1. Nokia's revenue recognition policies are generally consistent with the revenue recognition principle. However, the use of estimates could result in reported revenue numbers that do not accurately reflect financial performance. The judgments used in applying similar policies by competitors could undermine comparability between companies.
2. Murray's driving range business could have either a $2,450 profit or $4,900 loss for the first month, depending on accounting methods used. Becoming a partner based on the higher profit figure would be riskier without more accurate financial information.
3. Adjusting entries are needed for Amato Theater's prepaid, accrued, and deferred revenue accounts. Income before adjustments would misrepresent performance, so bankers should wait
1. Nokia's revenue recognition policies are generally consistent with the revenue recognition principle. However, the use of estimates could result in reported revenue numbers that do not accurately reflect financial performance. The judgments used in applying similar policies by competitors could undermine comparability between companies.
2. Murray's driving range business could have either a $2,450 profit or $4,900 loss for the first month, depending on accounting methods used. Becoming a partner based on the higher profit figure would be riskier without more accurate financial information.
3. Adjusting entries are needed for Amato Theater's prepaid, accrued, and deferred revenue accounts. Income before adjustments would misrepresent performance, so bankers should wait
1. Nokia's revenue recognition policies are generally consistent with the revenue recognition principle. However, the use of estimates could result in reported revenue numbers that do not accurately reflect financial performance. The judgments used in applying similar policies by competitors could undermine comparability between companies.
2. Murray's driving range business could have either a $2,450 profit or $4,900 loss for the first month, depending on accounting methods used. Becoming a partner based on the higher profit figure would be riskier without more accurate financial information.
3. Adjusting entries are needed for Amato Theater's prepaid, accrued, and deferred revenue accounts. Income before adjustments would misrepresent performance, so bankers should wait
1. Nokia's revenue recognition policies are generally consistent with the revenue recognition principle. However, the use of estimates could result in reported revenue numbers that do not accurately reflect financial performance. The judgments used in applying similar policies by competitors could undermine comparability between companies.
2. Murray's driving range business could have either a $2,450 profit or $4,900 loss for the first month, depending on accounting methods used. Becoming a partner based on the higher profit figure would be riskier without more accurate financial information.
3. Adjusting entries are needed for Amato Theater's prepaid, accrued, and deferred revenue accounts. Income before adjustments would misrepresent performance, so bankers should wait
Nokia (FIN) provided the following disclosure in a recent annual report.
Use of Estimates (Partial). The preparation of financial statements in conformity with
IFRS requires the application of judgment by management in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. . . . are areas requiring significant judgement and estimation that may have an impact on reported results and the financial position.
Revenue Recognition. Sales from the majority of the Group are recognized when the significant risks and rewards of ownership have transferred to the buyer, continuing managerial involvement usually associated with ownership and effective control have ceased, the amount of revenue can be measured reliably, it is probable that economic benefits associated with the transaction will flow to the Group and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Sales may materially change if management’s assessment of such criteria was determined to be inaccurate. The Group makes price protection adjustments based on estimates of future price reductions and certain agreed customer inventories at the date of the price adjustment. Possible changes in these estimates could result in revisions to the sales in future periods. Revenue from contracts involving solutions achieved through modification of complex telecommunications equipment is recognized on the percentage of completion basis when the outcome of the contract can be estimated reliably. Recognized revenues and profits are subject to revisions during the project in the event that the assumptions regarding the overall project outcome are revised. Current sales and profit estimates for projects may materially change due to the early stage of a longterm project, new technology, changes in the project scope, changes in costs, changes in timing, changes in customers’ plans, realization of penalties, and other corresponding factors.
Instructions (a) Briefly discuss how Nokia’s revenue recognition policies are consistent with the revenue recognition principle. Evaluate both: 1. Sales. 2. Revenue from contracts. (b) Briefly discuss how estimates inherent in Nokia’s revenue recognition policies can result in reported revenue numbers that are not relevant and faithful representations. (c) Assume that Nokia’s competitors use similar revenue recognition policies for their sales. What are some of the judgments inherent in applying those policies that could raise concerns with respect to the qualitative characteristic of comparability?
2. The Caddie Shack Driving Range
William Murray achieved one of his life-long dreams by opening his own business, The Caddie Shack Driving Range, on May 1, 2015. He invested $20,000 of his own savings in the business. He paid $6,000 cash to have a small building constructed to house the operations and spent $800 on golf clubs, golf balls, and yardage signs. Murray leased 4 acres of land at a cost of $1,000 per month. (He paid the first month’s rent in cash.) During the first month, advertising costs totaled $750, of which $150 was unpaid at the end of the month. Murray paid his three nephews $400 for retrieving golf balls. He deposited in the company’s bank account all revenues from customers ($4,700). On May
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https://www.coursehero.com/file/213245136/Cases-Inhouse-classdocx/ 15, Murray withdrew $800 in cash for personal use. On May 31, the company received a utility bill for $100 but did not immediately pay it. On May 31, the balance in the company bank account was $15,100. Murray is feeling pretty good about results for the first month, but his estimate of profitability ranges from a loss of $4,900 to a profit of $2,450.
Accounting Prepare a statement of financial position at May 31, 2015. (Murray appropriately records any depreciation expense on a quarterly basis.) How could Murray have determined that the business operated at a profit of $2,450? How could Murray conclude that the business operated at a loss of $4,900?
Analysis Assume Murray has asked you to become a partner in his business. Under the partnership agreement, after paying him $10,000, you would share equally in all future profits. Which of the two income measures above would be more useful in deciding whether to become a partner? Explain.
Principles What is income according to IFRS? What concepts do the differences in the two income measures for The Caddie Shack Driving Range illustrate?
3. The Amato Theater is nearing the end of the year and is preparing for a meeting with its bankers to discuss the renewal of a loan. The accounts listed appeared in the December 31, 2015, trial balance as follows :
a. The equipment has an estimated useful life of 16 years and a residual value of £40,000 at the end of that time. Amato uses the straight-line method for depreciation. b. The note payable is a one-year note given to the bank January 31 and bearing interest at 10%. Interest is calculated on a monthly basis. c. The theater sold 350 coupon ticket books at £50 each. Two hundred ticket books were used in 2015. One hundred fifty of these ticket books can be used only for admission any
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https://www.coursehero.com/file/213245136/Cases-Inhouse-classdocx/ time after January 1, 2016. The cash received was recorded as Unearned Service Revenue. d. Advertising paid in advance was £6,000 and was debited to Prepaid Advertising. The company has used £2,500 of the advertising as of December 31, 2015. e. Salaries and wages accrued but unpaid at December 31, 2015, were £3,500.
Accounting Prepare any adjusting journal entries necessary for the year ended December 31, 2015.
Analysis Determine Amato’s income before and after recording the adjusting entries. Use your analysis to explain why Amato’s bankers should be willing to wait for Amato to complete its year-end adjustment process before making a decision on the loan renewal.
Principles Although Amato’s bankers are willing to wait for the adjustment process to be completed before they receive financial information, they would like to receive financial reports more frequently than annually or even quarterly. What trade-offs, in terms of relevance and faithful representation, are inherent is preparing financial statements for shorter accounting time periods ?
4. Counting Crows Inc. provided the following information for the year 2015.
Retained earnings, January 1, 2015 £ 600,000
Administrative expenses 240,000 Selling expenses 300,000 Sales revenue 1,900,000 Cash dividends declared 80,000 Cost of goods sold 850,000 Gain on sale of investments 62,700 Loss on discontinued operations 75,000 Rent revenue 40,000 Unrealized holding gain on non-trading equity securities 17,000 Income tax applicable to continuing operations 187,000 Income tax benefit applicable to loss on discontinued operations 25,500 Income tax applicable to unrealized holding gain on non-trading equity securities 2,000 Weighted-average shares outstanding 100,000 shares
Accounting Prepare : (a) an income statement for 2015, (b) a retained earnings statement for 2015, and (c) a statement of comprehensive income using the two statement format.
Analysis Explain how income statement subheads can provide useful information to financial statement readers.
Principles
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https://www.coursehero.com/file/213245136/Cases-Inhouse-classdocx/ In a recent meeting with its auditor, Counting Crows’ management argued that the company should be able to prepare a pro forma income statement, with some one-time administrative expenses reported similar to discontinued operations. Is such reporting consistent with the qualitative characteristics of accounting information as discussed in the Conceptual Framework ? Explain.
5. Early in January 2016, Hopkins Company is preparing for a meeting with its bankers to discuss a loan request. Its bookkeeper provided the following accounts and balances at December 31, 2015.
Except for the following items, Hopkins has recorded all adjustments in its accounts. a. Net accounts receivable is comprised of £52,000 in accounts receivable and £13,500 in allowance for doubtful accounts. b. Cash includes £500 petty cash and £15,000 in a bond sinking fund. c. Equipment had a cost of £112,000 and accumulated depreciation of £28,000. d. On January 8, 2016, one of Hopkins’ customers declared bankruptcy. At December 31, 2015, this customer owed Hopkins £9,000.
Accounting Prepare a corrected December 31, 2015, statement of financial position for Hopkins Company.
Analysis Hopkins’ bank is considering granting an additional loan in the amount of £45,000, which will be due December 31, 2016. How can the information in the statement of financial position provide useful information to the bank about Hopkins’ ability to repay the loan ?
Principles In the upcoming meeting with the bank, Hopkins plans to provide additional information about the fair value of its equipment and some internally generated intangible assets related to its customer lists. This information indicates that Hopkins has significant unrealized gains on these assets, which are not reflected on the statement of financial position. What objections are the bank likely to raise about the usefulness of this information in evaluating Hopkins for the loan renewal ?
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https://www.coursehero.com/file/213245136/Cases-Inhouse-classdocx/ 6. Savannah, Inc. is a manufacturing company that manufactures and sells a single product. Unit sales for each of the four quarters of 2015 are projected as follows
Quarter Units First 80,000 Second 150,000 Third 550,000 Fourth 120,000 Annual Total 900,000
Savannah incurs variable manufacturing costs of £0.40 per unit and variable non- manufacturing costs of £0.35 per unit. Savannah will incur fixed manufacturing costs of £720,000 and fixed non-manufacturing costs of £1,080,000. Savannah will sell its product for £4.00 per unit.
Accounting Determine the amount of net income Savannah will report in each of the four quarters of 2015, assuming actual sales are as projected and employing (a) the integral approach to interim financial reporting and (b) the discrete approach to interim financial reporting. Ignore income taxes.
Analysis Compute Savannah’s profit margin on sales for each of the four quarters of 2015. What effect does employing the integral approach instead of the discrete approach have on the degree to which Savannah’s profit margin on sales varies from quarter to quarter?
Principles Should Savannah implement the integral or discrete approach under IFRS? Do you agree? That is, explain the conceptual rationale behind the integral approach to interim financial reporting.
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