Financial Reporting Methods - Essay Example

Financial Reporting Methods STUDENT’S NAME NAME OF THE INSTITUTION UNI NAME LECTURE’S NAME FACULTY Bloomberg System: Barnes and Noble Inc Ltd Introduction Barnes and Noble Inc Ltd is a US based company that uses the Last in, first out (LIFO) accounting method. A comprehensive guide was used in obtaining information from Bloomberg at the link (http://www.bloomberg.com/professional/documentation/) (http://www.investopedia.com/university/how-to-use-bloomberg-terminal-computer-system/). The information about Barnes & Noble Incorporated Limited was obtained through the school system terminal of Bloomberg system at the school lab. Below is the information that was obtained from the system and recorded in thousands of dollars except for the per share data. This information was then analysed in terms US GAAP and IFRS systems for comparison. The subsequent financial books were then analysed and presented. The purpose of the analysis, which this paper presents anyway, is a comparison of the IFRS and the GAAP accounting systems and hence determine the most appropriate one for the purpose of accounting. This will be determined by finding the difference. However, in determining the best method, it will be good to consider that each of them has advantages and disadvantages. Below is a presentation of the information from Bloomberg and the relevant analyses with respect of attaining the objective of determining the best method between GAAP and IFRS. Financial Reports Barnes & Noble Inc Ltd Consolidated Income Statement For The Year Ended 2nd, May 2015 BARNES & NOBLE INC LTD CONSOLIDATED BALANCE SHEET FOR THE YEAR ENDED 2ND, MAY 2015 BARNES & NOBLE INC LTD CONSOLIDATED CASH FLOWS STATEMENT FOR THE YEAR ENDED 2ND, MAY 2015 The Significant Accounting Policies and Methods Consolidation The consolidated financial reports include the accounts of Barnes & Noble Incorporation as well as wholly and majority owned subsidiary businesses. Significant intercompany transactions and accounts have not been included in the consolidation report (Jarnagin, 2006). Cash & Cash Equivalents All highly liquid instruments procured with an initial maturity of three months or less were regarded cash equivalents (Epstein & Jermakowicz, 2010). Merchandise Inventories The inventories are stated at different market costs. Those majorly comprising of finished goods are stated at the lower or market cost. There are two cost determinants which include the retail inventory LIFO basis and at times first in, First out (FIFO) basis (Epstein & Lee, 2004). The Barnes & Noble Inc College textbook and book trade inventories are usually valued using the LIFO, whereby the related reserve is not material to the recorded figures of the company’s inventories as at 2nd May, 2015. There were no LIFO adjustments in fiscal period of 2015 as compared to the favorable adjustment of $7,692 in the fiscal period of 2014. The basis of determination was an estimated net realizable value. This is ideally the inventory selling price. Besides, the reserves for the non-returnable inventory had basis on the firm’s liquidating history on non-returnable inventory (Eisen, 2000). The shortage rates were estimated on the basis of the historical rates and are believed to be implicated by the changes in the merchandise mix as well as changes in the actual shortage trends. Long-term Assets The property and Equipment were carried at costs less than the accumulated amortization and depreciation. For the purpose of reporting, depreciation was calculated using the straight-line method over the estimated lives. For the tax purposes, different methods are used. The maintenance and repairs were expensed as incurred while major maintenance and remodeling costs are capitalized whenever they extend the useful life of the assets. The leasehold improvements were amortized over the shorter of their estimated useful lives or a period of 10 years (Alexander, Britton, & Jorissen, 2005). The capitalized lease acquisition costs were also amortized over the terms of the underlying lease. The system costs were capitalized and incorporated in property and equipment. The costs are normally depreciated on their estimated useful lives from the date the systems become operational. The company’s property was $449,292 and equipment $490,713 of net of accumulated depreciation as at 2nd May, 2015 and 3rd May, 2014 respectively and $179,462 and $198,972 of depreciation expenses for fiscal year 2015 and 2014 respectively (Epstein & Jermakowicz, 2010). Goodwill and Unamortizable Intangible Assets The costs in excess of net assets of businesses acquired are presented as goodwill in the accompanying consolidated balance sheets. The goodwill and other intangible assets, requires that goodwill and other unamortizable intangible assets no longer be amortized but be tested for impairment annually or earlier whenever there are indications of impairment (Whittington, 2011). The company completed its annual goodwill impairment test as at first day of the third quarter of the fiscal period 2015. In performance of the valuations, the firm used cash flow that reflected the management’s forecasts and discount rates that included risk adjustments that were in consistence with the market conditions (Greuning, 2006). THE FINANCIAL STATEMENTs UNDER THE RULE OF IFRS Barnes & Noble Inc Statement of Comprehensive Income For the year ended 2nd May, 2015 2015 2014 $ $ Revenue 6,069,497 6,381,357 Cost of Goods Sold (4,196,998) (4.523, 422) Operating Income 1,872,499 1,857,935 Expenses Selling & Administrative expenses (1,545,152) (1,606,936) EBITDA 327,347 250,999 Depreciation & Amortization Expenses (194,174) (216,807) EBIT 133,173 34,192 Interest expenses & deferred fees (17,890) (29,507) EBT 115,283 4,685 Income taxes (Benefits) (78,687) (51,953) Net Income/Loss 36,596 (47,268) Barnes & Noble Inc Statement of Financial Position As at 2nd May, 2015 2015 2014 $ $ ASSETS Current Assets Cash & Cash equivalents 74,360 340,171 Account Receivables, Net 98,576 143,981 Merchandise Inventories, Net 1,293,164 1,234,635 Textbook rental Inventories 55,075 50,341 Prepaid expenses & other current assets 65,331 66,580 Short-term deferred tax assets 142,809 144,730 Total 1,729,315 1,980,438 Fixed Assets Property & Equipment Land & Land Improvements 2,541 2, 541 Building & leasehold improvements 1,207,039 1,224,083 Fixtures & Equipment 1,866,719 1,938,555 Accumulated Depreciation & Amortization (2,627,007) (2,674,466) 449,292 490,713 Goodwill 489,267 493,189 Intangible Assets, Net 513,842 528,576 Other fixed assets 47,789 44,533 Total 1,500,190 1,557,011 TOTAL ASSETS 3,229,505 3,537,449 LIABILITIES & SHAREHOLDES’ EQUITY Current Liabilities Account Payables 655,064 735,112 Accrued Liabilities 434,049 502,583 Gift Card Liabilities 358,146 356,700 Short-term note payable - 127,250 Total 1,447,259 1,721,645 Long-term Liabilities Long-term deferred taxes 200,257 211,925 Other long-term liabilities 196,302 366,989 396,559 578,914 Shareholders’ Equity Redeemable Preferred shares 196,059 194,797 Preferred Membership Interests - 383,397 Common Stock 98 94 Additional paid-in capital 1,927,997 1,395,463 Accumulated other comprehensive loses (16,533) (11,773) Retained earnings 357,512 344,021 Treasury Stock (1,079,716) (1,069,109) Total 1,189,358 658,696 TOTAL LIABILITIES & SHAREHOLDES’ EQUITY 3,229,505 3,537,449 Barnes & Noble Inc Statement of Cash Flows For the year ended 2nd May, 2015 2015 2014 $ $ OPERATING ACTIVITIES Net Income/Loss 36,596 (47,268) Cash Received Depreciation & amortization 199,652 222,764 Inventory compensation expense 19,989 12,171 Non-cash Impairment charges 373 32,390 Gain/loss on disposal of fixed assets 4,843 (572) Pension reclassification 7,317 - Cash Paid Deferred taxes (12,578) 43,225 Increase/Decrease in other long term assets (30,532) (10,382) Changes in operating assets & Liabilities (169,752) 67,628 Net cash from operating activities 55,908 319,956 INVESTING ACTIVITIES Purchases of property & equipment (143,257) (134,981) Increase/Decrease in other fixed assets (5,712) 6,482 Other investing activities, net (3,000) - Net cash from Investing activities (151,969) (128,499) FINANCING ACTIVITIES Cash Received Net proceeds from Microsoft Commercial 57,161 84,675 Proceeds from credit facility 349,400 734,000 Proceeds from exercise of common stock 1,282 1,031 Tax benefit 1,865 560 Cash Paid Payments on credit facility (349,400) (811,000) Purchase of treasury stock (10,607) (5,254) Dividends paid to shareholders (16,026) (15,768) Payment of Junior Seller note (127,250) - Acquisition of preferred members’ interests (76,175) - Net cash flows from financing activities (169,750) (11,756) Net Inc/Dec in Cash & Cash equivalents (265,811) 179,701 Cash & cash equivalents at beginning year 340,171 160,470 Cash & cash equivalents at end year 74,360 340,171 Similarities Between US GAAP & International Financial Reporting Standards (IFRS) The similarities described herein are as accords with the findings of comparative analysis. They are as follows; Both the methods are recognized financial reporting standards in many countries. Both techniques report the income statement and financial position of a given company at the end of its financial period. Both the techniques apply the First-in, first out (FIFO) in determining the estimated values of inventories at disposal. Differences between Us Generally Accepted Accounting Principle (GAAP) & International Financial Reporting Standards (IFRS) The methods vary in recognition of intangible assets. The GAAP recognizes the assets at fair value unlike the IFRS where they are only recognized if the asset will have a future economic benefit and has measured reliability There’s a difference in the economies of transactions. The IFRS tends to represent and capture the economies of transactions better than the US GAAP .this is because it is used in more than 110 countries in which is considered to be more of a “principles based”. On the other hand, the GAAP technique is mostly used in United States therefore it is more of “rules based.” There is a difference in application of FIFO and LIFO methods on inventory. GAAP allows both the LIFO and FIFO accounting methods for accounting inventory whereas In IFRS, only the FIFO method for accounting inventory is allowed. (Shamrock, 2012) Defining the US GAAP The US GAAP is the Generally Accepted Accounting Principles adopted by the United States Securities and Exchange Commission (SEC). Principles of US GAAP Revenue Recognition Principle; it states that firms should record revenue whenever earned and not when received. Historical Costs; it requires firms to be accounting and reporting assets and liabilities acquisition costs rather than the fair market value Disadvantage of US GAAP The method is less accurate, less timely and has little cover of financial statement information. The information and timeliness as well as accuracy are relevant and conformal to the financial standards. (Shamrock, 2012) Earnings Per Share (EPS) 2015 EPS= (Net Income-Preferred Dividend)/Weighted Average Common Shares Outstanding = (36,596-12,776.82)/60,872 = 0.21 2014 (-47,268-18,779.52)/58,971 =1.12 Definition of IFRS These are International Financial Reporting Standards (IFRS) acceptable as accounting methodology in over 110 countries. This technique offers an advantage in that owing to the standardization and harmonization of reporting standards under method (IFRS), the investors do not necessarily incur extra costs for processing and adjusting financial statements in order to understand them. Disadvantage of IFRS The technique is expensive for firms to implement. This is due to the need for companies to change their entire internal system to become compatible with the new reporting standards. It also implies an additional training costs. The Most Appropriate Reporting Method The choice of the most appropriate reporting method is reached from a comparative analysis made hereinbefore. The IFRS is the most appropriate reporting method based on the accuracy, timeliness and comprehensive coverage realized from this analysis. This is because the information provided by those reporting in IFRS is of high quality and understandable to the investors. It, therefore, reduces investors’ risks of buying and owning shares which may not be performing well in the market. The method creates a conducive environment for investment by making the market more attractive. References Alexander, D., Britton, A., & Jorissen, A. (2005). International financial reporting and analysis. London: Thomson. Eisen, P. (2000). Accounting. Hauppauge, N.Y.: Barron's Educational Series. Epstein, B. & Jermakowicz, E. (2010). Wiley IFRS 2010. Hoboken, N.J.: Wiley. Epstein, M. & Lee, J. (2004). Advances in management accounting. Amsterdam: Elsevier/Jai. Greuning, H. (2006). International financial reporting standards. Washington, D.C.: World Bank. Jarnagin, B. (2006). 2007 U.S. master GAAP guide. Chicago: CCH Inc. Shamrock, S. (2012). IFRS and US GAAP. Hoboken, New Jersey: Wiley. Whittington, O. (2011). Wiley CPA Exam Review test bank CD[electronic resources]. John Wiley & Sons Inc. Read More