Understanding Financial Statements, Goodwill, And Temporary Differences

Statement of comprehensive income

Statement of comprehensive income is one of the components of the financial statements. The two major components of this statement include net income and other comprehensive income. Other comprehensive income includes items like pension adjustments, unrealised gains or losses from available from sale securities, gains or losses because of foreign currency translations etc. These items do not affect the income statement directly. It is usually followed by the income statement in the financial statement. However, the company also has an option to combine the income statement and the statement of comprehensive income.

Statement of cash flows is prepared in order to know about the cash inflows and cash outflows that have occurred during the year. The cash flows of the company are divided into three main categories. They are cash flows from operating activities, investing activities and financing activities (Alvarez, 2013).

Statement of changes in equity: the statement of changes in equity represents the balances in share capital and reserves, along with the additions and deductions made during the year. This statement helps the shareholders understand the additions and withdrawals from the shareholders fund (Easton, 2010).

Statement of financial position: the stamen of financial position lists the sources of funds and application of the same. This statement lists in details the various sources which have helped to finance the operations, the investments made and liabilities outstanding during the end of a reporting cycle.

• Merchandising: this organisation is involved in the sale of goods. Such organisations either procure goods from a vendor or produce them and then present it to sell. Example: Woolworths Ltd.
• Manufacturing: this organisation in involved in procurement of raw materials which are then processed into final products. Example of such organisation is Toyota, who is involved in manufacture of automobiles.
• Serviced: These types of organisations are involved in providing services to the customers by helping them and supplying them with needs. Example of such organisation is Price Waterhouse cooper who are involved in providing various financial services (Elaine, 2015).
• Governmental: the organisations which are owned and managed by the government are government organisations, such as the municipalities.
• Non-Profit: the organisations which provide services and goods for a social cause and not with the motive of earning profits, such as world trade organisations.

Wages Expense Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Statement of Profit and Loss
Cost of Goods sold	Statement of Profit and Loss
Sales revenue	Statement of Profit and Loss
Merchandise inventory	Statement of financial position
Net Income	Statement of Profit and Loss
Retained earnings	Statement of financial position
Contributed capital	Statement of financial position
Rent expense	Statement of Profit and Loss
Cash	Statement of financial position

Financial statements are used by many people for knowing about the financial performance and financial position of the company. The users of the financial statements are those that have interest in the workings of the company. Such people include investors and other stakeholders such creditors, banks, customers, competitors, employees, Investment analysts, governments and other lenders (Penman, 2012).

Goodwill is an intangible asset that is closely associated with the acquisition of one company by the other. Goodwill arises when the purchase consideration of the company exceeds the fair value of all assets and liabilities. Few examples of goodwill are the value that the brand name of the company holds, a strong customer base, cordial customer and employee relation etc (Siciliano, 2015).

Intangible assets are those assets that are not physical in nature. Few examples of intangible assets are patent, trademark, copyright, brand recognition and other intellectual property.

When the shares are issued, the amount is raised in various stages. First the application money is paid, after which shares are issued. After issue of shares, the company calls for the unpaid remaining amount on the shares which are call money. There are few shareholders who fail to pay such amount when called for by the company. This is called unpaid calls. There are various treatments of the unpaid calls in the company’s books (Simpson, 2012).

Part a
	Dr amount	Cr Amount
Bank	1,10,000
To 8% Debentures		1,00,000
To Premium on issue of debentures		10,000
(Being 8% debentures issued at 10% premium)
Part b
	Dr amount	Cr Amount
8% Debentures	1,00,000
Premium on redemption of debentures	10,000
To Bank		1,10,000
(Being 1000 number of $100 debenture redeemed at $110)

Statement of cash flows

Taxable temporary difference is the temporary differences which result in future taxable liability for the company. These differences result in increase in taxable profit of the company. This will then increase the tax liability in future

Deductible temporary difference is the temporary difference which will reduce the tax liability of the firm in future. This difference will result in deductions from the taxable profit of the company which will reduce the tax liability in future (Skonieczny, 2012).

Solution 10
Part a
Plant and machinery
Balance as at 1 July	300000
Carrying amount
Balance as at 1 July	300000
Less: Depreciation @ 10%	30000
	270000
Tax Base
Balance as at 1 July	300000
Less: Depreciation @ 15%	45000
	255000
Temporary taxable difference- Liability	15000
Part b
Accounts Receivable
Balance as at 1 July	250000
Carrying amount
Balance as at 1 July	250000
Less: Bad debts written off	10000
	240000
Tax Base
Balance as at 1 July	250000
Less: Doubtful debts expensed at year end	25000
	225000
Temporary taxable difference- Liability	15000

An issue of additional equity share to the existing shareholders without any consideration is known as bonus issue. For example, the company may issue one bonus shares for every six shares that are already held by the shareholder.

Dividend is the amount that is paid to the shareholders of the company from the profits after tax.  These dividends are distributed to a certain class of shareholders.

Dividend equalization reserve is the portion of money that the company keeps aside for paying out dividend in the year in which it does not earn sufficient profits.

Current assets are those assets that can be easily converted into cash within a short span of time. These assets are used to carry out day to day operations smoothly. Few examples of current assets are debtors, inventories, prepaid expenses and cash in hand.

Current liabilities are those liabilities that to be paid within twelve months. Few examples of current liabilities are creditors, bank overdraft, etc.

AASB 124 lay down the requirements to be fulfilled by the companies f they are dealing with any related parties. Definition of related party has also been provided in the same standard. The disclosures which are required to be made as per the AASB 124 include disclosure of type of relationship, which is to be made irrespective of occurrence of transactions between the parties. In case of transactions the nature, amount, outstanding amount and other information is also required to be reported.

Impairment refers to the situation where the book value of the asset exceeds the market value of the asset. The assets which are not included in the scope of AASB 136 include Inventories, Deferred tax assets and assets arising from construction contracts (Australian Accounting Standards Board).

Solution 15
	Dr amount	Cr Amount
Accumulated Impairment account	5,000
To Goodwill		5,000
(Being impairment on goodwill realised)
Impairment loss	5,000
To accumulated impairment Account		5,000
(Being impairment Loss realised)
Solution 16
	Dr amount	Cr Amount
General Reserve	10000
Share capital	80000
Retained earnings	15000
Goodwill	95000
To Investment in Kutumba Ltd		200000
(Being elimination of investment in the books of Kawan Ltd passed)

Solution 1
Particulars	Amount
Cash flow from Operating activities
Profit before tax	392
Adjustment for:
Depreciation	118
Loss on Disposal of non-current asset	18
Interest payable	28
Changes in working capital
– Increase in inventory	-4
– Increase in trade receivable	-18
– Increase in Trade Payables	6
Tax expense paid during the year	-108
Net cash from operating activities	432
Cash Flow from Investing activities
Proceeds from Sale of Machine	12
Machine purchased	-90
Interest expense	-28
Net cash from Investing activities	-106
Cash Flow from Financing activities
Dividend Paid	-66
Issue of Shares at premium	32
Loans Repaid	-300
Net cash from Financing activities	-334
Opening bank	56
Changes during the year	-8
Closing cash balance	48

Solution 2
Part a
Shares applied for	Amount received	Shares allotted	Application	Allotment	Refund
5,00,000	5,00,000	5,00,000	2,50,000	2,50,000	–
12,00,000	6,00,000	10,00,000	5,00,000	5,00,000	–
1,00,000	50,000	NIL			50,000

Part b
Particulars	Dr Amount	Cr Amount
Bank	250000
To Share Application		250000
(Being application money on 500000 shares at $ 0.50 received)
Share Application	250000
To Share Capital		250000
(Being application money transferred to share capital)
Bank	250000
To Share Allotment		250000
(Being allotment  money on 500000 shares at $ 0.50 received)
Share Allotment	250000
To Share Capital		250000
(Being allotment money transferred to share capital)
Bank	600000
To Share Application		600000
(Being application money on 1200000 shares at $ 0.50 received)
Share Application	500000
To Share Capital		500000
(Being application money for 1000000 shares transferred to share capital)
Bank	400000
Share Application	100000
To Share Allotment		500000
(Being allotment  money on 500000 shares at $ 0.50 received, balance adjusted from application money)
Share Allotment	500000
To Share Capital		500000
(Being allotment money transferred to share capital)
Bank	50000
To Share Application		50000
(Being application money on 100000 shares at $ 0.50 received)
Share Application	50000
To Bank		50000
(Being application money received refunded)

Solution 3
Part a
30th September	Bank	28000000
	To 8% Debentures		28000000
	(Being 280000 number of 8% debentures of $100 each issued)
Part b
1st March	Interest on Debentures	375000
	To Bank		375000
	(Being interest on 150000 debentures @ 5% paid, semi-annually)
30th September	Interest on Debentures	375000
	To Bank		375000
	(Being interest on 150000 debentures @ 5% paid, semi-annually)
30th June	8% Debentures	7500000
	To Bank		7500000
	(Being debentures worth $7500000 redeemed)
1st January	Bank	22500000
	To 8% Debentures		22500000
	(Being 225000 number of 9% debentures of $100 each issued)
15th May	8% Debentures	4500000
	Premium on debentures repurchased	270000
	To Bank		4770000
	(Being 45000 number debentures bought back from ASX at $6 premium)
1st April	Bank	15000000
	To 7.5% Debentures		15000000
	(Being 150000 number of 7.5% debentures of $100 each issued)
30th September	Interest on Debentures	562500
	To Bank		562500
	(Being interest on 150000 debentures @ 3.75% paid, semi-annually)
1st December	7.5% Debentures	5500000
	To Discount on redemption of debentures		165000
	To Bank		5335000
	(Being 45000 number debentures bought back from ASX at $6 premium)
31st March	Interest on Debentures	450000
	To Bank		450000
	(Being interest on 150000 debentures @ 3.75% paid, semi-annually)

Solution 4
Working Note:
Calculation of Net assets taken over
Freehold Premises	90000
Plant and Machinery	30000
Patents	7400
Inventory	8600
Accounts Receivable	7000
Less:
Bank Overdraft	8000
Accounts Payable	5000
Mortgage on Freehold	20000
NATO	110000
Purchase consideration	102000
Capital Reserve	8000
Part i
Freehold Premises	90000
Plant and Machinery	30000
Patents	7400
Inventory	8600
Accounts Receivable	7000
To Business Purchase		102000
To Bank Overdraft		8000
To Accounts Payable		5000
To Mortgage on Freehold		20000
To Capital Reserve		8000
(Being Assets taken over)
Business Purchase	102000
To Equity Share Capital		102000
(Being purchase consideration paid)
Proposed Dividend	20000
To Bank		20000
(Being payment made for dividend proposed)
Part ii
General Reserve	150000
To Dividend Equalisation Reserve		150000
(Being transfer made to dividend equalisation reserve)
Land	50000
To Revaluation		50000
(Being land revalued upward by $50000)
Revaluation	50000
To Equity Share Capital		50000
(Being bonus shares issued)
General Reserve	50000
To Proposed Dividend		50000
(Being dividend proposed)

Working Note:

Calculation of Depreciation
Machine	150000
Less: Depreciation 2014	25000
Less: Depreciation 2015	50000
WDV	75000

Calculation of deferred tax
Expenses as per companies act
Long service Leave expense	24,000
Depreciation on Machine as per companies act	50,000
Expenses as per income tax
Long service Leave expense	16,000
Depreciation on Machine as per companies act	75,000
Temporary difference	-17,000
Deferred tax liability	5100

Part a
Calculation of taxable profit
Operating Profit before tax	5,40,000
Add: Expenses not allowable
Impairment loss goodwill	20,000
Depreciation building	15,000
Long service Leave expense	24,000
Depreciation on Machine as per companies act	50,000
Less: Incomes not taxable
Profit on sale of Shares	45,000
Less: Expenses allowable under income tax act
Long service Leave expense	16,000
Depreciation on Machine as per companies act	75,000
Taxable Income	5,13,000
Tax @ 30%	1,53,900
Tax Expense	1,59,000
To Provision for Tax		1,53,900
To Deferred tax liability		5,100
(Being current tax for the year recorded)

Alvarez, F. (2013). Financial statement analysis. Hoboken, N.J.: Wiley.

Australian Accounting Standards Board. (n.d.). Impairment of Assets. Retrieved from www.aasb.gov.au: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf

Easton, P. (2010). Financial statement analysis & valuation. Cambridge, UK: Cambridge Business Publishers.

Elaine, H. (2015). International financial statement analysis. Hoboken: John Wiley & Sons.

Penman, S. (2012). Financial statement analysis and security valuation. Boston, Mass.: McGraw-Hill.

Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.

Simpson, M. (2012). Financial accounting. Basingstoke: Macmillan Press.

Skonieczny, M. (2012). The basics of understanding financial statements. Schaumburg, Ill.: Investment Publishing.