Week 3 - Statement of Financial Position adjustments & introduction to the Statement of Profit or Loss and adjustments Flashcards
Why does IFRS10 wants us to consider the parent and subsidiary as a single entity? (3)
Intragroup trading makes it easy to manipulate accounts
Even genuine transactions, inflate figures in the accounts
It also ensures comparability of group vs a company that grows naturally
Why do assets in an entity might not equal the liabilities of another even if its the same transaction? (2)
Cash in transit
Goods in transit
How can unrealised profit arise within a group? (2)
On inventory where companies trade with each other
On non-current assets where one group company has transferred an asset to another
What entries do we make or unrealised profit if a parent sells goods to a subsidiary?
Dr Retained earning (parent)
Cr Inventory
What entries do we make for unrealised profit if a subsidiary sells goods to a parent?
Dr Retained earning (Subsidiary)
Cr Inventory
How to calculate unrealised profit?
1) Calculate how much profit was made
2) Calculate how much inventory is remaining at the business
3) Make the correct entries depending which company makes the sale
What 2 things do we have to remove when calculating unrealised profit on non-current assets?
Remove profit on sale
Remove extra depreciation
How to calculate unrealised profit on NCA using the table
Before transfer After transfer diff
Cost x
Dep’n (x)
C/d x x x
Dep’n (x) (x) (x)
c/d x x x
When do we start to consolidate a company?
At the time we take control of the company so we have to pro rata the figures
What to do with unrealised profit in financial statements?
SOPL - Dr cost of sales
- Cr Inventory (SOFP)
Why do we have a Dr entry for unrealised profit into the cost of sales account?
Because we need to reduce the profit if the company and one way of doing it is by increasing costs.
