LectureNoteswk4_209 - THE UNIVERSlTY OF NEW SOUTH WALES...

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Unformatted text preview: THE UNIVERSlTY OF NEW SOUTH WALES Australian School of Business School of Accounting ACCT 1501: Accounting and Financial Management 1A Week 4 The Mechanics of Accounting Student Handout Lecturer: Trish Strong School of Accounting '. UNSW QUAD 3067 Ph: 9385 6657 [email protected] Course website: http://Www.webct.unsw.edu.au/ Session 2, 2009 AFMlA WEEK 4: FINANCIAL REPORTING PRINCIPLES 1. Introduction In these lectures we continue our examination of the communication of financial information through financial statements. We begin by taking a look at the “big picture” of accounting. The principles of financial reporting govern the way in which we apply and interpret accounting rules, make choices in the design of accounting systems and in the recording and reporting of economic events. The lecture explores the qualitative and quantitative issues surrounding the production of financial information. The link between the financial reports will be reinforced. The second half of the lecture moves on to discuss the process and the various components of the accounting cycle. Objectives I At the end of this topic you should be able to: Appreciate the role of GAAP in financial reporting Discuss the assumptions underlying financial reports and qualitative characteristics of financial reports Describe the relationship between financial reports Understand the purpose of the components of the accounting cycle Distinguish between external and internal transactions Recognise source documents and the information they contain Identify account types and the effect of debits and credits on them Recognise journal entries, posts to the General Ledger and trial balances Understand the role of T—accounts when recording in the GL Required reading 0 Framework for the preparation and presentation of financial statements (downloadable from hfipzflwwwaasbcomau) o Trotman & Gibbins Chapter 1, pg 23 (Refresher) 0 Trotman & Gibbins Chapter 6, pg 286-303, pg 307-311 0 Trotman & Gibbins Chapter 4, pg 154—169 Session 2, 2009 AF MlA 2. Tutorial Questions — Week 5 Students should attempt these questions before the tutorial. Preparation Questions - TG 6.1 0 TG 4.4 . TG 4.7 0 TG 4.13,Parts 1-3 Tutorial Questions 0 Chapter 4, Discussion Questions 8, 9 0 TG 4.14 (except part 4) 0 TG Case 4 B Session 2, 2009 AFMIA Understand the information needs, sug'glz and demand of information. and the cost of re ortin Week 4 p g _ - ~ Understand the grincigl Qualitative 5355K)" 2: 2009 1 characteristics of financial reports Financia' Reporting ' ' ‘ Appreciate the trade-ailr and constraints in the PrInCIples preparation and presentation of financial reports Trish Strong Understand the elements of the accounting Quad 3067 EVC—le I General-purpose financial. reponingv(GPFR) ‘ Market for Accounting Information — Objective is to provide information about the firrn's financial POSitioni Performance and cash flows to help users make I There is a market for accounting information economic decisions (See AASB Framework pg 12-13) _ Includes: — Demand for “information” Balance Sheet i.e., to make decisions Income Statement -—Supply of “information” Cash flow Statement i.e., to obtain capital . credit. investments ‘Statement of Changes in Equity Notes to the accounts and other relevant explanatory materials l Information needs include I AASB Framework. . _performance _ Income Statement (p&L) Australian equivalent to’the IA‘SB Framework —Financia| position — The Balance Sheet _Underlying Assumptions —Financing, investing, and Operating Cash Flow —Qualitative Characteristics —Compliance — meeting regulatory requirements ~The e'ements 0f the finanCia' report — Recognition Principles I E.g.. You have $1,000 to invest in shares. Would you buy Woolworths shares? How would you make that decision? IAccrual Basis v . . . I Understandabilig. ‘ l Relevance —»Evenls,and transactions are recorded when they- are —' incurred , . . _Matefla|ity . HOW does this differ to cash? I Reliability — Faithful representation — Substance over form _That the company will continue in operation for the —Neutrality foreseeable future Why does this martefl l Going Concern _ Prudence _ Completeness I Comgarabilig I Ability of users to understand information provided in financial _ _ . . ‘ reports depends on V " Makingand evaluating deCismns about the allocation of scarce resources — Users' capabilities I . . -— Way in which information is displayed ' Predlcnon I Relevant but complex transactions should not be excluded on I confirmation the grounds that they cannot be presented in simple terms _ V ‘ . I Assessmg the Judgement or accountability by preparers — Users should seek professional advice I Relevance of information is affected by both its nature and magnitude (materiality) - i.e. 0.0001% of profit or TA may not material I Faithful representation of transactions and events - / :I:|nfonnation-may-be relevant and-reliable: but may. be - . _ No material bias (neutrality) immaterial: and including it would impairunderstandability _ No material em), i bimateriafity; Could the .. . '. i I Substance over form — (think ownership & lease) ~0missionlnon—disclosure - Neutrality ——misstatement I Prudence — Caution exercised in making estimates under conditions of affect the decisions of users ? uncertainty ._ Ensure assets or income not overstated and liabilities or expenses not understated I Completeness I An example of a‘prudent policy . I Consistency in accountingtreatment _Through out an entity/ over time — getween entities I Users be informed of —Policies used in GPFR —Changes in those policies — eg. change inventory values; or depreciation method. —Effects of those changes I Information may be relevant but be so unreliable in nature orvrepresentation as tobe useless or potentially misleading _if a company had a legal action for damages and the outcome and amount of the claim is uncertain, then the company shouldn't recognise an asset until there is a courtjudgment —But it is include it in the notes to the accounts. [Historical cost- —Reliable ? — Impairment & Revaluation! ——Relevant ? — think changes in the value of NCA! Constraints lTimeiiness I Cost v. benefit ,, Balance'beMeenQ litative Characteristics I‘Trade-off between qualitative characteristics is often inevitable ' ' I Appropriate balance among the characteristics to meet the objective of financial reports _ Timeliness v accuracy I Information may lose relevance if there is undue delay in reporting I Provision of timely information may require a report before all aspects of a transaction or eventzare known (unreliable) Cost v. Benefit of Information I Cost of providing information should not exceed the benefits to be derived I Problems: Evaluation largely judgemental; Costs not necessarily borne by those who reap the benefits I Financial reports should show a true and fair view, or-present fairly, the financial information-of an entity I Application of the principal qualitative characteristics and of appropriate accounting standards Would normally lead to such a result Framework: What else does the framework assist with? Definitions of elements of financial statements (Wks 2 + 3) (Revisit) Recognition criteria (Wk 5) I Think about Woolworth’s oumal entries I Identifying and measuring 'ERecording — how does mgt know how they are performing & what Source documents they are doing? ; . » . . I Accounting system Q V Accounting assumptions and principles _ Record all eligible transactions w — Classify them to transform data to make it useful I Good internal control Reporting Classifying and Balance Sheet Tmsfonmfiun summarising — Information integrity Income Statement - Adjusting enm'es Ledger Entries —- information is useful for decisions CaSh F 10W$ ' Owing “mes Trial Balance _Eoonomic event that affecté a business and needs to Adjustments. made .toirecords that introduce new. data or H ' be reflected in its financial statements alter eXISt'ng data I I Characteristics - External Transaction (remember from wk 2) _ Intended to enhance information __ Exchange of items of economic value ——Reflect‘economic events that are not exchanges, ‘are’ P t t not supported by normal source documents (evidence) _ as even or are not readily measurable in dollars. —lnvolves party external to business I Examples —Evldence (documentation) Use of free r -— o I supp ies ——Measurable in monetary units ($) ._De reciation of an asset I Examples: Payment of wages to em/ees; Receipt of cash from p customer who bought on credit; Loan from a bank; Purchase of equipment. I Step 1 — Recognise transactions Idemsifying and measuring _. Recording 0 urce documents Journal entries I Step 2 —— Translate to accounting language m Accounting assumptions and principles w Reporting Classifying and Balance Sheet Transfofinafion summarising Income Statement ' AdJ'USIing entries Ledger Entries Cash Flows ' Cl°5ing elm“ Trial Balance -' 'I Initially, transactions are represented andevidenced by Identifying and meas“ri“g .__.. Recording . H source documents, 9.9., , ' Source documents Journal entnes ; —°hequebutts > v L m Accounting assumptions and principles w Reporting Classifying and Balance Sheet Tmsformfion summarising Income Statement 'Adjusting entries Ledger Entries Cash Flows ' Ck’Sing “"1"” Trial Balance Record of payment for goods and services —|nvoices for purchases and sales — Bank statements —Bank deposit receipts I Source documents by themselves do not constitute an accounting But there are some problems with Journals system because data has not been classlfied. ordered or transformed ' in any meaningful way I Transformation involves recording in general and/or special [ournals I Journal enmes record Fransacnons 'n Chr°n°|oglcal _ and posting to General Ledger accounts - (refer to your QVder BUT do “0t PrOVlde the _____DALANCE at any 90"“ m Comprehensive Class Example question to view samples of these ledgers) time Journal _. This is provided by the ledger accounts entm Cr Account PR Narrative (a “short story”) ' Genera, edger ____ Identifying and measuring 1 , Source documents J —//j ' I General Ledger is 'a collection of all individual accounts _ , . _ (assets, liabilities, equity, revenues and expenses) for 3 Accounting assumptions and princtples business M —We will use T-accounts to represent the individual Reporting Classifying and amounts Balance Sheet Trans‘bmafion summarising Income Statement - Adjusting entries Ledger Entries Cash Flows ' Cl°smg mm Trial Balance - I u - n - u - - n I Five basic types ofaccounts Note all accounts have a debit Side and a credit Side — Assets, liabilities and owner‘s equity — Revenue and expenses I Debit __. LHS I can be represented as T—accounts: Name'of account I Cred" = RHS Debit Credit Name of account Debit Credit I Chart of Accounts 1 ulAccounts, are used to classify transactions 1 v , . — Represents listing. of all accounts in the General Ledger I For example, information about cash inflows and , ' outflows is stored in an account called Cash Identified by S‘F’ecmc‘mmbe' Usually contained'in accounting manual Cash aIBank Liablllfies “559‘s 201 Accounts Payable 10‘ C35“ 231 Notes Payable Emu": 111 Accounts Receivable owner-s Equity 501 Rent Expense 141 of“ Supplies 301 Capi'a' 503 Ulilllles Expense 151 Office Furniture 311 Wm ls 5°256|ary amuse 191 Land Revenues 401 Service Revenue Resources Sources V H I I Assets = Liabilities + Owner’s Equity Asset account _ Liabili account Debit Credit Debit Credit increases decreases decreases increases Owners' e ui Debit Credit decreases increases Owners'e uj .account Debit r . Credit: :-. decreases “increases” I Owners' equity Revenue account — Revenue Debit decreases — Expert‘se Ex ense account increases decreases I . Types Of account Asset account —— Asset Debit Credit increases decreases Liabili account —Liability Debit Credit decreases increases account __ Owners’ eq uity Dabit Credit decreases increases I Posting is a process of transferring data fromjournals to accounts in General Ledger-=‘ I At a. convenienttime, all‘joumal entries are postedtothe GL —Norrnally,' takes place at end of month in a manual accounting system I This is a very simple process — simply follow the "instructions" contained in the journal entry I For example: Debit the Cash Account; Credit Sales Revenue. I Accounting packages make this process very simple. Example: ‘ _ Dr Equipment or Recorded In journal 21/05 Equipment 500 21/06 Cash 500 21/06/06 or Equipment (A) 23’06 E'e° 5"” “'0‘” Cr Cash (A) To record the purchase of a safe Dr Electricity exp or N ote tha‘ the other account 23,05 Cash 10mg affected is always recorded — this allows the 23/06/06 Dr Electricity exp (E) $10,000 transaction to be cross_ or Cash (A) 310.000 referenced (easier to spot and correct errors) To pay electricity account_(i_n arrears) Asset account Normal sign = D: Dr I We are going to open ledger accounts for each of the accounts and Cash . : post-thejoumal entries Ito-the ledger. - Some key Questions 01/07 Opening ha" 500 05/07 Supplies I I 200 I Are there any opening balance for these ledger accounts? —how do 03/07 Sales 3,000 09/07 Equipment 1,800 you know that where do you get this information from? 29/07 53195 2500 31/07 005mg bal‘ 4’000 I What is a Trial Balance? Is this different to the Balance Sheet? 6000 W I We are looking at the Post-closing TB which only shows ‘Permanent 1/08 Opening ha]. 4,000 magma,“ is the Account' balances. What do we mean by gennanenl accounts? excess of Dr over Cr or vice versa. The opening balance is how much is in the account at the beginning of the period - note Dr because this is an asset _ Let's post me first 2 “ansacfions I What might temwrarz accounts be? Can you name examples of these accounts. why might we call them temporary accounts? Cash at: bank 3,280 Accounts Receivable 3,880 Plum Inning fee: ash V 1' ' H $16,800 Accounts r/c $7,580 CR Piano Repair Fees cllh It blnk o/b 3,280 Tmns lPiano Tuning Fees 23,940 Trans 2Piano Repair Fees 16,800 Accounts receivable o/b 3,880 Trans 1 Piano Tuning Fees 4,660 Trans 2 Piano Repair Fees 7,580 Pllno repair fees Trans 2 $24,380 Al Dr Cash $23,940 Dr Accounts r/c $4,660 CR Piano Tuning Fees Clsh It bank o/b 3,280 Trans 1 Piano Tuning fees 23,940 Account: receivable o/b 3,880 — Transl Piano Tuning fees 4,660 I’lnnn lunlng fees in Trans l Cash/Ace Rec 28,600 I T-account —Rarely seenin business. _.Just one way of displaying data in an account ——Used mainly to teach concepts and by people trying to reconstruct other‘s accounts (auditors, etc) —Used in the olden days when I was young! Cash Account :.' I~Alisting of all the ' accounts :with their related balances Date Particulars Dr Cr Balance 0l/07 Opening Balance 500 500Dr 03/07 Sales 3,000 3,500Dr 05/07 Supplies 200 3,300Dr 09/07 Equipment 1,800 1,500Dr 29/07 Sales 2,500 4,000Dr ‘I Used‘a‘s-a check on I’ \ ' , accuracy by showing 5—n-v whether total debits equal DEBIT EDI-rs to total credits This is exactly the same data as we saw above, only presented differently! Note - there would be corresponding entries in other accounts. The change in how these are displayed was as we moved to electronic use of spreadsheets. ‘ Identifying and measuring J Recolrdmg . Cash (atBank) - Source documents ouma entries License Expense ' Rem Expense Accounting assumptions and principles Advertising Expense : E 1 : Sales Revenue Loans Payable , Reporting Classifying and Balance Sheet Tmeonnafion summarising Income Statement ' Adjusting entries Ledger Entries Cash Flows ' Cl°5ing “mes Trial Balance Acwuns Payable Cost 01 Goods Sold Total I Adjusting the Accounts ——Part of any good accrual accounting system ...
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LectureNoteswk4_209 - THE UNIVERSlTY OF NEW SOUTH WALES...

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