NOTES. ACCT10001: Accounting Reports and Analysis. The University of Melbourne
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1 NOTES ACCT10001: Accounting Reports and Analysis The University of Melbourne
2 Table of Contents 1! ACCOUNTING CONCEPTS AND CONTEXT! 4! 1.1! USERS!OF!ACCOUNTING!INFORMATION! 4! 1.2! ASSUMPTIONS!OF!FINANCIAL!ACCOUNTING! 4! 1.3! QUALITATIVE!CHARACTERISTICS!OF!ACCOUNTING!INFORMATION! 4! 1.4! STRUCTURE!OF!BUSINESS!ENTITIES! 4! 1.4.1! SOLE!PROPRIETORSHIP/!SOLE!TRADER! 4! 1.4.2! PARTNERSHIP! 5! 1.4.3! COMPANY/CORPORATION!(LIMITED!LIABILITY)! 5! 2! ACCOUNTING!ELEMENTS!AND!SYSTEMS! 6! 2.1! ACCRUAL!ACCOUNTING! 6! 2.2! CASH!ACCOUNTING! 6! 2.3! ACCOUNTING!EQUATION! 6! 2.3.1! ASSETS! 6! 2.3.2! LIABILITIES! 6! 2.3.3! SHAREHOLDERS!EQUITY! 7! 2.4! ACCOUNTING!EQUATION!IN!DETAIL! 7! 2.4.1! DOUBLE!ENTRY!ACCOUNTING! 7! 3! BALANCE SHEET! 8! 3.1! BALANCE!SHEET! 8! 3.2! ALLOWANCE!FOR!DOUBTFUL!DEBT! 8! 3.3! INVENTORY!SYSTEMS! 9! 3.3.1! PERPETUAL!INVENTORY!CONTROL!SYSTEM! 9! 3.3.2! PERIODIC!INVENTORY!CONTROL!SYSTEM! 9! 3.4! MEASURING!INVENTORY! 9! 3.4.1! FIFO! 9! 3.4.2! LIFO! 9! 3.4.3! WEIGHTED!AVERAGE!COST!METHOD! 9! 3.5! MEASURING!ASSETS! 10! 3.5.1! HISTORICAL!COST! 10! 3.5.2! MARKET!VALUE! 10! 3.6! CAPITAL!BUDGETING! 11! 3.6.1! PRESENT!VALUE!FORMULA! 11! 3.6.2! CAPITAL!BUDGETING! 11! 3.6.3! NPV!! 11! 3.7! PROVISION!V!CONTINGENT!LIABILITY! 12! 3.7.1! DEFINITION!AND!RECOGNITION!OF!LIABILITY! 12! 3.7.2! CONTINGENT!LIABILITY! 12! 3.7.3! PROVISIONS! 12! 3.7.4! LIMITATIONS!OF!THE!BALANCE!SHEET! 12! 4! OTHER!FINANCIAL!STATEMENT! 13! 4.1! INCOME!STATEMENT! 13! 4.2! STATEMENT!OF!CASH!FLOWS! 13! 4.3! ACCRUAL!ADJUSTMENTS! 15!
3 4.3.1! EXPIRATION!OF!ASSETS! 15! 4.3.2! UNEARNED!REVENUE! 15! 4.3.3! ACCRUAL!OF!UNRECORDED!REVENUE! 15! 4.3.4! ACCRUAL!OF!UNRECORDED!EXPENSES! 15! 4.4! DEPRECIATION! 16! 5! FINANCIAL!STATEMENT!ANALYSIS! 18! 5.1! PERFORMANCE!RATIOS! 18! 5.2! ACTIVITY!RATIOS! 18! 5.3! LIQUIDITY!RATIOS! 18! 5.4! FINANCIAL!STRUCTURE!RATIOS! 19! 5.5! ANALYTICAL!METHODS! 19! 5.6! LIMITATIONS!ON!FINANCIAL!STATEMENT!ANALYSIS! 20! 6! COSTING!AND!PRICING! 21! 6.1! COST!BEHAVIOURS! 21! 6.2! CVP!ANALYSIS! 21! 6.2.1! BREAK!EVEN!ANALYSIS!TO!FIND!THE!PRICE!WE!SHOULD!SELL!A!GIVEN!AMOUNT!OF! PRODUCTION!FOR.! 22! 6.2.2! HOW!TO!DETERMINE!NET!PROFIT!BEFORE!TAX:! 22! 6.2.3! HOW!TO!DETERMINE!THE!UNITS!NECESSARY!TO!REACH!A!PROFIT!AFTER!TAX!GOAL:! 22! 6.2.4! SALES! 23! 6.2.5! SALES!RETURNS!OR!ALLOWANCES! 23! 6.3! RELEVANT!INFORMATION! 23! 7! BUDGETING! 24! 7.1! THE!BUDGETING!PROCESS! 24! 7.2! BEHAVIOURAL!ASPECTS!OF!BUDGETING! 24! 7.3! BUDGETARY!APPROACHES! 25! 8! PERFORMANCE!REPORTING! 26! 8.1! PERFORMANCE!MANAGEMENT! 26! 8.2! NON!!FINANCIAL!PERFORMANCE!MANAGEMENT! 26! 8.2.1! BALANCED!SCORECARD! 26! 8.2.2! DIVISIONAL!PERFORMANCE!MANAGEMENT! 27! 8.2.3! RESPONSIBILITY!ACCOUNTING! 27! 8.3! FINANCIAL!PERFORMANCE!MANAGEMENT! 28! 8.3.1! ANALYSIS!OF!PROFIT! 28!!
4 1 Accounting Concepts and Context 1.1 Users!of!Accounting!Information! Users of accounting information are the people that depend on and use the financial information (provided by financial statements) to make economic decisions. 1.2 Assumptions!of!Financial!Accounting! Assumptions are the tools and principles that we assume accountant will always use when presenting and creating financial statements Relevant assumptions: Accrual Accounting Measure the performance and position of a company by recognising economic events regardless of when cash transactions occur. Going Concern A business will continue to operate for the foreseeable future Monetary Unit - Measured in common denominator Accounting Period Discrete equal periods Historical Cost Cost at initial acquisition 1.3 Qualitative!Characteristics!of!Accounting!Information! Understandability Relevance! Materiality Reliability! Fair representation (represent what really existed/happened)! Neutrality (freedom from bias)! Substance over form (reflects the economic reality)! Prudence (caution in estimates)! Completeness (material info not omitted, not misleading) Comparability 1.4 Structure!of!Business!Entities! Sole Proprietorship/ Sole trader The owner is called the proprietor Separate accounting entity Not separate legal entity Not separate taxable entity
5 Unlimited liability - owner personally liable for debts of business Partnership Separate accounting entity Not separate legal entity Not separate taxable entity Unlimited liability - individual partners personally liable for debts of partnership Company/Corporation (limited Liability) The owners are called the shareholders Separate accounting, legal and taxable entity Limited liability - shareholders personally liable up to the value of their shares
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