22107 lecture 1 online 3 slides

Accounting for Business Decisions A

Lecture 1 1

WELCOMETO

UNIVERSITY OF TECHNOLOGY, SYDNEY

2 2 1 0 7A C C O U N T I N G F O R B U S I N E S S

D E C I S I O N S A

OFFERED BY

T H E A C C O U N T I N G G R O U PU T S S C H O O L O F B U S I N E S S

F O R T H E W E E K C O M M E N C I N G 2 4 / 0 2 / 2 0 1 4

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LECTURE1FINANCIAL ACCOUNTING

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Lecture 1 2

Lecture 1 Learning Objectives

1. Describethefourassumptionsmadewhencommunicatingaccountinginformation.

2. Describethepurposeandstructureofanstatementofcomprehensiveincomeandthetermsandprinciplesusedtocreateit.

3. Describethepurposeandstructureofastatementoffinancialpositionandthetermsandprinciplesusedtocreateit.

Lecture 1 Learning Objectives continued4. Describethepurposeandstructureofastatement

ofchangesinequity andhowitlinksthestatementofcomprehensiveincomeandthestatementoffinancialposition.

5. Describethepurposeandstructureofaofcashflowstatementandthetermsandprinciplesusedtocreateit.

6. Describethequalitativecharacteristicsthatmakeaccountinginformationuseful.

7. Describetheconceptualframeworkofaccounting.

BEGINNINGASSUMPTIONSLO1

Accounting istheprocessofidentifying,measuring,andcommunicatingeconomic

informationtopermitinformedjudgmentsanddecisions.Putmoresimply,accountingisthe language

ofbusiness.


Lecture 1 3

1 EconomicEntity This assumption states that the financial

activities of a business can be separated from the financial activities of the businesss owner.

2 TimePeriod Accountants assume that economic information

can be meaningfully captured and communicated over short periods of time.

3

4

Toaccomplishtheprocessofaccounting,accountantsusefourassumptions:

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2

3 MonetaryUnit Accountants assume that the dollar is the most

effective means to communicate economic activity.

4 GoingConcern Accountants assume that a company will

continue to operate into the foreseeable future.

Toaccomplishtheprocessofaccounting,accountantsusefourassumptions:

REPORTINGPROFITABILITY:THESTATEMENTOFCOMPREHENSIVEINCOMELO2

?One of the first questions any business wants to know is whether they are making money or are profitable.

These answers can be found in the statement of comprehensive income.


Lecture 1 4

THEINCOMESTATEMENTANDTERMSAnstatementofcomprehensiveincomereportsa

companysrevenues andexpenses.

Revenue Anincreaseinresources

resultingfromthesaleofgoods

orservices

Terms

RevenueRecognitionPrinciple Arevenueshouldberecordedwhenaresourcehasbeenearned

Expense Adecreaseinresources

resultingfromthesaleofgoods

orservices

MatchingPrinciple Expensesshouldberecordedintheperiodresourcesareusedtogeneraterevenues

STATEMENTOFCOMPREHENSIVEINCOMEEXAMPLEExhibit 1-1

Lawn ServiceStatement of Comprehensive Income

For the month ending 31 January 2014

Revenues $1120Expenses:Fuel $80Interest 5Depreciation 70Total expenses 155Net profit (total comprehensive income) $965

BASICSTRUCTUREOFTHESTATEMENTOFCOMPREHENSIVEINCOME

Revenues Expenses=ProfitorLossReportedoveraspecificperiod,likeforthe

yearendedJune30,2013

TheStatementofComprehensiveIncomemaybereferredtoastheIncomeStatementortheProfitandLoss

StatementwhiletheTotalComprehensiveIncomeisoftencalledProfitorLoss,

IncomeorevenNetIncome.


Lecture 1 5

THESTATEMENTOFFINANCIALPOSITIONANDRELATEDTERMSLO3

Asset: An economic resource that is

objectively measurable, that

results from a prior transaction, and that

will provide future economic benefit.

Cost principle:

Liability: An obligation of a business that

results from a past transaction and will require the sacrifice

of economic resources at some

future date.

Equity: The difference between a companys assets and liabilities,

representing the share of assets that is claimed by the companys owners.

Contributed capital:

THESTATEMENTOFFINANCIALPOSITIONANDRELATEDTERMS

Asset:

Cost principle: The principle that assets should be recorded and reported at

the cost paid to acquire them.

Liability:

Equity:

Contributed capital: The resources that

investors contribute to a business in exchange for

ownership interest.

REPORTINGFINANCIALPOSITION:THESTATEMENTOFFINANCIALPOSITION

? An important issue for any business is its current financial position. What does the business own? What does it owe?

These answers can be found in the statement of financial position.


Lecture 1 6

BASICSTRUCTUREOFTHESTATEMENTOFFINANCIALPOSITION

ACCOUNTINGEQUATIONAssets=Liabilities+Equity

Reportedatagiventimeordate

TheStatementofFinancialPositionisalsoknownastheBalanceSheet

STATEMENTOFFINANCIALPOSITIONEXAMPLEExhibit 1-2Lawn Service

Statement of financial positionAt 31 January 2014

Cash $194 Note payable (to Mum) $200

Accounts receivable 120 Total liabilities 200

Supplies (petrol) 10 Contributed capital 100

Lawnmower 195 Retained earnings 234

Petrol can 15 Total equity 334

Total assets $534 Total liab and equity $534

REPORTINGEQUITY:THESTATEMENTOFCHANGESINEQUITYLO4

Astatementofchangesinequity showsthechangeinacompanysequity,mainly(atthisstage)thechangeinretainedearningsoveraspecificperiodoftime.


Lecture 1 7

BASICSTRUCTUREOFTHESTATEMENTOFCHANGESINEQUITY

(Profit or loss)

STATEMENTOFRETAINEDEARNINGSEXAMPLEExhibit 1-3

Lawn ServiceStatement of Retained Earnings

For the month ending 31 January 2014

Retained earnings, 1 January $ 0

+ Net income (or Net profits) 965

Drawings (Dividends) 731

Retained earnings, 31 January 234

LINKINGTHESTATEMENTOFCOMPREHENSIVEINCOMEANDTHESTATEMENTOFFINANCIALPOSITION

The statement of changes in equity links the incomestatement and the statement of financial position.

Statement of Comprehensive IncomeProfits $ 965

Statement of Changes in EquityRetained earnings, 1 January $ 0+ Profits 965 Drawings 731Retained earnings, 31 January $ 234

Statement of Financial PositionLiabilities 200Contributed capital 100Retained earnings 234

Total assets $ 534 Total liab & equity $ 534


Lecture 1 8

REPORTINGCASHFLOWS:THESTATEMENTOFCASHFLOWS

?A business needs to answer questions about the management of cash:

Where do we get our cash? Where does our cash go? Will there be enough cash to . pay bills?

These answers can be found in the Statement of Cash Flows.

LO5

REPORTINGCASHFLOWS:THESTATEMENTOFCASHFLOWS

Thedetailsofcashinflowsandoutflowsforabusinessarereportedonastatementofcashflowsinthefollowingthreesections:

OperatingActivitiesInvestingActivitiesFinancingActivities

STATEMENTOFCASHFLOWSEXAMPLE EXHIBIT15Cash Flow Statement

For the month ending 31 JanuaryOperating activitiesCash received from customers $1000Cash paid for petrol (90) Cash paid for interest (5)Net cash provided by operating activities $905Investing activitiesCash paid for lawnmower $(260) Cash paid for petrol can (20)Net cash used by investing activities (280)Financing activitiesCash received from borrowing $ 200Cash received from owner 100Drawings (dividend) (731) Net cash used by financing activities (431)

Net increase in cash $194Cash balance, 1 January 0Cash balance, 31 January $194


Lecture 1 9

QUALITATIVECHARACTERISTICSOFACCOUNTINGINFORMATIONUnderstandability

Theabilityofaccountinginformationtobecomprehensibletothosewhohaveareasonableunderstandingofbusinessandarewillingtostudytheinformationwithreasonablediligence.

Relevance Thecapacityofaccountinginformationtomakeadifferenceindecisions.

LO6

QUALITATIVECHARACTERISTICS(CONTINUED)

Reliability Theextenttowhichaccountinginformationcanbedependedupontorepresentwhatitpurportstorepresent,bothindescriptionandinnumber.

Comparability Theabilitytouseaccountinginformationtocompareorcontrastthefinancialactivitiesofdifferentcompanies.

QUALITATIVECHARACTERISTICS(CONTINUED)Consistency Theabilitytouseaccounting

informationtocompareorcontrastthefinancialactivitiesofthesameentityovertime.

Materiality Thethresholdatwhichafinancialitembeginstoaffectdecisionmaking.

Conservatism Themannerinwhichaccountantsdealwithuncertaintyregardingeconomicsituations.


Lecture 1 10

THECONCEPTUALFRAMEWORK(LETSREVIEWTHISLECTURE)

LO7

Theconceptualframeworkofaccountingisthecollectionofconceptsthatguidethemannerinwhichaccountingispracticed.

Thegrammarorterms,explainingfinancialaccounting

languageinthischapter,aremoreformallyknownascomponentsoftheconceptual

frameworkofaccounting.

TERMSUSEDTOIDENTIFYANDDESCRIBEECONOMICINFORMATION

Term Definition Reported on the

Asset A resource of a business

statement of financial position

Liability An obligation of a business


Equity The difference between assets and liabilities


Contributed Capital

Equity resulting from contributions from owners


TERMSUSEDTOIDENTIFYANDDESCRIBEECONOMICINFORMATION

Term Definition Reported on the

Retained Earnings

Equity resulting from profitable operations

Income and Equity

Revenue An increase in assets resulting from selling a good or giving services

statement of comprehensive income

Expense A decrease in assets resulting from selling a good or providing a service

statement of comprehensive income

Dividend A distribution of profits to owners

statement of changes in equity


Lecture 1 11

PRINCIPLESUSEDTOMEASUREECONOMICINFO.Principle Definition RamificationRevenue Recognition

Revenues are recorded when they are earned.

The receipt of cash is not required to record a revenue.

Matching Expenses are recorded in the time period when they are incurred to generate revenues.

For many assets, the cost of the asset must be spread over the periods that it is used.

Cost Assets are recorded and maintained at their historical costs.

Except in a few cases, market values are not used for reporting asset values.

ASSUMPTIONSMADEWHENCOMMUNICATINGECONOMICINFORMATION

Assumption Definition RamificationEconomic entity

The financial activities of a business can be accounted for separately from the business's owners.

We do not have to worry that the financial information of the owner is mixed with the financial information of the business.

Monetary unit

The dollar, unadjusted for inflation, is the best means of communicating accounting information

All transactions in foreign currencies are converted to dollars.

ASSUMPTIONSMADEWHENCOMMUNICATINGECONOMICINFORMATION

Assumption Definition RamificationTime period Accounting

information can be communicated effectively over short periods of time.

Most businesses prepare quarterly and annual financial statements.

Going concern

The company for which we are accounting will continue its operations indefinitely.

If an entity is not selling its assets, then the cost principle is appropriate.


Lecture 1 12

QUALITATIVECHARACTERISTICSOFACC INFOTerm Definition Ramification

Understand-ability

Accounting information should be comprehensible by those who spend time studying it.

Users must spend a time studying accounting info for it to beunderstandable.

Relevance The capacity of accounting information to make a difference in decisions.

Information should have predictive or feedback value and should be timely.

QUALITATIVECHARACTERISTICSOFACC INFOTerm Definition RamificationReliability The extent to which

accounting information can be depended upon to represent what it purports to represent

Information should be free from error, a faithful representation and neutral.

Compar-ability

The ability to use accounting inform. to compare or contrast the financial activities of different companies.

Entities must disclose the accounting methods that they use so that comparisons across companies can be made.

QUALITATIVECHARACTERISTICSOFACC INFO

Terms Definition Ramifications

Consistency Accounting information should be comparableacross different time periods within a company.

An entity should use the same accountingmethods year to year and disclose when they change methods.

Materiality The threshold over which an item could begin to affect decisions.

When an amount is small enough, normalaccounting procedures are not always followed.


Lecture 1 13

QUALITATIVECHARACTERISTICSOFACC INFO

Terms Definition Ramifications

Conservatism When uncertainty exists, accounting informationshould present the least optimistic alternative.

An entity should choose accounting techniquesthat guard against overstating revenues or assets.

FINANCIALSTATEMENTSUSEDTOCOMMUNICATEECONOMICINFORMATION

Statement Purpose Structure Links to Other Statements

StatementofFinancialPosition

Showsacompanysassets,liabilities,andequityataspecificpointintime.

Assets=Liabilities+Equity

Thebalanceinretainedearningscomesfromthestatementofchangesinequity.Thebalanceincashshouldagreewiththeendingcashbalanceonthestatementofcashflows.

FINANCIALSTATEMENTSUSEDTOCOMMUNICATEECONOMICINFORMATION(CONT)


StatementofComprehensiveIncome

Showsacompanysrevenuesandexpensesoveraspecificperiodoftime.

RevenueExpenses=ProfitorLoss

Totalcomprehensiveincome/lossgoestothestatementofchangesinequity tocomputeretainedearnings.


Lecture 1 14



StatementofChangesinEquity

Showsthechangesinacompanysretainedearningsoveraspecificperiodoftime.

BeginningRetainedEarnings+/NetIncome/LossDividends=EndingRetainedEarnings

Endingretainedearningsgoestothestatementoffinancialposition.



StatementofCashFlows

Showsacompanysinflowsandoutflowsofcashoveraspecificperiodoftime.

OperatingCashFlows+/InvestingCashFlows+/FinancingCashFlows=Netchangeincash

TheendingcashbalanceontheStatementofcashflowsshouldagreewiththebalanceincashontheStatementoffinancialposition.

HOW TO SUCCEED IN BUSINESS(In Accounting for Business Decisions A) Attend the lectures.

Read the textbook.

Do the tutorial questions before class.

Check your answers on the Guide on UTSOnline

Go to tutorials and ASK questions

Take advantage of all the support at UTS

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22107 lecture 1 online 3 slides

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