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ACCT2005 Financial Accounting for Annual Report of ABC Limited


Case Study for Annual Report Assignment

The following details are taken from the accounting records of the company as at 30 June 2017:






Sales revenue



Sales returns



Services revenue



Other revenues and income






Cash at bank



Shop furniture and fittings (at cost net of depreciation)



Equipment (at cost net of depreciation)



Buildings (at cost net of depreciation)



Land (at cost)



Accounts receivable



Allowance for doubtful debts



Inventory (at lower of cost or net realisable value)



Prepaid rent revenue



Loan from WBank



Provision for annual leave



Provision for warranty



Provision for legal case



Accounts payable



Accrued expenses



Dividend Paid



Share capital



Retained earnings (1 July 2016)



General reserve






Additional information: Note: Unless otherwise indicated the events and transactions outlined below have already been accounted for in the balances above if required.

a. Includedin the amount of ‘Expenses’ in the trial balance provided above are:

  • Costof sales $21,490,000
  • $9,430,000for employee  This includes annual leave expense of $783,000. The balance of the provision for annual leave at 30 June 2016 was $1,230,000.
  • Generaloperating expenses of $4,560,000.
  • Extraordinaryexpense of $2,400,000 for strategic  In July 2016 the directors decided that it would be useful to have external parties undertake a review of company operations, procedures and policies and to provide some suggestions to improve profitability. Under this strategic review:
    • $1,150,000 was paid to the company auditors to conduct an analysis ofvarious aspects of the 
    • $850,000 was paid to FutureInc Ltd to prepare a report on future trends inthe company’s 
    • $400,000was paid to LookForTomorrow Ltd to make suggestions on improvements to the company’s store fronts and store layouts to attract more customers and sales. 
  • Interestpaid of $267,000.
  • $1,500gift to an employee of the company who competed in the Olympic Games in Rio in 2016 to help with their travel 
  • Depreciationexpense for shop furniture and fittings $747,000.
  • Depreciationexpense for equipment $487,000.
  • Depreciation expensefor buildings of $340,000.
  • Warranty expense of $1,290,000. The balance of the provision for warranty at 30June 2016 was $690,000. Of the balance of this provision at 30 June 2017 65% is expected to be used by 30 June 
  • Doubtfuldebts expense for the period of $1,492,000.
  • $815,000payment to auditors for audit of company 
  • Thecarrying amount of the shop furniture and fittings sold in March 2017 of $740,000. (This is comprised of cost of $2,250,000 less accumulated depreciation to date of sale of $1,510,000).

(Note: This does not detail all expenses included in the total of ‘Expenses’ in the trial balance above. You should classify any remaining expenses as ‘other’ or ‘miscellaneous’) 

b. Thecompany borrowed $4,000,000 from WBank on 1 January  In taking out this loan fees of $2,500 were paid (these are included in the expenses amount in the trial balance). The principal amount of the loan of $4,000,000 is to be repaid at the end of 2 years. Interest payments are due every 3 months (on 1 April, 1 July, 1 October, 1 January). On 1 April 2017, the company paid $267,000 for interest. A further payment of $267,000 for interest is to be paid on 1 July 2017.
c. Otherrevenues and income is comprised of:
  • Interestearned during the period of $1,250 from cash held at  Interest is accrued and paid to the company on 31 December and 30 June each year.
  • Rentrevenue of $83,400 from building space rented out to other  The balance of prepaid rent in the trial balance relates to this.
  • Proceeds from the sale of non-current assets. On 1 March 2017 the companyreceived $865,000 from the sale of shop furniture and fittings that were replaced as part of the upgrade recommended by Look For Tomorrow 
d. In July 2016 the Directors asked their auditors to undertake an analysis of a numberof the aspects of the company as part of their strategic review. From this review the auditors noted that the sales returns had been increasing gradually over the last 5  As part of its strategy to gain initial market penetration the company had a policy of allowing customers to return a range of its products within 2 months of initial sale date, if the customer was not completely satisfied and with no questions asked (i.e. could return for any reason for a refund). The review noted that most sales returns related to products where this policy applied. It was decided that this policy would be revoked and, in relation to these products, from 1 September 2016 the following applied:
  • Customers could return within 1 week of purchase for a refund without anyreason – providing the returned product was in ‘new’
  • The warranty period for these products would be extended from 1 year to 2

This has resulted in a 500% reduction in sales returns but an increase of more than 20% in warranty expenses due to the extension of warranty period.

e. The balance of the legal provision in the trial balance relates to a case that originated in 2013 in relation to a product liability claim. The company had anticipated that it would be required to pay $250,000. However the company’s lawyers were able to settle this matter but for more than expected (i.e. $285,000) in November  The amount of $285,000 has been paid.
f. Directors had recommended a dividend of $412,500 from retained earnings on 30June 2016. This required approval at the Annual General Meeting. This approval was given and this dividend was paid on 30 August 
g. At1 July 2017 the share capital comprised:
  • 2,500,000 fully paid ordinary shares at an issue price of $1.10 issued on 1September  Share issue costs paid in relation to this issue were $23,000.
  • 1,500,000 fully paid ordinary shares at an issue price of $1.60 issued on 1January 2016. The terms of the issue required $1.00 to be paid on application, with the remaining $0.60 due when called. A first and final call was made on 10 September 2016. All call monies were received by 1 October. Share issue costs paid in relation to this issue were $16,000.

Unless otherwise indicated the following events/transactions are not reflected in the trial balance above. You will need to make appropriate adjustments if required. 

h. Areview by the chief accountant on 1 July 2017 revealed the following:
  • Nobalance date adjustment had been made in relation to interest accrued on the loan from WBank.
  • The company uses diminishing balance method to depreciate its equipment anddepreciation for previous periods has been calculated using diminishing balance  However the chief accountant has noticed that the depreciation expense for this year (i.e. for year ending 30 June 2017) in relation to equipment had been calculated by the assistant accountant at straight line on cost using an incorrect percentage/rate. This has resulted in the depreciation expense (included in the trial balance figures) in relation to equipment being overstated by $260,000.
i. On30 June 2017 the directors decided to transfer $4,600,000 from retained earnings to the general reserve.
j. Directorsrecommended a final dividend on the 3 July 2017 of 9 cents per  This requires approval at the Annual General Meeting to be held in early September 2017.
k. On 5 July 2017, the company was advised by its lawyers that a customer was suingthe company for  In late April the customer fell over some building supplies that had been left on the floor in one of the company’s shops. At the time the shop was being upgraded. The customer broke both his hips. Further, apart from being unable to work for some time, the customer will also not be able in the future to undertake a range of leisure activities that they previously enjoyed (such as synchronised swimming!). The company does have public liability insurance. However, as the accident occurred due to employee negligence (as the building supplies had been moved from a secure storage area into the shop incorrectly by the store manager) the insurance company has indicated that the company’s insurance policy will not cover any claims. The company’s lawyers have indicated that there is an 85% probability that the company will be liable to pay damages and estimated these at $540,000. The matter is expected to be decided in court in August 2018.
l. On25 August 2017 the directors successfully implemented one of the recommendations from the strategic review. The recommendation was to advertise via Adwords in  (This is Google's advertising system. Companies or advertisers bid for keywords in order for their linked ads to appear in Google's search results and then pay for each click). The cost is expected to be approximately $35,000 a month for the next year. The effectiveness of this will be reviewed every 6 months.
m. The company tax rate is 30%. Ignore tax-effect accounting. Tax expense should bebased on 30% of the accounting profit before tax. No tax expense has yet been

You should assume that the company is a reporting entity and that the date the annual report (including the financial report) is authorised for issue is the 21 August 2017.


Annual report of ABC limited:

Financial statements: 


In the books of XYZ limited

Income Statement

for the year ended 30th June,2016


Note Para 81(A)(c) and 82


Sales Revenue



Less: Sales Return



Net Sales Revenue



Services Revenue



Net Total Revenue



Less: Cost of Sales



Gross Profit



Operating Expenses:



Employee Expenses



Provision for Annual Leave



Provision for Warranty Expense



General Operating Expenses



Sponsorship to Employee



Depreciation Expense



Doubtful Debts Expense



Auditors' Fees



Other Misc. Expenses



Net Operating Profit



Other Non-Operating Income/(Expenses):



Rent Revenue



Profit on Sale of Old Furniture



Strategic Review Costs



Interest Income



Provision for Legal Claim



Net Profit before Interest & Tax



Finance Cost



Net Profit before Tax



Less: Income Tax Expenses



Net Profit for the period



Statement of equity:


Share Capital

Retained Earnings

General Reserve

Opening Balance as on 1/07/2015




Fully Paid Shares




Partly Paid Shares




Paid-up Capital




Receipt of Calls




Dividend Paid




Net Profit for the year




Dividend Declared




Share Issuance Cost




Transfer to General Reserve




Closing Balance as on 30.06.16





In the books of XYZ limited

Balance Sheet

As on 30th June,2016

Particulars (Paragrapgh 54)



Current Assets:



Cash at Bank



Accounts Receivable



Less: Allowance for doubtful debts






Prepaid Rent Revenue



Deferred Revenue Expenditure:



Analysis by Auditors



Future Trend Analysis



Shop Improvement Analysis



Total Current Assets



Non-Current Assets:



Shop Furniture & Fittings,net,






Add: Overstatement of Depreciation






Land,at cost



Total Non-Current Assets



Total Assets



Current Liabilities:



Provision for Annual Leave



Current Portion of Provision for Warranty Expense



Accounts Payable



Accrued Expenses



Add: Interest Payable



Dividend Payable



Tax Payable



Total Current Liabilities



Non-Current Liabilities:



Loan from WB Bank



Provision for Warranty expenses



Provision for Legal Claim



Total Non-Current Liabilities



Total Liabilities






Share Capital



Retained Earnings



General Reserve



Total Equity



Total Equity & Liabilities



Summary of significant accounting policies-

The consolidated financial statement of ABC limited is prepared in accordance with Australian Accounting standard Borad101. The standard is in accordance with International Financial reporting standard that is issued by the international standard board. At the end of the financial year 2016, the consolidated financial statement of ABC limited is prepared in accordance with the requirement of

  • Australian Accounting standard board 101
  • Is prepared as a going concern

In accordance with the AASB 101, the preparation is not applicable to content and structure condensed in the interim financial statements. ABC limited is a profit making entity and the terminology is suitable to be used. There are three different paragraphs that have been referred with and statements bare pre3eparesd in accordance with the AASB 101.

In Paragraph 54 of AAASB 101, the items are included that are sufficiently different in nature or function. According to this paragraph, there are several items that have to be included in the financial statements. The items are deferred tax assets and liabilities along with the current tax assets and liabilities as defined by AASB 112 of the income tax. Many other items are also included in the preparation of balance sheet. Income statement has been prepared in accordance with the paragraph 81(A) to 82. In addition to the paragraph 85 requirement.

In addition to the requirement of Australian accounting standard in preparation of profit and loss statement, it has been prepared by referring to the AASB 101. The statement have been prepared in accordance with paragraph 81 (A) and 82.It is required to include tax expense, revenue and finance cost. For the relevanvcce3 of understanding the financial position of the company, it is required to present subtotals, additional line items and headings in the income statement.

Paragraph 106 of AASB 101 has been used in preparing the statement of changes in equity. As per the requirement of paragraph 10, the statements of changes in equity have been prepared. The items used in preparing the statement of changes in equity of ABC limited involve the items of comprehensive income. In accordance with AASB 108, each component of equity is recognized as per AASB 102.

Notes to Financial statements:

Cash and cash equivalent- Cash and cash equivalent are subjected to some significant changes risk of change in value and they comprise of cash at bank, cash in hand and all short-term deposits that are readily converted into amount of cash. The component has been mentioned in accordance with paragraph 54.

Financial guarantee- Financial guarantee are recognized as financial liability and as in accordance with paragraph 54 of AASB 101. Valuation of financial lioability is done at subsequently higher price and at fair value.

Depreciation- Depreciation of assets of ABC limited is calculated over the estimated useful life of assets. With respected to internally constructed assets, depreciation are calculated from the date of acquisition. Under finance lease, ABC limited will obtain the life of assets. Useful lives of assests are revalued annually. It has been mentioned in accordance with the Para 81(A)(c).

Finance costs-Finance cost is calculated using the effective interest method and is comprised of interest that is payable on borrowing. The interest rate that is applicable to ABC limited is used for calculating the cost of borrowing. Note 8 of the financial statement depict finance cost and it is valuated according to the paragraph 82 of AASB 101.

Provision on legal claim- This comprised of cost that is required in addressing the potential legal claim of ABC limited. This is the component of income statement that is mentioned accordance with AASB 101 in paragraph 81(1)(c). Some of the other components are represented in the income statement under same paragraph in the note 5, note 4 and note 6.

Tax expense- ABC limited is paying expected amount of tax that is payable in the year 2016. At the balance sheet, tax amount6 is substantially enacted and the tax payable in previous year is adjusted to tax amount of that year. The amount of tax that is payable is mentioned and depicted according to the paragraph 82 of AASB 101.

Post balance date events- There would be material impact of date of any other report on consolidated financial statements.

Notes : 


Employee Expenses


Less: Annual Leave Expenses


Net Employee Expenses



Provision for Annual Leave:


Closing Balance


Add: Annual Leave Expense




Less: Opening Balance


Annual Provision for Annual Leave



Provision for Warranty Expense:


Closing Balance


Add: Annual Warranty Expense




Less: Closing Balance


Annual Provision for Warranty Expense



Depreciation Expense:



Shop Furniture & Fittings






Less: Wrongly Overstated






Total Depreciation Expense




Profit on Sale of Old Furniture:


Sale Proceedings


Less: Carrying Cost of Sold Furniture


Profit on Sale



Strategic Review Cost:



Analysis by Auditors



Less: Deferred Revenue Expenditure @ 70%



Future Trend Analysis



Less: Deferred Revenue Expenditure @ 100%



Shop Improvement Analysis



Less: Deferred Revenue Expenditure @ 70%



Annual Strategic Review Costs




Provision on Legal Claims:


Annual Claim Paid


Add: New Provision




Less: Opening Balance





Finance Cost:


Loan Fees


Interest Paid on Loan


Interest Accrued on Loan


Total Finance Cost


Declaration by directors:

ABC limited in accordance with the directors’ resolution declares that:

  • Financial report of ABC limited complies with the International Financial reporting standard.
  • Australian accounting standards that are applicable aligns with the financial statements components.
  • Report of management as per the directors’ best knowledge includes financial position and business development and fair value performance.
  • A true and fair view of liabilities, assets and financial position, profit and loss statement is clearly depicted in the financial statements.

Director report:

The business portfolio of ABC limited is generating cash over time and the main reasons are its strong corporate governance principles complying with ASX principles. The main focus of company is managing the cash flow and reduces the cost. It is sought by ABC limited for maintaining strong balance sheet so that they provide the shareholders with strong return.

A net total revenue of $ 522822400 is generated by the company in the financial year 2016. Company ha s made payment of $ 74000 to the suppliers and the amount payable by company as an employee expense stood at $ 8647000. The financial statement of ABC limited is clearly depicting dividend payment of amount $ 412500 to the shareholders. Retained earnings of ABC limited in financial year 2016 at $ 9101050. $ 4600000 is the amounts that have been transferred to general reserves. The value of paid up share capital of ABC limited as on 30th June, 2016 stood at 4250000. Compared to previous year, the amounts of retained earnings have increased.

One of the important aspects for the business operation is the well being of economic. Operational activities are carried out by organization by committing to strong fundamentals and good prospects. In order to provide satisfactory return to the shareholder4s of the company, ABC limited should need to put some efforts. With the help of financial discipline and managing the diversified portfolio in an exceptional way, organization will meet its primary objective of providing shareholders with the satisfactory return. Each division of organization is overseen by divisional board of directors. One of the key focuses of organization development of operational management and strong management capability. The annual report of the organization also outlines the risks and operations in addition to summarizing the prospects. In is required by users of financial statement to read such review along with the financial statements.

Relevant changes in state of affairs of ABC limited:

  • As compared to the revenue generated in the previous year of $ 4300000, reve3nue generated from ordinary activities stood at $ 52822400.
  • The value of retained earnings has increase as compared to previous year and the amount stands at $ 9097165.
  • Totals assets valuation has also increased to $ 28243320 compared to value in previous year of $ 8094209.
  • Shareholder4s have received higher amount of dividend per share in this year at the rate of $ 2.54 per share.
  • Amount of profit also includes tax impairment and the value is up from previous year at $ 5368 615.

Auditor’s indemnification:

Auditor of company is KPMG and in terms of engagement with the auditors, it has been agreed by the organization several liabilities to the parties concerned attributing from the audit engagement. Nonetheless, any act resulting from the activities of KPMG would not be extended to indemnity.

Corporate governance:

In an attempt to recognize the needs of corporate behavior and standards of accountability, the directors of ABC limited have complied with the recommendations and principles of corporate governance as listed on Australian stock exchange.  

Environmental performance and regulations:

There are various authorities of Australia that regulates the activities of organization that bare subjected to environmental regulation. Some of the activities that are regulated by providing the licenses are hazardous material, carrying of waste and water, disposal of waste and other environmental concerns. During its year of operation, organization has not breached any conditions of generating licenses.

Auditors report:

Reporting of the financial results:

The accompanying financial report of ABC limited is audited by KPMG and the financial statements comprise of consolidated income statement, statement of equity and statement of financial position or balance sheet dated 30th June, 2016. The report comprise of declaration by directors in addition to explanatory information and summarizing and examination of significant accounting policies of organization.

Responsibility of auditors:

Expressing opinion on the financial statements of the organization is the responsibility of auditors. Auditing of the statements of ABC limited by KPMG has been conducted in accordance with the Australian Accounting standards. Auditors are required to obtain reasonable assurance regarding the financial statements of organization that it is free from any material misstatements. Evidence of audit relating to the amount depicted in the financial report and the disclosure presented in conducting the audit has been obtained by performing several auditing procedures. Based on the selected procedures, the auditors have formed their judgment. Assessment of the financial risk of the statements and the data presented that might result in occurrence of fraud and error is the main objective of carrying out auditing of the organization. Regarding the internal control ineffectiveness of the organization, an auditor does not make any opinion. However, internal control is considered for assessment of risks that is regarded significant for financial report preparation and designing the audit procedures.

The financial statements of ABC limited has been audited by auditors and this involve comprehensive income statement, balance sheet and statement of changes in equity for the year ended 2016. Moreover, auditors have audited the declaration made by directors and the remuneration report.

While conducting the audit, several tasks has been done such as evaluating the appropriateness of the procedures of audit and reasonable of the accounting estimates. The overall presentation of financial report of ABC limited has also been evaluated by auditors. It is assessed that auditors for providing the audit opinion have found sufficient and appropriate audit evidence.

Assessing material misstatement risks:

The auditors have arrived at audit opinion by consideration the changes that have been witnesses on operations carried out on year to year.

Valuation of assets:

The values of portfolio of assets have been affected by change in the price and market volatility. The assessment of estimated future cash flow of cash generating unit of the assets is used for revaluating the value of property, plant and equipment along with intangible assets. Value of property, equipment and plant at end of financial year 2016 stood at $ 2284000. One of the key area of judgment is cash generating unit. It is required to apply some key inputs for arriving at relevant judgment as determining the future cash flow is inherently difficult. The value of materiality of audit report of ABC limited stood at 4 AUS 8 million.

Following key procedures have been performed by auditors:

  1. Evaluation of the forecasted price of assets impairment of organization is done by comparing the input with data available in the market and benchmarks that are externally available.
  2. Testing of the key controls have been performed for asset valuation of organization and several terms and items involved in impairment and reversal of assets are also involved.
  3. Auditors have compared the prices of commodity, inflation rates along with risks by making use of authentic and reliable data available in the market.
  4. Within the business model, the competency and objectivity of experts responsible for producing reserve statement have been evaluated. Consideration of personal qualification and experience is done for making such evaluation.

Opinion of auditors:

According to the opinion of KPMG, the financial report of ABC limited is prepared in accordance with Australian Accounting standard board (AASB 101) and followings are included:

  • Compliance with the Australian Accounting boards 101.
  • ABC limited financial position represents a true and fair view as on 30thJune, 2016.


Giles, R., 2014. Finance & Accounting New 4th Edition. Lulu. com.

Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.

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