ACCT1101 Exam Notes PDF

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Summary

Module 1 to Module 5 personal notes, Module 1 to Module 5 personal notes...

Description

Module 1

The accounting system  

Allows users to identify, measure, record and summaries information about activities of a business Accounting information enables decision making

Accounting Information 

Powerful tool for making good business decisions

People inside business   

Use accounting info the help determine and manage costs Set selling prices Control operations of the business

People outside the business 

Use accounting info the help make investment and credit decisions about the business

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Management accounting o Using information in accounting system to produce reports for internal users o Internal users make decisions for the entity Financial accounting o Using information in accounting system to produce reports for external users o External users make decisions about the entity o Is orgranised for use by interested people outside the business o As opposed to management accounting, it follows specific guidelines known as GAAP (Generally accepted accounting principles) Australian Accounting Standards (AAS) o Standards to govern measurement rules and level of disclosure o AAS Boards (AASB) is responsible for technical accounting standards o Australia (like many other countries) has adopted the IFRS (International Financial Reporting Standards) o AASB’s are compliant with international accounting standards

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Private Enterprise  

In this system, individuals own businesses that produce and sell services and/or good for a profit These businesses general fall in three categories: o Service o Merchandising o Manufacturing

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Service Business o Perform Service or activities that benefit individuals or business customers o Professional practices such as accounting, law and medicine are service business o Example: Qantas Airlines, LJ Hooker Real Estate Merchandising Business o Purchase goods for resale to customers o Some merchandising businesses are wholesalers, meaning they sell their goods to retailers or other commercial users o Others are retailers and sell goods to public Example: Woolworths Manufacturing Business o Make their produces and sell these products to customers o Unlike merchandisers who purchase ready-to-sell merchandise, manufacturer has no goods to sell until they are manufactured o Example: Ford Australia, Black & Decker, BHP Steel

Source of Capital for Entrepreneurs: o o

Investing: Invest own money and find other investors to do the same Borrow:Borrow money from bank or other lending services

Forms of businesses:   

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Sole Proprietorship/Sole trader o Owned by one person who is the sole investor of capital Partnership o Owned by two or more individuals who each invest capital into the business Company/Corporation o A separate legal entity independent of its owners and run by a board of directors

Sole Proprietorship o Advantages  Total undivided authority  No restrictions on type of business – must be legal  Simple structure, cheaper o Disadvantages  Unlimited liability  Limitation on size- fund raising power  Income taxed in hands of owner Partnership o Advantages  Better credit standing – possibly  More brain power, but consultation with partners required  Easy to establish  Shared control can reduce individual burden o Disadvantages  Unlimited personal liability for general partners  Need for written partnership agreement  Problems deciding who has authority  Disputes over profit-sharing, administration and business development Company o Advantages  Separate legal existence  Limited liability of shareholders  Transferability of ownership relatively easy  Ability to distribute franked dividends  Flat rate of taxation  Greater ability to raise capital o Disadvantages  Separation of ownership and control  Extensive governmental regulation  More expensive to establish  Higher compliance costs

Regulatory environment of business 

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Issues covered by laws and authorities that regulate business o Consumer protection o Environmental protection o Employer safety o Hiring practices o Taxes Companies must comply with different set of regulations depending on nature of business Regulations are imposed by local, state and federal government When a business conducts business internationally, it must abide by laws and regulations of other country with which it operates

Financial Statements o

Summarize and communicate financial information to external users (general purpose financial statements)

Goal of Financial Reporting o

To provide relevant and reliable information that is useful for investment and lending decisions

Accounting terms (definitions) o

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Assets o Here’s where business lists its economic resources such as cash, money owed to it by clients, inventories of its products, equipment and buildings it owns Liabilities o Here’s where the business lists the obligation it owes to creditors such as banks or suppliers and to employees Owner’s equity o Here’s where the business lists the owner’s current investment in the assets of the business Cash flow from for operating actives o Here’s where the business lists the cash it received and paid in selling products/performing services for a specified time Cash flow from investing activities o Here’s where the business lists the cash it received and paid in buying and selling assets such as equipment and buildings Cash flow from financing activities o Here’s where the business lists the cash it received and paid in obtaining and repaying bank loans and from contributions and withdrawals of cash made by the business owners

Three major financial statements o o o o

Income statement (Profit and loss statement) Balance sheet (Statement of financial position) Cash flow statement (Also) Supporting financial statement (statement of changes in owner’s equity)

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Income Statement (Profit and loss statement) o Shows results of business operating activities over a specified time period and profit/loss for that period o Includes revenues, expenses and net income Balance Sheet (Statement of financial position) o Shows the financial position of a business on/as at a given date o Includes assets, liabilities and owner’s equity Cash Flow statement o Summarizes cash receipts, cash payments and net change in cash for a specified time period o Includes cash flows from operating activities, cash flows from investing activities and cash flows from financing activities Statement of changes in owner’s equity o Provides information about the amount shown in the owner’s equity section of the balance sheet

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Includes beginning equity, net income, owner’s contributions and withdrawals and the ending equity

Corporate Social Responsibility (CSR): o o

CSR required firms to structure governance of the organisation and conduct business in an ethical and socially responsible fashion There are many people interested in the information provided about the operations of the business (Stakeholders)

Triple Bottle Line (TBL) Reporting: o

TBL reporting requires accounts to provide information about the three key areas of business performance o Financial / Economic performance o Social / Ethical performance o Environmental performance

Ethics in Business and Professional Life o o

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Ethics relates to a set of standards of right and wrong that provide a framework of human behavior Professional Ethics o Studies ethics in professional setting o Characteristics of a profession form an integral part of the desirable ethical standards for members of the profession Example: Chartered Accounts Australia & NZ (ICAA & NZICA) & CPA Australia are regulater under APES 110 (Complied code of ethics for professional accountants) issued by APESB (Accounting Professional and Ethical Standards Board)

Critical Thinking o o

Necessary skills for successful problem solving and decision making Both creative thinking and critical thinking skills are important for all stages of decision making process

Process of critical thinking Recognize problems -> Identify alternatives -> Evaluate alternatives -> Make decision -> Creative thinking

Module 2 Business Plan o

Evolving report that describes a business goals and its current plans for achieving those goal o Description of the business o Marketing plan o Operating plan o Environmental management plan o Financial Plan

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Description of the business – Information about o Organisation of the business o Its product or service o Its current and potential customers o Its objectives o Where it is located o Where it conducts business o Important people and their major roles in the business Marketing Plan – Information about o How the business will make sales o How the business will influence and respond to market conditions o Evidence of the demand for the business products or services o Any market research that has been conducted Operating plan – Information about o Relationships between business and its suppliers o Relationships between business and its customers o How the business will develop, service, protect and support its products or services Environmental Management Plan- Information about o Environmental impact of the business o Social impact of the business o Environmental indicators cover performance related to:  Inputs such as material, energy, water  Outputs such as emissions and waste Financial plan – Information about o Capital requirements o Sources of capital o Projected financial performance o Short term capital sources  Repaid within a year or less o Long term capital sources  Repaid to creditors or returns to investors after more than a year

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CVP (Cost-Volume-Profit) Analysis o o o

Shows how profit will be affected by alternative sales volumes, selling prices and costs How many items do you sell to break even Based on simple profit calculation involving revenues and costs

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Helps in estimating profit at given unit sales volumes, finding break-even point and finding the unit sales volume to achieve a target profit Fixed costs o Constant in total for a specified time period & not affected by differences in volume o Horizontal straight line on a graph, indicating that the cost will be the same over different volume levels Variable costs o Total variable cost changes in a time period in direct proportion to a change in volume o Unit cost remains constant o Sloping line on a graph, indicating that the cost will increase/decrease in proportion to different volume levels Total costs o Total costs at any volume are the sum of the fixed costs and the variable costs at the volume o Total costs = f + vX  F = total fixed costs  V = Variable cost per unit sold  X = Sales volume Profit Calculation o Net Income (Profit) = Revenues – Expenses

Profit Graph o o o o

One way of graphing a business net income is to show its revenues and expenses on the same graph The graph of a business revenues is shown by a straight line sloping upward from the origin The graph of a business’ total costs includes its fixed costs and variable costs The unit sales volume at which the business earns zero profit is called break-even point

Contribution margin o o

Contribution margin = Estimated Sales Revenue – Estimated Total Variable Costs Contribution margin unit (CMU) = Sales revenue per unit – variable costs per unit

Breakeven Units (BE)

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Fixed Costs (FC) / Contribution margin per unit (CMU)

Budgeting o o

Improves planning, operating and evaluating & controlling processes Helps to o Add order to the planning process o Recognize and avoid potential operating problems o Quantify plans o Create benchmarks for evaluating a business performance

Business Types and Terms: o

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Service Companies o Sell time, skills, knowledge o No inventory Retail companies o Resell products purchased from supplier o Inventory of good for resale

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o Income statement incudes ‘cost of goods sold’ Manufacturing Companies o Use labour, equipment, supplies, etc to convert raw material into finished products  Materials inventory  Work in process/progress inventory  Finished good inventory Inventory o Unsold goods in stock / in hand Gross profit and Net Profit o Gross Profit = Sales less cost of goods sold o Net Profit = Gross Profit less operating expenses Cost of Goods Sold (COGS) o Cost of the inventory that the business has sold to customers o Also called cost of sales

Operating Cycles o o o

In budgeting, a business quantifies its planned activities in relation to its operating cycle The operating activities of a business depend on whether it is a retail, service or manufacturing business Each business type has a different operating cycle

Operating Cycle of Retail Business o

Average time it takes the business to complete the following o Use cash to buy goods for sale o Sell these goods to customers o Collect cash from its customers

Operating Cycle of Service Business o

Average time it takes the business to complete the following o Use cash to acquire services and supplies o Sell these goods to customers o Collect cash from its customers

Budge as framework for planning o o

Master budget is the overall structure a business uses to organize its budgeting process It is a set of interrelated reports (or budges) o Goals to be met (linked to business strategy – long term) o Activities to be performed in operating cycle (linked to business strategy – short term) o Resources to be used

Retail business sales budget o o o o

Number of unites of inventory they expect to sell each month Related monthly sales revenue Which months business expects to collect cash from these sales To estimate number of units of inventory that will be sold each month, various types of information is gathered:

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Past sales data Industry trends Economic forcasts

(Notes completed until lecture 2 – 3A)...