Part 2 Of The Second Part Of This Assignment

Part 2in The Second Part Of This Assignment You Will Write a Final Pa

In the second part of this assignment, you will write a Final Paper. Include a title page, introduction, and conclusion in addition to the sections below. Include all appropriate in-text citations and references to support your statements. Document any information used from sources in APA style as outlined in the Ashford Writing Center’s Citing Within Your Paper guide. In your Final Paper, analyze management judgments and their effect on the financial statements. Explain the calculations of cash flow statements. Summarize the reporting methods for comprehensive income. Examine the purpose of liquidation and required disclosures.

Paper For Above instruction

Management Judgments and Estimation Uncertainty

International Financial Reporting Standards (IFRS) mandate that entities disclose management judgments with the most significant effects on financial statements, as well as information pertaining to major sources of estimation uncertainty that could lead to material misstatements. According to the IFRS guidance (Applying IFRS: Enhancing Communication Effectiveness, pp. 39-44), judgments in financial statements should be disclosed in specific notes, particularly in areas where these judgments significantly influence reported figures. For example, judgments related to goodwill impairment testing and lease classifications are crucial disclosures due to their substantial impact.

Two examples of judgments that could significantly impact financial statements include: (1) valuation assumptions for intangible assets, and (2) the classification of leases as operating or finance leases. Regarding estimation uncertainty, four notable examples are: (1) the fair value of financial instruments, (2) allowances for doubtful accounts, (3) warranty obligations, and (4) asset retirement obligations. If an estimation value might change substantially within one year, such as a fair value based on recent market prices that are volatile, entities should disclose the potential for significant changes. These disclosures are essential because they inform stakeholders about the potential variability in reported amounts.

In the case of Home Depot's 2017 Annual Report, the notes to financial statements present disclosures about judgments related to inventory valuation, warranty obligations, and impairment assessments—illustrating real-world application of IFRS disclosure requirements (Home Depot, 2017).

Cash Flow Statements: Indirect vs. Direct Methods

The statement of cash flows can be prepared using either the indirect or direct method. The indirect method starts with net income and adjusts for non-cash transactions, changes in working capital, and other operational activities to arrive at cash flows from operating activities. Conversely, the direct method reports actual cash receipts and payments for operating activities directly, providing more detailed insights into cash transactions.

All three sections—operating, investing, and financing—appear in both methods, but the presentation differs, especially in the operating section. The FASB prefers the direct method because it offers more transparent insight into cash flows from operations, though the indirect method is more commonly used because it aligns with net income and is easier to prepare from existing accounting data.

When preparing the cash flow statement via the direct method, certain calculations are necessary: (1) Cash collected from customers is derived from sales revenue adjusted for the change in accounts receivable; (2) Cash paid for merchandise is based on purchases adjusted by accounts payable; (3) Cash paid to employees and for other accrued expenses is calculated from expense figures adjusted for changes in liabilities; and (4) Cash paid for operating costs, including insurance, involves adjusting expense accruals for prepaid expenses and accrued liabilities.

Comprehensive Income and Its Reporting

According to Statement of Financial Accounting Standards No. 130 (FASB 130), comprehensive income encompasses all changes in equity during a period except those resulting from investments by owners and distributions to owners. It includes net income and other comprehensive income (OCI), which covers unrealized gains and losses on financial instruments, foreign currency translation adjustments, and pension adjustments.

Four theoretical methods for reporting comprehensive income are: (1) a separate statement of comprehensive income; (2) combined income statement with a single continuous statement incorporating OCI; (3) comprehensive income presented as a component of the statement of changes in equity; and (4) notes disclosures only. The advantages of a separate statement include clarity and focus, yet it may fragment financial presentation. Combining OCI with net income provides a complete picture at a glance, but may obscure the separation of ordinary and unrealized items. My preferred approach is the separate statement, as it enhances transparency and comparability.

Liquidation Accounting and Disclosures

Liquidation accounting, as described by the ASC (Accounting Standards Update, Topic 205), involves recognizing assets and liabilities at the lower of carrying amount and fair value during the process of winding down operations. When liquidation becomes imminent—characterized by a formal decision to liquidate and sale of substantially all assets—the accounting treatment shifts to reflect the liquidation basis.

Initial measurement involves recognizing assets at fair value less costs to sell, and liabilities are settled at their expected amounts. Subsequent measurement continues to evaluate assets at fair value, adjusting for any changes in value or costs to sell. Disclosures include the reasons for liquidation, expected timing, assets and liabilities on the liquidation basis, and the impacts on financial positions, ensuring transparency for stakeholders.

In conclusion, understanding management judgments, cash flow reporting methods, comprehensive income, and liquidation procedures are crucial for accurate financial analysis and reporting. These standards promote transparency, comparability, and informed decision-making among stakeholders in financial markets.

References

  • Applying IFRS: Enhancing Communication Effectiveness. (n.d.). IFRS Foundation.
  • Home Depot. (2017). Annual Report. Retrieved from https://www.homedepot.com
  • Financial Accounting Standards Board. (1997). Statement of Financial Accounting Standards No. 130 (FASB 130): Reporting Comprehensive Income.
  • Financial Accounting Standards Board. (2020). Accounting Standards Update: Presentation of Financial Statements (Topic 205).
  • FASB. (2017). Statement of Financial Accounting Concepts No. 6— ELEMENTS OF Financial Statements.
  • International Accounting Standards Board (IASB). (2018). IAS 1 Presentation of Financial Statements.
  • Henningsen, P., et al. (2019). Principles of Financial Accounting. Pearson.
  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th ed.). Wiley.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial Accounting Theory and Analysis. Wiley.
  • U.S. Securities and Exchange Commission (SEC). (2021). Financial Reporting Manual.

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