YEAR ONE Workbook 1 with annotations PDF

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FINANCIAL ACCOUNTING YEAR ONE WORKBOOK TERM ONE AUTUMN 2012

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CONTENTS Lecture One: Introduction to financial accounting: Objectives of financial accounting Lecture Two: Users of financial statements and accounting concepts Lecture Three: Assets, liabilities, capital, income, expenses and the accounting equation Lecture Four: Recording dual aspects of transactions and books of prime entry Lecture Five: Ledger accounting and double entry bookkeeping Lecture Six: Ledger accounting and double entry bookkeeping Lecture Seven: Closing off the ledger accounts and preparation of the trial balance Lecture Eight: Preparation of accounts from the trial balance Lecture Nine: Cash accounting versus accruals accounting Lecture Ten: Year end adjustments -write off of irrecoverable debts and allowances for doubtful debts Lecture Eleven: Year end adjustments- Inventory valuations and inventory adjustments

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TERM TWO Lecture Twelve: Year end adjustments- accruals and prepayments Lecture Thirteen: Year end adjustments-non- current assets, depreciation and disposals Lecture Fourteen: Control accounts Lecture Fifteen: Financial Statements for Companies-Share capital, share premium, revaluation reserve, loan notes, statement of retained earnings Lecture Sixteen: Preparation of company financial statements Lecture Seventeen: Statement of cash flows Lecture Eighteen: Statement of cash flows continued Lecture Nineteen: Ratio analysis- Interpretation of accounts Lecture Twenty Exam format and focus Lecture Twenty One Revision question

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Reading Required Core text Wood, F.and Sangster, A., 2011,Business Accounting Volume 1 with MyAccountingLab access card, 12th edition : Financial Times/Prentice Hall ISBN13: 9780273759287 ISBN10: 0273759280 Home work and some tutorial questions will be set from this text most weeks. Books recommended for purchase by students: Wood, F.and Robinson, S., 2009, Book-Keeping and Accounts 7th edition: Financial Times/Prentice Hall ISBN13: 9780273718055 ISBN10: 0273718053 Further Reading/Resources: Business news in the quality press, web sites and current affairs programmes Special ICTS Requirements: An accounting package will form the basis of the IT element of this unit

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Financial accounting unit objectives: •

To form a foundation for your studies in year 2 and 3 – Corporate Reporting and Analysis

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To compliment other units in the first year: –

Information for Management

FINANCIAL ACCOUNTING UNIT STRUCTURE: •

Formal one hour lecture per week –

Term one workbook and term two workbook

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Also available on Moodle

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Based around the core text: •

Business Accounting 1 – Frank Wood: 12th Edition IFRS version

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One hour Supertutorial every week

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One hour tutorial every week –

Expected to do some practice questions as a prior requirement to attempting the ‘set’ tutorial questions

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Two ‘RED’ weeks – no lectures, Supertutorials or tutorials on normal timetabled subjects – other activities take place.

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Term two-accounting package workshops every week

USE OF MOODLE: •

A resource available to support your studies

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Lecture, Supertutorial and tutorial material including podcasts

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Progress/practice tests

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Past exams

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Notifications

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COURSE ASSESSMENT: UNIT LEARNING OBJECTIVES •

Learning Outcome 1: Explain accounting concepts and demonstrate accounting techniques

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Learning Outcome 2: Apply fundamental methods in recording business transactions

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Learning Outcome 3: Prepare financial statements for unincorporated and corporate entities

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Learning Outcome 4: Prepare basic financial statements using an accounts preparation IT package

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Lecture One: Introduction to financial accounting; Objectives of financial accounting Lecture Learning objectives: 1. To state the objectives of financial statements 2. Identify the components of financial statements for an unincorporated business and a corporate entity 3. To distinguish between an unincorporated business and a corporate entity

What is the objective of financial accounting? The objective of financial statements is to provide useful economic information about the financial performance (as measured by the income statement) and the financial position (reflected in the Statement of Financial Position) to a wide range of interested parties for decision making purposes. What do financial statements include?

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INCOME STATEMENT (IS) ALSO CALLED PROFIT AND LOSS ACCOUNT OR STATEMENT OF COMPREHENSIVE INCOME STATEMENT OF FINANCIAL POSITION (SOFP) ALSO CALLED BALANCE SHEET. STATEMENT OF CHANGES IN EQUITY (SOCIE) FOR COMPANIES ONLY-LATER

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STATEMENT OF CASHFLOW (LATER)

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What does the IS and SOFP look like?

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EXAMPLE OF INCOME STATEMENT FOR AN UNINCORPORATED BUSINESS-ROONEY Income statement year ended 31 March 20X1 £

£

Revenue

93,900

Opening inventory

16,000

Purchases

48,200

Closing inventory

(18,000)

Cost of sales

(46,200)

Gross Profit

47,700

Wages

11,000

Admin expenses

7,300

Rent and insurance

10,000

Motor expenses

5,600

Depreciation- Van

5,000

- shop fittings Profit on sale of old van Interest

4,000 (500) 800

43,200

Net profit

4,500

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EXAMPLE OF SOFP FOR AN UNINCORPORATED BUSINESS-ROONEY SOFP at 31 March 20X1 Non-current assets

£

£

Motor van

15,000

Shop fittings

16,000 31,000

Current Assets Inventory

18,000

Receivables

7,800

Prepayment

1,000

Bank/Cash

1,000 27,800 58,800

Total assets Capital and liabilities Capital account Balance b/f

50,500

Profit for the year

4,500

Drawings

(12,700) 42,300

Non-current liabilities – loan

9,300

Current liabilities Trade payables

4,500

Accrued expenses

2,700

7,200 58,800

Capital and liabilities

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EXAMPLE OF INCOME STATEMENT FOR A COMPANY-CITY LIMITED INCOME STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 20X1 Sales

200,000

Cost of sales

(120,000)

Gross profit

80,000

Rental income

5,000 85,000

Selling and distribution

(4,500)

Administration

(32,500)

Finance costs

(2,000)

Profit before tax

46,000

Taxation

(13,000)

Profit after tax

33,000

(EXTRACT) STATEMENT OF CHANGES IN EQUITY-CITY LIMITED For the period ended 31 December 20X1 Retained earnings b/f

(1/1/X1)

£ 32,000

Profit for the year

33,000

Dividends paid

(15,000)

Retained earnings

(31/12/X1)

50,000

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£

EXAMPLE OF SOFP FOR A COMPANY-CITY LIMITED SOFP AS AT 31 DECEMBER 20X1 Assets

£

£

Non-current assets Goodwill

20,000

Land and buildings

50,000

Plant and machinery

20,000 90,000

Current assets Inventory

20,000

Receivables

25,000

Cash and bank

15,000

60, 000 150,000

Total assets

Equity and liabilities Equity shares

50,000

Reserves (From SOCIE) -Retained earnings

50,000 100,000

Non-current liabilities – loan

10,000

Current liabilities Payables Accruals and provisions

35,000 5,000

40,000 150,000

Equity and liabilities

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What is the difference between an unincorporated business and a company? Unincorporated businesses This is an individual running a business as a sole trader; they own and run the business. There is no legal distinction between the owner (the proprietor) and the business. The owner takes all the profit and suffers all losses. All of the assets are owned by the owner and all the business debts are debts of the owner. If the business defaults on the debts then the owner must pay the debts from their own private assets. The owner has unlimited liability A partnership is also an example of an unincorporated business. This is where two or more individuals run a business with a view to making a profit. Most partnerships have unlimited liability The accounts of an unincorporated business do not have to be made public. A company A company is a separate legal entity. Companies are owned by shareholders. The profit and losses belong to the company as do the assets and liabilities. The owners of a company have limited liability as their own private assets are not at risk. Their liability is limited to the amount of money invested in the company. They are not personally liable for the company debts. Companies must adhere to strict accounting rules and accounts have to be made public.

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Supertutorial question for lecture 1

(a) What are the objectives of financial statements? (b) List the four statements that might be included in financial statements and identify the only one relevant to companies (c) Complete the following table, indicating by a tick where each item would appear

Item Revenue Non Current assets Dividends Purchases Current Assets Retained earnings b/f Wages expense Drawings Equity shares

SOFP

IS

SOCIE

(d) Identify the differences between an unincorporated business and a company in terms of the following

Unincorporated business Legal distinction Liability for debts Entitlement of profit Publication of accounts

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Company

Lecture Two: Users of financial statements and accounting concepts Lecture Learning objectives: 1. 2. 3. 4. 5.

Identify the principal users of financial statements and their specific needs Describe the characteristics that make accounting information useful Discuss the need for a regulatory framework Be aware of the differing sources of regulation Discuss the concepts underlying the preparation of financial statements

Who is interested in the accounts of businesses and why?-users of accounts and their needs?

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Investors: present and prospective –

Hold or sell shares

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Income/returns (dividends) and their growth

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Risk/security/stability of investment

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Efficiency of management (re-appoint directors)

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Secondary issues: ethical/green investments

Lenders: banks loan providers –

Can business pay interest and capital on loan?

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Cash flow statement important

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Imposition of charges on assets/covenants

Employees (and representatives – trade unions) –

Secure employment

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Levels of remuneration (pensions)

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Promotion prospects

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Job satisfaction (staff turnover rates?)

Management –

Achieving stewardship function

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Safeguarding the company's assets

– Managing the business efficiently •

Government (local and national) 13

– – – – – – – – – • • •

Corporation tax Income tax from employees VAT from consumers Business rates Allocation of resources Distribution of grants or incentives National statistics Exports Inflation

Business Contact Groups Suppliers (creditors), customers and competitors Public – Interaction with local economy/environment

What are the principles of accounting-how should financial accounts be prepared? The international ‘Framework’ as produced by the International Accounting Standards Board (IASB) •

Sets out the principles that the IASB believe should underlie the preparation of financial statements

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Clarifies the conceptual underpinning of Financial Reporting standards, but it is NOT a financial reporting standard

Main contents: •

Define the objectives of financial statements (as above)

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Describes the elements of financial statements (i.e. what they should contain) (as above)

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Identifies the users of financial statements (as above)

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Explains the qualitative characteristics financial statements

The qualitative characteristics financial statements •

Relevance-Relevant financial information is capable of making a difference in the decisions made by users. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both. The predictive value and confirmatory value of financial information are interrelated. -Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information relates in the context of an individual entity’s financial report

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Faithful representation -To be useful, financial information must not only be relevant, it must also represent faithfully the phenomena it purports to represent. This fundamental characteristic seeks to maximise the underlying characteristics of completeness, neutrality and freedom from error. Information must be both relevant and faithfully represented if it is to be useful. Enhancing qualitative characteristics

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Comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented.

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Comparability – Information about a reporting entity is more useful if it can be compared with a similar information about other entities and with similar information about the same entity for another period or another date. Comparability enables users to identify and understand similarities in, and differences among, items.

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Verifiability – Verifiability helps to assure users that information represents faithfully the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.

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Timeliness – Timeliness means that information is available to decision-makers in time to be capable of influencing their decisions.

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Understandability – Classifying, characterising and presenting information clearly and concisely makes it understandable. While some phenomena are inherently complex and cannot be made easy to understand, to exclude such information would make financial reports incomplete and potentially misleading. Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyse the information with diligence.

What are accounting concepts- broad basic assumptions underlying the preparation of financial statements?

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Going concern

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Accruals (matching)

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Consistency

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Prudence

Other concepts/axioms

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Materiality

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Substance over Form

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Entity

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Money measurement

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Historical cost convention

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Objectivity Vs Subjectivity

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Duality

Detail of accounting policies •

Consistency implies no changes; comparability now considered to be more important

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Old importance attached to prudence deemed to be too pessimistic often leading to understatement of profits, overstatement of liabilities

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Need to understand the difference between a change in policy and a change in an estimation technique

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Change of presentation in financial statements is a change of policy (e.g. an expense that was included in cost of sales and is now treated as an administration cost)

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Accounting policies must be selected on the basis of relevance and faithful representation

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Accounting policies must be reviewed annually

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Going concern and accruals (except in cash flow statements) concept play a pervasive role (i.e. they are the most important concepts). Accruals is closely related to realisation (only realised profits are in the income statement)

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Prudence and accruals are now desirable features

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Estimation techniques (e.g. calculation of depreciation) are selected on the basis of giving a true and fair view

Disclosures •

Accounting policies and any changes therein, departures from accounting standards, estimation techniques and going concern problems

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Supertutorial question for lecture 2 Past examination questions a) The IASB’s Framework sets out the concepts and principles that should underlie the preparation of financial statements. For financial statements to be of benefit to users, the information contained must be relevant and of faithful representation.

Required: For each of the following items explain, with an example, what they mean and the way they enhance relevance and faithful representation: - materiality - the use of the accruals basis - the use of prudence - reporting the substance of transactions - application of consistency

b) The IASB’s ‘Framework for the preparation and presentation of financial statements’ identified several user groups that would be interested in an entities financial statements. Required: Identify five user groups and describe their information needs and concerns.

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Lecture Three- Assets, liabilities, capital, income and expenses and the accounting equation (unincorporated businesses) Lecture Learning objectives: 1. Define assets and liabilities; and apply these definitions to specific examples 2. Define income and expenses and apply these definitions to specific examples 3. List and describe the major categories of assets and liabilities as they appear on a statement of financial position 4. List and describe the major categories of income and expenses as they appear in the Income Statement 5. Explain how the elements of financial statements are dependent on the above definitions In Lecture one, we saw illustrations of a business’s Income Statement and Statement...