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    Individual Assignment 2A - Conceptual Framework For Financial Reporting

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    EGI PRANAJAYA
    Murray opened a driving range business on May 1, 2015, investing $20,000 of his savings. He incurred various startup costs for equipment, building construction, land lease, and advertising. In the first month, the business generated $4,700 in revenue but had expenses for wages, utilities, and advertising. Murray estimated the business either earned a profit of $2,450 or incurred a loss of $4,900 for the month, but it is unclear how he calculated these amounts. As the financial statements do not include depreciation, this could account for the difference in estimated profitability. Accurately calculating income is important for a potential new partner to assess the business opportunity.

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    Individual Assignment 2A - Conceptual Framework For Financial Reporting

    Uploaded by

    EGI PRANAJAYA
    63 views10 pages
    Murray opened a driving range business on May 1, 2015, investing $20,000 of his savings. He incurred various startup costs for equipment, building construction, land lease, and advertising. In the first month, the business generated $4,700 in revenue but had expenses for wages, utilities, and advertising. Murray estimated the business either earned a profit of $2,450 or incurred a loss of $4,900 for the month, but it is unclear how he calculated these amounts. As the financial statements do not include depreciation, this could account for the difference in estimated profitability. Accurately calculating income is important for a potential new partner to assess the business opportunity.

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    Tugas MBA ITB

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    Individual assignment 2A - Conceptual Framework for Financial Reporting

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    Murray opened a driving range business on May 1, 2015, investing $20,000 of his savings. He incurred various startup costs for equipment, building construction, land lease, and advertising. In the first month, the business generated $4,700 in revenue but had expenses for wages, utilities, and advertising. Murray estimated the business either earned a profit of $2,450 or incurred a loss of $4,900 for the month, but it is unclear how he calculated these amounts. As the financial statements do not include depreciation, this could account for the difference in estimated profitability. Accurately calculating income is important for a potential new partner to assess the business opportunity.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    63 views10 pages

    Individual Assignment 2A - Conceptual Framework For Financial Reporting

    Uploaded by

    EGI PRANAJAYA
    Murray opened a driving range business on May 1, 2015, investing $20,000 of his savings. He incurred various startup costs for equipment, building construction, land lease, and advertising. In the first month, the business generated $4,700 in revenue but had expenses for wages, utilities, and advertising. Murray estimated the business either earned a profit of $2,450 or incurred a loss of $4,900 for the month, but it is unclear how he calculated these amounts. As the financial statements do not include depreciation, this could account for the difference in estimated profitability. Accurately calculating income is important for a potential new partner to assess the business opportunity.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 10

    FRC

    Egi Pranajaya
    29123366
    Question 1
    1. Financial Statement Analysis Case
    Nokia (FIN) provided the following disclosure in a recent annual report. Use of Estimates
    (Partial). The preparation of financial statements in conformity with IFRS requires the application
    of judgment by management in selecting appropriate assumptions for calculating financial
    estimates, which inherently contain some degree of uncertainty.... are areas requiring significant
    judgement and estimation that may have an impact on reported results and the financial
    position.

    Revenue Recognition. Sales from the majority of the Group are recognized when the
    significant risks and rewards of ownership have transferred to the buyer, continuing
    managerial involvement usually associated with ownership and effective control have ceased,
    the amount of revenue can be measured reliably, it is probable that economic benefits
    associated with the transaction will flow to the Group and the costs incurred or
    to be incurred in respect of the transaction can be measured reliably. Sales may materially
    change if management’s assessment of such criteria was determined to be inaccurate. The
    Group makes price protection adjustments based on estimates of future price reductions and
    certain agreed customer inventories at the date of the price adjustment. Possible changes in
    these estimates could result in revisions to the sales infuture periods. evenue from contracts
    involving solutions achieved through modification of complex telecommunications equipment
    is recognized on the percentage of completion basis when the outcome of the contract can be
    estimated reliably. Recognized revenues and profits are subject to revisions during the project
    in the event that the assumptions regarding the overall project outcome are revised. Current
    sales and profit estimates for projects may materially change due to the early stage of a long-
    term project, new technology, changes in the project scope, changes in costs, changes in
    timing, changes in customers’ plans, realization of penalties, and other corresponding factors.
    Instructions “Intermediate Accounting” by Kieso, Weygandt,
    (a) Briefly discuss how Nokia’s and Warfield states:

    revenue recognition policies are


    consistent with the revenue
    recognition principle. Evaluate both:
    1. Sales. 2. Revenue from contracts

    Moreover, IASB, specifically IAS 18 – Revenue


    (see this Deloitte link) states:
    Recognition, as defined in the IASB Framework,
    means incorporating an item that meets the
    definition of revenue (above) in the income
    statement when it meets the following criteria:
    it is probable that any future economic
    benefit associated with the item of revenue
    will flow to the entity, and
    the amount of revenue can be measured with
    reliability
    Nokia revenue recognition from sales and contracts has complied
    IASB framework both on sales of goods and rendering of services

    Sales Contracts
    These requirements (found on IAS 18.14) for
    According to IAS 18.20, Nokia revenue from
    revenue recognition through sales for Nokia are
    contracts will be recognized based on the
    met:
    transaction's completion status and fulfillment of
    1. The seller has passed on to the buyer the
    the following criteria:
    substantial risks and rewards of ownership
    1. It is possible to measure revenue amounts with
    2. The seller no longer has effective control
    accuracy
    over the items sold or ongoing managerial
    2. The likelihood is that the seller will profit
    engagement to the extent often associated
    financially
    with ownership
    3. It is possible to measure the completion status
    3. The amount of income can be reliably
    at the balance sheet date with accuracy
    quantified
    4. It is possible to measure the costs incurred or
    4. The seller is likely to benefit economically
    will be incurred in relation to the transaction with
    from the transaction, and
    accuracy.
    5. The expenditures incurred or to be incurred
    in relation to the transaction may be
    measured with reliability
    Instructions

    (c) Assume that Nokia’s competitors use similar revenue recognition


    policies for their sales. What are some of the judgments inherent in
    applying those policies that could raise concerns with respect to the
    qualitative characteristic of comparability?

    This illustration describes that although Nokia and other competitors have the same framework
    in recognizing their revenue, it is still cannot be comparable. Since each company definitely has
    their own measurements of estimation or assumption or other judgement based on their
    management.

    Nokia Other competitors


    sales/contracts sales/contracts
    revenue recognition revenue recognition

    Estimate 1 Judgment A Estimate 2 Judgment C

    Assumption Assumption Assumption Assumption


    B D C E
    Instructions

    The Caddie Shack Driving Range

    William Murray achieved one of his life-long dreams Accounting


    by opening his own business, The Caddie Shack Prepare a statement of financial position at May 31, 2015. (Murray
    Driving Range, on May 1, 2015. He invested $20,000 appropriately records any depreciation expense on a quarterly
    of his own savings in the business. He paid $6,000 basis.) How could Murray have determined that the business
    cash to have a small building constructed to house operated at a profit of $2,450? How could Murray conclude that the
    the operations and spent $800 on golf clubs, golf business operated at a loss of $4,900?
    balls, and yardage signs. Murray leased 4 acres of
    land at a cost of $1,000 per month. (He paid the first
    Analysis
    month’s rent in cash.) During the first month,
    advertising costs totalled $750, of which $150 was Assume Murray has asked you to become a partner in his
    unpaid at the end of the month. Murray paid his three business. Under the partnership agreement, after paying him
    nephews $400 for retrieving golf balls. He deposited $10,000, you would share equally in all future profits. Which of the
    in the company’s bank account all revenues from two income measures above would be more useful in deciding
    customers ($4,700). On May 15, Murray withdrew whether to become a partner? Explain.
    $800 in cash for personal use. On May 31, the
    company received a utility bill for $100 but did not Principles
    immediately pay it. On May 31, the balance in the
    What is income according to IFRS? What concepts do the
    company bank account was $15,100. Murray is
    differences in the two income
    feeling pretty good about results for the first month,
    measures for The Caddie Shack Driving Range illustrate?
    but his estimate of profitability ranges from a loss of
    $4,900 to a profit of $2,450.
    Instructions

    Prepare a statement of financial position at May 31, 2015. (Murray appropriately records any depreciation expense on a quarterly
    basis.) How could Murray have determined that the business operated at a profit of $2,450? How could Murray conclude that the
    business operated at a loss of $4,900?

    Caddie Shack Driving Range


    Statement of Financial Position
    May 2015
    Asset Equity
    Building $6k Capital $20k
    Equipment $0.8k Retained earning $1.65k
    Cash $15.1k
    Total Asset $21.9k Liabilities
    Ads cost $1.5k
    Utilities $1k
    Total E+L $21.9k

    Retained earning = Revenue – Expenses – Dividend (as stated that Murray use for personal use)
    = $4.7k – ($1k+$0.75k+$0.4k+$0.1k) – $0.8k
    = $1.65k
    Murray’s measurement of profit Murray’s measurement of loss
    $2.45k -$4.9k

    Revenue
    Cash in $4.7k
    Revenue $4.7k

    Building $6k

    Land rent $1k C/F -$4.9k Asset Equipment


    P/L $2.45k $0.8k
    Asset
    Building Land rent $1k
    Equipment Ads cost $0.75k Cash out
    Cash Ads cost
    Total Asset
    Operational Cost
    $0.6k
    Labor $0.4k Operational
    cost
    Labor $0.4k

    Utilities $0.1k personal use


    $0.8k
    (b) Assume Murray has asked you to become a partner in his
    business. Under the partnership agreement, after paying him
    $10,000, you would share equally in all future profits. Which of
    the two income measures above would be more useful in
    deciding whether to become a partner? Explain
    Building $0.5k
    Asset or
    I would choose none of them, since certain reasons below: depresiation
    cost Equipment
    asset cost should be spread into depreciation cost in Revenue $4.7k $0.067k
    couple months. For example, if we want to allocated those
    P/L 1.883k
    depreciations cost for 12 months, then it will be charged: Land rent $1k
    Expense

    Building permonth = $6k:12months


    = $0.5k/month Ads cost $0.75k

    Equipment per month = $0.8k : 12 months Oprational


    Cost
    = $0.067k Labor $0.4k

    All cost should be recognized in the month that they be


    incurred, not when they are paid Utilities $0.1k
    (c) What is income according to IFRS? What concepts
    do the differences in the three income measures for The
    Caddie Shack Driving Range illustrate?

    Income, based on IFRS (see this link), is the increase in economic advantages
    that occur throughout the accounting period, excluding those related to
    contributions from equity participants, and take the form of inflows, asset
    upgrades, or liability reductions that raise equity.

    Both measurement of profit $2.45k and loss $4.9k have difference in terms of
    expense recognition as followed:
    Profit $2.45k recognizes expenses when it incurred
    Loss $4.9k recognizes expenses when it paid
    In conclusion, IFRS states profit $2.45k as income since it cover up the cost
    when it incurred

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