1.41 CII Financial Reportng Trade-Off between Qualitative Characteristics In eac

Question

1.41 CII Financial Reportng Trade-Off between Qualitative Characteristics In each of the following independent situations, an example is glven requiring a tr qualitative characteristics discussed in the text. For each situation, identify briefly discuss how satisfying one characteristic may involve not satisfying another Exercise 1-5 the relevant characteristics and 1. The book value of an office building is approaching its originally estimated salvage value of $100,000 would ike to However, its fair value has been estimated at $10 milion The company's management disclose to financial statement users the current value of the building on the balance Industries has used the FIFO inventory method for the past 20 years. competitors use the LIFO method of FIFO to LIFO Hobson, Inc is negotiating with a major bank for a significant loan. The bank has asked that a set However, all other major accounting for inventories. JCB is contemplating a switch from 3. of financial many of the company's suppliers are mailed several weeks after inventory is received, Hobson, Inc is considering estimating the amounts associated with those labilities to be able to prepare its finan- statements be provided as quickly after the year-end as possible. Because invoices from cial statements more quickly. Starship, Inc. produces and sells satellites to government and private industries The company pro- vides a warranty guaranteeing the performance of the sartelites. A recent space launch placed one of its satellites in orbit, and several malfunctions have occurred. At year-end, Starship, Inc's auditors like the company to disclose the potential liability in the notes to the financial statements Officers of Starship, Inc believe that the satelite can be repaired in orbit and that disclosure of a con tingency such as this would unnecessarily bias the financial statements Elements of Financial Reporting For each of the following items, identify the financial statement element being discussed Exercise 1-6 1. Changes in equity during a period except those resulting from investments by owners and distribu- tions to owners 2. The net assets of an entity 8. The result of a transaction requiring the future transfer of assets to other entities An increase in assets from the delivery of goods that constitutes the entitys ongoing central operations 5. An increase in an entity's net assets from incidental transactions 6. An increase in net assets through the issuance of stock 7. Decreases in net assets from peripheral transactions of an enterprise 8. The payment of a dividend Outflows of assets from the delivery of goods or services 10. Items offering future value to an entity Assumptions of Financial Reporting In each of the following independent situations, an example is given involving one of the five traditional assumptions of the accounting model For each situation,idently the assumption involved (briefly explair your answer) 1. A subsidiary of Parent, Inc. was exhibiting poor eamings performance for the year. In an effort to Exercise 1-7 increase the subsidiary's reported earnings, Parent, Inc purchased products from the subsidiary at twice the normal markup. When preparing the financial statements for MacNeil &Sons, the accountant included certain personal assets of MacNell and his sons 3. The operations of Uintah Savings & Loan are being evaluated by the federal govemment. During their investigations government officials have deternined that numerous loans made by top management were unwise and have seriously endangered the future existence of the savings and loarn Pine Valley Ski Resort has experienced a drastic reduction in revenues because of light snowfall for the year. Rather than produce financial statements at the end of t done 4. the fiscal year, as is traditionally has elected to wait until next year and present results for a two-year period.

Explanation / Answer

Exercise 1-5)

1) If the office building’s value unlocking does not take place, then assets are shown at undervalue level by $10m. However, disclosing the office building will raise the tax and goodwill in the balance sheet. So, better action would be to disclose the value of office building in the balance sheet.

2) Switching inventory valuation method from FIFO to LIFO will eliminate the buffer cost standing in the inventory costs because the COGS is valued at the latest inventory costs. But change of inventory valuation method will give rise to taxation and other adjustments. So, best way to deal the situation is that we must switch to LIFO, so we could undertake the extra adjustment cost of inventory in current period and have reduction in income.

3) If the financial statements are not provided to the bank, then the loan comes under question. If company final the results and prepare financial statements without invoices from clients, it will affect the Sales and income figure in the Financial Statements. As the loan is a significant importance so the company must finalize the results and make financial statements as soon as year ends, so that the same would be submitted to banks for loan purpose.

4) It is the duty of the auditor to ask company to disclose significant loss under guarantee / warranty in the financial statements. But on the other hand, the supplying company is ready to repair the satellite in orbit, and then quantification of the losses in the financial statements will become bias because in short time satellite will be repaired. But the correct action would be that company put a note under financial statements disclosing the losses alongwith correction note that repairs are undertaken by supplier while the satellite is in orbit.

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