THE UNIVERSITY OF NEW SOUTH WALES

Australian School of Business

School of Accounting ACCT 1501: Accounting and Financial Management 1A

Week 1

Introduction to Financial Accounting & Key Financial Statements

Student Handout

Lecturer: Dr. Youngdeok Lim School of Accounting UNSW QUAD 3069 youngdeok.lim@unsw.edu.au

Blackboard: http://telt.unsw.edu.au.

Session 1, 2012

WEEK 1: Introduction to Financial Accounting & Key Financial Statements

Welcome to Accounting and Financial Management 1A. In this first lecture you will be introduced to the lecture staff on the course and be given the Course Outline. We will be outlining the objectives of the subject, its structure and requirements as described in the Course Outline and answer any questions you may have about the course. We will be referring to the Woolworths 2007 Annual Report (WW2007) throughout the course. The annual report is included as an appendix in your course textbook (Trotman & Gibbons (T&G) pages 709-748). We will then begin to explore the nature of accounting and introduce general purpose financial reports.

Learning objectives
At the end of this topic you will be able to: Understand the overall course requirements and assessment tasks for this unit. Define Accounting Begin to become familiar with the Woolworths 2007 annual report and the information it contains. Be aware of key financial statements and the users of these reports. Understand the foundations of modern accounting practices including the underlying assumptions of financial reporting Begin to understand the accrual concept

Required Reading
ACCT1501: Accounting and Financial Management 1A: Course Outline Trotman & Gibbins Chapter 1: sections 1.1 to 1.4, & 1.9 - 1.11; Appendix 1 (WW2007)

AFM1A

2.

Tutorial Questions Week 2

Preparation Questions You should attempt these questions before the tutorial. The answers to the preparation questions will be made available on the course website at the end of the relevant lecture week. In this way you can check your understanding of these questions before the tutorial class. You are welcome to raise any unresolved issues that you have with the preparation questions with your tutor. This will be important and essential information for you when you complete your reflection task. DQ 1.1, 1.2, 1.3, 1.7, P1.6, P1.16, C1A (1-7)

Tutorial Questions The answers to tutorial questions are the focus of the tutorial class work: DQ 1.12, 1.16, P1.7, P1.15, P1.25

AFM1A

ABC faced insolvency in 2007

Colin Kruger May 22, 2010 ABC Learning was staring down the barrel of a $1.78 billion loss for the 2008 financial year when it collapsed, but the company may have been insolvent as early as mid-2007, according to a report from its administrators, led by Ferrier Hodgson's Greg Moloney. In the final drafts of ABC's financial statements prepared for the year ending June 30, 2008, its auditors included impairment charges totalling $1.168 billion, and a $364 million loss on the disposal of a majority stake in ABC's US business. Significant contributors to the loss - $1.2 billion more than previous estimates - are a $686 million cut in the valuation of childcare licences and a $127 million write-down of debts owed by ABC's childcare developer, 123 Group. The massive loss means the net assets on ABC's balance sheet were reduced from $2.22 billion the previous year to just $284.5 million at June 30, 2008, putting the company in breach of its covenants almost five months before administrators were appointed. But the bombshell in the report to creditors is the administrators' analysis that for the 2007 and 2008 financial years ABC had just 30 and 40, respectively, of current assets for every dollar of current liabilities. This equates to a current ratio of 0.3 and 0.4 for those years. The administrator's report notes that ''a current ratio and quick ratio less than one may indicate a potential liquidity crisis''. An analysis of the company's quick ratio showed ABC had just 20 of ''liquid'' assets for every dollar of current liabilities in 2007, and 10 in 2008. The quick ratio is lower because it does not include potential proceeds from assets held for sale. ''This indicates that there was a reliance on the sale of assets to discharge short-term liabilities as at 20 June 2008,'' the report said. In an examination into ABC's collapse, senior executives told the Federal Court last month there were no liquidity concerns when ABC began a fire sale of assets in early 2008, despite evidence to the contrary from junior ABC management. The report also spells out just how reliant ABC was on the banks and investors for its cash. Over the six-year period leading up to its collapse, ABC generated $3.43 billion from debt and equity markets against $375 million cash generated from its childcare operations.

AFM1A

''This reliance on external capital, combined with failing support by equity and debt investors as well as underwhelming financial performance, led to a liquidity crisis and was a major contributor to the failure of the ABC Group,'' the report said. The administrators said they have yet to determine exactly when ABC became insolvent. The second creditors' meeting, expected to vote to wind up ABC, is scheduled to be held June 2 at the Tattersall's Club in Brisbane.

Read more: http://www.smh.com.au/business/abc-faced-insolvency-in-200720100521-w1tf.html#ixzz1Rc0qPPKJ

AFM1A

Accounting and Financial Management 1A

Todays lecture objectives:

Week 1 Session 1, 2012 Ensure you have an understanding of the Course
Outline especially what you need to do to be successful in this course,

& the administrative side of the course.

Begin to be familiar with annual report Develop a brief understanding of the

nature of accounting:

the financial statements,

Lecturer in Charge Dr Youngdeok Lim Quad 3069

key principles & assumptions

The Course Outline Introduction

What you need to know?
1. Understand the course structure
Australian School of Business School of Accounting ACCT1501 ACCOUNTING AND FINANCIAL MANAGEMENT 1A

Teaching staff Dr. Youngdeok Lim (Lecturer-in-Charge) Jeffrey Knapp (Lecturer) Dr. Tami Dinh Thi (Lecturer) Other tutors Wei, Jo, Radzi, Alex, Carone, Tara,
Amanda, Candice, Sunny, Brent, Wendy, Abarna, Rommo, Li, Bonnie, Cece, Abby, Michelle, Stella, Chloe, Karen, Dominic
Take a couple of minutes and introduce yourself to two people near you. Ask
them what tutorial group they are in & what else they are studying.

2. Course objectives 3. Clarify roles and responsibilities

COURSE OUTLINE SESSION 1 2012

Required Texts
Lecture outlines and additional readings Available on Blackboard Trotman & Gibbins 4th Edition Practice Set

Course schedule (see page 15 in course outline )

http://www.perdisco.com.au/home.asp All the instructions on how to log on and use Perdisco are covered in the Course Outline

Lectures: How do you prepare for lectures

Read the assigned reading materials before the lecture

Tutorials: How to maximize the return on your investment (ROI)

Participation in class (both lectures & tutorials)

Students

Lectures are only a summary and are not a substitute for reading

do not benefit from copying solutions

Bring your Lecture Notes to every lecture & tutorials !!!!!

Attempting

The lecture notes follow the lecture outline with space for you to make your own additional notes during the lecture Lecture notes will be posted on Blackboard. Lectures will be Podcast recorded with screen captures of the lecture slides. This is recommended as an additional resource not a substitute for face-to-face interaction in the lectures.

your work is essential to identifying concepts/ issues you do not understand

Your tutor will randomly choose 6 weeks to review your written answers to the assigned tutorial questions and preparation questions and mark the best 5 weeks (no half mark).

How Help

do you learn to drive or cook, is it by reading only? tutors help you, by proactively asking questions!

Interaction

in the tutorial helps everybody learn it might even be fun!!!!

Preparation & Tutorial Questions: Work you must do to pass the course !!

Learning Assessment (or how to pass AFM1A)

Assessment Item / Due date Tutorial participation (complete each week) Mid-session class test (Week 7) Multiple Choice Tests 2 quizzes 5% each (Week 5 & 12) Perdisco Practice Set Assignment (May 11th @ 3pm) Final examination TOTAL Weight 10% 15% 10% 10% 55% 100%

Preparation Questions: Attempt all preparation questions and check

the solutions on Blackboard before your tutorial. Raise any questions with your tutor in class or your tutors consultation time. Refer to Blackboard for the consultation schedule.

Tutorial Questions (also attempt before class): The goal of the

tutorial is to discuss the questions and clarify any concerns you may have. The process in an interactive one and you are required to engage with your tutor by asking and answering questions.

Note: DQ1.1 means Chapter 1, discussion questions 1. P1.6 refers to problems at the end of chapter 1. Let us try these P4.25 & P6.22 - How will you find these???

You must satisfactorily complete all assessment tasks and score a total mark of at least 50, including a satisfactory pass mark in the final exam.

This assignment is due May 11th @ 3pm 20 hrs work approx. Two Quizzes YOU must read the instructions!!!! The quiz will consist of 30 multiple choice questions. It is recommended to be completed in 60 minutes; however there will be no official time limit limit. One attempt. attempt

Practice Set Assignment (Week 10)

Perdisco on-line practice set an individual assignment. A practice set is a comprehensive accounting exercise
designed to integrate your knowledge of accounting systems and the accounting cycle. (Business transactions for 1mth)

Important feedback!!!!

This task is expected to take approximately 20 working

hours to complete. Start working on this exercise as early as possible (around week 5) to be able to complete it by the due date

For you & us!

DO NOT LEAVE THIS TASK TO THE LAST

MINUTE !!!!

Important note

Special Consideration and Supplementary examinations:

There

Additional resources

is only one opportunity to sit a supplementary final exam which will be held on 10 July 2012 exams for the School of Accounting after the final exam session. you are too ill to perform reasonably on the final exam, do not attend the final and apply for a supplementary instead.

Consultation PASS (Peer Assistance Support Scheme)

If

Applying

for special consideration does not automatically mean that you will be granted a supplementary exam.

The Course Website

Blackboard http://telt.unsw.edu.au Announcements!!! your responsibility to read View preparation and tutorial solutions Use the Discussion board - 3 Categories
Course Course On-line

Student responsibilities:

Preparation for lectures & tutorials Workload and other commitments balance!!! Attendance 80% rule University & ASB Conduct and behaviour respectful to others at all
times in lectures, tutorials, via email and on Blackboard

Content, Administration Practice Set (student only)

Keeping informed !!! Read the course outline;

Blackboard Announcements & your university email.

overseen by staff members

ONLY attend the lecturers and tutorials that you are

officially enrolled to attend.

Use appropriately and with respect for others

Ground rules in noise control

Be quiet in my lecture for a student who wants to listen. To discourage unnecessary noise in my lecture, there will

Introduction to Financial Accounting & Key Financial Statements (Ch 1)

be a 1 mark penalty to a student who is not quiet.

What is accounting?
Accounting is the process of identifying, measuring, recording and communicating economic information to assist users to make decisions decisions.
Accounting System

Financial Accounting System

Periodic financial statements and related disclosures

Managerial Accounting System

Detailed plans and continuous performance reports

Business language Grammar Vocabulary Practice

External Decision Makers
Investors, creditors, suppliers, customers, etc.

Internal Decision Makers

Managers throughout the organization

What is financial accounting?

What is management accounting?

Financial accounting will be the focus of this course. Financial accounting focuses on the provision of
information to users external to the enterprise.

Management accounting will be the focus of later part of

this courses.

Management accounting focuses on the provision of

information o a o to o use users s within the ee enterprise e p se ( (to oa aid d in operational planning and control decisions).

The focus is on reporting financial position and

financial performance.

The rise of economic consequences Is accounting really important?

Conveys economic information to decision makers

This

Used by:

is extremely important!!

Management in making business decisions Shareholders for decision making Board of directors in takeover battles Bankers and creditors in lending decisions

The rise of economic consequences relating to

financial reporting

Recently we have seen some critical developments in

this area which has impacted this relationship.
The

introduction of IFRS (International Financial Reporting Standards) Corporate Governance laws

New

Is accounting really important? (cont.)

Used by:

Accounting information and share prices

Qantas shares dive as profit plunges (February 18, 2010,

Sydney morning herald) Qantas Airways shares have plunged the most in a year after the airline reported a 72 per cent slide in first-half net profit and said it would pay no dividends as it was forced to slash fares to fill aircraft. Qantas shares ended the day down 24 cents, or 8.1 per cent, to $2.73. The airline, which delivered results within its own forecast range but at the lower end of analysts expectations, said there were some signs of improvement by the end of the second quarter, but increased fuel and depreciation costs would be felt in the second half.

Boards in rewarding and removing executives Management and unions in wage negotiations Impacts communities Impacts workers

Some examples of an economic consequence

The Accounting Scandals such as Enron,
Worldcom,

The nature of accounting (ABC Learning Why is accounting important?)

Misleading reporting Mismanagement ABC learning Collapse of the company Indictments

 We have focused mainly on the economic consequences

in the equity markets
The

Other users of accounting information:

decision maker in this situation is the investor / owner

Their

decisions are based on what value they are willing t either to ith buy b or sell ll shares h i in th the market k t

Can you think of other users of accounting information? And, for what purposes will they use the accounting
information?

Small group (two to 4 people) discussion.

Can you think of total salary of CEO of Woolworths for the year ended 26 June 2011?
25% 25% 25% 25%

How can you find the information?

Information asymmetry, Voluntary disclosure Annual report

1. $ 500,000 2. $ 1,000,000 3. $ 5,000,000 4. Above $5M

What is an annual report?

Glossy magazine that
contains a lot of descriptive information about the company and the general purpose financial statements.

Financial Statements

The Balance Sheet (Week 2) The Income Statement, (profit & loss, P&L) (Week 2) Statement of Cash Flows (AFM1B will cover in details if you
continue to study Accounting )

How to get it?

Introducing Balance Sheet(1)

Introducing Balance Sheet(2)

Shows financial position as of a certain point in time

Creation of income

Assets

Current assets: Converted into cash in 1 year or operating cycle, whichever is longer
Cash, Account receivables, Inventories, Short-term investments

Assets

Liabilities

Interest expense C Creditors

Non current assets

L Long-term t i investment, t t Property, P t plant l t & Equipments, E i t Intangible I t ibl assets t

Liabilities

Operating income Equities Net profit Investors Investment = Financing Dividends

Stockholders Equity

Current liabilities Noncurrent liabilities Share capital Retained profits

Distribution of income

 Shows the results of operation during the period Revenue

Introducing Income Statement

Introducing Statement of Cash flows

Shows cash flows (inflows and outflows) by activities during the period

Operating activities
Sales, purchase activities

Sales revenue Service revenue, fees earned Resources or services used to generate revenue Operating and non-operating expenses Includes cost of
goods sold

Investing activities
Purchase and disposal of non current assets Purchase and disposal of securities

Expenses p

Financing activities
Issuance, retirement of bonds Issuance of stock

Revenue Operating expenses Operating income Non-operating income and expenses Net profit/loss
Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Change in cash Cash, beginning balance Cash, ending balance xxx xxx xxx xxx xxx xxx

The key financial statements?

Balance Sheet

Resources and Claims

Income Statement

Profitability

Cash Flow Statement

Receipt and payment of cash

(The next 3 slides are extracts from your textbook view Appendix Woolworths Financial Statements p.709 in your T&G textbook to view the following slides in more detail)

Key principles: Double entry book-keeping

Summary

What does double entry accounting achieve? For every transaction, there are two sides i.e. there is a
source for every resource. Resources = Sources

RESOURCES = SOURCES Money must come from somewhere--it doesn't just

"appear. A company has to find the money to fund resources.
What we have = What we owe + What we contributed

Double-entry accounting is a method of recordkeeping that lets you track:

Assets = Liabilities + Shareholders Equity

where the money comes from and where it goes.

Example

Financial statement assumptions

Financial statement assumptions include:

You purchase one bed apartment at $500,000 on

1/7/2011 and rent it.

accounting entity accounting period monetary historical cost going concern materiality.

Financing source: Your own money $100,000, Borrowing

from bank $400,000

Rent revenue (cash) $400/week, Interest expense (cash)

$200/week, Tax expense (cash) $1000/year

Prepare B/S as of 1/7/2011

Accounting entity assumption

Accounting Period assumption

The entity for which financial statements are prepared Activities of the entity are separate from those of its
owners/members

Life of business divided into discrete time periods of equal

length to determine financial performance and position.

Production of regular, comparable financial statements.

Includes, but not limited to, legal entities Economic entity a group of entities where the goals of
the controlling entity are pursued:
e.g.

companies, partnerships, funds, associations, public sector bodies.

Monetary assumption

Historical cost assumption

Universally accepted medium of exchange. Measure economic activity by a common denominator.

Transactions are initially recorded at their original

cost.

Treats assets in terms of their use rather than for

resale.

Going concern assumption

Materiality assumption

Assumes continued operation of accounting entity into

foreseeable future

A sub-factor of relevance A piece of information is said to be material if its

omission or misstatement could influence the economic decisions of users made on the basis of the financial statements

There is no intention or need to liquidate Produces demand for financial information during life of
entity

No set rules on determining materiality (auditors use

5% as a guide)

Financial statements in $million (see Woolworths

example in the Appendix)

Take away and coming upnext week! In profit measurement, private transactions of owners are not taken into account. What assumption/concept underlies this procedure?
25% 25% 25% 25%

Accounting entity assumption, accounting period assumption Balance Sheet

1. Materiality 2. Monetary concept 3. Accounting period 4. Accounting entity

Assets Liabilities Shareholders equity

Income Statement

Revenue (flow of income generated by selling goods or services) Expense (flow of expenses incurred in providing the goods or services for sale)

Cash. Vs . Accrual Profit

1 2 3 4