22107 lecture 1 online 3 slides
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22107 Lecture 1 Online 3 SlidesTRANSCRIPT
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Accounting for Business Decisions A
Lecture 1 1
WELCOMETO
UNIVERSITY OF TECHNOLOGY, SYDNEY
2 2 1 0 7A C C O U N T I N G F O R B U S I N E S S
D E C I S I O N S A
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Accounting for Business Decisions A
1-2
LECTURE1FINANCIAL ACCOUNTING
1-3
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Accounting for Business Decisions A
Lecture 1 2
Lecture 1 Learning Objectives
1. Describethefourassumptionsmadewhencommunicatingaccountinginformation.
2. Describethepurposeandstructureofanstatementofcomprehensiveincomeandthetermsandprinciplesusedtocreateit.
3. Describethepurposeandstructureofastatementoffinancialpositionandthetermsandprinciplesusedtocreateit.
Lecture 1 Learning Objectives continued4. Describethepurposeandstructureofastatement
ofchangesinequity andhowitlinksthestatementofcomprehensiveincomeandthestatementoffinancialposition.
5. Describethepurposeandstructureofaofcashflowstatementandthetermsandprinciplesusedtocreateit.
6. Describethequalitativecharacteristicsthatmakeaccountinginformationuseful.
7. Describetheconceptualframeworkofaccounting.
BEGINNINGASSUMPTIONSLO1
Accounting istheprocessofidentifying,measuring,andcommunicatingeconomic
informationtopermitinformedjudgmentsanddecisions.Putmoresimply,accountingisthe language
ofbusiness.
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1 EconomicEntity This assumption states that the financial
activities of a business can be separated from the financial activities of the businesss owner.
2 TimePeriod Accountants assume that economic information
can be meaningfully captured and communicated over short periods of time.
3
4
Toaccomplishtheprocessofaccounting,accountantsusefourassumptions:
1
2
3 MonetaryUnit Accountants assume that the dollar is the most
effective means to communicate economic activity.
4 GoingConcern Accountants assume that a company will
continue to operate into the foreseeable future.
Toaccomplishtheprocessofaccounting,accountantsusefourassumptions:
REPORTINGPROFITABILITY:THESTATEMENTOFCOMPREHENSIVEINCOMELO2
?One of the first questions any business wants to know is whether they are making money or are profitable.
These answers can be found in the statement of comprehensive income.
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THEINCOMESTATEMENTANDTERMSAnstatementofcomprehensiveincomereportsa
companysrevenues andexpenses.
Revenue Anincreaseinresources
resultingfromthesaleofgoods
orservices
Terms
RevenueRecognitionPrinciple Arevenueshouldberecordedwhenaresourcehasbeenearned
Expense Adecreaseinresources
resultingfromthesaleofgoods
orservices
MatchingPrinciple Expensesshouldberecordedintheperiodresourcesareusedtogeneraterevenues
STATEMENTOFCOMPREHENSIVEINCOMEEXAMPLEExhibit 1-1
Lawn ServiceStatement of Comprehensive Income
For the month ending 31 January 2014
Revenues $1120Expenses:Fuel $80Interest 5Depreciation 70Total expenses 155Net profit (total comprehensive income) $965
BASICSTRUCTUREOFTHESTATEMENTOFCOMPREHENSIVEINCOME
Revenues Expenses=ProfitorLossReportedoveraspecificperiod,likeforthe
yearendedJune30,2013
TheStatementofComprehensiveIncomemaybereferredtoastheIncomeStatementortheProfitandLoss
StatementwhiletheTotalComprehensiveIncomeisoftencalledProfitorLoss,
IncomeorevenNetIncome.
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THESTATEMENTOFFINANCIALPOSITIONANDRELATEDTERMSLO3
Asset: An economic resource that is
objectively measurable, that
results from a prior transaction, and that
will provide future economic benefit.
Cost principle:
Liability: An obligation of a business that
results from a past transaction and will require the sacrifice
of economic resources at some
future date.
Equity: The difference between a companys assets and liabilities,
representing the share of assets that is claimed by the companys owners.
Contributed capital:
THESTATEMENTOFFINANCIALPOSITIONANDRELATEDTERMS
Asset:
Cost principle: The principle that assets should be recorded and reported at
the cost paid to acquire them.
Liability:
Equity:
Contributed capital: The resources that
investors contribute to a business in exchange for
ownership interest.
REPORTINGFINANCIALPOSITION:THESTATEMENTOFFINANCIALPOSITION
? An important issue for any business is its current financial position. What does the business own? What does it owe?
These answers can be found in the statement of financial position.
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BASICSTRUCTUREOFTHESTATEMENTOFFINANCIALPOSITION
ACCOUNTINGEQUATIONAssets=Liabilities+Equity
Reportedatagiventimeordate
TheStatementofFinancialPositionisalsoknownastheBalanceSheet
STATEMENTOFFINANCIALPOSITIONEXAMPLEExhibit 1-2Lawn Service
Statement of financial positionAt 31 January 2014
Cash $194 Note payable (to Mum) $200
Accounts receivable 120 Total liabilities 200
Supplies (petrol) 10 Contributed capital 100
Lawnmower 195 Retained earnings 234
Petrol can 15 Total equity 334
Total assets $534 Total liab and equity $534
REPORTINGEQUITY:THESTATEMENTOFCHANGESINEQUITYLO4
Astatementofchangesinequity showsthechangeinacompanysequity,mainly(atthisstage)thechangeinretainedearningsoveraspecificperiodoftime.
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BASICSTRUCTUREOFTHESTATEMENTOFCHANGESINEQUITY
(Profit or loss)
STATEMENTOFRETAINEDEARNINGSEXAMPLEExhibit 1-3
Lawn ServiceStatement of Retained Earnings
For the month ending 31 January 2014
Retained earnings, 1 January $ 0
+ Net income (or Net profits) 965
Drawings (Dividends) 731
Retained earnings, 31 January 234
LINKINGTHESTATEMENTOFCOMPREHENSIVEINCOMEANDTHESTATEMENTOFFINANCIALPOSITION
The statement of changes in equity links the incomestatement and the statement of financial position.
Statement of Comprehensive IncomeProfits $ 965
Statement of Changes in EquityRetained earnings, 1 January $ 0+ Profits 965 Drawings 731Retained earnings, 31 January $ 234
Statement of Financial PositionLiabilities 200Contributed capital 100Retained earnings 234
Total assets $ 534 Total liab & equity $ 534
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REPORTINGCASHFLOWS:THESTATEMENTOFCASHFLOWS
?A business needs to answer questions about the management of cash:
Where do we get our cash? Where does our cash go? Will there be enough cash to . pay bills?
These answers can be found in the Statement of Cash Flows.
LO5
REPORTINGCASHFLOWS:THESTATEMENTOFCASHFLOWS
Thedetailsofcashinflowsandoutflowsforabusinessarereportedonastatementofcashflowsinthefollowingthreesections:
OperatingActivitiesInvestingActivitiesFinancingActivities
STATEMENTOFCASHFLOWSEXAMPLE EXHIBIT15Cash Flow Statement
For the month ending 31 JanuaryOperating activitiesCash received from customers $1000Cash paid for petrol (90) Cash paid for interest (5)Net cash provided by operating activities $905Investing activitiesCash paid for lawnmower $(260) Cash paid for petrol can (20)Net cash used by investing activities (280)Financing activitiesCash received from borrowing $ 200Cash received from owner 100Drawings (dividend) (731) Net cash used by financing activities (431)
Net increase in cash $194Cash balance, 1 January 0Cash balance, 31 January $194
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QUALITATIVECHARACTERISTICSOFACCOUNTINGINFORMATIONUnderstandability
Theabilityofaccountinginformationtobecomprehensibletothosewhohaveareasonableunderstandingofbusinessandarewillingtostudytheinformationwithreasonablediligence.
Relevance Thecapacityofaccountinginformationtomakeadifferenceindecisions.
LO6
QUALITATIVECHARACTERISTICS(CONTINUED)
Reliability Theextenttowhichaccountinginformationcanbedependedupontorepresentwhatitpurportstorepresent,bothindescriptionandinnumber.
Comparability Theabilitytouseaccountinginformationtocompareorcontrastthefinancialactivitiesofdifferentcompanies.
QUALITATIVECHARACTERISTICS(CONTINUED)Consistency Theabilitytouseaccounting
informationtocompareorcontrastthefinancialactivitiesofthesameentityovertime.
Materiality Thethresholdatwhichafinancialitembeginstoaffectdecisionmaking.
Conservatism Themannerinwhichaccountantsdealwithuncertaintyregardingeconomicsituations.
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THECONCEPTUALFRAMEWORK(LETSREVIEWTHISLECTURE)
LO7
Theconceptualframeworkofaccountingisthecollectionofconceptsthatguidethemannerinwhichaccountingispracticed.
Thegrammarorterms,explainingfinancialaccounting
languageinthischapter,aremoreformallyknownascomponentsoftheconceptual
frameworkofaccounting.
TERMSUSEDTOIDENTIFYANDDESCRIBEECONOMICINFORMATION
Term Definition Reported on the
Asset A resource of a business
statement of financial position
Liability An obligation of a business
statement of financial position
Equity The difference between assets and liabilities
statement of financial position
Contributed Capital
Equity resulting from contributions from owners
statement of financial position
TERMSUSEDTOIDENTIFYANDDESCRIBEECONOMICINFORMATION
Term Definition Reported on the
Retained Earnings
Equity resulting from profitable operations
Income and Equity
Revenue An increase in assets resulting from selling a good or giving services
statement of comprehensive income
Expense A decrease in assets resulting from selling a good or providing a service
statement of comprehensive income
Dividend A distribution of profits to owners
statement of changes in equity
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PRINCIPLESUSEDTOMEASUREECONOMICINFO.Principle Definition RamificationRevenue Recognition
Revenues are recorded when they are earned.
The receipt of cash is not required to record a revenue.
Matching Expenses are recorded in the time period when they are incurred to generate revenues.
For many assets, the cost of the asset must be spread over the periods that it is used.
Cost Assets are recorded and maintained at their historical costs.
Except in a few cases, market values are not used for reporting asset values.
ASSUMPTIONSMADEWHENCOMMUNICATINGECONOMICINFORMATION
Assumption Definition RamificationEconomic entity
The financial activities of a business can be accounted for separately from the business's owners.
We do not have to worry that the financial information of the owner is mixed with the financial information of the business.
Monetary unit
The dollar, unadjusted for inflation, is the best means of communicating accounting information
All transactions in foreign currencies are converted to dollars.
ASSUMPTIONSMADEWHENCOMMUNICATINGECONOMICINFORMATION
Assumption Definition RamificationTime period Accounting
information can be communicated effectively over short periods of time.
Most businesses prepare quarterly and annual financial statements.
Going concern
The company for which we are accounting will continue its operations indefinitely.
If an entity is not selling its assets, then the cost principle is appropriate.
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QUALITATIVECHARACTERISTICSOFACC INFOTerm Definition Ramification
Understand-ability
Accounting information should be comprehensible by those who spend time studying it.
Users must spend a time studying accounting info for it to beunderstandable.
Relevance The capacity of accounting information to make a difference in decisions.
Information should have predictive or feedback value and should be timely.
QUALITATIVECHARACTERISTICSOFACC INFOTerm Definition RamificationReliability The extent to which
accounting information can be depended upon to represent what it purports to represent
Information should be free from error, a faithful representation and neutral.
Compar-ability
The ability to use accounting inform. to compare or contrast the financial activities of different companies.
Entities must disclose the accounting methods that they use so that comparisons across companies can be made.
QUALITATIVECHARACTERISTICSOFACC INFO
Terms Definition Ramifications
Consistency Accounting information should be comparableacross different time periods within a company.
An entity should use the same accountingmethods year to year and disclose when they change methods.
Materiality The threshold over which an item could begin to affect decisions.
When an amount is small enough, normalaccounting procedures are not always followed.
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QUALITATIVECHARACTERISTICSOFACC INFO
Terms Definition Ramifications
Conservatism When uncertainty exists, accounting informationshould present the least optimistic alternative.
An entity should choose accounting techniquesthat guard against overstating revenues or assets.
FINANCIALSTATEMENTSUSEDTOCOMMUNICATEECONOMICINFORMATION
Statement Purpose Structure Links to Other Statements
StatementofFinancialPosition
Showsacompanysassets,liabilities,andequityataspecificpointintime.
Assets=Liabilities+Equity
Thebalanceinretainedearningscomesfromthestatementofchangesinequity.Thebalanceincashshouldagreewiththeendingcashbalanceonthestatementofcashflows.
FINANCIALSTATEMENTSUSEDTOCOMMUNICATEECONOMICINFORMATION(CONT)
Statement Purpose Structure Links to Other Statements
StatementofComprehensiveIncome
Showsacompanysrevenuesandexpensesoveraspecificperiodoftime.
RevenueExpenses=ProfitorLoss
Totalcomprehensiveincome/lossgoestothestatementofchangesinequity tocomputeretainedearnings.
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FINANCIALSTATEMENTSUSEDTOCOMMUNICATEECONOMICINFORMATION(CONT)
Statement Purpose Structure Links to Other Statements
StatementofChangesinEquity
Showsthechangesinacompanysretainedearningsoveraspecificperiodoftime.
BeginningRetainedEarnings+/NetIncome/LossDividends=EndingRetainedEarnings
Endingretainedearningsgoestothestatementoffinancialposition.
FINANCIALSTATEMENTSUSEDTOCOMMUNICATEECONOMICINFORMATION(CONT)
Statement Purpose Structure Links to Other Statements
StatementofCashFlows
Showsacompanysinflowsandoutflowsofcashoveraspecificperiodoftime.
OperatingCashFlows+/InvestingCashFlows+/FinancingCashFlows=Netchangeincash
TheendingcashbalanceontheStatementofcashflowsshouldagreewiththebalanceincashontheStatementoffinancialposition.
HOW TO SUCCEED IN BUSINESS(In Accounting for Business Decisions A) Attend the lectures.
Read the textbook.
Do the tutorial questions before class.
Check your answers on the Guide on UTSOnline
Go to tutorials and ASK questions
Take advantage of all the support at UTS
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