Accounting facts.docx

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John Gerrand

1) Accounting - it is the process of identifying, recording and communicating economic events to the users 2) Role of accounting – it is a means of communication as it provides information to see where the company has been by looking at past performance, to see where the company is now by looking at the current performance and to gain an insight on what the future prospects are. 3) Corporate governance – it is a system by which companies are directed or controlled, managed and administered. The ASX has issued a few guidelines called “Corporate Governance Principles and Recommendations” in 2003 which was revised in 2007 to guide the companies and prevent corporate failures. 4) a) Internal users of data – refers to the employees, mainly managers of the company who care about the short-term and long-term solvency, profitability, turnover rates and other factors that affect the company’s ability to perform efficient business. b) External users of data – they refer to the shareholders (profitability/ability to pay high dividends), creditors (risk of granting credit or lending money (bankers)), tax authorities (whether the company complies with the tax laws), potential investors (whether they should buy or sell shares), suppliers (risk of granting credit), customers (honour their warranties), employees (pay rises) and other parties that are interested in the company for various purposes. 5) Agent theory – when the principal delegates authority to the agent to act in the principal’s best interest. 6) Sustainability reporting/socially responsible reporting – It is the management and reporting of non-financial performance. the triple bottom line includes a) Social bottom line – related to working conditions, safety and security, entity’s support and contribution to community services. b) Economic bottom line – entity’s profitability and business strategy c) Environmental bottom line – how an entity’s products or operation impact the environment. 7) Conceptual framework – it is a system of interrelated objectives and fundamentals that lead to consistent standards. 8) A reporting entity – it is an entity where it is reasonable to expect the existence of users that depend on the company’s general purpose financial statements to enable them to make economic decision. Do they need the information and do they have the power to get it. If they need the information and don’t have the power to get it then they are dependent users and the entity is a reporting entity. Factors that make an entity a reporting entity a) Separation of management from economic interest b) Financial characteristics c) Economic/Political influence 9) The objective of financial reports is to provide information about the profitability, performance and cash flows of the entity and build accountability on the part of the entities. 10)Monetary unit assumption – it explains that only transactions expressed in monetary terms can be included in accounting records. Economic unit assumption – it states that the transactions or the activities of the entity must be kept separate from that of the personal owner. 11)Assets – it refers to a future economic benefit that arose from a past transaction and it is controlled by the entity. 12)Liabilities – it refers to a present obligation that will result in outflow of economic benefits as a result of a past event. 13)Owner’s equity – it refers to the residual amount remaining after subtracting the outside liabilities from the assets. 14)Income – it refers to the increase in the economic benefits arising from factors other than contribution in owners usually leading to increase in assets or decrease in liabilities. 15)Expenses – it refers to the decrease in economic benefits arising from factors other than contributions to owners usually resulting to decrease in assets or increase in liabilities. 16)Recognition criteria (a) Is it probable to take place and (b) Can it be reliably measured. 17) Fundamental a) Relevance 1) Confirmatory – confirm or correct past information 2) Predictive – help managers form predictions b) Faithful representation 1) Accuracy – the information should be free from error. 2) Substance over form – should be more concerned with economic substance rather than legal form. 3) Completeness – all relevant information within the bounds of materiality and cost should be available. 4) Neutrality – the information should be free from bias 18) Enhancing a) Verifiability – the information should have the ability to be checked and should result in accuracy. b) Comparability – it should be able to be compared with other information over time. c) Understandability – the information should be disclosed under the impression that users have basic accounting information. d) Timeliness – to provide information in a timely manner to ensure that relevance of information is not lost. 19) Constraints a) Materiality – determining if the information is likely enough to affect the decision of the manager. b) Cost Vs. Benefit – the cost of obtaining the data should not exceed the benefits of having the data. 20)Sales returns and allowances is a contra revenue account to sales. The normal balance of the sales returns and allowances account is debit. A contra account is used instead of sales to record the amounts of goods sold that are being returned. 21)Office supplies/ stationary supplies are prepaid expenses. 22)STATEMENT OF FINANCIAL POSITION ASSETS Current Assets a) Cash and cash equivalents b) Trade and other receivables c) Inventories d) Other current assets Non – current assets a) Investments b) Plant, property and equipment c) Intangibles d) Other non-current assets LIABILITIES Current liabilities a) Trade and other payables b) Current tax payable c) Short term borrowings d) Other current liabilities Non-current liabilities a) Long term borrowings b) Long term provisions c) Other non-current liabilities EQUITY Shareholder’s funds a) Other Reserves b) Retained earnings 23)In the 10 column worksheet, accumulated depreciation is entered in the credit side of the balance sheet. However, in the statement of financial position, accumulated depreciation is entered on the debit side as a negative balance ( ). 24)Financial assets – cash, accounts receivable, investment securities and investment in debt. 25)a) Income statement for a service organisation Sales revenue XXX Less: Operating Expenses Depreciation XXX Office expenses XXX Insurance expenses XXX Profit XXX b) Income statement for a retail organisation Sales revenue XXX Less: Cost of goods sold XXX Gross Profit XXX Less: Operating Expenses Depreciation XXX Other expenses XXX Wages XXX Profit XXX 26)Cash flow statement Statement of cash flows Current year($) Previous year($) Cash flows from operating activities Receipts from customers Payments to suppliers, govt. and employees Dividends received Interest received Interest paid Borrowing costs Income tax paid Net cash flow from operating activities Cash flows from investing activities Proceeds from the sale of fixed assets Proceeds from the purchase of fixed assets Net cash flow from investing activities Cash flows from financing activities Proceeds from the issue of shares Payments for shares bought back Proceeds from borrowings Repayment of borrowings Dividend paid Distributions to minority interests Net cash flow from financing activities Total cash flows from all activities ( net increase or decrease) Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 27)Why is cash flow statement needed and how is it different from income statement a. Evaluate entity’s ability to generate future cash flows and provide an indication of the future solvency of the entity. b. Evaluate management decisions (Investing/financing decisions) c. Determine the ability to pay dividends to shareholders and meet obligations. d. Compare profit/loss for the year and net cash provided (used) by operating activities. 28)Cash cycle – average time taken between acquiring stock for resale and collecting the cash from their sale, that is the time taken to generate outflows. Cash cycle = stock turnover + asset turnover ( in terms of days) 29)Limitations of ratio analysis a) Estimates – the data has estimates like for depreciation and hence the
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