Unit 1 Introduction - School of Accounting &...

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Unformatted text preview: School of Accounting & Corporate Governance BFA103 – Financial Accounting and Decision Making 2nd Semester 2009 ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Unit 1 Introduction ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Unit 1 – Introduction Objectives: For the student to develop an understanding of: • the role of accounting information; • the users of accounting information; • the concepts and regulation influencing accounting practice; • the different structures of businesses. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making References: • Atrill et al. Chapters 1 and 2 • Birt et al. • Hoggett et al. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making What is Accounting? • Accounting is defined by Atrill et al (2009 p. 2) as: concerned with the collection, analysis and communication of economic information. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Collection of Information Accountants need to identify what economic events are to be recorded by observing economic events and determining which of those events represent economic activities relevant to the particular business. Only those events that involve transactions may be recorded in the books of account. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Events versus transactions All events affecting Transactions the entity Data Processing Reports on Entity ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Thus the Financial Reports provide only a partial picture of the affairs of the entity. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Recording and Classification The analysis function of accounting involves the process of systematically maintaining a record of all financial transactions which have affected the business. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Communication •Internal ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Communication The most common external reports, the General Purpose Financial Reports (GPFR) are the: • Income Statement • Statement of Financial Position • Statement of Cash Flows ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Users of Financial Information • Internal Users • External Users ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Internal Users The needs of management can be summarised in the circular diagram (Figure 2) as reflecting planning, controlling and decision making based on an evaluation of the operations of the enterprise. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Accounting Information and Decision Making Make Plans Set Goals Control Evaluate ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Management also has the responsibility to provide information to enable users to make informed judgements about the performance, financial position, financing and investing, and compliance of the reporting entity. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making External Users External users are divided into three groups. • Resource providers • Recipients of goods and services • Parties performing a review or oversight function ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making External users are interested in assessing: • whether the reporting entity is achieving its objectives; • whether the entity is operating economically and efficiently; • the ability to continue to provide goods and services in the future; • confirming that resources have been used for the purposes intended. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making • Accounting reports and users Transactions Special Purpose Reports – Management Reports Accounting Information System Special Purpose Reports – External Users, government agencies General Purpose Financial Reports -Management and governing bodies -Resource providers -Recipients of goods and services -Reviewers and overseers ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Qualitative Characteristics of Accounting Information The defined purpose of financial reports is to provide information useful in making economic decisions. The qualities that make information useful are: • Relevance • Reliability • Comparability • Understandability ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Relevance For financial information to be relevant it must have value in terms of assisting users in making and evaluating decisions about the allocation of scarce resources … it must assist them in making predictions … or a confirmatory role in respect of their past evaluations. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Reliability Reliable information will, without bias or undue error, faithfully represent those transactions and events that either it purports to represent or could reasonably be expected to represent. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Comparability The users of general purpose financial reports need to be able to compare aspects of an entity at one time and over time, and between entities at one time and over time. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Understandability That quality of financial information which exists when users of that information are able to comprehend its meaning. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Influences on Accounting Practice Generally Accepted Accounting Principles – The GAAP Practices and procedures that have evolved over time. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Business Entity An accounting entity is an economic unit that engages in identifiable business activities. The business entity is regarded as being separate from the personal affairs of its owner(s). ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Going Concern An accounting entity will continue in operation for a period of time sufficient to carry out its existing commitments. It is assumed that a business will operate for more that one financial year. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Accounting Period The life of an enterprise is divided into chapters or time segments such as a year. The accounting period convention requires numerous estimates and assumptions to be made for the preparation of the final reports. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Historical Cost Transactions are initially recorded in the accounts at cost - this cost represents the fair market value at the time of the transaction. With the passage of time the fair market value of assets such as land and buildings may change greatly from their historical cost. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Monetary The monetary principle means that money is used as the basic measuring unit for financial reporting. In Australia this refers to the Australian dollar. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Objectivity The term objective refers to measurements that are unbiased and subject to verification by independent experts. Objectivity has its roots in the quest for reliability. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Consistency The principle of consistency implies that a particular accounting method or approach, once adopted, will not be changed from period to period. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Disclosure Adequate disclosure means that all material and relevant facts concerning financial position and the results of operations are communicated to users – it requires that no important facts be withheld. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Materiality The term materiality refers to the relative importance of an item or event. An item is material if there is a reasonable expectation that knowledge of it would influence the decisions of prudent users of financial statements. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Conservatism Conservatism means the adoption of cautious accounting practice. When some doubt exists about the valuation of an asset or the realisation of a gain accountants traditionally select the accounting option that produces the lower net profit or a less favourable financial position. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Influences on Accounting Practice Rules, guidelines and legislation that govern the preparation and presentation of financial reports in Australia. They include: • • • • Accounting Standards Corporations Law Stock Exchange Other ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Limitations on the Usefulness of Accounting Information • The information is only a part of that necessary to make ‘effective’ decisions • Accountancy is an inexact science • Economic conditions ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Types of Business Organisations • Sole Trader or Sole Proprietorship • Partnership • Company ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Sole Trader Characteristics of a sole trader • • • • • • No separate legal entity Limited Life Unlimited Liability Minimum reporting requirements Limited access to funds Ease of formation ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Partnerships Partnership Agreement The Partnership Agreement sets out the rights, obligations and duties of each of the partners. Unless otherwise stated in the agreement each partner has the right to: • Share equally in profits; • Participate in management; ___________________________________ • Joint ownership of all partnership property. School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Characteristics of a Partnership • • • • No separate legal entity Ease of formation; Limited rules and regulations; Greater access to capital and expertise; ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Characteristics of a Partnership • Income tax advantages through income splitting. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Characteristics of a Partnership • Limited life; • Unlimited liability; ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Characteristics of a Partnership • Partners are jointly and severally responsible for the debts of the business. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Characteristics of a Partnership • Mutual agency; • Transfer of interest; • Limited access to finance. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Companies Characteristics of a company • Separate Legal entity ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Companies Characteristics of a company • Unlimited Life ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Companies Characteristics of a company • Limited liability ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Companies Characteristics of a company • Company ownership of assets • Greater access to capital ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Companies Characteristics of a company • Regulation of reporting ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Business objectives: The main objective for business is to make a profit. ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Business objectives: • • • • • • • Maximising sales Maximising profit Maximising the return on investment of the owners Ensuring growth Maximising long-term wealth Ensuring the survival of the business Providing a fair return to all stakeholders ___________________________________ School of Accounting & Corporate Governance BFA103 Financial Accounting & Decision Making Conclusion It is the role of accounting to provide some of the information necessary to make an informed decision by parties both internal and external to the business. ___________________________________ Independent study tasks relevant to this unit ...
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Unit 1 Introduction - School of Accounting &...

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