Final project ( inventory IAS 2)

IAS 2 Inventories

The objective of this Standard is to prescribe the accounting treatment for inventories.
A primary issue in accounting for inventories is the amount of cost to be recognised as
an asset and carried forward until the related revenues are recognised.  This Standard
provides guidance on the determination of cost and its subsequent recognition as an
expense, including any write-down to net realisable value.  It also provides guidance
on the cost formulas that are used to assign costs to inventories.
Inventories shall be measured at the lower of cost and net realisable value.
Net realisable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the
sale.
The cost of inventories shall comprise all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their present location and condition.
The cost of inventories shall be assigned  by using the first-in, first-out (FIFO) or
weighted average cost formula.    An entity shall use the same cost formula for all
inventories having a similar nature and use  to the entity.  For inventories with a
different nature or use, different cost formulas may be justified.  However, the cost of
inventories of items that are not ordinarily interchangeable and goods or services
produced and segregated for specific projects shall be assigned by using specific
identification of their individual costs.
When inventories are sold, the carrying  amount of those inventories shall be
recognised as an expense in  the period in which the related revenue is recognised.
The amount of any write-down of inventories to net realisable value and all losses of
inventories shall be recognised as an expense in the period the write-down or loss
occurs.  The amount of any reversal of any write-down of inventories, arising from an
increase in net realisable value, shall be recognised as a reduction in the amount of
inventories recognised as an expense in the period in which the reversal occurs.

Final project ( cash flow statement)

CASH FLOW STATEMENT
(SIMPLE FORMULAS OR COCEPTS ARE USED WHILE PREPARING CASH FLOW STATEMENT.)
Interest received = + decrease in interest receivable

-        Increase in interest receivable

Dividend received =  + decrease in dividend receivable

-        Increase in dividend receivable

Purchase             =      + increase in inventory

-        Decrease in inventory

Cash paid for goods = + decrease in A/p

-        Increase in A/P

Cash paid for expense = + increase in prepaid expenses   - decrease in prepaid expenses
            Or
                                         + decrease in accrued liabilities   -  increase in  accrued liabilities 


The Cash Flow Statement summarizes where a company’s money came from (inflow or cash receipts) and where it went (outflow or cash paid). It is a standard financial statement, along with the balance sheet and income statement. It breaks the cash flow into three categories:

• Operating
• Investing
• Financing activities.

Cash flow statements tell companies where their expenses went high and where they can invest in something beneficial when cash receipts are high. Cash flow is very important for business management as it provides an overview of view the cash has been utilized and then deciding where it should be used up.

Under the indirect method of preparing and presenting the cash flow statement, the operating activities section begins with the net income during the period of the statement. Since the company's net income was calculated and reported under the accrual basis of accounting, the amount of net income needs to be adjusted to a cash amount. The first adjustment is to add back the amount of depreciation, depletion, and amortization expenses, since these expenses had reduced net income but did not reduce the company's cash. Next, any gains or losses on the sale of long-term assets used in the business are listed, since the entire amount received from the sale is reported as investing activities. Lastly, the changes in the current assets (other than cash) and the changes in current liabilities are listed. For example, if inventory has increased, the amount of the increase in inventory is subtracted because additional cash would have been used to increase the amount of inventory. The amount by which a current liability decreased is also subtracted, since it is assumed that cash was used to decrease the current liability. All of the items reported in the operating activities section are combined into a final number: the net amount of cash provided by operating activities.
The second section of the cash flow statement reports the investing activities. The changes in the long-term asset account balances are reported in this section. For example, if a company's long-term investment in another company has increased during the period, the amount of the increase is reported as a negative amount in the investing activities section—an indication that cash was used. The same is true for the purchase of property, plant and equipment for use in the business—an increase in the equipment account indicates that cash was used to purchase equipment. If a long-term investment or plant asset is sold, the entire proceeds from the sale are reported as a positive amount in the investing activities section. This indicates that cash was provided or increased from the sale. (Any gain or loss on the sale is an adjustment to the net income reported in the operating activities section of the statement.)
The third section of the cash flow statement contains the company's financing activities. This section lists the changes in long-term liabilities and stockholders' equity. For example, if Bonds Payable has increased by $1,000,000, it is assumed that cash of $1,000,000 was provided. The $1,000,000 will appear as a positive amount in the financing activities section of the statement. If Bonds Payable decreased, then the amount of the decrease will be reported as a negative amount—indicating that cash was used to retire the bonds. The amount of dividends declared and paid will also appear as a negative amount, since cash was used. If the company sells some of its shares of stock, the amount received will be reported as a positive amount since it provided cash. If the company purchases some of its shares of stock, the amount will appear as a negative amount in the financing activities section because cash was used.
In addition to the three main sections of the cash flow statement, it is also necessary to disclose significant noncash transactions (e.g. exchanging stock for land) and other items required by generally accepted accounting principles.

FINAL PROJECT(IAS 16 property and plant)

IAS 16 Property, Plant and Equipment

1.    This Standard is to prescribe the accounting treatment for property, plant and equipment hence users of the financial statements can use information about an entity’s investment in its property, plant and equipment and the changes in such investment. The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges are to be recognized.

·         Property, plant and equipment are tangible items that:

(a)  Are held for use in the production or supply of goods or services, for rental to others, or for administrative Purposes.

(b)  Are expected to be used during more than one period.

·         The cost of an item of property, plant and equipment shall be recognized as an asset;

(a)  It is probable future economic benefits associated with the item will flow to the entity.

(b)  The cost of the item can be measured reliably.

·         The cost of an item of property, plant and equipment comprises;

(a)  Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade Discounts and rebates.

(b)  Any costs directly attributable to bringing the asset to the location and condition necessary for it to be Capable of operating in the manner intended by management.

(c)  The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

·         Measurement after recognition;

2.    An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment.

·         Cost model:

3.    After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.

·         Revaluation model:

4.    After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.  Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.

·         If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss. If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in profit or loss. However, the decrease shall be recognized in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset.

·         Depreciation  is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately.  The depreciation charge for each period shall be recognized in profit or loss unless it is included in the carrying amount of another asset.  The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

·         The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

FINAL PROJECT ( ADJUSTING ENTRIES)

ADJUSTING ENTRIES IN ACCOUNTING

Adjusting entries are journal entries made at the end of the accounting period to allocate revenue and expenses to the period in which they actually are applicable. Adjusting entries are required because normal journal entries are based on actual transactions, and the date on which these transactions occur may not be the date required to fulfill the matching principle of accrual accounting.

Adjusting entries are accounting journal entries that convert a company's accounting records to the accrual basis of accounting. An adjusting journal entry is typically made just prior to issuing a company's financial statements.

To demonstrate the need for an accounting adjusting entry let's assume that a company borrowed money from its bank on December 1, 2010 and that the company's accounting period ends on December 31. The bank loan specifies that the first interest payment on the loan will be due on March 1, 2011. This means that the company's accounting records as of December 31 do not contain any payment to the bank for the interest the company incurred from December 1 through December 31. (Of course the loan is costing the company interest expense every day, but the actual payment for the interest will not occur until March 1.) For the company's December income statement to accurately report the company's profitability, it must include all of the company's December expenses—not just the expenses that were paid. Similarly, for the company's balance sheet on December 31 to be accurate, it must report a liability for the interest owed as of the balance sheet date. An adjusting entry is needed so that December's interest expense is included on December's income statement and the interest due as of December 31 is included on the December 31 balance sheet. The adjusting entry will debit Interest Expense and credit Interest Payable for the amount of interest from December 1 to December 31.

Another situation requiring an adjusting journal entry arises when an amount has already been recorded in the company's accounting records, but the amount is for more than the current accounting period. To illustrate let's assume that on December 1, 2010 the company paid its insurance agent $2,400 for insurance protection during the period of December 1, 2010 through May 31, 2011. The $2,400 transaction was recorded in the accounting records on December 1, but the amount represents six months of coverage and expense. By December 31, one month of the insurance coverage and cost have been used up or expired. Hence the income statement for December should report just one month of insurance cost of $400 ($2,400 divided by 6 months) in the account Insurance Expense. The balance sheet dated December 31 should report the cost of five months of the insurance coverage that has not yet been used up. (The cost not used up is referred to as the asset Prepaid Insurance. The cost that is used up is referred to as the expired cost Insurance Expense.) This means that the balance sheet dated December 31 should report five months of insurance cost or $2,000 ($400 per month times 5 months) in the asset account Prepaid Insurance. Since it is unlikely that the $2,400 transaction on December 1 was recorded this way, an adjusting entry will be needed at December 31, 2010 to get the income statement and balance sheet to report this accurately.

The two examples of adjusting entries have focused on expenses, but adjusting entries also involve revenues. This will be discussed later when we prepare adjusting journal entries.

For now we want to highlight some important points.

There are two scenarios where adjusting journal entries are needed before the financial statements are issued:

  Nothing has been entered in the accounting records for certain expenses or revenues, but those expenses and/or revenues did occur and must be included in the current period's income statement and balance sheet.

  Something has already been entered in the accounting records, but the amount needs to be divided up between two or more accounting periods

Adjusting entries assure that both the balance sheet and the income statement are up-to-date on the accrual basis of accounting. A reasonable way to begin the process is by reviewing the amount or balance shown in each of the balance sheet accounts. We will use the following preliminary balance sheet, which reports the account balances prior to any adjusting entries:

Parcel Delivery Service Preliminary Balance Sheet–before adjusting entries December 31, 2010 Assets Liabilities Cash $  1,800  Notes Payable $  5,000 Accounts Receivable 4,600  Accounts Payable 2,500 Supplies 1,100  Wages Payable 1,200 Prepaid Insurance 1,500  Unearned Revenues     1,300 Equipment 25,000  Total Liabilities 10,000 Accumulated Depreciation (7,500) Owner's Equity               Mary Smith, Capital   16,500              Total Assets $26,500  Total Liabilities & Owner's Equity $26,500

Let's begin with the asset accounts:

Cash  $1,800

The Cash account has a preliminary balance of $1,800—the amount in the general ledger. Before issuing the balance sheet, one must ask, "Is $1,800 the true amount of cash? Does it agree to the amount computed on the bank reconciliation?" The accountant found that $1,800 was indeed the true balance. (If the preliminary balance in Cash does not agree to the bank reconciliation, entries are usually needed. For example, if the bank statement included a service charge and a check printing charge—and they were not yet entered into the company's accounting records—those amounts must be entered into the Cash account. See the major topic Bank Reconciliation for a thorough discussion and illustration of the likely journal entries.)

Accounts Receivable  $4,600

To determine if the balance in this account is accurate the accountant might review the detailed listing of customers who have not paid their invoices for goods or services. (This is often referred to as the amount of open or unpaid sales invoices and is often found in the accounts receivable subsidiary ledger.) When those open invoices are sorted according to the date of the sale, the company can tell how old the receivables are. Such a report is referred to as an aging of accounts receivable. Let's assume the review indicates that the preliminary balance in Accounts Receivable of $4,600 is accurate as far as the amounts that have been billed and not yet paid.

However, under the accrual basis of accounting, the balance sheet must report all the amounts the company has an absolute right to receive—not just the amounts that have been billed on a sales invoice. Similarly, the income statement should report all revenues that have been earned—not just the revenues that have been billed. After further review, it is learned that $3,000 of work has been performed (and therefore has been earned) as of December 31 but won't be billed until January 10. Because this $3,000 was earned in December, it must be entered and reported on the financial statements for December. An adjusting entry dated December 31 is prepared in order to get this information onto the December financial statements.

To assist you in understanding adjusting journal entries, double entry, and debits and credits, each example of an adjusting entry will be illustrated with a T-account.

Here is the process we will follow:

1. Draw two T-accounts. (Every journal entry involves at least two accounts. One account to be debited and one account to be credited.)
2. Indicate the account titles on each of the T-accounts. (Remember that almost always one of the accounts is a balance sheet account and one will be an income statement account. In a smaller font size we will indicate the type of account next to the account title and we will also indicate some tips about debits and credits within the T-accounts.)
3. Enter the preliminary balance in each of the T-accounts.
4. Determine what the ending balance ought to be for the balance sheet account.
5. Make an adjustment so that the ending amount in the balance sheet account is correct.
6. Enter the same adjustment amount into the related income statement account.
7. Write the adjusting journal entry.

Let's follow that process here:

Accounts Receivable (balance sheet account)

Debit Increases an asset				Credit Decreases an asset
Preliminary Balance	4,600
ADJUSTING ENTRY	3,000
Correct Balance	7,600

Service Revenues (income statement account)

Debit Decreases Revenues				Credit Increases Revenues
				60,234		Preliminary Balance
				3,000		ADJUSTING ENTRY
				63,234		Correct Balance

The adjusting entry for Accounts Receivable in general journal format is:

Date

Account Name

Debit

Credit

Dec. 31, 2010

Accounts Receivable

3,000

Service Revenues

3,000

Notice that the ending balance in the asset Accounts Receivable is now $7,600—the correct amount that the company has a right to receive. The income statement account balance has been increased by the $3,000 adjustment amount, because this $3,000 was also earned in the accounting period but had not yet been entered into the Service Revenues account. The balance in Service Revenues will increase during the year as the account is credited whenever a sales invoice is prepared. The balance in Accounts Receivable also increases if the sale was on credit (as opposed to a cash sale). However, Accounts Receivable will decrease whenever a customer pays some of the amount owed to the company. Therefore the balance in Accounts Receivable might be approximately the amount of one month's sales, if the company allows customers to pay their invoices in 30 days.

At the end of the accounting year, the ending balances in the balance sheet accounts (assets and liabilities) will carry forward to the next accounting year. The ending balances in the income statement accounts (revenues and expenses) are closed after the year's financial statements are prepared and these accounts will start the next accounting period with zero balances.