NOTES
ACFI1001: Accounting for Decisions Makers
University of Newcastle
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Table of Contents
1! INTRODUCTION TO ACCOUNTING AND ACCOUNTING ENTITIES!
5!
1.1! USERS!OF!ACCOUNTING!INFORMATION!
1.2! ASSUMPTIONS!OF!FINANCIAL!ACCOUNTING!
1.3! QUALITATIVE!CHARACTERISTICS!OF!ACCOUNTING!INFORMATION!
1.4! STRUCTURE!OF!BUSINESS!ENTITIES!
1.4.1! SOLE!PROPRIETORSHIP/!SOLE!TRADER!
1.4.2! PARTNERSHIP!
1.4.3! COMPANY/CORPORATION!(LIMITED!LIABILITY)!
1.5! MAIN!FINANCIAL!REPORTS!
1.6! ACCRUAL!ACCOUNTING!
1.7! CASH!ACCOUNTING!
1.8! ACCOUNTING!EQUATION!IN!DETAIL!
1.8.1! DOUBLE!ENTRY!ACCOUNTING!
1.9! THE!ACCOUNTING!CYCLE!–!INITIAL!STEPS!OF!THE!RECORDING!PROCESS!
5!
5!
5!
6!
6!
6!
6!
6!
6!
6!
7!
7!
7!
2! THE STATEMENT OF FINANCIAL POSITION!
8!
2.1! ACCOUNTING!EQUATION!
2.1.1! ASSETS!
2.1.2! LIABILITIES!
2.1.3! SHAREHOLDERS!EQUITY!
2.2! BALANCE!SHEET!
2.3! CLASSIFICATION!OF!ASSETS,!LIABILITIES!AND!SHAREHOLDERS’!EQUITY!
2.3.1! CLASSIFICATION!OF!ASSETS!
2.3.2! LIABILITIES!
2.3.3! OWNERS’!EQUITY!
2.4! MEASURING!ASSETS!
2.4.1! HISTORICAL!COST!
2.4.2! MARKET!VALUE!
8!
8!
8!
8!
9!
10!
10!
10!
10!
10!
10!
10!
3! THE STATEMENT OF FINANCIAL PERFORMANCE!
12!
3.1! INCOME!STATEMENT!
3.2! ACCRUAL!ACCOUNTING!
3.3! CASH!ACCOUNTING!
3.4! DEPRECIATION!
3.5! MEASURING!INVENTORY!
3.5.1! FIFO!
3.5.2! LIFO!
3.5.3! WEIGHTED!AVERAGE!COST!METHOD!
3.6! PERPETUAL!INVENTORY!CONTROL!SYSTEM!
3.7! PERIODIC!INVENTORY!CONTROL!SYSTEM!
3.8! NET!REALISABLE!VALUE!–!NRV!
3.9! ALLOWANCE!FOR!DOUBTFUL!DEBT!
12!
12!
12!
12!
13!
13!
13!
13!
14!
14!
14!
14!
4! STATEMENT OF CASH FLOWS!
15!
4.1! ACCRUAL!ACCOUNTING!
4.2! CASH!ACCOUNTING!
15!
15!
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4.3! STATEMENT!OF!CASH!FLOWS!
4.4! PREPARING!THE!STATEMENT!OF!CASH!FLOWS!–!DIRECT!METHOD!
15!
16!
5! FINANCIAL!STATEMENT!ANALYSIS!
18!
5.1!
5.2!
5.3!
5.4!
5.5!
5.6!
18!
18!
18!
19!
19!
20!
PERFORMANCE!RATIOS!
ACTIVITY!RATIOS!
LIQUIDITY!RATIOS!
FINANCIAL!STRUCTURE!RATIOS!
ANALYTICAL!METHODS!
LIMITATIONS!ON!FINANCIAL!STATEMENT!ANALYSIS!
6! COST!VOLUME!PROFIT!ANALYSIS!
21!
6.1! COST!BEHAVIOUR!
6.1.1! HIGH!LOW!METHOD!
6.2! CVP!ANALYSIS!
6.2.1! BREAK!EVEN!ANALYSIS!TO!FIND!THE!PRICE!WE!SHOULD!SELL!A!GIVEN!AMOUNT!OF!
PRODUCTION!FOR.!
6.2.2! HOW!TO!DETERMINE!NET!PROFIT!BEFORE!TAX:!
6.2.3! HOW!TO!DETERMINE!THE!UNITS!NECESSARY!TO!REACH!A!PROFIT!AFTER!TAX!GOAL:!
6.3! TACTICAL!DECISION!MAKING!
6.3.1! RELEVANT!INFORMATION!
6.3.2! ACCEPTING/REJECTING!SPECIAL!CONTRACTS!
6.3.3! MAKE!OR!BUY!DECISIONS!
6.3.4! CLOSING!OR!CONTINUING!A!SECTION!OR!DEPARTMENT!
21!
21!
22!
7! BUDGETS!
25!
7.1!
7.2!
7.3!
7.4!
7.5!
7.6!
7.7!
25!
25!
25!
26!
26!
26!
26!
THE!BUDGETING!PROCESS!
BUDGET!V!FORECAST!
BUDGETARY!APPROACHES!
FLEXED!BUDGET!
KEY!VARIANCES!
LIMITATIONS!OF!CONTROL!THROUGH!VARIANCES!AND!STANDARDS!
BEHAVIOURAL!ASPECTS!OF!BUDGETING!
22!
22!
23!
23!
23!
23!
23!
24!
8! PROJECTED!FINANCIAL!STATEMENTS!
27!
8.1!
8.2!
8.3!
8.4!
27!
27!
27!
27!
INFORMATION!ASSUMPTION!NEEDED!FOR!PROJECTED!INCOME!STATEMENT!
INFORMATION!ASSUMPTION!NEEDED!FOR!PROJECTED!BALANCE!SHEET!
INFORMATION!ASSUMPTION!NEEDED!FOR!PROJECTED!CASH!FLOW!STATEMENT!
SENSITIVITY!ANALYSIS!
9! CAPITAL!BUDGETING!
28!
9.1!
9.2!
9.3!
9.4!
9.5!
28!
28!
28!
29!
29!
STEPS!OF!CAPITAL!BUDGETING!
NET!PRESENT!VALUE!(NPV)!
ACCOUNTING!RATE!OF!RETURN!
PROFITABILITY!INDEX!
PAYBACK!PERIOD!
10! WORKING!CAPITAL!
30!
10.1! NATURE!AND!PURPOSE!OF!WORKING!CAPITAL!
10.2! MANAGING!CURRENT!ASSETS!
10.2.1! INVENTORIES!
30!
30!
30!
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10.2.2! ACCOUNTS!RECEIVABLE!
10.2.3! CASH!
10.3! MANAGING!CURRENT!LIABILITIES!
10.3.1! ACCOUNTS!PAYABLE!
30!
31!
31!
31!
11! TRENDS!AND!ISSUES!IN!ACCOUNTING!
32!
11.1! THEORIES!OF!BUSINESS!SUSTAINABILITY!
11.1.1! CORPORATE!SOCIAL!RESPONSIBILITY!
11.1.2! SHAREHOLDER!VALUE!
11.1.3! STAKEHOLDER!THEORY!
11.2! SUSTAINABILITY!REPORTING!
11.3! CORPORATE!GOVERNANCE!
11.4! BALANCED!SCORECARD!
32!
32!
32!
32!
32!
33!
33!
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1 Introduction to Accounting and Accounting
Entities
1.1 Users of Accounting Information
•
Users of accounting information are the people that depend on and use
the financial information (provided by financial statements) to make
economic decisions.
•
Accountants must behave in an ethical manner so that users can trust the
information provided and use it to make decisions.
1.2 Assumptions of Financial Accounting
•
Assumptions are the tools and principles that we assume accountant will
always use when presenting and creating financial statements
•
Relevant assumptions:
•
Accrual Accounting – Measure the performance and position of a
company by recognising economic events regardless of when cash
transactions occur.
•
Going Concern – A business will continue to operate for the foreseeable
future
•
Monetary Unit - Measured in common denominator
•
Accounting Period – Discrete equal periods
•
Historical Cost – Cost at initial acquisition
1.3 Qualitative Characteristics of Accounting Information
• Understandability
• Relevance
!
•
•
Materiality
Reliability
!
Fair representation (represent what really existed/happened)
!
Neutrality (freedom from bias)
!
Substance over form (reflects the economic reality)
!
Prudence (caution in estimates)
!
Completeness (material info not omitted, not misleading)
Comparability
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1.4 Structure of Business Entities
1.4.1
Sole Proprietorship/ Sole trader
•
The owner is called the proprietor
•
Separate accounting entity
•
Not separate legal entity
•
Not separate taxable entity
•
Unlimited liability - owner personally liable for debts of business
1.4.2
Partnership
•
Separate accounting entity
•
Not separate legal entity
•
Not separate taxable entity
•
Unlimited liability - individual partners personally liable for debts of
partnership
1.4.3
Company/Corporation (limited Liability)
•
The owners are called the shareholders
•
Separate accounting, legal and taxable entity
•
Limited liability - shareholders personally liable up to the value of their
shares
1.5 Main Financial Reports
•
•
•
•
Statement of Cash Flows
Statement of Financial Performance and Income Statement
Statement of Owner’s Equity or Retained Earnings
Statement of Financial Position or Balance Sheet
1.6 Accrual Accounting
•
Recording the economic impact of transactions at the time they occur so
as to not omit information, which may misguide users of financial
statements.
1.7 Cash Accounting
•
Recording the transaction only at the time cash changes hands.
•
Although this is helpful for recording the company’s cash flows, it does
not reflect the true financial performance and position of the firm.
•
There is a timing issue, sometimes we record transactions; before, after
and at the same time as cash changes hands.
•
Good judgement is always required.
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1.8 Accounting Equation in Detail
• ! = ! + !"
•
•
!"!(!ℎ!"#ℎ!"#$%&’!!"#$%&) ! = !!ℎ!"#!!"#$%"&! + !!"#$%&"'!!"#$%$&'!!
!"#$%&"'!!"#$%$&'! = !!"#$%$&!!"#"$%&!!"#$%&"'!!"#$%$&'! +
!!"#"$%"!– !!"#$%&$&! − !!"#"$%&$'!
•
Assets are the resources
•
Liability and Shareholders’ Equity are the sources of funding for Assets
1.8.1
•
Double Entry Accounting
Concept of Duality – Every business transaction will have a dual effect on
the entity and accounting equation
•
Golden rule: !"#$%& = !"#$%&'
Asset
Liability
Revenue
Increase
Debit
Credit
Credit
Decrease
Credit
Debit
Debit
Balance
Debit
Credit
Credit
Expense
Debit
Shareholders’
Equity
Credit
1.9 The Accounting Cycle – Initial Steps of the Recording
Process
1) Source document: the documents that prove the transactions occurred
2) Journal entries: record the journal entries in a ‘journal’
3) Post to ledgers: post those entries to the ledger of each respective account
to determine the balance.
4) Pre-closing trial balance: Present a balance sheet with the balances in your
ledgers
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NOTES
MATH1002: Linear Algebra
The University of Sydney
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