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Accounting Chapter 1-5 notes
Accounting Reports And Analysis (ACCT10001)
University of Melbourne
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Accounting notes
Week 1, Chapter (1.1-1)
Accounting: the process of identifying, measuring and communicating economic information about an entity to a variety of users for decision making purposes.
1 st component of accounting – Identifying
Business transaction: an event that affects the financial position of an entity and can be measured and recorded reliably, includes withdrawal of cash by owner, payment of salaries etc
2 nd component: measuring of info
Identifies how transactions will affect entity position, and group similar items such as expenses and income
e contribution of capital by owners of an entity which will have an effect of increasing the cash at bank ( asset ) of the entity and increasing the capital ( equity ) of the entity.
Throughout accounting period, individual assets, expenses, income, equity and liabilities will be grouped together to summarise the information.
3 rd component: communication of relevant information through accounting reports this is done through statement of profit or loss and the statement of financial position for decision making purposes for the various users. Process of accounting assists users in the allocation of this scarce resource
1 accounting information and its role in decision making
Accounting info is designed to meet the needs of:
internal users (entity owner or management) - Makes decision concerning the operations of a business entity. Information owners or managers require is detailed enough to assist them in initial management planning processes. - Evaluate the success of entity in achieving its objectives - Weigh up various alternatives when investing resources
external users (employees, shareholders, suppliers, banks, consumers etc)
Investors, suppliers and lenders are primary users Once those three groups are satisfied, we can satisfy the rest
Cash equivalent: treasury bills, short term gov bonds,
commercial paper
Statement of financial position: entity’s assets and liabilities at a point in time are reported in the statement of financial position.
Management accounting : field of accounting that provides economic information for internal users.
- Main activities of management include formulating plans and budgets and providing information to be used in the monitoring and control of different parts of an entity.
Management accounting will create the information that is prepared and presented in the financial accounting process
1 Roles of accounting information in business planning
Benefits of a business plan: provides a clear formal statement of direction and purpose. It allows the management and employees of an entity to work towards a set of clearly defined goals in the daily operations of business. Also assists business entity in evaluating the business
Operations of the business: Accounting information provides managers and owners with tools they need to make decisions regarding the daily running of the business entity and whether the goal are being achieved
Evaluation of business plan: allows more effective use of scarce resources such as staff, equipment and budgeting
Results being compared to budgeting results so favourable and unfavourable variances can be detected
1 Globalisation of accounting
International financial reporting standards (IFRS): global accounting standards
Chapter 2
Accounting standards: accounting version of the bible, provides rules and guidance to preparers about how to disclose the effect of transactions and events in financial statements
AASB are consistent with international FRS
Key points: external users are reliant on GPFR
-not only source of info e economic
-GDFR not designed to show value of entity (but do provide info used to do this)
-Management does not rely on GDFR, they can obtain their info internally (note also: they prepare GPFR)
- other parties (regulators, public) may also be interested but GPFR not specifically directed to their needs
-GPFR based on estimares judgments and models rather than exact measurements
GPFR provides:
Economic resources and claims (Financial position)
changes in economic resources and claims e stocks that changed form start to end
- financial performances reflected by accrual accounting
-financial performance reflected by past cash flows
Financial statements represent economic phenomena in words and numbers
To be useful, financial statements must faithfully represent the phenomena it purports to represent
information must be unambiguous
Substance over form: its not the form that represents faithfulness, it’s the substance
Qualities it must follow:
-complete- all necessary info including descriptions and explanations
neutral- without bias, not manipulate to increase the probability that it will be received favorably or unfavorably
free from error- does not mean accurate, means no errors or missions in calculations, processes or descriptions, a reasonable estimate may not be accurate but id faithful.
Enhancing qualitative characteristics:
Comparability:
Information should be comparable with other entities/ other reporting periods
-consistent implicstion of accounting policies assists comparability
Verifiability:
-means different knowledgeable and independent observers could reach consensus (not necessarily complete agreement) that a particular depiction is a faithful representation
-does not necessarily mean confirmation o a single quantifiable amount
Where an item cannot be verified, disclosure of assumptions and methodology assists users
Eg like crime cases, you think this guy is the killer but you’re unsure so you use evidence and theories your friends give you in order to assist your search for the murderer
Timeliness:
- Having info available in time to be capable of influencing decisions - Generally the older the info, the less useful it is - However, info form prior periods useful in trend analysis (not too old)
Comprising faithfulness of having quick info: not being checked or proof read or smth like that
Understandability
- Presenting clear and concise info - Cannot avoid some necessary complexities - Assumes users have reasonable knowledges or access to someone else who does
Reporting periods
- Financial statements are prepared for a specified period of time - The CA 200 require reports to be prepared (at least) annually (also half yearly for publicly listed companies) - The reporting date is not prescribed (Aus fiscal year ends June 30)
Persepctive adopted:
- FS provide info about transaction and other events viewed from the perspective of the reporting entity as a whole, not from the perspective of users
Going concern:
- Fs are prepared on the assumption the neither will continue in operation fo the foreseeable future, neither the 9ntention nor need to liquidate - E they would be real cost instea do dhistroical value for bulidngs - Impications if this is not
- ability to enforce legal rights, including ownership demonstrate control but ownership aint essential
-exposure to significant variations in the amount of economic benefits produced by an economic resource may be an indication of control
Liability: a present obligation of the entity to transfer a economic resource as a result of past events
Obligation: duty an entity cannot avoid
Can arise from entity’s customary practices published policies
Transfer of economic resource
The obligation must have the potential to require the entity to transfer an economic resource to another party
Present obligation as a result of past events
Entity must have obtained economic benefits or taken an action that requires (or has the potential to require) the entity to transfer an economic resource that it would otherwise not have had to transfer
- No present obligations exists if the entity has not obtained the economic benefit or taken an action - example: employee services unpaid past wages vs future wages - a present obligation may accumulate over time, e borrowing money from bank - a present obligation can exist even if settlement cannot be enforced until some point in the future, due in 30 days late but PO now
Assets and liabilities:
- Asset and liabilities are grouped tgt for recognition, measurement and disclosure purposes - Descriptions used in financial statements for resources and obligations which have similar economic, characteristics and risks - Relevant in providing useful information
One entity’s obligations is a received right of another entity
Executory contracts:
- Conracts creates rights and obligations - A contract that is equally underperformed gives rise to neither an asset or a liability (.g when customer places an order) - If other entity performs obligation first, it gives rise to a liability and right (e when company ship out its product , the customer has not paid yet which shows them owing money. The company now has a right to receive the money form the consumer. - If entity performs its obligation first, contract gives rise to an asset
Whoever performs PB first has an asset
The other has a libaitlty, after the people has supplied and paid, ther eis now no right or obligation to be fulfilled
Rights to drjjink coffee, right to pay.
Consumer doesn’t have present obligation if the coffee shop doesn’t give it is coffee. And doesn’t have a present right because haven’t paid
Equity:
Residual interest in the assets of the entity after deducting all its liabilities
- Equity= asset – liability (net of the two) - Equity does no necessarily reflect value of the entity
Equity is:
- Contributed by investors (contributed equity, share capital, issued capital, padi up capital) - Net result of accumulated profits of the entity (retained profits and other reserves) - Shareholders contribute and equity that rises on their behalf
Definition of income Increases in asset or decrease in liabilities, that result in equity, other than those relating to contributions form holders of equty claims
Assets – lilabilities= equity Asset increase Liabilities decrease Equity increases
The link to the element:
Only items that meet the definition of an element can be recognized
An asset or liability is realized only when its recognition provides users with useful information/ data.
The information of assets, liabilities, equity, expense and income are relevant information to the users
However, recognition of an asset or liability may not be relevant if:
- It is uncertain on whether the liability or asset exists (existence uncertainty) - The asset or liability exists, but the probability of an inflow or outflow of economic benefit is low Existence uncertainty and/or low probability of inflow/outflow may lead to non- recognition, but explanatory information may be provided in the Notes.
Derecognition:
The removal all or part of a recognized asset or liability from an entity’s statement of financial position
Occurs when the asset or liability no longer meets the definition
For assets, when or as the asset:
- -Is consumed increase in expense may coincide with decrease in assets
- Is collected
- Is transferred
- Expires
Liabilities:
- -settled
- -fulfilled (delivering of a tv by JB hi-fi)
Increase in income may coincide with decrease in liability
Accounting standards prescribe/ provide guidance regarding measurement bases or methods
-Historical cost – the transaction price or value at time of recognition
-fair value- the market price (selling price)
-value in use – the present value of future cash flows generated rom use and ultimate disposal
Business events: occurrences that have the effect to affect the neitty in some way but is not counted until the exchange of a good or service occurs between the entity and other entities or individual
Accounting equation: expresses relationship between asset of an entity and how the assets are financed
Assets: resources controlled by the entity, can be funded through liabilities from other entities or through inside funds aka equity
EQUITY= ASSET – LIABILITY
Duality: this means that every transaction will have a dual effect, such that the equation will always be kept in balance.
e the purchase of a building will increase assets (the building) and also increase liability (the mortgage/loan on the building)
The financial statement: statement of financial position is determined by the accounting equation as the statement is made up of three components, assets, equity and liabilities
Cash
transaction: exchange of good or service involving cash
Credit transactions: an exchange of a good or service that will be received or paid at a later date
Current and non-current assets: the difference between is the timing of future economi benefits
Current and non-current liabilities: difference between is the timing of future economic payments
Non-current assets and liabilities only occur when the next payment is due or to be received over 12 months times
Operating cycle: when an entity has a single, clearly identifiable time lapse between the pourchase of assets for processing and the realization of their economic benenfits
Different types of assets:
Cash and cash equivalents: the cash resource that an entity has on hand at a particular point in time. Cash generates low returns relative to other assets
Trade receivables: cash the entity expects to receive from parties that owe it money.
inventories: supply of raw materials to be used in the production process, work in progress, and/or finished goods that the entity has available for sale.
Non-current asset: held for sale, group of asset entity plans to dispose of as a group in a single transaction
Investments accounted for using the equity method: class of asset will only appear if the entity owns enough shares in another entity to enable it to exert significant influence over the other entity’s decision making
Financial asset: any asset that is cash, a contractual right to receive cash or another financial asset.
Property plant and equipment: land, building, machinery etc
Agricultural assets: living animals or plants, trees in a plantation
Intangible assets: e brand names, patents, rights, agreements, development, expenditure licenses etc
Goodwill: excess of the consideration paid for a business over the fair value of the net assets acquired unidentifiable intangible asset. Can only be recognised in the statement of financial position only if it is acquired
Receivables: represents amount owed to the entity by othe entities/ individiuals
Accounting Chapter 1-5 notes
Course: Accounting Reports And Analysis (ACCT10001)
University: University of Melbourne
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