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ACCT 1501

Lecture Week 1 05/03/13


What is accounting?
Accounting list he process of identifying, measuring, recording and communicating
economic information to assist users to make decisions
Disclosure:
Shareholders gain through dividends/capital gains.
Accounting Systems
Financial Accounting Systems: periodic financial statements and related disclosures
External decision makers: investors, creditors, suppliers, customers
Managerial Accounting System: detailed plans and continuous performance reports
Internal decision makers: managers throughout the organisation
IFRS (international financial reporting standards)
Financial Statements
Balance Sheets: financial position of an enterprise at a particular point in time. What are
the entitys resources and how were they financed?
Assets: resources (benefits the company as current/non-current)
cash/property/equipment/inventory
ASSETS = LIABILITIES + EQUITY
Liabilities: what the company owes (accounts payable/loan payable)
Equity: what belongs to the owners (share capital/retained profits)
Financial statements that factor the holding company (parent company) subsidiaries into its
aggregated accounting figure
-

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

Accrual Accounting: revenue and expenses are recognised when an economically


meaningful event has occurred

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.

CHAPTER ONE: Introduction to Financial Accounting


The purpose of financial accounting is to produce information that is used by managers,
investors, bankers, financial analysts to improve decision making in allocating scare
resources. Accounting is the process of identifying, measuring and communicating
economic information, to allow informed decisions by the users of that information.
Financial accounting measures an enterprises performance over time and its position
(status) at a point in time in AUS, US, yen, Euros ECT relevant to the enterprises judgement.
-

Financial accounting systems: periodic financial statements provided to external


decision makers (investors, creditors and customers)

Management accounting systems; information for planning and performance


reports to managers throughout the organisation (internal decision makers)

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

Bank and other lenders to decide whether or not to lend

Managers to run enterprises on behalf of owners, members or citizen

Tutorial Preparations Questions Week 1


DQ 1.1 What is the basic purpose of financial accounting?
The purpose of financial accounting is to produce information that is used by managers,
investors, bankers, financial analysts to improve decision making in allocating scare
resources.
DQ 1.2 Distinguish between financial performance and financial position
Financial performance means generating new resources from day to day operations over a
period of time whereas financial position is the enterprises set of financial resources and
obligations at a point in time
DQ 1.3 What is the difference between financial and managerial accounting?
Financial accounting provides periodic financial statements to external decision makers
(investors, creditors and customers) whereas management accounting provides information
for planning and performance reports to managers throughout the organisation (internal
decision makers)
DQ 1.7 Do all users of financial accounting have the same information needs?
Why or why not?
All users of financial accounting do NOT have the same information needs as they work for
different relevant organisations, in different industries with different goals, objectives,
criteria they must meet thus require different forms of information. Such as stock market
investors need specific information to decide whether to buy, sell or hold shares of a
company whereas bank and other lenders need other forms of information to decide
whether or not to lend and managers to run enterprises on behalf of owners, members or
citizen
P 1.6
1. Bankers: the likelihood of the company meeting its interest payments on time
2. Managers: the profitability of each division in the company
3. ASIC: the financial position and performance of a company issuing shares to the
public for the first time
4. Shareholders: the prospects for future dividend payments
5. Suppliers: the probability that the company will be able to pay for its purchases on
time
6. ATO: the profitability of the company based on the tax laws
7. Trade unions: profitability of the company since the last contract with employees was
signed
P 1.14

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:

Revenue earned but received in other periods

Expenses incurred but paid for in other periods

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

liabilities=20000 at start of year

Therefore as liabilities halved at end of year = 20000/2


=10000
2. A=L+OE

75000=45000+EO

owners equity=30000 at start of year

Therefore owners equity at end of year = 30000+40000


=70000
3. A=L+OE

A=76000+32000

Assets=108000 at end of year

Therefore as total assets triple = 108000/3 at start of year =36000


P 1.24
A=L+OE
1800000+120000+480000+350000=88000+300000+EO
Therefore EO (shareholders equity)

=18562000

Tutorial Preparations Questions Week 3


DQ2.1
a) Revenue: a class of income relating typically to the ordinary activities of an entity
b) Expense: the cost of assets used and/or obligation created in generating revenue,
consumptions or losses of future economic benefits in the form of reduction in assets or
increases in liabilities of the entity, other than those relating to distributions to owners that
result in a decrease in equity during the reporting period
c) Net profit: the excess of revenue over expenses, the residual after deduction of
expenses from revenues
d) Dividend: distributions of a portion of net profit to shareholders in the company
e) Retained profit: profits not yet distributed to owners the sum of net profit earned over
the life of a company, less distributions (dividends declared) to owners
f) Shareholders equity: the sum of shareholders direct investment (share capital) and
indirect investment (retained profits and reserves)
DQ2.2 What is the difference between current and non current assets?
Current assets are short term assets and are expected to be used, sold or collected within
the next year. Non-current assets are long term assets and are expected to have benefits
for more than a year into the future
P2.3
Tin Ltd
Balance Sheet as at 30 June 2012
Current Assets

Current Liabilities

Cash and cash equivalents


000

43

Notes payable
000

30

Prepayments

10

Income taxes payable

32

000

000

Accounts receivable
000
Inventory

68
81 000

Accounts payable

Current portion of long term debt


000

202 000

Non-current Assets

61 000
25

148 000

Non-current Liabilities

Long-term investments
000

110

Long term debt


000

200

Property, plant and equipment


000

550

Provisions for employee entitlements


000

34

Patents and trademarks


Accumulated depreciation
000

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

Total Shareholder Equity


000

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

Share capital issued

=3 988.6m

10

Macs Liquor store, Dick Smith Electronics, Australian Safeway Stores

11

Cost of Goods Sold

12

Net profit (before income tax)

=3 014.9m

Net profit (after income tax)

=2 140.3m

Cash Balance (2010)

=713.4m

Cash Balance (2011)

=1 519.6m

Change in Cash Balance

=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

Net profit (after income tax)

14

Revenue from operations =54 279.5m

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

DQ2.6 How can a balance sheet answer the following questions:


a) Is a company financially sound?
If a company is financially sound, its assets should equal its liabilities + shareholders
equity. If the balance sheet does not show this, the company is not financially sound and
should be investigated.
b) Can a company pay its bills on time?
Referring under the Assets heading for cash and accounts payable in the Liabilities
heading can assess whether the company can pay its bills on time. If cash>accounts
payable, the company is liquid and can repay its bills in the short term. However, if
cash<accounts payable, the company cannot meet its bill repayments on time.
c) Should the board of directors declare a dividend?
With reference to the Shareholders equity heading for net profit, determinate to a
positive or negative value on the balance sheet, the board of directors can determine
whether or not to declare a dividend. If net profit is negative then no dividends should be

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

Net profit for the year


720

24

Total Shareholder Equity


720

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

Cost of confectionary sold

10 500

Electricity expense
Rent expense

5 090
33 200

Totals

91 570

Net Profit

2 430

2
Retained profits (31 December)

= retained profits (1 January) + net profit dividends


= 59720 + 2430 0
= 62150

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

Furniture and fitting


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

Total Shareholder Equity


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

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