University Financial Reporting and Analysis I Assignment Solution

This assignment solution for Financial Reporting and Analysis I addresses key accounting concepts. It begins with an explanation of revenue recognition, outlining the conditions under which revenue is recognized according to IFRS, and provides an example of transaction price allocation. The solution then delves into inventory cost methods, including First-In-First-Out (FIFO), Last-In-First-Out (LIFO), and weighted average methods, with examples illustrating their application. Finally, the assignment explores depreciation policies for long-lived assets, covering the straight-line method, accelerated depreciation, and the declining balance method, providing examples for each. The assignment is well-structured, providing a clear understanding of the concepts discussed. The solution is well-researched and supported by relevant references.

Running head: FINANCIAL REPORTING AND ANALYSIS I
Financial Reporting and Analysis I
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1FINANCIAL REPORTING AND ANALYSIS I
Table of Contents
Question 1:.......................................................................................................................................2
Requirement I:.............................................................................................................................2
Requirement II:............................................................................................................................2
Question 2:.......................................................................................................................................2
Requirement I:.............................................................................................................................2
Requirement II:............................................................................................................................2
Requirement III:...........................................................................................................................2
References:......................................................................................................................................3

2FINANCIAL REPORTING AND ANALYSIS I
Question 1:
Requirement I:
Requirement II:
Question 2:
Requirement I:
Revenue recognition is a principle of accounting outlining the particular conditions under
which revenue is recognised (Sedki, Smith and Strickland 2014). Based on the IFRS criteria, in
order to recognise revenue, the following conditions need to be met:

3FINANCIAL REPORTING AND ANALYSIS I
 Transfer of risks and rewards from sellers to buyers
 No control of the seller over the goods sold
 Reasonable assurance of the collection of payment from products or services
 Reasonable measurement of the amount of revenue (Wagenhofer 2014)
 Reasonable measurement of the cost of revenue
For instance, a contract involves selling a car with a complementary driving lesson and the
overall price of the transaction is $20,000. The standalone selling value of the car is $19,000,
while the same in case of the driving lesson is $1,000. The allocation of transaction price is
represented as follows:
Requirement II:
There are three types of inventory cost methods, which include First-In-First-Out (FIFO),
Last-In-First-Out (LIFO) and weighted average methods.
FIFO:
In this method, stock items are sold in the order they are purchased or manufactured,
which implies that the oldest stock items are sold first. For example, an organisation purchases
clothes on two different occasions at varying prices in a month, which are 100 clothes at $10
each and 200 clothes at $20 each. At the moth end, the organisation has sold 50 clothes.
Therefore, the cost of sales would be $500 ($10 x 50 clothes). This still leaves 50 clothes on

4FINANCIAL REPORTING AND ANALYSIS I
initial purchase and the remaining 200 clothes on next purchase. Hence, the remaining value of
inventory would be $4,500 {($10 x 50 clothes) + ($20 x 200 clothes)}.
LIFO:
In this method, the recently purchased stock items are sold first and with the increase in
product prices, there would be increase in cost of sales and decline in closing stock balance
(Seay 2014). By considering the above example, this method would utilise cost from the recent
transaction at the time 200 clothes have been purchased at $20 each. Therefore, cost of sales
would be $1,000 ($20 x 50 clothes). In addition, the remaining stock balance would be $4,000
{($10 x 100) + ($20 x 150)}.
Weighted average:
Under this method, stock and cost of sales are based on average cost of all items bought
in a period. By considering the same example, the weighted average cost would be $16.67 for
each cloth ($5,000/300). After it sold 50 shirts, the cost of sales would be $833.50 ($16.67 x 50).
The remaining stock balance would be $4,167.50 ($16.67 x 250).
According to IAS 2, inventory needs to be recognised at the lower of net realisable value
or cost and the organisations could not use LIFO for inventory valuation.
Requirement III:
There are certain depreciation policies for long-lived assets, which are discussed as
follows:
Straight-line method:

5FINANCIAL REPORTING AND ANALYSIS I
This method realises equivalent amount of depreciation expense in each year of the
useful life of an asset. If the asset has any residual value, it is deducted from the asset cost to
arrive at the depreciation expense. For instance, a firm buys an asset costing $50,000 with an
economic life of 5 years and after the end of economic life, it would salvage value of $5,000.
Under this method, the depreciation expense would be $9,000 per year {($50,000 - $5,000)/5
years}.
Accelerated depreciation method:
Under this method, the recognition of depreciation expense is accelerated systematically
for realising more depreciation in the initial part of the life of the asset and lower depreciation in
later part of asset life. However, there is no difference in total depreciation expense under this
method and straight-line method (Sellhorn and Stier 2018).
Declining balance method:
In this method, there is application of fixed rate of depreciation on the declining book
value of an asset every year. For instance, if the value of an asset is $14,000 with a residual
amount of $4,000 and economic life of five years, depreciation for the first year would be $5,600
(2/5 x $14,000), $3,360 for the second year {2/5 x ($14,000 - $5,600)}and $2,016 for the third
year [2/5 x {$14,000 - ($5,600 + $3,360)}]. However, as the total depreciation amount could not
go beyond $10,000 ($14,000 - $4,000), the third year depreciation would be limited to $1,040
($10,000 - $8,960).

6FINANCIAL REPORTING AND ANALYSIS I
References:
Sedki, S.S., Smith, A. and Strickland, A., 2014. Differences and similarities between IFRS and
GAAP on inventory, revenue recognition and consolidated financial statements. Journal of
Accounting and Finance, 14(2), p.120.
Seay, S.S., 2014. The economic impact of IFRS-a financial analysis perspective. Academy of
Accounting and Financial Studies Journal, 18(2), p.119.
Sellhorn, T. and Stier, C., 2018. Fair value measurement for long-lived operating assets:
Research evidence. European Accounting Review, pp.1-31.
Wagenhofer, A., 2014. The role of revenue recognition in performance reporting. Accounting
and Business Research, 44(4), pp.349-379.