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Statement of Profit or Loss Statement of Changes in Equity Statement of Financial Position Stateme Flows Reports revenues less expenses for a particular period of time. Reports total comprehensive income for the period and other changes in equity. Reports assets, liabilities and equity at a particul...

Description

Statement of Profit or Loss

Statement of Changes in Equity

Statement of Financial Position

Statem Flows

Reports revenues less expenses for a particular period of time.

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

Reports assets, liabilities and equity at a particular point in time. A = L + OE

Reports regardin receipts paymen particu time.

Its use: - Investors use this statement to determine if the entity is profitable. - Creditors use this to predict future performance - Bank use this to decide if they should lend money to a firm ( it capability to pay off its loan)

Explains all changes in equity during a period of time. Shareholders can see how much profit has been distributed as dividends by reading this statements

eg. An investor is considering purchasing shares in domino’s.

Its use: - Creditors use this as another source of infor to determine the likelihood that they will be repaid. Eg: does the entity have assets that could be easily be sold to repay its debts - Determine whether inventory is adequate to support future sales - Useful in assessing whether cash on hand is sufficient for immediate cash needs. Eg: North sales Ltd is considering extending credit to a new customer

TOPIC 1 Assets: a resource controled by the entity as result of a past events from which an inflow of future economic benefits are expected Recognition criteria: an asset is recognized in the statement of financial posision when: a) it is probable that the future economic benefits will flow to the entity b) the asset has a cost or value that can be measured with reliability Liabilities: an out flow of the future economic benefits that the entity is currently obliged to make as a result of past events or past transactions. Recognition criteria: a liability is recognized in the statement of financial position when:

This state by banker creditors. - Determi generating from its o its investin comparing provided b activities a used in In any deficie for Investi made from they the f provided f activities.

a) it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation. b) The amount at which the settlement will take place can be measured reliably Liabilities can be classified as: - Provisions are defined as liabilities for which the amount of the future sacrifice is uncertain. That is, whether a liability is a provision or some other type of liability (e.g. borrowings, trade creditors, accruals) depends upon the extent of uncertainty associated with the amount of the future sacrifice. - Other liabilities such as accruals are liabilities to pay for goods or services that have been provided but for which a supplier’s invoice has not yet been recorded as an account payable. Accruals often involve estimation, such as the amount of the next electricity bill or telephone account. - Contingent liabilities are liabilities for which the amount of the future sacrifice is so uncertain that it cannot be measured reliably. Liabilities are also classified as contingent if they do not satisfy the probability criterion, or if they are dependent upon the occurrence of an uncertain future event outside the control of the entity. Examples include an unresolved lawsuit brought against the entity and the potential liability resulting from a tax audit in progress. Contingent liabilities are not recognized because they are not probable or are unable to be measured reliably, or both, Operating cycle: tge average time taken to acquire goods and services and convert them to cash in producing in revenues.

Concepts and Principles - Monetary principle: requires that only those things that can be expressed in mone be included in the accounting recors. - Accounting entity concept: states that every entity can be separately identified and accounted for. Eg: suppose you are a shareholder in Domino’s, the amount of cash you have in your personal bank account and the balance owed on your personal car loan are not reported in the company’s financial statements. The reason is that, for accounting purposes, you and the company are separate accounting entities. - The accounting period concept: the life of the business can be devided into artificial periods and that useful reports covering those periods can be prepared for the business.

- Going concern principle: the business will remain in operation for the foreseeable future. Assume that the business ill continue operating. Eg. If going concern is not assumed, then plant and equipment should be stated at their liquidation value ( selling price – cost of disposal), not at their cost. - Cost Principle: all assets are initially recorded in the accounts that their purchase price or cost. - Full disclosure principle: requires that all circumstances and events that could make a difference to the decisions financial statement users might make, be disclosed.

Qualitative characteristics - Relevance: info is considered relevant if it is capable of making a difference in the decisions made by users Eg. When domino’s issues financial statements, the infor in the statements is considered relevant because it provides a basis for forecasting future profits. - Faithful representation: info is a faithful representation of the economic phenomena it purports to represent if it is complete neutral and free from material errors. Info that is considered to be neutral is free from bias.

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Relevance and faithful representation work together in enhacing the decision usefulness of info Comparability: info that is comparable facilitates users identifying similarities and differences between different economic phenomena. Verifiability: info is verifiable if it represents the economic phenomena without bias or material error and has been prepared with appropriate recognition and measurement methods. Understandability: the quality of info that assists users to understand the meaning of the info provided. Cost constraints: limit the info provided by financial reporting. Providing decision-useful info imposes costs, and the benefits of providing the info should outweigh the cost. Timeliness: is measured by whether the info is availbale to users before it ceases to be relevant

Profitability Profitability ratios measure the operating success of an entity for a given period of time. These ratios are helpful in evaluating and making decisions about an entity

Liquidity Liquidity ratios measure the short-term ability of the entity to pay its maturing obligations and to meet unexpected needs for cash. ( Use info from cashflow)

Solvency Solvency – its ability to pay interest as it comes due and to repay the debt at maturity. Solvency ratios measure the ability of the business to survice over a long period of time. The debt to total assets ratio is one source of info about long-term, debt-paying ability

Questions: 1.Decision making process 1. identify the issue or the decision to be made 2. Gather the relevant information required for the analysis

3. Identify the tool or technique that can provide the analysis of the issue to a decision may be made 4. Evaluate the results of the analysis and make the decision. 6.Conceptual framework A set of concepts to be followed by preparers of financial sttements and standard setters. 7. Why it is important to determind if a business entity is a reporting entity? Outline 3 main indicators that determind if an entity is a reporting entity It is important to determine whether an organization is a reporting entity as reporting entities must prepare external general purpose financial reports which comply with accounting standards. - Reporting entities tend to be larger organization and the financial info provided in external general purpose financial reports tend to be quite condense - Both reporting and non-reporting entities also prepare internal reports which have more detailed info.

TOPIC 3 Reporting and analyzing Inventory • Perpetual System: – Detailed inventory system in which the cost of inventory is maintained. – Records continuously show the inventory that should be on hand: • e.g. car dealerships, furniture stores. • Periodic system: – Inventory system in which detailed records are not maintained. – Cost of sales is determined only at end of accounting period by a physical inventory account. – Used widely by small businesses: • e.g. convenience stores, cafes. Key difference between periodic and perpetual inventory systems is the point at which the cost of sales is calculated

Purchase return and Allowances A purchase return is the return of goods by the customer. • The customer will receive a refund in the form of either credit or cash. • A purchase allowance occurs where the customer keeps the goods and a reduction in price is granted. Example: • Goods costing $300 are returned to PW Audio Supply Ltd.

Freight cost • Freight costs incurred by the seller are an operating expense to the seller. • These costs are included as part of delivery or freight-out expenses. Example: • PW Audio paid freight charges $150 for goods sold.

Purchase discounts Settlement discounts are discounts given for prompt payment of account. Example: Sauk Stereo settles account outstanding of $3500 and receives discount of $70.

Trade discounts are a % reduction in the list price of inventory sold. Example: List price quoted is $5000 and trade discount given of 10%.

Operating expenses • Selling expenses: – cost of making the sale – e.g. advertising, delivery expenses. • Administration expenses: – cost of operating activities of the general, accounting and personnel offices – e.g. salaries, rent.  Financial expenses: – costs of financing the business – e.g. interest expense, discounts allowed.

Accounting for GST • Purchasing inventory: Example: Retailer purchases 10 tables on credit from manufacturer for $440 (GST inclusive).

 Purchase returns: Example: Retailer returns 3 of the purchased tables for credit.

 Selling inventory: Example: Retailer sells five tables for $550 each including GST.

 Sales returns and allowances: Example: Customer returns one table for credit

Cost flow assumptions 1. First-in, first-out (FIFO). 2. Average cost. Example – Dubbo Electronics

• During the year 550 units were sold and 450 were in inventory at the end of year. 1. First-in, first-out (FIFO): – Assumes first goods purchased are first goods sold. – Allocation of costs:

2. Average cost: – Assumes that goods sold are similar in nature. – Cost of goods available for sale is calculated on weighted average unit cost incurred. – Allocation of costs:

TOPIC 5 Internal control, Cash and Recieavables Reconciling the bank account ( Chapter 7) A bank reconciliation involves a comparison between the bank;s records and the business’s cash receipts journal, cash payments journal and cash at bank ledger account. Because the bank and the business maintain independent records o the business’s bank account, you might assume that the respective balances will always agree. In fact, the 2 balances are seldom the same at any give time. Therefore it is necessary to male the balance in the business record agree with the balance as per the bank. -> reconciling the bank account.

Recording and reporting Recieavables • Accounts receivable are amounts owed to the business by customers on account.

• Notes receivable are amounts owed to the business for which formal instruments of credit are issued evidencing the debt.

• Other receivables include non-trade receivables such as interest receivable, loans, advances and GST receivable.

Valuing account receivables 1. Direct write-off method:

• Bad debts expense is recognised when the uncollectable account is specifically identified and written off. • Receivables are reported at gross amount

2.Recording estimated uncollectables by allowance method — journal entry

– Statement of Financial Position:

• A bad debt write-off affects the GST liability: – When the account was originally recorded a GST liability was recognised. – As the account is unpaid the GST liability must be reduced.

Advantages and Disadvantages of computerised systems Advantages

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Ability to process numerous transactions quickly Built-in automatic posting of transactions -> virtually error free Errors reduction Fast response time Flexible and fast report production

Disadvantages

- advantages outlined may not be achieved if the hardware and software are inappropriate, incompatible or faulty - Employees need to be able to operate the system - Unskilled employees may cause problems or not make full use of the system’s capabilities - Viruses and hackers can have devastating effects on data - Need good back-up mechanisms to ensure important data are not lost during power failures

TOPIC 8 Reporting and Analysing Equity • A corporation: – is created by law – has most of the rights and privileges of a person (but not voting or holding office) – is subject to the same duties and responsibilities as a person (including keeping the law and paying taxes). • Companies are the most common type of corporation.

Shareholders rights • A company is owned by its shareholders. • Different classes of shares carry different ownership rights: – ordinary shares – preference shares. • When a company has only one class of shares they are referred to as ordinary shares. • Ordinary shares have 3 major ownership rights:

• Preference shares have priority over ordinary shares with respect to dividends and claims at liquidation. • A company usually receives cash in exchange for issuing shares.

Accounting for the private issue of shares • When a company decides to issue shares, it must decide: – How many shares? – How shares should be issued? – At what price the shares should be issued? • When shares are issued by private placement, the proceeds are immediately available for use by the company. • Journal entry to record private placement:

• A share split involves the issue of additional shares according to the percentage ownership of shareholders. • This results in a reduction in the stated value per share: – e.g. a 2-for-1 split means that one share with a value of $10 will be exchanged for 2 shares each with a value of $5. • A share split does not affect the total equity of the company.

Dividends A dividend is a distribution of profit by a company to its shareholders on a pro rata basis. • Forms of dividends: – cash – property – shares. • Public companies often pay 2 dividends: – Final dividend determined at end of year. – Interim dividend paid during the year. • A cash dividend is a pro rata distribution of profit paid in cash to shareholders. • Companies can only pay a cash dividend if: – Assets exceed liabilities by more than the amount of dividend proposed. – It is fair and reasonable to shareholders as a whole. – It does not materially prejudice the company’s ability to pay its creditors • Journal entry when dividend is declared:

• Journal entry when dividend is paid:

( same shit with share dividends)

Statement of Financial Position • Equity section of the statement of financial position of a corporation includes: – Share capital: contributed equity (paid and any outstanding amounts). – Retained earnings: prior profits kept within company and not distributed as dividends. – Reserves: changes in equity not created through transactions with owners.

• Dividend record: – The dividend payout rate measures the percentage of profit distributed in the from of cash dividends to ordinary shareholders:

Eg.

• Earnings performance:

– Return on shareholders’ equity shows how many dollars of profit were earned for each dollar invested by ordinary shareholders:

Eg.

TOPIC 7 Property, Plant and Equipment ( PPE) These are assets that have physical substance ( a definite size and shape), are used in the operations of an entity for more than one period, and are not intended for sale to customers. • Two classes of PPE assets: – Property: • includes land and buildings. – Plant and equipment: includes cash registers, computers, office furniture, factory machinery, motor vehicles • The cost of an asset: – Consists of the fair value of all expenditure necessary to acquire the asset and make it ready for use: e.g. purchase price, freight costs paid, installation costs (capital expenses). – Excludes non-capital expenditures which are expensed immediately.

Depreciation Is the process of allocating to expense the cost of a PPE asset over its useful life in a rational and systematic manner. Accumulated depreciation: account represents the total amount of the asset’s cost that has been charged to depreciation expense since the asset was acquire ( it is not a cash fund)

Carrying amount – cost less accumulated depreciation

Depreciation methods Eg.Delivery truck purchased by Bill’s Pizzas

1. Straight-line method: • Depreciation expense same each year as benefits are consumed at same rate each year. • Calculation for annual charge: cost of asset – residual value useful life of the asset • Bill’s Pizzas example: – Annual depreciation: • ($13 000 - $1 000) / 5 = $2 400 Journal entry to record depreciation expense:

2.Diminishing-balance method: (Normally they would give the percentage) • Depreciation expense decreases each year as greater benefits are consumed earlier in assets life. • Calculation: Depreciation rate = 1 – or 1 – (r / c)1/n • Bill’s Pizzas example: Annual depreciation rate = 1 – ($1000/$13 000)1/5 = 1 – 0.5987 = 40% (approximately)

3. Units-of-production method: • Useful life is expressed in terms of total units of production or use expected from the asset. • Calculation of depreciation cost per unit: depreciable cost of asset useful life of the asset • Depreciation expense: depreciation cost x yearly units of per unit production

• Bill’s Pizzas example: – Depreciation per unit: = $12 000/100 000 units = $0.12 per unit – Depreciation expense: = $0.12 x 15 000 units = $1 800

Comparison of depreciation methods:

Patterns of depreciation:

Sales of PPE assets • Gain on Sale example: – Wright Ltd sells office furniture on 1 July 2015 for $16 000 cash. – Original cost was $60 000. – Accumulated depreciation to 1 January 2015 is $41 000. – Depreciation expense for first 6 months of 2015 is $8000. Recording depreciation

Calculation of gain on disposal:

Recording the sale of the asset:

Recording the loss on sale of the asset:

Intangible assets • Intangible assets are defined as identifiable non-monetary assets that have no physical substance. • Examples include: – Patents (e.g. Apple iPod) – Franchises (e.g. Domino’s Pizza) – Trademarks (e.g. swoosh of Nike). • Intangible assets can be separated into: a. Identifiable: • Must be capable of being separated or divided from an entity (whether sold, licensed, rented or exchanged) or must arise from contractual or other legal rights. b. Unidentifiable: • Cannot be separated from the entity itself. • Collectively referred to as goodwill. • Amortisation: • This is the term used to describe the allocation of the cost of an intangible asset to expense.

• Intangible assets are assumed to have a limited life and are amortised. • Patents are amortised over legal or useful life, whichever is shorter. • Example: • Patent costs $60 000 and has an estimated useful life of 8 years. • Annual amortisation expense: $60 000 ÷ 8 = $7500 • Recording annual amortisation.

Types of Intangibles ...