance. Take this example; if interest on debenture is 10% and the current tax rate is 35%, then the effective interest cost comes out as 10% * (1-35%), or 6.5%.

Issuing of debenture has another advantage non-dilution of control. Issue of shares would proportionately dilute control of share holders, but this does not happen in case of issue of debentures. Thus issue of debentures as means of raising capital is a better alternative as compare to issue of shares. As another alternative, taking bank loan is almost as good as issue of debentures. In that case your company has to mortgage assets as security to the provider of loan.

Hope the above discussion will come to your assistance. Feel comfortable to ask for further assistance if any.

Yours sincerely

Bella Cans

Manager

Gray and Associates

777 South Terrace, Adelaide

SA 5000

Note on disclosure to reconcile net cash flows from operating activities:

In order to reconcile cash flows from operation, with the net income non cash expenses are to be added, then from this total increase in current assets is to be deducted, and decrease in current assets is to be added. To the figure obtained increase in current liabilities is to be added and decrease in current liabilities is to be deducted. The result is reconciled cash flow from operations.

Other notes required by AASB 107 Para 40 – 52 (Chartered Accountants 2015:

1. Details of acquisition and/or disposal of subsidiaries or other business during the period must be disclosed.
2. The components of cash and cash equivalents must be disclosed and should be reconciled to the equivalent items reported in the balance sheet. The accounting policy adopted in determining these items must also be disclosed.
3. Relevant information as regards financial activities that do not require cash should be disclosed.
4. The amount of any significant cash and cash equivalents that is held by the entity but not available for use must be disclosed.