ACCT1501 Lecture Notes - Lecture 1: Cash Cash, Woolworths Limited, Abc Learning
ACCT1501 Kristy
Introduction to Financial Accounting Chapter 1
- DEFN: aoutig is the proess of idetifig, easurig, reordig ad ouiatig eooi
information to assist users to make decisions
- Stakeholders in financial information of co: (external) investors [eco conseq in equity markets- decision
maker based on what value willing to buy/sell shares], creditors (likelihood of co meeting interest/princ
payment on time), suppliers (probability pay on time), corp boards (exec), competitors, customers, gov, ATO
(profit based on tax law), ASX, ASIC (financial pos/perf of co IPO) + (internal) managers (mgmt making
business decisions), employees, trade unions (profitability since last contract w employees sign + wage
negos)
- Information users, preparers, auditors- owners/potential owners- credible, periodic: relevance, faithful
representation, comparability (w other org), verifiability (doc), timeliness (decision m), understandability,
materiality significance, consistency, disclosure- trade offs between
- Ethical issues
Accounting Systems
- Financial Accounting: periodic financial statem + related disclosures provision of info to users external to
enterprise (external users) GAAP reporting standard IFRS 17
- financial position PiT (fin resources/obligations) /perforae oer PoT ge e resoures fro ops + fi
statem (reports*pos/perf) [facilitate/lead to]
- Managerial Accounting: detailed plans + continuous performance reports provision of info to users w/in ent-
internal users (no reporting standard- not standardised quod vary by firm) (for future projections, breakeven
pt, operational planning, ctrl decisions)
- Misleading reporting, mismanagement, co collapse, indictments: Debt, liquidity, inflated asset values Enron,
ABC Learning, Dick Smith
Key Financial Statem (+users of these reports)
- Balance Sheet (financial position of an entp at particular point in time)- asset, liab, equity
- Assess financial structure + ability to pay debt
- Financial position: eterprises set of fiaial resoures, oligatios + OE at partiular PiT resoures + ho
were they financed)
- ASSETS (current+non resources- benefit this yr+fut: cash, accounts receivable, inventory,
prop/plant/equipm) = LIABILITIES (debt co owes- present obligations+fut use of assets/perf of fut services:
accounts payable- amount owed) + EQUITY (owners equity net assets [over liabilities]- share capital (direct
investm) +retained profits (total cumulative profit retained rather than distributed as dividends)) sources
- Cosolidatio: ie osider oership struture fator the holdig os susidiaries ito aggregated at fig-
considered as one accounting entity)
o Parent co (woolworths limited) + subsidiaries (ctrl’d by parent w power to (in)directly govern
financial + operating policies as to obtain benefits from its activities
o Intragroup balances/unrealised gains/losses/Y/expenses arising from intragroup transactions are
eliminated
- Y statem (financial performance over a period of time) or P&L- efficient/effective resource use
- Revenues (Y flow gen by selling g&s less cost of g sold) earned + expenses (flow of expenses incurred in
providing g&s for sale) incurred (economic benefits affect OE)
- Matching principle: liabilities accounted as assets (employee wages quod of fut expected revenue)- use
resources to generate revenue
- Financial performance: ailit to geerate e resoures fro ops oer a PoT
- R>E net profit/<loss (R – E =Profit/loss)
- Accrual (impact of transactions revenues/exp as they are incurred/occur rather than when the cash is
received or paid [eg depreciating assets as expense]- Y statem)- incl past cash receipts/payments + fut
epeted redit sales, alue of ioplete trasatios reeiale, estiate uko fig
- vs. cash acct (when cash paid/received in/outflows cash flow statem)
- Cashflow statement: cash inflows/outflows over PoT- operating (revenue producing from/to
suppliers/customers), investing (acquisition/disposal of LT/noncurrent assets eg prop/plant/equip/financial
find more resources at oneclass.com
find more resources at oneclass.com
ACCT1501 Kristy
securities), financing (equity capital/borrowing from/to investors) activities to calculate increase/decrease in
cash
Financial statem assump
- Accrual basis- recog when they occur rather when cash received/paid
- Accounting entity: consolidated (not personal assets- legal/economic entity separate from indiv owners)-
misrepresentation of
- Accounting period: split into discrete time periods- reg, comparable financial statem
- Monetary: medium of exchange AUD (common denom)
- Historical cost: assets at original cost e.g property (revaluation req) – quod take conservative approach-
value at transaction take
- Going concern: premise cont operation w/out asset liquidation- insolvency prepare special b/s
- Materiality- magnitude of omission/misstatement making it probable that a reasonable person would be
influenced- focus on accounting for majority- small discrepancies admissible
Chapter 2: Measuring & Evaluating Financial Position & Performance
- Retained profits (relationship between balance sheet and Y statem)
- Balance sheet: financial position of an enterprise at PiT- resources (assets useful financial resources), sources
(how were they financed- debt/equity) obligations- liabilities (co owes- accts/loans payable), equity (O
investm- share capital/retained profits: obligations - resources)
o Financial structure (debt to equity ratio)
o Liquidity- ease of converting assets to cash in normal course of business (short term)- working
capital, current ratio
o Solvency- ability to pay debts when they fall due (LT focus) debt to equity ratio
- A = L + OE(net assets)
- Double entry: b/s sides = so each change is recorded twice
- b/s: accrual- accounts payable/receivable OR cash- cash
Assets
- Resource that is controlled (not necessarily owned) by an entity as a result of past events, and from which
fut eco benefits are expected to flow to the entity
o E.g cash balances- command fut eco benefits; accts receivable- direct claims to cash inflows; prepay
provide rights to receive services in fut; inventories/PPE provide g&s
o Recognition criteria: probable eco benefit will flow to/from entity + item has cost/value measured
reliably
o EG: cash (equivalents), trade + other receivables, inventories, biological asets, investments
accounted for using the equity method, other financial assets, tax assets, PPE, investm property,
intangible assets
o Defn criteria: fut eco benefits (objective generate net cash flows), control by an entity
(benefit+regulate access), past event
o Recognition criteria: probable, reliable measurement (cost/value)
find more resources at oneclass.com
find more resources at oneclass.com
ACCT1501 Kristy
o current (expect to realise the benefits in the next 12 months from the b/s date e.g cash accounts
receivable, inventory, prepaym <12mths, trading investm) vs. non-current (realise benefits over
longer period e.g non-trading investm, motor vehicle, buildings, intangible, PPE)
o intent of managers for investment- non-trading e.g subsidiary vs. trading shares
- lassif a ost as a asset = apitalise it, if ost ist apitalised, it is epesed- DOES THAT MEAN
PREPAYMENTS ARE CAPITALISED EXPENSES IE ASSETS
- deisio to apitalise: he ost is iurred, eefit to usiess, eefit used i the period epese, if ot
used benefit classify as asset)
- asset sources: liabilities, share capital, retained profits
Liabilities
- Present obligation of the entity arising from past events, the settlement of which is expected to result in an
outflow from the entity of resources embodying eco benefits
o characteristics: present (exists+fut settlement), adverse financial consequences for the entity in that
the entity is obligated to sacrifice eco benefits
o current (1yr): accounts payable, loans, taxes, dividends, wages, overdraft vs. non current: provisions
for warranty expense
o EG: trade+other payables, interest-bearing liabilities, tax liabilities, provisions
- Liabilities: accounts payable, LT loans, accrued expenses *relate to expenses incurred during the year but
not yet paid), provision for employee entitlements
- Working capital = CA – CL (low/-ve WC indicated ST financial difficulties)
- WC ratio/Current ratio: CA/CL
- Quick ratio: co ability to sell inventory to pay its bills- cash + ST
Equity
- Residual interest in the assets of the entity after deducing all its liabilities A= L + OE (net assets)- share
capital + retained profits
- OE: owner invests/w/drawls from business + revenues/expenses profits + distributions to owners (book
value of ent- based on historical transact)
- Profit can be distributed to shareholders as dividends or kept in business to grow (retained)
- Y statem accts are temporary accounts (closed and balances transferred to the retained profits account) vs.
b/s accts are permanent accounts
o EG: contributed equity/issued capital, reserves, retained profits, minority interest/outside equity
✓ A = L + SE (both sides must balance out)
✓ = L + (SC + RP(t)) share capital
✓ RP(t) = RP(t-1) + (R-E) – Div
(ie opening retained profits + net profit – distributions (dividends not expense) = closing RP)
Y Statement
- ‘esults of usiess ops oer PoT- accounting period assumption- measure organisational efficiency
- Accrual vs. cash profit
- Connects to b/s through net profit after tax
- NET PROFIT= REVENUES (sales) – EXPENSES (COGS)
Revenue
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Def(cid:859)n: a(cid:272)(cid:272)ou(cid:374)ti(cid:374)g is the pro(cid:272)ess of ide(cid:374)tif(cid:455)i(cid:374)g, (cid:373)easuri(cid:374)g, re(cid:272)ordi(cid:374)g a(cid:374)d (cid:272)o(cid:373)(cid:373)u(cid:374)i(cid:272)ati(cid:374)g e(cid:272)o(cid:374)o(cid:373)i(cid:272) information to assist users to make decisions. Information users, preparers, auditors- owners/potential owners- credible, periodic: relevance, faithful representation, comparability (w other org), verifiability (doc), timeliness (decision m), understandability, materiality significance, consistency, disclosure- trade offs between. Managerial accounting: detailed plans + continuous performance reports provision of info to users w/in ent- internal users (no reporting standard- not standardised quod vary by firm) (for future projections, breakeven pt, operational planning, ctrl decisions) Misleading reporting, mismanagement, co collapse, indictments: debt, liquidity, inflated asset values enron, Balance sheet (financial position of an entp at particular point in time)- asset, liab, equity. Assess financial structure + ability to pay debt. Financial position: e(cid:374)terprise(cid:859)s set of fi(cid:374)a(cid:374)(cid:272)ial resour(cid:272)es, o(cid:271)ligatio(cid:374)s + oe at parti(cid:272)ular pit (cid:894)resour(cid:272)es + ho(cid:449) were they financed) Intragroup balances/unrealised gains/losses/y/expenses arising from intragroup transactions are eliminated. Y statem (financial performance over a period of time) or p&l- efficient/effective resource use.
