BSB110 - Final Exam Notes (Summary of Topics 7 - 12)

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Management and Human Resources
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BASIC CONCEPTS AND PRINCIPLES Cash Flow Statement – reports cash flows (cash receipts and cash payments) during the period and explains the change in a component of financial position, namely cash¸ from one balance sheet to the next. Purpose: - Predict future cash flows; - Evaluate management decisions; and - Predict a business’s ability to make debt payment to lenders and pay dividends to shareholders. Cash Inflow – receipts, Debit in Cash account Cash Outflow – payments, Credit in Cash Account Net cash provided – net cash receipt Net cash used – net cash payment Three Main Classifications of Cash Flows: 1. Operating – activities that relate to the provision of goods and services, key indicator of performance (Income Statement, current asset and current liability items ) 2. Investing – activities that relate to buying and selling non-current assets including investments and making and collecting loans (Non-current assets) 3. Financing - activities that relate to changing size and composition of the financial structure of the entity (Non-current liabilities and capital) Classification of Cash Flows Cash inflows Cash outflows Operating  Selling goods  Payments to suppliers  Providing services  Salaries  Interest revenue  Interest Investing  Sale of non-current  Purchase of non- assets including current assets including investments making investments  Collections of loans  Making loans Financing  Borrowing  Repayment of  Capital contributions borrowings  Drawings Christina Meyers BSB110 Accounting 1 Preparation of Cash Flow Statement 1. Analyse Cash transaction from Cash at Bank Account 2. Note balance at the start of period and at end of the period 3. Calculate increase in Cash for the period 4. Examine the Cash Transactions and classify those into Operating, Investing and Financing Format of a Cash Flow Statement 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 Cash Provided by Operating Activities Compared to Net Profit Income Statement Cash Flow Statement  Net Profit measured according to  Cash Flows from Operating Activities Accrual Accounting  Cash Received from Customers and Cash  Net Profit = Revenue – Expenses Paid to Suppliers  Includes adjusting entries which not cash flows e.g depreciation (major expense) Christina Meyers BSB110 Accounting 2 Corporate Governance: Companies having a set of in-built controls to make sure that the company is operating the way it’s meant to. All companies listed on the ASX must formulate such policies in accordance with these principles. A company should: 1. Lay solid foundations for management and oversight Recognise and publish the respective roles and responsibilities of board and management. 2. Structure the board to add value Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties. 3. Promote ethical and responsible decision-making Actively promote ethical and responsible decision-making. 4. Safeguard integrity in financial reporting Have a structure to independently verify and safeguard the integrity of the company’s financial reporting. 5. Make timely and balanced disclosure Promote timely and balanced disclosure of all material matters concerning the company. 6. Respect the rights of shareholders Respect the rights of shareholders and facilitate the effective exercise of those rights. 7. Recognise and manage risk Establish a sound system of risk oversight and management and internal control. 8. Encourage enhanced performance Fairly review and actively encourage enhanced board and management effectiveness. 9. Remunerate fairly and responsibly Ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to corporate and individual performance is defined. 10. Recognise the legitimate interests of stakeholders Recognise legal and other obligations to all legitimate stakeholders. Corporate Governance polices: implemented within the firm to ensure standards of good ethical business conduct are adhered to. All companies listed on Australian Stock Exchange (ASX) are obliged to formulate policies in accordance with principles established by the Corporate Governance Council of the ASX. Example of poor governance: WorldCom – US Telecom Company collapsed in 2002 after financial statement misstated by $3.8 billion over the previous 5 quarters, largest fraud in corporate history Christina Meyers BSB110 Accounting 3 Merchandising Firm - sell goods to customers, cost of goods sold - Main revenue item is Sales of Goods - Main expenditure item is Cost of Goods Sold (CoGS) Merchandise Inventory Inventory – goods held for resale in the normal course of business, current asset in Balance sheet Inventory Systems Two Types: 1. Periodic  no CoGS account (no continuous record of inventory movement/inventory on hand)  physical stocktake at end of period to determine amount of inventory on hand  Inventory account records ending inventory after stocktake, this becomes beginning inventory for next period  Simple, inexpensive, but not reliable , less internal control  Assumed difference between goods available for sale and goods not sold was sold Periodic Accounts Inventory Account – Current Asset  Only have opening and closing balances (does not record daily movements) Purchases Account – Expense  Debited at cost Purchases Returns & Allowances Account – Contra Expense  Credited at cost  Deducted from purchases account Sales Account – Revenues  Credited at selling price Sales Returns and Allowances Account – Contra Revenue  Debited at selling price  Deducted from Sales Account No CoGS Account  Calculated after ending stock take Christina Meyers BSB110 Accounting 4 PERIODIC INCOME STATEMENT for the year ended ……. $ $ Sales Revenue XXX Less: Cost of Goods Sold Opening Inventory XXX Plus: Purchases XXX Cost of Goods Available for Sale XXX Less: Closing Inventory (XXX) Cost of Goods Sold XXX Gross Profit XXX Add: Other Operating Revenues XXX XXX Less: Operating Expenses XXX Net Profit XXX 2. Perpetual  CoGS account (continuous record of inventory to compare stocktake account)  Even through balance of inventory at end of each account period is known, still conduct physical stocktake to verify balance as per inventory cards, if discrepancy records is as loss (shrinkage/theft), bringing inventory account in line with stock take  Timely information for management and control  Inventory card is kept for each item to record all movements in inventory at a cost  Two sets of entries for every sale – post journal entries to Inventory Account, CoGS Account and Inventory Shortage Account in the General Ledger Perpetual Accounts Inventory Account – Current Asset  All movements of inventory at cost debited CoGS Account – Expense  Debited at cost Sales Account – Revenue  Credited at selling price Sales Returns and Allowances Account – Contra Revenue  Debited at selling price  Deducted from Sales Account Christina Meyers BSB110 Accounting 5 Merchandising Firm PERPETUAL Income Statement for the year ended 30 June Sales XXX Less Sales returns XXX Net sales XXX Less Cost of Goods Sold XXX Inventory Shortage XXX XXX GROSS PROFIT XXX Operating Expenses Selling Expenses Sales Salaries XXX Freight Outwards XXX Advertising Expense XXX XXX Administrative Expenses Admin. Salaries XXX Insurance Expense XXX XXX Financial Expenses Interest Expense XXX XXX Total Operating Expenses XXX Net Profit XXX Stock take: performed to check accuracy of stock cards/records Classified Income Statement – Perpetual – Functional Format - Expenses are classified according to FUNCTION: 1. Selling – expense related to selling goods (delivery, freight outwards) 2. Administrative – expenses relating to administration of business (telephone, rent) 3. Financial – expense relating to financing the business (interest) Christina Meyers BSB110 Accounting 6 Merchandising Firm PERPETUAL Income Statement for the year ended 30 June $ $ $ Sales XXX Less Sales returns XXX Net sales XXX Less Cost of Goods Sold XXX Inventory Shortage XXX XXX GROSS PROFIT XXX Operating Expenses Selling Expenses Sales Salaries XXX Freight Outwards XXX Advertising Expense XXX XXX Administrative Expenses Admin. Salaries XXX Insurance Expense XXX XXX Financial Expenses Interest Expense XXX XXX Total Operating Expenses XXX Net Profit XXX Inventory – Calculating the Cost - Four commonly used methods of inventory costing : 1. Specific identification – antiques, luxury cars etc. 2. FIFO (First in first out) – Sell oldest first working forward to most recent 3. LIFO (Last in first out) – Sell most recent first working back to oldest 4. Average cost method – weighted average cost for each item Inventory Costing Method Method Specific Identification - Specific cost of each unit of inventory FIFO - Cost of unit sold are the oldest costs of inventories - Cost of units on hand (inventory) assumed to be most recent purchase cost - Ending inventory in the Balance Sheet reflect higher cost of the most recent purchase (items bought most recently) Christina Meyers BSB110 Accounting 7 LIFO - Cost of units sold are most recent costs of inventory - Cost of ending inventory consists of the cost of the oldest purchases - Not permitted under AASB102 or by Australian Income Tax Legislation (maximises profit (cost of sale), minimises income tax) Average Cost - Calculate new average cost each time goods are purchases/a purchase return occurs Physical flow: inventories would generally be first in first out e.g fruit shop Inventory card: a continuous record kept for each inventory item to record all movements in inventory at cost (purchase at cost, sales at cost, and balance at cost) Effects of Inventory Costing Methods - Different inventory costing methods produce different values of ending inventory and CoGS - Significant effect on an entity’s reported assets and net profit Inventory Costing Method Rising Prices Falling prices FIFO Ending Inventory (asset) is Assets are LOWER than HIGHER than AVERAGE Cost AVERAGE Cost CoGS (expense) is LOWER than Expenses are HIGHER than AVERAGE Cost AVERAGE Cost Profit is HIGHER than Average Profit is LOWER than Cost Profit Average Cost Profit Average Cost Assets are LOWER than FIFO Assets are HIGHER than FIFO Expenses are HIGHER than Expenses are LOWER than FIFO FIFO Profit is LOWER than FIFO Profit is HIGHER than FIFO Profit Profit Accounting principles and inventories Relevance: firm’s financial statement should report sufficient information to enable outsiders to make knowledgeable decisions about the business – disclosing method(s) used in valuing inventories Comparability: businesses should consistently use the same accounting methods and procedures from period to period – business making an accounting change must disclose the effect of the change on net profit Materiality: business need report only information that is significant in its financial statement – would cause a statement user to change a decision because of that information Christina Meyers BSB110 Accounting 8 Conservatism: reporting items in the financial statement at amounts that lead to the gloomiest immediate financial results - writing down assets that become obsolete Lower-of-Cost-and-Net-Realisable-Value (NRV) Rule: principle of conservatism whereby inventory must be reported in the financial statements at whichever is lower (historical cost or NRV) Net-Realisable-Value (NRV): estimated proceeds of sale less all further costs to complete the product (selling price – cost to complete product) - Losses on Inventory added to CoGS in Income Statement - Inventory in Balance Sheet - Profit and asset values NRV may be lower than cost if: - Falling demand/excess supply - Physical deterioration of product - Obsolescence - Deliberate policy by management to sell at loss to increase market share Estimating inventory - Estimating inventory - Retail inventory method: Requires that the business records inventory purchases both at cost (as shown in the purchase record) and at retail (selling) price Internal control: controls within an organisation designed to: - Safeguard assets - Ensure accurate and reliable accounting records – cash at bank is correct, cash receipts is correct and match - Promote operational efficiency (cash flow) and - Encourage adherence to business policies Two Types of Internal Control 1. Administrative: methods and procedures for maintaining operational efficiency and adhering to management policies of the firm 2. Accounting: methods and procedures for safeguarding assets and maintaining reliable system of accounting records Characteristics of an Effective System of Internal Control • Competent, reliable and ethical personnel  payment of appropriate salaries  adequate training Christina Meyers BSB110 Accounting 9  rotation of employees through various jobs • Assignment of responsibilities  Assigning specific duties to specific personnel  Assigning appropriate duties for the skill level of the staff members • Proper authorisation  Procedures outlining who is responsible to authorise transactions & events  Deviation from stated policies requires proper authorisation • Separation of duties  Operations from accounting e.g manufacturing, sales  Custody of assets from accounting  Temptation and fraud  if accountants don’t handle cash and if cashiers don’t have access to the accounting records  Authorisation of transactions from the custody of related assets  Reduces risk that illegitimate bills will be paid  Within the accounting function  The person who authorises transaction shouldn’t handle the related asset  Reduces risk that illegitimate bills will be paid  Limits chance for fraud and promotes the accuracy of accounting records • Internal and external audits  External: performed on behalf of shareholders and checks the accuracy of the financial statements. It is performed by an outside organisation (e.g. a big four accounting firm such as KPMG or Ernst & Young)  Internal: regularly conducted through the year on behalf of management • Appropriate documents and records  Pre-numbered and standardised e.g sales invoices with clear fields, cheques sequentially numbered • Electronic devices and computer controls  Many businesses employ electronic data processing (EDP) auditors to ensure the integrity of their computer databases e.g passwords, levels of access Limitations • Cost • Human error • Collusion Cash Controls Importance • most important assets • most likely to be misappropriated Procedures • Separate cash handling from recording • Deposit intact all cash receipts in the bank daily • Major payments by cheque with two signatories • Bank reconciliation by a person other than the one who recorded cash transactions • Petty cash system • Cash budgets Christina Meyers BSB110 Accounting 10 Bank Reconciliation: explains differences between bank statement & firm’s bank account balance Reasons for Differences Items in CRJ and CPJ, but NOT on Bank Statement • Deposits in transit: business has recorded these deposits in CRJ, but the bank has not • Outstanding cheque: business issued cheque & recorded in CPJ, bank hasn’t yet paid them • Bank errors • These items are used to prepare the Bank Reconciliation Statement Items NOT in CRJ and CPJ, but ARE on the Bank Statement • Bank collections/Direct deposits: monies directly collected by banks on behalf of depositors • Bank charges: banks fee for processing depositor’s transaction • Interest earned on cheque or savings accounts • Dishonoured cheques – not a correct signatory, signed by the wrong person, insufficient funds, have to reverse in your books as well • Our errors  recorded in the firm’s books Reconciliation Procedure, Items needed to carry out bank reconciliation: 1. Most recent bank reconciliation prepared for the business (usually for the previous month) – various items that have to be resolved, carry forward until resolved 2. Opening and closing balance of the Cash at Bank account 3. CRJ and CPJ 4. Bank statement for the current period Steps in the Reconciliation Procedure 1. Tick-off entries in the CREDIT column in the bank statement against CRJ and the deposit section of last month's bank reconciliation. 2. Tick-off entries in the DEBIT column in the bank statement against the CPJ and the outstanding cheques section of last month's bank reconciliation. 3. Enter unticked items from the bank statement into CRJ (eg. interest received) and into CPJ (eg. bank charges). 4. Adjust the CRJ and CPJ for any errors made by the firm. 5. Post the adjusted totals of CRJ and CPJ to the cash at bank account in the general ledger. 6. Items unticked in the firm's journals and not in the bank statement are now used to prepare the bank reconciliation statement for the month: • deposits in transit • outstanding/unpresented cheques • errors made by the bank Christina Meyers BSB110 Accounting 11 Process to prepare the Bank Reconciliation Statement: 1. Find the final balance of the bank statement 2. If credit (money in the bank) add deposits, less outstanding cheques 3. If debit (owe the bank money) add outstanding cheques, less deposits 4. Add deposits in transit--check for un-ticked deposits in the CRJ and last period’s bank reconciliation statement 5. Subtract outstanding cheques--check for un-ticked cheques in the CPJ and last period’s bank reconciliation statement 6. Adjust for Bank Errors-- check for marked errors in the CRJ and CPJ 7. Final balance = Cash at Bank balance NOTE: The Bank Statement is from the bank’s perspective. Credit balance: (firm has money in the bank): + deposits, - outstanding cheques Bank’s view, a liability (Cr) – OPPOSITE Firm’s view, an asset (Dr) Debit balance: (firm owes the bank money): - deposits, + outstanding cheques Bank’s view, an asset (Dr) – OPPOSITE Firm’s view, a liability (Cr) Bank Reconciliation – Format Bank Reconciliation of as at 30 June Balance as per bank statement at 30 June $XXXCR CR6,850 Cr Add: deposits in transit XXX30 570 XXX Less: outstanding cheques Cheque # XXX XXX Cheque # XXX XXX Cheque # XXX XXX Cheque # XXX XXX XXX XXX Add: Bank Error XXX Balance as per cash at bank account at 30 June XXXDr Cash Budget: isaprojectionon anticipated futurecashreceiptsand payments Cashtransactions:receiptsfromcustomersforthesales andthepaymentsto suppliersforthe purchases. Items not included in a cash budget: Christina Meyers BSB110 Accounting 12  Depreciationexpense:– notacashtransaction– a“book”entry  CoGS– not acashtransaction–anexpense(notcashflow –whenyou buyandsellthegoods) =thecostpriceofthe goodssold Purposes ofaCashBudget • Firm’screditstanding/reputation dependsonmeetingcommitments astheyfall due. • Acash budgetwarns offuturecashshortageorsurplus. • Allows firmstomake decisionsto avoidcashproblems:  Postponeorreducesomefutureexpenditure  Change prices  Improvecreditcontrols  Organise financing • Firmsmay analysewherecash is neededandmay:  beabletominimiseinterest expense  avoid havingidlefunds inthe banke.g.surpluscashmaybeinvested • Motivational advantages departments haveowncashbudgets,motivateskeepwithin confines • Measureofperformance AFTERBUDGETCOMPLETED,COMPAREACTUALFIGURESWITHBUDGETEDFIGURES Consideration of Budget Figures: Whenthecashbudgetiscompleted, decisionscanbemadeasto the“best” (mostefficient)useofthe cashresources  Try to avoid bank overdraft(interestexpensecostly)  Cannotdefer taxor dividends  Suggestdeferring payments whichcanbepostpone untilcashresourcesareavailable  Obtainlong-termloanandthen addinterestandrepaymentsintothecashbudget Receivables: amount duefrom otherpersonsorentities arising from variousbusinesstransactions mostoftenfrom thesaleofgoodsorservicesoncredit Twomajortypesofreceivables: 1. Accountsreceivable: arisewhencreditisextendedto customersonanaccount 2. Billreceivable: credit is granted upon receipt of a formal legal instrument such as a bill of exchange or a promissory note  Current asset: duewithinoneyearorless  Non-current:duebeyondoneyear BadDebts: uncollectibledebts,financialexpenseofdoing businessoncredit (customermightnotpay) Matching Principle: bad debtsexpense should beaccountedforinthesameaccountingperiod inwhich therevenuehasbeenrecorded(necessary to estimate future bad debts) MethodsofAccounting for BadDebts Christina Meyers BSB110 Accounting 13 Direct write-off method Allowance method  Inconsistent with the matching principle  Consistent with the matching principle  Only write off debt when 100% certain  Adjusting entry prepared at the end of debt is uncollectible (written each accounting period confirmation received)  Bad debts estimated at 30 June & create  Not recommended allowance to reflect future debt expense Allowance method – Steps 1. Estimate bad debt expense for current accounting period at end of each accounting period  Allowance account is contra asset account to a/c receivable (deduced Balance sheet)  Journalise: Bad Debt Expense Allowance for Bad Debts 2. When debt ultimately proved to be bad, write off the debt  Journalise: Allowance for Bad Debts Accounts Receivable – Customer Name Methods of Estimating Bad Debt Expense 1. Percentage of net sales: estimate of bad debt expense is based on a pre-determined percentage of net credit sales (Bad Debt Expense = Sales – Sales Returns – Allowances)  Ignores current balance in the Allowance for Bad Debts Account  Assumes opening balance of Allowance for bad debt and analyses previous bad debt to include what percentage of net credit sales will be bad 2. Ageing of accounts receivable  Analyses all individual accounts receivable from specific customers according to the length of time they have been receivable from the customer at balance date and determines the likelihood of them being bad  The longer debt goes unpaid, more likely it will be bad  Takes into account cu
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