Deutsch and Chikarovski's ACCOUNTING FOR NON-ACCOUNTANTS A Question and Answer Handbook Robert Deutsch and Kris Chikarovski THE FEDERATION PRESS 2012
Preface - x Who is this book for? x What is in this book? x Who we are xi Thanks xi SECTION 1 - ACCOUNTING FUNDAMENTALS 1.01 Overview 1 1. What is accounting? 1 2. Why is accounting important? 2 3. What are the main sources of accounting information? 2 4. Who are the key users of accounting information? 3 5. What can accounting information tell me about an accounting entity? 3 6. How can I use accounting information to gain an understanding of an accounting entity? 4 7. Where can I find accounting information about an accounting entity? 5 1.02 The Language of Accounting 5 8. What is the fundamental equation at the heart of accounting information? 5 9. What is the meaning of the key elements of the accounting equation? 6 10. What does double entry bookkeeping mean? 9 1.03 Fundamental Concepts of Accounting 10 11. What are the fundamental concepts that underpin accounting? 10 12. How does the concept of the accounting entity and the accounting period influence how you review accounting information? 11 13. What are the implications of the historical cost concept? 12 14. How are historical costs modified in certain circumstances? 12 15. How does the concept of the going concern influence accounting information? 13 16. How does the concept of depreciation influence accounting information? 13 1.04 Fundamental Principles of Accounting 14 17. How does the principle of accrual accounting influence accounting information? 14 18. How does the realisation principle influence accounting information? 15 19. How does the matching principle influence accounting information? 15 20. How does the balance day adjustments principle influence accounting information? 16 VI
SECTION 2 - MAIN SOURCES OF ACCOUNTING INFORMATION 21. What are the four critical financial statements? 17 22. Why are the notes to the financial statements important? 17 23. What are some of the key items typically included in the notes to the financial statements? 19 24. What is the time period covered by the four financial statements? 22 25. How are the four financial statements related to each other? 22 2.01 The Statement of Financial Position (Balance Sheet) 24 26. What financial information does a Statement of Financial Position (Balance Sheet) generally contain? 24 27. How is a Balance Sheet usually presented? 27 28. What are assets? 27 29. How do current assets and non-current assets differ? 28 30. What are Current assets? 29 31. What are the main types of current assets? 29 32. What are non-current assets? 32 33. How are leases of assets treated for accounting purposes? 32 34. What are property, plant and equipment? 34 35. What are the main types of property, plant and equipment? 34 36. How is depreciation calculated? 35 37. What are intangible assets? 37 38. What are the main types of intangible assets? 37 39. What are the key accounting standards controlling the reporting of intangible assets? 39 40. How does asset impairment testing impact on the reporting of assets? 40 41. What are liabilities? 42 42. What are the main types of liabilities? 44 43. How is shareholders' equity determined? 45 2.02 The Statement of Financial Performance (Profit and Loss Statement) 48 44. What financial information does a Statement of Financial Performance (Profit and Loss Statement) usually contain? 48 2.03 Statement of Changes in Equity 50 45. What financial information does a Statement of Changes in Equity usually contain? 50 46. What are the key elements of a Statement of Changes in Equity? 52 2.04 Cash Flow Statement 53 47. What financial information does a Cash Flow Statement usually contain? 53 48. What is treated as cash for the purposes of the Cash Flow Statement? 55 49. How is a Cash Flow Statement usually presented? 55 50. What are the key elements of a Cash Flow Statement? 56 51. How are cash flows reported? 58 vii
SECTION 3 - UNDERSTANDING ACCOUNTING INFORMATION 52. What is financial statement analysis? 59 3.01 Comparative Analysis 59 53. What is comparative analysis? 59 54. What is horizontal analysis? 61 55. What is vertical analysis? 61 3.02 Financial Ratio Analysis 62 56. What is the concept underpinning financial ratio analysis? 62 57. What are the three main types of financial ratios commonly used? 65 58. What are the key liquidity ratios? - 66 59. How do you calculate the current ratio? 67 60. How do you calculate the quick ratio? 68 61. How do you calculate the current cash debt coverage ratio? 69 62. How do you calculate receivables turnover? 70 63. How do you calculate the average collection period? 70 64. How do you calculate inventory turnover? 71 65. How do you calculate average days in inventory? 72 66. What are the key solvency ratios? 73 67. How do you calculate the debt to total assets ratio? 73 68. How do you calculate the liabilities to equity ratio? 74 69. How do you calculate the times interest earned ratio? 75 70. How do you calculate the cash debt coverage ratio? 76 71. How do you calculate free cash flow? 77 72. What are the key profitability ratios? 78 73. How do you calculate return on equity? 78 74. How do you calculate return on assets? 79 75. How do you calculate the net profit margin? 80 76. How do you calculate asset turnover? 81 77. How do you calculate the gross profit margin? 82 78. How do you calculate operating expenses to sales ratio? 83 79. How do you calculate cash return on sales ratio? 84 80. How do you calculate earnings per share? 84 81. How do you calculate the price-earnings ratio? 85 82. How do you calculate the dividend payout ratio? 86 3.03 Financial Covenant Ratio Analysis 87 83. What is the concept underpinning financial covenant ratio analysis? 87 84. What are the key financial covenant ratios usually used? 88 85. How do you calculate the asset value to net exposure percentage? 89 86 How do you calculate the debt service cover ratio? 90 87. How do you calculate the interest cover ratio? 90 88. How do you calculate the total leverage ratio? 91 89. How are financial covenant thresholds determined and applied? 91 viii
90. What are the typical consequences of breaching any financial covenant thresholds applied? 92 91. Can manipulation occur in relation to meeting any financial covenant thresholds applied?. 92 SECTION 4 - APPLYING ACCOUNTING INFORMATION TO ASSESS THE FINANCIAL POSITION OF AN ACCOUNTING ENTITY 92. How can I use the accounting information and financial statement analysis to determine the immediate financial health of an entity? 93 93. How can I use the accounting information and financial statement analysis to determine the ongoing viability of an entity? 94 94. How can I use the accounting information and financial statement analysis to determine the overall competitiveness of an entity? 95 SECTION 5 - LIMITATIONS OF ACCOUNTING INFORMATION 95. What are the key factors that limit the accuracy of information available from financial statements? 96 96. How can the financial information available in financial statements be manipulated? 99 97. How can revenue figures be manipulated? 101 98. How can expense figures be manipulated? 102 99. How can asset figures be manipulated? 104 100. How can liability figures be manipulated? 104 101. How can cash flow figures be manipulated? 105 102. How can financial ratio figures be manipulated? 106 103. How can statistics be manipulated? 106 APPENDICES APPENDIX 1 - Summary of Financial Ratios 110 APPENDIX 2 - Sample Financial Information 112 Part A - Sunshine Pty Ltd 112 Part B - WorleyParsons Limited 115 APPENDIX 3 - Illustration of how Financial Information in Financial Statements can be Manipulated 149 APPENDIX 4-Glossary 151 APPENDIX 5 - Further Reading 163 ix