Table of Contents

Week 1.

Week 2.

Week 3.

Week 4.

Week 5.

References.

Advanced Financial Accounting - Week 1

The basis of the belief that in the absence of regulation, organizations will have an incentive to provide correct information about their performance to third parties outside the organization is that organizations will perform self-reporting to make sure that outside parties are informed about the positive performance of the business and to assure that the wealth of shareholders is being managed in a proper manner (CPA Australia, n.d.). Companies have really strong incentives to make a voluntary disclosure of information and these are all related to the need for the company's management to communicate with various stakeholders and the public. Companies would do self-reporting of their financial performance, even in the absence of accounting regulation, because this will provide them an opportunity to explain the future growth prospects of the company to its investors.

If there are no accountings regulations, organizations will still want to make a voluntary disclosure and reporting about their true financial performance to maintain the confidence of existing shareholders and appear as an attractive investment opportunity to potential investors. Further, reporting of information voluntarily would provide them a chance to decide what information to disclose, and what information to hold, as market information about a company affects the prices of its shares in the share market. Companies could use voluntary self-reporting as a tool to control the prices of their shares in the share market (CPA Australia, n.d.).

There is another important reason as to why the management would like to perform self-reporting, true and complete disclosures would indicate that management of the organization is transparent and is trustworthy (CPA Australia, n.d.). A large number of companies make voluntary disclosures of information related to their sustainable performance and involve themselves in Corporate Social Responsibility reporting, which is done by them voluntarily. This would help the organization to maintain its reputation in the market (CPA Australia, n.d.). If the organizations do not do such authentic voluntary reporting of its performance and activities, it will lead to an increase in its operations as it will have to incur higher costs to attract investment into its capital. In the absence of adequate reporting and disclosures, investors may presume that the affairs of the company are not being conducted properly and ethically and would be reluctant to invest in the organization, thereby leading to a substantial increase in costs of raising capital (CPA Australia, n.d.).

Advanced Financial Accounting - Week 2

The conceptual framework of accounting consists of a set of rules and principles that guide concerning the accounting treatment for certain items and transactions that are not covered by any particular accounting standard (BDO Australia, 2019). The conceptual framework consists of the broad concepts that are to be followed in preparation and presentation of financial statements intended to be used by third parties. It must, however, be noted that even though the conceptual framework covers several important concepts that are to be applied in preparation and presentation of financial statements, it has no legal force. This is because while it is compulsory to follow a particular accounting standard that applies to a particular item of the transaction, there is no compulsion to specifically follow the concepts provided in the conceptual framework.

The conceptual framework may only be referred to when there is no specific accounting standard for that transaction or situation (Australian Accounting Standards Board, 2014). In case of a conflict between accounting standards and the conceptual framework, the accounting standards prevail over the conceptual framework (Australian Accounting Standards Board, 2014). The Australian Accounting Standards have been introduced as per the Corporations Act, and thus have a legal force. However, it is not the same as the conceptual framework. The statements are not a mandatory conceptual framework and do not hold the effect of a law or statute (Dagwell, Wines & Lambert, 2015 p.79,80). Thus, it is right to conclude that the conceptual framework does not have any force of law.

Advanced Financial Accounting​​​​​​​ - Week 3

The positive theory of accounting provides explanations and predictions of a certain phenomenon. The positive accounting theory has been developed based on observations. The observations made costs spent by an organization due to issues related with differences in the interests of shareholders and the management and due to the existence of information asymmetry between the shareholders, who act as the principal and the management who acts as the agent (Srivastava, & Baag, n.d.). Information asymmetry refers to the difference in the extent of information that is held by shareholders and that held by the management (Finance Train, n.d.). As the management is involved in the day to day management and activities of the company, they own much more detailed and accurate information about the company as compared to the shareholders. The information asymmetry has a direct impact on the agency costs, if the information asymmetry is high, the agency costs will also be high.

The main reason behind the incurrence of agency cost of equity is that shareholders and managers have different interests. As the interests of the management are different from the interest of shareholders, it becomes necessary for the shareholders to incur agency costs. Therefore, those costs that mainly arise due to the separation of ownership and control in a company are referred to as agency costs (Finance Train, n.d.). The main interests of the shareholders are maximization of their wealth, however, at times the decisions taken by the management are not in the best interests of the shareholders (Finance Train, n.d.). As a result, the shareholders take certain actions to oversee and monitor the actions and decisions of the management, which has a cost. Thus, the agency cost of equity consists of two types of costs – costs due to bad decisions of the management and costs spent in monitoring the actions of management to discourage them from taking such bad decisions in the future.

 The agency cost of debt is incurred because of differences in the interests of shareholders and the creditors and lenders. If the management acts in the interests of shareholders of the company, it may pass on the funds to shareholders, the eve before paying off the lenders and creditors (Finance Train, n.d.). Therefore, the lenders and debt holders take certain actions to prevent the management from doing this. The agency cost of debt may occur in different forms- it can be in the form of restrictive covenants and can also be in the form of high-interest rates to prevent themselves from big losses in case of default. It is due to this factor only; that the dividends to shareholders can only be paid after the interests payable to lenders has been paid (Finance Train, n.d.).

Advanced Financial Accounting​​​​​​​ - Week 4

(a) The acquisition cost of the machine

Cash

$ 70,000.00

Fair Value of land

$ 4,50,000.00

Bank loan liability of Blue Limited acquired by TXA Ltd

$ 89,000.00

The acquisition cost of the machine

$ 6,09,000.00

(b)

Journal entries in books of TXA Ltd

Particulars

Debit

Credit

Loss on revaluation of land

$ 2,00,000.00

 

Land

 

$ 2,00,000.00

Machinery

$ 6,09,000.00

 

Cash

 

$ 70,000.00

Land

 

$ 4,50,000.00

Bank Loan- Liability

 

$ 89,000.00

Advanced Financial Accounting​​​​​​​ - Week 5

Journal entries for the disposal of the machinery and the acquisition of the motor vehicle on 1 July 2019

Date

Particulars

Debit

Credit

01.07.2019

Motor Vehicle

$ 11,000.00

 

 

Loss on disposal of motor vehicle

$ 33,524

 

 

Machinery

 

$ 44,524

 

 

(Being disposal of machinery and acquisition of motor vehicle in exchange)

 

 

Workings:

1. Calculation of Book value of Machine as on 1 July 2019

Year

Depreciable cost

Remaining life of machines

depreciation expense

Book Value

1

$ 55,000.00

6

$ 15,714

$ 39,286

2

$ 55,000.00

5

$ 13,095

$ 41,905

3

$ 55,000.00

4

$ 10,476

$ 44,524

4

$ 55,000.00

3

$ 7,857

$ 47,143

5

$ 55,000.00

2

$ 5,238

$ 49,762

6

$ 55,000.00

1

$ 2,619

$ 52,381

 

Total

21

$ 55,000

 

2. Calculation of loss on disposal of the machine

 

Book Value at the machine as at 1 July 2019

 

=

$ 44,524

Less:

Fair Value of motor vehicle received in exchange

   

=

$ 11,000.00

 

Loss on disposal of the machine

 

 

 

$ 33,524

References for Advanced Financial Accounting

Australian Accounting Standards Board. (2014). Framework for the Preparation and Presentation of Financial Statements. Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/Framework_07-04_COMPjun14_07-14.pdf

BDO Australia. (2019). New Conceptual Framework – Who will it apply to and when? Retrieved from https://www.bdo.com.au/en-au/accounting-news/accounting-news-july-2019/conceptual-framework

CFI. (n.d.). What are Agency Costs? Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/agency-costs/

CPA Australia. (n.d.). Financial Accounting And Reporting. Retrieved from https://www.cpaaustralia.com.au/-/media/corporate/allfiles/document/cpaprogram/foundation-exams/faar-study-guide-eighth-edition.pdf?la=en&rev=aef9de1323284b56a7787fb360be1d6d

Dagwell, R., Wines, G., & Lambert, C. (2015). Corporate accounting in Australia. Pearson Higher Education AU.

Finance Train. (n.d.). Agency Costs of Equity and Debt. Retrieved from https://financetrain.com/agency-costs-of-equity-and-debt/

Srivastava, J., & Baag, P. K. Positive Accounting Theory and Agency Costs: A Critical Perspective.

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