Professional Documents
Culture Documents
A simple balance sheet - GG Coffee G.Green Balance sheet for the period ended 31 Dec. 2010
____________________________________________________________________________________________________________________________
Financial
Accounting
&
Management
Accounting
(cont.)
Management
accounting
provides
economic
information
for
internal
users
Financial accounting
Management accounting
Regulations
Timeliness
Level
of
detail
Main users
____________________________________________________________________________________________________________________________
Sources
of
Regulation
The
Corporations
Act
stipulates
that
all
disclosing
entities
must
apply
Australian
Accounting
Standards
in
preparing
their
financial
reports
Is
a
company
watchdog
that
enforces
company
and
financial
services
laws
to
protect
consumers,
investors
and
creditors
Enforced
by
the
Australian
Securities
and
Investments
Commission
(ASIC)
v Disclosing
entity
an
entity
that
issues
securities
that
are
quoted
on
a
stock
market
or
made
available
to
the
public
via
a
prospectus
Australian
Securities
Exchange
(ASX
)
The
ASX
is
the
main
Australian
market
place
for
trading
equities,
government
bonds
and
other
fixed
interest
securities
ASX
Listing
Rules
help
ensure
that
companies
are:
providing
adequate
disclosures
to
various
stakeholders
behaving
appropriately
Standard
Setting
Framework
-
Australian
and
International
Standards
Since
1
Jan
2005,
Australian
entities
have
complied
with
International
Financial
Reporting
Standards
(IFRSs)
The
role
of
professional
bodies
3
professional
bodies
in
Australia:
CPA
Australia
The
Institute
of
Chartered
Accountants
in
Australia
(ICAA)
Institute
of
Public
Accountants
(IPA)
Time lag in the distribution of information to users, therefore affecting its accuracy
Costs involved in gathering, summarising and producing info contained in financial report
Release
of
competitive
information
Info in financial report may contain proprietary information that could be used by competitors to
strengthen their market position
_____________________________________________________________________________________________________________________
Careers
in
accounting
Traditional
areas
Public
accounting
Private
sector
Government
and
not-for-profit
sector
New
opportunities
Forensic
accounting
E-commerce
Environmental
accounting
International
accounting
____________________________________________________________________________________________________________________________
Business
structures
The
basic
forms
of
business
structure
are:
Sole
trader
Partnership
Company
Trust
(not
covered
in
this
course)
They differ in terms of owner liability, equity structure, funding opportunities, decision making
responsibilities and taxation
All
businesses
are
separate
accounting
entities,
but
may
not
be
separate
legal
entities
accounting
entity
concept
____________________________________________________________________________________________________________________________
Owner
claims
all
the
profits
of
the
business
and
all
the
after-tax
gains
if
the
business
is
sold
Disadvantages
Unlmtd liability = owner bears full respons. for bus, debts & legal actions such as negligence
No
separate
taxation
payable
but
does
lodge
income
tax
return
with
Australian
Taxation
Office
(ATO)
The
Partnership
Agreement
Includes
details
of
the
partnership:
Name
of
partnership
Partner
contributions
of
cash
and
other
assets
Profit
and
loss
sharing
ratios
Entry
and
exit
information
Partnership
-
Advantages
Ability
to
share
capital,
skills,
talents,
knowledge
and
workload
between
two
or
more
people
Disadvantages
Limited
life
if
one
partner
dies
or
withdraws
from
the
business
then
the
partnership
must
dissolve
Mutual
agency
each
partner
is
seen
as
being
an
agent
for
the
business
and
so
is
bound
by
any
partnership
contract
____________________________________________________________________________________________________________________________
Companies
-
Definition
and
Features
Independent
legal
entity
(i.e.
separate
from
the
people
who
own,
control
and
manage
it;
can
enter
into
contracts,
sue
and
be
sued
in
own
right)
Shareholders
have
limited
liability
only
liable
for
the
full
purchase
price
of
their
shares
(not
company
debts)
A
company
has
unlimited
life
not
dissolved
when
owners
die
or
change
Companies
-
Types
Public
Proprietary (Private)
Ltd
Pty Ltd
Yes
No
Typical size
Large
Smaller
Extent of regulation
Extensive
Moderate
Yes
Some restrictions
Yes
Depends on size
Company
Advantages
Can
raise
additional
equity
(capital)
through
public
share
offerings,
floating
the
company
Disadvantages
of
a
company
Must
comply
with
complex
company
rules
and
other
legal
requirements
even
more
so
when
issuing
shares
to
the
public
for
the
first
time
Corporations
Act
ASIC
ASX
accounting
standards
The main point to note at the moment is the use of the accounting entity concept
Gross profit
statement
shows
income
less
expenses
14 000
Operating
expenses
Administration
expenses
$1
200
Rent
4 000
Finance expenses
400
No
taxation
is
shown
Profit
$ 400
6 000 13 600
_____________________________________________________________________________________________________________________
28 000
10 000
Accounts payable
8 000
Non-current liabilities
Bank loan
10 000
Total liabilities
18 000
Net assets
$10 800
Owners equity
Profit (loss)
28 800
Current liabilities
Total equity
Balance
sheet
has
only
one
capital
account
18 000
Total assets
Capital A. Wong
10 400
400
$ 10 800
____________________________________________________________________________________________________________________________
PARTNERSHIP
INCOME
STATEMENTS
-
Tom,
Felix
and
Charlie
Accountants
31/12/13
Profit
$ 31 200
v Profit
and
loss
Distributions to partners
is
split
Salary Tom
8 000
according
to
Felix
4 000
original
capital
contributions
Charlie
6 000
18 000
as
specified
in
Distribution of remaining profit to current accounts
the
partnership
Tom (100 000/560 000 13 200)
2 358
agreement
Felix (400 000/560 000 13 200)
9 428
Charlie (60 000/560 000 13 200)
1 414
13 200
v No
taxation
is
shown
$ 31 200
____________________________________________________________________________________________________________________________
PARTNERSHIP
BALANCE
SHEET
-
Tom,
Felix
and
Charlie
Accountants
31/12/13
1. Balance
Net assets
$573 200
sheet
has
a
Partners equity
capital
account
Capital
(and
often
a
Tom
100 000
current
Felix
400 000
account)
for
each
Charlie
60 000
560 000
partner
Current
Tom
2 358
Felix
9 428
Charlie
1 414
13 200
$ 573 200
____________________________________________________________________________________________________________________________
PRIVATE
COMPANY
-
INCOME
STATEMENT
-
Simply
Scarves
Pty
Ltd
-
for
period
end.
31/12/13
Income
v Income
tax
deducted
Sales
$300 000
directly
from
Cost of sales
70 000
company
profit
Gross profit
230 000
Operating expenses
80 600
(details as per sole trader)
Profit before tax
$ 150 000
Taxation expense
42 900
Profit after tax
$ 107 100
____________________________________________________________________________________________________________________________
PRIVATE
COMPANY
-
BALANCE
SHEET
(EXTRACT)
-
Simply
Scarves
Pty
Ltd
-
As
at
31/12/13
v Share
capital
as
Net assets
$290 210
opposed
to
owners
Shareholders equity
or
partners
capital
account
Share Capital
200 000
Retained Earnings
90 210
v Retained
earnings
Total Shareholders equity
$ 290 210
____________________________________________________________________________________________________________________________
PUBLIC
COMPANY
-
INCOME
STATEMENT
-
Power
Point
Ltd
for
the
period
ended
31/12/13
Income
Notes
v The
income
Sales
3
$300 000
statement
is
Cost of sales
4
70 000
prepared
in
accordance
Gross profit
230 000
with
Operating expenses
80 600
pronounceme
nts
of
the
(details as per sole trader)
Australian
Profit before tax
$ 150 000
Accounting
Standards
Taxation expense
7
42 900
Board
(AASBs)
Profit for the year
$ 107 100
Earnings Per Share
Basic Shares
$82.45
31
____________________________________________________________________________________________________________________________
Business transactions are occurrences that affect the assets, liabilities and equity items in an entity
Under
the
accounting
entity
concept,
every
entity
must
keep
records
of
its
business
transactions
separate
from
any
personal
transactions
of
the
owners
Examples
of
business
transactions
contribution
of
capital
by
owners
payment
of
salaries
receipt
of
bank
interest
receipt
of
GST
refund
purchase
of
laptop
on
credit
payment
of
accounts
payable
depreciating
office
equipment
purchase
of
accounting
software
charging
interest
on
overdue
accounts
receivable
cash
sales
payment
of
advertising
withdrawal
of
capital
cash
purchases
____________________________________________________________________________________________________________________
Personal
transactions
are
transactions
of
the
owners,
partners
or
shareholders
that
are
unrelated
to
the
operation
of
the
business
Business
events
are
occurrences
that
will
probably
affect
the
entity
in
some
way,
but
are
not
recorded
as
business
transactions
until
an
exchange
of
goods
occurs
between
the
entity
and
an
outside
entity
____________________________________________________________________________________________________________________________
Business
transactions
and
the
Accounting
Equation
This
balance
is
reflected
in
the
balance
sheet,
which
is
based
on
the
accounting
equation:
ASSETS
-
LIABILITIES
=
EQUITY
A
L
=
E
____________________________________________________________________________________________________________________________
Accounting
Equation
ASSETS
=
LIABILITIES
+
EQUITY
A
=
L
+
E
Expresses the relationship between assets (A) of an entity and how those assets are financed
Liabilities
and
equity
represent
the
claims
against
the
entitys
assets
____________________________________________________________________________________________________________________________
The
concept
of
duality
Stevens
Seagulls
needs
$350,000
of
assets
to
do
business.
Steven
only
has
$200,000
to
contribute
as
equity;
his
business
needs
to
borrow
additional
funds
of
$150,000
from
a
bank
which
will
become
a
liability
of
the
business.
A
=
L
+
E
CASH
$350,000
=
LOAN
$150,000
+
CAPITAL
$200,000
____________________________________________________________________________________________________________________________
2.
Asset
purchase
Firm purchases new laptop computer for $3,500 and pays by cash
This
will
show
as
a
decrease
in
cash
(asset)
and
an
increase
in
office
equipment
(asset)
by
the
same
amounT
ASSETS
=
LIABILITIES
+
EQUITY
CASH
$3,500
OFFICE
EQUIPMENT
$3,500
____________________________________________________________________________________________________________________________
EXPANDED
ACCOUNTING
EQUATION
Recall
Chapter
1
Income
produces
an
increase
in
equity
Expenses
result
in
decreases
in
equity
Therefore:
Profit
(loss)
is
added
to
(subtracted
from)
opening
equity
on
the
balance
sheet
ASSETS
=
LIABILITIES
+
OPENING
EQUITY
+
INCOME
EXPENSES
____________________________________________________________________________________________________________________________
This
will
show
as
an
increase
in
debtors
or
accounts
receivable
(asset)
and
an
increase
in
fees
(income)
by
the
same
amount
v Note
income
increases
equity
while
expenses
decrease
equity
ASSETS
=
LIABILITIES
+
EQUITY
+
INCOME
EXPENSES
DEBTORS
FEES
$3,000
$3,000
____________________________________________________________________________________________________________________________
The
Accounting
Worksheet
All business transactions of the entity can be entered into the worksheet
Then
the
individual
columns
of
the
worksheet
can
be
totalled
and
used
as
the
basis
for
preparing
financial
statements
____________________________________________________________________________________________________________________________
Capturing
Accounting
Information:
Journal
and
Ledger
Accounts
Analysing
each
transaction
by
using
the
accounting
equation
is
not
appropriate
for
a
large
number
of
transactions
Instead,
we
can
use
the
journal
or
ledger
to
effectively
and
efficiently
capture
accounting
information
Pages
123-127
of
your
textbook
describe
journal
entries,
ledger
accounts,
debit
&
credit
rules,
and
the
trial
balance;
however,
we
do
not
cover
this
material
in
this
course.
____________________________________________________________________________________________________________________________
The
balance
sheet
is
a
financial
statement
that
details
the
entitys
assets,
liabilities
and
equity
as
at
a
particular
point
in
time
the
end
of
the
reporting
period
Reflects
the
assets
in
which
the
entity
has
invested
(its
investing
decisions),
and
how
the
entity
has
financed
the
assets
(its
financing
decisions)
____________________________________________________________________________________________________________________________
Format
and
presentation
of
the
balance
sheet
Comparative
information
allows
users
to
see
how
firms
financial
position
has
changed
between
the
previous
and
current
periods
____________________________________________________________________________________________________________________________
The
definition
and
recognition
of
assets
An
asset
is
formally
defined
in
the
Conceptual
Framework
(para.
49(a))
as
a
resource
controlled
by
the
entity
as
a
result
of
past
events
and
from
which
future
economic
benefits
are
expected
to
flow
to
the
entity.
____________________________________________________________________________________________________________________________
Asset
definition
-
Control
An
entity
must
control
the
item
for
that
item
to
be
consid.
as
an
asset
and
recognised
on
the
balance
sheet
The concept of control refers to the capacity of the entity to benefit from the asset in the pursuit of its
objectives, and to deny or regulate the access of others to the benefit
Past
event
Every
asset
must
have
arisen
from
a
transaction
that
has
already
happened
A company cannot include an asset it will be getting in the future
Future
Economic
Benefit
Items
must
provide
benefits
to
the
entity
that
uses
them
in
order
to
be
regarded
as
assets
Benefit can be cash or control of resources
____________________________________________________________________________________________________________________________
Recognition
Recognition
means
recording
items
in
the
financial
statements
with
a
monetary
value
assigned
to
them
Satisfying the definition criteria is only part of the process in recording an item on the balance sheet
recognition criteria must also be satisfied
To
be
recognised
as
an
asset
on
the
balance
sheet,
the
future
economic
benefits
expected
to
flow
from
the
asset
must:
be
probable,
and
be
capable
of
being
measured
reliably
Recognition
of
an
Asset
Probable
It
is
more
than
likely
that
the
future
economic
benefits
will
flow
from
the
asset
to
the
business
controlling
it
Reliably
Measured
The
value
of
the
asset
can
be
measured
reliably
May
require
the
use
of
estimates
___________________________________________________________________________________________________________________________
Summarising:
Criteria
to
be
satisfied
to
recognise
an
asset
v The
essential
characteristics
for
an
asset
are:
1. the
resource
must
be
controlled
by
the
entity
2. the
resource
must
be
as
a
result
of
a
past
event
3. future
economic
benefits
are
expected
to
flow
to
the
entity
from
the
resource.
v Furthermore,
to
be
recognised
as
an
asset
on
the
balance
sheet,
the
future
economic
benefits
must
be
probable
and
capable
of
being
measured
reliably.
____________________________________________________________________________________________________________________________
TOPIC
4
CHAPTER
6
INCOME
STATEMENT
AND
STATEMENT
OF
CHANGES
IN
EQUITY
Purpose
and
importance
of
measuring
financial
performance
The
income
statement
reflects
the
accounting
return
for
an
entity
over
a
specified
time
period
PROFIT
=
INCOME
-
EXPENSES
But
not
all
value
changes
result
in
income
or
expenses
that
are
recognised
in
the
income
statement
(profit
&
loss
account)
E.g.
unrealised
gains
from
revaluing
assets
are
taken
directly
to
equity,
bypassing
the
income
statement)
v Income
encompasses
both:
revenue arising in the ordinary course of activities (e.g. sales, fees, dividends)
gains
(e.g.
gains
on
disposal
of
non-current
assets,
and
unrealised
gains
on
revaluing
assets)
only
realised
gains
are
included
in
the
income
statement
---
unrealised
gains
are
taken
directly
to
equity
(and
reported
on
the
statement
of
comprehensive
income)
____________________________________________________________________________________________________________________________
The
reporting
period
The
financial
statements
assume
that
an
entity
is
a
going
concern,
but
the
life
of
the
entity
is
divided
into
arbitrary
reporting
periods,
also
known
as
accounting
periods
For
external
reports,
the
convention
is
that
the
arbitrary
reporting
period
is
yearly,
and
so
the
entity
prepares
financial
statements
at
the
end
of
each
12
months
(not
necessarily
a
calendar
year)
____________________________________________________________________________________________________________________________
Accrual
accounting
vs
Cash
Accounting
Accrual
accounting
is
a
system
in
which
transactions
and
events
are
recorded
in
the
periods
they
occur,
rather
than
in
the
periods
the
entity
receives
or
pays
the
related
cash
A
cash
accounting
system
would
determine
profit
or
loss
as
the
difference
between
the
cash
received
in
relation
to
income
items
and
the
cash
paid
for
expenses
Under
accrual
accounting,
the
following
may
occur:
Income
is
recognised
without
receipt
of
cash
(accrued
income)
Cash
is
received
but
income
is
not
recognised
(unearned
income)
Expense
is
recognised
without
payment
of
cash
(accrued
expense)
Expense
is
paid
but
not
recognised
as
an
expense
(prepaid
expense)
____________________________________________________________________________________________________________________________
Accrued
income
Income
has
been
earned
in
the
current
accounting
period
but
has
not
yet
been
received
in
cash
Must
be
recorded
as
both
income
(e.g.
accrued
interest
income,
accrued
rent
income)
and
an
asset
(e.g.
interest
receivable,
rent
receivable)
When
the
cash
is
received
next
period,
do
not
record
as
income
simply
record
the
receipt
of
cash
and
reduce/eliminate
the
receivable
____________________________________________________________________________________________________________________________
Unearned
(deferred)
income
Cash
has
been
received
in
the
current
accounting
period,
but
the
income
has
not
yet
been
earned
is
Examples include purchases paid for in advance of delivery, magazine subscriptions, etc.
At
the
time
cash
is
received,
income
is
not
recorded
instead,
a
liability
is
recognised
(unearned
income
or
revenues
received
in
advance)
At
the
end
of
the
period,
must
determine
how
much
of
the
unearned
income
has
now
been
earned
(goods
delivered
or
services
provided)
and
record
this
amount
as
income,
while
reducing
the
liability
by
the
same
amount
____________________________________________________________________________________________________________________________
Accrued
expenses
Expenses
have
been
incurred
in
the
current
accounting
period
(resources
consumed)
but
cash
has
not
yet
been
paid
Must
be
recorded
as
both
an
expense
(e.g.
accrued
wages,
accrued
electricity)
and
a
liability
(e.g.
wages
payable,
electricity
payable)
When
the
cash
is
paid
next
period,
do
not
record
as
an
expense
simply
record
the
decrease
in
cash
and
reduce/eliminate
the
liability
____________________________________________________________________________________________________________________________
Prepaid
(deferred)
expenses
Expenses
have
been
paid
in
the
current
accounting
period
but
resources
not
yet
consumed
At
the
time
cash
is
paid,
the
expense
is
not
recorded
instead,
an
asset
is
recognised
(e.g.
prepaid
rent,
prepaid
insurance,
etc.)
At
the
end
of
the
period
must
determine
how
much
of
the
prepaid
expense
has
expired
or
been
consumed,
and
record
this
amount
as
an
expense
while
reducing
the
pre-payment
(asset)
by
the
same
amount
____________________________________________________________________________________________________________________________
Topic 5
Cash sales
Credit sales
Cash sales
Credit sales
cash receipts
cash payments
net
change
in
cash
resulting
from
operating,
investing
and
financing
activities
To
ensure
that
an
entity
has
enough
cash
on
hand
to
meet
its
financial
commitments
in
a
timely
fashion
avoid
insolvency
____________________________________________________________________________________________________________________________
Relationship
of
the
statement
of
cash
flows
to
other
financial
statements
Income statement & balance sheet only show part of the activities of the bus.
Cash
flow
statement
gives
additional
information
to
assist
decision
makers
in
assessing
an
entitys
ability
to:
generate
cash
flows
meet
financial
commitments
as
they
fall
due
fund
changes
in
scope
and/or
nature
of
activities
obtain
external
finance
___________________________________________________________________________________________________________________________
Classified
into
three
main
sections
reflecting
the
major
cash
flow
activities
Operating
activities
(Income
statement
revenue
and
expenses;
Current
assets
and
liabilities
in
the
balance
sheet)
Cash
equivalents:
Short
term,
highly
liquid
investments,
easily
converted
to
known
amounts
of
cash
with
little
risk
of
a
change
in
value
Investments
with
maturity
3
months
Bank
overdrafts
____________________________________________________________________________________________________________________________
Format
of
the
statement
of
cash
flows
(cont)
Operating
activities
Activities
relating
to
provision
of
goods
and
services
and
other
activities
that
are
neither
investing
nor
financing
activities
Act.
reported
in
the
income
statement
are
adjusted
from
accrual
to
cash
basis
Cash
from
operating
activities
shows
ability
to:
generate
cash
meet
short
term
obligations
continue
as
a
going
concern
expand
Investing
activities
Consist
of
those
activities
that
relate
to
the
acquisition
&/or
disposal
of:
non-current assets (including property, plant and equipment, and other productive assets), and
Activities that change the size and/or composition of the financial structure of the entity
Allows
users
to
see
the
changes
in
operating
accounts
brought
about
by
use
of
accrual
versus
cash
basis
of
accounting
____________________________________________________________________________________________________________________________
The
usefulness
of
the
statement
of
cash
flows
For
investment
community
Statement
of
cash
flows
can
be
used
to
assess
organisations
management
and
whether
it
has
or
can
generate
sufficient
cash.
____________________________________________________________________________________________________________________________
Analysing
the
statement
of
cash
flows
v The
statement
of
cash
flow
can
provide
warning
signals:
Cash
received
less
than
cash
paid
Net
operating
cash
outflow
Cash
from
operations
less
than
after
tax
profit
Proceeds
from
share
capital,
investments
and
borrowings
used
to
compensate
for
negative
operating
cash
Loss
of
cash
on
a
continual
basis
Current
assets:
assets
the
entity
expects
to
convert
to
cash
within
the
next
12
month
e.g.
cash,
debtors
Net
working
capital:
current
assets
minus
current
liabilities
the
need
to
earn
the
required
rate
of
return
on
assets
for
investors
(working
capital
that
is
too
high
reduces
return
on
equity)
To achieve an appropriate level of net working capital many firms use the hedging principle
This means matching the maturity of the source of funding with its use or cash flows
To
make
the
hedging
principle
more
useful,
it
is
useful
to
think
in
terms
of
different
3
different
sources
of
funding
Permanent
sources
funding
with
maturities
>
I
year
e.g.
long
term
debt,
leases,
shares
Temporary
sources
short
term
finance
e.g.
bank
loans,
commercial
bills
Spontaneous
sources
unplanned
or
unstructured
funding
e.g.
trade
creditors,
accrued
expenses
Principles
for
using
the
various
sources
of
financing
are:
Permanent assets should be financed with permanent & spontaneous sources of funding
Managers face a trade-off between risk/return when contemplating how much cash to hold
Cost
may
be
minimised
by
holding
as
little
cash
as
possible,
but
risk
is
increased
The
timing
of
cash
flows
The
timing
of
most
cash
flows
is
normally
variable,
the
only
exceptions
probably
being
the
payment
by
the
entity
of
wages
and
taxes
Entities
can
plan
the
timing
of
the
purchase
and
sale
of
assets,
and
the
requirements
for
capital
injections,
to
suit
their
needs
Similarly,
in
contracting
for
loans
or
placing
funds
in
the
short-term
money
market,
an
entity
can
negotiate
timing
that
best
suits
its
own
needs
The
cost
of
cash
Two
types
of
cost
associated
with
holding
cash:
Opp.
cost
of
holding
currency
or
cash
deposits,
rather
than
short-term
securities
cost
of
ensuring
physical
security
of
currency
Electronic
alternatives
have
reduced
the
amounts
of
currency
handled
by
entities
but
has
increased
costs
elsewhere
The
cost
of
not
having
enough
cash
Not having enough cash at the required time may result in the loss of the bus.
However,
as
a
general
rule,
the
more
desperate
the
need,
the
higher
the
cost
of
emergency
funds
____________________________________________________________________________________________________________________________
Increasing
sales:
new
customers
from
cash-only
suppliers
customers
may
bring
planned
purchases
forward
impulsive
purchases
customers
who
would
not
otherwise
have
purchased
Costs
Inventories
or
stock
are
normally
a
component
of
current
assets
for
most
entities
involved
in
manufacturing
or
the
sale
of
goods
Types
of
inventories
Raw
materials
Work
in
progress
(WIP)
Finished
goods
Benefits
and
costs
of
holding
inventories
Benefits
Goodwill built up
Ordering
costs
compounded
if
a
large
number
of
small
orders
Holding
costs
Storage
and
display
costs
Insurance
costs
Deterioration
and
obsolescence
Wholesale
price
changes
Theft
Financing
costs
Inventory
management
techniques
1.
Maintaining
a
minimum
level
of
stock
Manager
can
decide
on
a
number
of
days
of
inventory
to
be
held
as
optimum
for
the
firm
Inventory
turnover
=
Average
inventory
x
365
=
x
days
Cost
of
sales
Economic
order
quantity
(EOQ):
Calculates the optimum size of the order, taking these two components into account
Decreasing
inventory
held
means
an
increase
in
order
costs
as
the
number
of
orders
rises
in
the
period
EOQ
seeks
to
identify
the
size
of
the
order
that
will
minimise
the
total
costs.
EOQ
Model
EOQ =
2DC
H
where:
D
is
the
annual
demand
for
the
item
of
stock
C
is
the
cost
of
placing
an
order
H
is
the
cost
of
holding
one
unit
of
stock
for
one
year
Some
limiting
assumptions
apply
to
the
model:
Demand is even
EXAMPLE
v ADM
Ltd
sells
2,000
units
of
product
X
each
year.
It
has
been
estimated
that
the
cost
of
holding
one
unit
of
the
product
for
a
year
is
$4.
The
cost
of
placing
an
order
for
stock
is
estimated
at
$25.
What
is
the
EOQ
for
this
product?
v EOQ
=
(2DC
/
H)
=
(2
x
2,000
x
$25
/
$4)
=
158
v This
will
mean
that
the
business
will
have
to
order
product
X
about
13
times
each
year
in
order
to
meet
sales
demand
(2,000
/
158
=
12.7)
____________________________________________________________________________________________________________________________
Sources
of
short-term
finance
Trade
credit
particularly
important
because
arises
through
normal
business
activities,
and
doesnt
require
formal
agreements
or
additional
accounting
practices.
Sources
of
long-term
debt
finance
TOPIC 6
Business
Sustainability
Sustainable
development
is
development
that
meets
the
needs
of
the
present
without
compromising
the
ability
of
future
generations
to
meet
their
own
needs.
____________________________________________________________________________________________________________________________
Business
Sustainability
Key
Drivers
Competition
for
Resources
Climate
Change
Economic
Globalisation
Connectivity
and
Communication
Business
Sustainability
Principles
Ethics
Governance
Transparency
Business
relationships
Financial
return
Comm.
involvement/economic
dev.
Value
of
products/services
Employment
practices
Protection
of
the
environment
____________________________________________________________________________________________________________________________
Theories
of
Business
Sustainability
Corporate
Social
Responsibility
Refers
to
the
responsibility
an
entity
has
to
all
stakeholders,
including
society
in
general
and
the
physical
environment
in
which
it
operates.
Profitable
to
do
so
Reduce
interference
from
government
and
lobby
groups
Desire
to
do
the
right
thing
Shareholder
Value
A
corporation
has
many
stakeholders
Stakeholders
represent
all
parties
that
have
a
vested
interest
and
can
either
influence
the
entitys
management
and
operations
or
are
affected
by
them
Shareholder
returns
are
usually
the
primary
focus
of
an
org.
Managers
act
on
behalf
of
shareholders
____________________________________________________________________________________________________________________________
Stakeholder
theory
holds
that
the
purpose
of
the
entity
is
to
work
for
the
good
of
all
stakeholder
groups,
not
just
to
maximise
shareholder
wealth.
____________________________________________________________________________________________________________________________
Stewardship
theory
Directors
act
in
the
interest
of
a
group(s)
of
stakeholders
not
just
shareholder
value
____________________________________________________________________________________________________________________________
Reporting
and
Disclosure
One approach to sust. reporting is the GRI reporting framework comprised of:
Sustainable
business
practices
means
that
decisions
may
be
made
that
are
not
necessarily
profit
maximising,
but
are
beneficial
for
the
environ./
community.
____________________________________________________________________________________________________________________________
Triple
Bottom
Line
Reporting
Triple
Bottom
Line
refers
to
reporting
on
the
3
Pillars
of
Sustainability:
1. Economic
performance
2. Environmental
performance
3. Social
performance
____________________________________________________________________________________________________________________________
Corporate
Governance
Corporate
governance
refers
to
the
direction,
control
and
management
of
an
entity.
This
includes
the
rules,
procedures
and
structure
upon
which
the
organisation
seeks
to
meet
its
objectives.
Morality
vs
Prudence
Prudence
-
Acting
in
ones
self-interest
Morality
-
Acting
as
one
ought
to
by
taking
into
account
the
interests
of
other
people
____________________________________________________________________________________________________________________________
Ethical
Theories
John
Stuart
Mill
proposed
that
behaviour
should
be
based
on
what
provides
the
greatest
good
to
the
greatest
number
If all businesses focus on profitability, max. prod. will be achieved from societys limited resources
Hobbes:
if
everyone
acted
in
their
own
self-interest,
anarchy
would
rein
therefore
people
will
want
regulation
for
security
and
protection
But
Smith
believed
regulation
impedes
prosperity
competitive
self-interests
are
necessary
in
the
commercial
world
to
achieve
overall
public
benefit
Teleological
Conclusion
Friedman
mooted
limited
government
intervention
and
self-interest
as
long
as
in
accordance
with
the
rules
of
the
game
laissez-faire
economy
____________________________________________________________________________________________________________________________
Deontological
theories
Kant
proposed
that
an
action
is
morally
right
if
it
is
motivated
by
a
good
will
that
stems
from
a
sense
of
duty
So
a
business
motivated
by
profits,
despite
doing
respectful
things,
is
acting
in
a
prudent
rather
than
a
moral
way
____________________________________________________________________________________________________________________________
Ethical
behaviour
and
professional
code
of
ethics
Many companies and professional bodies have developed their own codes of ethics
CPA
Australia
and
ICAA
have
joint
code
of
ethics
for
professional
accountants
Five
fundamental
principles
Integrity
(honest,
sincere)
Objectivity
(no
bias
or
conflict
of
interest)
Professional
competence
and
due
care
Confidentiality
Profession.
behaviour
(uphold
rep.
of
job)
Overarching
principle
act
in
the
public
interest.
____________________________________________________________________________________________________________________________
Key
ethical
issues
facing
entities
today
include:
Carbon
emissions
Ethical
investments
Whistleblowing
Insider
trading
Bribery
Fraud
____________________________________________________________________________________________________________________________
Ethics,
regulation,
sustainability
and
politics
Ethical
decision
making
in
business
is
complex
with
only
principles,
values
and
approaches
to
guide
the
individual
or
group
Directing and motivating coordinating activities and human resources to produce a smooth-running
organisation
Commonly relates to broader issues such as business takeovers, expansion plans, deletion of business
segments, and radical product/service development
____________________________________________________________________________________________________________________________
Budgeting
is
a
process
that
focuses
on
the
short-term
Budgets operationalise strategic plans and allow operational areas to understand how their area
contributes to the entitys strategic objectives
Budgets
Part
of
the
formal
planning
process
relates
to
an
entitys
operational
plans,
including
short
term
goals
and
targets:
Performance management:
involves setting targets in other than just financial terms, e.g. improving customer service, corporate
governance, management techniques, and human resource management
providing profit forecasts and other financial data to the capital markets
forecasting data such as sales or fees, which commonly set the level of activity for the budget period
helping determine required inventory levels and purchasing requirements for raw materials
Purchases budget
Cash budget
Capital budgets
Program
budget
____________________________________________________________________________________________________________________________
Master
budget
A
master
budget
is
a
set
of
interrelated
budgets
for
a
future
period
which
provides
a
framework
for
viewing
relevant
budgets
of
an
entity
Because
budgets
are
based
on
forecasts
about
the
future,
complete
accuracy
is
impossible
and
variances
will
inevitably
arise
Both
favourable
and
unfavourable
variances
must
be
analysed
to
understand
their
causes
Corrective
action
may
be
taken,
or
the
budget
revised
managements best estimate of sales revenue for the budget period derived from the sales forecast
Developing the production budget
based on labour hours required to meet production budget and wage rates
Developing the operating expenses budget
other production and support department costs
____________________________________________________________________________________________________________________________
The
cash
budget
The
cash
budget
is
a
statement
of
expected
future
cash
receipts
and
payments
It
assists
decision
making
by:
For
an
entity
that
provides
goods
or
services
on
credit,
one
of
the
main
tasks
in
the
preparation
of
a
cash
budget
is
calculating
the
cash
receipts
from
the
credit
sales
or
fees
generated
Past experience suggests debtors settle accounts according to the following pattern:
$210,000 in October
$282,000 in November
$303,000
in
December
____________________________________________________________________________________________________________________________
v
____________________________________________________________________________________________________________________________
Budgets:
planning
and
control
The preparation of the cash budget is an important part of the planning process
It can then be used for monitoring cash performance, also known as the control process
A
cash
budget
prepared
on
a
month-by-month
basis
is
much
more
useful
for
this
purpose
than
one
prepared
on
a
quarterly
or
yearly
basis
As
each
month
passes,
actual
cash
numbers
can
be
compared
to
the
budget
numbers,
with
the
difference
between
the
two
known
as
a
variance
____________________________________________________________________________________________________________________________
Step
5:
Compare
actual
performance
against
budget
____________________________________________________________________________________________________________________________
Improving
cash
flow
Cash
inflow
may
be
increased
by:
providing
an
extra
capital
contribution
from
the
owners,
or
considering
a
change
in
ownership
structure
keeping
inventory
levels
to
only
what
is
required,
as
excess
inventory
ties
up
cash
and
often
adds
to
storage
and
handling
costs
Like
all
decision-making
processes,
budgeting
is
affected
by
human
behaviour,
attitudes
and
assumptions
These are seen in the management styles adopted in the budget process
The behavioural aspects of budgeting are also seen in the attempts by some line managers to:
include some margin for error in case targets are not met
manipulate information so that their performance is presented in the best possible light
____________________________________________________________________________________________________________________________
CVP
analysis
is
concerned
with
the
change
in
profits
in
response
to
changes
in
sales
volumes,
costs
and
prices
Helps
answer
the
following
questions:-
How
many
units
need
to
be
sold,
or
services
performed,
to
break
even
(that
is,
earn
zero
profit)?
What
is
the
impact
on
profit
of
a
change
in
the
mix
between
fixed
and
variable
costs?
How
many
units
need
to
be
sold,
or
services
performed,
to
achieve
a
particular
level
of
profit?
What
is
the
impact
on
profit
of
a
15
per
cent
increase
in
costs?
A
10%
decrease
in
sales
volume?
Etc.
____________________________________________________________________________________________________________________________
Cost
behaviour
CVP
analysis
is
an
important
part
of
the
managerial
planning
process
Begins
with
a
consideration
of
cost
behaviour
The relevant range is the range of activity over which the cost behaviour is assumed to be valid
If
the
activity
level
goes
outside
the
relevant
range,
then
the
expected
behaviour
of
costs
changes,
e.g.
fixed
costs
can
no
longer
be
assumed
to
be
fixed
Mixed costs occur because some costs have both fixed and variable components
____________________________________________________________________________________________________________________________
Break-even
analysis
v Break-even
analysis
relates
to
the
calculation
of
the
necessary
levels
of
activity
required
in
order
to
break
even
in
a
given
period
Break-even
occurs
when
total
revenue
and
total
costs
are
equal,
resulting
in
zero
profit
i.e.
when
Revenue
=
FC
+
VC
Break-even
analysis
involves
the
contribution
margin
concept
Contribution
margin
is
calculated
by
deducting
total
variable
costs
from
total
revenue
Contribution
margin
per
unit
can
be
calculated
by
deducting
variable
cost
per
unit
from
revenue
per
unit
Contribution
margin
=
Revenue
VC
____________________________________________________________________________________________________________________________
Break-even
analysis
for
a
single
product
or
service
Example
1
Selling
price
$25
Purchase
price
$14
Fixed
exhibition
and
trade
show
costs
$28,000
p.a.
Fixed
transport
costs
$10,600
p.a.
Variable
demonstration
costs
$1
per
unit
Administration
fixed
costs
$6,400
p.a.
____________________________________________________________________________________________________________________________
Using
break-even
data
Identifying
the
number
of
products
or
services
required
to
be
sold
to
meet
break-even
or
profit
targets
Planning
products
and
allocating
resources
by
focusing
on
those
products
that
contribute
more
to
profitability
Determining the impact on profit of changes in the mix of fixed and variable costs
Pricing
products
____________________________________________________________________________________________________________________________
CVP
assumptions
Fixed
costs
remain
fixed
over
the
time
period
and/or
a
given
range
of
activity
(often
referred
to
as
the
relevant
range)
Unit price and cost data remain constant over the time period and relevant range
For
multi-product
entities,
the
sales
mix
between
the
products
is
constant
____________________________________________________________________________________________________________________________
Margin
of
safety
and
operating
leverage
The
margin
of
safety
provides
an
indication
of
how
much
revenue
(or
sales
in
units)
can
decrease
before
reaching
the
break-even
point:
Margin
of
safety
in
units
=
actual
or
estimated
units
of
activity
-
units
at
break-
even
point
Margin
of
safety
revenues
=
actual
or
estimated
reven
revenue
at
break-even
point
Provides
a
measure
of
how
much
risk
is
involved
in
the
activity
____________________________________________________________________________________________________________________________
Operating
leverage
is
the
mix
between
FC
and
VC
in
the
cost
structure
of
an
entity
Casual employee
$250,000
$250,000
140,000
150,000
110,000
100,000
55,000
45,000
Profit
55,000
Profit
55,000
Permanent
employee
Casual employee
$200,000
$200,000
112,000
120,000
88,000
80,000
55,000
45,000
Profit
33,000
Profit
35,000
____________________________________________________________________________________________________________________________
Contribution
margin
per
limiting
factor
Contribution
margin
per
limiting
factor
is
the
contribution
margin
per
unit
of
limited
resource
Example
2
Products
B101
C101
D101
.
Budgeted
sales
next
year
60,000
40,000
100,000
SP
per
unit
$25
$40
$20
VC
per
unit
$15
$22
$15
CM
per
unit
$10
$18
$5
Labour
time
per
unit
1
hr
4
hrs
1.5
hrs
Total
labour
hrs
required
60,000
hrs
160,000
hrs
150,000
hrs
By summing the required hours, we find that the firm needs a total of 370,000 hours
To
do
this
need
to
find
CM
per
hour
because
time
is
the
limiting
factor
B101
C101
D101
CM
per
unit
$10
$18
$5
Labour
time
per
unit
1
hr
4
hrs
1.5
hrs
Total
labour
hrs
required
60,000
hrs
160,000
hrs
150,000
hrs
CM
per
hour
$10
per
hr.
$4.50
per
hr.
$3.33
per
hr.
This
analysis
shows
that:
C101
is
most
profitable
per
unit
But
B101
will
maximise
profit
by
providing
more
CM
per
hour
May
and
buy
(outsourcing)
and
special
order
decision
To
make
sure
decisions
are
based
on
the
right
information,
the
following
must
be
identified
where
relevant:
Relevant costs and relevant income
Incremental costs and incremental income
Opportunity cost
Avoidable costs and unavoidable costs
____________________________________________________________________________________________________________________________
A
make
or
buy
(outsourcing)
decision
requires
an
entity
to
choose
whether:
To make or provide a product or service, or
To outsource the production of that product or service
Such
a
decision
will
involve:
quantitative factors (comparison of relevant costs, opportunity costs between both options) and
qualitative factors (product quality, reliability of supply, on-time delivery, staffing considerations, etc.)
___________________________________________________________________________________________________________________________
A
special
order
is
a
one-off
request
from
a
customer
that
is
diff.
from
the
orders
usually
received
by
the
entity
Will
incremental
revenue
exceed
incremental
costs?
Incremental
costs
=
additional
VC,
but
may
also
be
incremental
FC
Must
also
consider
whether
the
entity
is
operating
at
full
capacity,
or
has
idle
capacity
(or
available
capacity)
Insufficient
idle
capacity
=>
opportunity
cost
____________________________________________________________________________________________________________________________
TOPIC
9
CHAPTER
8
ANALYSIS
AND
INTERPRETATION
OF
FINANCIAL
STATEMENTS
Users
and
decision
making
The
users
of
financial
reports
can
broadly
be
categorised
as:
resource
providers
e.g.
creditors,
lenders,
shareholders,
employees
recipients
of
goods
and
services
i.e.
customers,
debtors
parties
performing
an
overview
or
regulatory
function
e.g.
tax
office,
corporate
regulator,
statistical
bureaus
internal
management
to
assist
in
their
decision
making
duties
____________________________________________________________________________________________________________________________
The
need
for
financial
analysis
The
financial
analyst
attempts
to
explain
to
the
players
and
the
umpires
the
meaning
of
the
accounting
scores:
Involves expressing the reported numbers in relative terms rather than relying on the absolute numbers
By evaluating an entitys financial past, users are in a better position to form an opinion as to the entitys
future financial health
the equivalent figures from previous years (rather than in one years absolute terms)
benchmarks
Analytical
methods
include:
Horizontal analysis
Trend analysis
Vertical analysis
Ratio
analysis
____________________________________________________________________________________________________________________________
Horizontal
analysis
Compares
reported
numbers
in
different
reporting
periods
to
highlight
magnitude
and
significance
of
changes
Dollar
change
is
calculated
by:
Accounting
number
in
current
reporting
period
Accounting
number
in
previous
reporting
period
Percentage
change
is
calculated
by
Accounting
number
in
current
reporting
period
Accounting
number
in
previous
reporting
period
x
100
/
Accounting
number
previous
reporting
period
2013
2012
Difference
Sales
$858,000
$803,000
$55,000
COGS
513,000
509,000
4,000
Gross
profit
345,000
294,000
51,000
____________________________________________________________________________________________________________________________
Trend
analysis
Tries
to
predict
the
future
direction
of
various
items
on
the
basis
of
the
direction
of
the
items
in
the
past
Trend
analysis
of
a
particular
item
involves
expressing
the
item
in
subsequent
years,
relative
to
a
selected
base
year
(which
is
usually
given
a
value
of
100)
____________________________________________________________________________________________________________________________
Example
:
Converting
Sales
Revenue
for
a
trend
analysis
Absolute
figures
$m
2013
2012
2011
2010
2009
2008
Sales revenue
$2959.3
$2731.3
$2327.3
$1828.6
$1281.8
$945.8
Trend numbers
313
289
246
193
135
100
Working
Etc.
Etc.
Etc.
1. Set
2008
as
base
year
and
assign
it
index
value
of
100
2. Divide
2009
revenue
by
2008
revenue
and
multiply
by
100
3. Divide
2010
revenue
by
2008
revenue
and
multiply
by
100
4. Divide
each
subsequent
years
revenue
by
2008
revenue
and
multiply
by
100
____________________________________________________________________________________________________________________________
Vertical
analysis
Involves
comparing
the
items
in
a
financial
statement
to
an
anchor
item
in
the
same
financial
statement:
Revenue
and
expense
items
are
expressed
as
a
percentage
of
sales
or
revenue
A,
L
and
Equity
items
are
expressed
as
a
percentage
of
total
assets
Particularly
useful
for
inter-company
comparisons
and
different
size
comparisons
(common
size
financial
statements)
JB
Hi-Fi
Ltd
Ratio
analysis
An
expression
of
one
item
in
the
financial
statements
as
a
fraction
of
another
item
in
the
financial
statements
one
item
is
divided
by
another
to
create
the
ratio
the entitys ratios with those of other entities in same industry (intra-industry analysis)
the
entitys
ratios
with
those
of
entities
operating
in
different
industries
(inter-industry
analysis)
ROE
measures
the
rate
of
return
achieved
by
the
companys
managers
on
the
capital
invested
by
shareholders
ROE
will
be
greater
than
ROA
when
a
firm
is
earning
a
return
on
borrowed
funds
that
is
greater
than
the
cost
of
those
funds
Captures
profitability,
efficiency
and
capital
structure
Compares
a
firms
profits
to
the
assets
that
are
available
to
generate
the
profits
measures
the
return
earned
by
management
through
operations
Ratios
that
relate
profit
to
sales
revenue
generated
by
the
entity
include
the
gross
profit
margin
and
the
profit
margin
Gross
profit
margin
reflects
the
proportion
of
sales
dollars
that
ends
up
as
gross
profit
Gross
profit
margin
Gross
profit
x
100
=
x%
Sales
revenue
Profit
Margin
EBIT
x
100
=
x%
sales
revenue
Net
profit
margin
Net
profit
margin
indicates
what
percentage
of
sales
dollars
remains
as
distributable
profits
Net
profit
after
tax
x
100
=
x%
Sales
revenue
Cash
flor
to
sales
ratio
Measures
the
amount
of
operating
cash
flow
generated
by
each
sales
dollar
Cash
flor
from
operating
activities
x
100
=
x%
Sales
revenue
____________________________________________________________________________________________________________________________
Asset
efficiency
analysis
Asset
turnover
ratio
Shows an entitys overall efficiency in generating income per dollar of investments in assets
Value will depend on the efficiency with which it manages its current and non-current investments
Like ROA, this ratio is influenced by asset valuation policy
Ave. total assets = (open. assets + clos. assets)/2
Liquidity analysis
The
survival
of
the
entity
depends
on
its
ability
to
pay
its
debts
when
they
fall
due
(its
liquidity)
An
entity
must
have
sufficient
working
capital
to
satisfy
its
short-term
requirements
and
obligations
But
excess
working
capital
is
undesirable
because
the
funds
could
be
invested
in
other
assets
that
would
generate
higher
returns
Current
ratio
(or
working
capital
ratio)
indicates
$
of
current
assets
per
$
of
current
liabilities
Measures
a
firms
liquidity
=
the
ability
of
the
firm
to
meet
its
short-term
obligations)
____________________________________________________________________________________________________________________________
Capital
structure
analysis
An
entitys
capital
structure
is
the
proportion
of
debt
financing
relative
to
equity
financing
(=
gearing
or
leverage)
X Ltd
Y Ltd
100,000
200,000
10% loan
200,000
100,000
300,000
300,000
EBIT
50,000
50,000
Interest expense
(20,000)
(10,000)
30,000
40,000
(9,000)
(12,000)
21,000
28,000
ROE
21%
14%
X Ltd
Y Ltd
100,000
200,000
10% loan
200,000
100,000
300,000
300,000
EBIT
25,000
25,000
Interest expense
(20,000)
(10,000)
5,000
15,000
(1,500)
(4,500)
3,500
10,500
ROE
3.5%
5.25%
Debt needs to be serviced from cash flow, so it is useful to relate the entitys cash generating capacity to
its long-term debt
This ratio links cash flows from operating activities with long-term debt
Debt
coverage
ratio
Non-current
liabilities
=
x
times
Net
cash
flows
provided
by
operating
activities
____________________________________________________________________________________________________________________________
Market
performance
analysis
Net
tangible
asset
backing
per
share
(NTAB)
Provides an indication of the book value of the entitys tangible assets (as reported in the balance sheet)
per ordinary share on issue
Intangible assets, such as goodwill, are excluded from calculation due to their lack of identifiability
(goodwill) or marketability (most other intangible assets)
Net
tangible
asset
backing
per
share
Ordinary
shareholders
equity
Intangible
assets
=
x
cents/share
No.
of
ordinary
shares
on
issue
at
year-end
Earnings,
cash
flow
and
dividend
per
share
Earnings
per
share
Profit
available
to
ordinary
shareholders
=
x
cents/share
Weighted
no.
of
ordinary
shares
on
issue
Operating
cash
flow
per
share
Net
cash
flows
from
operating
activities
Preference
dividends
=
x
cents/share
Weighted
no.
of
ordinary
shares
on
issue
Dividend
per
share
Dividends
paid
to
ordinary
shareholders
in
current
period
=
x
cents/share
Weighted
no.
of
ordinary
shares
on
issue
____________________________________________________________________________________________________________________________
Dividend
payout
ratio
The proportion of current years profits that are distributed to shareholders as dividends
A market value indicator that reflects the number of years of earnings that investors are prepared to pay
to acquire a share at its current market price
Highlights the markets assessment of the future performance of a firm
Price
earnings
ratio
Current
market
price
=
x
times
Earnings
per
share
____________________________________________________________________________________________________________________________
Ratio
interrelationships
In
presenting
profitability,
asset
efficiency,
liquidity,
capital
structure
and
market
performance
ratios,
we
attempt
to
link
ratios
to
describe
the
financial
health
of
the
firm
Ratio
analysis
is
valuable
because
it
helps
to
interpret
and
explain
why
ratios
may
be
different
from
those
of:
previous
years
competitors
industry
averages
entities
in
unrelated
industries??
____________________________________________________________________________________________________________________________
Performing
a
ratio
analysis
Across
Time
A
ratio
from
two
years
The
method
DES
(Describe,
Explain,
Suggest)
Describe
the
change
In
the
previous
year
the
ratio
was...
This
year
the
ratio
is...
Explain
the
change
The
numerator
moved
at
greater
rate
than
the
denominator
(or
vice-versa)
Suggest
a
cause
For example: if the numerator was current assets, then what accounts had the
greatest impact on current assets?
Cash?
Inventory?
Sales?
Why?
Trends
may
be
identified
by
plotting
key
ratios
on
a
graph,
giving
a
visual
representation
of
changes
happening
over
time
Key
financial
ratios
are
often
published
in
companies
annual
reports
as
a
way
of
helping
users
identify
important
trends.
Limitations
of
the
analytical
process
need
to
be
considered
when
interpreting
and
relying
on
the
ratios
to
form
an
opinion
as
to
a
firms
financial
health,
both
past
and
present
Limitations
relate
to
the
nature
of
the
financial
statements
and
the
data
disclosed
(or
not
disclosed),
while
others
are
inherent
in
the
nature
of
the
financial
ratios
themselves
Most
analysis
is
for
the
purpose
of
forecasting
future
performance,
but
historical
relationships
may
not
continue
Historical
cost
data
fail
to
account
for
the
effects
of
inflation
Can
ROA
be
meaningful
when
current
$
profits
are
divided
by
historical
$
assets?
Any
ratios
based
upon
balance
sheet
figures
will
not
be
representative
of
the
whole
period
because
the
balance
sheet
is
a
snapshot
of
a
moment
in
time
No
two
businesses
are
identical
and
the
greater
their
differences,
the
greater
the
limitations
of
ratio
analysis
as
a
basis
for
comparison:
size
accounting
methods
employed
diversification
of
product
lines
Comprehensive
and
effective
financial
analysis
considers
information
beyond
financial
reported
numbers
SUMMARY
Summary
CH
1,2,3
Management
accounting
concerns
needs
of
internal
users,
while
financial
accounting
focuses
on
reports
for
external
users
The
main
sources
of
company
regulation
are
the
Corporations
Act,
the
ASX
listing
rules
and
the
influence
of
the
accounting
profession
Limitations
of
accounting
relate
to
the
time
lag,
historical
nature
of
information
and
costs
associated
with
releasing
accounting
information.
Sole Trader
Partnership
Companies
No. Of Owners
2 50
Liability
Unlimited
Unlimited
Limited
Profit
Belongs to owner
Tax
Financial
Statements
Sole Trader
Partnership
Companies
Income
Statement
No
tax
shown
Prepared
to
meet
needs
of
owner
No
tax
shown
Profit
distribution
to
individual
partners
shown
Equity
on
Balance
Sheet
____________________________________________________________________________________________________________________
CH
4
SUMMARY
Business transactions are occurrences that affect the assets, liabilities and equity items in an entity
Business
transactions
are
an
exchange
of
goods
that
occurs
between
the
entity
and
an
outside
entity
After each and every transaction, the accounting equation must remain balanced
Journals and Ledgers use debits and credits (not covered in this course)
____________________________________________________________________________________________________________________________
TOPIC 5 SUMMARY
A
statement
of
cash
flows
enables
decision
makers
to
evaluate
the
entitys
ability
to
generate
positive
cash
flows
in
the
future,
pay
dividends
and
finance
growth
v It
provides
a
summary
of
cash
and
types
of
cash
flows
in
and
out
of
an
equity
v The
format
is
governed
by
accounting
standards
v Interpretation
requires
a
general
evaluation
as
well
as
the
use
of
trend
and
ratio
analysis
v Working
capital
consists
of
funds
invested
in
(net)
current
assets
v Entities
must
manage
their
cash,
debtors
and
inventory
as
these
are
their
most
liquid
assets
v Firms
have
a
large
number
of
short
term
finance
options
v Long-term
debt
may
be
borrowed
through
financial
institutions
as
intermediaries
or
directly
by
the
debt
market
v Equity
finance
instruments
consist
of
ordinary
&
preference
shares,
rights
&
options
____________________________________________________________________________________________________________________________
TOPIC 6 SUMMARY
Sustainable
development
is
development
that
meets
the
needs
of
the
present
without
compromising
the
ability
of
future
generations
to
meet
their
own
needs.
Four
key
responsibilities
of
business
1. Economic
2. Legal
3. Ethical
4. Discretionary
Corporate
social
responsibility
(CSR)
refers
to
the
responsibility
an
entity
has
to
all
stakeholders,
including
society
in
general
and
the
physical
environment
in
which
it
operates.
An
corporation
has
many
stakeholders
Stakeholder
theory
holds
that
the
purpose
of
the
entity
is
to
work
for
the
good
of
all
stakeholder
groups,
not
just
to
maximise
shareholder
wealth.
Corporate
governance
refers
to
the
direction,
control
and
management
of
an
entity.
This
includes
the
rules,
procedures
and
structure
upon
which
the
organisation
seeks
to
meet
its
objectives.
The
key
to
governance
for
sustainability
may
be
determined
by
the
extent
of
ethical
consciousness
Teleological
theories
TOPIC 7 SUMMARY
Strategic
planning
influences
shorter
term
aspects
of
the
budgetary
planning
process
A
master
budget
may
be
viewed
as
a
set
of
interrelated
budgets
for
a
future
period
A
master
budget
is
commonly
classified
into
a
set
of
operating
budgets
and
financial
budgets
The
behavioural
aspects
of
budgeting
relate
to
the
human
involvement
in
decision
making
TOPIC
8
SUMMARY
CVP
analysis
is
an
important
part
of
the
planning
process
and
serves
as
a
useful
decision-making
tool
An
understanding
of
fixed,
variable
and
mixed
costs
is
necessary
to
execute
break-even
analysis
Break-even
analysis
can
be
conducted
for
single-product/service
entities
and
multi-
product/service
entities
we
consider
only
single-product
scenario
The
concepts
of
margin
of
safety
and
operating
leverage
provide
businesses
with
useful
extensions
to
the
basic
CVP
analysis
and
break-even
calculations
Special
attention
needs
to
be
given
to
limited
resources
Entities
use
relevant
income/costs
(not
full
cost)
to
analyse
make
or
buy
and
special
order
decisions.
TOPIC
9
SUMMARY