BSB110 Final Study Notes

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Queensland University of Technology
Management and Human Resources

BSB110 FINAL STUDY NOTES LECTURE 7: Cash Flow Statements Cash flow statement: reports cash flows – receipts and payments – during the period. Shows where cash came from and how it is spent 1. Types of Cash Flows  Operating:  Cash inflows from selling goods, providing services, interest revenue  Cash outflows for payments to suppliers, salaries, interest, rent  Income statement items, current account and current liability items  Regarded as a key indicator of performance.  Investing  Activities that relate to: 1. Buying & selling non-current assets including investments 2. Making and collecting loans  Cash inflows from sale of non-current assets  Cash outflows for purchase of non-current assets  Financing  Activities that relate to changing size and composition of the financial structure of the entity  Cash inflows from borrowing, capital contributions  Cash outflows for repayment of borrowings, drawings 2. Prepare a cash flow statement by analysing the cash transaction in the Cash at Bank a/c Albert Enterprises Cash Flow Statement for the year ended 30th June Inflows (Outflows) Cash flows from operating activities Receipts from customers XXX Payments to suppliers and employees (XXX) Interest received XXX Net cash provided by operating activities XXX Cash flows from investing activities Purchase of investments (XXX) Payment for equipment (XXX) Proceeds from sale of equipment XXX Net cash used in investing activities (XXX) Cash flows from financing activities Capital contributions XXX Proceeds from borrowings XXX Repayment of borrowings (XXX) Drawings (XXX) Net cash provided by financing activities XXX Net increase (decrease) in cash held XXX Cash at beginning of year XXX Cash at end of year $XXX Jessica King BSB110 Final Notes Semester 1, 2009 3. Understand why cash from operating activities is different from net profit  Accrual a/c = revenue earned/expenses incurred  Cash flow = only the flows of cash/receipts from customers/payments to suppliers and employees  The results of the operating activities of a business are reported in two different financial statements in two different ways:  Income Statement—net profit measured according to Accrual Accounting Why different?  Net profit is based on Revenue earned less Expenses incurred—includes adjusting entries which are not cash flows (depreciation is a major expense)  Cash Flows from Operating Activities is Cash Received from Customers and Cash Paid to Suppliers and Employees Decision Guidelines Question Financial Statement What to look for INVESTORS Where is most of the company‘s Cash flow statement Operating activities – good sign cash coming from? Investing activities – bad sign Financing activities – okay sign Do high sales and profits translate Cash flow statement Usually, but cash flows from into more cash? operating activities must be the main source of cash for long-term success Is sales and profits are low, how is Cash flow statement If investing activities are generating the company generating cash? cash, the business may be in trouble because its selling off its long term assets If financing activities are generating cash that cannot go on forever. Sooner or later, investors will demand cash flow from operating activities. Is the cash balance large enough to Balance Sheet The cash balance should be growing the Balance sheet to provide for over time. If not, the company may expansion? be in trouble. CREDITORS Can the business pay its debts? Income Statement Increasing net profit Cash flow statement Cash flows from operating activities should be the main source of cash Jessica King BSB110 Final Notes Semester 1, 2009 LECTURE 8: Accounting and Control of Inventory Systems (NO GST) 1. Periodic – Calculate Gross Profit  Traditional system - Simple, inexpensive but NOT reliable  no continuous record of inventory movements nor of inventory on hand -must perform a physical stock take at the end of the period to determine the amount of inventory on hand  no COGS a/c – thus no record of inventory shortage Equations Net Sales = Sales – Sales Returns GP = net sales – COGS COGS = beginning inventory – net purchases – ending inventory Stock-take: necessary to find out a company‘s ending inventory 2. Perpetual – journals, ledgers, calculate gross profit  Inventory a/c = all movements of inventory at cost  a continuous record of inventory on a daily basis  records cost of sales at the time items are taken from inventory – constant tracing of costs removed from inventory  COGS a/c  Inventory Shortage Expense a/c  Stock-take: to check accuracy of records 3. Costing Methods  The stock take (physical count) determines the number of items on hand at the end of the financial year  Each of these units must be valued (costed) at a dollar amount FIFO o based on the assumption that the first units acquired are the first units sold o the cost of units sold are the oldest costs of inventories o the cost of units on hand (inventory) are assumed to be the most recent purchase cost o ending inventory in the Balance Sheet reflects the higher cost of the most recent purchases o COGS is based on the oldest purchases o Costing is consistent with physical movement of inventory Weighted Average o calculates a new average cost each time goods are purchased or a purchases return occurs o Account for its inventory through calculating a new average cost per unit after each purchase o Ending inventory and COGS are then based on the average cost per unit Specific Identification o used when it is possible to identify each unit sold with a specific cost price Eg. luxury cars, antiques LIFO o based on the assumption that the last units acquired are the first units sold o the cost of units sold are the most recent costs of inventory o the cost of ending inventory consists of the cost of the earliest (oldest) purchases o not permitted in Australia o LIFO costing doesn‘t follow the flow of goods - often result sin higher COGS and lower income tax Jessica King BSB110 Final Notes Semester 1, 2009 4. Effects of Inventory Costing Methods  significant effect on an entity‘s reported assets and net profit  FIFO produces the lowest COGS and highest gross profit – net profit is higher under FIFO when inventory costs rising. Many firms wish to report a higher net profit to attract investors and borrow on good terms – FIFO offers this.  LIFO results in lower COGS and lower gross profit – lets business pay the lowest income taxes when inventory costs are rising. Low tax payments conserve a firm‘s cash but also means the business reports a lower net profit  The average cost method generates gross profit, income tax and net profit amounts that fall between the extremes of LIFO and FIFO. Differences between inventory cost estimation methods may provide management with an opportunity to manipulate profit for a variety of reasons rather than simply giving flexibility to the method that is genuinely believed to be a best estimate of ‗true‘ cost inventory.  Thus, the costing method used affects assets and profits and Management must choose the appropriate method  The items affected by the inventory costing method are COGS, Gross Profit, Net Profit, Inventory in the Balance Sheet and Owner‘s Equity (through net profit) 5. Low of Cost and Net Realisable Value  NRV = estimated proceeds of sale less all further costs to complete the product. If NRV falls below cost then must write down the value of inventory for each item of inventory  Why may NRV be lower than cost? a. falling demand for the product or an excess supply so that selling price declines b. physical deterioration of the product c. obsolescence Jessica King BSB110 Final Notes Semester 1, 2009 LECTURE 9: Internal Management Control and Accounting and Control of Cash 1. Bank Reconciliation  The ending balance of the bank statement usually differs from the ending balance of the firm‘s cash at bank account REASONS FOR DIFFERENCES ITEMS recorded IN CRJ AND CPJ, BUT NOT ON THE BANK STATEMENT Deposits in transit Unpresented cheques Outstanding/ Bank errors  These items are used to prepare the Bank Reconciliation Statement ITEMS not recorded IN CRJ AND CPJ, BUT ARE ON THE BANK STATEMENT Bank collections/Direct deposits Interest earned Bank charges Dishonoured cheques  These items are recorded in the firm’s books DEPOSITS IN TRANSIT and OUTSTANDING CHEQUES deposit in transit = the firm has recorded money received in the cash receipts journal (CRJ) but the bank has not outstanding cheque = a cheque issued / written by the firm and recorded in the cash payments journal (CPJ), but the person who receives the cheque (ie. the payee) has not yet presented the cheque to the bank = unpresented cheque THE RECONCILIATION PROCEDURE Items needed to carry out a bank reconciliation: 1. The most recent bank reconciliation prepared for the business (usually for the previous month) 2. The opening and closing balance of the cash at bank account 3. The cash receipts and cash payments journals 4. The bank statement for the current period FORMAT Balance as per b/s as at (date) CR Add deposits in Transit Less outstanding cheques Balance per Cash at Bank as at (date) DR * Look out for negative items where bank statement is a DR ie. Overdraft. 2. Cash Budgets  Planning cash inflows and outflows is important aspect of control over cash.  CASH BUDGET is a projection of anticipated future cash receipts and payments.  ONLY CASH items are included (no depreciation)  Details how the business intends to go from the beginning cash balance to the desired ending balance  Receipts and payments depend in part on revenue and expenses Purposes of a Cash Budget (a) Firm‘s credit standing/reputation depends on meeting commitments as theyfall due. A cash budget warns of future cash shortage or surplus. (b) Allows firms to make decisions to avoid cash problems, e.g.:  Postpone or reduce some future expenditure  Change prices  Improve credit controls  Organise financing (c) Firms mayanalyse where cash is needed and may: Jessica King BSB110 Final Notes Semester 1, 2009  be able to minimise interest expense  avoid having idle funds in the bank e.g. surplus cash maybe invested (d) Motivational advantages (e) Measure of performance  MOST IMPORTANT: AFTER THE BUDGET IS COMPLETED , COMPARE ACTUAL FIGURES WITH BUDGETED FIGURES Decision guidelines Decision Guidelines Why should a company develop a budget?  Requires management to plan  Promotes coordination and communication  Helps managers to evaluate performance by providing a benchmark  Motivates employees Jessica King BSB110 Final Notes Semester 1, 2009 LECTURE 10: Accounting and Control of Other Current and non-Current Assets Deprecation Non-Current Assets – the cost of acquisition  Non-current assets (the only assets which are depreciated) are not expected to be realised (ie. converted into cash) within twelve months of balance date – hold onto them for the long term. Eg. Land and buildings, motor vehicles, P&E Nature of Depreciation  All physical non-current assets are considered to have a limited useful life, and therefore subject to depreciation except land, which is considered to have an unlimited useful life  Depreciation = the allocation of the cost of an asset over its estimated useful life. Three misconceptions about depreciation  First Misconception: Depreciation is a process of valuation Fact: Depreciation is NOT a process of valuation ie. does not attempt to determine the asset‘s value at balance date --an asset must be depreciated even if it‘s value increases --focus is on profit determination rather than the value of the asset  Second Misconception: Depreciation is a source of funds for future replacement Fact: Depreciation is NOT a source of funds for future replacement --affects profit and written down value of the asset --Not based on future values— based on past cost  Third Misconception: Depreciation provides ―cash‖ funds Fact: Depreciation does NOT provide ―cash‖ funds -- Establishing a cash fund is entirely separate from depreciation - Requires an entry that debits Cash What does depreciation measure Depreciation attempts to measure the decline in service potential of an asset which occur as a result of  general wear and tear from usage  technical obsolescence due to technological advances  commercial obsolescence due to fall in demand for an asset Depreciation Methods Straight Line Method  allocates an equal amount of depreciation expense each year . depreciation expense = (cost - est. residual value) estimated useful life Reducing Balance Method  an accelerated depreciation method  assumes that the asset will yield more service potential in the earlier years than in the later years  Depreciation for year 1 is calculated on COST  RBD = Carrying amount x depreciation rate  Final year depreciation is calculated by subtracting the residual value from the carrying amount at beginning of the year. Units of production method  allocates a fixed amount of depreciation to each unit of estimated output produced by the non-current asset  can only be applied if the asset can measure its output EG a photocopier, motor vehicle  The depreciable amount is divided by the useful life in units to determine the depreciation per unit of production. The actual production for the year is then multiplied by the depreciation per unit Jessica King BSB110 Final Notes Semester 1, 2009 Effects of Depreciation Methods  The yearly amount of depreciation varies by method but the total depreciation amount remains the same Management must decide on which is the most appropriate method for each particular asset.  Note the effect on profit of the different methods— the large the depreciation expense, the smaller profit figure which is recorded.  The items affected by the depreciation method are: -- Depreciation Expense -- Net Profit -- Accumulated Depreciation -- Book value of non-current asset -- Total non-current assets -- Total assets -- Owner‘s equity  Given that all of these items are affected, the choice of the appropriate depreciation method then becomes an important decision for management  Often for tax purposes, a business will prefer the larger depreciation expense to give a smaller taxable profit. This will lead to a lower tax payment for the current year. Comparing Depreciation Methods  Straight line: depends on the asset and situation of the business. A business should match e against r for the period. Therefore, if the asset generates revenue equally over time, the SLM method follows the matching period.  Units of production: best fits an asset that deprecates due to wear and tear rather than obsolescence. Deprecation is only caused when the asset is used  Reducing balance: accelerated method works best for assets that produce more R in their early years – higher depreciation is matched against higher revenue earn in these periods. Decision guidelines Decision Guidelines Which depreciation method to use: For financial reporting Use the method that best matches depreciation expense against revenue produced by the asset For income state Use the method that produces the fastest tax deductions. Jessica King BSB110 Final Notes Semester 1, 2009 LECTURE 11: An Introduction to Management Accounting Budgeting  Management‘s tool for forecasting the future  summarizes the planning decisions of the business  sets out the business‘s financial goals  shows how resources are expected to be acquired and used during a specified time period  serves as a basis for comparison to indicate whether the business is meeting its targets Advantages of budgeting  Requires planning  Promotes coordination and communication  Provides a benchmark that helps management evaluate performance  Motivates employees Preparation of a Budget  Very important to accurately forecast sales as all figures in the Master Budget are based on the sales forecast  Businesses invest much time and effort into ensuring that the sales are accurately predicted Sales Budget  Prepared first  Then need to budget for the purchases necessary to achieve sales of that nature  Beginning inventory + purchases – ending inventory = COGS Performance Reports  Comparing ACTUAL results to budgeted figures is a key element in the evaluation of the activities of a business  Performance reports compare budget to actual and show VARIANCES - is the difference between budget and actual  Favourable Variance:  Revenue – actual is less than budgetExpense –actual is greater than  Revenue – actual > budget  Expense – actual is < budget budget  Unfavourable variance: Reasons why the actual performance is worse than the budget:  budget is unrealistic  uncontrollable factors  business did a poor job selling during th period Decision guidelines Decision Guidelines Why should a company develop a  Requires management to plan budget?  Promotes coordination and communication
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