DECISION MAKING

Accounting & Decision Making

Accounting & Decision Making

Subjective Judgment Areas in DITW's Financial Statements for 2012

According to IFRS (2012, p. 1), IASB conceptual framework has set guidelines for preparing and presenting financial statements for key stakeholders and external users of a company's financial communications. Basically, the conceptual framework addresses a firm's objective of financial reporting, concepts of capital and capital management, and qualitative attributes of relevant information of finance (IFRS, 2012, p. 1).

According to Clendon (2011, p.1), IASB analyzes fairness of financial statements on the basis of three elements in combination with the nature of reporting entity. Two of these elements are related with expenses and income sections of income statement while the third one is concerned with equity, liabilities and assets of balance sheet (Clendon, 2011, p. 1). Hence, in order to highlight subjective areas of presented financial statements, a close look at these factors will be essential.

Subjective Judgment - Income

In accordance with conceptual framework, a firm must report the business revenue generated through the increase in asset value or decrease in the portion of business liability. A firm may report all direct and indirect sources of business income. Contrary to the standard, DITW has provided general sources of revenue generation such as income from dying wood by not providing any information regarding comprehensive income or asset enhancement. Therefore, DITW should make changes to the current income statement by disclosing all types of income sources including comprehensive income.

Subjective Judgment - Liabilities

In accordance with IAS, DITW has reported current liabilities of business including note payable and trade payable on the balance sheet. However, the company has not met with the other requirement of disclosing non-current liabilities of a business. It is recommended that DITW add the account of non-current liabilities on the financial position, in order to meet with the basic standards of IAS.

Subjective Judgment - Assets

In the light of conceptual framework, DITW has met with the basic reporting requirements by classifying assets as current and non-current. However, there is ambiguity on the true ownership of business assets because the company has not disclosed its legal control over business assets. DITW's financial statements are not in compliance with IAS 17, where disclosure of asset ownership is mandatory. Therefore, DITW is recommended to clearly state the portion of leased and originally owned assets.

Subjective Judgment - Shareholders' Equity

According to IAS, a firm should clearly disclose and report the original capital investment, capital reserves and non-controlling interests (equity of subsidiaries) under the head of shareholders' equity. However, analysis of DITW's financial position provides no information on the changes in equity or equity share of other subsidiaries. DITW can make changes to the present financial position statement by clearly disclosing the worth of non-controlling interests.

Statement of Cash Flows for DITW for 2012

Dyed in the Wool Limited

Cash Flow Statement

For the Year Ended Dec 31, 2012

 

 

Cash Flow from Operating Activities

£ 2012

Operating Income (EBIT)

778,000 Depreciation Expense

317,000 Loss on sale of Equipment

32,000 Increase in Trades Receivables

(147,000)

Increase in Stocks

(55,000)

Decrease in Trades Payable

...