Accounting)Exam)Notes! Week 1 The role of accounting in business Adjusting processes can be created Accounting period - a measurement period. 12 months. Listed companies can be 6 months - even quarterly. After numbers are balanced, start preparing financial reports. Listed companies have their reports on their website free to download. Accounts = financial statements. Statement of cash flow; income statement; balance sheet. Financial statements are a means of communicating. Production of financial statements required by law. After Easter we learn about operations. Working how stock/inventories work. Attention to detail is critical. Then there will be a test. Managerial accounting (internal accounting) - cost-benefit analysis. Make decisions internally. How costs are allocated. Cost-profit volume analysis. *The accounting equation and its function - this is critical Assets, liability and capital (assets = liability + capital) Method for self-balancing -->the accounting equation. Assets = funds. Funds can either come from internal sources (the owner) or can be borrowed. Defining accounting Accounting encompasses the information system that: Measures business activity Processes the data into reports Communicates the results to decision makers It is divided into two main types, namely Financial accounting Managerial accounting Measurement is dollars. Managerial accountants work on operations. In-depth, internal. Decision makers: The users of accounting information Individuals Businesses Investors Creditors Government regulatory agencies Tax authorities
Non-profit organisations Other users, e.g. employees and labour unions 3.1% of shareholders read their financial statements. The accounting profession: Career opportunities Lucrative career with many opportunities Professionally qualified accountants pass the educational and experience requirements of a professional body Professional bodies recognised in Australia include: Institute of Chartered Accountants in Australia CPA Australia Institute of Public Accountants Chartered Institute of Management Accountants Australian Accounting Standards - accounting regulation Corporations Act - statutory regulation Corporate social responsibility: Financial reports prepared by accountants play a central part in informing financial decisions The ICAA and CPAA have a joint code of ethics for professional accountants as part of their professional standards It includes the following principles: Integrity Objectivity Professional competence and due care Confidentiality Professional behaviour Types of business organisations: Proprietorship - there is one owner. The proprietorship is personally liable, and is separate from the proprietor. Tutorial: Week 3 - test - worth 5% 4 slides per person in presentation - worth 10 marks each Mid-semester 15% - 30 multiple choice Group assignment due on the last week. Final exam worth 50%. Assets, liabilities, owners equity, expenses (e.g. wages, electricity, gas, rent), revenue. Revenue Assets Sale of $100 for cash Always need a debit and a credit Debit - cash $100 (accounts) Credit - sales $100 (accounts)
Sold 1 item. Know the rules of debits and credits To increase an asset, debit the account. When you pay it does into their asset account. To increase this, you debit it. To decrease an asset account, you credit it. Group presentations: Summary of Tuesday's lecture Group 3 will look back on lecture 2 Group 2 will look forward to lecture 4 Group 5 looking at lecture 3-18th Accounting lecture - Tuesday 19-03-2013 Accrual accounting - records the effect of each transaction as it occurs Cash-basis accounting - records only cash receipts and cash payments. It ignore receivables, payables and other items In accrual accounting, revenues are recorded when earned, which is not necessarily in the same accounting period as when the corresponding cash is received. Most businesses use the accrual basis as covered in this book. Accounting lecture on Tuesday 26 March 2013 Completing the accounting cycle The current ratio measures a firm's ability to pay its current liabilities with its current assets Current ratio = total current assets / total current liabilities The debt ratio measures an organisation's overall ability to pay its total liabilities (debt) Debt ratio = total liabilities / total assets Summary: The worksheet is a tool that puts the whole accounting process in one place The formal financial statements yield the same net income or loss that is shown on the worksheet Closing the accounts bring all temporary accounts back to zero The post-closing trial balance contains the same accounts that the balance sheet contains Classification means dividing assets and liabilities between those that will last less than a year (current) and those that will last longer than a year (long-tern) The different ratios give different views of a company's financial health. Retailing operations - Chapter 5 Periodic inventory system is normally used for relatively inexpensive goods. Goods are counted periodically to determine quantity. The perpetual inventory system keeps a running computerised record of inventory. The number of inventory units and the dollar amounts are perpetually (constantly) updated. It records units purchased and cost amount, units sold and sales and costs amounts, and the quantity of inventory on hand and its cost.
Many businesses offer customers a settlement discount for early payment. Businesses allow customers to return goods that are defective, damaged or otherwise unsuitable - purchase returns The seller may also deduct an allowance form the amount the buyer owes - purchase allowances. The purchase agreement specifies FOB (free on board) terms to determine when title to the good transfers to the purchaser and who pays the freight. FOB delivery point means the buyer takes ownership (title) to the goods at the delivery point FOB destination means the buyer takes ownership (title) to the goods at the delivery destination point Freight in is the transportation cost to ship goods into the purchaser's warehouse Freight out is the transportation cost to ship goods out of the warehouse and to the customer. Never debit sales. Adjusting inventory based on a physical count. The inventory account should stay current at all times in a perpetual inventory system. The actual amount of inventory on hand may differ from what the books show. For this reason, businesses take a physical count of inventory at least once a year. The business then adjusts the Inventory account Closing the accounts of a retailer Step1: make the revenue and contra revenue accounts equal zero via the income summary Three ratios for decision making The gross profit percentage is one of the most carefully watched measures of profitability. Gross profit percentage = gross profit/net sales revenue Inventory turnover measures how rapidly inventory is sold Inventory turnover = cost of sales/average inventory Days in inventory ratio measures the average number of days inventory is held by the business. Days in inventory = 365 days/inventory turnover ratio. Week 7 Accounting lecture Chapter 18 Financial statement analysis Horizontal analysis The study of percentage changes in comparative statements is called horizontal analysis It compares one year to the next Step 1: calculate the dollar amount of the change from the earlier period to the later period Step 2: divide the dollar amount of change by the earlier period amount Trend analysis Form of horizontal analysis Trend percentages indicate the direction a business is taking Trend analysis percentages are calculated by selecting a base year (the earliest year) The base year amounts are set equal to 100% The amounts for each subsequent year are expressed
Vertical analysis Vertical analysis of a financial statement shows the relationship of each item to its base amount How do we compare one company with another? A common size statement reports only percentages By only reporting percentages, it removes dollar value bias when comparing one company to another Dollar value bias is the bias one sees from comparing numbers in absolute (dollars) rather than relative (percentage) terms Benchmarking is the practice of comparing a company with other leading companies It often uses the common-size percentages in a graphical manner to highlight differences Benchmarking against a key competitor Using ratios to make decisions: A ratio expresses the relationship of one number to another number No single ratio tells the whole picture of any company's performance Ratios may be classified as follows: Evaluating the ability to pay current liabilities to sell inventory and collect receivables to pay long terms Evaluating the ability to pay current liabilities Working capital measures the ability to meet short-term obligations with current assets. Two decision tools based on working capital data are the current ratio and the acid-test ratio The most widely used ratio is the current ratio, which is current assets divided by current liabilities The current ratio measures a company's ability to pay current liabilities with its current assets Current ratio = current assets/current liabilities A high current ratio indicates that the business has sufficient current assets to maintain normal business operations. Acid-test ratio (quick ratio) tells us whether the entity could pay all its current liabilities if they came due immediately Acid test ratio = (Cash + Short term investments + net current receivables) / current liabilities The norm for the acid test ratio ranges from 0.20 for shoe retailers to 1.00 for manufacturers of equipment. Evaluating the ability to sell inventory and collect receivables The inventory turnover ratio measures the number of times a company sells its average level of inventory during a year A high rate of turnover indicates ease in selling inventory Inventory turnover = cost of sales / average inventory Inventory turnover varies widely with the nature of the business
Days in inventory ratio measures the average number of days inventory is held by the company. Days in inventory = 365 days / inventory turnover ratio Profit percentage measures the profitability of each net sales dollar Gross profit % = gross profit / net sales Gross profit % varies widely, depending on the business The accounts receivable turnover ratio measures the ability to collect cash from credit customers. The higher the ratio, the faster the cash collections Accounts receivable turnover = net credit sales / average net accounts receivable. Evaluating the ability to pay long-term debt 3 key indicators of a business' ability to pay noncurrent liabilities are the debt ratio, the debt to equality ratio and the times-interest-earned ratio The debt ratio shows the proportion of assets financed with debt If the debt ratio is 1, then all the assets are financed with debt Debt ratio = total liabilities / total assets (gearing ratio / leverage ratio) The debt to equity ratio shows the proportion of total liabilities relative to the proportion of total equity that is financing the company's assets Debt to equity = total liabilities / total equity Times-interest-earned-ratio relates to profit before interest and taxes to interest expense Evaluating profitability: The rate of return on net sales ration shows the % of each net sales dollar earned as profit Rate of return on net sales = profit / net sales The rate of return on total assets measures a company's success in using assets to earn a profit Rate of return on total assets = (Profit + interest before tax expense) / average total assets The asset turnover ratio measures the amount of net sales generated for each average dollar of total assets invested This ratio measures how well a company is using its assets to generate sales revenues The asset turnover ratio = net sales / average total assets Rate of return on ordinary shareholders' equity shows the relationship between profit and ordinary shareholders' equity It shows how much profit is earned for each $1 invested by the ordinary shareholders Rate of return on ordinary shareholders equity = (Profit - preference dividends) / average shareholders' equity. Evaluating share investments Dividend payout is the ratio of annual dividends declared per ordinary share relative to the earnings per share of the company This ratio measures the % Book value per ordinary share is ordinary shareholders' equity is divided by the number of ordinary shares issued
Defining accounting Accounting encompasses the information system that o measures business activity o processes the data into reports o communicates the results to decision makers It is divided into two main types, namely o financial accounting o managerial accounting Decision makers: the users of accounting information o Individuals o Businesses o Investors o Creditors o Government regulatory agencies o Tax authorities o Non-profit organisations o Other users, e.g. employees and labour unions The accounting profession: Career opportunities o Lucrative career with many opportunities o Professionally qualified accountants pass the educational and experience requirements of a professional body o Professional bodies recognised in Australia include o Institute of Chartered Accountants in Australia o CPA Australia o Institute of Public Accountants o Chartered Institute of Management Accountants
The accounting equation Assets are a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity Liabilities are debts that are payable to outsiders called creditors Equity is the residual interest in the assets of the entity after deducting all of its liabilities Income refers to all increases in equity other than investments by owners Revenue is that part of income arising from ordinary activities Expenses decrease equity by using up assets or increasing liabilities in order to deliver goods or services to customers Accounting for business transactions Accounts record the impact of events that are considered to affect the value of entities assets and liabilities A transaction is an event that involves at least two parties exchanging resources Each transaction affects at least two accounts Some transactions affect only one side of the equation; some affect both sides Transaction 1: Starting the business Transaction 2: Purchase of land Transaction 3: Purchase of office supplies Transaction 4: Earning of service revenue Transaction 5: Earning of service revenue on credit Transaction 6: Payment of expenses Transaction 7: Payment of account Transaction 8: Personal transaction Transaction 9: Collection on account Transaction 10: Sale of land Transaction 11: Withdrawal of cash