fbpx

Jaunty Coffee Company Case Study

Jaunty Coffee Company Case Study

SCENARIO
Jaunty Coffee Company is a public, multinational company. You are the chief financial officer of Jaunty Coffee Company, and the board of directors has asked you to research the conversion to IFRS versus the continued use of U.S. GAAP.Order from Course Researchers Research the conversion to IFRS versus the continued use of U.S. GAAP using Jaunty Coffee CompanyREQUIREMENTS
Your submission must be your original work. No more than a combined total of 30% of the submission and no more than a 10% match to any one individual source can be directly quoted or closely paraphrased from sources, even if cited correctly. An originality report is provided when you submit your task that can be used as a guide.

You must use the rubric to direct the creation of your submission because it provides detailed criteria that will be used to evaluate your work. Each requirement below may be evaluated by more than one rubric aspect. The rubric aspect titles may contain hyperlinks to relevant portions of the course.

A. Use the attached “Jaunty Coffee Company Balance Sheet and Income Statement” to do the following:

1. Complete the “IFRS Balance Sheet” section using the numbers provided in the “GAAP Balance Sheet” section.
2. Complete the “Differences Between GAAP and IFRS” section.Order from Course Researchers Research the conversion to IFRS versus the continued use of U.S. GAAP using Jaunty Coffee CompanyB. Write an analysis (suggested length of 4 pages) in which you do the following:
1. Discuss how the information found in the “Additional Information” section (located below the “GAAP Balance Sheet”) would impact the balance sheets.
2. Summarize the similarities and the differences found in the eight items of the “Additional Information” section.
3. Justify the use of GAAP or IFRS in accordance with your calculations from part A.

C. Write a letter (suggested length of 3 pages) to the board of directors in which you do the following:
1. Recommend whether Jaunty Coffee Company should convert to IFRS or continue the use of GAAP.
2. Justify your recommendation, using at least one of each of the following to support your justification:
● a ruling
● a regulation
● a policy

D. Submit your completed “Jaunty Coffee Company Balance Sheet and Income Statement.”
E. When you use sources, include all in-text citations and references in APA format.

IFRS versus U.S. GAAP: Jaunty Coffee Company Case Study Partial Solution

In the additional information, the first item is foreign exchange gain, resulting from the short-term investment. Both IFRS and GAAP establishes that foreign exchange gains or losses should be recognized in the income statement. GAAP excludes monetary exchange gains and losses and sale securities that are unrealized from the income statement and classifies them in the Other Comprehensive Income (O.C.I.), unlike IFRS which treats them as part of profit or loss (KPGM, 2015). Therefore, in the IFRS balance sheet, $4000 gains should be transferred to income statement. To record $4000, resulting in foreign exchange, the following adjustment will be made.

Net Income 2600
Tax Payable (35% Tax Rate) 1,400
Foreign Exchange gain 4,000
(To record gain from foreign exchange rate)

The gain increase net income by $2600, which is then transferred to retained earnings. The tax payable will also increase by $1400. There is no difference between IFRS and GAAP balance sheets for this gain as in both standards it is a balance sheet item. Therefore, the differences between the two balance sheets is zero.

Order from Course Researchers IFRS versus U.S. GAAP for Jaunty Coffee Company Case
Order a Customized One for $12 per Page/275 words

Inventory under IFRS should be accounted for using First-in-First-out (FIFO) or weighted average method, unlike GAAP, which uses the LIFO method (KPMG, 2020). As such, the adjustment has to be made to include the effect of FIFO in the balance sheet prepared under IFRS policy.

FIFO
Ending inventory 45,000
Beginning Inventory (35,000)
COGS 10,000
(To record decrease in COGS in the income statement)
Gross profit increase 10,000
Tax rate 35%
Tax payable increase 3500
Net income increase 6,500
Retained Earnings Increase 6,500
(To record increase in tax payable and retain earnings as a result of COGS decrease)

FIFO method increases the tax liability

Tax Benefit Disadvantage

Inventory 35,000
Tax rate 35%
Tax payable increase 12250
Retained earnings increase 22,750
(To record impact of FIFO for past year inventory)

By using the FIFO method, it means the inventory worth $35,000 would have been sold first. Therefore, the COGS would be determined first, which is $10,000. This means COGS will reduce by 10,000, and this will lead to an increase in income. However, this income should be subjected to the taxation of 35%, meaning the net income that should be transferred to retained earnings will be 6500, while tax payable will increase by 3500. The use of  FIFO will disadvantage Jaunty Coffee Company since it does enjoy the tax benefit associated with LIFO, which is the only inventory valuation method under GAAP (KPMG, 2020). As such, the opening an inventory of $35,000 will be subjected to taxation with payable tax increasing by 12,250, while the retained earnings increase by 22,750. This illustrated the increase in taxation when the FIFO method is used. With the FIFO method, a 45,000 ending stock reserve should be added to the current inventory. Therefore, the current inventory will be 120,000 (75,000 + 45,000).

References 

KPGM. (2015). IFRS compared to U.S. GAAAP: An Overview. KPMG International Standards Group. Retrieved from https://assets.kpmg/content/dam/kpmg/pdf/2015/12/US-GAAP-comparison-2015-overview.pdf

KPMG. (2020). IFRS Compared to US GAAP. KPMG International Standards Group. Retrieved from https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/03/ifrs-us-gaap-2020.pdf?ExcludePageBreak=true

error: Content is protected !!