Please solve the questions and follow the instructions

College of Administrative and Financial SciencesAssignment 1
Deadline: 02 /03/ 2024 @ 23:59
Student’s Name: Shahad Aliessa Sumani
Student’s ID Number: S200348661
CRN:23676
Course Name: Financial Accounting
Course Code: ACCT 201
Semester: 2
Academic Year: 2023- 24
For Instructor’s Use only
Instructor’s Name:
Students’ Grade: …… /15
Level of Marks: High/Middle/Low
nstructions – PLEASE READ THEM CAREFULLY
• The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover page.
• Students must mention question number clearly in their answer.
• Late submission will NOT be accepted.
• Avoid plagiarism, the work should be in your own words, copying from students or
other resources without proper referencing will result in ZERO marks. No exceptions.
• All answered must be typed using Times New Roman (size 12, double-spaced) font.
No pictures containing text will be accepted and will be considered plagiarism).
•
Submissions without this cover page will NOT be accepted.
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Assignment Question(s): Marks 15 Chapter 1 to 5
Q1 Globalization demands a single set of high-quality international accounting standards. List
the elements of High Quality Standards and explain the two major boards that sets standards.
High-quality international accounting standards are essential for ensuring consistency, comparability,
transparency, and reliability in financial reporting across different countries and jurisdictions. The
following are the key elements of high-quality standards:
1. Relevance: Information should be pertinent to users’ economic decisions.
2. Reliability: Data should be dependable and unbiased, reflecting transactions accurately.
3. Comparability: Standards should enable meaningful comparisons across entities and
timeframes.
4. Consistency: Application should be uniform for predictability and reliability.
5. Transparency: Financial statements must provide clear, comprehensive information for
assessment.
6. Understandability: Standards should be easily comprehensible to users.
7. Completeness: All relevant information must be included, leaving nothing significant out.
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The two major standard-setting boards responsible for developing international accounting
standards:
1. International Accounting Standards Board (IASB):
The IASB is an independent standard-setting body responsible for developing and promoting
the adoption of International Financial Reporting Standards (IFRS). It was established in 2001 and is
based in London, United Kingdom. The IASB operates under the oversight of the International
Financial Reporting Standards Foundation (IFRS Foundation). Its standards, known as IFRS, are used
in over 140 jurisdictions globally, including the European Union, many Asian and South American
countries, and various African nations.
2. Financial Accounting Standards Board (FASB):
The FASB is an independent, private-sector organization responsible for developing and
issuing accounting standards for public and private companies in the United States. It was established
in 1973 and is based in Norwalk, Connecticut. The FASB operates under the oversight of the Financial
Accounting Foundation (FAF). While FASB standards primarily apply within the United States, their
influence extends globally due to the significance of the U.S. capital markets. The FASB collaborates
with the IASB on convergence projects to achieve greater consistency and compatibility between U.S.
Generally Accepted Accounting Principles (GAAP) and IFRS.
Both the IASB and FASB play crucial roles in setting high-quality international accounting
standards, contributing to the global harmonization and improvement of financial reporting practices.
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Q2. Q2. What do you understand by deferrals and accruals in adjusting entries? Give
numerical examples on how such adjusting entries are made.
(4 Marks)
Deferrals and accruals are types of adjusting entries made at the end of an accounting period to ensure
that revenues and expenses are recognized in the period in which they are earned or incurred,
regardless of when cash is received or paid.
1. Deferrals: Deferrals involve the recognition of revenue or expenses that have been received
or paid in advance but have not yet been earned or incurred.
Example of Deferral (Prepaid Expense): Company XYZ pays $1,200 on January 1st for a 12month insurance policy. On January 31st, the company makes an adjusting entry to recognize the
portion of insurance expense incurred in January:
Adjusting Entry:
•
Debit Insurance Expense: $100 (1/12 of $1,200)
•
Credit Prepaid Insurance: $100
2. Accruals: Accruals involve the recognition of revenue or expenses that have been earned or
incurred but have not yet been recorded.
Example of Accrual (Accrued Revenue): Company ABC provides consulting services to a client
in December but will invoice the client in January. The service provided in December needs to be
recognized as revenue in December:
Adjusting Entry:
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•
Debit Accounts Receivable: $2,000
•
Credit Consulting Revenue: $2,000
Example of Accrual (Accrued Expense): Company XYZ receives utility services in December but
won’t receive the bill until January. The expense for the utility service received in December needs
to be recognized in December:
Adjusting Entry:
•
Debit Utilities Expense: $500
•
Credit Utilities Payable: $500
In both cases, the adjusting entries ensure that the financial statements reflect the accurate
financial position and performance of the company for the accounting period.
Q3. Fill in the blanks (1 Mark)
Sales Revenue
– Cost of goods sold
500,000
?
Answer:
Sales Revenue
500,000
486,800
?
305,800
=
Gross
Profit
175,000
?
– Cost of goods sold
= Gross Profit
325,000
305,800
175,000
181,000
– Operating
expenses
?
115,750
=Net Profit
76,500
65,250
Operating
expenses
98,500
115,750
=Net Profit
76,500
65,250
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Q4. a. What do you understand by allocation to non-controlling interest and discontinued
operations? Explain how they are reported in the income statement. (2 Marks)
Answer: Allocation to non-controlling interest and discontinued operations are two accounting
concepts related to the presentation of financial information, particularly in the income statement,
that reflect the interests of minority shareholders and significant changes in a company’s operations.
1. Allocation to Non-Controlling Interest:
When a parent company prepares consolidated financial statements that include its
subsidiaries, it needs to account for the portion of the subsidiaries’ net income that belongs to minority
shareholders, known as non-controlling interest (NCI). Here is how it is reported:
After calculating the consolidated net income, the parent company allocates a portion of this
income to NCI. The allocated amount is subtracted from the consolidated net income to arrive at the
net income attributable to the parent company. This allocation is usually presented as a separate line
item on the income statement, typically titled “Net income attributable to non-controlling interest” or
something similar. The net income attributable to the parent company, after deducting the portion
allocated to NCI, is then presented as the final figure for net income or profit for the period.
Essentially, this ensures that the income statement reflects the portion of profits belonging to minority
shareholders, providing a clear representation of the overall financial performance of the group while
distinguishing between the interests of the parent company and minority shareholders.
2. Discontinued Operations:
Discontinued operations refer to significant components of a company’s business that have
been disposed of or are classified as held for sale and are reported separately on the income statement.
Here is how it is reported:
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Income or loss from discontinued operations is shown separately from income from
continuing operations. The income or loss from discontinued operations includes both the operating
results of the discontinued segment up to the date of disposal or classification as held for sale, as well
as any gain or loss on disposal. This amount is presented net of tax, and it’s typically shown as a single
line item on the income statement, labeled “Income (loss) from discontinued operations, net of tax.”
Below the line for income from discontinued operations, the income statement may provide additional
details such as the nature of the discontinued operations and any related tax effects.
By reporting discontinued operations separately, the income statement highlights the financial
impact of significant changes in the company’s business structure, providing stakeholders with clarity
on the company’s ongoing operations and the effects of strategic decisions such as divestitures or
closures.
Q4b. Intraperiod Tax Allocation.
XYZ Co. has income before income tax of SR 50,000. XYZ Co. has a gain of SR 10,000 from a
discontinued operation. Assuming a 35 percent income tax rate, how would XYZ Co. present the
information on the income statement, and if it had a loss of SR 10,000 from a discontinued operation.
Assuming a 35 percent income tax rate, show the changes in Income on the income statement
(2 Marks)
Prepare:
1. Changes in Income on the income statement when Loss made from discontinued operations
2. Changes in Income on the income statement when Gain made on discontinued operations
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Answer:
1. Changes in Income on the income statement when Loss made from discontinued
operations:
Given:
• Income before income tax (from continuing operations) = SR 50,000
• Loss from discontinued operation = SR 10,000
• Income tax rate = 35%
Calculation:
• Calculate income tax expense on income before income tax: Income tax expense = (Income
before income tax x Tax rate = SR 50,000 x 35% = SR 17,500
• Calculate net income from continuing operations: Net income from continuing operations =
Income before income tax – Income tax expense = SR 50,000 – SR 17,500 = SR 32,500
• Calculate net income including discontinued operations: Net income including discontinued
operations = Net income from continuing operations – Loss from discontinued operation = SR
32,500 – SR 10,000 = SR 22,500
Income Statement:
Income before income tax
Income tax expense
Net income from continuing operations
Loss from discontinued operation
Net income
Amount (SR)
50,000
17,500
32,500
(10,000)
22,500
2. Changes in Income on the income statement when Gain made on discontinued
operations:
Given:
• Income before income tax (from continuing operations) = SR 50,000
• Gain from discontinued operation = SR 10,000
• Income tax rate = 35%
Calculation:
• Calculate income tax expense on income before income tax: Income tax expense = Income
before income tax x Tax rate = SR 50,000 x 35% = SR 17,500
• Calculate net income from continuing operations: Net income from continuing operations =
Income before income tax – Income tax expense = SR 50,000 – SR 17,500 = SR 32,500
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•
Calculate net income including discontinued operations: Net income including discontinued
operations = Net income from continuing operations + Gain from discontinued operation =
SR 32,500 + SR 10,000 = SR 42,500
Income Statement:
Amount (SR)
Income before income tax
50,000
Income tax expense
17,500
Net income from continuing operations
32,500
Gain from discontinued operation
10,000
Net income
42,500
Q5
The following information in SAR. Prepare a Cash Flow Statement:- (3 Marks)
Opening Cash Balance
15,000
Closing Cash Balance
23,000
Increase in current liabilities
13,000
Decrease in current assets
17,000
Fixed assets purchase
30,000
Redemption of 12% bonds
14,000
Profit for the year
18,000
Depreciation
4000
Answer:
To prepare the Cash Flow Statement, we’ll use the indirect method, which starts with the net profit and
adjusts for non-cash items and changes in working capital. Let’s calculate:
1.Operating Activities: Net profit for the year: SAR 18,000 Add: Depreciation: SAR 4,000
Adjust for changes in working capital:
•
Increase in current liabilities: SAR 13,000
•
Decrease in current assets: SAR 17,000 Net cash provided by operating activities =
Net profit + Depreciation – Increase in current liabilities – Decrease in current assets
2.Investing Activities: Fixed assets purchase: SAR 30,000
3.Financing Activities: Redemption of bonds: SAR 14,000
4.Opening and Closing Cash Balance: Opening cash balance: SAR 15,000 Closing cash
balance: SAR 23,000
Calculation of the amounts:
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• Operating Activities: Net cash provided by operating activities = 18,000 + 4,000 – 13,000 17,000 = SAR 2,000 (Negative indicates use of cash)
• Investing Activities: Net cash used in investing activities = SAR 30,000 (Negative indicates
use of cash)
• Financing Activities: Net cash used in financing activities = SAR 14,000 (Negative indicates
use of cash)
• Opening and Closing Cash Balance: Opening cash balance: SAR 15,000 Closing cash
balance: SAR 23,000
Cash Flow Statement:
Cash Flow from Operating Activities
SAR
Net profit
18,000
Depreciation
4,000
Increase in current liabilities
(13,000)
Decrease in current assets
17,000
Net Cash Provided by Operating Activities
2,000 (use of cash)
Cash Flow from Investing Activities
SAR
Fixed assets purchase
(30,000) (use of cash)
Cash Flow from Financing Activities
Redemption of bonds
SAR
(14,000) (use of cash)
Net Increase in Cash
Opening Cash Balance
Closing Cash Balance
SAR (42,000)
15,000
23,000
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References
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2011). Intermediate Accounting, IFRS Edition. Hoboken,
NJ: John Wiley & Sons, Inc. ISBN-978-0-470-1630-7.