ACCT10001 Chapter Notes - Chapter 6: Accrual, Integrated Reporting, Financial Statement
22 May 2018
School
Department
Course
Professor
Profit reflects outcome of entity's investment and financing decisions
Entity should periodically report performance to enable internal and external users to make
informed decisions
internal decisions such as entity's pricing of goods and services and need to review cost
structures
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External decisions such as whether or not to invest in, or lend to, the business
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Profit or loss statement will inform
Entity that generates losses rather than profits is not sustainable
Statement of profit of loss reflects accounting return
Triple bottom line reporting/environmental, social and governance (ESG) reporting = articulate
governance, environmental and social policies and report on environmental and social performance
in addition to financial performance
Integrated reporting conveys info on how entity's strategy, governance, performance and prospects
lead to creation of value
Profit or loss figure is not a measure of change in entity's value
Revenue = income arising in the ordinary course of an entity's activities
Users rely on periodic profit or loss figures to evaluate past decisions, revise predictions and make
future decisions
Usually prepared for a 12
-
month period
Large companies are required to prepared a profit of loss for 12
-
month period in addition to
producing and lodging a semi
-
annual statement
Purpose and importance of measuring financial
performance
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Also known as accounting periods
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External reports are usually prepared yearly
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Internal reports may be prepared more regularly
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Interim reporting is common
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State Government of Victoria requires monthly reporting by all public hospitals
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Reporting period:
Accrual accounting = transactions are recorded in period to which they relate, rather than
period in which cash if received or paid
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Reported profit of loss = income
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expenses
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Cash accounting determines cash profit or loss = cash received
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cash paid
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Transaction can be income or expense without being cash
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Accrual accounting better reflects performance of entity for a reporting period
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Accrual accounting vs cash accounting:
Depreciation and amortisation are expenses recognised in statement of profit or loss that do
not involve cash
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All PPE must be depreciated
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Some intangible assets must be amortised
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Straight
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line depreciation: annual depreciation expense = (cost of asset
-
expected residual
value)/asset's expected useful life in years
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Accumulated depreciation = account used to capture total depreciation charged for a
particular asset
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Contra amount = accumulated depreciation account
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Depreciation:
Accounting concepts for financial reporting
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Depreciation methods = straight
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line, diminishing balance or units of production
assumes economic benefits of using asset will decrease over useful life
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Depreciation expense is higher in earlier years
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Diminishing balance depreciation:
Charges depreciation expense based on activity or output relative to asset's total expected
activity or output
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Depreciation expense = (cost of asset
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expected residual value) units in the period / total
estimated units
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Units of production depreciation:
Depreciation expense affects accumulated depreciation which affects carrying amount
Estimating impaired accounts receivable
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Estimating costs associated with a well
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planned and well
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documented business restructure
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Estimating expense associated with employee benefits
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Other estimations:
Are earnings persistent?
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Are earnings being managed?
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Quality of earnings:
May desire to portray economic reality of entity
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Avoid breaching loan covenants
○
Maintain share price
○
Maximise salary bonuses
○
May be driven by self
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interest
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Independent audit provides assurance
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Earnings management = managers' use of accounting discretion to portray desired level of profit
Effect of accounting policy choices, estimates and
judgements on financial statements
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Document Summary
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