satan

Topics: Generally Accepted Accounting Principles, December 2010 lunar eclipse, Lunar eclipses Pages: 7 (1681 words) Published: April 23, 2014
EXAMPLE 1
A company began trading on 1 January 2009, preparing its financial statements to 31 December each year.
As at 31 December 2011, the company adopted a new accounting policy with regard to the measurement of inventories. If the new policy had been applied in previous years, the company's inventory at 31 December 2009 would have been £150,000 higher than the amount originally calculated. Similarly, the inventory at 31 December 2010 would have been £400,000 higher than the amount originally calculated. An extract from the draft statement of comprehensive income for the year to 31 December 2011 (before accounting retrospectively for the change in accounting policy) is as follows: 2011 2010

£000 £000
Profit before taxation 2,600 1,900
Taxation 780 570
––––– –––––
Profit after taxation 1,820 1,330
––––– –––––
Retained earnings were originally reported to be £840,000 on 31 December 2009. No dividends were paid in 2009, 2010 or 2011. It may be assumed that the company's taxation expense is always equal to 30% of its profit before tax. (a) Prepare an extract from the company's statement of comprehensive income for the year to 31 December 2011, showing restated comparative figures for 2010. (b) Calculate the company's retained earnings at 31 December 2011 and the restated retained earnings at 31 December 2009 and 2010.

Solution
(a) If the new accounting policy had always been applied, opening inventory for the year to 31 December 2011 would have been £400,000 higher. This would have caused an increase of £400,000 in cost of sales for the year and a decrease of £400,000 in pretax profits. Similarly, pre-tax profits for the year to 31 December 2010 would have been increased by £400,000 but reduced by £150,000, giving an overall increase of £250,000. Therefore the extract from the company's statement of comprehensive income for the year to 31 December 2011 is as follows:

(restated)
2011 2010
£000 £000
Profit before taxation 2,200 2,150
Taxation 660 645
––––– –––––
Profit after taxation 1,540 1,505
––––– –––––
Note that these figures show an increase in profit of approximately 2%, whereas the original figures (which were distorted by the change in accounting policy) suggested incorrectly that profit had risen by nearly 37%.

(b) In the year to 31 December 2009, the effect of increasing closing inventory by £150,000 is to increase pre-tax profit for the year by £150,000. The tax liability increases by £45,000 (30% of £150,000) and so retained earnings at the end of the year increase by £105,000. Retained earnings figures are as follows: £000

Balance at 31 December 2009, as previously reported 840
Change in accounting policy relating to inventories 105
–––––
Restated balance at 31 December 2009 945
Restated profit for the year to 31 December 2010 1,505
–––––
Restated balance at 31 December 2010 2,450
Profit for the year to 31 December 2011 1,540
–––––
Balance at 31 December 2011 3,990
–––––
If the change in accounting policy had not been accounted for retrospectively, the retained earnings figure at 31 December 2011 would still have been £3,990,000 (£840,000 + £1,330,000 + £1,820,000). However, the distribution of earnings over the three years concerned would have been different and misleading. EXAMPLE 2

Whilst preparing its financial statements for the year to 31 December 2011, a company discovers that (because of an arithmetic error) its inventory at 31 December 2010 was overstated by £50,000. This is a material amount.

An extract from the company's draft statement of comprehensive income for the year to 31 December 2011 (before correcting the error) shows the following: 2011 2010
£000 £000
Sales 940 790
Cost of goods sold 750 540
–––– ––––
Gross profit 190 250
Other expenses 120 110
–––– ––––
Profit before taxation 70 140
Taxation 14 28
–––– ––––
Profit after taxation 56 112
–––– ––––
Retained earnings were reported to be £270,000 on 31 December 2009. No dividends were paid in...
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