RevenueWithExamReminder_ACCT2011_Sem2_2009

RevenueWithExamReminder_ACCT2011_Sem2_2009 - Accounting for...

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1 Accounting for revenue: issues in recognition and performance reporting Dr Isabel Gordon Week 8
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2 Lecture objectives Understand the accounting measurement models Understand that the accounting measurement model used affects the concept of income Understand the asset/liability approach to income and apply this to revenue Understand the recognition of revenue within the entity’s operating cycle Understand the information presented in the statement of comprehensive income (revision)
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3 Lecture objectives **this week’s lecture material on revenue recognition is not in the mid-semester (but it is strongly advised that students come to lectures)
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4 Lecture outline 1. How do we measure our wealth or our “well-offness”? 2. The Framework and the definition of income, revenue, expense, gain and loss: using the asset/liability model 3. Measurement of revenue with AASB 118 4. The role of alternative accounting models to measure wealth and the related question of what should we include in reported income? Concepts of profit (i) Current operating profit approach (ii) All inclusive approach (iii) Comprehensive income 5. A review of performance indicators used in the business world – Qantas as our case study
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5 References Alfredson et. al. Applying International Financial Reporting Standards chapter 3 AASB 118 Also AASB 101 & AASB 108
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6 1. How do we measure our wealth or our “well-offness”? There are two main approaches to measuring income: 1. The capital maintenance approach. Income is measured by comparing the net assets at the end of the period with the net assets at the beginning of the period, after adjusting for dividends and capital transactions. Income is the excess after maintaining capital. 2. The transactions approach. Income is measured by the matching of expenses with revenues reported during the period. Profit is R – E. Issues include what transactions to recognise and at what stage in the operating cycle to recognise revenue. in practice, a combination of the approaches is used
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7 Capital maintenance concepts of income Economic concept of income: defined by Adam Smith as the amount that can be consumed without encroaching upon capital, including both fixed and circulating capital Hicks refined this definition by stating that income is the amount that a person can consume during a period of time and be as well off at the end of that period of time as she was at the beginning Problem: what does “well-offness” mean? How we measure wealth (or capital) at the beginning of the period is critical to capital maintenance concepts of income because this determines the capital to be maintained before income is generated Example: if net assets of firm at t = 0 are $100,000 and at t = 1 are $140,000, then net income = $40,000 (assuming no transactions with owners).
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8 Capital maintenance concepts of income If net assets of firm at t = 0 are $100,000 and at t = 1 are $140,000, and capital contributions are $20,000 and dividends $1,000 then net income = $40,000 – 20,000 + 1,000 = $21,000 Note how transactions with owners are excluded
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