Financial Accounting Level 3: Consolidation & Analysis Worked examples: Consolidation, ROU assets, liquidity and profitability ratios Meta Summary: Advanced reporting under IFRS: IFRS 10 control, business combinations, consolidated statements, IFRS 16 lessee accounting with ROU asset and lease liability, financial ratio analysis, and IESBA Code of Ethics. Complete calculations included. Table of Contents Chapter 1: IFRS 10 Control & Business Combinations Chapter 2: Consolidated Financial Statements - Worked Example Chapter 3: IFRS 16 Leases - ROU Asset & Liability Chapter 4: Financial Statement Analysis - Ratio Calculations Chapter 5: IESBA Code of Ethics for Accountants FAQ References Related Topics Chapter 1: IFRS 10 Control & Business Combinations 1.1 Definition of Cont...
Financial Accounting Level 2: Assets Deep Dive
Meta Summary: Master current assets: cash, receivables with allowance method, notes receivable discounting, perpetual vs periodic inventory, FIFO, LIFO, weighted average, and LCNRV under IFRS. Complete calculations with step-by-step examples.
Table of Contents
Chapter 1: Cash & Cash Equivalents
1.1 Definition & Restricted Cash
Cash: Currency, coins, checks, money orders, demand deposits.
Cash Equivalents: Short-term, highly liquid investments: 3 months or less maturity, treasury bills, commercial paper, money market funds.
Restricted Cash: Cash set aside for specific purpose. Report separately on balance sheet as current or non-current.
Chapter 2: Accounts Receivable & Bad Debts - Worked Examples
2.1 Allowance Method - Percentage of Sales
Data: Credit sales $500,000. Estimated 1.5% uncollectible. Allowance for Doubtful Accounts has $1,200 credit before adjustment.
Bad Debt Expense = 500,000 × 1.5% = 7,500
Entry: Dr Bad Debt Expense 7,500, Cr Allowance for Doubtful Accounts 7,500
Ending Allowance = 1,200 + 7,500 = 8,700 credit
This method matches expense to revenue period. Focuses on income statement.
2.2 Aging of Receivables Method
Data: A/R balance $200,000. Aging schedule estimates uncollectible:
Current 0-30 days...... 120,000 × 1% = 1,200
31-60 days............. 50,000 × 5% = 2,500
61-90 days............. 20,000 × 15% = 3,000
Over 90 days........... 10,000 × 40% = 4,000
Required Allowance................... 10,700
If Allowance has $2,000 credit before adjustment:
Needed adjustment = 10,700 - 2,000 = 8,700
Dr Bad Debt Expense 8,700, Cr Allowance for Doubtful Accounts 8,700
Write-off: Customer owes $3,000 deemed uncollectible.
Dr Allowance for Doubtful Accounts 3,000, Cr Accounts Receivable 3,000
Recovery: Customer pays $3,000 previously written off.
Dr Accounts Receivable 3,000, Cr Allowance for Doubtful Accounts 3,000
Dr Cash 3,000, Cr Accounts Receivable 3,000
Chapter 3: Notes Receivable & Discounting
3.1 Interest-Bearing Note & Discounting
Issuance: Apr 1, received $20,000, 12%, 6-month note.
Dr Notes Receivable 20,000, Cr Sales Revenue 20,000
Year-end accrual Dec 31: 9 months interest = 20,000 × 12% × 9/12 = 1,800
Dr Interest Receivable 1,800, Cr Interest Revenue 1,800
Discounting at bank: On Aug 1, discount note at bank charging 15% discount rate. Note due Oct 1 = 2 months left.
Maturity value = 20,000 + (20,000 × 12% × 6/12) = 21,200
Discount = 21,200 × 15% × 2/12 = 530
Proceeds = 21,200 - 530 = 20,670
Interest earned to Aug 1 = 20,000 × 12% × 4/12 = 800
Dr Cash 20,670, Cr Notes Receivable 20,000, Cr Interest Revenue 800, Cr Gain on Discounting 130
Chapter 4: Inventory Systems & Costing - FIFO, LIFO, Weighted Average
4.1 Perpetual Inventory - FIFO, LIFO, Weighted Average
Data: Beginning inventory 100 units @ $10 = 1,000. Purchases: Mar 5, 200 @ $11 = 2,200; Aug 15, 150 @ $12 = 1,800. Sales: Jun 10, 180 units; Nov 20, 200 units.
FIFO Perpetual
Jun 10 COGS: 100@10 + 80@11 = 1,880. Inv: 120@11 + 150@12 = 3,120
Nov 20 COGS: 120@11 + 80@12 = 2,280. Inv: 70@12 = 840
Total COGS = 4,160. Ending Inv = 840
LIFO Perpetual - Note: Prohibited under IFRS
Jun 10 COGS: 180@11 = 1,980. Inv: 100@10 + 20@11 + 150@12 = 3,020
Nov 20 COGS: 150@12 + 20@11 + 30@10 = 2,320. Inv: 70@10 = 700
Total COGS = 4,300. Ending Inv = 700
Moving Weighted Average
After Mar 5: (1,000 + 2,200) / 300 = 10.67/unit
Jun 10 COGS: 180 × 10.67 = 1,921. Inv: 120 × 10.67 = 1,279
After Aug 15: (1,279 + 1,800) / 270 = 11.40/unit
Nov 20 COGS: 200 × 11.40 = 2,280. Inv: 70 × 11.40 = 798
Total COGS = 4,201. Ending Inv = 798
Chapter 5: LCNRV & Inventory Errors
5.1 Lower of Cost and Net Realizable Value - IAS 2
Rule: Inventory reported at lower of cost and NRV. NRV = estimated selling price - costs to complete and sell.
Example: Item cost $100. Selling price $120. Costs to sell $25. NRV = 120 - 25 = 95.
Since 95 < 100, write down $5.
Dr Cost of Goods Sold 5, Cr Inventory 5
Portfolio method: Apply to total inventory or by category. If total cost 50,000, total NRV 48,000, write down 2,000.
5.2 Inventory Errors Impact
Ending inventory overstated $5,000 in 2025:
2025: COGS understated 5,000 → Net Income overstated 5,000
2025: Ending Inv overstated 5,000 → Assets overstated 5,000
2026: Beginning Inv overstated 5,000 → COGS overstated 5,000
2026: Net Income understated 5,000
Error self-corrects over 2 years if not discovered. Both years’ income misstated.
FAQ
Why is LIFO prohibited under IFRS?
IAS 2 prohibits LIFO because it can result in inventory valuations that are outdated and do not reflect current costs. FIFO and weighted average better represent physical flow and current value. US GAAP still allows LIFO.
When do I use percentage of sales vs aging for bad debts?
Percentage of sales focuses on income statement matching — better for income measurement. Aging focuses on balance sheet valuation of A/R — better for net realizable value. Companies often use aging for year-end and percentage during year.
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