ACCY130 notes - Lectures and tutorials 1-12 [email protected] PDF

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Accounting for Decision MakingWeek 1 - Tuesday 5 March and Friday 8 MarchAdmin -  [email protected] Justin -  [email protected] Martien -  [email protected] Objectives Explain the process of accounting  Outline the importanc...

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Accounting for Decision Making Week 1 - Tuesday 5 March and Friday 8 March Admin - [email protected] Justin - [email protected] Martien - [email protected]

Learning Objectives     

Explain the process of accounting Outline the importance of accounting and its role in decision making by various users Explain the differences between financial accounting and management accounting Identify the elements of each of the four main financial statements Clarify the relationships between financial statements

What is Accounting?    

…My business had positive cash flows in spite of a sluggish economy …My business owned a property worth $2 million …The tax bill for the year is $500 thousand …My company produces four different types of shoes, and flip-flops are the most profitable

 

All of these financial information is communicated by Accounting Accounting is the language of business

Why does Accounting exist? Primary function of accounting is to provide financial information for decision making (2 groups) 

Management accounting provides information for decision making within the business o Core activities include: (i) formulating plans and budgets; (ii) providing information to be used in monitoring and control within the entity



Financial accounting provides information to assist external users' decision making o Preparation and presentation of financial statements

Who uses Financial Information? 

Question: Classify the following users into Internal and External (Financing and Public) groups



Board of Directors, CHRO (Chief Human Resource Officer), Employees, Analysts, Managers, Shareholders, Media, Lenders, CEO (Chief Executive Officer), Suppliers, CFO (Chief Financial Officer), Regulatory Agencies, Customers, Governments, Researchers, CMO (Chief Marketing Officer)

Users of Financial Information

Internal Users

External Users

Management Group

Financing Group

Chief Human Resource Officer, Chief Executive Officer, Chief Financial Officer, Chief Marketing Officer, Managers, Board of Directors

Public Group

Lenders, Regulatory Agencies, Shareholders, Media, Governments, Suppliers, Employees Researchers, Analysts

Money owed to employees = Accounts Salary

What are users interested in? External users have an interest in 3 main types of business activities: Operating Activities

Investing Activities

Financing Activities

Results from operational activities Acquisition or sale of resources needed undertaken to earn income. to operate the business e.g. purchase or Revenue less expenses = Profit/Loss sale of property, plant and equipment

Two primary outside sources of funds: 1. Borrowing from banks 2. Selling shares to investors

Where do Users get Info From? FOUR STATEMENTS TO FOCUS ON Income Statement Retained Earnings Balance Sheet (Statement of Profit Statement (Statement of (Statement of or Loss) Changes in Equity) Financial Position)

Statement of Cash Flows

Reports total comprehensive income for the period and other changes in equity

Reports information regarding cash receipts and cash payments for a particular period of time

Reports revenues less expenses for a particular period of time

Reports assets, liabilities and equity at a particular point in time

Income Statement    

Purpose is to report the entity's success or failure over a period of time Lists the entity's income (revenues and gains) Lists the entity's expenses Income less expenses = profit (loss)

Retained Earnings

Balance Sheet  

Reports assets and claims to those assets (liabilities and equity) at a specific point in time Based on the basic accounting equation



Assets must balance to the claims on assets

Balance Sheet and Retained Earnings

Statement of Cash Flows  

Main purpose is to provide financial information about cash receipts and cash payments of an entity for a specific time period Informs users about what is happening to entity's most important resource - CASH

Balance Sheet @ Jan 1 Assets Liabilities Cash

Payables

Receivables

Accrued liabilities

Inventory

Debt

Fixed assets

Equity

Balance Sheet @ Dec 31 Assets Liabilities Cash

Payables

Receivables

Accrued liabilities

Inventory

Debt

Fixed assets

Equity

Cash Flow Statement Cash @ Jan 1 + Cash in - Cash out = Cash @ Dec 31 Income Statement Revenue -/- Expenses = Profit

Interrelationships between the statements  

Review question: Fill in the blanks with appropriate financial statements The financial statements are interrelated: o The balance sheet is linked to the income statement and the retained earnings statement by the ending retained earnings balance o The cash flow statement is linked to the balance sheet by the ending cash balance

Cash Flows and Balance Sheet

Summary    

Process of accounting concerns identifying, measuring and communicating economic information for decision making Users of accounting information may be external or internal Management accounting concerns needs of internal users, while financial accounting focuses on reports for external users Accounting plays a major role in the business planning process

Business Structure and Transactions Week 2 - Tuesday 12 March and Friday 15 March

Business Structure Learning Objectives 1. 2. 3. 4.

Understand the different forms that business entities take Define the term 'sole trader' and discuss the main features of a sole trader Define the term 'partnership' and discuss the main features of a partnership Define the term 'company' and different types of companies

Forms of Business Entities  

Sole Trader (or Sole Proprietorship) Partnership





Company o Limited Liability Company o Corporation Trust

What is the Main Difference? Why?

1st graph shows how popular each business is 2nd graph shows where the revenue is going to

Sole Trader    

Business is owned and run by one person Typically has few, if any, employees Advantages o Easy to create Disadvantages o No separation between the entity and the owner o Unlimited personal liability o Limited life

Partnership   

Similar to a sole proprietorship, but with more than one owner All partners are personally liable for all of the firm's debts. A lender can require any partner to repay all of the firm's outstanding debts The partnership ends with the death or withdrawal of any single partner

Limited Liability Companies  

All owners have limited liability, but they can also run the business Relatively new business form

Corporation 

A legal entity separate from its owners o Has many of the legal powers individuals have such as the ability to enter into contracts, own assets, and borrow money o The corporation is solely responsible for its own obligations. Its owners are not personally liable for any obligation the corporation enters into



Ownership o Represented by shares of stock o Owner of stock is called  Shareholder  Stockholder  Equity Holder o Sum of all ownership value is called equity o There is not limit to the number of shareholders and, thus, the amount of funds a company can raise by selling stock o Owner is entitled to dividend payments

Problems within Corporations 

Agency Problems o Managers (agent) may act in their own interest rather than in the best interest of the shareholders (principal) o One potential solution is to tie management's compensation to firm performance

Review Question #1 The advantage of a partnership over a sole trader business structure is: A. A limited liability B. Greater access to skills and resources C. Not required to prepare financial statements in accordance with accounting standards D. Mutual agency

Review Question #2 A company has which of these sets of characteristics? A. Difficulty raising funds, owners have full control B. Owners have shared control and unlimited liability C. Simple to set up and mutual agency D. Separate legal entity and owner have limited liability

Comparison of Business Reports Characteristics

No of owners

Sole Trader

Partnership

Companies

1

2-50

As many as per articles of association

Liability

Unlimited

Unlimited

Limited

Profit

Belongs to owner

Distributed to partners as per agreement

Distributed to shareholders in form of dividends, at discretion of board

Tax

Owner taxed as individual tax payer (profit treated as income of owner)

Partners taxed as Company taxed on profits. separate individuals Shareholders taxed on dividends less tax credit for tax paid by company

Financial Statements Sole Trader Income Statement

Partnership No 



Companies No tax

tax shown

shown



Pre  pared to meet needs of owner

Profit distribution to individual partners shown

 Equity on balance sheet

Pro  fit increases capital directly

Tax shown as



expense 

Individual  partner equity shown 

Earnings per share shown but not dividends Capital = issued shares Retained earnings = all profits not distributed to shareholders

Business Transactions Learning Objectives: 1. 2. 3. 4.

Describe the characteristics of business transactions Differentiate between a business transaction, a personal transaction and a business event Explain the account equation process of the double-entry system of recording Identify the impact of business transactions on the accounting equation

Recognising Business Transactions  



Business transactions are occurrences that affect the assets, liabilities and equity items in an entity Under the entity concept, every entity must keep records of its business transactions separate from any personal transaction of the owners Personal transactions: o Transactions of the owners, partners or shareholders o Are unrelated to the operation of the business

Which of these is a Business Transaction? 1. A VUW student just bought a cheese burger from Burger King $10/ 2. Two Burger King's employees just went out for lunch together at Subway and paid $20

The Accounting Equation

Assets = resources controlled by entity Liabilities = external sources of funds Equity = internal sources of funds (from owners) Assets need to be funded by owners and lenders: the liabilities and equity represent the claims against the entities assets

Example Valerie's Vases needs $350,000 of assets to do business. Valerie only has $200,000 to contribute as equity; therefore her business needs to borrow additional funds of $150,000 from a bank which will become a liability of the business

The Concept of Duality   

The accounting equation MUST be kept in balance after a transaction is entered o i.e. Assets MUST = Liabilities + Equity In order to keep the equation in balance, a transaction must be recorded at least twice, or double-entry system A transaction has a dual effect on the equation o Cash movement effect o Category of transaction effect

The Concept of Duality - Example The purchase of a delivery truck via a loan  Cash effect - Loan Payable (Liability): o Payment will be made in the future  Category Effect - Motor Vehicle (Asset): o This is the purchase of a delivery truck to support the business whilst the business generates revenue

Transaction Analysis

1. 2. 3. 4.

Read the transaction Identify the cash effect Identify the nature of the transaction Check the equation balances

Transaction Analysis - Example 1 Capital Contribution: 

Owner contributes $20,000 in cash to start a business: o Key words … o Cash … o Owner … o A=L+E

Transaction Analysis - Example 2 Purchase of an asset with cash: 

Firm purchases new iPad for $500 and pays by cash o Key words … o Cash … o New iPad… o A=L+E

The Accounting Equation The expanded accounting equation:  Recall from chapter 1: o Income produces an increase in equity o Expenses result in decreases in equity  Therefore: o Profit (loss) is added to (subtracted from) opening equity on the balance sheet

Transaction Analysis - Example 3 Income earned: 

BCS sends an invoice to Tassie Tennis for providing tennis coaching services totalling $3,000 o Key words … o Accounts Receivables … o Fees Revenue …

Review questions Equity is increased by: A. Dividends B. Revenues C. Expenses D. Liabilities Which of the following items has no effect on equity? A. Expenses B. Dividends C. Land purchase D. Revenue

Balance Sheet Week 3 - Tuesday 19 March and Friday 22 March

Learning Objectives 1. 2. 3. 4. 5. 6.

Explain the nature and purpose of the balance sheet Apply the asset definition criteria Apply the liability definition criteria Discuss the definition and nature of equity Apply the recognition criteria to assets, liabilities and equity Describe the format and presentation of the balance sheet

Balance Sheet  

Reports assets and claims to those assets (liabilities and equity) at a specific point in time (snap shot) Based on the basic accounting equation



Assets must balance to the claims on assets

Example The business just bought a house using its own $250k cash and $750k bank loan What would the accounting equation for the house look like?

Asset

Liability $750k bank loan (Mortgage)

$1 million house

Equity $250k own cash

Assets The Complicated, Accounting Jargon Definition "An asset is a resource controlled by the entity as a result of past events, and from which future economic benefits are expected to flow to the entity" - IASB Conceptual Framework The Simplified Definition Something that is owned/controlled by the business That will make money for the business What the Business "Owns" 3 Criteria of Assets   

Things the business control (not necessarily own) From a past event That will generate a future economic benefit

E.g. a truck, cash Current and Non-Current Assets Current: Those that will be "realised" (turned into cash or consumed) within a year E.g. cash (itself), accounts receivable, inventories Non-Current: Those that will be "realised" (turned into cash or consumed) within a period longer than a year E.g. PPE, long-term investments

Review Question #1 Accounts receivable includes: A. B. C. D.

Non-trade receivables Amounts owed by customers on account Interest receivable Loans to company officers

Liabilities The Complicated, Accounting Jargon Definition "A liability is a present obligation of the entity arising from the past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits: - IASB Conceptual Framework The Simplified Definition Something that the business must do that will result in an outflow of funds *What the Business "Owes" 3 Criteria of Liabilities Present obligation Based on past events Leading to an outflow of economic resources E.g. loans, accounts payable Current and Non-Current Liabilities Similar to assets, there is a division between current non-current liabilities Current liabilities must be settled within the year e.g. accounts payable, salaries payable Non-Current liabilities need not to be settled for at least a year e.g. bonds, long-term bank loans

Review Question #2 Which of the following most likely would be classified as a current liability? A. B. C. D.

Mortgage payable Bonds payable Three-year notes payable Accounts payable

Equity

According to the IASB Conceptual Framework, equity is; "the residual interest in the assets of the equity after deducting all of its liabilities" Thus, there is no formal explanation of equity it's a derivative of the definitions of assets and liabilities Equity = Assets - Liabilities Essentially, it's what is left for the owners from the assets once all the liabilities have been paid off *It is the "net worth" of the business Share Capital/Common Stock Retained Earnings Various Reserves Preferred Stock Treasury Stock

Review Question #3 When a company issues new shares the impact on the accounting equation is to increase: A. B. C. D.

Equity and decrease assets Equity and increase liabilities Liabilities and increase assets Assets and increase equity

Balance Sheet Review

Provide one number per ? 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

How much cash $2100 Ending balance of A/R $40,500 Amount of inventory year-end $31,000 Historical cost of PPE $393,000 = 5,500 + 6,500 + 180,000 + 201,000 Net value of PPE $337,000 Total value of intangibles and investments $341,000 = 305,000 + 36,000 How much owned in total $770,000 Amount of trade credit $35,900 How much owed to employees $8,500 How much owed to government $6,100 Total short-term liabilities $61,000 Short + Long-term liabilities $481,000 Amount of owners' contribution $110,000 Accumulated retained earnings $220,000

15. Total claims to assets $770,000

Week 3 - Tutorial 1 - Tues 19 March Warm up questions 1. Which of the following is NOT a primary financial statement: a. Statement of Financial Position b. Statement of Changes in Equity c. Statement of Profit or Loss d. Statement of Inventory e. Statement of Cash Flows 2. The positive difference between income and expense is referred to as: a. Revenue b. Income c. Gains d. Dolla - dolla bills e. Profit 3. Which of the following represents The Basic Accounting Equation: a. Assets * Equity = Liabilities b. (Assets - Liabilities) / Equity c. Equity - Liabilities * Assets d. Assets - Liabilities = Equity e. Assets + Liabilities = Equity 4. A sole trader business owner: a. Is personally liable for all debts incurred by the business b. Is taxed as an individual on the business income c. Is not bound by the formal requirements of accounting standards d. All of the above 5. A disadvantage of a partnership is that of 'mutual agency' which means: a. Each partner has limited liability for the debts incurred on a contract entered into by any other partner b. Each partner must contribute the same capital and skills to the partnership c. Each partner has the right to enter into contracts on behalf of the partnership d. Only the partner with the highest cash contribution has the right to enter into contracts on behalf of the partnership

Income Statement Week 4 - Tuesday 26 March and Friday 29 March Profit and Loss Statement Revenue and Expenses Statement

Learning Objectives: 1. 2. 3. 4. 5. 6. 7.

Explain the purpose and importance of measuring financial performance Explain the difference between accrual accounting and cash accounting Describe the measurement of financial performance Discuss the definition and classification of...