ACCOUNTING FOR DECISION MAKERS LECTURES 9 & 10

ACCOUNTING FOR DECISION MAKERS LECTURES 9 & 10 -...

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ACCOUNTING FOR DECISION MAKERS LECTURES 9  & 10 (DRAFT 1) FINANCIAL PERFORMANCE AND ACCRUAL ACCOUNTING AND THE INCOME  STATEMENT Overview of Week 5 Lectures In this week’s two lectures we will consider: o How economists’ view of income is translated into accountants’ view  of profit. o Cash accounting vs accrual accounting o Definition and recognition of income (revenues) and expenses. Depreciation; capitalisation (When we spend cash (revenue), we  ask if that expenditure will rise to an asset or if it is a cost. If that  expenditure gives rise to an asset, therefore capitalisation has  occurred.) Revenues and expenses are defined in relation to the balance  sheet. o Classification of income and expenses o Impact of accounting policy choices on profit and the balance sheet. o Inter-relationship between the income statement (profit in a period)  and balance sheet. o Basic analysis of financial performance In week 2 We gradually show our wealth in the balance sheet so for any given  financial year we will have an opening balance sheet at the start of the  year and we’ll make another balance sheet at the end of the year. o However, the balance sheet doesn’t give us much information why  net worth has changed from one period to another. We need to  know this information for future decision-making. Accountant’s perspective: Present Balance sheet – Initial Balance  sheet = Comprehensive income [operating profit/loss + other  comprehensive income]
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There are two things driving the change in wealth, which are: o Our operations, such as buying and selling our services. If this is  done well, we’ll increase net assets (wealth). This is referred to as  our operating growth or operating profit. This reflects actual  transactions outside the entity. o Capital maintenance Comprehensive income: Change in wealth is based on our operations,  where we will increase net assets if run profitably. It reflects the results  of actual transactions with external parties. Balance sheet could change also due to the value of assets changing  over time from one period to another of the balance sheet.  Unrealised gains/losses – Where no transaction has occurred yet with  other external parties. Operating profit/loss: Change in the balance sheet that has been  realised, thus are transactions that are recognised between external  parties.
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