W8_lecture_handout_slides

W8_lecture_handout_slides - Week 8: Financial Performance...

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1 Week 8: Financial Performance and the Income Statement Text: Ch.7 (LO 1-6) Lecture exercises: Income statement extracts Self-Study exercises: 7.2, 7.4, 7.5, E7.1, E7.2, E7.5, P7.1 Announcements: The mid-semester exam results will be discussed during next week’s lecture Lecture outline • Financial performance • Recognition of income and expenses • The matching principle • Accrual basis of accounting • Depreciation • The Income Statement 2
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2 Financial performance Financial performance measures profitability over a period The performance of a business depends on the available resources entrusted to the business and therefore, the assessment of performance entails the evaluation of: the appropriateness of chosen assets the management of assets to generate profit the financing sources used to acquire these assets Financial performance Businesses generate profit in different ways: Retailers buy and re-sell ready made products and rely on their market positioning and supply chain Manufacturers rely on their uniqueness/usefulness of their product and their manufacturing capabilities Consulting firms rely on training and the quality of their staff Hi-tech firms rely on research and development and their ability to produce marketable patents Mining firms rely on their ability to locate and extract natural resources
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3 Accrual-based financial performance Performance can be measured using a cash basis or an accrual basis. Week 8 focuses on accrual performance Accrual accounting recognises income when it is earned and expense when it is incurs. The focus is on the timing of exchange of resources Cash accounting recognises income when cash is received and expenses when cash is paid. More on cash performance in week 10 Due to periodic disclosure, accrual-based performance is different to cash-based performance If performance was measured over the life of the business (and not on a periodic basis) then it would be the same under accrual and cash accounting Recognition criteria To measure accrual-based performance, we must first identify and measure all income and expense items attributable to the relevant reporting period (regardless if there is cash involved or not) An income or expense item must satisfy their definition (week 4) and the following recognition criteria: it is probable that its future economic benefit or economic cost will flow to the entity, and the amount can be measured with reliability
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4 Recognition of income items IAS 18 discusses under which circumstances the recognition criteria for income are fulfilled, e.g. for sales when: significant risk and reward of ownership is transferred seller no longer controls or legally owns the goods sold the amount of revenue can be measured reliably the economic benefits associated with the sale are probable the costs incurred or to be incurred in respect of the transaction can be measured reliably
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This note was uploaded on 09/06/2011 for the course ECON 1001 at University of Sydney.

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W8_lecture_handout_slides - Week 8: Financial Performance...

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