Chapter-01

Revenue Recognition
[IFRS 15: Revenue from Contracts with Customers]
Overview

IFRS 15 specifies how and when an IFRS reporter will recognize revenue as well as requiring
such entities to provide users of financial statements with more informative, relevant disclosures.
The standard provides a single, principles based five-step model to be applied to all contracts
with customers.
IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after
1 January 2018. On 12 April 2016, clarifying amendments were issued that have the same
effective date as the standard itself.

Superseded Standards

IFRS 15 replaces the following standards and interpretations:

• IAS 11 Construction contracts
• IAS 18 Revenue

Summary of IFRS 15

Objective

The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful
information to users of financial statements about the nature, amount, timing, and uncertainty of
revenue and cash flows arising from a contract with a customer. [IFRS 15:1] Application of the
standard is mandatory for annual reporting periods starting from 1 January 2018 onwards. Earlier
application is permitted.
Scope

IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except
for: leases within the scope of IAS 17 Leases; financial instruments and other contractual rights
or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated
Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and
IAS 28 Investments in Associates and Joint Ventures; insurance contracts within the scope of
IFRS 4 Insurance Contracts; and non-monetary exchanges between entities in the same line of
business to facilitate sales to customers or potential customers. [IFRS 15:5]
A contract with a customer may be partially within the scope of IFRS 15 and partially within the
scope of another standard. In that scenario: [IFRS 15:7]
• if other standards specify how to separate and/or initially measure one or more parts of
the contract, then those separation and measurement requirements are applied first. The
transaction price is then reduced by the amounts that are initially measured under other
standards;
 • if no other standard provides guidance on how to separate and/or initially measure one or
more parts of the contract, then IFRS 15 will be applied.

Key definitions
Contract
An agreement between two or more parties that creates enforceable rights and obliga-
tions.
Customer
A party that has contracted with an entity to obtain goods or services that are an output of
the entity’s ordinary activities in exchange for consideration.
Income
Increases in economic benefits during the accounting period in the form of inflows or en-
hancements of assets or decreases of liabilities that result in an increase in equity, other
than those relating to contributions from equity participants.
Performance obligation
A promise in a contract with a customer to transfer to the customer either:
• a good or service (or a bundle of goods or services) that is distinct; or
• a series of distinct goods or services that are substantially the same and that have
the same pattern of transfer to the customer.
Revenue
Income arising in the course of an entity’s ordinary activities.
Transaction price
The amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on
behalf of third parties.

Accounting requirements for revenue

The five-step model framework

The core principle of IFRS 15 is that an entity will recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. This core principle is
delivered in a five-step model framework:
• Identify the contract(s) with a customer
• Identify the performance obligations in the contract
• Determine the transaction price
• Allocate the transaction price to the performance obligations in the contract
• Recognize revenue when (or as) the entity satisfies a performance obligation.

Application of this guidance will depend on the facts and circumstances present in a contract
with a customer and will require the exercise of judgment.

Step 1: Identify the contract with the customer

A contract with a customer will be within the scope of IFRS 15 if all the following conditions are
met: [IFRS 15:9]
• the contract has been approved by the parties to the contract;
• each party’s rights in relation to the goods or services to be transferred can be identified;
• the payment terms for the goods or services to be transferred can be identified;
• the contract has commercial substance; and
• it is probable that the consideration to which the entity is entitled to in exchange for the
goods or services will be collected.
If a contract with a customer does not yet meet all of the above criteria, the entity will continue
to re-assess the contract going forward to determine whether it subsequently meets the above
criteria. From that point, the entity will apply IFRS 15 to the contract. [IFRS 15:14]
The standard provides detailed guidance on how to account for approved contract modifications.
If certain conditions are met, a contract modification will be accounted for as a separate contract
with the customer. If not, it will be accounted for by modifying the accounting for the current
contract with the customer. Whether the latter type of modification is accounted for prospec-
tively or retrospectively depends on whether the remaining goods or services to be delivered
after the modification are distinct from those delivered prior to the modification. Further details
on accounting for contract modifications can be found in the Standard. [IFRS 15:18-21].

Step 2: Identify the performance obligations in the contract

At the inception of the contract, the entity should assess the goods or services that have been
promised to the customer, and identify as a performance obligation: [IFRS 15.22]
• a good or service (or bundle of goods or services) that is distinct; or
• a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer.
A series of distinct goods or services is transferred to the customer in the same pattern if both of
the following criteria are met: [IFRS 15:23]
• each distinct good or service in the series that the entity promises to transfer consecu-
tively to the customer would be a performance obligation that is satisfied over time (see
below); and
• a single method of measuring progress would be used to measure the entity’s progress
towards complete satisfaction of the performance obligation to transfer each distinct good
or service in the series to the customer.
A good or service is distinct if both of the following criteria are met: [IFRS 15:27]
• the customer can benefit from the good or services on its own or in conjunction with
other readily available resources; and
• the entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.
Factors for consideration as to whether a promise to transfer goods or services to the customer is
not separately identifiable include, but are not limited to: [IFRS 15:29]
• the entity does provide a significant service of integrating the goods or services with
other goods or services promised in the contract;
• the goods or services significantly modify or customize other goods or services promised
in the contract;
• the goods or services are highly interrelated or highly interdependent.
Step 3: Determine the transaction price

The transaction price is the amount to which an entity expects to be entitled in exchange for the
transfer of goods and services. When making this determination, an entity will consider past
customary business practices. [IFRS 15:47]
Where a contract contains elements of variable consideration, the entity will estimate the amount
of variable consideration to which it will be entitled under the contract. [IFRS 15:50] Variable
consideration can arise, for example, as a result of discounts, rebates, refunds, credits, price con-
cessions, incentives, performance bonuses, penalties or other similar items. Variable considera-
tion is also present if an entity’s right to consideration is contingent on the occurrence of a future
event. [IFRS 15:51]
The standard deals with the uncertainty relating to variable consideration by limiting the amount
of variable consideration that can be recognized. Specifically, variable consideration is only
included in the transaction price if, and to the extent that, it is highly probable that its inclusion
will not result in a significant revenue reversal in the future when the uncertainty has been subse-
quently resolved. [IFRS 15:56]
However, a different, more restrictive approach is applied in respect of sales or usage-based
royalty revenue arising from licenses of intellectual property. Such revenue is recognized only
when the underlying sales or usage occur. [IFRS 15:B63]

Step 4: Allocate the transaction price to the performance obligations in the contracts

Where a contract has multiple performance obligations, an entity will allocate the transaction
price to the performance obligations in the contract by reference to their relative standalone
selling prices. [IFRS 15:74] If a standalone selling price is not directly observable, the entity will
need to estimate it. IFRS 15 suggests various methods that might be used, including: [IFRS
15:79]
• Adjusted market assessment approach
• Expected cost plus a margin approach
• Residual approach (only permissible in limited circumstances).
Any overall discount compared to the aggregate of standalone selling prices is allocated between
performance obligations on a relative standalone selling price basis. In certain circumstances, it
may be appropriate to allocate such a discount to some but not all of the performance obliga-
tions. [IFRS 15:81]
Where consideration is paid in advance or in arrears, the entity will need to consider whether the
contract includes a significant financing arrangement and, if so, adjust for the time value of
money. [IFRS 15:60] A practical expedient is available where the interval between transfer of
the promised goods or services and payment by the customer is expected to be less than 12
months. [IFRS 15:63]

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

Revenue is recognized as control is passed, either over time or at a point in time. [IFRS 15:32]
Control of an asset is defined as the ability to direct the use of and obtain substantially all of the
remaining benefits from the asset. This includes the ability to prevent others from directing the
use of and obtaining the benefits from the asset. The benefits related to the asset are the potential
cash flows that may be obtained directly or indirectly. These include, but are not limited to:
[IFRS 15:31-33]
• using the asset to produce goods or provide services;
• using the asset to enhance the value of other assets;
• using the asset to settle liabilities or to reduce expenses;
• selling or exchanging the asset;
• pledging the asset to secure a loan; and
• holding the asset.
An entity recognizes revenue over time if one of the following criteria is met: [IFRS 15:35]
• the customer simultaneously receives and consumes all of the benefits provided by the
entity as the entity performs;
• the entity’s performance creates or enhances an asset that the customer controls as the
asset is created; or
• the entity’s performance does not create an asset with an alternative use to the entity and
the entity has an enforceable right to payment for performance completed to date.
If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time.
Revenue will therefore be recognized when control is passed at a certain point in time. Factors
that may indicate the point in time at which control passes include, but are not limited to: [IFRS
15:38]
• the entity has a present right to payment for the asset;
• the customer has legal title to the asset;
• the entity has transferred physical possession of the asset;
• the customer has the significant risks and rewards related to the ownership of the asset;
and
• the customer has accepted the asset.

Contract costs

The incremental costs of obtaining a contract must be recognized as an asset if the entity expects
to recover those costs. However, those incremental costs are limited to the costs that the entity
would not have incurred if the contract had not been successfully obtained (e.g. ‘success fees’
paid to agents). A practical expedient is available, allowing the incremental costs of obtaining a
contract to be expensed if the associated amortization period would be 12 months or less. [IFRS
15:91-94]
Costs incurred to fulfill a contract are recognized as an asset if and only if all of the following
criteria are met: [IFRS 15:95]
• the costs relate directly to a contract (or a specific anticipated contract);
• the costs generate or enhance resources of the entity that will be used in satisfying per-
formance obligations in the future; and
• the costs are expected to be recovered.
These include costs such as direct labor, direct materials, and the allocation of overheads that
relate directly to the contract. [IFRS 15:97]
The asset recognized in respect of the costs to obtain or fulfill a contract is amortized on a sys-
tematic basis that is consistent with the pattern of transfer of the goods or services to which the
asset relates. [IFRS 15:99]
Further useful implementation guidance in relation to applying IFRS 15
These topics include:
• Performance obligations satisfied over time
• Methods for measuring progress towards complete satisfaction of a performance obliga-
tion
• Sale with a right of return
• Warranties
• Principal versus agent considerations
• Customer options for additional goods or services
• Customers’ unexercised rights
• Non-refundable upfront fees
• Licensing
• Repurchase arrangements
• Consignment arrangements
• Bill-and-hold arrangements
• Customer acceptance
• Disclosures of disaggregation of revenue
These topics should be considered carefully when applying IFRS 15.

Presentation in financial statements

Contracts with customers will be presented in an entity’s statement of financial position as a

contract liability, a contract asset, or a receivable, depending on the relationship between the
entity’s performance and the customer’s payment. [IFRS 15:105]
A contract liability is presented in the statement of financial position where a customer has paid
an amount of consideration prior to the entity performing by transferring the related good or
service to the customer. [IFRS 15:106]
Where the entity has performed by transferring a good or service to the customer and the
customer has not yet paid the related consideration, a contract asset or a receivable is presented
in the statement of financial position, depending on the nature of the entity’s right to considera-
tion. A contract asset is recognized when the entity’s right to consideration is conditional on
something other than the passage of time, for example future performance of the entity. A receiv-
able is recognized when the entity’s right to consideration is unconditional except for the passage
of time.
Contract assets and receivables shall be accounted for in accordance with IFRS 9. Any impair-
ment relating to contracts with customers should be measured, presented and disclosed in accor-
dance with IFRS 9. Any difference between the initial recognition of a receivable and the corre-
sponding amount of revenue recognized should also be presented as an expense, for example, an
impairment loss. [IFRS 15:107-108]

Disclosures
The disclosure objective stated in IFRS 15 is for an entity to disclose sufficient information to
enable users of financial statements to understand the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers. Therefore, an entity should
disclose qualitative and quantitative information about all of the following: [IFRS 15:110]
• its contracts with customers;
• the significant judgments, and changes in the judgments, made in applying the guidance
to those contracts; and
• any assets recognized from the costs to obtain or fulfill a contract with a customer.
Entities will need to consider the level of detail necessary to satisfy the disclosure objective and
how much emphasis to place on each of the requirements. An entity should aggregate or disag-
gregate disclosures to ensure that useful information is not obscured. [IFRS 15:111]
In order to achieve the disclosure objective stated above, the Standard introduces a number of
new disclosure requirements. Further detail about these specific requirements can be found at
IFRS 15:113-129.

Effective date and transition

The standard should be applied in an entity’s IFRS financial statements for annual reporting
periods beginning on or after 1 January 2018. Earlier application is permitted. An entity that
chooses to apply IFRS 15 earlier than 1 January 2018 should disclose this fact in its relevant
financial statements. [IFRS 15:C1]
When first applying IFRS 15, entities should apply the standard in full for the current period,
including retrospective application to all contracts that were not yet complete at the beginning of
that period. In respect of prior periods, the transition guidance allows entities an option to either:
[IFRS 15:C3]
• apply IFRS 15 in full to prior periods (with certain limited practical expedients being
available); or
• retain prior period figures as reported under the previous standards, recognising the cu-
mulative effect of applying IFRS 15 as an adjustment to the opening balance of equity as
at the date of initial application (beginning of current reporting period).

Special Issue

Revenue Recognition before Delivery

Most notable example is long-term construction contract accounting.
Two Methods:
◆ Percentage-of-Completion Method.
Rationale is that the buyer and seller have enforceable rights.
◆ Completed-Contract Method.
Must use Percentage-of-Completion method when estimates of progress toward
completion, revenues, and costs are reasonably dependable and all of the following
conditions exist:
 ◆ Contract clearly specifies the enforceable rights regarding goods or services by
the parties, the consideration to be exchanged, and the manner and terms of
settlement.
◆ Buyer can be expected to satisfy all obligations.
◆ Contractor can be expected to perform under the contractual obligations.
◆ Companies should use the Completed-Contract method when one of the following
conditions applies when:
◆ Company has primarily short-term contracts, or
◆ Company cannot meet the conditions for using the percentage-of-completion
method, or
◆ There are inherent hazards in the contract beyond the normal, recurring business
risks.
◆ Percentage-of-Completion Method
Formula for Total Revenue to Be Recognized to Date

E18-7 (LO2) (Determine Transaction Price) Blair Biotech enters into a licensing agreement
with Pang Pharmaceutical for a drug under development. Blair will receive a payment of
$10,000,000 if the drug receives regulatory approval. Based on prior experience in the drug-
approval process, Blair determines it is 90% likely that the drug will gain approval and a 10%
chance of denial.
Instructions
a) Determine the transaction price of the arrangement for Blair Biotech.
b) Assuming that regulatory approval was granted on December 20, 2017,
and that Blair received the payment from Pang on January 15, 2018,
prepare the journal entries for Blair. The license meets the criteria for
point-in-time revenue recognition.
E18-5 (LO2) (Determine Transaction Price) Jeff Heun, president of Concrete Always, agrees
to construct a concrete cart path at Dakota Golf Club. Concrete Always enters into a contract
with Dakota to construct the path for $200,000. In addition, as part of the contract, a performance
bonus of $40,000 will be paid based on the timing of completion. The performance bonus will be
paid fully if completed by the agreed-upon date. The performance bonus decreases by $10,000
per week for every week beyond the agreed-upon completion date. Jeff has been involved in a
number of contracts that had performance bonuses as part of the agreement in the past. As a
result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff
estimates, given the constraints of his schedule related to other jobs , that there is 55%
probability that he will complete the project on time, a 30% probability that he will be 1 week
late, and a 15% probability that he will be 2 weeks late.
Instructions:
a)Determine the transaction price that Concrete Always should compute for this agreement.
b) Assume that Jeff Heun has reviewed his work schedule and decided that it makes sense
to complete this project on time. Assuming that he now believes that the probability for
completing the project on time is 90% and otherwise it will be finished 1 week late,
determine the transaction price.
E18-13 (LO3) (Allocate Transaction Price) Crankshaft Company manufactures equipment.
Crankshaft’s products range from simple automated machinery to complex systems containing
numerous components. Unit selling prices range from $200,000 to $1,500,000 and are quoted
inclusive of installation. The installation process does not involve changes to the features of the
equipment and does not require proprietary information about the equipment in order for the
installed equipment to perform to specifications. Crankshaft has the following arrangement with
Winkerbean Inc.
• Winkerbean purchases equipment from Crankshaft for a price of $1,000,000 and contracts with
Crankshaft to install the equipment. Crankshaft charges the same price for the equipment
irrespective of whether it does the installation or not. Using market data, Crankshaft determines
installation service is estimated to have a standalone selling price of $50,000. The cost of the
equipment is $600,000.
• Winkerbean is obligated to pay Crankshaft the $1,000,000 upon the delivery and installation of
the equipment.
Crankshaft delivers the equipment on June 1, 2017, and completes the installation of the
equipment on September 30, 2017. The equipment has a useful life of 10 years. Assume that the
equipment and the installation are two distinct performance obligations which should be
accounted for separately.
Instructions
i. How should the transaction price of $1,000,000 be allocated among the service
obligations?
ii. Prepare the journal entries for Crankshaft for this revenue arrangement on June 1, 2017
and September 30, 2017, assuming Crankshaft receives payment when installation is
completed.

Problem-01:
Shanahan Construction Company has entered into a contract beginning January 1, 2012, to build
a parking complex. It has been estimated that the complex will cost $600,000 and will take 3
years to construct. The complex will be billed to the purchasing company at $900,000. The
following data pertain to the construction period.

2012 2013 2014

Costs to date $270,000 $450,000 $610,000
Estimated costs to complete 330,000 150,000 –0–
Progress billings to date 270,000 550,000 900,000
Cash collected to date 240,000 500,000 900,000

Instructions
a. Using the percentage-of-completion method, compute the estimated gross profit
that would be recognized during each year of the construction period.
b. Using the completed-contract method, compute the estimated gross profit that
would be recognized during each year of the construction period.
Solution:

(a) 2012 2013 2014

Contract price $900,000 $900,000 $900,000
Less estimated cost:
Costs to date 270,000 450,000 610,000
Estimated cost to complete 330,000 150,000 —
Estimated total cost 600,000 600,000 610,000
Estimated total gross profit $300,000 $300,000 $290,000

Gross profit recognized in—

2012: $270,000 X $300,000 = $135,000

$600,000

2013: $450,000 X $300,000 = $225,000

$600,000
Less 2012 recognized gross
profit 135,000
Gross profit in 2013 $ 90,000

2014: Less 2012–2013 recognized

gross profit 225,000
Gross profit in 2014 $ 65,000
(b) In 2012 and 2013, no gross profit would be recognized.

Total billings ...................................... $900,000

Total cost ........................................... (610,000)
Gross profit recognized in 2014 ....... $290,000

Problem-02:
On March 1, 2012, Chance Company entered into a contract to build an apartment building. It is
estimated that the building will cost $2,000,000 and will take 3 years to complete. The contract
price was $3,000,000. The following information pertains to the construction period.

2012 2013 2014

Costs to date $6,00,000 $15,60,000 $21,00,000
Estimated costs to complete 14,00,000 5,20,000 –0–
Progress billings to date 10,50,000 20,00,000 30,00,000
Cash collected to date 9,50,000 19,50,000 28,50,000

Instructions
a. Compute the amount of gross profit to be recognized each year, assuming the
percentage-of-completion method is used.
b. Prepare all necessary journal entries for 2014.
(a) Gross profit recognized in:

2012 2013 2014

Contract price $3,000,000 $3,000,000 $3,000,000
Costs:
Costs to date $ 600,000 $1,560,000 $2,100,000
Estimated costs
to complete 1,400,000 2,000,000 520,000 2,080,000 0 2,100,000
Total estimated
profit 1,000,000 920,000 900,000
Percentage
completed to date X 30%* X 75%** X 100%
Total gross profit
recognized 300,000 690,000 900,000
Less: Gross profit
recognized in
previous years 0 300,000 690,000
Gross profit
recognized in
current year $ 300,000 $ 390,000 $ 210,000

**$600,000 ÷ $2,000,000
**$1,560,000 ÷ $2,080,000
(b) Construction in Process
($2,100,000 – $1,560,000) ....................................... 540,000
Materials, Cash, Payables. .............................. 540,000
(To record the cost of Construction)
Accounts Receivable ($3,000,000 – $2,000,000) ........... 1,000,000
Billings on Construction in Process .............. 1,000,000
(To Record the progress billing)

Cash ($2,850,000 – $1,950,000) ...................................... 900,000

Accounts Receivable....................................... 900,000
(To record cash collection)

Construction Expenses .................................................. 540,000

Construction in Process ......................................... 210,000
Revenue from Long-Term Contracts .............. 750,000*
*$3,000,000 X (100% – 75%)
(To recognize revenue and gross Profit)

Billings on Construction in Process ............................. 3,000,000

Construction in Process ................................. 3,000,000

Problem-03:

On February 1, 2012, Hewitt Construction Company obtained a contract to build an athletic

stadium. The stadium was to be built at a total cost of $5,400,000 and was scheduled for
completion by September 1, 2014. One clause of the contract stated that Hewitt was to deduct
$15,000 from the $6,600,000 billing price for each week that completion was delayed.
Completion was delayed 6 weeks, which resulted in a $90,000 penalty. Below are the data
pertaining to the construction period.
2012 2013 2014
Costs to date 1,620,000 3,850,000 5,500,000
Estimated costs to complete 3,780,000 1,650,000 –0–
Progress billings to date 1,200,000 3,300,000 6,510,000
Cash collected to date 1,000,000 2,800,000 6,510,000

Instructions
a. Using the percentage-of-completion method, compute the estimated gross profit
recognized in the years 2012–2014.
b. Prepare a partial balance sheet for December 31, 2013, showing the balances in
the receivables and inventory accounts.
(a) 2012 2013 2014
 Contract price $6,600,000 $6,600,000 $6,510,000
Less estimated cost:
Costs to date 1,620,000 3,850,000 5,500,000
Estimated cost to complete 3,780,000 1,650,000 —
Estimated total cost 5,400,000 5,500,000 5,500,000
Estimated total gross profit $1,200,000 $1,100,000 $1,010,000
Gross profit recognized in—
2012: $1,620,000 X $1,200,000 = $360,000
$5,400,000

2013: $3,850,000 X $1,100,000 = $770,000

$5,500,000
Less 2012 recognized
gross profit 360,000
Gross profit in 2013 $410,000

2014: Less 2012–2013

recognized gross profit 770,000
Gross profit in 2014 $240,000

(b) HEWITT CONSTRUCTION COMPANY

Balance Sheet
December 31, 2013

Current assets:
Accounts receivable
($3,300,000 – $2,800,000) ................. $ 500,000
Inventories
Construction in process (66,00,000X70%) $4,620,000*
Less: Billings up to 2013 ......... …. 3,300,000
Costs and recognized profit
in excess of billings ............... 1,320,000

*$6,600,000 X ($3,850,000 ÷ $5,500,000)

E18.33 (LO5, 6) (Recognition of Profit on Long-Term Contracts) During 2019, Nilsen Company
started a construction job with a contract price of Tk.1,600,000. The job was completed in 2021.
The following information is available.
 2019 2020 2021
Costs incurred to date Tk.400,000 Tk.825,000 Tk.1,070,000
Estimated costs to complete 600,000 275,000 –0–
Billings to date 300,000 900,000 1,600,000
Collections to date 270,000 810,000 1,425,000

Instructions
a. Compute the amount of gross profit to be recognized each year, assuming the percentage-of-
completion method is used.
b. Prepare all necessary journal entries for 2020.
c. Compute the amount of gross profit to be recognized each year, assuming the cost-recovery
method is used.

E18.34 (LO5) (Analysis of Percentage-of-Completion Financial Statements) In 2019, Steinrotter

Construction began construction work under a 3-year contract. The contract price was
Tk.1,000,000. Steinrotter uses the percentage-of completion method for financial accounting
purposes. The income to be recognized each year is based on the proportion of cost incurred to
total estimated costs for completing the contract. The financial statement presentations relating to
this contract at December 31, 2019, are shown below.
Statement of Financial Position

Tk. Tk.
Accounts receivable 18,000
Construction in process 65,000
Less: Billings 61,500
Costs and recognized profit in excess of billings 3,500
Income Statement
Income (before tax) on the contract recognized in 2019 19,500

Instructions
a. How much cash was collected in 2019 on this contract?
b. What was the initial estimated total income before tax on this contract?

E18.35 (LO5) (Gross Profit on Uncompleted Contract) On April 1, 2019, Dougherty Inc. entered
into a cost plus fixed fee contract to construct an electric generator for Altom Corporation. At the
contract date, Dougherty estimated that it would take 2 years to complete the project at a cost of
Tk.2,000,000. The fixed fee stipulated in the contract is Tk.450,000. Dougherty appropriately
accounts for this contract under the percentage-of-completion method. During 2019, Dougherty
incurred costs of Tk.800,000 related to the project. The estimated cost at December 31, 2019, to
complete the contract is Tk.1,200,000. Altom was billed Tk.600,000 under the contract.

Instructions
Prepare a schedule to compute the amount of gross profit to be recognized by Dougherty under
the contract for the year ended December 31, 2019. Show supporting computations in good form.
E18.36 (LO5, 6) (Recognition of Revenue on Long-Term Contract and Entries) Hamilton
Construction Company uses the percentage-of-completion method of accounting. In 2019,
Hamilton began work under contract #E2-D2, which provided for a contract price of Tk.
2,200,000. Other details follow:

2019 2020
Costs incurred during the year Tk. 640,000 Tk. 1,425,000
Estimated costs to complete, as of December 31 960,000 –0–
Billings during the year 420,000 1,680,000
Collections during the year 350,000 1,500,000

Instructions
a. What portion of the total contract price would be recognized as revenue in 2019?
In 2020?
b. Assuming the same facts as those above except that Hamilton uses the cost-
recovery method of accounting, what amount of the total contract price would be
recognized as revenue in 2020?
c. Prepare a complete set of journal entries for 2019 (using the percentage-of
completion method).

P18.10 (LO5, 6, 7) (Long-Term Contract with Interim Loss) On March 1, 2019, Pechstein
Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc.
for a total contract price of $8,400,000. The building was completed by October 31, 2021. The
annual contract costs incurred, estimated costs to complete the contract, and accumulated billings
to Fabrik for 2019, 2020, and 2021 are given below.

2019 2020 2021

Contract costs incurred during the year $2,880,000 $2,230,000 $2,190,000
Estimated costs to complete the contract at 12/31 3,520,000 2,190,000 –0–
Billings to Fabrik during the year 3,200,000 3,500,000 1,700,000

Instructions
a. Using the percentage-of-completion method, prepare schedules to compute the
profit or loss to be recognized as a result of this contract for the years ended
December 31, 2019, 2020, and 2021. (Ignore income taxes.)
b. Using the cost-recovery method, prepare schedules to compute the profit or loss
to be recognized as a result of this contract for the years ended December 31,
2019, 2020, and 2021. (Ignore incomes taxes.)

P18.11 (LO5, 6, 7) (Long-Term Contract with an Overall Loss) On July 1, 2019, Torvill
Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total
contract price of $1,900,000. On July 1, Torvill estimated that it would take between 2 and 3
years to complete the building. On December 31, 2021, the building was deemed substantially
completed. Following are accumulated contract costs incurred, estimated costs to complete the
contract, and accumulated billings to Gumbel for 2019, 2020, and 2021.
 2019 2020 2021
Contract costs incurred to date $ 300,000 $1,200,000 $2,100,000
Estimated costs to complete the contract 1,200,000 800,000 –0–
Billings to Gumbel 300,000 1,100,000 1,850,000

Instructions
a. Using the percentage-of-completion method, prepare schedules to compute the
profit or loss to be recognized as a result of this contract for the years ended
December 31, 2019, 2020, and 2021. (Ignore income taxes.)
b. Using the cost-recovery method, prepare schedules to compute the profit or loss
to be recognized as a result of this contract for the years ended December 31,
2019, 2020, and 2021. (Ignore income taxes.)
 Chapter-02 & 03
Current Liabilities and Contingencies

Definition of Liabilities:

Liabilities as “probable future sacrifices of economic benefits arising from present obligations
of a particular entity to transfer assets or provide services to other entities in the future as a
result of past transactions or events.” In other words, a liability has three essential
characteristics:
1) It is a present obligation that entails settlement by probable future transfer or use of
cash, goods, or services.
2) It is an unavoidable obligation.
3) The transaction or other event creating the obligation has already occurred.

Definition of Current liabilities:

Current liabilities are “obligations whose liquidation is reasonably expected to require use of
existing resources properly classified as current assets, or the creation of other current
liabilities.”
This definition has gained wide acceptance because it recognizes operating cycles of varying
lengths in different industries. This definition also considers the important relationship
between current assets and current liabilities.

Typical Current Liabilities:

 Accounts payable.
 Notes payable.
 Current maturities of long-term debt.
 Short-term obligations expected to be refinanced.
 Dividends payable.
 Customer advances and deposits.
 Unearned revenues.
 Sales taxes payable.
 Income taxes payable.
 Employee-related liabilities.

Distinction between a current liability and a long-term debt:

Current liabilities are obligations whose liquidation is reasonably expected to require use of
existing resources properly classified as current assets, or the creation of other current
liabilities. Long-term debt consists of all liabilities not properly classified as current
liabilities.

How are current liabilities related by definition to current assets? How are current
liabilities related to a company’s operating cycle?

Current liabilities are obligations whose liquidation is reasonably expected to require the use
of existing resources properly classified as current assets, or the creation of other current
liabilities.
Because current liabilities are by definition tied to current assets and current assets by
definition are tied to the operating cycle, liabilities are related to the operating cycle.

Under what conditions a short-term obligation should be excluded from current

liabilities?
Answer:

An enterprise should exclude a short-term obligation from current liabilities only if (1) it
intends to refinance the obligation on a long-term basis, and (2) it demonstrates an ability to
consummate the refinancing.

Definition of (a) a contingency and (b) a contingent liability

(a) A contingency is defined as an existing condition, situation, or set of circumstances

involving uncertainty as to possible gain (gain contingency) or loss (loss contingency)
to an enterprise that will ultimately be resolved when one or more future events occur
or fail to occur.

Typical Gain Contingencies are:

1. Possible receipts of monies from gifts, donations, asset sales, and so on.
2. Possible refunds from the government in tax disputes.
3. Pending court cases with a probable favorable outcome.
4. Tax loss carry forwards (Chapter 19).

Gain contingencies are not recorded.

Disclosed only if probability of receipt is high.

Loss Contingencies

 Involves possible losses.

Likelihood of Loss

FASB uses three areas of probability:

 Probable.
 Reasonably possible.
 Remote.

Common loss contingencies:

1. Litigation, claims, and assessments.
2. Guarantee and warranty costs.
3. Premiums and coupons.
4. Environmental liabilities.

(b) A contingent liability is a liability incurred as a result of a loss contingency.

Under what conditions a contingent liability should be recorded?

Answer:

A contingent liability should be recorded and a charge accrued to expense only if:

(a) information available prior to the issuance of the financial statements indicates that it
is probable that a liability has been incurred at the date of the financial statements,
and
 (b) the amount of the loss can be reasonably estimated.

Distinguish between a determinable current liability and a contingent liability. Give two
examples of each type.

A determinable current liability is susceptible to precise measurement because the date of

payment, the payee, and the amount of cash needed to discharge the obligation are reasonably
certain. There is nothing uncertain about (1) the fact that the obligation has been incurred and (2)
the amount of the obligation.

A contingent liability is an obligation that is dependent upon the occurrence or nonoccurrence

of one or more future events to confirm the amount payable, the payee, the date payable, or
its existence. It is a liability dependent upon a “loss contingency.”

Determinable current liabilities—accounts payable, notes payable, current maturities of long

-term debt, dividends payable, returnable deposits, sales and use taxes, payroll taxes, and
accrued expenses.

Contingent liabilities—obligations related to product warranties and product defects,

premiums offered to customers, certain pending or threatened litigation, certain actual and
possible claims and assessments, and certain guarantees of indebtedness of others.

Contrast the cash-basis method and the accrual method of accounting for warranty
costs.

Answer:

Under the cash-basis method, warranty costs are charged to expense in the period in which
the seller or manufacturer performs in compliance with the warranty, no liability is recorded
for future costs arising from warranties, and the period of sale is not necessarily charged with
the costs of making good on outstanding warranties. Under the accrual method, a provision
for warranty costs is made at the time of sale or as the productive activity takes place; the
accrual method may be applied two different ways: expense warranty versus sales warranty
method. But under either method, the attempt is to match warranty expense to the related
revenues.

Problem-01:

Alvardo company sells a machine for Tk. 7,400 under a 12-month warranty agreement that
requires the company to replace all defective parts and to provide the repair labor at no cost to
the customers. With sales being made evenly throughout the year, the company sells 600
machines in 2017 (warranty expenses is incurred half in 2017 and half in 2018). As a result of
product testing, the company estimates that the warranty cost is Tk. 390 per machine (Tk. 170
parts and Tk. 220 labor).

Instructions:
Assuming that actual warranty costs are incurred exactly as estimated, what journal entries
would be made relative to the following facts?
a. Under application of the expenses warranty accrual method for:
i. Sale of machinery in 2017.
ii. Warranty cost incurred in 2017.
iii. Warranty expenses charged against 2017 revenues.
iv. Warranty costs incurred in 2018.
 v. What amount, if any, is disclosed in the Balance sheet as a liability for future
warranty costs as of December 31, 2012, under each method?

Problem-02:

XYZ Company is presently testing a number of new agricultural seeds that it has recently
harvested. To stimulate interest, it has decided to grant to five of its largest customers the
unconditional right of return to these products if not fully satisfied. The right of return
extends for 4 months. XYZ sells these seeds on account for Tk.30, 00,000 on January 2,
2017. Companies are required to pay the full amount due by March 15, 2017.
Instructions:
i. Prepare the journal entry for XYZ at January 2, 2017, assuming XYZ estimates
returns of 20% based on prior experience. (Ignore cost of goods sold.)
ii. Assume that one customer returns the seeds on March 1, 2017, due to unsatisfactory
performance. Prepare the journal entry to record this transaction, assuming this
customer purchased Tk. 2, 00,000 of seeds from XYZ.
iii. Briefly describe the accounting for these sales, if XYZ is unable to reliably estimate
returns.

Problem-03:

Doss Passos Company sells television at an average price of Tk. 900 and also offers to each
customer a separate 3-years warranty contract for Tk. 90 that requires the company to
perform periodic services and to replace defective parts. During 2017, the company sold 300
televisions and 270 warranty contracts for cash. It estimates the 3-years warranty costs as Tk.
20 for parts and Tk. 40 for labor, and accounts for warranties separately. Assume sales
occurred on December 31, 2017, and straight -line recognition of warranty revenues occurs.

Instructions:
i. Record the necessary journal entries in 2017.
ii. What liability relative to these transactions would appear on the December31, 2017,
balance sheet and how would it be classified?
In 2018, Brooks’s corporation incurred actual costs relative to 2014 television warranty sales
of Tk. 2000 for parts and Tk. 4000 for labor.
iii. Record the necessary journal entries in 2018 relative to 2017 television warranties.
iv. What amount relative to the 2017 television warranties would appear on the
December 31, 2018, balance sheet and how would they be classified.

Problem-04:

Mc-Caffy Corporation sells computers under a 2-year warranty contract that requires the
corporation to replace defective parts and to provide the necessary repair labor. During 2014,
the corporation sells for cash 400 computers at a unit price of Tk. 2,500. On the basis of past
experience, the 2-year warranty costs are estimated to be Tk. 155 for parts and Tk. 185 for
labor per unit. (For simplicity, assume that all sales occurred on December 31, 2014.) The
warranty is not sold separately from the computer.
Instructions
i. Record any necessary journal entries in 2014, applying the cash-basis method.
ii. Record any necessary journal entries in 2014, applying the expense warranty accrual
method.
 iii. What liability relative to these transactions would appear on the December 31, 2014,
balance sheet and how would it be classified if the cash-basis method is applied?
iv. What liability relative to these transactions would appear on the December 31, 2014,
balance sheet and how would it be classified if the expense warranty accrual method
is applied?

Problem-05:

Garison Music Emporium carries a wide variety of musical instruments, sound reproduction
equipment, recorded music, and sheet music. Garison uses two sales promotion techniques-
warranties and premiums-to attract customers.
Musical instruments and sound equipment are sold with a 1-year warranty for replacement of
parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. The
premium is offered on the recorded and sheet music. Customers receive a coupon for each
dollar spent on recorded music or sheet music. Customers may exchange 200 coupons and
Tk.20 for an MP3 player. Garison pays Tk.32 for each player and estimates that 60% of the
coupons given to customers will be redeemed.
Garison’s total sales for 2017 were Tk.7,200,000-Tk.5,700,000 from musical instruments and
sound reproduction equipment and Tk.1,500,000 from recorded music and sheet music.
Replacement parts and labor for warranty work totaled Tk.94,000 during 2017. A total of
6,500 players used in the premium program were purchased during the year and there were
1,200,000 coupons redeemed in 2017.

The balances in the accounts related to warranties and premiums on January 1, 2017, were as
shown below.
Inventory of Premiums Tk. 37,600
Premium Liability 44,800
Warranty Liability 136,000

Instructions:

Garison Music Emporium is preparing its financial statements for the year ended December
31, 2017. Determine the amounts that will be shown on the 2017 financial statements for the
following.

(a) Warranty Expense. (d) Inventory of Premiums.

(b) Warranty Liability. (e) Premium Liability.
(c) Premium Expense.

https://chatgpt.com/c/6762ceae-4f80-800b-b198-
990d2311e022#:~:text=Let%E2%80%99s%20break%20this%20down%20into,%3A%20Tk.%2026%2C800%
20(Current%20Liabilities).
 Chapter-04
Long-Term Liabilities

Definition of Long-term Liabilities:

Long-term debt consist of probable future sacrifices of economic benefits arising from present
obligations that are not payable within a year or the operating cycle of the company,
whichever is longer.
Examples:
► Bonds payable
► Long-term notes payable
► Mortgages payable
► Pension liabilities
► Lease liabilities

Question-01
a) From what sources might a corporation obtain funds through long-term debt?
b) What is a bond indenture? What does it contain?
c) What is a mortgage?

(a) Funds might be obtained through long-term debt from the issuance of bonds, and from the
signing of long-term notes and mortgages.
(b) A bond indenture is a contractual agreement (signed by the issuer of bonds) between the
bond issuer and the bondholders. The bond indenture contains covenants or restrictions for
the protection of the bondholders.
(c) A mortgage is a document which describes the security for a loan, indicates the conditions
under which the mortgage becomes effective (that is, conditions of default), and describes
the rights of the mortgagee under default relative to the security. The mortgage accom-
panies a formal promissory note and becomes effective only upon default of the note.

Question-02

Distinguish between the following interest rates for bonds payable:

(a) Yield rate. (d) Market rate. (b) Nominal rate. (e) Effective rate. (c) Stated rate.

(a) Yield rate—the rate of interest actually earned by the bondholders; it is synonymous with
the effective and market rates.
(b) Nominal rate—the rate set by the party issuing the bonds and expressed as a
percentage of the par value; it is synonymous with the stated rate.
(c) Stated rate—synonymous with nominal rate.
(d) Market rate—synonymous with yield rate and effective rate.
(e) Effective rate—synonymous with market rate and yield rate.
 4. (a) Maturity value—the face value of the bonds; the amount which is payable upon
maturity.

(b) Face value—synonymous with par value and maturity value.

(c) Market (fair) value—the amount realizable upon sale.
(d) Par value—synonymous with maturity and face value.

Question-03
What is off-balance-sheet financing? Why might a company be interested in using off-balance-
sheet financing?
Off-balance-sheet financing is an attempt to borrow monies in such a way that the obligations are
not recorded. Reasons for off-balance sheet financing are:
(1) Many believe removing debt enhances the quality of the balance sheet and permits
credit to be obtained more readily and at less cost.
(2) Loan covenants are less likely to be violated.
(3) The asset side of the balance sheet is understated because fair value is not used for
many assets. As a result, not reporting certain debt transactions offsets the non
recognition of fair values on certain assets.

Question-04
What are some forms of off-balance-sheet financing?

Forms of off-balance-sheet financing include (1) investments in non-consolidated subsidiaries

for which the parent is liable for the subsidiary debt; (2) use of special purpose entities (SPEs),
which are used to borrow money for special projects (resulting in take-or-pay contracts); (3)
operating leases, which when structured carefully give the company the benefits of ownership
without reporting the liability for the lease payments.
Problem-01

Sabonis Cosmetics Co. purchased machinery on December 31, 2016, paying $50,000 down and
agreeing to pay the balance in four equal installments of $40,000 payable each December 31. An
assumed interest of 8% is implicit in the purchase price.
Instructions
Prepare the journal entries that would be recorded for the purchase and for the payments and
interest on the following dates. (Round answers to the nearest cent.)
(a) December 31, 2016. (d) December 31, 2019.
(b) December 31, 2017. (e) December 31, 2020.
(c) December 31, 2018.
PROBLEM 14-9

(a) 12/31/13 Machinery.....................................................................................................

182,485.20
Discount on Notes Payable ..........................................................................
27,514.80
Cash...................................................................................................50,000.00
Notes Payable ................................................................................... 160,000.00
[To record machinery at the
present value of the note plus
the immediate cash payment:
PV of $40,000 annuity @ 8%
for 4 years ($40,000 X
3.31213)].........................................................................................
$132,485.20
Down payment .................................................................................50,000.00
Capitalized value of
Machinery...................................................................................... $182,485.20

(b) 12/31/14 Notes Payable ...............................................................................................

40,000.00
Cash...................................................................................................40,000.00

Interest Expense ...........................................................................................

10,598.82
Discount on Notes Payable ..............................................................10,598.82

Schedule of Note Discount Amortization

Interest Expense Carrying Amount of
Date Cash Paid Amortization Note
12/31/13 $132,485.20
12/31/14 $40,000.00 $10,598.82* $29,401.18 103,084.02**
12/31/15 40,000.00 8,246.72 31,753.28 71,330.74
12/31/16 40,000.00 5,706.46 34,293.54 37,037.20
12/31/17 40,000.00 2,962.80*** 37,037.20 —

*$132,485.20 X 8%
**$103,084.02 = $132,485.20 – $29,401.18.
***$0.18 adjustment due to rounding.
(c) 12/31/15 Notes Payable ...............................................................................................
40,000.00
Cash...................................................................................................40,000.00

Interest Expense ...........................................................................................

8,246.72
Discount on Notes Payable .............................................................. 8,246.72

(d) 12/31/16 Notes Payable ...............................................................................................

40,000.00
Cash...................................................................................................40,000.00

Interest Expense ...........................................................................................

5,706.46
Discount on Notes Payable .............................................................. 5,706.46

(e) 12/31/17 Notes Payable ...............................................................................................

40,000.00
Cash...................................................................................................40,000.00

Interest Expense ...........................................................................................

2,962.80
Discount on Notes Payable .............................................................. 2,962.80

E14-4:
Celine Dion Company issued $600,000 of 10%, 20-year bonds on January 1, 2017, at 102.
Interest is payable semiannually on July 1 and January 1. Dion Company uses the straight-line
method of amortization for bond premium or discount.
Instructions
Prepare the journal entries to record the following.
(a) The issuance of the bonds.
(b) The payment of interest and the related amortization on July 1, 2017.
(c) The accrual of interest and the related amortization on December 31, 2017.

E14-5 (L01) EXCEL (Entries for Bond Transactions—Effective-Interest) Assume the same
information as in E14-4, except that Celine Dion Company uses the effective-interest method of
amortization for bond premium or discount. Assume an effective yield of 9.7705%.
Instructions
Prepare the journal entries to record the following. (Round to the nearest dollar.)
(a) The issuance of the bonds.
(b) The payment of interest and related amortization on July 1, 2017.
(c) The accrual of interest and the related amortization on December 31, 2017.

E14-6 (L01) (Amortization Schedule—Straight-Line) Devon Harris Company sells 10%

bonds having a maturity value of $2,000,000 for $1,855,816. The bonds are dated January 1,
2017, and mature January 1, 2022. Interest is payable annually on January 1.
Instructions
Set up a schedule of interest expense and discount amortization under the straight-line method.
(Round answers to the nearest cent.)
E14-7 (L01) (Amortization Schedule—Effective-Interest) Assume the same information as
E14-6.
Instructions
Set up a schedule of interest expense and discount amortization under the effective-interest
method. (Hint: The effective-interest rate must be computed.)

P14-3 (L01,3) (Negative Amortization) Good-Deal Inc. developed a new sales gimmick to help
sell its inventory of new automobiles. Because many new car buyers need financing, Good-Deal
offered a low down payment and low car payments for the first year after purchase. It believes
that this promotion will bring in some new buyers.
On January 1, 2017, a customer purchased a new $33,000 automobile, making a down payment
of $1,000. The customer signed a note indicating that the annual rate of interest would be 8% and
that quarterly payments would be made over 3 years. For the first year, Good-Deal required a
$400 quarterly payment to be made on April 1, July 1, October 1, and January 1, 2018. After this
one-year period, the customer was required to make regular quarterly payments that would pay
off the loan as of January 1, 2020.
Instructions
(a) Prepare a note amortization schedule for the first year.
(b) Indicate the amount the customer owes on the contract at the end of the first year.
(c) Compute the amount of the new quarterly payments.
(d) Prepare a note amortization schedule for these new payments for the next 2 years.
(e) What do you think of the new sales promotion used by Good-Deal?

(a)

Carrying
Cash Paid Interest Discount Amount of Note
Date Expense Amortized
1/1/14 $32,000
4/1/14 $400 $640* $240 32,240
7/1/14 400 645 245 32,485
10/1/14 400 650 250 32,735
1/1/15 400 655 255 32,990
*($32,000 X 8% X 1/4)

(b) At this point, we see that the customer owes $32,990, or $990 more than at the
beginning of the year.

(c) To earn 8% over the next two years the quarterly payments must be $4,503
computed as follows:
$32,990 ÷ 7.32548 (PVOA8, 2%) = $4,503
(d)
Carrying
Cash Paid Interest Discount Amount of Note
Date Expense Amortized
1/1/14 $32,990
4/1/14 $4,503 $660 $3,843 29,147
7/1/14 4,503 583 3,920 25,227
 10/1/14 4,503 505 3,998 21,229
1/1/15 4,503 425 4,078 17,151
4/1/15 4,503 343 4,160 12,991
7/1/15 4,503 260 4,243 8,748
10/1/15 4,503 175 4,328 4,420
1/1/16 4,503 83* 4,420 0
*rounded up $5

(e) The new sales gimmick may bring people into the showroom the first time but will
drive them away once they learn of the amount of their year 2 and year 3 payments.
Many will not have budgeted for these increases, and will be in a bind because they
owe more on their car than it’s worth. One should question the ethics of a dealer
using this tactic.

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onno percentage bond er carrying value er opor dhore interest expense ber korte hoy.

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sobsomoy carrying value theke bar bar minus korte hobe

# in discount amortization method: cash payment + discount = interest expense ber hobe abong discount
sobsomoy carrying value er sathe plus hobe
 Chapter-05
Owners’ Equity (Accounting for Issuance of Stock)

Corporation
A corporation is created by law, and its continued existence depends upon the corporate statutes
of the state in which it is incorporated. A corporation is a separate entity for both accounting and
legal purpose. As a legal entity, a corporation has most of the rights and privileges of a person.
Owners of a corporation are called stockholders or shareholders.

Special characteristics of the corporate form:

1. Influence of state corporate law.
• Corporation must submit articles of incorporation to the state in which
incorporation is desired.
• State issues a corporation charter.
• Advantage to incorporate in a state whose laws favor the corporate form of
business organization.

2. Use of capital stock or share system.

In the absence of restrictive provisions, each share carries the following rights:
• To share proportionately in profits and losses.
• To share proportionately in management (the right to vote for directors).
• To share proportionately in assets upon liquidation.
• To share proportionately in any new issues of stock of the same class—
called the preemptive right.

3. Development of a variety of ownership interests.

i) Common stock is the residual corporate interest.
• Bears ultimate risks of loss.
• Receives the benefits of success.
• Not guaranteed dividends nor assets upon dissolution.
ii) Preferred stock is a special class of stock is created by contract, when stockholders’
sacrifice certain rights in return for other rights or privileges, usually dividend
preference.
Features often associated with preferred stock:
1. Preference as to dividends.
2. Preference as to assets in the event of liquidation.
3. Convertible into common stock.
4. Callable at the option of the corporation.
 5. Nonvoting.

Corporate Capital
Two Primary Sources of Equity
1. Contributed Capital: i) Common Stock Account ii) Preferred Stock Account iii) Additional
Paid-in Capital Account
2. Retained Earnings Account
Less: Treasury Stock Account
Assets – Liabilities = Equity

Accounting procedures for issuing shares of stock:

Stock issue considerations
a) Authorized Capital: The amount of stock that a corporation is authorized to sell is
indicated in it MOA. The total amount of authorized stock at the time of incorporation
normally anticipates both initial and subsequent capital need of a company.
b) Issued Capital: A corporation can sell stock directly (privately held) or indirectly
(publicly held). To sell directly, it advertises its stock issuance to potential buyers. To sell
indirectly, a corporation pays a brokerage house to issue its stock.
c) Paid in Capital: Paid in capital is the term used to describe the total amount of cash and
other assets paid in to the corporation by stockholders in exchange for capital stock.
d) Market Value of Stock: Market value is the price at which a stock is bought and sold.
Expected future earnings, dividends, growth, and other company and economic factors
influence market value.
e) Par value stock: Par value stock is a class of stock assigned a par value, which an amount
is assigned per share by the corporation in its MOA.
f) No Par Value Stock: No Par Value Stock, or no par stock, is stock not assigned a value
per share by the corporate charter (MOA). No par stock may be no par with stated value
or no par without stated value. In case of former, the directors assigned a stated value per
share. Stated value per share becomes the minimum legal capital. In case of later, the
entire proceeds are treated as legal capital per share.

Accounting for Common Stock:

1. Common stock at par:

Date Accounts Title and Explanation Debit Credit
Cash *****
Common Stock *****

2. Common stock at premium:

Date Accounts Title and Explanation Debit Credit
Cash *****
 Common Stock *****
Paid in capital in excess of par *****

3. Common stock at discount:

Date Accounts Title and Explanation Debit Credit
Cash *****
Discount on Common stock *****
Common Stock *****

4. Common stock for service:

Date Accounts Title and Explanation Debit Credit
Organizational costs *****
Common Stock *****

5. Common stock for non cash assets:

Date Accounts Title and Explanation Debit Credit
Land or Others *****
Common Stock *****

6. Common stock for no par: Issuance 20,000 shares of no-par value common stock for Tk.
3,00,000 cash
Date Accounts Title and Explanation Debit Credit
Cash 3,00,000
Common Stock, No-par value 3,00,000

Accounting for Preferred Stock:

1. Common Preferred stock at par:

Date Accounts Title and Explanation Debit Credit
Cash *****
Preferred Stock *****

2. Common Preferred stock at premium:

Date Accounts Title and Explanation Debit Credit
Cash *****
Preferred Stock, par value *****
Paid in capital in excess of par *****

Accounting for Treasury Stock:

Treasury stock, also known as treasury shares or reacquired stock refers to previously
outstanding stock that is bought back from stockholders by the issuing company. The result is
that the total number of outstanding shares on the open market decreases. These shares are issued
but no longer outstanding and are not included in the distribution of dividends or the calculation
of earnings per share (EPS).
Treasury stock is a contra equity account recorded in the shareholder's equity section of
the balance sheet. Because treasury stock represents the number of shares repurchased from the
open market, it reduces shareholder's equity by the amount paid for the stock.

In addition to not issuing dividends and not being included in EPS calculations, treasury shares
also have no voting rights. The amount of treasury stock repurchased by a company may be
limited by its nation's regulatory body. In the United States, the Securities and Exchange
Commission (SEC) governs buybacks.

Corporations purchase their outstanding stock to:

• Provide tax-efficient distributions of excess cash to stockholders.

• Increase earnings per share and return on equity.
• Provide stock for employee stock compensation contracts or to meet potential
merger needs.
• Thwart (Impede, Hamper) takeover attempts or to reduce the number of
stockholders.
• Make a market in the stock.

Treasury Shares vs. Retired Shares

Treasury stock can be retired or held for resale in the open market. Retired shares are
permanently canceled and cannot be reissued later. Once retired, the shares are no longer listed
as treasury stock on a company's financial statements. Non-retired treasury shares can be
reissued through stock dividends, employee compensation, or a capital rising.

Companies use two general methods of handling treasury stock in the accounts: the cost method
and the par value method. Both methods are generally acceptable. The cost method enjoys more
widespread use.
• The cost method results in debiting the Treasury Stock account for the reacquisition cost and
in reporting this account as a deduction from the total paid-in capital and retained earnings on
the balance sheet.
• The par (stated) value method records all transactions in treasury shares at their par value and
reports the treasury stock as a deduction from capital stock only.

1. Purchase of Treasury Stock:

Date Accounts Title and Explanation Debit Credit
Treasury Stock *****
cash *****

2. Sale of Treasury Stock above cost:

Date Accounts Title and Explanation Debit Credit
Cash *****
 Treasury Stock *****
Paid in capital from Treasury Stock *****

3. Sale of Treasury Stock above cost:

Date Accounts Title and Explanation Debit Credit

Cash *****
Paid in capital from Treasury Stock *****
Treasury Stock *****

Dividend Policy

Types of Dividends
1. Cash dividends.
2. Property dividends
3. Liquidating dividends.
4. Stock dividends.
All dividends, except for stock dividends, reduce the total stockholders’ equity in the
corporation.
Three dates for dividends record:
a. Date of declaration
b. Date of record
c. Date of payment

Illustration: David Freight Corp. on June 10 declared a cash dividend of 50 cents a share on 1.8
million shares payable July 16 to all stockholders of record June 24.

At date of declaration (June 10)

Retained Earnings 900,000
Dividends Payable 900,000
At date of record (June 24) No entry
At date of payment (July 16)
Dividends Payable 900,000
Cash 900,000

Property Dividends
• Dividends payable in assets other than cash.
• Restate at fair value the property it will distribute, recognizing any gain or
loss.
Hopkins, Inc. transferred to stockholders some of its equity investments costing $1,250,000 by
declaring a property dividend on December 28, 2013, to be distributed on January 30, 2014, to
stockholders of record on January 15, 2014. At the date of declaration, the securities have a
market value of $2,000,000. Hopkins makes the following entries.

At date of declaration (December 28, 2013)

Equity Investments 750,000
Unrealized Holding Gain or Loss—Income 750,000
Retained Earnings 2,000,000
Property Dividends Payable 2,000,000

Hopkins, Inc. transferred to stockholders some of its equity investments costing $1,250,000 by
declaring a property dividend on December 28, 2013, to be distributed on January 30, 2014, to
stockholders of record on January 15, 2014. At the date of declaration, the securities have a
market value of $2,000,000. Hopkins makes the following entries.

At date of distribution (January 30, 2014)

Property Dividends Payable 2,000,000

Equity Investments 2,000,000

Liquidating Dividends
• Any dividend not based on earnings reduces corporate paid-in capital.
• The portion of these dividends in excess of accumulated income represents a return of
part of the stockholder’s investment

Illustration: Horaney Mines Inc. issued a “dividend” to its common stockholders of

$1,200,000. The cash dividend announcement noted stockholders should consider $900,000 as
income and the remainder a return of capital. Horaney Mines records the dividend as follows.

Date of declaration
Retained Earnings 900,000
Paid-in Capital in Excess of Par-Common 300,000
Dividends Payable 1,200,000
Date of payment
Dividends Payable 1,200,000
Cash 1,200,000

Stock Dividends and Stock Splits

Stock Dividends
• Issuance by a company of its own stock to stockholders on a pro rata basis,
without receiving any consideration.
• Used when management wishes to “capitalize” part of earnings.
• If stock dividend is less than 20–25 percent of the common shares
outstanding, company transfers fair market value from retained earnings
(small stock dividend).
Illustration: Koebele Corporation has outstanding 1,000 shares of $100 par value common
stock and retained earnings of $50,000. If Koebele declares a 10 percent stock dividend, it issues
100 additional shares to current stockholders. If the fair value of the stock at the time of the stock
dividend is $130 per share, the entry is:
Date of declaration
Retained Earnings 13,000
Common Stock Dividend Distributable 10,000
Paid-in Capital in Excess of Par-Common 3,000
Date of distribution
Common Stock Dividend Distributable 10,000
Common Stock 10,000

Stock Split
• To reduce the market value of shares.
• No entry recorded for a stock split.
• Decrease par value and increase number of shares.
Problem-01:
Omega company issued 10,000 shares of Tk. 10 per common stock for Tk. 1,50,000 on January
2, 2019. On February 5, the company issued 1,000 shares of Tk. 20 per preferred stock at Tk. 2
premium per share. Additional 2,000 shares of common stock were issued on April 13, 2019 to
the land holder to purchase the land. The fair market value of this land was Tk. 26,000. Record
the stock transactions and also show the presentation of shareholders equity on Balance sheet.
Assume that there was a credit balance of retained earnings total Tk. 3,000 at the end of
accounting period on December 31, 2019.
Solution-01:
Omega Company
Journal Entries

Debit Credit
Date Accounts Title and Explanation
(Tk.) (Tk.)
2019 Cash 1,50,000
January 2 Common stock-Tk. 10 par 1,00,000
Paid in capital in excess of Par common stock 50,000
(To record issue 10,000 common stock at Tk.
1,50,000)
February 5 Cash 22,000
Preferred stock-Tk. 20 par 20,000
Paid in capital in excess of Preferred stock 2,000
(To record issue 1,000 Preferred stock at Tk.
22)
April 13 Land 26,000
Common stock-Tk. 10 par 20,000
Paid in capital in excess of Par common stock 6,000
(To record issue 2,000 common stock to the
land holder)

Omega Company
Balance Sheet (Partial)
December 31, 2019

Particulars Tk. Tk.

Stockholder’s Equity
Paid-in Capital:
Common stock-Tk. 10 par value, 12,000 shares issued and outstanding 1,20,000
Add: Paid in capital in excess of Par- common stock 56,000 1,76,000
Preferred stock-Tk. 20 par value, 1,000 shares 20,000
Add: Paid in capital in excess of par- Preferred stock 2,000 22,000
Total Paid-in Capital 1,98,000
Retained Earnings 3,000
Total Stockholder’s Equity 2,01,000

Problem-02:
The Doss Pond Company issued 30,000 shares no par value at Tk. 6, 00,000 on January 7, 2015.
The directors of the company was decided that the value of the share should be Tk. 15 per share.
On March 15, the company issued 1,500 of Tk. 20 par value preferred stock to Mr. Box, who has
assisted to establish the company, as a settlement of debt Tk. 37,500. On May 17, 2015 the
company reacquired 5,000 shares of common stock for Tk. 17 per share. On June 15, the
company resale the reacquired stock 3,000 shares for Tk. 54,000. Again 1,500 treasury stock was
sold at Tk. 16 per share on July 20. Remaining 500 no-par stated value treasury stocks was
retired on December 25, 2015.
Journalize all the transactions and also show the presentation of shareholder’s equity on the
Balance sheet as on December 31, 2015. Assume that the closing balance of retained earnings
was Tk. 50,000.
Dos Pond Company
Journal Entries

Debit Credit
Date Accounts Title and Explanation
(Tk.) (Tk.)
2015 Cash 6,00,000
January 2 Common stock-Tk. 15 par 4,50,000
Paid in capital in excess of Par common stock 1,50,000
(To record issue 30,000 no par stated value
common stock at Tk. 6,00,000)
March 15 Organizational Costs 37,500
Preferred stock-Tk. 20 par 30,000
Paid in capital in excess of Preferred stock 7,500
(To record issue 1,500 Preferred stock par
value to meet organizational cost)
May 17 Treasury stock 85,000
Cash 85,000
(To record purchase 5,000 treasury stock at Tk.
17 each)
June 15 Cash 54,000
Treasury Stock 51,000
Paid in capital from Treasury Stock 3,000
(To record sale 3,000 treasury stock at above
cost.)
July 20 Cash 24,000
Paid in capital from Treasury Stock 1,500
Treasury Stock 25,500
(To record sale 3,000 treasury stock at above
 cost.)
December 25 Common Stock-Tk. 15 stated value (500X15) 7,500
Paid in capital in excess of stated value 2,500
(500X5)
Paid in capital from Treasury Stock 1,500
(3,000-1,500)
Treasury Stock (500X17) 8,500
Retained earnings (Balancing figure) 3,000

Dos Pond Company

Balance Sheet (Partial)
December 31, 2015
treasury balance is zero
Particulars Tk. Tk.
Stockholder’s Equity
Paid-in Capital:
Common stock-Tk. 15 par value, 29,500 shares issued and outstanding 4,42,500
Add: Paid in capital in excess of Par- common stock (150000-2500) 1,47,500 5,90,000
Preferred stock-Tk. 20 par value, 1,500 shares 30,000
Add: Paid in capital in excess of par- Preferred stock 7,500 37,500
Total Paid-in Capital 6,27,500
Retained Earnings (50,000+3,000) 53,000
Total Stockholder’s Equity 6,80,500

Note:
1. On selling remaining treasury stock, any gain or loss balance of treasury stock
transactions should be zero.
2. Any balancing figure should be adjusted with Retained Earnings Account.

Problem-03:
Record the following transactions relating the stock in the books of ABC enterprise in 2019:

January 5 Common stock 10,000 shares of Tk. 10 par value was issued for Tk. 12 each.
March 3 Issued 1,500 preferred stock of Tk. 25 par value at Tk. 23 per shares.
August 7 Reacquired 4,000 own common stock from the market for Tk. 52,000.
October 2 Sale 3,000 common stock at Tk. 15 each which was purchased on August 7.
November 9 Resale 400 common stock for Tk. 4,800 that was acquired as Treasury stock.
December 8 Sale the remaining treasury stock for Tk. 10 each.
Show the Balance sheet presentation of Stockholders equity.

ABC Enterprise
Journal Entries

Debit Credit
Date Accounts Title and Explanation
(Tk.) (Tk.)
2015 Cash (10,000X12) 1,20,000
 January 5 Common stock-Tk. 10 par value 1,00,000
Paid in capital in excess of Par common stock 20,000
(To record issue 10,000 par common stock at
premium)
March 3 Cash (1,500X23) 34,500
Discount (1,500 X 2) 3,000
Preferred Stock-Tk. 25 par (1,500 X25) 37,500
(To record issue of 1,500 Preferred stock at
discount)
August 7 Treasury stock (4,000X13) 52,000
Cash 52,000
(To record purchase 4,000 treasury stock at Tk.
13 each)
October 2 Cash (3,000X15) 45,000
Treasury Stock (3,000X13) 39,000
Paid in capital from Treasury Stock 6,000
(To record sale 3,000 treasury stock at above
cost.)
Nov. 9 Cash (400X12) 4,800
Paid in capital from Treasury Stock 400
Treasury Stock (400X13) 5,200
(To record sale 400 treasury stock at below
cost.)
December 8 Cash (600X10) 6,000
Paid in capital from Treasury stock 1,800
Treasury Stock (600X13) 7,800
(To record the sale of 600 remaining treasury
stock)
December 8 Paid in capital from Treasury stock 3,800
Retained earnings (Balancing figure) 3,800
(6,000-400-1,800)
#treasury
treasurybalance retained
stock er lovangssho balanceearnings
bochor seshe zero korte hobe abong retained earnings e transfer
korte hobe ABC Enterprise
Balance Sheet (Partial)
December 31, 2019

Particulars Tk. Tk.

Stockholder’s Equity
Paid-in Capital:
Common stock-Tk. 10 par value, 10,000 shares issued and outstanding 1,00,000
Add: Paid in capital in excess of Par- common stock 20,000 1,20,000
Preferred stock-Tk. 25 par value, 1,500 shares 37,500
Less: Discount- Preferred stock 3,000 34,500
Total Paid-in Capital 1,54,500
Retained Earnings 3,800
Total Stockholder’s Equity 1,58,300
# treasury stock er balance ke retained earnings e nite hobe,, balance sheet e rakha jabe na
 treasury balance retained earnings

treasury balance retained earnings

Note:
3. On selling remaining treasury stock, any gain or loss balance of treasury stock
transactions should be zero.
4. Any balancing figure should be adjusted with Retained Earnings Account.

Problem-04:
Record the following transactions of Z enterprise in 2019:

January 2 25,000 shares of common stock were issued for Tk. 5, 00,000.
April 17 Issued 1,000 preferred stock of Tk. 20 par value at Tk. 25 per shares.
September 13 Reacquired 5,000 own common stock from the market for Tk. 1,35,000.
October 12 Sale 3,000 common stock at Tk. 30 each which was purchased on September 13.
December 10 Resale 1,000 common stock for Tk. 26,000 that was acquired as Treasury stock.
December 25 Retired the remaining treasury stock.
Show the Balance sheet presentation of Stockholders equity.

Z Enterprise
Journal Entries

Debit Credit
Date Accounts Title and Explanation
(Tk.) (Tk.)
2019 Cash 5,00,000
January 2 Common stock-no par common stock 5,00,000
(To record issue 25,000 par common stock)
April 17 Cash (1,000X25) 25,000
Preferred Stock-Tk. 20 par (1,000 X20) 20,000
Paid in capital from Preferred Stock 5,000
(To record issue of 1,000 Preferred stock at
premium)
September 13 Treasury stock 1,35,000
Cash 1,35,000
(To record purchase 5,000 treasury stock at Tk.
27 each)
October 12 Cash (3,000X30) 90,000
Treasury Stock (3,000X27) 81,000
Paid in capital from Treasury Stock 9,000
(To record sale 3,000 treasury stock at above
cost.)
December 10 Cash 26,000
Paid in capital from Treasury Stock 1,000
Treasury Stock (1,000X27) 27,000
(To record sale 1,000 treasury stock at below
cost.)
December 25 Common stock-No par {(5,00,000/25,000)x1,000 20,000
 Paid in capital from Treasury stock (9000-1000) 8,000
Treasury Stock (1000X27) 27,000
Retained earnings (Balancing figure) 1,000
(To record the retirement of 1,000 no-par
common stock)

Z Enterprise
Balance Sheet (Partial)
December 31, 2019

Particulars Tk. Tk.

Stockholder’s Equity
Paid-in Capital:
Common stock-no par 24,000 shares outstanding 4,80,000
Preferred stock-Tk. 20 par value, 1,000 shares 20,000
Paid-in Capital in excess of par- Preferred stock 5,000 25,000
Total Paid-in Capital 5,05,000
Retained Earnings 1,000
Total Stockholder’s Equity 5,06,000

ASSIGNMENT/HOMEWORK (16th edition) (Intermediate Accounting; Kieso, Kimmel,

Weigndt) (Chapter-15)

Exercise no. 15.2; 15.18

Problem no. 15.1; 15.2; 15.3
# treasury stock er lovvanghsher balance thakle ta "Additional Paid in Capital" e jabe. ar jodi balance na
thake ba loss beshi hoy tokhon retained earning er balance kombe

# jodi treasury stock sompurno birkri na hoy tahole jototuk bikri na hobe tototuk balance retained
earnings theke "Cost of treasury stock" name minus korte hobe

# purbe kono lav hoy ni tai "paid in capital" account toiri hoy ni. tai direct "retained earning" komate hobe.

# dividend, issued share er opor dhorte hoy.

# shareholders equity te sobsomoy issued share er mullo ber korte hobe. treasury stock pura ta bikri na
hole sei balance common stock theke bad deya jabe na oita shudhu retained earnings theke "Cost of
treasury stock" name minus korte hobe.
 Chapter- 7(1)
Preparation of Complete Set of Corporate
Financial Statements

Objective of IAS 1

The objective of IAS 1 (2007) is to prescribe the basis for presentation of general purpose
financial statements, to ensure comparability both with the entity's financial statements of
previous periods and with the financial statements of other entities. IAS 1 sets out the overall
requirements for the presentation of financial statements, guidelines for their structure and
minimum requirements for their content.
Objective of financial statements

The objective of general purpose financial statements is to provide information about the
financial position, financial performance, and cash flows of an entity that is useful to a wide
range of users in making economic decisions. To meet that objective, financial statements
provide information about an entity's:

• assets
• liabilities
• equity
• income and expenses, including gains and losses
• contributions by and distributions to owners (in their capacity as owners)
• cash flows.

That information, along with other information in the notes, assists users of financial
statements in predicting the entity's future cash flows and, in particular, their timing and
certainty.

Components of financial statements

A complete set of financial statements includes: [IAS 1.10]

• a statement of financial position (balance sheet) at the end of the period

• a statement of profit or loss and other comprehensive income for the period (presented
as a single statement, or by presenting the profit or loss section in a separate statement
of profit or loss, immediately followed by a statement presenting comprehensive
income beginning with profit or loss)
• a statement of changes in equity for the period
• a statement of cash flows for the period
• notes, comprising a summary of significant accounting policies and other explanatory
notes
• comparative information prescribed by the standard.

Comparative information
IAS 1 requires that comparative information to be disclosed in respect of the previous period
for all amounts reported in the financial statements, both on the face of the financial
statements and in the notes, unless another Standard requires otherwise. Comparative
information is provided for narrative and descriptive where it is relevant to understanding the
financial statements of the current period.

Statement of financial position (balance sheet)

Current and non-current classification

An entity must normally present a classified statement of financial position, separating

current and non-current assets and liabilities, unless presentation based on liquidity provides
information that is reliable. In either case, if an asset (liability) category combines amounts
that will be received (settled) after 12 months with assets (liabilities) that will be received
(settled) within 12 months, note disclosure is required that separates the longer-term amounts
from the 12-month amounts.

Current assets are assets that are:

• expected to be realised in the entity's normal operating cycle

• held primarily for the purpose of trading
• expected to be realised within 12 months after the reporting period
• cash and cash equivalents (unless restricted).

All other assets are non-current.

Current liabilities are those:

• expected to be settled within the entity's normal operating cycle

• held for purpose of trading
• due to be settled within 12 months
• for which the entity does not have an unconditional right to defer settlement beyond
12 months (settlement by the issue of equity instruments does not impact
classification).

Other liabilities are non-current.

When a long-term debt is expected to be refinanced under an existing loan facility, and the
entity has the discretion to do so, the debt is classified as non-current, even if the liability
would otherwise be due within 12 months.

Minimum line items

The minimum line items to be included on the face of the statement of financial position are:

(a) property, plant and equipment

(b) investment property
 (c) intangible assets
(d) financial assets (excluding amounts shown under (e), (h), and (i))
(e) investments accounted for using the equity method
(f) biological assets
(g) inventories
(h) trade and other receivables
(i) cash and cash equivalents
(j) assets held for sale
(k) trade and other payables
(l) provisions
(m) financial liabilities (excluding amounts shown under (k) and (l))
(n) current tax liabilities and current tax assets, as defined in IAS 12
(o) deferred tax liabilities and deferred tax assets, as defined in IAS 12
(p) liabilities included in disposal groups
(q) non-controlling interests, presented within equity
(r) issued capital and reserves attributable to owners of the parent.

Format of statement

IAS 1 does not prescribe the format of the statement of financial position. Assets can be
presented current then non-current, or vice versa, and liabilities and equity can be presented
current then non-current then equity, or vice versa. A net asset presentation (assets minus
liabilities) is allowed.

Share capital and reserves

Regarding issued share capital and reserves, the following disclosures are required:

• numbers of shares authorized, issued and fully paid, and issued but not fully paid
• par value (or that shares do not have a par value)
• a reconciliation of the number of shares outstanding at the beginning and the end of
the period
• description of rights, preferences, and restrictions
• treasury shares, including shares held by subsidiaries and associates
• shares reserved for issuance under options and contracts
• a description of the nature and purpose of each reserve within equity.

Additional disclosures are required in respect of entities without share capital and where an
entity has reclassified puttable financial instruments.

Statement of profit or loss and other comprehensive income

Concepts of profit or loss and comprehensive income

Profit or loss is defined as "the total of income less expenses, excluding the components of
other comprehensive income". Other comprehensive income is defined as comprising "items
of income and expense (including reclassification adjustments) that are not recognised in
profit or loss as required or permitted by other IFRSs". Total comprehensive income is
defined as "the change in equity during a period resulting from transactions and other events,
other than those changes resulting from transactions with owners in their capacity as owners".

Comprehensive income Profit Other

= +
for the period or loss comprehensive income

All items of income and expense recognised in a period must be included in profit or loss
unless a Standard or an Interpretation requires otherwise. Some IFRSs require or permit that
some components to be excluded from profit or loss and instead to be included in other
comprehensive income.

Examples of items recognized outside of profit or loss

• Changes in revaluation surplus where the revaluation method is used under IAS 16
Property, Plant and Equipment and IAS 38 Intangible Assets
• Remeasurements of a net defined benefit liability or asset recognised in accordance
with IAS 19 Employee Benefits (2011)
• Exchange differences from translating functional currencies into presentation
currency in accordance with IAS 21 The Effects of Changes in Foreign Exchange
Rates
• Gains and losses on remeasuring available-for-sale financial assets in accordance with
IAS 39 Financial Instruments: Recognition and Measurement
• The effective portion of gains and losses on hedging instruments in a cash flow hedge
under IAS 39 or IFRS 9 Financial Instruments
• Gains and losses on remeasuring an investment in equity instruments where the entity
has elected to present them in other comprehensive income in accordance with IFRS 9
• The effects of changes in the credit risk of a financial liability designated as at fair
value through profit and loss under IFRS 9.

In addition, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires
the correction of errors and the effect of changes in accounting policies to be recognised
outside profit or loss for the current period.

Choice in presentation and basic requirements

An entity has a choice of presenting:

• a single statement of profit or loss and other comprehensive income, with profit or
loss and other comprehensive income presented in two sections, or
• two statements:
o a separate statement of profit or loss
o a statement of comprehensive income, immediately following the statement of
profit or loss and beginning with profit or loss.

The statement(s) must present:

 • profit or loss
• total other comprehensive income
• comprehensive income for the period
• an allocation of profit or loss and comprehensive income for the period between non-
controlling interests and owners of the parent.

Profit or loss section or statement

The following minimum line items must be presented in the profit or loss section (or separate
statement of profit or loss, if presented): [IAS 1.82-82A]

• revenue
• gains and losses from the derecognition of financial assets measured at amortised cost
• finance costs
• share of the profit or loss of associates and joint ventures accounted for using the
equity method
• certain gains or losses associated with the reclassification of financial assets
• tax expense
• a single amount for the total of discontinued items

Expenses recognised in profit or loss should be analysed either by nature (raw materials,
staffing costs, depreciation, etc.) or by function (cost of sales, selling, administrative, etc).
[IAS 1.99] If an entity categorises by function, then additional information on the nature of
expenses – at a minimum depreciation, amortisation and employee benefits expense – must
be disclosed. [IAS 1.104]

Other comprehensive income section

The other comprehensive income section is required to present line items which are classified
by their nature, and grouped between those items that will or will not be reclassified to profit
and loss in subsequent periods. [IAS 1.82A]

Other requirements

Additional line items may be needed to fairly present the entity's results of operations. [IAS
1.85]

Items cannot be presented as 'extraordinary items' in the financial statements or in the notes.
[IAS 1.87]

Certain items must be disclosed separately either in the statement of comprehensive income
or in the notes, if material, including: [IAS 1.98]

• write-downs of inventories to net realisable value or of property, plant and equipment

to recoverable amount, as well as reversals of such write-downs
 • restructurings of the activities of an entity and reversals of any provisions for the costs
of restructuring
• disposals of items of property, plant and equipment
• disposals of investments
• discontinuing operations
• litigation settlements
• other reversals of provisions

Statement of cash flows

Rather than setting out separate requirements for presentation of the statement of cash flows,
IAS 1.111 refers to IAS 7 Statement of Cash Flows.

Statement of changes in equity

IAS 1 requires an entity to present a separate statement of changes in equity. The statement
must show: [IAS 1.106]

• total comprehensive income for the period, showing separately amounts attributable
to owners of the parent and to non-controlling interests
• the effects of any retrospective application of accounting policies or restatements
made in accordance with IAS 8, separately for each component of other
comprehensive income
• reconciliations between the carrying amounts at the beginning and the end of the
period for each component of equity, separately disclosing:
o profit or loss
o other comprehensive income*
o transactions with owners, showing separately contributions by and
distributions to owners and changes in ownership interests in subsidiaries that
do not result in a loss of control

* An analysis of other comprehensive income by item is required to be presented either in the

statement or in the notes. [IAS 1.106A]

The following amounts may also be presented on the face of the statement of changes in
equity, or they may be presented in the notes: [IAS 1.107]

• amount of dividends recognised as distributions

• the related amount per share.

Notes to the financial statements

The notes must: [IAS 1.112]

• present information about the basis of preparation of the financial statements and the
specific accounting policies used
• disclose any information required by IFRSs that is not presented elsewhere in the
financial statements and
• provide additional information that is not presented elsewhere in the financial
statements but is relevant to an understanding of any of them
Notes are presented in a systematic manner and cross-referenced from the face of the
financial statements to the relevant note. [IAS 1.113]

IAS 1.114 suggests that the notes should normally be presented in the following order:

• a statement of compliance with IFRSs

• a summary of significant accounting policies applied, including: [IAS 1.117]
o the measurement basis (or bases) used in preparing the financial statements
o the other accounting policies used that are relevant to an understanding of the
financial statements
• supporting information for items presented on the face of the statement of financial
position (balance sheet), statement(s) of profit or loss and other comprehensive
income, statement of changes in equity and statement of cash flows, in the order in
which each statement and each line item is presented
• other disclosures, including:
o contingent liabilities (see IAS 37) and unrecognised contractual commitments
o non-financial disclosures, such as the entity's financial risk management
objectives and policies (see IFRS 7 Financial Instruments: Disclosures)

Other disclosures

Judgements and key assumptions

An entity must disclose, in the summary of significant accounting policies or other notes, the
judgements, apart from those involving estimations, that management has made in the
process of applying the entity's accounting policies that have the most significant effect on
the amounts recognised in the financial statements. [IAS 1.122]

Dividends

In addition to the distributions information in the statement of changes in equity (see above),
the following must be disclosed in the notes: [IAS 1.137]

• the amount of dividends proposed or declared before the financial statements were
authorised for issue but which were not recognised as a distribution to owners during
the period, and the related amount per share
• the amount of any cumulative preference dividends not recognised.

Capital disclosures

An entity discloses information about its objectives, policies and processes for managing
capital. [IAS 1.134] To comply with this, the disclosures include: [IAS 1.135]

• qualitative information about the entity's objectives, policies and processes for
managing capital, including>
o description of capital it manages
o nature of external capital requirements, if any
o how it is meeting its objectives
• quantitative data about what the entity regards as capital
• changes from one period to another
 • whether the entity has complied with any external capital requirements and
• if it has not complied, the consequences of such non-compliance.

Puttable financial instruments

IAS 1.136A requires the following additional disclosures if an entity has a puttable
instrument that is classified as an equity instrument:

• summary quantitative data about the amount classified as equity

• the entity's objectives, policies and processes for managing its obligation to
repurchase or redeem the instruments when required to do so by the instrument
holders, including any changes from the previous period
• the expected cash outflow on redemption or repurchase of that class of financial
instruments and
• information about how the expected cash outflow on redemption or repurchase was
determined.

Other information

The following other note disclosures are required by IAS 1 if not disclosed elsewhere in
information published with the financial statements: [IAS 1.138]

• domicile and legal form of the entity

• country of incorporation
• address of registered office or principal place of business
• description of the entity's operations and principal activities
• if it is part of a group, the name of its parent and the ultimate parent of the group
• if it is a limited life entity, information regarding the length of the life

Terminology

The 2007 comprehensive revision to IAS 1 introduced some new terminology. Consequential
amendments were made at that time to all of the other existing IFRSs, and the new
terminology has been used in subsequent IFRSs including amendments. IAS 1.8 states:
"Although this Standard uses the terms 'other comprehensive income', 'profit or loss' and
'total comprehensive income', an entity may use other terms to describe the totals as long as
the meaning is clear. For example, an entity may use the term 'net income' to describe profit
or loss." Also, IAS 1.57(b) states: "The descriptions used and the ordering of items or
aggregation of similar items may be amended according to the nature of the entity and its
transactions, to provide information that is relevant to an understanding of the entity's
financial position."

Term before 2007 revision of IAS 1 Term as amended by IAS 1 (2007)

balance sheet statement of financial position
cash flow statement statement of cash flows
statement of comprehensive income (income
income statement statement is retained in case of a two-statement
approach)
recognised in the income statement recognised in profit or loss
recognised [directly] in equity (only
recognised in other comprehensive income
for OCI components)
recognised [directly] in equity (for recognised outside profit or loss (either in OCI or
recognition both in OCI and equity) equity)
removed from equity and recognised reclassified from equity to profit or loss as a
in profit or loss ('recycling') reclassification adjustment
Standard or/and Interpretation IFRSs
on the face of in
equity holders owners (exception for 'ordinary equity holders')
balance sheet date end of the reporting period
reporting date end of the reporting period
after the balance sheet date after the reporting period

Problem No. 1
The Trial Balance of Yeasmine Ltd. As on 30th September, 2022 and additional information
are given as follows:

Particulars Taka Taka

‘000 ‘000
Sales 1,03,500
Inventories at 1 October 2021 5,460
Purchases 67,206
Distribution costs 8,000
Sales people commission 2,920
Administrative Salaries 2,280
Manufacturing Wages 2,000
Finance cost (Interest paid) 540
Administrative expenses 5,000
3% debenture loans 18,000
Equity share capital 60,000
Retained earnings at 1st October 2021 8,495
Cash 2,685
Dividend paid 2,820
Revaluation reserve @ 1st October 2021 6,000
Trade payable 5,861
Land and buildings-At Cost 92,578
Accumulated Depreciation- Land and 25,000
buildings
Plant and Equipment 35,000
Accumulated Depreciation- Plant and 15,313
Equipment
Trade receivables 16,395
Accruals 715
2,42,884 2,42,884

Additional information:
 i. Inventories were valued at Tk. 7850000 on September 2022;
ii. Depreciation is to be provided for the year to 30 September 2022 as follows:
1. Building @ 10% per annum Straight line basis;
2. Plant and Equipment @ 25% per annum reducing balance basis;
Depreciation is to be apportioned as follows:
a. Cost of Sales @ 55%;
b. Distribution Costs @ 30%;
c. Administrative expenses @ 15%.
iii. Land and Buildings in the trial balance includes a value for land at Tk. 42578000. It is
to be revalued at Tk. 61000000 and this revaluation is to be included in the financial
statements for 30th September, 2022.
iv. A bad debt of Tk. 21,000 which is included in trade receivables is to be written-off.
v. Administrative expenses of Tk. 85,000 owing at 30 September, 2022 are to be
provided for.
vi. The companies tax charge for the year has been estimated as Tk. 15,00,000.
Required:
Compliance with the IAS-1: Presentation of Financial Statements, you have to prepare a
Statement of Profit or Loss and Other Comprehensive Income and Statement of Changes in
Equity for Yeasmine Ltd. For the year ended 30 September, 2014 and also the Statement of
Financial Position as at that date.
Problem No. 2
The following trial balance has been extracted from the books of accounts of Keya
International Ltd. As at 31st March, 2022.

Particulars Taka Taka

‘000 ‘000
Purchase 9,60,000
Inventories (at 1 April 2021) 1,50,000
Accounts payables 2,60,000
Revenue 20,10,000
Administrative expenses 2,10,000
Ordinary Share capital 6,00,000
Accounts receivable 4,70,000
Advanced, Deposits and prepayments 2,00,000
Bank overdraft 80,000
Provisions for warranty costs 2,05,000
Distribution costs 4,20,000
Non-current asset investments 5,60,000
Investment income 75,000
Finance cost 10,000
Freehold land and building cost 2,00,000
Term loan 2,00,000
Plant and equipment at cost 5,50,000
Accumulated depreciation- Plant and
equipment 2,20,000
Retained earnings (at 1 April, 2011) 1,80,000
Final dividend paid for 2021 65,000
 Final dividend paid for 2022 35,000
38,30,000 38,30,000
Additional Information:
i. Inventories at 31 March 2022 were valued at Tk. 1,60,000;
ii. The following items are already included in the balances listed in the trial balance:

Distribution costs Administrative

expenses
Depreciation charges for the year Tk. 27,000 5,000
Employee expenses 1,50,000 80,000

iii. The income tax charges for the year is estimated at Tk. 74,000;
iv. The warranty provision is to increased by Tk. 16,000, charged to administrative
expenses. Product warranty period is 2 years.
v. Staff bonuses totaling Tk. 40,000 are to be provided for, charged equally to
distribution costs and administrative expenses;
vi. The freehold land and buildings were bought on the last day of the accounting period
at a bargain price. They are to be revalued to Tk. 2,80,000;
vii. In May 2022 a final dividend for 2022 of 10 paisa per share was proposed on each of
the company’s 6, 00,000 ordinary shares.

Required:

Compliance with the IAS-1: Presentation of Financial Statements, you have to prepare
a Statement of Profit or Loss and Other Comprehensive Income and Statement of
Changes in Equity for Keya International Ltd. For the year ended 30 September, 2014
and also the Statement of Financial Position as at that date.
Problem No. 3
The trial balance of Mercury at 30 June 2012 was as follows:

Dr. Cr.
Tk. ‘000 Tk. ‘000
7% Preferred shares of Tk. 1 500
Ordinary shares of 50 cents 250
Share premium account 180
Retained earnings, at 1 July 2011 70
Inventory, 1 July 2011 450
Land at cost 300
Buildings at cost 900
Buildings, accumulated depreciation, 1 July 2011 135
Plant at cost 1,020
Plant, accumulated depreciation, 1 July 2011 370
Trade payables 900
Trade receivables 600
Allowance for doubtful debts, at 1 July 2011 25
Purchases 2,030
Administrative expenses 205
 Revenue 3,000
Distribution costs 240
Other expenses 50
Bank balance 110
Ordinary dividend paid 25
10% Loan notes 500
5,930 5,930

You are provided with the following additional information:

i. Depreciation on buildings is to be provided at 5% per year on cost and allocated to

administrative expenses.
ii. Plant is to be depreciated at 20% per year using the reducing balance method and
included in distribution costs.
iii. Closing inventory is valued at Tk. 500,000.
iv. The allowance for doubtful debts is to be maintained at 5% of trade accounts
receivable balances.
v. An accrual for distribution wages of Tk. 30,000 is required.
vi. Interest on the loan notes has not been paid during the year.
vii. During June, a bonus (or scrip) issue of two for five was made to ordinary
shareholders. This has not been entered into the books. The bonus shares do not rank
for dividend for the current financial year.
viii. Provisions are to be made for the following:
a. the preferred dividend for the year;
b. an income tax charge of Tk. 55,000 for the year.
Required:

Prepare for Mercury for the year ended 30 June 2012, in accordance with IAS 1 Presentation
of Financial Statements:
1. a statement of profit or loss; and
2. a statement of changes in equity; and
3. a statement of financial position.

Notes to the accounts are NOT required.

Problem No. 4
The balances listed below were extracted from the records of Sulphur Co on 30 June 2012:

Taka
Revenue 530,650
Purchases 298,400
Returns (inwards) 1,880
Delivery vehicles (carrying amount) 19,230
Factory plant and equipment (carrying amount) 24,000
Land and buildings (carrying amount) 350,000
Factory overheads 66,420
Administrative expenses 18,710
Rent received 12,000
 Investments (unlisted) 30,000
Investment income 1,500
Inventory at 1 July 2011 24,680
Trade receivables 15,690
Trade payables 34,700
Distribution costs 44,280
Cash in hand 410
Bank overdraft 4,820
Ordinary shares (Tk. 1 each) 150,000
Retained earnings at 1 July 2011 160,030

The following transactions and events occurred on 30 June 2012, after the above balances
had been extracted:
(1) Sulphur received Tk. 460 from a customer.
(2) Inventory was valued at Tk. 29,170 at the close of business.
(3) Sulphur received an electricity bill for Tk. 1,240 relating to the factory for the three
months to 30 June 2012. The bill was paid in July 2012.
(4) Sulphur paid Tk. 690 to a supplier in full settlement of an invoice for Tk. 700.
(5) The company’s land and buildings were valued by a chartered surveyor at Tk.
390,000 and the new value is to be included in the statement of financial position.
(6) Depreciation was provided on the reducing balance basis at the following annual
rates:
Delivery vehicles 20%
Factory plant and equipment 10%

(7) Bonus shares were issued on the basis of one for every two held on 29 June 2012.
(8) Income tax for the financial year ended 30 June 2012 was estimated at Tk. 38,100.

Required:
Prepare for Sulphur for the year ended 30 June 2012, in accordance with IAS 1 Presentation
of Financial Statements:
a) a statement of total comprehensive income using the “cost of sales” (i.e. function of
expense) method;
b) a statement of changes in equity; and
c) a statement of financial position.

Problem No. 5
Cayman prepares annual financial statements to 30 September. At 30 September 2011, the
company’s list of account balances was as follows:

Tk. ‘000 Tk. ‘000

Revenue 7,400
Production costs 4,140
Inventory at 1 October 2010 695
Distribution costs 540
Administrative expenses 730
Loan interest expense 120
Land at valuation 5,250
 Buildings – cost 4,000
accumulated depreciation at 1 October 2010 1,065
Plant and equipment-cost 6,400
accumulated depreciation at 1 October 2010 1,240
Trade accounts receivable 2,060
Trade accounts payable 1,120
Bank overdraft 40
Issued shares (50 cent ordinary) at 30 September 2011 7,000
Share premium account at 30 September 2011 2,000
Revaluation surplus 1,500
Retained earnings 1,570
12% loan (payable 2018) ----- 1,000
23,935 23,935

The following matters are relevant to the preparation of the financial statements for the year
ended 30 September 2011:
(1) Inventory at 30 September 2011 amounted to Tk. 780,000 at cost before adjusting for the
following:
Items which had cost Tk. 40,000 and which would normally sell for Tk. 60,000 were found
to be faulty. Tk. 10,000 needs to be spent on these items in order to sell them for Tk. 45,000.
(i) Goods sent to a customer on a sale or return basis have been omitted from inventory and
included as sales in September 2011. The cost of these items was Tk. 8,000 and they were
included in revenue at Tk. 12,000. The goods were returned by the customer in October
2011.
(2) Depreciation is to be provided on cost as follows:
Buildings: 2% per year
Plant and equipment: 20% per year
80% of the depreciation is to be charged to cost of sales and 10% to each of
distribution costs and administrative expenses.
(3) Land is to be revalued to Tk. 5,000,000.
(4) Accrued expenses and prepayments were:
Accrued expenses Prepayments
Tk. 000 Tk. 000
Distribution costs 95 60
Administrative expenses 35 30

(5) During the year 4 million ordinary shares were issued at 75 cents each. The directors of
Cayman declared an interim dividend of 2 cents per share in September 2011. No dividends
were paid during the year.
(6) Loan interest is paid annually, in arrears, on 30 September each year.

Required:

Prepare for Cayman for the year ended 30 September 2011 in accordance with IAS 1
Presentation of Financial Statements:
1. a statement of total comprehensive income;
2. a statement of financial position; and
3. a statement of changes in equity,
Notes to the financial statements are NOT required.
Problem No. 6
Agrani Limited, a company with an authorized capital of Tk. 8, 00,000 divided in shares of
Tk. 20 each, showed the following balances as on December 31, 2014

Particulars Taka Taka

Share capital 4,00,000
Buildings 1,70,000
Rates and taxes 5,400
Purchases 14,53,980
Sales 18,94,200
Accounts receivable 1,74,480
Purchase returns 5,520
Accounts payable 1,22,400
Salaries 1,00,000
Bad debts 7,300
Allowance for doubtful accounts 9,300
Interim dividend paid 20,000
Insurance premium 2,920
Office expenses 75,340
Furniture 14,000
Accumulated Depreciation-Furniture 7,000
General Reserve 70,000
Inventory 2,01,980
Cash at bank 1,00,240
Wages 1,17,840
Motor vehicles 1,50,000
Accumulated depreciation-Motor vehicles 50,000
Discounts 5,820 800
Income statements 40,080
15,00,000 15,00,000

Additional information:

i. Closing inventory valued at Tk. 2, 40,000, which does not include goods amount Tk.
24,000 destroyed by the fire. Insurance company admitted the claim to the extent to
Tk. 22,500.
ii. Rates and taxes cover 15 months to 31st March 2015 and the insurance was accrued
Tk. 920.
iii. General reserve to be raised by Tk. 30,000.
iv. Depreciation on all types of tangible fixed assets @ 10% per annum.
v. Total dividend for this year 20% on paid up capital.
You are required to prepare:

a. Comprehensive Income Statement for the year ended 31 December, 2014;

b. Statement of Financial Position as at 31 December, 2014;

Problem No. 7
The following is the Trial Balance of Salman Ltd. As of December 31, 2014
 Particulars Taka Taka
Share capital (Tk. 10 par share) 1,00,000
Paid-in capital in excess of par 5,000
General reserve 25,000
Debenture, 8% issued on July 1, 2014 50,000
Buildings and accumulated depreciation 1,10,000 30,000
Plant and Machinery and accumulated depreciation 70,000 20,000
Investment 14,000
Preliminary expenses 8,000
Cash in hand and at bank 23,000
Inventory 64,000
Accounts receivable and accounts payable 35,000 15,000
Advance income tax 4,000
Purchase and sales 1,25,000 2,04,000
Returns 2,000 3,000
Bad debts and allowance for bad debts 2,300 800
Salaries 6,000
Printing and stationery 700
Interest expense on debenture 1,700
Insurance expense 1,200
Audit fees 1,400
Interest received 1,000
Income statement 14,500
4,68,300 4,68,300

Additional information:

i. Closing inventory valued at Tk. 55,000, which includes goods amount Tk. 4,000
destroyed by the fire. Insurance company admitted the claim to the extent to Tk.
2,500.
ii. General reserve to be raised to Tk. 30,000.
iii. Accrued salaries were Tk. 1,000.
iv. Insurance was paid for twelve months on March31, 2014.
v. Depreciation on Building and Machinery @ 12% per annum.
vi. 25% preliminary expenses should amortize this year.
vii. Dividend was declared 25% on paid up capital.

You are required to prepare:

a. Comprehensive Income Statement for the year ended 31 December, 2014;

b. Statement of Financial Position as at 31 December, 2014;

Problem No. 8
Ajita ltd. was registered with 30,000 shares of Tk. 10 each. Following is the Trial Balance as
on 31st December 2014.
 Accounts Title Taka Taka
Land and Buildings 70,000
12% investment 10,000
Plant and Machinery 80,000
Furniture and Fixtures 20,000
Inventory 40,000
Purchase 1,00,000
Wages 20,000
Salary 10,000
Advertisement 3,000
Discounts on Dentures 1,000
Accounts Receivable 25,000
Rates and Taxes 1,500
Bad debts 2,000
Repairs of plants 1,000
Preliminary expenses 5,000
Goodwill 30,000
Cash at Bank 75,000
Cash in Hand 1,000
Accounts Payable 20,000
Sales 2,20,000
Paid up capital (16,400 shares) 1,64,000
10% Debentures 50,000
Reserve fund 20,000
Transfer fees 500
Retained Earnings 20,000
4,94500 4,94,500
Other Information:

i. Closing inventory Tk. 50,000.

ii. Write off Goodwill by 10% and Preliminary expenses by 20%.
iii. Depreciate Plant and Machinery by 10%, Land and Building by 2% and Furniture and
Fixture by 15%.
iv. The directors proposed 5% dividend.
v. Increase the Reserve fund to Tk. 30,000.
vi. Provide a Allowance of 5% for bad debts and doubtful debts.

You are required to prepare:

a. Comprehensive Income Statement for the year ended 31 December, 2014;

b. Statement of Financial Position as at 31 December, 2014.

Problem No. 9
You are given below the Trial Balance and other information for adjustment from the books
of Cosmopolitan Trading Company Ltd.:

Particulars Taka Taka

 Land and Buildings (Cost Tk. 5,00,000) 4,10,000 -----
Plant and machinery (Cost Tk. 4,50,000) 3,40,000 -----
Preliminary expenses 15,000 -----
Stock (01.07.2011) 65,000 -----
Purchases 3,30,000 -----
Salaries 50,000 -----
General expenses 12,500 -----
Directors fees 6,000 -----
Auditors fees 1,500 -----
Wages 55,000 -----
Manufacturing expenses 25,000 -----
Carriage inwards 5,000 -----
Advertising 20,000 -----
Sundry debtors 60,000 -----
Goodwill 50,000 -----
Bank Balance 55,000 -----
Share capital (Fully paid) ----- 5,00,000
Share premium ----- 50,000
General Reserve ----- 1,00,000
Income Statement ----- 75,000
Bank loan @ 6%, taken on 01.06.2012 ----- 1,00,000
Sundry creditors ----- 55,000
Sales ----- 6,20,000
15,00,000 15,00,000
Adjustments:

ii. The closing stock on 30th June, 2012 was Tk. 75,000;
iii. The managing director is entitled to a commission of 5% on net profit before charging
his commission;
iv. General expense include prepaid rates totaling Tk. 300;
v. A provision for income tax to the extent of Tk. 25,000 is to be kept and the directors
recommended a dividend @ 5%;
vi. Depreciation should be written off Plant and Machinery and Land and Buildings @
10% and 2% on cost respectively;
vii. Create a 5% provisions for bad debts on sundry debtors.
You are required to prepare:

a. Comprehensive Income Statement for the year ended 30th June 2012;
b. Statement of Financial Position as at 30th June 2012;

Problem No. 10
You are given below the Trial Balance and other information for adjustment from the books
of Gigabyte Company Ltd.:

Particulars Taka Taka

10,000 shares of Tk. 10 each, Tk. 5 paid-up … 50,000
Calls in advance … 500
Stock (01.01.2010) 15,500 …
Plant and Machinery 25,000 …
 Building (Lease for 10 years) 10,000 …
Furniture and fixture 1,200 …
Purchase and Returns 40,000 1,200
Bills Receivable 2,000 …
Wages 60,000 …
Sales and Returns 500 80,000
Sundry Creditors 20,500
Preliminary Expenses 5,000 …
Investments 8,000 …
Bank overdraft … 13,000
Goodwill 10,000 …
Drawing Office Supplies 3,000 …
Salaries 23,600 …
5% Debentures … 50,000
Interest on Debenture 1,400 …
Compensation for late delivery of goods 700 …
Rates and Insurance 2,400 …
Advertisement 5,600 …
Cash Balance 11,300 …
Sundry Debtors 5,500 ...
Profit and Loss Account … 15,500
2,30,700 2,30,700

Others Information:

i. The value of closing stock as per stock book was Tk. 99,000; but actually the stock
amounting Tk. 4,000 was lost by fire.
ii. Depreciate machinery @ 10%. Machinery includes a new machine costing Tk. 5,000
installed on July 1, 2010.
iii. Write off advertisement 50%, Goodwill 10% and Preliminary expenses 5%.
iv. Provide for bad debts Tk. 500.
v. Proposed dividends @ 10%.
vi. Office supplies on hand Tk. 500.
You are required to prepare Comprehensive Income Statement 31st December 2010 and a
Statement of Financial Position as at that date.

Problem No. 11
The allied company Ltd. has the following balances with appear in the books as on 30the
June, 2011. You are required to prepare (a) Comprehensive Income Statement, (b) Statement
of Financial Position.

Preliminary Expenses 25,000 Goodwill 90,000

Machinery (cost Tk. Bank Balance 25,000
4,50,000) 3,40,000
Land & Building (cost Tk. Share capital (Fully paid 4,000
4,00,000) 3,10,000 shares of Tk. 100 each) 4,00,000
Stock (1.7.2010) 65,000 Share premium 60,000
Purchases 3,30,000 General Reserve 80,000
Salaries 50,000 Profit & Loss A/C 45,000
 General Expenses 15,000 Bank Loan (Taken on 1.1.2010 @
6%) 2,00,000
Directors Fees 13,000 Sundry creditors 35,000
Auditors Fees 12,000 Sales 6,40,000
Wages 60,000 Advertising 20,000
Factory Overhead 20,000 Sundry Assets 60,000
Carriage Inward 25,000

The closing stock on 30th June, 2011 was Tk. 60,000. The Managing director is entitled to a
commission of 5% on net income after charging his commission. Sundry assets include
sundry debtors of Tk. 10,000 on which a provision of 5% is to be made for bad debts. A
provision for income tax to the extent of Tk. 12,000 is desired and directors recommended a
dividend of 5%. Depreciation is to be charged for machinery @ 10% and Land and Building
@ 2% on the original cost. 50% of the advertisement is to be capitalized.

Problem No. 12
The following is the Trial Balance of Susex Ltd. as on 31.03.2010:

Particulars Debit (Taka) Credit (Taka)

Equity share Capital (shares of Tk. 10 each) 1,50,000
10% Debentures 1,00,000
General Reserve 65,000
Profit and Loss Account 36,000
Securities Premium 20,000
Sales 3,50,000
Creditors 26,000
Provisions for Depreciation 86,000
Suspense Account 2,000
Land at Cost 1,10,000
Plant and Machinery at Cost 3,85,000
Debtors 48,000
Stock (31.03.2010) 43,000
Cash at Bank 10,000
Adjusted Purchases 1,60,000
Factory Expenses 30,000
Administrative Expenses 15,000
Selling Expenses 15,000
Debenture Interest 10,000
Interim Dividend Paid 9,000
8,35,000 8,35,000

Additional Information:

a) On 31.03.2010 the company issued bonus shares to the share holders on 1:3 basis. No
entry relating to this has yet been made.
b) The authorized share capital of the company is 25,000 equity shares of Tk. 10 each.
 c) The company on the advice of an independent valuer wishes to revalue the land at
Tk. 1, 80,000.
d) Proposed final dividend 10% (in addition to interim dividend).
e) Suspense account of Tk. 2,000 represents cash received for the sale of some of the
machinery on 01.04.2001. The cost of the machinery was Tk. 5,000 and the
accumulated depreciation thereon being Tk. 4,000.
f) Depreciation is to provided on plat and machinery at 10% on cost.
g) Transfer amount Tk. 6,225 to General Reserve.
You are required to prepare Comprehensive Income Statement, a Statement of Financial
Position as at 31.03.2010.

Answer 1 OSCAR

(a) Profit or loss for the year ended 31 March 2012

Tk. 000 Notes
Sales 2,010
Operating costs Tk. (140 + 960 – 150 + 420 + 210 + 16) (1,596)
———
Operating profit before interest 414
Income from investments Tk. (75 + 20) 95 (2)
———
Profit before taxation 509 (1)
Income tax (49) (3)
———
Profit for year 460
———

Extract from statement of changes in equity: (not required by question)

Opening retained earnings 180
Profit for year 460
Dividends (120)
——
Closing retained earnings 520
——

Statement of financial position as at 31 March 2012

Tk. 000 Tk. 000 Notes
Assets
Non-current assets
Tangible assets 530 (4)
Investments 580 (5)
——
1,110
Current assets
Inventory 150
Receivables 470
——
620
——
1,730
Equity and liabilities ——
Capital and reserves
Share capital 600 (8)
Retained earnings 520
—— 1,120
Non-current liabilities
Provisions for liabilities and charges 196 (7)

Current liabilities 414 (6)

———
1,730

The following notes form part of these accounts:

Notes to the accounts for the year to 31 March 2012

(1) Included in operating profit are the following items:

Tk. 000
Depreciation Tk. (27 + 5) 32
Directors’ emoluments 45

(2) Income from financial asset investments

Tk. 000
Listed financial asset investments 75
Gain in value of investment 20
——

(3) Income tax

Tk. 000
Income tax based on the profits for the year at a rate of 33% 74
Over provision for tax in the previous year (25)
——
49
——
(4) Tangible assets – plant and machinery
Tk. 000
Cost at 1 April 2011 and 31 March 2012 750
——
Accumulated depreciation
At 31 March 2011 188
Charge for the year Tk. (27 + 5) 32
——
At 31 March 2012 220
——
Carrying amount at 31 March 2012 530
——
 (5) Investments Tk. 000

The financial asset investments are classed as “Fair Value though profit or
loss”, their fair value at 31 March 2012 was Tk. 580,000. The gain in value of
Tk. 20,000 has been credited to profit or loss.

(6) Current liabilities

Tk. 000
Trade payables 260
Income tax 74
Bank overdraft 80
——
414
——

(7) Provisions for liabilities and charges

Tk. 000
Pollution costs
At 1 April 2011 180
Provided in the year 16
——
At 31 March 2012 196
——

(8) Called up share capital

Authorised Issued
Tk. 000 Tk. 000
Ordinary shares of Tk. 1 each 1,000 600
——— ——–
 Chapter-04
Statement of Cash Flows (IAS-7)

1. Definition of Cash Flow Statement

A cash flow statement can be defined as a statement which summarizes sources of cash inflows
and uses of cash outflows of a firm during a particular period of time say a month or a year.
Such a statement can be prepared from the data made available from comparative balance
sheets, profit and loss account and additional information.

2. Classification of Cash Flows

The statemnt of cash flows classifies cash receipts and payments by operating, investing and
financing activities. Transactions and other events of each kind of activity are as follows:

2.1 Opearting Activity: Operating activities includes the transactions that create revenues and
expenses and thus enter into the determination of net income. It is the principal revenue
producing activities.
Cash Inflows:
• From sale of goods or services
• From return on loans (interest received) and on the equity securities (dividend received)
Cash Outflows:
• To suppliers for inventory
• To employees for services
• To government for taxes
• To lenders for expenses
• To others for expenses

2.2 Investing Activities: Investing activity means the acquiring and disposing activities of long
term assets and investments i.e.; i) Acquiring and disposing of investments and productive long
lived assets and ii) lending money and collection of loans.
Cash Inflows:
• From sale of property, plant and equipment
• From sale of debt or equity securities of other entities
• From collection of principal on loan to other entities
Cash Outflows:
• To purchase property, plant and equipment
• To purchase debt or equity securities of other entities
• To make loan to other entities
2.3 Financing Activities: Financing activities includes cash from issuing debt and borrowing,
repaying the amount borrowed, obtaining cash from stockholders and providing them with a
return on their investment.
Cash Inflows:
• From sale of equity securities (company’s own stock)
• From issuence of debt (bonds and notes)
Cash Outflows:
• To payments of stockholders as dividends
1|Page
 • To redeem long-term debt or acquire capital stock

3. Objectives of Cash Flow Statement

The main objective of preparing a cash flow statement for a particular accounting period is to
present information regarding inflow and outflow of cash. Besides, it presents investment and
financial activities of a concern for a particular period.
i. Ensuring future positive cash flow of a particular concern.
ii. Ensuring capacity of an organization to pay dividend.
iii. Identifying non-cash items ensuring cash income and expenses of a concern.
iv. Comparing various items of current year with those of last year.
v. Knowing cash and cash equivalent and outsource inflow of a concern for a particular
period.

4. Usefulness of Cash Flow Statement

Cash flow statement is very useful to the management for short term planning due to the
following reasons:

i. Predict Future Cash Flow

This statement is often used as an indicator of the amount, timing and certainty of future
cash flows on the basis of what happened in the past.

ii. Determine the Ability to Pay Dividends and Other Commitments

This statement indicates the sources and uses of cash under operating, investing and
financing activities, helps shareholders to know whether the business can make the
payment of amount of dividends on their investment in share and creditors to receive
interest and principal amount in time.
iii. It shows the relationship of net income to changes in the business cash

iv. Efficiency in Cash Management

This statement is very useful to the management in evaluating financial policies and cash
position. It will help the management to make the reliable cash flow projections for the
immediate future and will tell surplus or deficiency of cash so that management may be
able to make plan for investment of surplus cash or to tap the sources wherefrom the
deficiency is to be met.
v. Discloses Movement of Cash
Previous year cash flow statement when compared with the budget of that year will
indicate as to what extent the resources of the enterprises were raised and applied.

5. Differences between Cash book and Cash flow statement

The cash book and the cash flow statement are both financial tools used to track cash
movements within a business, but they serve different purposes and are structured differently.
Here's a breakdown of the differences:

1. Purpose:

2|Page
 • Cash Book:
o A cash book is a detailed ledger used to record all cash transactions (receipts and
payments) made by a business on a daily basis. It serves as both a journal and a
ledger.
o It provides a real-time record of all cash inflows and outflows, used for day-to-
day tracking of cash balance.
• Cash Flow Statement:
o A cash flow statement is a financial statement that summarizes the total cash
inflows and outflows over a specific period (e.g., a month, quarter, or year).
o It is used to assess the company’s liquidity and overall cash position, helping
stakeholders understand how cash is generated and used across three categories:
operating, investing, and financing activities.

2. Content:

• Cash Book:
o Includes individual entries of all cash and bank transactions, showing detailed
information like date, amount, and the purpose of each transaction.
o It records both cash receipts (debits) and cash payments (credits).
• Cash Flow Statement:
o Categorizes cash movements into:
▪ Operating activities (cash flows from core business operations),
▪ Investing activities (cash related to the purchase and sale of assets),
▪ Financing activities (cash from debt, equity, or dividends).
o It provides an overview, not daily details.

3. Time Frame:

• Cash Book:
o Updated continuously in real time (daily, weekly), reflecting each transaction as
it happens.
• Cash Flow Statement:
o Prepared periodically (monthly, quarterly, annually) for reporting purposes,
summarizing the inflows and outflows over the period.

4. Use:

• Cash Book:
o Mainly used by accountants or the finance team for internal record-keeping and
daily cash management.
• Cash Flow Statement:
o Used by management, investors, and external stakeholders to assess the
company’s financial health, especially its liquidity and ability to generate cash to
fund operations or investments.

5. Format:

• Cash Book:
o Similar to a traditional ledger with columns for date, description, reference
number, receipts, payments, and balance.
• Cash Flow Statement:

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 o Follows a structured format as per accounting standards, divided into sections for
operating, investing, and financing activities, and ends with the net increase or
decrease in cash.

6. Focus:

• Cash Book:
o Focuses on the business's immediate cash position, providing ongoing insight into
the cash available for day-to-day operations.
• Cash Flow Statement:
o Focuses on overall cash management over time, offering insights into broader
cash trends, strategic investments, and financing activities.

Summary Table:

Aspect Cash Book Cash Flow Statement

Summarizes cash inflows/outflows over a
Purpose Records day-to-day cash transactions
period
Time
Real-time updates Periodic (monthly, quarterly, annually)
Frame
Operating, Investing, and Financing
Categories Cash receipts and payments
activities
Users Internal (accountants, finance team) Management, investors, stakeholders
Detailed record of individual
Details Summary of cash flow trends
transactions
Focus Daily cash management Cash flow trends and liquidity over time

In essence, the cash book is a detailed transactional record, while the cash flow statement
provides a broader financial overview of cash movements.

6. Preparation of cash Flows Statement

Cash Flow Statements are prepared As per IAS-7. The following two methods are followed for
preparation of Cash Flows Statement:

A. Direct Method
B. Indirect Method

The format of Cash Flows Statement is as Follow:-

Name of Company
Statement of Cash Flows (Indirect Method)
For the year ended….
Particulars Taka Taka
Cash Flows from Operating Activities:
Net Income ***
Add: Non cash expenses:
Depreciation expenses: Building **

4|Page
 Depreciation expenses: Equipment **
Amortization expenses: Patent **
Amortization of discount on notes payable ** **
Add:
Decrease in Accounts receivable **
Decrease in inventory **
Decrease in prepaid expenses **
Increase in Accounts payable **
Increase in accrued expenses payable **
Loss on sale of investment **
Loss on sale of equipment ** **
Less:
Decrease in Accounts payable **
Decrease in Accrued expenses **
Increase in Accounts Receivable **
Increase in inventory **
Increase in prepaid expenses **
Gain on sale of investment **
Gain on sale of equipment **
Income tax paid **
Net Cash Flows from Operating Activities ***
Cash Flows from Investing Activities
Add:
Cash received from sale of trading securities **
Cash received from sale of equipment **
Cash received from sale of fixed assets **
Less:
Cash paid for building **
Cash paid for equipment **
Cash paid for fixed assets **
Net Cash Flows from Investing Activities ***
Cash Flows from Financing Activities
Add:
Cash received from short-term notes payable **
Cash received from bond issue **
Cash received from issuance share/stock **
Less:
Cash paid for treasury stock **
Cash paid for dividends **
Cash paid for retirement of bond **
Net Cash Flows from Financing Activities ***
Net Changes in cash during the year ***
Add: Beginning Balance of Cash ***
Ending Balance of Cash ***

8. Computation of Cash basis ratios:

Net Cash provided by opearting activities
i. Current Debt coverage ratio:
Average current liabilities
Net Cash provided by opearting activities
ii. Cash return on sales ratio:
Net Sales
Net Cash provided by opearting activities
iii. Cash debt coverage ratio:
Average total liabilities (Curent + Long term)
9. Computation of Free Cash Flows:
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In the statement of cash flows, cash provided by operating activities is intended to indicate the
cash-generating capability of the company. Analysts have noted, however, that cash provided
by operating activities fails to take into account that a company must invest in new fixed
assets just to maintain its current level of operations. Companies also must at least maintain
dividends at current levels to satisfy investors. The measurement of free cash flow provides
additional insight regarding a company’s cash-generating ability. Free cash flow describes the
cash remaining from operations after adjustment for capital expenditures and dividends.
Consider the following example: Suppose that MPC produced and sold 10,000 personal
computers this year. It reported $100,000 cash provided by operating activities. In order to
maintain production at 10,000 computers, MPC invested $15,000 in equipment. It chose to pay
$5,000 in dividends. Its free cash flow was $80,000 ($100,000 - $15,000 - $5,000). The
company could use this $80,000 either to purchase new assets to expand the business or to pay
an $80,000 dividend and continue to produce 10,000 computers. In practice, free cash flow is
often calculated with the formula.
Free Cash Flow = Cash Provided by Operating Activities - Capital Expenditures - Cash
Dividends
Problem-01:

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 Juarez Company
Statement of Cash Flows (Indirect Method)
For the year ended December-31, 2012
Particulars Amount Amount
(Tk.) (Tk.)
Cash flows from operation activities:
Net Income 84,000
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation expense 18,000
Loss on sale of equipment 1,000
Decrease in Accounts receivable 3,000
Increase in inventory (10,000)
Decrease in prepaid expenses 2,000
Decrease in accounts payable (8,000)
Increase in income tax payable 12,000
Decrease in accrued expenses payable (5,000) 13,000
Net cash provided by operating activities 97,000
Cash flows from investing activities:
Sale of equipment 17,000
Purchase of equipment (1,80,000)
Net cash used by investing activities (1,63,000)
Cash flows from financing activities:
Payments of cash dividends (32,000)
Issuance of bonds 1,30,000

7|Page
 Net cash provided by financing activities 98,000
Net increase in cash during the period 32,000
Cash at the beginning of the period 1,59,000
Cash at the end of period 1,91,000
Significant non cash investing and financing
activities:
Acquired land by issuance of common stock 60,000

Juarez Company
Statement of Cash Flows (Direct Method)
For the year ended December-31, 2012
Particulars Amount Amount
(Tk.) (Tk.)
Cash flows from operation activities:
Cash receipts from suppliers 9,78,000
(9,75,000+3000)
Cash Payments:
To suppliers (6,60,000+10,000+8,000) 6,78,000
For Operating Expenses 1,79,000
(1,76,000-2,000+5,000)
For Income Taxes (36,000-12,000) 24,000 (8,81,000)
Net cash provided by operating activities 97,000
Cash flows from investing activities:
Sale of equipment 17,000
Purchase of equipment (1,80,000)
Net cash used by investing activities (1,63,000)
Cash flows from financing activities:
Payments of cash dividends (32,000)
Issuance of bonds 1,30,000
Net cash provided by financing activities 98,000
Net increase in cash during the period 32,000
Cash at the beginning of the period 1,59,000
Cash at the end of period 1,91,000
Significant non cash investing and financing
activities:
Acquired land by issuance of common stock 60,000

Workings:
1. Determination the charges in cash/ Determining net increase/decrease in cash:
Comparative balance sheet shows that the increase of cash in the period 2011 (191000-
159000)= 32000.
2. Determine the net cash provided by operating activities:
i) Cash receipts from customers:

Revenue from cash sales 9,75,000

Add: Decrease in Accounts Receivable (Cash collection from 3,000
Credit sales)
Cash receipts from customers 9,78,000

8|Page
 ii) Cash Payments to suppliers:

Cost of goods sold 6,60,000

Add: Increase in Inventory (paid for more inventory, i.e.; 10,000
increase from previous year)
Cash receipts from customers 6,70,000
Add: Decrease in Accounts Payable (Cash paid to Credit 8,000
purchase)
Cash Payments to suppliers 6,78,000

iii) Cash payments for operating expenses:

Operating expense (excluding depreciation) 1,76,000

Less: Decrease in prepaid expense (prepaid expense adjust this (2,000)
period, not any cash outflow)
1,74,000
Add: Decrease in Accrued expenses (paid for accrued expenses) 5,000
Cash payments for operating expenses 1,79,000

iv) Cash payments for Income taxes:

Income tax expenses 36,000

Less: Increases in income taxes payable (12,000)
Cash payments for Income taxes 24,000

Problem: 2
Presented below is the comparative balance sheet for WELLER Company as of December-31.
Willer Company
Comparative Balance Sheets
December-31
Assets 2010 2009
Cash 35,000 20,000
Accounts Receivable 33,000 14,000
Merchandise Inventory 27,000 20,000
Property, Plant and Equipment 60,000 78,000
Accumulated Depreciation (29,000) (24,000)
Total 1,26,000 1,08,000
Liabilities & Stockholders Equity
Accounts Payable 29,000 15,000
Income Taxes Payable 7,000 8,000
Bonds Payable 27,000 33,000
Common Stock, 18,000 14,000
Retained Earnings 45,000 38,000
1,26,000 1,08,000

Willer Company
Income Statements
For the year ended December-31, 2010
9|Page
 Particulars Taka
Sales 2,42,000
Cost of Goods Sold (1,75,000)
Gross Profit 67,000
Operating expenses (24,000)
Income from operations 43,000
Interest expense 3,000
Income before income taxes 40,000
Income Tax expenses 8,000
Net income 32,000

Additional Data:
i. Dividend declared and paid Tk. 25,000;
ii. During the year equipment was sold for Tk. 8,500 cash. This equipment cost Tk. 18,000
originally and had a book value of Tk. 8,500 at the time of sale.
iii. All depreciation expenses, Tk. 14,500, are in the operating expenses.
iv. All sales and purchases are on account.

Required:
a. Prepare a Cash Flow Statement using indirect method.
b. Prepare a Cash Flow Statement using direct method.
b)
Willer Company
Statement of Cash Flows (Direct Method)
For the year ended December-31, 2010

Particulars Amount Amount

(Tk.) (Tk.)
Cash flows from operation activities:
Cash Receipts from customers (2, 24,000-19,000) 2,23,000
Cash Payments:
To suppliers (1,75,000+7,000-14,000) 1,68,000
For Operating Expenses (24,000-14,500) 9,500
For Interest Expense 3,000
For Income Tax Expenses (8,000+1000) 9,000 (1,89,500)
Net cash provided by operating activities 33,500
Cash flows from investing activities:
Sale of equipment 8,500
Net cash provided by investing activities 8,500
Cash flows from financing activities:
Payments of cash dividends (25,000)
Redemption of bonds (6,000)
Issuance of common stock 4,000
Net cash used by financing activities (27,000)
Net increase in cash during the period 15,000
Cash at the beginning of the period 20,000
Cash at the end of period 35,000

Workings:

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 1. Determination the charges in cash/ Determining net increase/decrease in cash:
Comparative balance sheet shows that the increase of cash in the period 2010 (35,000-
20,000) = 15,000.
2. Determine the net cash provided by operating activities:
i) Cash receipts from customers:

Revenue from cash sales 2,42,000

Less: Increase in Accounts Receivable (Cash for Credit sales) 19,000
Cash receipts from customers 2,23,000

ii) Cash Payments to suppliers:

Cost of goods sold 1,75,000

Add: Increase in Inventory (paid for more inventory, i.e.; 7,000
increase from previous year)
Cash receipts from customers 1,82,000
Less: Increase in Accounts Payable (For Credit purchase) (14,000)
Cash Payments to suppliers 1,68,000

iii) Cash payments for operating expenses:

Operating expense (excluding depreciation) 24,000

Less: Depreciation Expenses (14,500)
Cash payments for operating expenses 9,500

iv) Cash payments for Income taxes:

Income tax expenses 8,000

Add: Decrease in income taxes payable 1,000
Cash payments for Income taxes 9,000

v) Cash payments for Interest Expenses = Tk. 3,000

Problem: 3
Presented below is the comparative balance sheet for Navana Corporation as of October, 31st:-

Assets 2011 2010

Cash 41,000 45,000
Accounts Receivable 47,500 52,000
Inventory 1,51,450 1,42,000
Prepaid Expense 16,780 21,000
Land 1,00,000 1,30,000
Equipment 2,28,000 1,55,000
Accumulated Depreciation- Equipment (45,000) (35,000)
Building 2,00,000 2,00,000
Accumulated Depreciation- Building (60,000) (40,000)
6,79,730 6,70,000
Liabilities & Stockholders Equity
Accounts Payable 43,730 40,000
Bonds Payable 2,50,000 3,00,000
Common Stock, Tk. 10 par 2,00,000 1,50,000
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 Retained Earnings 1,86,000 1,80,000
6,79,730 6,70,000
Additional Information:
i. Operating expenses include depreciation expenses of Tk. 42,000 and charges from
prepaid expenses of Tk. 4,220;
ii. Land was sold for cash at book value;
iii. Cash dividend of Tk. 32,000 were paid;
iv. Net income for 2011 was Tk. 38,000;
v. Equipment was purchased for Tk. 95,000 cash. In addition, equipment costing Tk.
22,000 with a book value of Tk. 10,000 was sold for Tk. 8,100.
vi. Bonds were converted at face value by issuing 5,000 shares of Tk. 10 per value
common stock.

Required:
Prepare a Cash Flow Statement using indirect method.
Problem: 4
Presented below is the comparative balance sheet for Nicolas Cage Company at December-31.
Nicolas Cage Company
Comparative Balance Sheet
December-31
Assets 2012 2011
Cash 45,000 57,000
Accounts Receivable 72,000 64,000
Inventory 1,32,000 1,40,000
Prepaid Expense 12,140 16,540
Land 1,25,000 1,50,000
Equipment 2,00,000 1,75,000
Accumulated Depreciation- Equipment (60,000) (42,000)
Building 2,50,000 2,50,000
Accumulated Depreciation- Building (75,000) (50,000)
7,01,140 7,60,540
Liabilities & Stockholders Equity
Accounts Payable 38,000 45,000
Bonds Payable 2,35,000 2,65,000
Common Stock, Tk. 1 par 2,80,000 2,50,000
Retained Earnings 1,48,140 2,00,540
7,01,140 7,60,540
Additional Information:

i. Operating expenses include depreciation expense Tk. 70,000 and charges from prepaid
expenses of Tk. 4,400;
ii. Land was sold for cash at cost;
iii. Cash dividend of Tk. 79,290 were paid;
iv. Net income for 2012 was Tk. 26,890;
v. Equipment was purchased for Tk. 65,000 cash. In addition, equipment costing Tk.
40,000 with a book value of Tk. 13,000 was sold for Tk. 14,000.
vi. Bonds were converted at face value by issuing 30,000 shares of Tk. 1 par value common
stock.
vii. Net sales for 2012 were Tk. 3,67,000.

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Required:
Prepare a Cash Flow Statement using indirect method.

Problem-04:
Nicolas Cage Company
Statement of Cash Flows (Indirect Method)
For the year ended December-31, 2012

Particulars Amount Amount

(Tk.) (Tk.)
Cash flows from operation activities:
Net Income 26,890
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation expense 70,000
Gain on sale of equipment (1,000)
Decrease in inventory 8,000
Increase in Accounts receivable (8,000)
Decrease in prepaid expense 4,400
Decrease in accounts payable (7,000) 66,400
Net cash provided by operating activities 93,290
Cash flows from investing activities:
Purchase of equipments (65,000)
Sale of equipment 14,000
Sale of land 25,000
Net cash used by investing activities (26,000)
Cash flows from financing activities:
Payments of cash dividends (79,290)
Net cash used by financing activities (79,290)
Net decrease in cash during the period (12,000)
Cash at the beginning of the period 57,000
Cash at the end of the period 45,000

Significant non cash investing and financing activities:

Conversion of bonds by issuance of common stock 30,000

Problem: 5
Presented below is the comparative balance sheet for Wiggle Company as of December-31.
Wiggle Company
Comparative Balance Sheet
December-31
Assets 2011 2010
Cash 41,000 45,000
Accounts Receivable 47,500 52,000
Inventory 1,51,450 1,42,000
Prepaid Expense 16,780 21,000
Land 1,00,000 1,30,000
Equipment 2,28,000 1,55,000
Accumulated Depreciation- Equipment (45,000) (35,000)
Building 2,00,000 2,00,000
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 Accumulated Depreciation- Building (60,000) (40,000)
6,79,730 6,70,000
Liabilities & Stockholders Equity
Accounts Payable 43,730 40,000
Bonds Payable 2,50,000 3,00,000
Common Stock, Tk. 1 par 2,00,000 1,50,000
Retained Earnings 1,86,000 1,80,000
6,79,730 6,70,000
Additional Information:
i. Operating expenses include depreciation expense Tk. 42,000;
ii. Land was sold for cash at book value;
iii. Cash dividend of Tk. 32,000 were paid;
iv. Net income for 2011 was Tk. 38,000;
v. Equipment was purchased for Tk. 95,000 cash. In addition, equipment costing Tk.
22,000 with a book value of Tk. 10,000 was sold for Tk. 8,100.
vi. Bonds were converted at face value by issuing 50,000 shares of Tk. 1 par value
common stock.
vii. Net sales for 2011 totaled Tk. 4, 20,000.
Required:
Prepare a Cash Flow Statement using indirect method.

Problem: 6
Presented below is the comparative balance sheet for Farm Galley as of December-31.
Farm Galley
Comparative Balance Sheet
December-31
Assets 2011 2010
Cash 97,800 38,400
Accounts Receivable 90,800 33,000
Inventory 1,12,500 1,02,850
Prepaid Expense 18,400 16,000
Investment 1,08,000 94,000
Plant Assets 2,70,000 2,42,000
Accumulated Depreciation (50,000) (52,000)
Totals 6,47,500 4,74,750
Liabilities & Stockholders Equity
Accounts Payable 92,000 67,300
Accrued Expense Payable 16,500 17,000
Bonds Payable 85,000 1,10,000
Common Stock, Tk. 1 par 2,20,000 1,75,000
Retained Earnings 2,34,000 1,05,450
6,47,500 4,74,750
Additional Information:
i. New plant assets costing Tk. 85,000 were purchase for cash during the year.
ii. Net income for 2011 was Tk. 150,900.
iii. Old plant asset having an original cost of Tk. 57,500 was sold at Tk. 1,500 and the book
value of this asset was Tk. 9,000 at the time of sale.
Instruction:
Prepare a Cash Flow Statement for the year 2011 using indirect method.

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Problem-06
Farm Galley
Statement of Cash Flows (Indirect Method)
For the year ended December-31, 2011

Particulars Amount Amount

(Tk.) (Tk.)
Cash flows from operation activities:
Net Income 1,50,900
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation expense 46,500
Loss on sale of plant assets 7,500
Increase in Accounts receivable (57,800)
Increase in inventory (9,650)
Increase in accounts payable 24,700
Increase prepaid expense (2,400)
Decrease accrued expenses payable (500) 8,350
Net cash provided by operating activities 1.59,250
Cash flows from investing activities:
Purchase of plant assets (85,000)
Sale of equipment 1,500
New Investment (14,000)
Net cash used by investing activities (97,500)
Cash flows from financing activities:
Payments of cash dividends (22,350)
Redemption of bonds (25,000)
Issuance of common stock 45,000
Net cash used by financing activities (2,350)
Net increase in cash during the period 59,400
Cash at the beginning of the period 38,400
Cash at the end of period 97,800

Workings:
1. Calculation of depreciation:
Cost price of sold equipment Tk. 57,500
Less: Book value of sold equipment 9,000
Accumulated depreciation 48,500
Accumulated depreciation (Closing) 50,000
Total accumulated depreciation 98,500
Accumulated depreciation (Beginning) 52,000
Depreciation expense for the year 46,500
2. Calculation of Dividend paid in cash:
Retained earnings at the beginning Tk. 1,05,450
Add: Net income for the year 1,50,900
Total Retained earning 2,56,350
Less: Retained earnings at the end 2,34,000
Dividend paid in cash 22,350

Problem-07

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The comparative Balance Statements of Juarez Company are presented below:

Juarez Company
Comparative Balance Sheet
December-31

Particulars 2012 (Tk.) 2011 (Tk.)

Cash 1,91,000 1,59,000
Accounts Receivable (net) 12,000 15,000
Merchandise Inventories 1,70,000 1,60,000
Prepaid Expense 6,000 8,000
Land 1,40,000 80,000
Equipment 1,60,000 --
Accumulated Depreciation- Equipment (16,000) --
Total Assets 6,63,000 4,22,000
Liabilities & Stockholders’ Equity
Accounts Payable 52,000 60,000
Income-tax Payable 12,000 --
Accrued expenses payable 15,000 20,000
Bonds Payable 1,30,000 --
Common Share 3,60,000 3,00,000
Retained Earnings 94,000 42,000
Total Liabilities and Stockholder’s Equity: 6,63,000 4,22,000

Juarez Company
Income Statements
For the year ended December 31, 2012

Amount Amount
Particulars
Taka Taka
Net Sales Revenue -- 9,75,000
Less: Cost of goods sold 6,60,000
Less: Operating expenses (excluding 1,76,000
depreciation)
Depreciation expenses 18,000
Loss on sale of equipment 1,000 8,55,000
Income-before income tax 1,20,000
Less: Income tax expenses 36,000
Net Income 84,000

Additional Information:
a) In 2012, the company declared and paid a Tk. 32,000 cash dividend.
b) Bonds were issued at the face value for Tk. 1,30,000 in cash.
c) Equipment with a cost of Tk. 1,80,000 was purchased for cash.
d) Equipment costing Tk. 20,000 was sold for Tk. 17,000 cash when the book value of the
equipment was Tk. 18,000.
e) Common stock of Tk. 60,000 was issued to acquire land.
Required:
Prepare a statement of cash-flow for 2012, under the indirect method.

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Problem-08:

Ideal products a greeting card company, had the following statements as of December,

Ideal Inc.
Comparative Balance Sheet
As at December 31, 2013 and 2012

Particulars 31.12.2013 31.12.2012

Taka Taka
Cash 6,000 7,000
Accounts Receivable 62,000 51,000
Short-term Investment (Available for sale) 35,000 18,000
Inventories 40,000 60,000
Prepaid rent 5,000 4,000
Printing equipment 1,54,000 1,30,000
Accumulated Depreciation-Equipment (35,000) (25,000)
Copyrights 46,000 50,000
Total Assets 3,13,000 2,95,000
Accounts payable 46,000 40,000
Income taxes payable 4,000 6,000
Wages payable 8,000 4,000
Short-term loans payable 38,000 40,000
Long-term loans payable 60,000 69,000
Common stock, Tk. 10 par 1,00,000 1,00,000
Retained earnings 57,000 36,000
Total Liabilities and Stockholder’s Equity: 3,13,000 2,95,000

Ideal Inc.
Income Statement
For the year ended December 31, 2013

Amount Amount
Particulars
Taka Taka
Sales 3,38,150
Cost of goods sold 1,75,000
Gross margin 1,63,150
Operating expenses 1,20,000
Operating Income 43,150
Interest expenses 11,400
Gain on sale of equipment 2,000 (9,400)
Income before tax 33,750
Income tax expenses 6,750
Net Income 27,000

Additional Information:
1. Dividends in the amount of Tk. 6,000 were declared and paid during 2013.
2. Depreciation expenses and amortization expenses are included in operating expenses.
3. No unrealized gains or losses have occurred on the investments during the year.

17 | P a g e
 4. Equipment that had a cost of Tk. 20,000 and was 70% depreciated was sold during the
year 2013.

Solutions of
Cash Flow Statement & Cash Budget
Problem-01:
Juarez Company
Statement of Cash Flows (Indirect Method)
For the year ended December-31, 2012
Particulars Amount Amount
(Tk.) (Tk.)
Cash flows from operation activities:
Net Income 84,000
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation expense 18,000
Loss on sale of equipment 1,000
Decrease in Accounts receivable 3,000
Increase in inventory (10,000)
Decrease in prepaid expenses 2,000
Decrease in accounts payable (8,000)
Increase in income tax payable 12,000
Decrease in accrued expenses payable (5,000) 13,000
Net cash provided by operating activities 97,000
Cash flows from investing activities:
Sale of equipment 17,000
Purchase of equipment (1,80,000)
Net cash used by investing activities (1,63,000)
Cash flows from financing activities:
Payments of cash dividends (32,000)
Issuance of bonds 1,30,000
Net cash provided by financing activities 98,000
Net increase in cash during the period 32,000
Cash at the beginning of the period 1,59,000
Cash at the end of period 1,91,000
Significant non cash investing and financing
activities:
Acquired land by issuance of common stock 60,000

Problem-02:
Willer Company
Statement of Cash Flows (Indirect Method)
For the year ended December-31, 2010

Particulars Amount Amount

(Tk.) (Tk.)
Cash flows from operation activities:
Net Income 32,000
Adjustment to reconcile net income to net cash provided
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by operating activities:
Depreciation expense 14,500
Increase in Accounts receivable (19,000)
Increase in inventory (7,000)
Increase in accounts payable 14,000
Decrease in income tax payable (1,000) 1,500
Net cash provided by operating activities 33,500
Cash flows from investing activities:
Sale of equipment 8,500
Net cash provided by investing activities 8,500
Cash flows from financing activities:
Payments of cash dividends (25,000)
Redemption of bonds (6,000)
Issuance of common stock 4,000
Net cash used by financing activities (27,000)
Net increase in cash during the period 15,000
Cash at the beginning of the period 20,000
Cash at the end of period 35,000

Problem-03:
Navana Corporation
Statement of Cash Flows (Indirect Method)
For the year ended October 31, 2012

Particulars Amount Amount

(Tk.) (Tk.)
Cash flows from operation activities:
Net Income 38,000
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation expense 42,000
Loss on sale of equipment 1,900
Increase in inventory (9,450)
Decrease in Accounts receivable 4,500
Decrease in prepaid expense 4,220
Increase in accounts payable 3,730 46,900
Net cash provided by operating activities 84,900
Cash flows from investing activities:
Purchase of equipments (95,000)
Sale of equipment 8,100
Sale of land 30,000
Net cash used by investing activities (56,900)
Cash flows from financing activities:
Payments of cash dividends (32,000)
Net cash used by financing activities (32,000)
Net decrease in cash during the period (4,000)
Cash at the beginning of the period 45,000
Cash at the end of the period 41,000

Significant non cash investing and financing activities:

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Conversion of bonds by issuance of common stock 50,000

Problem-04:
Nicolas Cage Company
Statement of Cash Flows (Indirect Method)
For the year ended December-31, 2012

Particulars Amount Amount

(Tk.) (Tk.)
Cash flows from operation activities:
Net Income 26,890
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation expense 70,000
Gain on sale of equipment (1,000)
Decrease in inventory 8,000
Increase in Accounts receivable (8,000)
Decrease in prepaid expense 4,400
Decrease in accounts payable (7,000) 66,400
Net cash provided by operating activities 93,290
Cash flows from investing activities:
Purchase of equipments (65,000)
Sale of equipment 14,000
Sale of land 25,000
Net cash used by investing activities (26,000)
Cash flows from financing activities:
Payments of cash dividends (79,290)
Net cash used by financing activities (79,290)
Net decrease in cash during the period (12,000)
Cash at the beginning of the period 57,000
Cash at the end of the period 45,000

Significant non cash investing and financing activities:

Conversion of bonds by issuance of common stock 30,000

Problem-05:
Wiggle Company
Statement of Cash Flows (Indirect Method)
For the year ended December-31, 2011
Particulars Amount Amount
(Tk.) (Tk.)
Cash flows from operation activities:
Net Income 38,000
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation expense 42,000
Loss on sale of equipment 1,900
Increase in inventory (9,450)
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Decrease in Accounts receivable 4,500
Decrease in prepaid expense 4,220
Increase in accounts payable 3,730 46,900
Net cash provided by operating activities 84,900
Cash flows from investing activities:
Purchase of equipments (95,000)
Sale of equipment 8,100
Sale of land 30,000
Net cash used by investing activities (56,900)
Cash flows from financing activities:
Payments of cash dividends (32,000)
Net cash used by financing activities (32,000)
Net decrease in cash during the period (4,000)
Cash at the beginning of the period 45,000
Cash at the end of the period 41,000

Significant non cash investing and financing activities:

Conversion of bonds by issuance of common stock 50,000

Problem-06:

Farm Galley
Statement of Cash Flows (Indirect Method)
For the year ended December-31, 2011

Particulars Amount Amount

(Tk.) (Tk.)
Cash flows from operation activities:
Net Income 1,50,900
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation expense 46,500
Loss on sale of plant assets 7,500
Increase in Accounts receivable (57,800)
Increase in inventory (9,650)
Increase in accounts payable 24,700
Increase prepaid expense (2,400)
Decrease accrued expenses payable (500) 8,350
Net cash provided by operating activities 1.59,250
Cash flows from investing activities:
Purchase of plant assets (85,000)
Sale of equipment 1,500
New Investment (14,000)
Net cash used by investing activities (97,500)
Cash flows from financing activities:
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 Payments of cash dividends (22,350)
Redemption of bonds (25,000)
Issuance of common stock 45,000
Net cash used by financing activities (2,350)
Net increase in cash during the period 59,400
Cash at the beginning of the period 38,400
Cash at the end of period 97,800

Workings:
1. Calculation of depreciation:
Cost price of sold equipment Tk. 57,500
Less: Book value of sold equipment 9,000
Accumulated depreciation 48,500
Accumulated depreciation (Closing) 50,000
Total accumulated depreciation 98,500
Accumulated depreciation (Beginning) 52,000
Depreciation expense for the year 46,500
2. Calculation of Dividend paid in cash:
Retained earnings at the beginning Tk. 1,05,450
Add: Net income for the year 1,50,900
Total Retained earning 2,56,350
Less: Retained earnings at the end 2,34,000
Dividend paid in cash 22,350

Problem No. 7

IDEAL PRODUCTS
Statement of Cash Flows (Indirect Method)
For the year ended December-31, 2013

Amount Amount
Particulars
(Tk.) (Tk.)
Cash flows from operation activities:
Net Income 27,000
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation expense 24,000
Amortization of copyright 4,000
Gain on sale of equipment (2,000)
Increase in Accounts receivable (11,000)
Decrease in inventory 20,000
Increase in accounts payable 6,000
Increase prepaid rent (1,000)
Decrease in income tax payable (2,000)
Increase in wages payable 4,000 42,000
Net cash provided by operating activities 69,000
Cash flows from investing activities:
Sale of equipment [(20,000 x 30%) + 2,000] 8,000
Purchase of equipment (44,000)

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 Purchase available- for sale Investments (17,000)
Net cash used by investing activities (53,000)
Cash flows from financing activities:
Payments of Short term loans (2,000)
Payments of Long term loans (9,000)
Payments of cash dividends (6,000)
Net cash used by financing activities (17,000)
Net decrease in cash during the period (1,000)
Add: Cash at the beginning of the period 7,000
Cash at the end of period 6,000

Workings:
1. Calculation of depreciation:
Cost price of sold equipment Tk. 20,000
Less: Book value of sold equipment 6,000
Accumulated depreciation 14,000
Add: Accumulated depreciation (Closing) 35,000
Total accumulated depreciation 49,000
Less: Accumulated depreciation (Beginning) 25,000
Depreciation expense for the year 24,000

Problem-09:

Lansbury Inc. had the following balance sheet at December 31, 2018.
LANSBURY INC.
BALANCE SHEET
DECEMBER 31, 2018
Amount
Particulars
(Tk.)
ASSETS
Cash 20,000
Accounts receivable 21,200
Investments 32,000
Plant assets (net) 81,000
Land 40,000
Total Assets 194,200
LIABILITIES AND STOCKHOLDERS EQUITY
Notes payable (long-term) 41,000
Common stock 100,000
Accounts payable 30,000
Retained earnings 23,200
Total Liabilities and Stockholders’ Equity 194,200

During 2019, the following occurred.

1. Lansbury Inc. sold part of its investment portfolio for Tk.15,000. This transaction
resulted in a gain of Tk.3,400 for the firm. The company classifies its investments as
available-for-sale.
2. A tract of land was purchased for Tk.18,000 cash.
3. Long-term notes payable in the amount of Tk.16,000 were retired before maturity by
paying Tk.16,000 cash.
23 | P a g e
 4. An additional Tk.20,000 in common stock was issued at par.
5. Dividends of Tk.8,200 were declared and paid to stockholders.
6. Net income for 2019 was Tk.32,000 after allowing for depreciation of Tk.11,000.
7. Land was purchased through the issuance of Tk.30,000 in bonds.
8. At December 31, 2019, Cash was Tk.32,000, Accounts Receivable was Tk.41,600, and
Accounts Payable remained at Tk.30,000.
Instructions:
a) Prepare a statement of cash flows for 2019.
b) How might the statement of cash flows help the user of the financial statements?
c) Compute two cash flow ratios.

Solution:
a)

LANSBURY INC.
Statement of Cash Flows
For the Year Ended December 31, 2014

Cash flows from operating activities

Net income ....................................................................................... $32,000
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation expense .................................................................
$ 11,000
Gain on sale of investments .......................................................
(3,400)
Increase in account receivable
($41,600 – $21,200) ................................................................
(20,400) (12,800)
Net cash provided by operating activities ........................................ 19,200

Cash flows from investing activities

Sale of investments...........................................................................
15,000
Purchase of land ...............................................................................
(18,000)
Net cash used by investing activities................................................ (3,000)

Cash flows from financing activities

Issuance of common stock ...............................................................
20,000
Retirement of notes payable .............................................................
(16,000)
Payment of cash dividends ...............................................................
(8,200)
Net cash used by financing activities ............................................... (4,200)

Net increase in cash ................................................................................ 12,000

Cash at beginning of year ....................................................................... 20,000
Cash at end of year ................................................................................. $32,000
Noncash investing and financing activities
Land purchased through issuance of $30,000 of
bonds
b)
Cash flow information is useful for assessing the amount, timing, and uncertainty of future cash
flows. For example, by showing the specific inflows and outflows from operating
24 | P a g e
 activities, investing activities, and financing activities, the user has a better
understanding of the liquidity and financial flexibility of the enterprise. Similarly, these
reports are useful in providing feedback about the flow of enterprise resources. This
information should help users make more accurate predictions of future cash flow. In
addition, some individuals have expressed concern about the quality of the earnings
because the measurement of the income depends on a number of accruals and estimates
which may be somewhat subjective. As a result, the higher the ratio of cash provided by
operating activities to net income, the more comfort some users have in the reliability of
the earnings. In this problem the ratio of cash provided by operating activities to net
income is 60% ($19,200 ÷ $32,000).

c) An analysis of Lansbury’s free cash flow indicates it is negative as shown below:

Free Cash Flow Analysis

Net cash provided by operating activities .................................................................. $19,200

Less: Purchase of land ............................................................................................. 18,000
Dividends ................................................................................................... 8,200
Free cash flow ............................................................................................................ $ (7,000)

 $19,200 
Its current cash debt coverage is 0.64 to 1 
 $30,000 
and its cash debt coverage is 0.25 to 1

 $71,000 + $85,000 
 $19,200 ÷ 2  , which are reasonable. Overall, it appears that its
liquidity position is average and overall financial flexibility and solvency should be improved.

Problem-10:
Aero Inc. had the following balance sheet at December 31, 2013.
Amount (Tk.)
Cash 20,000
Accounts Receivable 21,200
Investments 32,000
Plant Assets 81,000
Land 40,000
Total Assets 1,94,200
Accounts Payable 30,000
Bonds Payable 41,000
Common Stock 1,00,000
Retained Earnings 23,200
Total Liability and Stockholders 1,94,200

During 2014, the following occurred.

1. Aero liquidated its available-for-sale investment portfolio at a loss of Tk.5, 000.
2. A tract of land was purchased for Tk.38, 000.
3. An additional Tk.30, 000 in common stock was issued at par.
4. Dividends totaling Tk.10, 000 were declared and paid to stockholders.
5. Net income for 2014 was Tk.35, 000, including Tk.12, 000 in depreciation expense.
6. Land was purchased through the issuance of Tk.30, 000 in additional bonds.

25 | P a g e
 7. At December 31, 2014, Cash was Tk.70, 200, Accounts Receivable was Tk.42, 000, and
Accounts Payable was Tk.40, 000.

Instructions:
a) Prepare a statement of cash flows for the year 2014 for Aero.
b) Compute Aero’s free cash flow and current cash debt coverage for 2014.
c) Use the analysis of Aero to illustrate how information in the statement of cash flows
helps the user of the financial statements.

Solution:

AERO INC.
Statement of Cash Flows
For the Year Ended December 31, 2014

Cash flows from operating activities

Net income ........................................................................................
$35,000
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation expense ..................................................................
$12,000
Loss on sale of investments .........................................................
5,000
Increase in accounts payable
($40,000 – $30,000) ..............................................................
10,000
Increase in accounts receivable
($42,000 – $21,200) ..............................................................
(20,800) 6,200
Net cash provided by operating activities .........................................41,200

Cash flows from investing activities

Sale of investments ............................................................................
27,000
Purchase of land ................................................................................
(38,000)
Net cash used by investing activities ................................................. (11,000)

Cash flows from financing activities

Issuance of common stock ................................................................
30,000
Payment of cash dividends ................................................................
(10,000)
Net cash provided by financing activities .........................................20,000

Net increase in cash .................................................................................50,200

Cash at beginning of year ........................................................................20,000
Cash at end of year ..................................................................................
$70,200
Noncash investing and financing activities
Land purchased through issuance of $30,000 of bonds

b) An analysis of Aero’s free cash flow indicates it is negative as shown below:

Free Cash Flow Analysis

26 | P a g e
 Net cash provided by operating activities ..................................................................
$41,200
Less: Purchase of land ...........................................................................................
38,000
Dividends .....................................................................................................
10,000
Free cash flow ............................................................................................................
$ (6,800)
c) This type of information is useful for assessing the amount, timing, and uncertainty of future
cash flows. For example, by showing the specific inflows and outflows from operating
activities, investing activities, and financing activities, the user has a better understanding
of the liquidity and financial flexibility of the enterprise. Similarly, these reports are useful
in providing feedback about the flow of enterprise resources. This information should
help users make more accurate predictions of future cash flow. In addition, some
individuals have expressed concern about the quality of the earnings because the
measurement of the income depends on a number of accruals and estimates which may
be somewhat subjective. As a result, the higher the ratio of cash provided by operating
activities to net income, the more comfort some users have in the reliability of the
earnings.

Statement of Cash flows

Data presented below are from the records of Antonio Brasileiro Company:

December December
31, 2017 31, 2016

Cash 15000 8000

Current assets other than cash 85000 60000
Long-term investments 10,000 53,000
Plant assets 335,000 215,000
445,000 336,000
Accumulated depreciation 20000 40000
Current liabilities 40000 22000
Bonds payable 75000 254000
Common stock 254,000 254,000
Retained earnings 56,000 20,000
445,000 336,000

Additional information:
1. In 2017, the company sold for $34,000 available-for-sale debt investments carried at a
cost of $43,000 on December 31, 2017. No unrealized gains or losses were recorded on
this investment in 2017.
2. In 2017, the company sold for $8,000 plant assets that cost $50,000 and were 80%
depreciated. The loss was incorrectly charged directly to Retained Earnings.
3. Net income as reported on the income statement for the year was $48,000.
4. The company paid dividends totaling $10,000.
5. Depreciation charged for the year was $20,000.

SOLUTION:
27 | P a g e
 ANTONIO BRASILEIRO COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2017
INDIRECT METHOD

Cash flows from operating activities

Net income ($48,000 − $2,000) $46,000

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense $ 20,000
Loss on sale of investments 9,000
Loss on sale of plant assets 2,000
Increase in current assets other than cash (25,000)
Increase in current liabilities 18,000 24000
Net cash provided by operating activities 70,000
Cash flows from investing activities
Sale of plant assets 8,000
Sale of investments 34,000
Purchase of plant assets* (170,000)
Net cash used by investing activities (128,000)
Cash flows from financing activities
Issuance of bonds payable 75,000
Payment of dividends (10,000)
Net cash provided by financing activities 65,000
Net increase in cash 7,000
Cash balance, January 1, 2017 8,000
Cash balance, December 31, 2017 15,000

*Supporting computation (purchase of plant assets):

Plant assets, December 31, 2017 $335,000
Less: Plant assets, December 31, 2016 215,000
Net change 120,000
Plant assets sold 50,000
Plant assets purchased $170,000

Jobim Inc. had the following condensed balance sheet at the end of operations for 2016.

JOBIM INC.
BALANCE SHEET
DECEMBER 31, 2016

Liabilities and
Assets Taka Taka
shareholder’s equity

28 | P a g e
 Cash $ 8,500 Current liabilities $ 15,000
Current assets other than 29,000 Long-term notes payable 25,500
cash 20,000 Bonds payable 25,000
Equity investments 67,500 Common stock 75,000
Plant assets (net ) Retained earnings 24,500
Land 40,000
Total assets $165,000 Total Liabilities and $165,000
shareholder’s equity

During 2017, the following occurred.

1. A tract of land was purchased for $9,000.
2. Bonds payable in the amount of $15,000 were redeemed at par.
3. An additional $10,000 in common stock was issued at par.
4. Dividends totaling $9,375 were paid to stockholders.
5. Net income was $35,250 after allowing depreciation of $13,500.
6. Land was purchased through the issuance of $22,500 in bonds.
7. Jobim Inc. sold part of its investment portfolio for $12,875. This transaction resulted in a
gain of $2,000 for the company. No unrealized gains or losses were recorded on these
investments in 2017.
8. Both current assets (other than cash) and current liabilities remained at the same amount.

Instructions
a) Prepare a statement of cash flows for 2017 using the indirect method.
b) Prepare the condensed balance sheet for Jobim Inc. as it would appear at December 31,
2017.

Solution

JOBIM INC.
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income $35,250
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense $13,500
Gain on sale of investments (2,000 ) 11,500
Net cash provided by operating activities 46,750
Cash flows from investing activities
Purchase of land (9,000)
Sale of investments 12,875
Net cash provided by investing activities 3,875
Cash flows from financing activities
Payment of dividends (9,375)
Redemption of bonds payable (15,000)
Issuance of common stock 10,000
Net cash used by financing activities (14,375)

Net increase in cash 36,250

Cash, January 1, 2017 8,500

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Cash, December 31, 2017 $44,750
Noncash investing and financing activities
Issuance of bonds for land $22,500

b.
JOBIM INC.
BALANCE SHEET
December 31, 2017

Assets Equities
Cash $44,750 Current liabilities $ 15,000
Current assets Long-term notes
other than cash 29,000 Payable 25,500
Investments 9,125a Bonds payable 32,500c
Plant assets (net ) 54,000 Common stock 85,000
Land 71,50 b Retained earnings 50,375d
$208,375 $208,375

a$20,000 – ($12,875 – $2,000)

b$40,000 + $9,000 + $22,500
c$25,000 – $15,000 + $22,500
d$24,500 + $35,250 – $9,375

(SCF-Indirect Method, and Net Cash Flow from Operating Activities, Direct Method)
Comparative balance sheet accounts of Marcus Inc. are presented below

MARCUS INC.
COMPARATIVE BALANCE SHEET ACCOUNTS
AS OF DECEMBER 31, 2017 AND 2016

December 31

Debit accounts 2016

2017
Cash $ 42,000 $ 33,750
Accounts Receivable 70,500 60,000
Inventory 30,000 24,000
Equity investments 22,250 38,500
Machinery 30,000 18,750
Buildings 67,500 56,250
Land 7,500 7,500
$269,750 $238,750
Credit Accounts
Allowance for Doubtful Accounts $ 2,250 $ 1,500
Accumulated Depreciation—Machinery 5,625 2,250
Accumulated Depreciation—Buildings 13,500 9,000
Accounts Payable 35,000 24,750
Accrued Payables 3,375 2,625

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 Long-Term Notes Payable 21,000 31,000
Common Stock, no-par 150,000 125,000
Retained Earnings 39,000 42,625
$269,750 $238,750

Additional data (ignoring taxes):

1. Net income for the year was $42,500.
2. Cash dividends declared and paid during the year were $21,125.
3. A 20% stock dividend was declared during the year. $25,000 of retained earnings was
capitalized.
4. Equity investments (level of ownership is less than 20%) that cost $25,000 were sold
during the year for $28,750. No unrealized gains and losses were recorded on these
investments in 2017.
5. Machinery that cost $3,750, on which $750 of depreciation had accumulated, was sold
for $2,200.

Marcus’s 2017 income statement follows (ignoring taxes).

Sales revenue $540,000
Less: Cost of goods sold 380,000
Gross margin 160,000
Less: Operating expenses (includes $8,625 depreciation
and $5,400 bad debts) 120,450
Income from operations 39,550
Other: Gain on sale of investments $3,750
Loss on sale of machinery (800) 2,950
Net income $ 42,500

Instructions
a) Compute net cash flow from operating activities using the direct method.
b) Prepare a statement of cash flows using the indirect method.

Solution
a)

Net Cash Flow from Operating Activities

Cash received from customers. $524,8501
Cash payments:
Cash payments to suppliers $375,7502
Cash payments for operating expenses 105,6753
481,425
Net cash provided by operating activities $ 43,4251
1
$540,000 – $10,500 – $4,650* = $524,850
2
$380,000 + $6,000 – $10,250 = $375,750
3
$120,450 – $8,625 – $750** – $5,400 = $105,675*
Write off of accounts receivable.
GGG($1,500 + $5,400 – $2,250)
**Increase in accrued payables

b)

31 | P a g e
 MARCUS INC.
Statement of Cash Flows
For the Year Ended December 31, 2017

Cash flows from operating activities

Net income $42,500
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense $8,625
Gain on sale of investments (3,750)
Loss on sale of machinery 800
Increase in accounts receivable (net. (9,750)*
Increase in inventory. (6,000)
Increase in accounts payable 10,250
Increase in accrued payables 750 925
Net cash provided by operating activitie s43,425
Cash flows from investing activities
Purchase of investments
$22,250 – ($38,500 – $25,000). (8,750)
Purchase of machinery
$30,000 – ($18,750 – $3,750). (15,000)
Addition to buildings. (11,250)
Sale of investments. . 28,750
Sale of machinery... 2,200
Net cash used by investing activities. (4,050)
Cash flows from financing activities
Reduction in long-term note payable (10,000)
Cash dividends paid. G (21,125 )
Net cash used by financing activities. (31,125)
Net increase in cash. 8,250
Cash, January 1, 2017.. 33,750
Cash, December 31, 2017 $42,000

*($70,500 – $2,250) – ($60,000 – $1,500)

*($70,500 – $2,250) – ($60,000 – $1,500)
*($70,500 – $2,250) – ($60,000 – $1,500)
*($70,500 – $2,250) – ($60,000 – $1,500)
*($70,500 – $2,250) – ($60,000 – $1,500)
*($70,500 – $2,250) – ($60,000 – $1,500)
*($70,500 – $2,250) – ($60,000 – $1,500)
*($70,500 – $2,250) – ($60,000 – $1,50

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SCF—Direct and Indirect Methods from Comparative Financial Statements) Chapman
Company, a major retailer of bicycles and accessories, operates several stores and is a publicly
traded company. The comparative balance sheet and income statement for Chapman as of May
31, 2017, are as follows. The company is preparing its statement of cash flows

CHAPMAN COMPANY
COMPARATIVE BALANCE SHEET
AS OF MAY 31

Particulars 2017 2016

Current assets
Cash $ 28,250 $ 20,000
Accounts receivable 75,000 58,000
Inventory 220,000 250,000
Prepaid expenses 9,000 7,000
Total current assets 332,250 335,000
Plant assets Plant assets 600,000 502,000
Less: Accumulated depreciation— 150,000 125,000
plant assets
Net plant assets 450,000 377,000
Total assets $782,250 $712,000
Current liabilities
Accounts payable $123,000 $115,000
Salaries and wages payable 47,250 72,000
Interest payable 27,000 25,000
Total current liabilities 197,250 212,000
Long-term debt Bonds payable 70,000 100,000
Total liabilities 267,250 312,000
Stockholders’ equity Common 370,000 280,000
stock, $10 par
Retained earnings 145,000 120,000
Total stockholders’ equity 515,000 400,000
Total liabilities and stockholders’ $782,250 $712,000
equity

CHAPMAN COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED MAY 31, 2017

Particulars Dollars
Sales revenue $1,255,250
Cost of goods sold 722,000
Gross profit 533,250

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 Expenses
Salaries and wages expense 252,100
Interest expense 75,000
Depreciation expense 25,000
Other expenses 8,150
Total expenses 360,250
Operating income 173,000
Income tax expense 43,000
Net income $ 130,000

The following is additional information concerning Chapman’s transactions during the year
ended May 31, 2017.
1. All sales during the year were made on account.
2. All merchandise was purchased on account, comprising the total accounts payable
account.
3. Plant assets costing $98,000 were purchased by paying $28,000 in cash and issuing
7,000 shares of stock.
4. The “other expenses” are related to prepaid items.
5. All income taxes incurred during the year were paid during the year.
6. In order to supplement its cash, Chapman issued 2,000 shares of common stock at par
value.
7. Cash dividends of $105,000 were declared and paid at the end of the fiscal year.
Instructions
a) Compare and contrast the direct method and the indirect method for reporting cash flows
from operating activities.
b) Prepare a statement of cash flows for Chapman Company for the year ended May 31,
2017, using the direct method. Be sure to support the statement with appropriate
calculations. (A reconciliation of net income to net cash provided is not required.)
c) Using the indirect method, calculate only the net cash flow from operating activities for
Chapman Company for theyear ended May 31, 2017

Solution : P23-7
a)
Both the direct method and the indirect method for reporting cash flows from
operating activities are acceptable in preparing a statement of cash flows according to GAAP;
however, the FASB encourages the use of the direct method. Under the direct method, the
statement of cash flows reports the major classes of cash receipts and cash disbursements, and
discloses more information; this may be the statement’s principal advantage. Under the indirect
method, net income on the accrual basis is adjusted to the cash basis by adding or deducting
noncash items included in net income, thereby providing a useful link between the statement of
cash flows and the income statement and balance sheet.

b) The Statement of Cash Flows for Chapman Company, for the year endedMay 31, 2017, using
the direct method, is presented below.
CHAPMAN COMPANY
Statement of Cash Flows
For the Year Ended May 31, 2017
Cash flows from operating activities
Cash received from customers $1,238,250
Cash payments:
To suppliers $684,000

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 To employees 276,850
For other expenses 10,150
For interest 73,000
For income taxes 43,000 1,087,000
Net cash provided by operating 151,250
activities
Cash flows from investing activities
Purchase of plant assets (28,000) (28,000)
Cash flows from financing activities
Cash received from common stock issue 20,000
Cash paid:
For dividends (105,000)
To retire bonds payable (30,000)
Net cash used by financing activities. (115,000)
Net increase in cash 8,250
Cash, June 1, 2016. 20,000
Cash, May 31, 2017 $28,250

Note 1: Noncash investing and financing activities: Issuance of common stock for plant assets
$70,000.

Supporting Calculations:
Cash collected from customers
Sales revenue................................................... $1,255,250
Less: Increase in accounts receivable......... 17,000
Cash collected from customers.......... $1,238,250

Cash paid to suppliers

Cost of goods sold.......................................... $722,000
Less: Decrease in inventory.......................... 30,000
Increase in accounts payable............. 8,000
Cash paid to suppliers......................... $ 684,000

Cash paid to employees

Salaries and wages expense.......................... $ 252,100
Add: Decrease in salaries andwages payable.............. 24,750
Cash paid to employees....................... $276,850

Cash paid for Other expenses................................. $ 8,150

Add: Increase in prepaid expenses............... 2,000
Cash paid for other expenses.............. .$10,150
Cash paid for interest

Interest expense............................................... $ 75,000

Less: Increase in interest payable................ 2,000
Cash paid for interest........................... $ 73,000
Cash paid for income taxes:
Income tax expense (given)............................ $ 43,000

c)
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The calculation of the cash flow from operating activities for Chapman Company, for the year
ended May 31, 2017, using the indirect method is presented below
.CHAPMAN COMPAN
Statement of Cash Flows
For the Year Ended May 31, 2017

Cash flows from operating activities

Net income $130,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense $25,000
Decrease in inventory. 30,000
Increase in accounts payable 8,000
Increase in interest payable. 2,000
Increase in accounts receivable (17,000)
Increase in prepaid expenses (2,000)
Decrease in salaries and wages payable (24,750)
21,250
Net cash provided by operating activities $151,250

Comparative balance sheet accounts of Sharpe Company are presented below.

SHARPE COMPANY
COMPARATIVE BALANCE SHEET, AS OF DECEMBER 31

2021 2020
Particulars Amount Amount
(Tk.) (Tk.)
Assets
Cash 70,000 51,000
Accounts Receivable 1,55,000 1,30,000
Inventory 75,000 61,000
Debt investments (available-for-sale) 55,000 85,000
Equipment 70,000 48,000
Buildings 1,45,000 1,45,000
Land 40,000 25,000
Total Assets 6,10,000 5,45,000
Liabilities and Stockholders’ Equity
Allowance for Doubtful Accounts 10,000 8,000
Accumulated Depreciation—Equipment 21,000 14,000
Accumulated Depreciation—Buildings 37000 28000
Accounts Payable 66000 60,000
Income Taxes Payable 12000 10,000
Long-Term Notes Payable 62000 70,000
Common Stock 3,10,000 2,60,000
Retained Earnings 92,000 95,000
Total Liabilities and Stockholders’ Equity 6,10,,000 5,45,000

Additional data:
i. Equipment that cost Tk.10, 000 and was 60% depreciated was sold in 2021.
ii. Cash dividends were declared and paid during the year.
36 | P a g e
 iii. Common stock was issued in exchange for land.
iv. Debt investments that cost Tk.35, 000 were sold during the year.
v. There were no write-offs of uncollectible accounts during the year.

Sharpe’s 2021 Income Statement is as follows.

Sales revenue 9,50,000
Less: Cost of goods sold 6,00,000
Gross profit 3,50,000
Less: Operating expenses (includes
depreciation expense and bad debt expense) 2,50,000
Income from operations 1,00,000
Other revenues and expenses
Gain on sale of investments 15,000
Loss on sale of equipment (3,000) 12,000
Income before taxes 1,12,000
Income taxes 45,000
Net income 67,000

Instructions:
i. Compute net cash provided by operating activities under the direct method;
ii. Prepare a Statement of Cash Flows using the indirect method.

Solution 23-8
(a)

Net Cash Provided by Operating Activities

Cash receipts from customers $925,000 (1)
Cash payments:
To suppliers $608,000(2)
For operating expenses 226,000(3)
For income taxes 43,000 (4) 877,000
Net cash provided by operating activities$ 48,000

(1) (Sales Revenue) less (Increase in Accounts Receivable)

$950,000 – $25,000 = $925,000
(2) (Cost of Goods Sold) plus (Increase in Inventory) less(Increase in Accounts Payable)
$600,000 + $14,000 – $6,000 = $608,000
3) (Operating Expenses) less (Depreciation Expense) less(Bad Debt Expense)
$250,000 – $22,000* – $2,000 = $226,000
(4) (Income Taxes) less (Increase in Income Taxes Payable)
$45,000 – $2,000 = $43,000

*$21,000 – [$14,000 – ($10,000 X .60)] = $13,000 Equipment depreciation

$37,000 – $28,000 = 9,000 Building depreciation
$22,000

(b) SHARPE COMPANY

Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income $67,000
37 | P a g e
 Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense $22,000
Gain on sale of investments (15,000)
Loss on sale of equipment 3,000
Increase in accounts receivable (net) (23,000)
Increase in inventory ( 14,000)
Increase in accounts payable 6,000
Increase in income taxes payable. 2,000 (19,000 )
Net cash provided by operating activities 48,000
Cash flows from investing activities
Purchase of investments
[$55,000 – ($85,000 – $35,000] (5,000)
Purchase of equipment
[$70,000 – ($48,000 – $10,000)] (32,000)
Sale of investments ($35,000 + $15,000) 50,000
Sale of equipment
[$10,000 – ($10,000 X 60%)] – $3,000 1,000
Net cash provided by investing activities 14,000
Cash flows from financing activities
Payment of long-term notes payable (8,000)
Cash dividends paid
[($95,000 + $67,000) – $92,000] (70,000)
Issuance of common stock. 35,000 *
Net cash used by financing activities (43,000 )
Net increase in cash 19,000
Cash, January 1, 2017 51,000
Cash, December 31, 2017 $70,000
Noncash investing and financing activities
Issuance of common stock for land.................. $15,000

*$310,000 – $260,000 = $50,000; $50,000 – ($40,000 – $25,000) = $35,000

P23-9 (L02,4) (Indirect SCF) Dingel Corporation has contracted with you to prepare a statement
of cash flows. The controller has provided the following information.

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 Dingel Corporation
Comparative Balance Sheet
December-31

2017 (Tk.) 2016 (Tk. )

Cash 38,500 13,000
Accounts receivable 12,250 10,000
Inventory 12,000 10,000
Equity investments –0– 3,000
Buildings –0– 29,750
Equipment 40,000 20,000
Copyrights 5,000 5,250
Totals 107,750 91,000
Allowance for doubtful accounts 3,000 4,500
Accumulated depreciation—equipment 2,000 4,500
Accumulated depreciation—buildings –0– 6,000
Accounts payable 5,000 4,000
Dividends payable –0– 5,000
Notes payable, short-term (nontrade) 3,000 4,000
Long-term notes payable 36,000 25,000
Common stock 38,000 33,000
Retained earnings 20,750 5,000
Totals 107,750 91,000

Additional data related to 2017 are as follows.

1. Equipment that had cost $11,000 and was 30% depreciated at time of disposal
was sold for $2,500.
2. $5,000 of the long-term note payable was paid by issuing common stock.
3. Cash dividends paid were $5,000.
4. On January 1, 2017, the building was completely destroyed by a flood. Insurance
proceeds on the building were $33,000 (net of $4,000 taxes).
5. Equity investments (ownership is less than 20% of total shares) were sold at
$1,500 above their cost. No unrealized gains or losses were recorded in 2017.
6. Cash and long-term note for $16,000 were given for the acquisition of equipment.
7. Interest of $2,000 and income taxes of $5,000 were paid in cash.
Instructions
a) Use the indirect method to analyze the above information and prepare a statement of cash
flows for Dingel.
b) What would you expect to observe in the operating, investing, and financing sections of
a statement of cash flows of:
i. A severely financially troubled firm?
ii. A recently formed firm that is experiencing rapid growth?

Solution - P23-9
DINGEL CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2017

Cash flows from operating activities

Net in come $15,750(a)
Adjustments to reconcile net income to

39 | P a g e
 net cash provided by operating activities:
Loss on sale of equipment $ 5,200b
Gain from flood damage (13,250)*
Depreciation expense 800(c)
Copyright amortization 250
Gain on sale of investment... (1,500)
Increase in accounts receivable (net) (3,750)
Increase in inventory (2,000)
Increase in accounts payable 1,000 (13250)
Net cash flow provided by operating 2500
activities
Cash flows from investing activities
Sale of investments 4,500
Sale of equipment. 2,500
Purchase of equipment (cash) (15,000)
Proceeds from flood damage to building 37,000
Net cash provided by investing activities 29,000
Cash flows from financing activities
Payment of dividends. (5,000)
Payment of short-term notes payable (1,000)
Net cash used by financing activities (6.000)
Increase in cash 25,500
Cash, January 1, 2017 13,000
Cash, December 31, 2017 $38,500

Noncash investing and financing activities:

Retired note payable by issuing common stock . $ 5,000

Purchased equipment by issuing notes payable 16,000

$21,000
Supporting Computations:
( a) Ending retained earnings.. $20,750
Beginning retained earnings . (5.000 )
Net income $15,750

(b) Cost....... $11,000

Accumulated depreciation (30% X $11,000).... (3.300)
Book value... Proceeds from sale $ 7,700
Loss on sale .......... (2.500)
$ 5,200

(c) Accumulated depreciation on equipment sold Decrease in accumulated depreciation.$ 3,300

Depreciation expense(2,500)
$ 800
(b) (1) For a severely financially troubled firm:

Operating: Probably a small cash inflow or a cash outflow

Investing: Probably a cash inflow as assets are sold to provide needed cash.
Financing: Probably a small cash inflow or a cash outflow

(2) For a recently formed firm this is experiencing rapid growth:

40 | P a g e
Operating: Probably a cash inflow.
Investing: Probably a large cash outflow as the firm expands.
Financing: Probably a large cash inflow to finance expansion.

CA23-1 WRITING (Analysis of Improper SCF) The following statement was prepared by
Maloney Corporation’s accountant.
MALONEY CORPORATION
STATEMENT OF SOURCES AND APPLICATION OF CASH
FOR THE YEAR ENDED SEPTEMBER 30, 2017

Particulars Sources of cash

Net income $111,000
Depreciation and depletion 70,000
Increase in long-term debt 179,000
Changes in current receivables and inventories, less current 14,000
liabilities (excluding current maturities of long-term debt)
$374,000
Application of cash
Cash dividends $ 60,000
Expenditure for property, plant, and equipment 214,000
Investments and other uses 20,000
Change in cash 80,000
$374,000

The following additional information relating to Maloney Corporation is available for the year
ended September 30, 2017.
1. Salaries and wages expense attributable to stock option plans was $25,000 for the year.
2. Expenditures for property, plant, and equipment $250,000
Proceeds from retirements of property, plant, and equipment 36,000
Net expenditures $214,000
3. A stock dividend of 10,000 shares of Maloney Corporation common stock was distributed to
common stockholders on April 1, 2017, when the per share market price was $7 and par value
was $1.
4. On July 1, 2017, when its market price was $6 per share, 16,000 shares of Maloney
Corporation common stock were issued in exchange for 4,000 shares of preferred stock.
5. Depreciation expense $ 65,000
Depletion expense 5,000
$ 70,000
6. Increase in long-term debt $620,000
Less: Redemption of debt 441,000
Net increase $179,000

Instructions
(a) In general, what are the objectives of a statement of the type shown above for Maloney
Corporation? Explain.
(b) Identify the weaknesses in the form and format of Maloney Corporation’s statement of cash
flows without reference to the additional information. (Assume adoption of the indirect method.)
(c) For each of the six items of additional information for the statement of cash flows, indicate
the preferable treatment and explain why the suggested treatment is preferable.

Solution CA 23-1
41 | P a g e
(a) The main purpose of the statement of cash flows is to show the change in cash from one
period to the next. Another objective of a statement of the type shown is to summarize the
financing and investing activities of the entity, including the extent to which the company has
generated cash or near cash assets from operations during the period. Another objective is to
complete the disclosure of changes in financial position during the period. The information
shown in such a statement is useful to a variety of users of financial statements in making
economic decisions regarding the company.

(b) The following are weaknesses in form and format of Maloney Corporation's Statement of
Sources and Application of Cash:
1. The title of the statement should be Statement of Cash Flows.
2. The statement should add back to (or deduct from) net income certain items that did
not use (or provide) cash during the period. The resulting total should be described as net cash
provided by operating activities. Cash flows from extraordinary items, if any, should be
presented with appropriate modifications in terminology as investing or financing activities. The
only apparent adjustments in this situation are the amounts to be added back to net income for
the depreciation and depletion expense, for any wage or salary expense related to the employee
stock option plans, and for changes in current assets and liabilities
3. The format used should separate the cash flows into investing, financing, and operating
activities. Noncash investing and financing activities, it significant, should be shown in a
separate schedule or note.
4. Individual items should not be grouped together, as was the case for the $14.000 item.

(c) 1. (i) The $25.000 option plan salaries and wages expense should be included in the
statement as an amount added back to net income, an expense not requiring the outlay of cash
during the period.
(ii) Since the statement balances and no reference is made to the $25.000 salaries and wages
expense, it appears the expense was not recorded or that there is an offsetting error else where in
the statement.

2. The expenditures for plant as set acquisitions should not be reported net of the proceeds from
plant-asset retirements. Both the outlay for acquisitions and the proceeds from retirements
should be reported as investing activities. The details provide useful information about changes
in financial position during the period.
3. Stock dividends or stock splits need not be disclosed in the statement because these
transactions do not significantly affect financial position.
4. The issuance of the 16,000 shares of common stock in exchange for the preferred stock
should be shown as a noncash financing activity. Since these transactions significantly change
the corporation's capital structure, they should be disclosed.
5. The presentation of the combined total of depreciation and depletion is probably acceptable.
The general rule is that related items should be shown separately in proximity when the result
contributes information useful to the user of the statement, but immaterial items may be
combined. In this situation, it is likely that no additional relevant information would be added by
showing depletion as a separate item. The total should be added back to net income in the
computation of the net cash flow from operating activities.
6. The details of changes in long-term debt should be shown separately. Payments should not be
netted against increases in long-term borrowings. The long-term borrowing of $620,000 should
be shown as cash provided and the retirement of $441.000 of debt should be shown as use of
cash from financing activities.

42 | P a g e
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 Chapter- 08
Ideas on Accounting for Operating Segment
(IFRS-8)

1. Definition of Segment reporting

Segment reporting is the practice of breaking down accounts in an annual report to detail
activity in particulars section of a business. In many countries, accounting rules mean this
must be done where a business can clearly identify sections of a certain size. The idea is to
give investors a better insight into the way a company is being run and any potential problem
areas.

Most countries which have such rules do so under International Financial Reporting
Standards. These are rules and principles agreed by international bodies with the aim of
making it easier to compare the performance of companies in different countries. The rules
on segment reporting appear in IFRS statement number 8, first issued in 2006 and updated at
several points since.

2. Objectives of Segment Reporting

To enable the users of financial statements to:

➢ Better understand the performance of the enterprise;

➢ Better assess the risks and returns of the enterprise; and
➢ Make more informed (up-to-date) judgments about the enterprise as a whole.

3. Applicability of this standard

⚫ Listed Companies
⚫ Companies in the process of listing their equity or debt securities
⚫ Banks including Co-operative banks
⚫ Financial Institutions
⚫ Insurance companies
⚫ All commercial and business reporting enterprises having turnover exceeding Rs. 50
Crores.
⚫ All commercial and business reporting enterprises having borrowings including
public deposits in excess of Rs. 10 Crore at any time during the accounting period.
⚫ Holding and subsidiary companies of above.

4. Definition of Operating Segment

IFRS defines an operating segment as a component of an entity:

• That engages in business activities from which it may earn revenues and incur
expenses.
 • Whose operating results are regularly reviewed by the entity’s chief operating
decision maker to make decisions about resources to be allocated to the segment and
asses its performance
• For which discrete (separated) financial information is available.

5. Definition of Reportable segments

A business or geographical segment is a reportable segment only if:

➢ Its revenue from sales to external customers and from transactions with other
segments is 10% or more of the total revenue, external and internal, of all
segments; or
➢ Its segment result whether profit or loss is 10% or more of –
▪ The combined result of all segments in profit; or
▪ The combined result of all segments in loss,

Whichever is greater in absolute amount; or

Any segment may be treated as reportable segment by the management. If not designated as a
reportable segment, it should be included as an unallocated reconciling item.

➢ its segment assets are 10% or more of the total assets of all segments.

1. Revenue Test
2. Operating Profit (Loss) Test
3. Identifiable Assets Test

“All reportable segments are operating segments, but all operating segments are not
reportable.”- Explain.

6. Geographical Segment - Definition

‘Geographical segment’ is a distinguishable component of an enterprise:

➢ that is engaged in providing products or services within a particular economic

environment; and
➢ that is subject to risks and returns that are different from those of components
operating in other economic environments.

Factors for determination of geographical segment

⚫ Similarity of economic and political conditions;

⚫ Relationships between operations in different geographical areas;
⚫ Proximity (nearness or similarity) of operations;
⚫ Special risks associated with operations in a particular area
⚫ Exchange control regulations
⚫ The underlying currency risks.

7. Disclosing Segmental information

A. General Information:
 IFRS 8 requires disclosure of the following:

Factors for consideration of reportable segment

⚫ Nature of products or services

⚫ Nature of product processes
⚫ Type or class of customers for the product or services
⚫ Methods used to distribute the products or provide the services
⚫ The nature of regulatory environment, for example, banking, insurance or public
utilities.

B. Information about Profit or Loss and Other Segment Items:

For each reportable segment an entity should report:

• A measure of profit or loss

• A measure of total assets
• A measure of total liabilities (if such an amount is regularly used in decision
making).

IFRS 8 does not define segment revenue, segment result (profit or loss) or segment
assets.

• Therefore, the following amounts must be disclosed if they are included in

segment profit or loss:
✓ Revenues from external customers
✓ Revenues from inter-segment transactions
✓ Interest revenues
✓ Interest expense
✓ Depreciation and amortization
✓ Material items of income and expense (exceptional items)
✓ Interest in the profit or loss of associate and joint ventures accounted
for the equity method
✓ Income tax expense
✓ Material non-cash items other than depreciation or amortization.
• The following amounts must be disclosed if they are included in segment
assets:
✓ Investment in associates and joint ventures accounted for by the equity
method
✓ Amounts of additions to non-current assets other than financial
instruments

C. Entity wide disclosures

IFRS 8 also requires the following disclosures about the entity as a whole, even if it
only has one reportable segment.

• The revenues from external customers for each product and service or each
group of similar products and services.
• Revenues from external customers split between the entity’s country of
domicile and all foreign countries in total.
 • Non-current assets split between those located in the entity’s country of
domicile and all foreign countries in total.
• Revenue from single external customer which amounts to ten percent or move
an entity’s revenue. The identity of the customer does not need to be
disclosed.

D. Measurement

IFRS 8 requires segmental reports to be based on the information reported to and used by
management, even where this is prepared on a different basis from the rest of the financial
statements.

Therefore, an entity must provide explanations of the measurement of segment profit or

loss, segment assets and segment liabilities, including:

• The basis of accounting for any transactions between reportable segments

• The nature of differences between the measurement of segment profit or loss,
assets and liabilities and the amounts reported in the financial statements.
Differences could result from accounting policies and/or policies for the
allocation of common costs and jointly used assets to segments
• The nature of any changes from prior periods in measurement methods
• The nature and effect of any asymmetrical allocations to segments (for
example, where an entity allocates depreciation expense but not the related
non-current assets).

8. Segment Revenue

‘Segment revenue’ is the aggregate of

(i) the portion of enterprise revenue that is directly attributable to a segment.

(ii) the relevant portion of enterprise revenue that can be allocated on a reasonable
basis to a segment, and
(iii) revenue from transactions with other segments of the enterprise.

Exclusions from Segment revenue

(a) Extraordinary items.

(b) Interest or dividend income, including interest earned on advances or loans to other
segments unless the operations of the segment are primarily of a financial nature; and
(c) Gains on sales of investments or on extinguishment of debt unless the operations of
the segment are primarily of a financial nature.

9. Segment Expenses

‘Segment expense’ is the aggregate of

(a) the expense resulting from the operating activities of a segment that is directly
attributable to the segment, and
 (b) the relevant portion of enterprise expense that can be allocated on a reasonable
basis to the segment including expense relating to transactions with other segments of
the enterprise.

Segment Expense- Exclusions

⚫ Extraordinary items
⚫ Interest expense including interest incurred on advances or loans from other segments,
unless the operations of the segment are primarily of a financial nature;
⚫ Losses on sales of investments or losses on extinguishment of debt unless the
operations of the segment are primarily or a financial nature;
⚫ Income-tax expense
⚫ General administrative expenses, head-office expenses, and other expenses that arise
at the enterprise level and relate to the enterprise as a whole.

10. Segment Assets

⚫ Segment assets are those operating assets that are employed by a segment in its
operating activities and that either are directly attributable to the segment or can be
allocated to the segment on a reasonable basis.

If the segment result includes interest or dividend income, its segment assets should
also include the related receivables, loans, investments, or other interest or dividend
generating assets.

11. Segment Liabilities

⚫ Segment liabilities are those operating liabilities that result from the operating
activities of a segment and that either are directly attributable to the segment or can be
allocated to the segment on a reasonable basis.

If the segment result of a segment includes interest expense, its segment liabilities
include the related interest bearing liabilities. It does not include income-tax liabilities.

12. Problems areas in Segment Reporting

Segmental reports can provide useful information, but they also have important
limitations.
• IFRS 8 states that segments should reflect the way in which the entity is
managed. This means that segments are defined by the directors. Arguably,
this provides too much flexibility. It also means that segmental information is
only useful for comparing the performance of the same entity over time, not
for comparing the performance of different entities.
• Common costs may be allocated to different segments on whatever basis the
directors believe is reasonable. This can lead to arbitrary (random) allocation
of these costs.
• A segment’s operating results can be distorted (unclear) by trading with other
segments on non-commercial terms.
Probem-1: (Segment Reporting)

Finlay Corporation is a diversified company that operates in different segments of the

followings:
Segment Revenue Profit Total Segment Revenue Profit Total
s Asset s Assets
s
A 800 100 550 F 60 15 72
B 450 70 400 G 30 18 45
C 70 30 80 H 40 21 45
D 100 70 112 I 90 45 60
E 80 20 178

Determine which of the segments are reportable based on the:

i. Revenue Test;
ii. Operating Profit (Loss) Test;
iii. Identifiable Assets Test.
Solution:
1. Revenue Test:
Total Revenue: (800+450+70+100+80+60+30+40+90) = 1,720;
10% of Total Revenue i.e.; 10% of 1720 = 172.
Hence segments A and B meet this test.

2. Operating Profit Test:

Total Operating Profit : (100+70+30+70+20+15+18+21+45) = 389;

10% 0f Total Profit i.e.; 10% of 389 = 38.9.
Hence segments A, B, D, and I meet this test.

3. Identifiable Assets Test:

Total Identifiable Assets: (550+400+80+112+178+72+45+45+60) = 1,542;

10% 0f Total Identifiable Assets i.e.; 10% of 1542 = 154.2.
Hence segments A, B, and E meet this test.

So, Segments A, B, D, E, and I are reportable segments.

Problem-2 (Segment Reporting)

Identify the reportable segments from the following segments information:

Revenue Profit Total Revenue Profit Total
Assets Assets
A 800 100 550 F 60 15 72
 B 450 70 400 G 30 18 45
C 70 30 80 H 40 21 45
D 100 70 112 I 90 45 60
E 80 20 178

Problem-3 (Segment Reporting)

Finlay Corporation is a diversified company that operates in five different industries: A, B, C,

D, & E. The following information relating to each segment is available for 2010:

Particulars A (Tk.) B (Tk.) C (Tk.) D (Tk.) E (Tk.)

Sales 40,000 80,000 5,80,000 35,000 55,000
Cost of Goods Sold 19,000 50,000 2,70,000 19,000 30,000
Operating Expenses 10,000 40,000 2,35,000 12,000 18,000
Total Expenses 29,000 90,000 5,05,000 31,000 48,000
Operating Profit (Loss) 11,000 (10,000) 75,000 4,000 7,000
Identifiable Assets 35,000 60,000 5,00,000 65,000 50,000

Sales of segment B & C included inter segment sales of Tk. 20,000 and 1, 00,000
respectively.
Instructions:
i. Determine which of the segments are reportable based on the:
1. Revenue Test;
2. Operating Profit (Loss) Test;
3. Identifiable Assets Test.
ii. Prepare necessary disclosure required by IFRS-08.
Solution:
i) Determination of Reportable Segments:
1. Revenue Test:
Total Revenue: (40,000+80,000+5, 80,000+35,000+55,000) = 7,90,000
10% 0f Total Revenue i.e.; 10% of 7,90,000 = 79,000.
Hence segments B and C both meet this test.

2. Operating Profit Test:

Total Operating Profit : (11,000+75,000+4,000+7,000) = 97,000;

10% 0f Total Profit i.e.; 10% of 97,000 = 9,700.
Hence segments A (11,000), B (10,000, absolute value), and C (75,000) all meet
this test.
3. Identifiable Assets Test:

Total Identifiable Assets: (35,000+60,000+5,00,000+65,000+50,000) = 7,10,000;

10% 0f Identifiable Assets i.e.; 10% of 7,10,000 = 71,000.
Hence only segment C meets this test.

Therefore, Segments A, B, and C are reportable segments.

ii)
Finlay Corporation
 Segmental Worksheet

Particulars A B C Others Total

External Revenues 40,000 60,000 4,80,000 90,000 6,70,000
Intersegment Revenues 20,000 1,00,000 1,20,000
Total Revenues 40,000 80,000 5,80,000 90,000 7,90,000
Cost of Goods Sold 19,000 50,000 2,70,000 49,000 3,88,000
Operating Expenses 10,000 40,000 2,35,000 30,000 3,15,000
Total Expenses 29,000 90,000 5,05,000 79,000 7,03,000
Operating Profit (Loss) 11,000 (10,000) 75,000 11,000 87,000
Identifiable Assets 35,000 60,000 5,00,000 1,15,000 7,10,000

Reconciliation of Revenues:

Particulars Taka
Total Segmented revenues 7,90,000
Revenues from immaterial segments (90,000)
Eliminated of inter segmental Revenues (1,20,000)
Revenues for reportable segments 5,80,000

Reconciliation of Profit/ (Loss):

Particulars Taka
Total Segmented Operating Profit 87,000
Profits from immaterial segments (11,000)
Profits for reportable segments 76,000

Reconciliation of Identifiable assets:

Particulars Taka
Total Segmented Assets 7,10,000
Identifiable assets from immaterial segments (1,15,000)
Identifiable assets for reportable segments 5,95,000

Problem-4 (Segment Reporting)

West Corporation reported the following consolidated data for 2012:

Sales Tk. 8,10,000

Consolidated income before tax 1,28,000
Total Assets 12,00,000

Data reported for West four operating divisions are as follows:

Division Division Division Division

A B C D
Sales to outsiders 2,80,000 1,30,000 3,40,000 60,000
Intersegment 60,000 18,000 12,000
sales
Traceable costs 2,45,000 90,000 2,90,000 82,000
 Assets 4,00,000 1,05,000 5,00,000 75,000

Intersegment sales are priced at cost, and all goods have been subsequently sold to non
affiliates. Some joint production costs are allocated to the divisions based on total sales.
These joint costs were Tk. 45,000 in 2012. The company’s corporate center had Tk. 20,000 of
general corporate expenses and Tk. 1,20,000 of identifiable assets, which the chief operating
decision maker did not use in decision making regarding the operating segments.

Required:

i. Prepare a segment disclosure worksheet for the company as per IFRS-8.

ii. Prepare schedule showing which segments are reportable.

a) Segmental Reporting Worksheet:

Corporate
Particulars A B C D Total
Admin
Tk. Tk. Tk. Tk. Tk. Tk.
Revenues:
External Revenues 2,80,000 1,30,000 3,40,000 60,000 8,10,000
Inter segmental
Revenues 60,000 18,000 12,000 90,000
Total Revenues 3,40,000 1,30,000 3,58,000 72,000 9,00,000
Operating Costs:
Traceable Cost (245000) (90000) (290000) (82000) (7,07,000)
Allocated Cost *(17,000) (6,500) (17,900) (3,600) (45,000)
Segmented
Profit/(Loss) 78000 33500 50100 (13,600) 1,48,000
Other Items:
General Corporate
Expenses (20,000) (20,000)
Income from
Continuing Operation 78,000 33,500 50,100 (13,600) (20,000) 1,28,000
Assets:
Segments 4,00,000 1,05,000 5,00,000 75,000 10,80,000
General Corporate
Assts 1,20,000 1,20,000
Total assets 4,00,000 1,05,000 5,00,000 75,000 1,20,000 12,00,000
*(3,40,000/9,00,000)x 45,000 = 17,000
A= (45000/900000) x 340000 = 17000
B = (45000/900000) x 130000 = 6500
b)
1. Revenue Test:
10% of Total Revenue = 10% of 9, 00,000 = 90,000
So, Segments A, B, and C meet this Test.
2. Operating profit Test:
10% of Total Profit = 10% of (78,000 + 33,500 + 50,100) 1, 61,600 = 16,160
So, segments A, B, and C meet this Test.
3. Identifiable Assets Test:
10% of Total Identifiable Assets = (10% of Tk. 10, 80,000) = 1, 08,000
So, segments A, and C meet this Test.
 Schedule of 10% Quantitative Test Result
Name of Segments
Name of Test
A B C D
1.Revenue Test YES YES YES NO
2.Operating profit Test YES YES YES NO
3.Identifiable Assets Test YES NO YES NO

Therefore, Segments A, B, and C are reportable segments.

Problem-05

You are the CFO of Miaco Ltd. And you are asked for prepare a management information
system (MIS) report with the following data for the management for discussion making based
on IFRS-8.

Amount (Tk. Amount (Tk.

Particulars
in millions) in millions)
Sales:
Food products 5,650
Plastic & Packaging 625
Health & scientific 345
Others 162 6,782
Expenses:
Food products 3,335
Plastic & Packaging 425
Health & scientific 222
Others 200 4,182
Others:
General Expenses 562
Income from Investments 132
Interest Expenses 65
Identifiable Assets:
Food products 7,320
Plastic & Packaging 1,320
Health & scientific 1,050
Others 665 10,355

General Assets 722

Others Information:

i) Inter Segment Sales:

Food products Tk. 55 millions
Plastic & Packaging Tk. 72 millions
Health & scientific Tk. 21 millions
Others Tk. 7 millions
ii) Other operating profit includes Tk. 33 millions on intersegment sales;
iii) Information about intersegment expenses is not available.

Required:
Prepare a statement showing financial information about Miaco Ltd.’s operation in different
industry segments as per IFRS-8.

Problem-06:

Data with respect to four operating segments of Wabash Company for the period year ended
November 30, 2013, follows:

Operating Segments (Tk.)

Alpha Beta Gamma Delta
Net sales to outsiders 40,000 20,000 25,000 5,000
Intersegment transfer out 2,000 4,000 1,000 3,000
Intersegment transfer in 4,000 3,000 2,000 1,000
Other traceable expenses 9,000 6,000 5,000 10,000
Non traceable expenses total Tk. 20000
Wabash allocated non traceable expenses to operating segments by the following reasonable
method:

Alpha - 40%
Beta - 30%
Gamma - 20%
Delta - 10%
Alpha= (40000+2000) 42000-4000-9000-8000=21000
Beta = (20000+4000) 24000 – 3000-6000-6000 = 9000
Gamma = (25000+1000) 26000 – 2000-5000-4000=15000
Delta= (5000+3000) 8000-1000-10000-2000 = (5000)
Instructions:
a) Prepare a working paper to compute the segment profit or loss for Wabash
Company’s four operating segments for the year ended November 30, 2013.
b) Identify the reportable segments.
Answer: 21000, 9000, 15000, (5000)

Problem: 07

Lioyd Corporation reports the following information for 2018 for its three operating
segments:
Segment A Segment B Segment C
Sales Tk. 15,00,000 Tk. 12,00,000 Tk. 3,00,000
Traceable operating expenses 10,00,000 7,00,000 3,00,000
Other 2018 expenses for Lioyd Corporation are as follows:
Indirect operating expenses Tk. 9,00,000
Interest expenses 1,20,000
General corporate expenses 2,00,000

Indirect operating expenses are allocated to segments based upon the ratio of each segment's
traceable operating expenses to total traceable operating expenses. Interest expense is
allocated to segments based upon the ratio of each segment's sales to total sales. Required:
i. Calculate the operating profit or loss for each of the segments for 2018.
 ii. Determine which segments are reportable, applying the operating profit or loss test as
per IFRS-8.

Problem: 08

Calvin Inc. has operating segments in five different industries: apparel, building chemical,
furniture, and machinery. Data for the five segments for 2019 are as follows:
Apparel Building Chemical Furniture Machinery
(Figures in Taka)
Sales to non affiliates 8,70,000 7,50,000 55,000 95,000 1,80,000
Intersegments sales 5,000 15,000 1,40,000
Cost of goods sold 4,80,000 4,50,000 42,000 78,000 1,50,000
Selling expenses 1,60,000 40,000 10,000 20,000 30,000
Other traceable
expenses 40,000 30,000 6,000 12,000 18,000
Allocated general
corporate expenses 80,000 75,000 7,000 13,000 25,000
Other information:
Segment assets 6,10,000 5,60,000 80,000 90,000 1,40,000
Depreciation expense 60,000 50,000 10,000 11,000 25,000
Capital expenditure 20,000 30,000 15,000
Additional Information:
1. The corporate headquarters had general corporate expenses totaling Tk. 2,35,000. For
internal reporting purposes, Tk. 2,00,000 of these expenses were allocated to the
divisions based on their cost of goods sold. The other corporate expenses are not used
in segmental decision making by the chief operating decision maker.
2. The company had an inter corporate transfer pricing policy that all intersegment sales
shall be priced at cost. All intersegment sales were sold to outsiders by December 31,
2019.
3. Corporate headquarters had assets of Tk. 1, 25,000 that were not used in segmental
decision making by the chief operating decision maker.
4. The depreciation expenses (listed in the section titled, “Other information”) has
already been added into cost of goods sold in accordance with the company’s cost
measurement policies.
Instructions:
i. Prepare a Segment disclosure work paper for Calvin Inc.
ii. Prepare schedules to show which segments are separately reportable as per IFRS-8.