abj study guide 2009-10

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The University of Birmingham

College of Social Sciences

Birmingham Business School

Department of Accounting and Finance

Accounting Theory

(07 !7"#

Academic $ear 00%&'0

Study uide to Chapters ) to 7 of Ale*ander+ Britton and ,orissen (00%- !'.'%#

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Introduction

The textbook deals with the subject of accounting for changing prices not only in a

different order from that in the lectures on the accounting theory module but also in a

different manner. With respect to the latter difference, students struggling with

aspects of the material presented in the lectures may find the alternative approach in

the textbook helpful. This study guide reconciles the two approaches where they are

materially different as well as providing suggested solutions to some of the endof

chapter exercises in the textbook.

!hapter " #conomic $aluation !oncepts %&1'()

The first few pages of this chapter provide an overview of the issues which underlie

the subject of accounting for changing prices generally in a similar manner to the first

lecture on the module and hence the explanation and analysis of economic income per

se does not begin until page '*. +ote the last paragraph of the introduction %p. &).

The first sentence echoes the distinction between deductive and inductive approaches

to accounting theory made by Whittington %1(-&) which was introduced in the second

lecture in the first week of the module.

With respect to the section on income and capital %p. &) students should bear in mind

the /aish criti0ue explained in the lectures on economic income in week of the

module. Individuals have a personal preference for capital over income or vice versa

however, they are also willing to give up one type of wealth as long as they are

compensated by a sufficient amount of the other type. This tradeoff is mapped in

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individuals indifference curves. 2owever, it is not clear that such indifference curves

may be mapped for business entities as opposed to individuals.

3ctivity ". %pp. &"&4) merely serves to introduce valuation alternatives to historical

%not historic) cost. The alternatives are replacement cost %5! 6 introduced in week "

of the module), net realisable value %+5$ 6 week &) and net present or economic

value %#$ 6 week ). The final paragraph in the activity feedback %p. &4) 0uestions

the assumption of stability in the monetary measurement unit and this topic is dealt

with in week of the module under current purchasing power accounting %!//3) and

again in week 4 under real terms accounting %5T3). The subject of the changing

value of the monetary unit is raised again in 3ctivity "." %p. &&).

The array of value concepts introduced on pages &&&- is based on #dwards and 7ell

%1(&1) and the recommendation to accounting students in the first sentence in this

section cannot be supported enough. 2owever this source is now almost half a century

old and it may be useful for todays accounting students to know that the I387

%together with the 9387) is currently involved in a measurement project and has

produced its own array of possible valuation concepts. These are listed in Table 1

below.

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Table 1: I387 ;easurement 7asis !andidates

;easurement

7asis

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Time 9rame: /5#8#+T

". !urrent entry

price

The price that an entity would have to pay

currently in exchange for purchasing its asset.

#xample: The amount that an entity would have

to pay currently to purchase its head0uarters

building.

The current entry price of replacing an existing

asset with an identical one by purchase.

!urrent cost

;arket

price=value

5eplacement

cost

4. !urrent exit

price

The price that an entity would receive currently

in exchange for selling its asset.

#xample: the price that an entity would receive

currently from selling a parcel of land.

The price that an entity would receive currently

in exchange for selling its asset less any prices

it would have to pay for dispositionrelated

goods or services.

#xample: the amount that an entity would

receive from selling a parcel of land, net of an

appraisal fee and a real estate transfer tax.

9air value

;arket

price=value

+et realisable

value

&. !urrent

e0uilibrium

price

The single e0uilibrium price for which an asset

could be exchanged currently between

knowledgeable, willing parties in an arms

length transaction conducted in an efficient,

complete, and perfect market.

#xample: the price at which a security could be

purchased or sold currently, if the securitiesmarket were efficient, complete, and perfect.

9air value

'. $alue in use The value that an entity places on its own asset.

In its most sophisticated form, the amount of

the discounted net cash flow that the entity

expects to receive from using its asset,

including cash flow from the assets eventual

disposition.

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#xample: the forecast future cash flows from

using a printing press% including cash inflows

from printing revenues and the sale of the press

at the end of its use, as well as cash outflows for

supplies, repairs, and maintenance), discounted

at a rate e0ual to the entitys cost of capital andnetted.

Time 9rame: 9>T>5#

-. 9uture entry

price

The price that an entity would have to pay in

the future in exchange for purchasing its asset.

#xample: the amount that an entity forecasts it

would have to pay to purchase a replacement jet

airplane eight years in the future.

9uture cost

(. 9uture exit price The price that an entity would receive in the

future in exchange for selling its asset.

9uture selling

price

8ource: www.iasb.org.uk

$aluation is hence a very current issue and always subject to change %for example, the

measurement bases in the textbook taken from #dwards and 7ell %1(&1) do not

mention fair value as it was not a term in use at the time the book was written but

nevertheless the book remains a timeless classic).

The short paragraph on capital maintenance %p. &() is misleading. There are in fact

only three capital maintenance concepts. These are: money capital maintenance %as

illustrated in activity ".' and which is the concept used in pure historical cost

accounting 6 2!3)? financial capital maintenance %which preserves the spending

power of shareholders in real terms and is seen most clearly in current purchasing

power accounting 6 !//3)? and physical capital maintenance %which maintains the

&
http://www.iasb.org.uk/http://www.iasb.org.uk/

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current replacement cost of an entitys operating base such as noncurrent assets,

inventories and monetary working capital and is most clearly seen in current cost

accounting 6 !!3, introduced in week ' of the module).

The discussion of economic income on pages '*'4 clearly shows that, for accounting

purposes, 2ickss approach provides the more useful definitions. It is far from clear

how a business entity can have @psychic income.

3ctivity ".11 is a good illustration of the traditional way in which calculations of

economic income are dealt with in financial accounting textbooks. In comparison with

the lectures on economic income given in week of the module, the textbook

example has assumed static economic conditions in which neither the cash flow

%A1,***) nor the interest rate %1*B) change. 2ence, the ex ante measures of economic

income e0ual the ex post measures and it would appear that only one measure of

economic income can be calculated.

In Table ". on page '&, this calculation of economic income is presented in the usual

very complex manner. The figure in column ( for total economic income may be

derived much more simply by applying the constant interest rate to the present value

of the discounted future cash flows %i.e. A,"-& x *.1* C A"-.& rounded up to A"().

+ote the implicit capital maintenance assumption 6 the example maintains the capital

%present) value of prospective receipts in money terms which, because the interest rate

does not change, is e0uivalent to maintaining a constant annual income stream of

A"( %A"( D *.1* C A,"(* which, allowing for rounding error, is e0uivalent to the

capital value of prospective receipts A,"-&).

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3ctivities ".1 and ".1 introduce ex post measures of economic income but as only

the cash flows change while the interest rate remains constant, only versions 3 and 7

of Income +o. 1 can be calculated. The present value of the changed cash flows is:

Eear !ash flow

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Table : 8ummary of I958 measurement re0uirements Has at ctober **&J

3sset=Giability ;easurement 7asis

/roperty, plant and e0uipment 2! or 9$

Intangible assets 2! or 9$

#xploration and evaluation assets for mineral

resources 2! or 9$

3ssets held on finance leases Gower of 9$ at ac0uisition date and

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rate of interest on the remaining

balance

Initial cost of assets and liabilities ac0uired in a

business combination 9$ at ac0uisition date

Internally generated intangibles Kenerally not recognised. Where

recognised measured at 2! unless

ac0uired in a business combination

when they may be recognised at 9$

at the date of the combination

Koods and services received in a sharebased

payment transaction

9$ of goods and services or 9$ of

e0uity instruments granted

Transactions with employees 9$ of e0uity instruments granted

9inancial statements of companies that report

in the currency of a hyperinflationary economy

5estatement in terms of current

purchasing power

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Is there consistency and additivity in the table aboveL !learly not 6 the application of

I958 results in a mixed value system %which may be called modified recoverable

historical cost accounting 6 ;52!3). 3s a result, the individual items in a balance

sheet prepared using I958 are not genuinely additive. 2owever, although economists

are keen to point out that apples and oranges cannot be added together, the accountant

adopts a more pragmatic approach adding them together anyway and calling the total

a basket of fruit. @Kenuine additivity might only be found in the field of pure

mathematics.

#xercises ". and ".

8uggested solutions to these exercises are to be found on the student side of the

textbooks companion website 6 www.cengage.co.uk=abj"e.

#xercise "."

There is more than enough detail to answer this 0uestion on pages '*'" of the

textbook.

#xercise ".4

8ee the lecture notes on economic income and the /aish criti0ue %week).

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#xercise ".&

If ideals are by definition unattainable, then the 0uestion cannot be construed as a

criticism of economic income. 9urthermore, 2icks presents his definitions as no more

than @approximations to the central concept of income and not as ideals. 2owever,

although unattainable, it is always possible to aspire to an ideal. In this sense,

economic income may act as a yardstick against which alternative valuation bases

may be measured, the 0uestion being: to what extent is this particular valuation basis

a good surrogate for economic incomeL

#xercise ".'

!alculation of economic income

Eear !ash flow

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The above table re0uires some explanation because the 0uestion in the exercise

contains an opening year 1 cash outflow and the textbook does not include an

example of how to deal with this situation.

The negative figures in the table above arise due to the specific pattern of cash flows

given in the 0uestion. The initial investment is A1,*** to purchase the machine but the

cash inflows for the first two years only total %4** F "**) A(** and so the projects

substantial positive net present value is all earned in year .

In year *, there is a cash outlay of A1,*** and in exchange 8pock secures ownership

of a project with a positive net present value of A4-.1-. Kiven the assumptions

behind 0uestions such as this 6 specifically the complete and perfect market

assumptions 6 no bank will lend 8pock more than this lower amount. Therefore,

8pock needs to find the remaining cash to fund the purchase of the machine out of his

own pocket and this is the reason for the negative amount of e0uity reported in

column .

3t the end of year 1, the first cash inflow of A"** is received. 2owever, the project is

re0uired to provide 8pock with an economic income of A4.- as well as reinvesting

A""'.1- %a total of A4**). The only way in which this re0uirement can be met is to

borrow another A1** from the bank %column ') secured on the strength of the newly

reinvested amount. +ote that for the first year operating income is negative because

of the need to pay 8pock interest at 1*B on the additional cash he lent the entity.

1

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3t the end of year , the second cash inflow of A4** is received together with an

amount of A"".' %column ') being interest on the amount reinvested at the

beginning of year %a total of A4"".'). 8pock receives his economic income of

A4.- leaving A"(1.(* to be reinvested at the end of year . 3t this point e0uity

once again becomes negative because of the need to repay to 8pock the additional

cash he lent the entity in year * in order to purchase the machine in the first place.

3t the end of year , the final cash inflow is %&** F "**) A1,***. In order for the

project to be left with a net present value of A4-.1-, the entity pays back to 8pock

the A"1*.(* together with interest on the amount.

3ny student who gets anywhere near this solution 6 there may be one or two 6 has a

brain commensurate in ability with that of the eponymous alien. 3 greater number of

students may have chosen to ignore the opening cash outflow, in which case they

should obtain figures similar those detailed below:

!alculation of economic income ignoring opening cash outflow

Eear

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/roof of capital maintenance throughout if only A14.- is spent annually

Eear!ash9low

A

!losingcapital

A

peningcapital

A

pera

ingIncome

A

3mount

rein$ested

A

!umulative

amount reinvested

A

Income on

reinvestedamount

A

#cono

micincome

A

1 " 4 & ' -%"F')

1 "** 1-1.** 14-.1- 14.- "'.1- "'.1- * 14.-

4** (*(.1*N 1-1.** 1-.1* '1.(1 &1(.*( ".' 14.-

1*** * (*(.*( (*.(1 (*(.*( 14-.1- &1.(1 14.-N 5ounding error

3dding together columns and & in each year proves that opening capital of

A1,4-.1- has been maintained throughout if economic income of A14.- %column -

the total of columns " and ') is spent in each period. +ote that the figure for

economic income is exactly A1** greater than that in the previous solution. WhyL

!hapter 4 !urrent #ntry $alue %-1(")

What in the textbook is called @current entry value is in the module lectures referred

to as replacement cost and the subject is dealt with in week ".

The sentence opening the second paragraph of the introduction %p. -1) is confusing

but presumably the @remaining five value concepts referred to are those found in

Table ". of the previous chapter.

3ctivity 4.1 is an example of profit calculation using pure historical coat accounting

%2!3). 3ctivity 4. illustrates the shortcomings of pure 2!3 when the replacement

14

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cost of inventory is rising. 3ctivity 4. is best ignored. /ages --- introduce the

concept of holding gains with 3ctivity 4." explaining the realised and unrealised

distinction. 3ctivity 4.4 is a comparison between 2!3 income and #dwards and

7ells %1(&1) notion of business income.

3ctivity 4.&, which re0uires the preparation of an 5! balance sheet %the term @current

entry value having been conveniently discarded) is one which students need to

understand fully. The suggested solution below is produced in a more recognisable

balance sheet format.

7alance sheet as at 1

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The activity feedback on pages ---( is confusing not least because it begins with an

income statement which was not a re0uirement of the activity. In the textbook balance

sheet, all holding gains are treated as nondistributable consistent with the adoption of

the physical capital maintenance concept. The activity did not specify which capital

maintenance concept was to be applied. In the balance sheet above, the money capital

maintenance concept has been applied with holding gains being reported as part of

retained earnings. This is, in fact, all that can be done without the preparation of at

least some of the calculations re0uired to produce an income statement, which was not

asked for in the 0uestion.

The table below summarises the approach taken in the textbook to holding gains in a

more familiar manner.

3nalysis of realised %52K) and unrealised %>2K) holding gains

52Ks >2Ks Total

Gand and buildings 4,*** 4,***

/lant and machinery "** ,&** ",***

Inventory (,*** 11,'"* *,'"*

(,"** "*,"* "(,'"*

The textbook is inconsistent in its calculation of the 52K on plant and e0uipment

compared to that on inventory. The former is calculated using end of year replacement

cost while the latter is calculated using average replacement cost for the year. 3 more

consistent calculation is given below.

1'

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3nalysis of realised %52K) and unrealised %>2K) holding gains

52Ks >2Ks Total

Gand and buildings 4,*** 4,***

/lant and machinery ** ,-** ",***

7acklog depreciation ** %**) Inventory (,*** 11,'"* *,'"*

(,"** "*,"* "(,'"*

HWith respect to the income statement on pages ---( of the textbook, the figure at

the bottom should read A&&,"* and not A&&,**. 8ome students may rightly 0uery the

complete lack of any mention of loan interest in this 0uestion.J

/resumably, the inconsistency has been tolerated in the textbook to obviate the need

to complicate the example with the problem of dealing with backlog depreciation at

this early stage. 2owever, as the next 3ctivity 4.' addresses this issue directly in any

case, it is difficult to see what has been gained by the delay.

#xercise 4.1

It is reasonably safe to assume, pace recent extraordinary events in the economy such

as plummeting house prices and a falling 5/I, that prices in general are rising. In

these more normal circumstances, the use of 5!3 results in operating profits which

are lower than those reported under 2!3, assuming use of the physical capital

maintenance concept. 9or example, in !haplin Gtd, the 5! operating profit is A1&,&**

while in the 2! balance sheet the profit is A&,***. In the 5! income statement, costs

such as depreciation and the cost of sales are charged against current revenues at their

higher 5!s and not at lower 2! amounts.

1-

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2owever, what is bad news for the income statement is good news for the balance

sheet whose book value is boosted by the inclusion of assets at their increased 5!s.

9or example, the value of e0uity in the !haplin Gtd 2! balance sheet is A&,*** but

in the 5! balance sheet this figure has risen to A&&,"* increasing book value per

share from 11p to 1p.

+ote however that both of these effects, falling profits and increasing balance sheet

asset values, combine to inflict a double whammy on the evaluation of the entitys

financial performance using a measure such as, for instance, return on e0uity %5#).

In 2! terms, 5# is %&,***=&,***) *.114 but in 5! terms it is only

%1&,&**=&&"*) *.*&. The 2! results overstate 5# by %*.114 6 *.*&=*.*&)

*.-"4(, almost -4B. In the 2! accounts, profit is overstated by %&,***

1&,&**=1&,&**) *.4&& and assets undervalued by %&&,"*&,***=&,***) *.1'-4.

The effects of these errors are multiplicative, as the table below illustrates.

5! 5# verstated profit >nderstated assets 2! 5#

*.*& times 1.4&& times 1.1'-4 e0uals *.114

The use of the physical capital maintenance concept restricts the income statement to

reporting only operating profits because all holding gains are held in a sort of

@revaluation reserve in the balance sheet. 2owever, if holding gains are considered

distributable, then they are included in the income statement thereby boosting

reported profit. In this case, the accounts will have been prepared using the money

capital maintenance concept. 9or example, in !haplin Gtd, reported profit in the

1(

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income statement would increase to %1&,&** F "(,'"*) A&&,"*. 5# increases to

%&&,"*=&&,"*) *."(1, almost 4B. This is a clear illustration of how the amount

of reported profit depends upon the capital maintenance concept %rather than the

valuation basis) adopted in the financial statements. This was the lesson learned,

albeit rather painfully, in the lectures on economic income in week of the module.

In 3ctivity 4.-, the first advantage claimed for 5!3 is that it splits profits between

those earned from operating activities and those earned from holding assets in a time

of rising prices hence facilitating appraisal of earlier actions and providing more

useful data for decisionmaking. That these data are more useful may be demonstrated

by considering !haplin Gtds reported 2! profit of A&,*** which, in the 5! income

statement, is split between 5! operating profit of A1&,&** and realised holding gains

of A(,"**. !onsidering the 2! reported profit alone, users are informed that any

dividend up to and including this amount may be distributed and still leave in tact the

original money capital of A**,***. 2owever, the disaggregation of this amount

between 5! operating profit and realised holding gains provides additional

information to the effect that only a smaller dividend of up to and including A1&,&**

may be distributed should the entity wish to maintain in tact its physical capital.

That this disaggregation permits better appraisal of earlier actions may be illustrated

by comparing two companies, 3 and 7, which earn identical 2! profits in the

following different ways:

*

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3 Am 7 Am

5! operating profits ( 1

5! holding gains 1 (

Total 1* 1*

It would appear that 3 is very good at selling but 7 is better at investing.

#xercise 4.

3 suggested solution to this exercise is to be found on the student side of the


#xercise 4.

%a) 52Ks are those which relate to assets valued at 5! and which have been used

up in the earning of revenues and hence are matched to the latter in the income

statement. In 5!3, these are the realised holding gains relating to depreciable

noncurrent assets and inventories. The gains are calculated with reference to

the e0uivalent 2! charges for depreciation and cost of sales.

%b) The answer to this 0uestion depends upon the capital maintenance concept

adopted in the financial statements. If physical capital maintenance is

preferred, then none of the holding gains, realised or unrealised, will appear in

the income statement. If the money capital maintenance concept is adopted

instead, then all holding gains are reported in the income statement to give a

measure of @business income. If the financial capital maintenance concept is

adopted, the answer becomes more complex. 9or example, the !haplin Gtd

1

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0uestion gives data on movements in general inflation which index has risen

from 1** to 1* over the year. In order to maintain the start of year spending

power of the shareholders, e0uity at the end of the year must be %**,*** x

1*=1**) A"*,***. Kiven this new capital base, retained earnings must be

%&&,"* 6 "*,***) A&,"*. 2ence, financial capital maintenance reports 5!

holding gains as part of profit in the income statement.

%c) 3 0uick glance at the balance sheets of !haplin Gtd provides an easy answer

to this 0uestion. 2owever the holding gains are reported, whether in the

balance sheet or the income statement, none are immediately distributable

because the company has no cash and cash e0uivalents. This is a far from

trivial point. The payment of a dividend is as much a financing decision as it is

a decision about how much capital should be maintained. /rofit and cash are

very different concepts. 2owever, if the financing constraint were lifted from

!haplin Gtd by assuming that the company has unrestricted access to bank

overdraft or loan facilities, then the distributability issue is reduced to the

0uestion simply of how much profit has been made and reported in the income

statement and this has been discussed in part %b) above. 7ut if the 0uestion is

interpreted within the narrower confines of #nglish company law, which is

based upon the 2!3 model, then distributable profit is limited to the 2!

amount of A&,*** %i.e. including 52Ks) but >2Ks are confined to a

@revaluation reserve in the balance sheet which, legally, is not available for

dividend purposes.

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#xercise 4."

This exercise is in effect an empirical 0uestion and it is a moot point as to whether

any data exist which may provide empirical evidence on which to base an answer

to this 0uestion. It would appear that three sets of data are re0uired:

1. a longrun series of reported 2! profit figures?

. a longrun series of reported 5! profit figures?

. an objective indicator of longrun economic performance.

The data for 1 are available. The data for might be constructed %e.g. market

capitalisation figures for listed companies). The data for are not available.

#xercise 4.4

3gain, this exercise may be interpreted as an empirical 0uestion but the fact that it has

been phrased in 3unt 8ally terms invites some sort of response. In support of the

statement, it is possible to list the first three disadvantages cited in activity 4.- on

page (1. In terms of advantages, only +o. on page (* refers explicitly to the balance

sheet.

It may be argued that the main advantage of a 5! balance sheet over a 2! balance

sheet is that the former captures an important element of the changing economic

environment which the latter ignores 6 the inescapable fact of changing asset prices.

In other respects, e.g. the use of arbitrary depreciation allocation methods and the

failure to recognise certain assets such as internally generated goodwill, the 5!

balance sheet shares the failings of the 2! balance sheet. Kiven this modest

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assessment of its superiority, it is perhaps less surprising that actual financial

statements eschew use of 5!s and continue to be produced using ;52!3 principles.

#xercise 4.&

%a) 2istorical cost accounts for the years *O1 and *O

Income 8tatements year ending 1

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%b) I. ;. !onfused 5eplacement cost accounts for the years *O1 and *O

Income statement year ending 1 nrealised holding gain on inventory H%& x 1,**) 6 &,"**J %5! 6 2! closing

inventory) -**Total earnings 1,***


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7alance sheet as at 1 nrealised holding gains on inventory

**

-**

**

-**

2istorical cost net assets 1*,** 1*,&4*5eplacement cost net assets 11,*** 11,-4*

The comparison between operating incomes highlights the fact that 2! overstates

income during periods of price increase in comparison with 5!, which reports much

lower profits because revenues at current selling prices are matched against current

%higher) costs rather than against historical %lower) costs. The inclusion of tax in the

0uestion also highlights the fact that in taxing 2! profits what in fact maybe being

taxed are holding gains and not operating profits. 2owever, the balance sheet

comparison reveals that although 5! is bad news for the income statement it is good

news for the balance sheet because asset values have increased materially because in

the 5! balance sheet they are stated at their increased current values.

+ote that the realised and unrealised holding gains are the same for each year which is

intuitively correct given that the inventory level in each period was & units with

&

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units sold in each period and the absolute price increase in *O1 was A** per unit

%from A1,*** to A1,** with an average of A1,1**) and that this increase was the same

in absolute terms as that in *O %from A1,** to A1,"** with an average of A1,**).

+otice that holding gains in *O are calculated in relation to the previous years

replacement cost accounts and not in relation to the *O historical cost accounts on

the grounds that only replacement cost accounts are prepared for reporting purposes.

5econciliation between 5! operating income and 2! income *O1 *OA A

5! operating income %14*)

5ealised holding gains on inventory ** **

>nrealised holding gains on inventory accrued in *O1 but realised in*O "**

2! income ** "4*

The reconciliation between 5! and 2! income highlights the fact that reported 2!

income is a mixture of different types of gains which have occurred in different

accounting periods. The *O 2! profit of A"4* is in fact made up of a *O

operating loss of A14*, a *O realised holding gain of A** and an unrealised 5!

holding gain of A"** realised in the *O 2! accounts but which actually arose in

*O1R In the 5! accounts, gains are reported in the period in which they arise.

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#xercise 4.'

%a) 2istorical cost accounts for the year *O1

Income statement year ending 1

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7alance sheet as at 1 nrealised holding gain on inventory %",*** 6 ,&**) %5! 6 2!closing inventory) "**

>nrealised holding gain on noncurrent assets %1,&** 6 -,1**) %5! 6 2!net book value) ",4** 1,"4*

Total e0uity 14,'(*

%c) ;allard !o +ature of holding gains and their ability to be distributed

>nderlying the notion of holding gains is the perception that managers may increase

the wealth of the entity in one of two ways: by buying low and selling high or by

buying low and then sitting on the asset until the price rises.

2olding gains represent gains from the latter strategy and arise when the prices of

factors of production increase %and holding losses arise when they decrease) in

comparison with their original %historical) ac0uisition costs. They are distinguished

from replacement cost operating gains and losses which arise when factors of

production are utilised and traded in transactions with third parties and are matched

against current revenues at their current replacement costs.

(

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2olding gains are classified as realised to the extent that they relate to factors of

production that have been used to generate revenues such as goods sold or

depreciation of noncurrent assets and hence are gains on factors of production which

have passed through the income statement. >nrealised holding gains are price

increases in the stocks of unused inventory and noncurrent assets which remain in the

balance sheet because they have not yet been used to generate revenues.

The extent to which holding gains may be regarded as distributable depends upon the

capital maintenance concept adopted by the entity. In the example above, none of the

holding gains are regarded as distributable because none are accounted for in the

income statement because the entity has adopted a physical capital maintenance

concept. n this basis, nothing can be distributed to the owners as dividends until the

physical capital of the entity has been maintained which re0uires, in this case, the

introduction of another A&,&&* of financial capital. In other words, the entity is selling

its goods at prices which do not recover the current replacement costs of the assets

used to generate the revenues in the first place. In the longer term, this is not a

sustainable policy.

If the company decided to distribute A-(* as a dividend, i.e. its historical cost

accounting profit, then de facto in this case the entity would be regarding its realised

holding gains as distributable because the 2! income is made up of the 5! operating

loss and the realised holding gains %A',44* A&,&&* C A-(*). If the company decided

that all of its holding gains realised and unrealised were distributable, then it would be

maintaining financial capital in money %or nominal) terms %i.e. the original A1*,***

*

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raised on the share issue). What is distributable income, therefore, depends upon the

capital maintenance concept adopted.

%d) ;allard !o !omparison between 5! and 2! profits using different stock flow

assumptions

H+ote: this re0uirement has been added in order to provide some justification %missing

in the textbook) for all of the transaction details relating to the purchase and sale of

widgets provided in the 0uestion. If use of 9I9 is assumed 6 and why should it not

beL 6 such details are conspicuously redundant. 2owever, it is sometimes claimed that

use of the GI9 inventory flow assumption better matches costs against revenue when

prices are rising. This claim, inter alia, is examined here in the calculations below. 9or

some indication, albeit in very general terms, of the difference between periodic and

perpetual inventory systems, see p. &" of the textbook.J

/eriodic inventory system 6 calculations of closing inventory and cost of sales

2istorical cost bases !losinginventory A

!ost of sales A

9I9 %"* x (*) ,&** 1,(4*

GI9 %"* x -*) ,** ,4*W3! H%4,44*="*) x "*J ,*' ,"

>nder the replacement cost basis, the alternative to using the closing replacement cost

of A1** per unit is to calculate the cost of sales and the closing inventory on the basis

of average replacement cost computed based on the duration in months of each of the

separate prices as follows:

H%-* x =1) F %'4 x =1) F %-4 x =1) F %(* x =1) F %1** x 1=1)J C -.'4

1

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!losing inventory is therefore %"* x -.'4) A,4* and the cost of sales is %(* x

-.'4) A,&&. ne of the reasons that these values are fractionally greater than those

under the 2! W3! method is because the 5! method illustrated above includes the

latest price increase which happened on 1

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3 perpetual inventory system makes the more accurate calculations for GI9 and

W3! performed above possible. The 9I9 calculation is unaffected.

#xercise 4.-

%a) %i) 2! Income statements for the period ending *

8eptember

G A 2A

5evenues %11* F 1* F 1*) &*

!ost of sales

/urchases %1** F 11* F 1* F 1*) "&* 1**!losing inventory 1* 1**

*

/rofit *

2! 7alance sheets as at * 8eptember

Inventory 1* 1**

#0uity

!apital 1** 1**

5etained earnings * 1* 1**

%a) %ii) 5! Income statements for the period ending *

8eptember

G A 2A

5evenues &*

!ost of sales % x 1*) (*

perating loss %*)

5ealised holding gain &* >nrealised holding gain *

7usiness income * *

5! balance sheets as at * 8eptember

Inventory 1* 1*

#0uity

!apital 1** 1**

5etained earnings * *

1* 1*

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%b) 2 is a shrewd investor. G is poor at selling. There are no data on 2s selling

ability. !an 2 realise the A* business income by selling his widget for A1*L G, for

example, has made losses on his buying and selling activities in replacement cost

terms. It is this uncertainty that may justify the 2! accounts in not reporting any

profit for 2 because after all, 2 has done nothing. n the other hand, G is effectively

in the same position in that his widget cost A1* and it needs to be sold for at least

this amount to avoid making a loss %as G has done on previous sales in comparison

with replacement costs). The 2! accounts report a profit for G which has been re

invested in the increased replacement cost of a widget. 2owever, Gs pricing policy,

according to the 5! accounts, is not keeping up with the increased replacement costs

of widgets as indicated by the 5! operating loss. 5egardless of the ultimate

judgement as between G and 2, the 5! accounts provide a lot more to talk about than

the 2! accounts.

!hapter &: !urrent #xit $alue and ;ixed $alues %(41*()

@!urrent exit value is the textbooks terminology for what in the week & module

lectures is called cash flow reporting %!95). >nder the heading of @mixed values the

textbook considers deprival value accounting %

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and an accompanying balance sheet. This approach fails to do sufficient justice to the

important change in the valuation basis as well as obscuring the principle underlying

this change, i.e. the emphasis on the realisability of the entitys assets. The examples

in the chapter have been reworked below in a more familiar !95 format on the basis

that the inventory is a readily realisable asset and that the noncurrent is not. This re

working reveals fatal flaws in the textbook solutions to these examples.

Textbook example %pp. ('(-)

7alance sheets as at the end of Eear 1 A Eear A

5ealised assets

!ash and cash e0uivalents 1,*** ",***

5eadily realisable assets

Inventory ,4** ,-**

+ot readily realisable assets

+oncurrent asset &,*** ",***

*,4** 1,-**

#0uity

8hare capital 14,*** 14,***

5etained earnings %balancing figure) 4,4** 1&,-**

*,4** 1,-**

8tatements of cash flow for the years ending Eear 1 A Eear A

!ash flow from operations ',*** 1,***

!ash flow on investing activities

+oncurrent asset %1*,***) !ash flow on financing activities

Issue of share capital 14,***

Increase in cash and cash e0uivalents 1,*** 1,***

pening cash and cash e0uivalents 1,***

!losing cash and cash e0uivalents 1,*** ",***

4

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8tatements of realisable income for the years ending Eear 1 A Eear A

!ash inflow from operations ',*** 1,***

Increase in readily realisable assets

Inventory ,4** 1,**

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In the more correct version above, the statement of realisable income reports in year 1

an increase in the value of inventory of A,4**, being the difference between the year

end closing inventory +5$ of A,4** and the opening inventory +5$ of Sero

%because no inventory was then held). The year statement of realisable income

reports an increase in the +5$ of inventory of A1,** being the difference between

the closing inventory +5$ of A,-** and the opening inventory +5$ of A,4**. +o

2!s are involved in these calculations.

3ctivity &. %pp. (-(()

7onds /lc 7alance sheets as at the end of Eear ' A Eear - A

5ealised assets

!ash and cash e0uivalents 14,4** ,(**

5eadily realisable assets

Inventory &,*** ,**


+oncurrent asset ',*** 4,***

-,4** 1,**

#0uity

8hare capital 4,*** 4,***

5etained earnings %balancing figure) ,4** &,**

-,4** 1,**

7onds /lc 8tatements of cash flow for the years ending Eear ' A Eear - A

!ash flow from operations %4**) ',"**

!ash flow on investing activities

+oncurrent asset %(,***)

!ash flow on financing activities

Issue of share capital 4,***

Increase in cash and cash e0uivalents 14,4** ',"**

pening cash and cash e0uivalents 14,4**

!losing cash and cash e0uivalents 14,4** ,(**

'

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7onds /lc 8tatements of realisable income for the years

ending Eear 1 A Eear A

!ash inflow from operations %4**) ',"**

Increase in readily realisable assets

Inventory &,*** %,'**)

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Kiven this background of rising prices %even rent and expenses have gone up) it seems

to say the least counterintuitive for the year - financial statements to be reporting a

holding loss.

/art of the reason for this is the fact that there has been a volume change in the

number of units of closing inventory between the beginning and end of year - which

the calculation in note of 3ctivity &. fatefully ignores. 3 further problem is that the

gains are calculated in the textbook with reference to two different costs, A14 in year '

and A1' in year -. 3 reconciliation between the holding gains reported in 3ctivity &.

is presented below.

>nits A

Eear - opening inventory holding gains ** ,***

$olume decrease at A14 per unit %1**) %1,4**)

1** 1,4**

Increase in year - +5$ per unit %*) **

Increase in year - 2! per unit %1'14) %**)

Eear - closing inventory holding gains 1** 1,&**

9rom the above analysis it is clear that only A1** of the reported holding loss is

attributable to pure price changes and that this A1** is actually a gain. The remainder

of the socalled @holding loss is in fact attributable to the volume change in

inventory. 7y whatever stretch of the imagination, this is not a @holding loss in the

normal sense of the term.

The first paragraph on page 1*1 states that financial reporting in practice %the example

of I958 is used explicitly) does not contain a re0uirement for any consistency of

approach as between the valuation of one asset and another. This assertion may be

(

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challenged. The valuation principle which underlies I958 may be characterised as

modified recoverable historical cost accounting %;52!3). The 52!3 principle

which underlies I958 is reproduced below.

5ecoverable 2istorical !ost 3ccounting %52!3)

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3lso, note that in the section of fair values %pp. 1*"1*') the textbook is not upto

date as it does not reconcile deprival value bases to the fair value basis in the manner

illustrated by van ijl and Whittington %**&).

#xercises &.1 and &.

The chapter contains sufficient discussion of principles and illustrations of both

methods. +ote that the above notes do not agree with the textbooks principles of

!95 as outlined in 3ctivity &.1.

#xercise &.



#xercise &."

The significant disadvantages of 5!3 are listed in 3ctivity 4.-. The main one

removed by the use of

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#xercise &.4

%a) 8ee 9igure &.1.

%b) #$ +5$ 5!

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#xercise &.&

8teward /lc Eear 1 3ccounts

8tatement of realised cash flow for the period ending Eear 1 A

perating cash flow H%-** x A14) 6 %1,*** x A1*) 6 A1,***)J H8ales minus purchases

less expensesJ

1,***

Investing cash flow H/urchase of noncurrent asset machineJ %1*,***)

9inancing cash flow HIssue of share capitalJ *,***

+et realised cash flow 1,***

8tatement of financial position as at the end of Eear 1 A

5ealised assets!ash and cash e0uivalents 1,***

5eadily realisable assetsInventory %** x A14) ,***


+oncurrent asset %1*,*** 6 1,***) (,***,***

#0uity8hare capital *,***

5etained realisable earnings %balancing figure) ,***Total e0uity ,***

8tatement of realisable earnings for the period ending year 1 A

!ash flow from operations 1,***5eadilyrealisable assets inventory %,*** 6 *) ,***

+ot readilyrealisable asset 6 noncurrent asset %(,*** 6 1*,***) %1,***)

5ealisable earnings for the period ,***

8tatement of changes in financial position for the period ending Eear 1 A

5ealised cash inflow

Increase %decrease) in realised assetsperating cash flow 1,***5eadilyrealisable cash inflow

Inventory %,*** 6 *) ,***+ot readilyrealisable cash inflow

+oncurrent asset %1*,*** 6 (,***) %1,***),***

Gongterm cash outflow5etained realisable earnings of the period ,***

"

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8teward plc Eear accounts

8tatement of realised cash flow for the period ending Eear A

!ash inflowsperating cash flow H%4** x A*) 6 %-** x A1) 6 A1,**J H8ales minus purchases

less expensesJ%1,&**)

+et realised cash flow %1,&**)

8tatement of financial position as at the end of Eear A

5ealised assets

!ash and cash e0uivalents %1,*** 6 1,&**) 1(,"**5eadilyrealisable assets

Inventory %4** x A*) 1*,***+ot readilyrealisable assets

+oncurrent asset %(,*** 6 1,***) -,***',"**

#0uity

8hare capital *,***5etained realisable earnings %,*** F ","**) ',"**

Total e0uity ',"**

8tatement of realisable earnings for the period ending Eear A

perating cash flow %1,&**)5eadilyrealisable assets inventory %1*,*** 6 ,***) ',***

+ot readilyrealisable assets 6 noncurrent asset %-,*** 6 (,***) %1,***)5ealisable earnings for the period ","**

5ealisable earnings brought forward ,***5ealisable earnings carried forward ',"**

8tatement of changes in financial position for the period ending Eear A

5ealised cash inflow

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#xercise &.'

%a) 2! income statements for the period

ending * 8eptember 8tan liver

5evenues %1* F 1"* F 14*) "* /urchases %1** F 114 F 14 F 1*) "'* 1**

!losing inventory %1*

)

%1**)

!ost of sales "*

/rofit -*


Inventory 1* 1**

!ash 4*

1-* 1**#0uity

!apital 1** 1**

5etained earnings -*

1-* 1**

%a) 5! income statements for the period

ending * 8eptember 8tan liver

5evenues %1* F 1"* F 14*) "*

!ost of sales % x 1*) (*

perating profit *

5ealised holding gains %(*"*) 4*

>nrealised holding gains *

7usiness income -* *


Inventory 1* 1*

!ash 4* 1-* 1*

#0uity

!apital 1** 1**

5etained earnings -* *

1-* 1**

"4

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%c) !95 balance sheets as at *

8eptember 8tan liver

!ash 4*

Inventory 1&* 1&*

1* 1&*#0uity

8hare capital 1** 1**

5etained earnings 11* &*

1* 1&*

8tatements of cash flow for the period

ending * 8eptember

perating cash flow 4*

Investing cash flows H/urchase of openinginventory

%1**)

%1**)

9inancing cash flows 1** 1**

Increase in cash and cash e0uivalents 4*

8tatements of realisable income for the

period ending * 8eptember

perating cash flows 4*

Increase in inventory value &* &*

5ealisable income 11* &*

!hapter ': !urrent /urchasing /ower 3ccounting %1111()

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as to begin with share capital and end with debtorsR 3 better solution is presented

below.

!haplin Gtd !// balance sheet as at end of year

A A

+oncurrent assets

Gand and buildings 11*,*** x 1*=1** 1,***

/lant and e0uipment &,*** x 1*=1** ",**

1'4,**

!urrent assets

Inventory (*,*** x 1*=11* (-,1-

Trade receivables (*,*** 1--,1-

&,-

#0uity8hare capital **,*** x 1*=1** "*,***

5etained earnings 7alancing figure ,-

&,-

Gongterm loan 4*,***

Trade payables 4*,*** 1**,***

&,-

Income statement for the year ended 1

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/roof of monetary gain

pening net monetary liabilities in

end of year monetary units %4* 6 "*) x 1*=1** 1

!hange in net monetary liabilities

1!losing net monetary liabilities 4* F 4* (* 1*

;onetary gain

3ctivity '.

;ushroom Gtd !//3 7alance sheet as at 1

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/roof of monetary loss

pening net monetary assets H+one in opening

balance sheet)

Increase in net monetary assets in end

of year monetary units 1,*** x 1*=11* 1,*(11,*(1

!losing net monetary assets !ash only 1,***

+et monetary loss %(1)

!haplin Gtd 6 5eal terms accounting %5T3 !// superimposed on 5!)

Income statement for the year ending 1

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Total e0uity &&,"*

3lternative calculation of real holding gains using indices A A

5eal realised holding gain on inventory 5! 6 %&*,*** x 1*=1**) '-,***!// 6 %&*,*** x 1*=1**) ',*** &,***

5eal realised holding loss on plant 5! 6 %",*** x 11*=1**) ","**

!// 6 %",*** x 1*=1**) ",-** %"**)

5eal unrealised holding gain on inventory 5! 6 %(*,*** x 1*=114) 1*1,'"*!// 6 %(*,*** x 1*=11*) (-,1- ,44-

5eal unrealised holding loss on plant 5! 6 %&,*** x 11*=1**) (,&**!// 6 %&,*** x 1*=1**) ",** %,&**)

5eal unrealised holding gain on land 5! 6 %valuation) 14,***!// 6 %11*,*** x 1*=1**) 1,*** ,***

Total real holding gains -,44-

The calculations above differ from those presented in the suggested solution on pp

1( 6 1* of the textbook. The only numbers that are in complete agreement as

between the two analyses of real holding gains are the figures for the gain on net

monetary liabilities of A,***, the real unrealised holding gain on land and buildings

of A,*** and %given the rounding error of A1) the real unrealised holding gain on

closing inventory of A44- %textbook A44').

ne of the reasons for the differences between the two suggested solutions is because

the textbook has decided to determine 5! operating income on the basis of average

replacement cost for both the inventory and the plant and e0uipment. This results in

significant differences in the reported holding gains for these assets.

4*

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Income statement for the year ending 1

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The cost of sales adjustment in the core text %p. 11-) with reference to the real realised

holding gain on opening inventory is incorrect computationally. The textbooks

intention would seem to be to uplift the opening inventory figure to average

replacement cost: in order to do so, however, the index re0uired is 114=1** and not

114=11* as printed. nce uplifted, the real realised holding gain %at average) is

determined by deducting the opening inventory adjusted to average !//. If this is

computed correctly, the figure at this point would be A,***. The final fraction uplifts

this real realised holding gain on inventory from average into closing pounds and

results in the figure of A,' shown.

!haplin Gtd 6 8uggested 8olution to !urrent !ost 3ccounts


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rdinary share capital **,***5etained earnings 1",41

!urrent cost reserve %note 4) 41,-'Total e0uity &&,"*

+ote A

1 !ost of sales adjustment

!ost of sales at average replacement cost %&*,*** x 114=1**) &(,***

!ost of sales on an historical cost basis &*,***!ost of sales adjustment %!83) (,***

nrealised holding gain on land and buildings %14,*** 6 11*,***) 4,***

>nrealised holding gain on plant and e0uipment %(,&** 6 &,***) ,&**

>nrealised holding gain on inventory %1*1,'"* 6 (*,***) 11,'"*!urrent cost reserve 41,-'

4

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#xercise '.1



#xercise '.

Keneral indices are certainly more useful than specific indices when it comes to

adjusting for price changes in the 4 and 1* year summaries of financial performance

disclosed by listed companies in their published accounts. 5emember that the use of a

general index is not an asset valuation techni0ue.

#xercise '.

The figure of A"*,*** represents the e0uivalent in endof year monetary units of the

same amount of purchasing power commanded by A**,*** start of year monetary

units.

#xercise '."

To no extent whatsoever. !//3 is not a valuation system. +ote however that !//

balance sheet figures are re0uired to be adjusted downwards when +5$ figures are

lower %see /883/ ().

4"

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#xercise '.4

The adjustments are just as hard to apply %e.g. the proof of the monetary gain or loss

arising for the year) as they are to explain and interpret. This is because !//3 adopts

a different unit of measurement to the more commonly used monetary unit, i.e. the

purchasing power unit. This change of measuring unit is implicit rather than explicit

but nevertheless underlies the use of the general price indices to adjust the 2!

amounts to their e0uivalent !// amounts in both the income statement and the

balance sheet.

#xercise '.&

/age plc 6 !urrent /urchasing /ower 3ccounts


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!alculation of net assets in !// terms as at 1

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possible, of the current cost reserve. nce this has been done, the gearing adjustment

may be calculated and the final accounts prepared.

+ote A***s

1

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7alance sheet as at * Vune *O %opening in abbreviated form) *O *O

A***s A***s

Gand %1,4** x "1=1) 1,&('./lant and machinery %(&* x &"(=&1*) 1,*1."

,'1-.&Inventory %&4* x "1=") &&.

ther net current assets %-* F 1* 6 '(*) 4*.* '1.

Total assets less current liabilities ,"*.(Goan '**.*

,'*.(

#0uityrdinary share capital 1,*"*.*

5etained earnings 1,"*.*

!urrent cost reserve %see below) '*.(Total e0uity ,'*.(

!alculation of current cost reserve as at * Vune *O A***s

Gand %1,&('. 6 1,4**.*) 1('.

/lant and machinery %1,*1." 6 (&*.*) &1."Inventory %&&. 6 &4*.*) 1.

!urrent cost reserve as at * Vune *O '*.(

7alance sheet as at * Vune *O" %closing in abbreviated form) *O" *O"

A***s A***s

Gand %1,4** x -(=1) ,*4.

/lant and machinery %'* x &(1=&1*) -14.&

,-4*.-Inventory %(** x "&="4&) (11.-

ther net current assets %1,** F &* 6 1,*&*) -&*.* 1,''1.-Total assets less current liabilities ",&.&

Goan '**.*,(.&

#0uityrdinary share capital 1,*"*.*

5etained earnings %1,"*.* F '1.') %check figure) ,141.'

!urrent cost reserve %see below) '*.(Total e0uity ,(.&

!alculation of current cost reserve as at * Vune *O" %before gearing adjustment) A***s

Gand %,*4. 6 1,4**.*) 44.

/lant and machinery %-14.& 6 '*.*) (4.&

Inventory %(11.- 6 (**.*) 11.-!urrent cost operating adjustments %*.1 F 4&.- F 11.") --.

!urrent cost reserve as at * Vune *O" %before gearing adjustment) '*.(

4(

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!alculation of gearing adjustment A***s A***s

pening and closing e0uity at current cost ,(.& ,'*.(

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!urrent cost balance sheets as at * Vune *O" *O" *O *O

A***s A***s A***s A***s

+oncurrent assetsGand ,*4. 1,&('.

/lant and machinery at gross current cost 1,4(. 1,'&.'3ccumulated depreciation on plant and machinery 4".' -14.& 44. 1,*1."

,-4*.- ,'1-.&

!urrent assets

Inventory (11.- &&.

Trade receivables 1,**.* -*.*!ash and cash e0uivalents &*.* 1*.*

,-1.- 1,4*.

!urrent liabilities 1,*&*.* '(*.*+et current assets 1''1.- '1.Total assets less current liabilities ",&.& ,"*.(

+oncurrent liabilities '**.* '**.*,(.& ,'*.(

#0uityrdinary share capital 1,*"*.* 1,*"*.*

5etained earnings ,1&1.' 1,"*.*!urrent cost reserve %'*.( 6 1*.*) '*.( '*.(

Total e0uity ,(.& ,'*.(

3nalysis of current cost reserve 6 method of updating brought forward balance A***s A***s

7alance brought forward 1 Vuly *O '*.(

#liminate gain on opening inventory sold during the year %1.)5eplace with gain on closing inventory 11.-

>pdate gain on land %gross !! value) %,*4. 6 1,&('.) -.*>pdate gain on plant and machinery %gross !! value) %1,4(. 6 1,'&.') -.&

Gess current year depreciation on plant and machinery %at average current cost) %*.1)7acklog depreciation 6 current year H"* x %&(1 6 &&1)=&1*J %11.-)

7acklog depreciation 6 previous year H"* x %&(1 6 &"()=&1*J %1&.4)!urrent cost operating adjustments *O" --.

Kearing adjustment *O" %1*.*) "4*.*

!urrent cost reserve as at * Vune *O" '*.(

The adjustment of the brought forward current cost reserve to the carried forward

current cost reserve using the above method will always involve the calculation of

backlog depreciation. 2owever, its correct computation will always be challenging,

&1

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especially where the depreciation adjustment has been based on average current cost

as the calculations below illustrate.

3nalysis of movements on accumulated depreciation at current cost A***s A***s

7rought forward depreciation at current *O cost %1,'&.' x *B) 44.

3dd previous years backlog depreciation %see above) 1&.4

>pdated brought forward depreciation at current *O" cost %1,4(. x *B) '1.-!urrent years historical cost depreciation charge %1,** x *B) "*.*

!urrent years depreciation adjustment at average current cost *.1!urrent years backlog depreciation %see above) 11.- '1.(

!arried forward depreciation at current cost %1,4(. x "*B) 4".'

The difference between the *O and *O" depreciation figures is a rounding error of

*.1.

#xercise '.-

Kiven the indices in the 0uestion, the report should at least mention the following

possible methods of accounting for pricelevel changes: !//3, 5!3, 5T3 and !!3

%as far as the

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depreciation in the income statement of A*,***. 2owever, the current replacement

cost of this machine new, according to the machine price index, would be "*B higher

at A1"*,***. Therefore, in order to ensure that the business has sufficient resources to

replace the old asset with a new one, the annual depreciation charge should be at least

A-,*** 6 2! profit would be lower and the dividend correspondingly reduced,

depending on the payout ratio %which the data seem to indicate is well in excess of

4*B).

2owever, the above analysis assumes that the company wishes to maintain intact its

physical capital, defined as the current replacement cost of its machinery and raw

materials. 3n alternative to this is financial capital maintenance which concept

consists of maintaining the value of shareholders e0uity defined in terms of spending

power as measured by the 5/I. 9or example, assume that years ago e0uity was

A1**,***. Kiven that the major portion of the annual profit is paid out as a dividend, it

may be assumed that e0uity is currently at a similar monetary amount. 2owever,

although similar in monetary terms, the two amounts are far from comparable in real

terms because the 5/I has risen by 1B over the intervening period. The number of

todays monetary unit e0uivalent to the spending power embodied in A1**,***

years previously is hence A11,***. 8etting aside an extra A1,*** reduces reported

2! profit and the dividend.

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abj study guide 2009-10

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