Unit 3: Financial decision making
Units 3 and 4 are designed to be taken as a sequence. While each unit has its particular application, both
examine the underlying principles and professional practices of accounting, the managerial role of the
accountant and likely future directions in accounting.
Unit 3 focuses on accounting and financial-decision making of a small business. The unit introduces a double
entry system using the accrual basis of accounting. It emphasises the role of accounting as an information
system and the role of information technology in completing procedures.
The unit introduces or extends double entry accounting for small businesses operating as sole proprietorships.
Double entry recording involves recording from verifiable evidence into journals and ledger accounts for each
transaction so that the accounting equation remains in balance. The accrual approach will be used for
recording and reporting.
Students are required to use information technology to prepare information for recording in double entry and
to use the capacity of electronic software to present and interpret information to assist financial decision
making. The accounting systems should,be applied to trading businesses only (not service) using the perpetual
method of stock recording (not physical).
Students are required to use information technology to prepare information for recording in double entry and
to use the capacity of electronic software to present and interpret the information produced.
Accounting procedures developed in each area of study will focus on the application of accounting concepts,
constraints and principles, where appropriate.
AREAS OF STUDY
the identification, definition and interrelationship of the accounting elements and the derivation
of the rules
double entry
expressed
in the accounting equation;
I:, Sources
andofprocessing
of as
financial
data
introduction
design of a double entry accounting system using T -form accounts only;
Thisthe
area
of study willand
include:
the establishment of a chart of accounts;
source documents for cash and credit transactions (no returns);
recording in special journals: simple sales and purchases journals and multi-column cash
receipts and payments journals (no discounts);
recording in the general journal transactions not recorded in the special journals, for example
i
I
:I
- establishing double entry
- correcting entries
- purchase of non-current assets on credit
- non-cash drawings by the owner;
1
posting of journals to accounts in the general ledger, including the use of control accounts
for debtors, creditors and inventory;
recording for trading stock using the perpetual inventory method only;
recording on stock cards using the identified cost only;
recording in subsidiary ledgers for debtors and creditors;
recording of balance day adjustments in the general journal and ledger for
- prepaid expenses (asset approach)
- accrued expenses
- revenue received in advance (liability approach)
- accrued revenues
- depreciation (straight-line method only)
- stock loss or gain;
• balancing accounts and closing the ledger using a profit and loss summary account;
'• preparation of a pre-adjustment trial balance and a post-adjustment trial balance;
• critical analysis of the recording system.
2. Financial outcomes
This area of study will. include:
reporting for balance day adjustments in profit and loss statements and balance sheets; preparation
of a ten-column worksheet; classification of reports: assets and liabilities, functional classification
of expenses in profit and loss statement for a single-activity trading business; preparation of a
classified statement of cash flow (using operating, financing and investing) from the books of
originating entry; preparation of bank reconciliation statements; alternate modes of display as an
aid to effective decision making.
Financial planning and decision making
This area of study will include:
use of schedules for the reconciliation of debtors, creditors and inventory against control accounts
in the general ledger; critical evaluation of reports; their presentation and usefulness to facilitate
understanding; management and control of stock, including use of stocktakes; management and
control of cash; understanding the difference between cash and profit; understanding and
evaluation (to include trends and benchmarks) of profitability (return on assets, return on sales,
asset turnover), liquidity (working capital and quick assets), stability (gearing), efficiency (debtors
turnover, stock turnover, creditors turnover), cash cycle. Calculations are not required.
ACCOUNTING
OUTCOMES
For this unit students are required to demonstrate achievement of two outcomes. As a set these
outcomes encompass all areas of study for the unit.
Outcome 1
On completion of this unit the student should be able to record and report financial information using
the double entry accrual-based system for a single-activity sole-proprietor business (trading businesses
only, where the trading business uses perpetual inventory) inanually and using information technology.
Key knowledge
In achieving this outcome the student will draw on knowledge described in areas of study 1 and 2.
To achieve this outcome the student should demonstrate knowledge of
• double entry accrual-based recording, using information technology where appropriate;
• reporting for a single-activity sole-proprietor business;
• definition of the following terms - asset, liability, owners
equity (proprietorship) - revenue and expenses - receipts
and payments - cash management through - bank
reconciliation statements - factors affecting cash flow
and the cash cycle.
Key skills
To achieve this outcome the student should demonstrate the ability to
• record accounting transactions using a double entry accrual-based accounting system from documents
or given information, using - general.and special journals - Worm accounts in the general ledger and
subsidiary ledgers for debtors and credit and stock;
• prepare reports using double entry-based electronic software;
• report on the business through the preparation of
- statements of profit and loss (fully classified)
- balance sheet (fully classified)
- statements of cash flow (fully classified) using the direct (transaction) approach;
. • implement control procedures for
- debtors
- creditors
- stock; '
• evaluate critically the recording and reporting system.
ACCOUNTING
Outcome 2
On completion of this unit the student should be able to analyse and use accounting information to
evaluate business profitability, liquidity, stability and efficiency to assist in making business decisions.
Key knowledge
In achieving this outcome the student will draw on knowledge described in area of study 3.
To achieve this outcome the student should demonstrate knowledge of
•
•
•
the techniques of analysis and interpretation of the performance of a business using financial and
non-financial information; .
the relationships between the tools of analysis;
the importance of the distinction between cash and profit.
Key skills
To achieve this outcome the student should derrionstrate the ability to'
•
•
evaluate the performance of the business using techniques of analysis and interpretation;
distinguish between cash and profit.
ASSESSMENT
The award of satisfactory completion for a unit is based on a decision that the student has
demonstrated achievement of the set of outcomes specified for the unit. This decision will be based on
the teacher's assessment of the student's overall performance on assessment tasks designated for the
unit. The Board of Studies will publish annually an assessment guide which will include advice on the
scope of the assessment tasks and the criteria for assessment.
The key knowledge and skills listed for each outcome should be used as a guide to course design and
the development of learning activities. The key knowledge and skills do not constitute a checklist and
such an approach is not necessary or desirable for determining the achievement of outcomes. The
elements of key knowledge and skills should not be assessed separately.
Assessment of levels of achievement
The student's level of achievement in Unit 3 will be determined by school-assessed coursework and a
mid-year examination.
Contributions to final assessment
School-assessed coursework for Unit 3 will contribute 17 per cent of the final assessment. The
mid-year examination will contribute 33 per cent.
School-assessed coursework
Teachers will provide to the Board of Studies a score representing an assessment of the student's level
of achievement.
The score must be based on the teacher's rating of performance of each student on the tasks set out in
the following table and. in accordance with an assessment guide published annually by the Board of
Studies. The assessment guide will also include advice on the scope of the task and the criteria for
assessment.
Assessment tasks must be a part of the regular teaching and learning program and must not unduly add
to the workload associated with that program. They must be completed mainly in class and within a
limited timeframe. Where optional assessment tasks are listed teachers must ensure that the tasks they
select are comparable in scope and demand.
Outcomes
Assessment tasks
Outcome 1
Record and report financial information using the double
entry accrual-based system for a single-activity
sole-proprietor business (trading businesses only, where
the trading business uses perpetual inventory) manually
and using information technology.
Outcome 2
Analyse and use accounting information to evaluate
business profitability, liquidity, stability and efficiency to
assist in making business decisions.
Marks allocated*
Recording and reporting of 30 transactions
using double entry computer software.
30
a test
or exercises involving manual recording and
reporting
a written report of financial analysis commenting on
significant changes in performance or a written evaluation
of data on a business commenting on the significant
changes in performance
Total marks
40
100
School-assessed coursework for Unit 3 contributes 17 per cent to the final assessment.
Mid-year examination
Description of task
Students will answer a set of structured questions relating to all outcomes in all areas of study in
Unit 3.
The task will be set by an examination panel using criteria published annually by the Board of
Studies.
Conditions
The task will be completed under the following conditions:
• ' Duration of task: one and a half hours.
• Date of task: mid-year, on a date to be notified in the VCE Bulletin.
• Board of Studies examination rules will apply. Details of these rules are published annually in the
VCE Administrative Handbook.
• The task will be marked by a panel appointed by the Board of Studies.
t
Contribution to final assessment
The examination contributes 33 per cent, to the final assessment.
Unit 4: Financial issues
This unit investigates accounting and financial issues associated with a small business. The unit further
develops the role of accounting as an information system, giving weight to alternative approaches in
accounting and their effect on outcomes.
The focus of this unit is on accounting. information for management, and the uses made of the
information to promote management effectiveness. It covers recording and reporting for trading
businesses only, using perpetual inventory recording and reporting on the accrual basis. Budgeting -for
cash, profit and financial position is also covered in this unit.
When preparing the reports for multiple-activity businesses, the study is to be limited to two
departments: one trading department (with perpetual recording for stock) and one service department.
Accounting procedures developed in each area of study will focus on the application of accounting
concepts, constraints and principles, where appropriate.
AREAS OF STUDY
1. Sources and processing of financial data
This area of study will include:
•
•
•
•
use of perpetual recording of inventory for trading stock (as covered in Unit 3) with the addition of
`first in, first out' (FIFO) recording and valuation at stocktake;
recording in special journals (as covered in Unit 3) with the addition of cash discounts;
use of general journal entries (in addition to those covered in Unit 3) for recording of
writing off bad debts
- disposal of a non-current asset: recording profit or loss on sale - sales
and purchase returns and allowances
- contra entries
- balance day adjustments for (a) prepaid expenses using the expense approach (including stock
of materials), and (b) revenue received in advance using the revenue approach;
posting to general and subsidiary ledgers with debtors and creditors schedules to reconcile with the
control account.
ACCOUNTING
ACCOUNTING
.
2. Financial outcomes
This area of study will include:
• preparation of reports for single-activity trading businesses with all adjustments listed;
preparation of classified profit and loss statements for multiple-activity businesses with trading and
service revenue centres to show the departmental contribution margin and overall net profit,
including all adjustments listed; preparation of classified statements of cash flow using financial
statements (reconstruction) method under headings for operating, investing and financing (no
reconciliation between cash flow from operations and net profit is required); preparation of
budgets for assets and liabilities, revenue and expense, receipts and payments, and variance reports.
3. Financial planning and decision making
This area of study will include:
interpretation of budgets and the analysis of variances evaluation of profitability, liquidity, stability
and efficiency through the use and explanation of trends, ratios, variances, vertical and horizontal
analysis, and benchmarks; consideration of inter-firm and intra-firm comparisons; limitations of
financial analysis; issues in accounting and their effect on profit and financial position of the
business (recording is not required but calculations may be required to show effect) - depreciation
(straight-line method, diminishing balance method) - revenue and expense recognition (point of
sale or point of cash transfer) - stock valuation (lower of cost and net realisable value) - historical
cost and non-current asset revaluation.
OUTCOMES
For this unit students are required to demonstrate achievement of three outcomes. As a set these
outcomes encompass all areas of study for the unit.
Outcome 1
On completion of this unit the student should be able to record and report using the double entry
accrual-based system, and use the reports to evaluate a business.
Key knowledge
In achieving this outcome the student will draw on knowledge described in areas of study 1, 2 and 3.
To achieve this outcome the student should demonstrate knowledge of
double entry accrual-based recording using the perpetual inventory method; reporting for singleand multiple-activity sole-proprietor businesses using all entries specified in area of study l; cash
flows from operating, investing and financing activities; how to complete an evaluation of a
business's profitability, liquidity, stability and efficiency; the limitations of financial analysis when
using trends, ratios, variances, vertical and horizontal analysis, and benchmarks;
ACCOUNTING
Outcome 3
On completion of this unit the student should be able to prepare budgets for cash, profit and financial
position, prepare variance reports and analyse budget variances to facilitate planning and control.
Key knowledge
_
In achieving this outcome the student will draw on knowledge described in area of study 3.
To achieve this outcome the student should demonstrate knowledge of interpretation of budgets for
cash, profit and financial position.
Key skills
To achieve this outcome the student should demonstrate the ability to
• prepare budgets for
- assets and liabilities
- revenue and expenses
- receipts and payments;
• analyse variances.
ASSESSMENT
The award of satisfactory completion for a unit is based on a decision that the student has
demonstrated achievement of the set of outcomes specified for the unit. This decision will be based on
the teacher's assessment of the student's overall performance. on assessment tasks designated for the
unit. The Board of Studies will publish annually an assessment guide which will include advice on the
scope of the assessment tasks and the-criteria for assessment.
The key knowledge and skills listed for each outcome should be used as a guide to course design and
the development of learning activities. The key knowledge and skills do not constitute a checklist and
such an approach is not necessary or desirable for determining the achievement of outcomes.
The-elements of key knowledge and skills should not be assessed separately.
Assessment of levels of achievement
The student's level of achievement in Unit 4 will be determined by school-assessed coursework and an
end-of-year examination.
Contributions to final assessment
School-assessed coursework for Unit 4 will contribute 17 per cent to the final assessment.
The level of achievement for Units 3 and 4 is also assessed by an end-of-year examination, which will
contribute 33 per cent to the final assessment.
School-assessed coursework
I
Teachers will provide to the Board of Studies a score representing an assessment of the student's level
of achievement.
The score must be based on the teacher's rating of performance of each student on the tasks set out in
the following table and in accordance with an assessment guide published annually by the Board of
Studies. The assessment guide will also include advice on the scope of the task and the criteria for
assessment.
Assessment tasks must be a part of the regular teaching and learning program and must not unduly add
to the workload associated with that program. They must be completed mainly in class and within a
limited timeframe. Where optional assessment tasks are listed teachers must ensure that the tasks they
select are comparable in scope and demand.
Outcomes
Outcome l Record and report using the double entry
accrual-based system, and use the reports to evaluate a
business.
Assessment tasks
Marks allocated*
Recording of 30 transactions into journals and the
general and subsidiary ledgers (including stock cards),
recording of all adjusting entries, and the preparation
of reports for cash, profit and financial position.
A written report evaluating a business over a twoyear
period. The report should use cash reports, profit
reports and balance sheets, and all techniques for
assessing a business. The report should provide advice
on how to improve the profitability, liquidity, stability
and efficiency of the business.
Outcome 2
Analyse accounting issues affecting financial reports.
Outcome 3
Prepare budgets for cash, profit and financial position,
and prepare variance reports and to analyse budget
variances to facilitate planning and control.
test(s)
or
responses to structured questions
or
a research report (Internet or secondary data)
or
• a folio of exercises
or
• a case study
30
20
, test(s)
or
• responses to structured questions
or
• a folio of exercises
or
• a case study
20
Total marks
100
School-assessed coursework for Unit 4 contributes 17 per cent to the final
assessment.