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LectureNoteswk3_209 - THE UNIVERSITY OF NEW SOUTH WALES...

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Unformatted text preview: THE UNIVERSITY OF NEW SOUTH WALES Australian School of Business School of Accounting ACCT 1501: Accounting and Financial Management 1A Weeks 3 The Mechanics of Accounting continued Student Handout Lecturer: Trish Strong School of Accounting UNSW QUAD 3067 Ph: 9385 6657 [email protected] Course website: http://www.webct.unsw.edu.au/ WEEK 3: THE INCOME STATEMENT & TRANSACTION ANALYSIS 1. Introduction Last week we learnt that all transactions affect the Balance Sheet. Transactions that result in the earning of a profit (or a loss) are also reported in the Income Statement. If a company earns a profit its net wealth is increased by the size of that profit, in the same way the profit reported in the Income Statement is the amount by which a company’s financial position has changed from one period to the next. Learning objectives At the end of this tOpic you should be able to: Understand the terms, format, content and fimction of the Income Statement Identify when a company earns revenue or incurs an expense Describe the relationship between the Balance Sheet and the Income Statement. Distinguish between accrual and cash accounting - Identify and analyse the effect of transactions on the accounting equation Understand debits and credits in the context of transaction analysis. AASB Framework for the Preparation and i3resentation of Financial Statements (downloadable from httpflwmvaasbcomau) 2. Tutorial Questions — Week 4 Preparation Questions: I T&G 2.21 I T&G 2.16 I T&G 2.23 I T&G 31* Tutorial Questions: I AQl 2 Read “For your Interest” page 186 — 187 T & G, prepare an answer for discussion. . I T&G 2.17 I T&G 2.25 I T&G 3.30 Week 3. Session 2. 2009 Income Statement I Trish Strong Quad 3067 Relating performance and wealth From last lecture... We discussed how accountants measure shareholder wealth (Le. Net Assets) In this lecture we will begin to explore the measurement of changes in shareholder wealth (or changes in Net Assets). I Traditional view - Appreciate the form and content of the income statemem Deccnbe the relationship between the balance sheet and the income statement Understand the implimtions of the decision to record expenditure as an asset or as an expense Understand the differences between cash profit and accrual profit Expand the accounting equation to account for owners' equity erements To be abte to analyse the inwaot of transactions on the expanded accounting equation Understand debits and credits in the context of transaction analysis A company exists for the benefit of shareholders. - Alternative view - Stakeholders: Society? Community? Economy ? Environment? I An increase in a company's wealth means an increase in owners' equity Changes to owners’ equity I Owners' Equity Start of Year Balance eContribuiions by owners U Contributions (new share issues) — Profit fl Profit I Loss (revenues—expenses) Revenues Increasesin Reserves Expenses Distributions (dividends) "Distribution to owners End of Year Baianoe u l Owners: - Owners: —Contributions by owners’, Share Capital _Contributions by owners I All othertransaciions & events: wissued Shares for $300,000 cash A Profit Share w“Valuation increases (later in NCA week) U 0511 Capital A=L+OE All othertransactions & events: I Owners: - Company receives $3,090 interest on bank deposit. _Di51rjbufion3 to OWners. Dividends I All other transactions & events: UCasI-r fl Revenue “Loss —Valuation decreases (later - NCA week) A=L+OE All other transactions & events: ' When a company eerns a profit, that profit can be . distributed to shareholders as dividends - Company pays $3.000 interest on a bank loan. Profit (Revenues — Expenses) less Distributions (Dividends) = Retained Profit Expense 7 Dividends are NOT AN EXPENSE! - ‘ mahonhdwa- Tout mum {emotion- }: 3334.2 31.3525 1-1 “55 3251 82.3“] 51.x 1 [mamas {6835 9.4445 2: Ill! in «.1 r3 — as Elma} £029.»: have!) 21522.: 99.: 23022.9 slum 5,391.9 K! W om 2mm; rm: 2619.86 13.154 3 “as 3E3 to 341951 {was} 12“»! rag pun sacrum as am hummus». ”Mirna-mm the profit swam-u: grammar-term gum may M Earringspgrshmnififls} Bali: EH tutu pl: M WmEPSlcm mfsfiml Wmel-atem number at snares cud Infiflmfleflnficmmm 1517.1 out: ran l‘éfi‘tlt “510 334155 2172 3132 90.33 1,113.1 M33 ror "anutiwn ofFin-nciutstutumnu” ' I On the face of the income statement — Revenue #255.” ram "21“ “an mu: 13515 lens 183.5 I Did not become formal report until 18305 with beginning of annual reports of railroads. However. income account used for internal management control since 13003 I it is a Summary of organisation‘s revenues and expenses over a period of time it measures financiai performance over that period of time. Basically, the change in financial position. I Accrual accounting principle!!!! I AKA. Statement of Financial Performance. Profit 8. Loss Statement I Presents the difference between revenues and expenses Profit = Revenues - Expenses ' maint-emuuunarr-mchlsumur I On the race of the statementor in the notes _ Income or expense item's that are material - nature and amount — Finance costs -— Share of the profit or loss of associates and joint ventures accounted for using the equity method a A single amount that combines the post tax profit (loss) of discontinued operations and the post tax gain (loss) on the disposal of the related assets _ Tax expense _ Profit or loss Profit (loss) of minority holders and parent equity holders _ Anatysis of expenses, classified by nature or function —— Depreciation — Amonisation —— Employee benefits __ Dividends to equity holders Expenses classified by nature or function I By nature —Woolworths Ltd “Branch expenses, administrative expenses I By function — Example Limited iWages, utilities. rent etc Income I Revenue — An‘ses in the course of the ordinary ac1ivi1ies of an entity — include sales. tees, inleresL-dividencls, royalties. rent I Gains — No diiferent in nature from revenues “ May or may not arise in the ordinal}r activities e E9. Gain from sale of non-current assets — Usually displayed sepaeatety "useful“ in decision making I income —— Revenues - Gains I Expenses income: increases in economic benefits timing the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants Expenses Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants Capitaltse v. expense Capitalise v. expense «A business bought an asset? What if a business has bought an asset? I _ Spend $50,000 cash for new ptant equipment? _ Borrow $50,000 to buy new plant equipment? —— Spend $12,000 on 3 months rent in advance? '_7 — Spend $3,000,000 on research to develop a drug to cure "Spend $12,000 on 3 months rent in advance? 'fi ha"9°Ver5'-’ — ‘ 9 _Spend $3,000,000 on research to develop a drug to cure Spend 550° °" 3 “‘th °f phot°c°py '“k- hangovers? _ Pay $4,000 for telephone calls this month? —Spend $50,000 on new plant equipment? _Borrow $50,000 on new plant equipment? —Spend $500 on 3 months of photocopy ink? Spend 3.000.000 on search to deirelo’p’a dmg’to eu hangovers? Capitalise orexpense? Which would a company prefer to do? It can mat/{e a forge A = L + OE diflérence 1'! flashfiasfl “OAPITALISE” V. “EXPENSE" fl sh expense - AAse Framework: maracteristlcs: Cash V Accrual Profit - expectation economic benefit An IT company completes a consultancy contract worth $500,000 ' control on March 1. The fees have not yet been received. but are due by . past event or transactlon March 30. Staff costs amounted to $200,000 and all wages will be r . . paid on March 15. I AASB Framework recognition critena ' probable ‘ reliable measurement As at March 1 has the company made a profit? ...othenlvise its an expense Cash v accrual profit Has the company made a profit? 7 Fee revenue ' Accrual profit: Account receivable Consulting Revenue $500,000 less Employee wages $200,000 Profit $300,000 I Cash profit : $0 Cash v accrual profit I Neither lransaction involves an increase or decrease in cash I The inourrence of an expense is not necessarily accompanied by an outflow of cash I The earning of a revenue is not necessarily accompanied by and inflow of cash. I Accrual profit is not the same as cash profit. Expanding the accounting equation IA=L+OE ICA+NCA=CL+NCL+OE IWhat is OE made up of? Recognition I Asymmetric Treatment I Record revenue when a service has been performed. I Record expense when expect you have incurred it. I Under aceruai accounting. cash flows are not necessary for the recognition of revenues and expenses. I Owners; Equity I —Contributions by owners H — Profit fl Revenues Expenses —Distribulion to owners 3 I A=L+0E I mmcmcuucuoe Balance Sheet I wn OE: K—‘g—‘e ”a OA+NCA=CL+NCL+ OE _ CC + Opening RE at the start 0! the period 1- RE for the period A (XI = capital caniribufions by equity holders _ RE = Retained Earnings O RE=O ' Rela' edEa' __ Rggpmfi1_g?$gutions:n mangs CA + NCA 2 CL + NCL + CC + 0p RE + R ' E " D __ RE=R—E—D _ R=Revenue fl E=Expen5a — D = Distribufions to equity holders (dividends) K St E t ncome a emen CA+NCA=CL+NCL+CC+Op.RE+R-E-D Piano Tuning senrice fees of $28,600 were receivable during the Petrol and oil for the vehicle cost $2,860 in cash. year; $23,940 ofthis tetal was received in cash. The remainder consisted of {ransacticns on credit. Cash Piano $23 940 Tuning OE ' Fees A = L OE $3.509 Petrol and N C Rec OII expense $4,660 Insurance on the vehicle. paid in advance was $840. Provide piano tuning services to client. The fee for this service was received in advance. Prepaid insurance L L + Fees received in advance Fee Revenue This is second transaction. need to consider the first transaction before analyzing this one, What was the initia! transaction? Incurred $420 interest on the bank loan. OE The Golden Rule: Interest Interest The accounting equation must Payable Manse always balance In accounting we use debit (L!) & credit (g) to describe changes in accounts The Golden Rule The accounting equation must always balance So for OE, Revenues and Capital Contributions '2 Cr Expenses and Dividends = Dr I Source documents by themselves do not constitute an aocountmg system _ -- because data has not been classified. ordered or transformed in any I From the transactlons already analyzed. and new meaningful way transactions. we can now do the journal entries for I Transformation involves recording in general andlor specialjuumais and transadions 1'3 in the Comprehensive Class'Example. posting fo'General Ledger accounts I Double entry means that every transaction n85 (arises!) two effects W Dr Account m Cr Account PR Narrative (a “short story") I Transaction 1) Tuning fees received Cash Accounts Receivable Piano Tuning Fees I Transaction 3) purchased supplies Supplies Accounts Payable PR Al A2 R1 PR A4 L] Debit 23 940 4 660 Debit 340 Credit 28 600 Cledit 340 I Transaction 2) Revenue received Cash Accounts Receivable Piano Repair Fees I Transaction 4) interest on ioan Bank Loan Interest Payable Interest Expense Cash PR Al A2 R2 PR L3 L2 E6 A 1 Debit [6 800 7 580 Debit 3 009 440 420 Credit 24 380 Credit I Transaclian 5) Petrol 8: OII expense PR Penal and Oil Expense El Cash Al I Transaction 7) Telephone Expanae 'PR Telephone Expense E5 Call A1 Debit 2 680 Deb it 2 240 Credit 2 650 Cred i1 2 240 I Transaction 6) Vehicle Insurance PR Debi! Credit Prepaid Insurance A3 840 Cash A1 8 40 I Transaction 8) Accounts Receivable & Acmunts Payable PR Debit Credit 32 Cash Al 13 900 Accounts Receivable A2 13 900 Debit Credit 8!) Act-aunts Payable 2 000 Cash 2 000 IWe will investigate some fundamental financial reporting principles and introduce the accounting cycle. ...
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