Case 1

CASE
ERASMUS BREWERY BV
ERASMUS BREWERY BV
Cases 1: Uses of Accounting Information
(Chapter 1 & 2)
The Company releases the following set of financial statements for year 2020. The financial
statements are prepared in accordance with outlined accounting policies and assumptions.
ERASMUS BREWERY BV
Statement of Financial Position
as of December 31, 2020
Dec 31, 2019 Dec 31, 2020
Non-current assets (in €) (in €)
Property, plant, and equipment (net) at historical cost 380,039 301,860
Property, plant, and equipment (net) at fair value 166,500 165,000
Current assets
Raw materials and work-in-progress 2,771 3,664
Finished goods 314 1,394
Accounts receivable, net 11,147 11,189
Prepaid expense 9,120 9,120
Assets-held-for-sale 85,000
Cash 4,913 38,137
Total Assets 574,804 615,364
Owners equity
Contributed capital 120,000 120,000
Retained earnings (note 1) 330,848 368,575
Revaluation reserves (note 2) 4,200
Non-current liabilities
Long-term debt (at 10% p.a.) 100,000 100,000
Current liabilities
Short-term debt 5,000 -
Unearned revenue - 3,675
Accounts & wage payable 18,956 18,914
Total Equity & Liabilities 574,804 615,364
Page 1 of 4
ERASMUS BREWERY BV
Income Statement
as of December 31, 2020
(in €)
Sales, net 441,763
Cost of sales (less capitalizable depreciation & depletion charge) (note 5) (196,262)
Gross profit 245,502
Depreciation & deletion (55,979)
Bad debt expense (3,622)
Selling, general & administrative expense (121,904)
Other expense (note 3) (4,375)
Operating profit 59,622
Interest expense (10,000)
Income before taxes 49,622
Income taxes (at 25%) (12,405)
Impairment & adjustments (note 4) 15,387
Net income 52,603
Notes to Financial Statements:
1. Retained earnings item includes dividend for Y2020 in the amount of €15,000 and accounting
adjustments of €125.
2. Revaluation reserves item includes the amount of upward revaluation of the equipment
carried at fair value.
3. Other expense item includes the loss on revaluation of the assets held for sale.
4. Impairment & adjustment item includes the reversal of the impairment on long-term assets
recognized in 2019.
5. For presentation purposes part of depreciation and depletion capitalized in Cost of Goods
Sold is reported separately. The company deems such presentation enhances relevance of
accounting information.
Page 2 of 4
REQUIRED:
Carefully study ERASMUS BREWERY financial accounting policies and financial statements
and answer the following questions:
1. What information from the financial statements and the accounting policies disclosures
can be seen as relevant to the decision-making of the users of financial statements
(decision-usefulness approach)?
2. What do you think the differences would be if the brewery management uses a rule-
based approach to applying accounting standards instead of a principle-based approach?
How would the switch affect the characteristics of accounting information such as
relevance, reliability, verifiability, timeliness, understandability, and comparability?
3. What are the examples of accrual accounts on the brewery’s balance sheet and Income
Statement (aka P&L)?
4. What would be the brewery’s operating income if it reports on cash basis instead of
accrual basis? Why the cash-based operating income is higher (lower) than accrual-based
operating income? [Ignore the possible changes in cost of sales.]
5. The financial statements of Erasmus Brewery are, in its most, based on historic costs.
Imagine that the fair value of all non-current assets carried at historical costs is 20%
higher than the disclosed value. In such a case, what would be the impact on the
financial statements if Erasmus Brewery decides to value all its non-current assets at fair
value instead of historic costs?
6. At the start of December, the Erasmus Brewery signed a contract with a national
restaurant chain for the production and delivery of 1,500 liters at €2.45 per liter over
the next three months. Payment for the contract has been received by the end of
December. Explain how, based on the Revenue Recognition Principle, earnings should
be recorded in the financial statements.
Page 3 of 4

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Notes to Financial Statements:

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