Professional Documents
Culture Documents
A subsidiary is a company controlled by the parent company. Control exists when the
parent company as power over the
Income Statement: financial position of an enterprise over a period of time. Has the entity
used its resources efficiently and effectively? (Profit and Loss Statement P&L)
-
Revenue: inflows of economic benefits that increases the owners equity (sales
revenue/service revenue/fees earned)
Expenses: use or loss of economic benefits that decrease owners equity
Cash Flow Statement: cash inflow and outflow, provide details of movements in an
entitys cash balance (operating/investing/financing activities)
Financial Accounting Assumptions
-
Accounting entity: the operations of which body involved are prepared on behalf.
Includes but not limited to.
Accounting period: life of a business is divided into discrete time periods of equal
length to determine financial performance and position. Production of regular,
comparable financial statements
Monetary: universally accepted medium of exchange, measures economic activity by
a common denominator
Historical costs: initial records of transaction at original cost, treats assets in term of
their use rather than for resale
Going concern: assumes the company continues operations of accounting entity into
foreseeable future, there is no need or intention to liquidate and produces demand
for financial information during the life of the entity
Materiality: the material if its omission or misstatement could influence the economic
decisions of users made on the basis of the financial statements, no set rules on
determining materiality (5% guide) in millions.
Financial performance means generating new resources from day to day operations over
a period of time
Financial position is the enterprises set of financial resources and obligations at a point in
time
Financial statements are the reports describing financial performance and position
Financial accounting is used by:
-
Stock market investors to decide whether to buy, sell or hold shares of a company
1. A
2. L
3. L
4. E
5. E
6. A
7. SE
8. L
9. E
10.A
11.E
12.R
C 1A
1. trade and other receivables trade and other payables
2. 21 094.5
3. 13 248.7
4. 7 593.2
5. A = L + OE 21094.5=3248.7+7593.2
6. 3014.9
7. 2410.3
8. Inflow: receipts from customers 58886.6 Outflow: payments to suppliers and
employees 54797.3
9. Cash flow from operations is a different figure to operating profit after tax because
the latter is calculated on an accrual basis and includes a number of items omitted
from the cash flow from operations including:
Expenses not involving cash outlays including depreciation and bad debts
In addition the cash flow from operations includes revenues and expenses relating to prior
or subsequent periods decrease
10.3736.5
11.26 June 2011
12.a) 2 b) 2 c) 2
13.Deloitte
DQ 1.12 Describe what is meant by accrual accounting? How does it differ from
cash accounting?
Under the accrual accounting system the impact of transactions on the financial statements
is recognised in the time periods during which the revenues and expenses occur rather than
when the cash is received or paid. Cash accounting however involves recording revenues
and expenses at the time the cash is received or paid and is more precise.
DQ 1.16 Explain in simple terms each of the following financial accounting
assumptions:
a) Accounting entity: the accounting entity is separate and distinguishable from its
owners and puts a boundary on the transactions that are to be recorded for any particular
accounting entity (accounting entity of a sole trader is differentiated form the financial
affairs of the owner)
b) Accounting period: the life of the business needs to be divided into discrete periods to
evaluate performance for that period (quarterly/half yearly)
c) Monetary: accounting transactions are measured in a common denominator (AUD) to
allow comparison across periods and across different companies.
d) Historical cost: assets are initially recorded at cost, where some assets (property, plant
and equipment) can be revalued periodically.
e) Going concern: financial statements are prepared on the premise that the organisation
will continue operations as a going concern in the foreseeable future.
f) Materiality: the material if its omission or misstatement could influence the economic
decisions of users made on the basis of the financial statements, no set rules on
determining materiality (5% guide) in millions
P 1.7
Profit = revenue expense
=160000
640000+490000-590000-380000
P 1.18
1. A=L+OE
60000=L+40000
75000=45000+EO
A=76000+32000
=18562000
Current Liabilities
43
Notes payable
000
30
Prepayments
10
32
000
000
Accounts receivable
000
Inventory
68
81 000
Accounts payable
202 000
Non-current Assets
61 000
25
148 000
Non-current Liabilities
Long-term investments
000
110
200
550
34
55 000
-190
525 000
Total Assets
000
727
234 000
Total Liabilities
000
382
Shareholders Equity
Retained Profits
184 000
Share Capital
000
161
345
C2A
1
26 June 2011
AUD$
3
Total assets (21 094.5m) = Total Liabilities (13 248.7m) + Total equity (7 845.8m) =
21 094.5m
4
Assets were financed as current assets (6 593m) and non current assets (14
501.5m)
5
Net assets = Total assets (21 094.5m) Total liabilities (13 248.7m) = 7 845.8m
Current assets
=6 593.0m
Non-current assets
=14 501.5m
Current liabilities
=8 288.3m
Non-current liabilities
=4 960.4m
7
Working capital = Current assets (6 593.0m) Current liabilities (8 288.3m) = -1
695.3m
8
9
=3 988.6m
10
11
12
=3 014.9m
=2 140.3m
=713.4m
=1 519.6m
=1 519.6m 713.4m
=40 186.3m
=806.2m
Therefore the net profit and change in cash balance are not the same amounts
13
14
15
Inventories
=3 736.5m
16
Cash (2011) `
=1 519.6m
Cash (2010)
=713.4m
Change in cash/equivalents
=2 140.3m
=1 519.6m 713.4m
=806.2m
declared as the company was unprofitable the past financial year. However if net profit is
positive, dividends should be declared unless amounts of the net profit was to be retained
in the company.
d) How old is the equipment?
Under the specific equipment classification in the assets heading can you determine how
old the equipment is. Assessing the depreciation value of the equipment can directly relate
to the age of the equipment, with higher depreciation (lower value recorded) proportional to
the age of the equipment.
DQ2.10 Explain the following in non-technical language that a business person
who has not read this text would understand:
a) Why is net profit part of shareholders equity?
Net profit is profit earned the recent financial year and recorded under shareholder equity
in the balance sheet as it is a form of retained profit if not paid out as dividends.
b) If net profit is part of shareholders equity, why is it necessary to have a
separate income statement? Why not just report net profit on the balance
sheet?
A separate income statement shows how the net profit was attained from valuing revenue
and expenses to determine the profitability of the company. If revenue and expenses were
also reported in the balance sheet, it would become overloaded and confusing as
determining whether revenue is equity or asset and expenses assets or liabilities a major
problem to the clarity in the balance sheet. Thus an alternative income statement is used.
c) Why are dividends to shareholders not considered to be an expense in
calculating net profit? Employee wages are considered an expense as is the
cost of products delivered to customers and shareholders must be kept
happy as must employees and customers.
Dividends to shareholders is actually the net profit attained from the company but only
given out to its shareholders for their investment and equity into the company whilst not
actually an expense. Wages are paid in exchange for labour which is part of operations in
the company, whereas cash inflow from consumer sales is also in exchange for the good
purchased. However, dividends are paid for the investment of the shareholder made
previously thus not classified as an expense but as equity of the business.
P2.7
Fine wines Limited
Balance Sheet as at 30 June 2012
Current Assets
Cash
Accounts receivable
Current Liabilities
4 340
Accounts payable
10
10 680
10 680
460
Non-current Liabilities
Inventory of grapes
98 000
Kitchen equipment
50 800
75 400
Non-current Assets
Total Liabilities
680
10
Shareholders Equity
0
Total Assets
400
75
Share Capital
000
40
24
64
The differences between my balance sheet and ALs is classifying the correct items under
the added current/non current assets, current/non-current liabilities and shareholders equity
headings and totals for a clearer and easier to understand balance sheet. I also separated
liabilities and shareholders equity into three headings and classified their subjects into
each separately. Net profit for the year and share capital is classified under shareholder
equity whilst accounts payable is a current liability but accounts receivables and kitchen
equipment both current assets.
P2.9
1
Century Cinemas
Income Statement as at 31 December 2012
Revenues
Ticket revenue
81 700
Confectionary sales
12 300
Totals
94 000
Expenses
Advertising expense
42 780
10 500
Electricity expense
Rent expense
5 090
33 200
Totals
91 570
Net Profit
2 430
2
Retained profits (31 December)
3
Century Cinemas
Balance Sheet as at 31 December 2012
Current Assets
Cash
Current Liabilities
4 610
Accounts receivable
450
Inventory
Accounts payable
13
13 910
Loan Payable
000
18 000
35
48 910
Non-current Liabilities
36 060
Non-current Assets
Land and buildings
60 000
Project Equipment
41 000
34
Total Liabilities
910
48
Shareholders Equity
135 000
Total Assets
060
171
Share Capital
000
60
Retained Profits
720
59
Net Profit
2 430
122 150
P2.11
122
1. Contribute cash to the company in return for share: increase cash (A) and
increase share capital (SE)
2. Borrow money from the bank: increase cash (A) and increase loan payable (L)
3. Receive payment from a debtor: decrease accounts receivables (A) and increase
cash (A)
4. Purchase inventory on credit: increase value of inventory (A) and increase credit
payable (L)
5. Purchase inventory for cash: increase value of inventory (A) and decrease cash (A)
6. Pay accounts payable: decrease cash (A) and decease accounts payable (L)
7. Receive interest that was due from the previous accounting period: decrease
accounts receivable (A) and increase cash (A)
8. Purchase furniture and fittings on credit: increase furniture and fitting (A) and
increase credit payable (L)
9. An owners contribution of his motor vehicle to the company in return for
additional shares: increase share capital (SE), increase value of motor vehicle (A)
Tutorial Preparation Questions Week 4
DQ3.3 Why does an increase in revenues result in an increase in shareholders
equity? What other part of the accounting equation is likely to be affected?
An increase in revenue means a greater net profit (net profit = revenue expenses) thus a
positive net profit dividends = added retained profits thus recorded as additional retained
profits in the balance sheet under the shareholders equity heading and increases
shareholders equity total. Increase in shareholders equity will also increase assets in the
accounting equation (assets = liabilities + shareholders equity).
DQ3.5 Which accounts normally have a debit balance and which normally have a
credit balance?
Debit balance (increase in assets, increase in expenses, decrease in liabilities, decrease in
sharehodlers equity, and decrease in revenue)
Credit balance (increase in liabilities, increase in shareholders equity, increase in revenue,
decrease in assets, decrease in expenses)
DQ3.7 Explain how the balance sheet and the income statement articulate
The balance sheet and income statement articulate through the net profit account. Net
profit is calculated in the income statement that shows the financial performance of the
entity, and transferred into the balance sheet as retained profits under shareholders equity
by the equation: opening retained profits + net profit dividends = closing retained profits,
showing the financial position of the entity.
P3.12
UL
Journal Entry as at 31 December 2012
Transactio
Accounts
n
Cash
Receivables
30000
1
0
20000
2
0
3
4
-8000
20000
5
0
6
70000
7 -40000
8 50000
9 -10000
10
4000
11 -30000
12
-8000
25800
0
70000
Asset
s
Equipmen
t
Inventor
y
Liabilities + Shareholder's
Equity
=
Credit
Payable
Bank Payable
200000
50000
50000
200000
-30000
-40000
200000
20000
548000
10000
200000
1 Revenue: Credit sales 70000, Customer sales 50000, Job revenue 4000
2 Expenses: Rent (8000), Cost of inventory sold (30000), Salaries (13000), Bank interest
(8000)
P3.19
1
South Shore Manufacturing Ltd
Journal Entry as at 31 July 2012
Transactio
Accounts
n
Cash Receivables
2438
8
89267
1000
1
0
1124
2
0
-11240
3
2200
4
0
2200
5
0
1200
6
0
7
1362
8
78027
A
Equipmen
t
584211
Inventor
y
111436
Land
78200
Prepayment
s
Depreciation
7321
-198368
7321
-198368
5320
52000
31900
616111
116756
13020
0
763675
South Shore Manufacturing Ltd
2
South Shore Manufacturing Ltd
Balance Sheet as at 31 July 2012
Assets
Current Assets
Cash
Accounts Receivables
Inventories cost
Prepayments
$
13628
78027
116756
7321
215732
Non-current Assets
Land cost
Factory and equipment
cost
Accumulated
depreciation
$
31000
115662
12665
18322
177649
130200
Non-current Liabilities
Mortgage (noncurrent)
253734
Employee
entitlements
67674
417743
Shareholder loan
616111
-198368
Liabilities
Current Liabilities
Bank overdraft
Accounts payable
Taxes payable
Mortgage (current)
Shareholder's equity
Share capital
Retained profits
763675
90000
411408
77000
97618
174618
763675