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, 2013

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 2011 Annual Report throughout the course. The annual report is included as an appendix in your course textbook (5th edition, Trotman Gibbons & Carson, pages 746787). 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 2011 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
1. ACCT 1501, S1 2013 Course Outline 2. Trotman, Gibbins & Carson Chapter 1 3. Woolworths 2011 Annual Report (familiarise yourself with the contents) (Appendix 1)

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 Case 1A

Tutorial Questions The answers to tutorial questions are the focus of the tutorial class work: DQ 1.12, 1.16 P1.7, P1.18, P1.24

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

Australian School of Business

ACCT1501
Semester 1, 2013

Week 1: Introduction
Lecturer: Dr Youngdeok Lim Lecturer in Charge Quad 3069

Todays lecture objectives:

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, key principles & assumptions

The Course Outline

What you need to know?

1. Understand the course structure 2. Course objectives 3. Clarify roles and responsibilities

Introduction
Teaching staff Dr. Youngdeok Lim (Lecturer-in-Charge) Dr. Wei Chen (Lecturer) Trish Strong (Lecturer) Other tutors Abarna, Bonnie, Candice, Karen, Li, Chloe, Cheryl, Amanda, Abby, Michelle, Sudipta, Arthur, Sabiq, Andy, Timmy, Ben, Felicia, Susan, Samuel
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.

Required Texts
Lecture outlines and additional readings Available on Blackboard Practice Set

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

Course schedule (see page 16 in course outline )

Lectures: How do you prepare for lectures

Read the assigned reading materials before the lecture Lectures are only a summary and are not a substitute for reading Bring your Lecture Notes to every lecture & tutorials !!!!! 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.

How to maximize the return on your investment (ROI)

Participation in class (both lectures & tutorials)
Students do not benefit from copying solutions Attempting your work is essential to identifying concepts/ issues you do not understand Tutorial homework (Max. 5 marks)
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).

Tutorial individual participation (max 3 marks) Tutorial group participation (max 2 marks)

How to maximize the return on your investment (ROI)

Participation in class (both lectures & tutorials)
How do you learn to drive or cook, is it by reading only? Help 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 !!

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???

Learning Assessment (or how to pass AFM1A)

Assessment Item / Due date Tutorial participation (complete each week) Mid-session class test (Week 8) Multiple Choice Tests 2 quizzes 5% each (Weeks 6 & 12) Perdisco Practice Set Assignment (Friday May 17 @ 3pm) Final examination TOTAL Weight 10% 15% 10% 10% 55% 100%

In order to pass, students must

Achieve a composite mark of at least 50% AND Satisfactorily complete all assessment tasks AND Achieve a satisfactory level of performance in the final exam, usually means a minimum mark of 50%

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. One attempt. Important feedback!!!! For you & us!

This assignment is due Friday May 17 @ 3pm 20 hrs work approx.

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) This task is expected to take approximately 20 working hours to complete. Start working on this exercise in week 5 to be able to complete it by the due date

DO NOT LEAVE THIS TASK TO THE LAST MINUTE !!!!

Special Consideration and Supplementary examinations:

There will be a very limited opportunity to sit a supplementary mid-session exam. To apply for this, see Part B. 4 regarding general information on special consideration. There is only one opportunity to sit for a supplementary final exam which will be held on 16 July 2013 exams for the School of Accounting after the final exam session. If you are too ill to perform reasonably on the final exam, do not attend the final and apply for a supplementary instead. Applying for special consideration does not automatically mean that you will be granted a supplementary exam.

Additional resources

Face to face consultation with full-time staff

Tutors will hold extra consultation will be held for mid-session exam and final exam (to be announced). Discussion boards on Blackboard

PASS (Peer Assistance Support Scheme) For questions of a private/personal nature

email ACCT1501@unsw.edu.au Please

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 Content, Course Administration On-line Practice Set (student only)
overseen by staff members

Use appropriately and with respect for others

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 Keeping informed !!! Read the course outline; Blackboard Announcements & your university email. ONLY attend the lecturers and tutorials that you are officially enrolled to attend.

Australian School of Business

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

Some ground rules

Please put your mobile phone on SILENT Lectures start at 5 minutes past the hour, and finish at 5 minutes to the hour
Well aim to have a 10 minute break half way through

Be considerate
This means no talking! If you are late, come in quietly, with minimal disruption to others

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What is accounting?

Accounting is the process of identifying, measuring, recording and communicating economic information to assist users to make decisions. Business language Grammar Vocabulary Practice

Accounting System

Financial Accounting System

Periodic financial statements and related disclosures

Managerial Accounting System

Detailed plans and continuous performance reports

External Decision Makers

Investors, creditors, suppliers, customers, etc.

Internal Decision Makers

Managers throughout the organization

How ACCT1501 is positioned within an accounting major

ACCT 1501 & 1511

Providing the foundation & Setting the scene
Basic terminology, record keeping, understanding & preparing basic financial statements, exposure to management accounting

Also Exciting electives!

ACCT 2A & 3B
Management Accounting
Information gathering & reporting for people inside the organisation

ACCT 2B & 3A
Financial Accounting
Information gathering & reporting for people outside the organisation

AUDIT: checking that procedures are in place to prepare financial statements that
are true and fair reflection of company position & performance

What is financial accounting?

Financial accounting will be the focus of this course. Financial accounting focuses on the provision of information to users external to the enterprise. The focus is on reporting financial position and financial performance.
We discuss financial accounting in weeks 1 to 10.

What is management accounting?

Management accounting will be the focus of later part of this courses. Management accounting focuses on the provision of information to users within the enterprise (to aid in operational planning and control decisions).
We start to look at management accounting in weeks 11 & 12

The rise of economic consequences

Conveys economic information to decision makers

This is extremely important!!

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) New Corporate Governance laws

Is accounting really important?

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

Is accounting really important? (cont.)

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

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.

Some examples of an economic consequence The Accounting Scandals such as Enron, Worldcom,
Misleading reporting Mismanagement ABC learning Collapse of the company Indictments

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

We have focused mainly on the economic consequences in the equity markets

The decision maker in this situation is the investor / owner Their decisions are based on what value they are willing to either buy or sell shares in the market

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.

Other users of accounting information:

User Bankers Company Management ASIC Type of Information

Suppliers Australian Tax Office Trade Unions

What is an annual report?

Glossy magazine that contains a lot of descriptive information about the company and the general purpose financial statements. How to get it?

Key financial statements

Balance sheet Financial position of an enterprise at a particular point in time. What are the entitys resources and how were they financed? Income statement Financial performance of an enterprise over a period of time. Has the entity used its resources efficiently and effectively? Sometimes referred to as the Profit and Loss Statement (P&L) Cash flow statement: (To be covered in 1B) Cash inflows and outflows. Notes to the financial statements (additional detail)

Introduction to the Balance Sheet

The balance sheet reports the financial position of an entity at a point in time.

Jan 1 2010

Dec 31 2010 Balance Sheet

Dec 31 2011 Balance Sheet

Dec 31 2012 Balance Sheet

Used to assess financial structure and ability to pay debt

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Balance sheet
Three main elements:
Assets
Resources - they will benefit the company this year (current) or in future years (non-current) e.g., cash, property, equipment, inventory

Liabilities
What the company owes e.g., accounts payable, loan payable

Equity
What belongs to the owners, the residual i.e. what is left after liabilities are taken care of e.g., share capital, retained profits

Balance sheet
Assets are due to debt or equity! The balance sheet shows resources (assets), and claims on those resources (liabilities and equity) at a point in time. We can represent this with the accounting equation: Assets
Resources

Liabilities + Equity
Sources

This will be very important to us in later weeks when we consider double-entry book keeping
There are always two aspects of a transaction

Example
You purchase one bed room apartment at $500,000 on 1/7/2011 and rent it. Financing source: Your own money $100,000, Borrowing from bank $400,000 (maturity: 3 years) Rent revenue (cash) $400/week, Interest expense (cash) $200/week, Tax expense (cash) $1000/year Prepare B/S as of 1/7/2011

Consolidated Balance Sheet Woolworths limited (2012)

Income Statement
Shows the results of business operations over a specific time period
Reports revenues earned, and any expenses incurred Revenue: inflows of economic benefits that increase owners equity
e.g., sales revenue, service revenue, fees earned

Expenses: Use or loss of economic benefits that decrease owners equity.

Incurred when you use resources to generate revenue

If revenues are greater than expenses, there is a profit If revenues are less than expenses, there is a loss
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Income Statement
Revenues & Expenses are recognised when an economically meaningful event has occurred
This is called Accrual Accounting It does not have to involve cash!

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Consolidated Income Statement Woolworths limited (2012)

Statement of cash flows (To be covered in 1B)

Statements of cash flows provide details of movements in an entitys cash balance. The cash flows are normally categorised into:
operating activities investing activities financing activities

Consolidated Cash Flow Statement Woolworths limited (2012)

Accrual vs. Cash Accounting (Week 2)

An income statements reports revenues and expenses
Accrual accounting

A cash flow statement reports cash inflows and outflows

Cash accounting

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A Key objective for this session: begin to understand the Accrual concept***
In June, a company makes cash sales of $10,000 and credit sales of $20,000 (all to be collected in July) What is sales using accrual accounting in June? What is cash inflows using cash accounting in June?

Financial statement assumptions

Financial statement assumptions include: accounting entity accounting period monetary historical cost going concern materiality.

Accounting entity assumption

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

Accounting Period assumption

Life of business is divided into discrete time periods of equal length to determine financial performance and position. Production of regular, comparable financial statements.

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

Historical cost assumption

Transactions are initially recorded at their original cost. Treats assets in terms of their use rather than for resale.

Going concern assumption

Assumes continued operation of accounting entity into foreseeable future There is no intention or need to liquidate Produces demand for financial information during life of entity

Materiality assumption
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 No set rules on determining materiality (auditors use 5% as a guide) Financial statements in $million (see Woolworths example in the Appendix)

In profit measurement, private transactions of owners are not taken into account. What assumption/concept underlies this procedure?
1. 2. 3. 4. Materiality Monetary concept Accounting period Accounting entity

0%
1

0%
2

0%
3

0%
4

Take away and coming upnext week!

Accounting entity assumption, accounting period assumption Balance Sheet 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

Appendix: Consolidated financial statement

Financial statements that factor the holding company (parent company)'s subsidiaries into its aggregated accounting figure.
A subsidiary is a company controlled by parent company. Control exists when the parent company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Intragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated

How the holding company is doing as a group. The consolidated accounts should provide a true and fair view of the financial and operating conditions of the group.