Advanced financial accounting - Lecture 30: Accounting policies, changes in accounting estimates and errors

Advanced financial accounting - Lecture 30: Accounting policies, changes in accounting estimates and errors. The main topics covered in this chapter include: profit and loss account; statement of retained earnings; prospective application; retrospective restatements;... Please refer to the lecture for details!

Advanced Financial

Accounting FIN-611

Mian Ahmad Farhan

Lecture-30 Accounting Policies, Changes in Accounting

Estimates & Errors

Solution

Profit & Loss Account

2004

2004 Rs.

Working (2004)

Gross profit = 717,50 x 1/3 = 23,917

Cost of goods sold = 71,750 – 23,917 = 47,833 Income tax = 16,167 x 30% = 4,850

Profit & Loss Account

2005

2005 Rs.

Working (2005)

Gross profit = 74,500 x 1/3 = 24,833

Cost of goods sold = 74,500 – 24,833 = 49,667 Income tax = 17,333 x 30% = 5,200

Statement of Retained Earnings

Statement of Retained Earnings

Working (2005)

Gross profit = 717,50 x 1/3 = 23,917

Cost of goods sold = 72,750 – 23,917 = 47,833 Income tax = 16,167 x 305 = 4,850

Prospective Application

Prospective application of a change in accounting

policy and of recognizing the effect of change in an accounting estimate respectively are:

a) Applying the new accounting policy to transactions, other events and conditions occurring after the date

as at which the policy is changed.

b) Recognizing the effect of the change in the

accounting estimates in the current and future

affected by the change

Question

Idrees Sports Private Limited purchased an assets with followings

details:

Cost price = Rs 2,500,000

Estimated useful life = 10 years

Estimated residual value = Rs 100,000

In third year, the company estimates the useful life of its assets at sixyears with residual value Rs 220,000 The company depreciates itsasset on straight line method

Solution

Straight line method

Depreciation Rate = 1 / Useful life x 100

Depreciation Rate = 1 / 10 x 100 = 10%

First year depreciation = 2,500,000 – 100,000

= 2,400,000 x 10% = 240,000Second year depreciation = 2,500,000 – 100,000

= 2,400,000 x 10% = 240,000Third year depreciation = 2,500,000 – 480,000 = 2,020,000Amount of depreciation = 2,020,000 – 220,000 = 1,800,000

= 1,800,000 / 6 = 300,000

OR

Depreciation rate = 1 / 6 x 100 = 16.666%

Depreciation expense = 1,800,000 x 16.666 / 100 = 300,000

Prior Period Error

Retrospective Restatements

Retrospective Restatements is correcting the recognitions, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred i.e correction of error is to be made by restating the previous income statement and opening

Question

During 2008, Saleem Co discovered that some products that hade been sold during 2007 were incorrectly included in inventory at 31 December 2007 at Rs 6,500

Saleem Co accounting record for 2008 show sales of Rs 104,000, cost of goods sold of Rs 86,500 (including Rs 6,500) for the error

in opening inventory and income taxes of Rs 5,250

Profit before income taxes 20,000

6,000

Saleem Co had Rs 50,000 of share capital through out

and no other components of equity except for retained

Earning

Working (2007)

Reported cost of goods sold 53,500 Add Overstated closing stock 6,500

60,000

Working (2008)

Reported cost of goods sold 86,500 Less Overstated closing stock 6,500

80,000

Statement of Change in Equity

2008

Rs

2007 Rs.

Opening retained profit 34,000 20,000