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BC1: Accounting Business Case

Online lecture and slides by: Joanne Bonderud, CGA

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BC1: Accounting Business Case

Part 1: Introduction

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Using the online lectures

· MP3 · MOV · Download and save to your computer

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Lecture overview

· · · · · · · · · · Part 1: Introduction Part 2: Getting started Part 3: Batches 2, 3, and 4 Part 4: Supporting schedules Part 5: Year-end financial statements Part 6: Product decision Part 7: Mall store Part 8: Improvements to the MIS Part 9: Pension proposal Part 10: IFRS

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Important information

· If the lecturer inadvertently contradicts the Accounting Business Case instructions, the instructions are deemed to be correct. · The audio is an integral part of this handout. · Email feedback to [email protected]

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Important information

· Lectures focus on course content. · Contact local CGA office for policy or procedure related questions. · Review course updates

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About BC1

· Purpose · Time expectations · NO final exam

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Course prerequisites

· Financial Accounting: Liabilities and Equities (FA3) · Managing Information Systems (MS1) · Corporate Finance Fundamentals (FN1) · Management Accounting Fundamentals (MA1)

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Computer requirements

· Microsoft Windows

­ CT1 Tutorial

· Microsoft Excel

­ CT2 Tutorial

· Sage Accpac ERP

­ CT3 Tutorial

· Microsoft Word · Internet access

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Sage Accpac ERP 5.6A

· Use only the CGA version · Do NOT use the commercial version · CT3 Tutorial · Technical support

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Learning objectives

· The Accounting Business Case has several learning objectives.

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BC1 website

· Announcements/course updates · Course material · Course director/peer-to-peer support

­ Please read the user guidelines

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Course material

· Course schedule · Course modules

­ Intro and sections 1 to 5 ­ Assignments ­ Data files ­ Network diagram

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Other resources

· Model Financial Statements · CT1 (Windows) · CT2 (Excel) · Online lectures

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BC1 structure

· Your role and responsibilities. · BC1 is divided into 5 sections.

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Preliminary information

· Section 1.0

­ Introduction to Handy Hardware Ltd.

· Section 2.0

­ Trial balance at November 30, 2007

· Section 3.0

­ Additional information for each account

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Transactions

· Section 4.0

­ December 2007 transactions

· Section 5.0

­ Accounting issues

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Student requirements and submission

· Five assignments

· Submit one Word document per assignment

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Part 1

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BC1: Accounting Business Case

Part 2: Getting started

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First things first...

· Read through all of the material in BC1 at least twice before beginning detailed work. · Install Sage Accpac ERP from CD. · If you aren't familiar with Accpac, work through Computer Tutorial 3: Accounting Using Sage Accpac ERP (CT3).

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Very important!!

You must install Sage Accpac ERP BEFORE you install the Accpac data files for Handy Hardware Ltd.

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Second...

· Download and install BC1 data files: ­ Accpac data files for Handy Hardware Ltd. ­ Five partially completed Excel files:

· BC1_product_1 · BC1_product_2 · BC1cfs · BC1note · BC1prior

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Very important!!

· Make a backup copy of all the files before you start working on the business case. · Make backups at regular intervals as you work through the business case.

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Course updates

· Check online for course updates.

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Network diagram

· PDF file · Overview of the current Handy Hardware network · You will need this diagram for Assignment 5.

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Model financial statements

· This document contains guidelines from CGA-Canada regarding format and presentation of financial statements. · You will need this for Assignment 2.

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BC1 Assignments

· Five separate assignments · Where are they?

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Assignment 1

· Read BC1 at least twice · Install Sage Accpac ERP · Install data files · Print trial balance at November 30, 2007

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Assignment 2

· Q1: Batch 2 and Schedule C-1 · Q2: Batches 3 and 4 and Schedule C-2 · Q3:

­ Year-end trial balance ­ Transactions listing ­ Final chart of accounts

· Q4: Financial statements

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Assignment 3

· Product decision ­ Excel spreadsheet file BC1_product_1 ­ Excel spreadsheet file BC1_product_2 ­ Report

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Assignment 4

· Evaluate the mall store's operations ­ Excel spreadsheet file BC1prior ­ Report

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Assignment 5

· Q1: Recommend improvements to the MIS · Q2: Analyze pension proposal · Q3: Research question on IFRS

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Now you are ready...

· This completes the portion of the lecture on getting started. · In the following lectures, I will go over the student requirements for completing the business case.

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Part 2

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BC1: Accounting Business Case

Part 3: Batches 2, 3, and 4

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Batch 2

· Prepare transactions for December

­ Record the transactions in Section 4.0. ­ Record the transactions chronologically.

· Source document codes

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Batch 2

· Section 4.1: Recording payment of expenses

­ Most expenses are processed through accounts payable. ­ First record payable, then record payment. ­ Two journal entries are required.

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Very important!!

· You must include your initials in the Batch Description.

AND

· You must also include your initials in either the Reference or Description fields.

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Concept review

· Current assets · Long-term investments · Current liabilities · Long-term liabilities · Current portion of long-term debt

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Concept review

· Merchandise inventory

­ Goods owned by a company and held for sale ­ Goods in transit

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Concept review

· Line of credit · Trade accounts payable · Non-trade accounts payable

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Concept review

· Goods and services tax

­ GST collected ­ GST paid ­ GST clearing account

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Concept review

· Mortgage · Mortgage loan · Blended payments · Amortization schedule

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Concept review

· Dividends

­ Three important dates ­ Recording cash dividends

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Concept review

· Dividend preference

­ Cumulative ­ Non-cumulative

· Callable preferred shares · Other features

­ Participating ­ Non-participating

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Concept review

· Income tax instalments

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Concept review

· Extraordinary items

­ CICA Handbook section 3480

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Helpful hints

· Interest expense

­ Prorate by month, not by day.

· Amortization expense

­ Accept the amounts given as correct.

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Helpful hints

· GST

­ GST rate used is 7%. ­ You do not have to calculate or verify GST. ­ Accept GST as correct.

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Post Batch 2

· Post December transaction batches.

­ Always back up your files before posting!! ­ Print the G/L Batch Listing Report. ­ Post the batch. ­ Correcting entries

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Completing Q1

· Batch listings · Schedule C-1

­ Non-interest-bearing note

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Batches 3 and 4

· Prepare and post adjusting entries for year end.

­ Accounting issues are in Section 5.0. ­ Use Batch 3 for adjusting entries except taxes. ­ Use Batch 4 for income tax and GST adjusting entries. ­ Follow the same posting procedure as for Batch 2.

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Helpful hints

· Allowance for doubtful accounts

­ Instructions are given for calculating the allowance for doubtful accounts at December 31. ­ Don't forget that the allowance account already has a balance.

· Inventory

­ Handy Hardware uses a perpetual inventory system. ­ Inventory is reviewed and counted at year-end.

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Question 3

· Year-end trial balance · Transactions listings · Final chart of accounts

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Part 3

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BC1: Accounting Business Case

Part 4: Supporting schedules

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Supporting schedules

· Two supporting schedules are required ­ Schedule C-1 · Discount on noninterest-bearing note ­ Schedule C-2 · Income tax calculations

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Noninterest-bearing note

­ Definition

· Interest-bearing versus noninterest-bearing notes

­ BC1note Excel file ­ Excel RATE function ­ Use cell references in formulas.

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Noninterest-bearing note

· Excel RATE function

=RATE(nper,pmt,PV,-FV,type,guess)

· Cash inflow/cash outflow · #NUM!

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Income tax calculations

· Schedule C-2 must be prepared from scratch. · Accounting issue #6 in Section 5.0 provides the information you need.

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Income tax calculations

· Interperiod tax allocation · Differences between taxable and accounting income:

­ Temporary differences ­ Permanent differences

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Income tax calculations

· Permanent differences · Temporary differences

­ Amortization vs CCA ­ Warranty expense

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Income tax calculations

· Start with accounting income

­ Earnings (loss) before income taxes

· Add permanent differences · This gives you accounting income subject to tax

­ Basis for income tax expense

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Income tax calculations

· Add the temporary differences. · This gives you taxable income

­ Basis for income tax payable

· The year-end journal entry should be a final adjustment.

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Future income tax asset/liability

· The temporary differences result in an increase or decrease of a future income tax asset or a future income tax liability. · These amounts will balance out your income tax adjustment journal entry.

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Income tax expense

· Income tax expense (or benefit) must be separated into current and future income tax expense (or benefit). · CICA Handbook 3465.91(a) and (b)

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Part 4

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BC1: Accounting Business Case

Part 5: Prepare and print year-end financial statements

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Financial statements

· Prepare and print year-end financial statements. · For internal decision-making purposes only · Modify pre-built statement layouts · CGA Model Financial Statements

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Balance sheet

· Print to file and submit the balance sheet as at December 31, 2007. · Print the balance sheet from Accpac ­ select quikbal3.xls. · Modify as needed.

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Income statement

· Print to file and submit the income statement for the year ended December 31, 2007. · Print the income statement from Accpac ­ select quikinc2.xls.

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Cash flow statement

· Prepare and submit a detailed cash flow statement for the month ended December 31, 2007. · Use Excel file BC1cfs.xls. · Use the indirect method.

­ Refer back to introductory or intermediate accounting textbooks.

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Cash flow statement

· The indirect method does not report individual operating cash inflows or cash outflows. · The indirect method starts with net income, which is then adjusted to convert from the accrual basis to the cash basis. · Calculate December net income on IS worksheet.

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Cash flow statement

· Adjustments for non-cash items · Interest expense and income tax expense · Changes in working capital balances

­ Use TB worksheet for this.

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Cash flow statement

· Interest paid and income tax paid must be reported separately.

­ Adjust net income by adding back interest expense and income tax expense. ­ Instead, you must report interest PAID and income tax PAID. ­ These items can be reported on your CFS after the working capital adjustments.

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Cash flow statement

· Cash flows from investing activities:

­ Identify changes in non-current asset accounts.

· Cash flows from financing activities:

­ Identify changes in non-current liability accounts and equity accounts.

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Cash flow statement

· Understand what comprises "cash and cash equivalents." · Examine the pre-set formula in cell F46 of the TB worksheet.

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Cash flow statement

· Besides future income taxes, the cash flow statement gives students the most trouble. · Brush up on cash flow statements before you attempt it.

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Part 5

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BC1: Accounting Business Case

Part 6: Product decision

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Product decision

· Review the information in Section 1.0. The Handisons are considering starting a manufacturing operation. · This task integrates concepts learned in MA1 and FN1.

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Product decision

· You have been provided with two Excel files:

­ BC1_product_1 ­ BC1_product_2

· Each file contains four worksheets.

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DATA worksheet

· The data table provides all the data you will need to complete the remaining worksheets. · The marketing report has already been done, so it is a sunk cost. · The advertising expense given in the data table is the total advertising budget for the company.

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CM worksheet

· Use the CM worksheet to calculate the contribution margin for each of the three possible sales levels. · The data table provides you with selling price per unit, variable costs per unit, and number of units expected to be sold at that price. · You will select the selling price that provides the greatest TOTAL contribution margin.

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IS worksheet

· Use the level of sales that provides the greatest total contribution margin. · Fixed expenses should be classified as:

­ Manufacturing overhead ­ Selling ­ Administrative

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CF worksheet

· Capital expenditures are a cash outflow · Tax shield is a cash inflow · Amortization is not relevant in the cash flow

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CCA tax shield

· Amortization vs. capital cost allowance · Reduction of taxable income · Reduction of income tax payable · Present value of CCA tax shield

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PVTS formula

PVTS = (Cdt/[d+k]) * ([1 + .5k]/[1 + k])

Where C = the capital cost of the asset added to the asset pool d = CCA rate t = the firm's marginal income tax rate k = the cost of capital or discount rate

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CF worksheet

· Your income statement solution provides the basis for net operating cash flow calculations in Year 1. · Adjust revenue and expenses in Years 2, 3, 4 and 5 as per the brothers' instructions. · Product 2: price can be raised in Years 2 and 3, then reduced in Years 4 and 5.

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Net present value

· After you have calculated the project cash flow for each year, you must calculate the net present value of the total cash flows. · Use the NPV worksheet function in Excel:

=(project cash flow in year 1) + NPV(discount rate, project cash flow year 2:project cash flow year 5)

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Report

· Now you are ready to write a report addressing the Handison brothers. · Product recommendation:

­ NPV comparison ­ Cash flow ­ Handy Hardware's current financial position ­ Non-financial considerations

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Part 6

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BC1: Accounting Business Case

Part 7: Evaluate the mall store's operations

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Evaluate the mall store's operations

· Complete the Excel spreadsheet file BC1prior. · Prepare a report on the mall store operation. · Purpose of task

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Mall store

· The Excel file contains five years of financial data for the mall store. · You must develop formulas to perform the ratio analysis for all five years.

­ Refer back to introductory or intermediate accounting textbooks.

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Use of averages

· For the 2004 to 2007 ratios, use averages where applicable. · For 2003, use year-end total balances. · "Pure" ratios:

­ Income statement item divided by another income statement item; ­ Balance sheet item divided by another balance sheet item

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Financial ratios

· Gross margin · Current ratio · Inventory turnover · Total debt to equity · Times interest earned

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Financial ratios

· Profit margin · Return on assets · Total assets turnover · Return on equity

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Answer questions

· What drives the ROA for mall operations? · What drives profitability? · What drives the effective use of assets? · What drives the ROE? · Based on the above, what are the managerial implications for the firm?

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Mall store recommendation report

· Report addressing the Handison brothers. · Compare the current year with preceding years. · Consider using ratios for HHL as a comparison benchmark. · Answer five questions. · Make a recommendation.

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Part 7

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BC1: Accounting Business Case

Part 8: Recommend improvements to the MIS

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Improvements to the MIS

· Write a report addressing four issues. · Your answer should be in the form of a report addressing the Handison brothers. · Purpose of task

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Section A

· Review the discussion you had with Carla, the system administrator. · Look over the network diagram. · Discuss what can or should be done to address any issues that have been raised. · At least 4 valid points are required.

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Section B

· The brothers have been discussing the merits of wireless technology. · What factors need to be considered when evaluating the addition of wireless technology to the company's network? · At least 3 valid points are required.

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Section C

· The brothers are also interested in eventually connecting all stores to the head office system. · What are the key issues to consider in connecting the individual store machines to the head office? · At least 5 valid points are required.

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Section D

· The brothers would eventually like to expand their web services. · What are the risk factors associated with their plan to expand into eBusiness? · At least 3 valid points are required.

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Part 8

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BC1: Accounting Business Case

Part 9: Analyze pension proposal

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Pension plan proposal

· Refer to Section 1.0 · Employee turnover has increased · Handisons considered several alternatives · Non-contributory defined benefit plan

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Pension plan proposal

· Financing issues · Accounting issues · Ratio analysis · Inter-relationship of the pension plan and the manufacturing venture

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Form of response

· May be in the form of a memo · Point form is acceptable

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Sources of information

· FA3 · CICA Handbook section 3461

­ Employee Future Benefits

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Minimum requirements

· Two financing issues · Two accounting issues · One issue related to ratios · Integration of pension and manufacturing venture issues

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Financing issues

· Past service costs · Current service costs · Financing the manufacturing venture

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Accounting issues

· CICA section 3461 · Unfunded past service costs · Disclosure requirements

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Ratio analysis

· Debt-to-equity · Times interest earned

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Part 9

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BC1: Accounting Business Case

Part 10: Research question on IFRS

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Research question on IFRS

· What would IFRS adoption imply for Handy Hardware? Will there be a different treatment of plan gains and losses? · Relates only to pension plan

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What is IFRS?

· International Financial Reporting Standards · Effective January 2011

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Employee future benefits

· Current Canadian standards:

­ CICA Section 3461

· IASB equivalent:

­ IAS 19, Employee Benefits

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Extraordinary items

· Current Canadian standards:

­ CICA Section 3480

· IASB equivalent:

­ IAS 1, Presentation of Financial Statements

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Part 10

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The end

· This completes the online lectures for BC1 ­ Accounting Business Case. · Email feedback to [email protected] · Good luck with your submission!

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