Accounting its framework and the business environment

1
Accounting its framework and the business
environment

• Lecture One

2
Learning Objectives

• Use accounting vocabulary
• Understand GAAP and the regulatory framework
• Understand accounting principles, concepts and
  standards
• Use the accounting equation
• Account for business transactions
• Prepare the Financial Statements

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Objective 1 Accounting Vocabulary

• ACCOUNTING
• An information system for measuring, processing
  and communicating financial information to
  decision-makers (the language of business)
• FIELDS OF ACCOUNTING
• Management accounting
• Financial accounting
• External User Interest
• Investors Return on investment e.g.. Dividends
• Creditors ?
• Employees ?
• Environmental Groups Environmental concerns
  e.g.. pollution
• Clients Product/service supply
• Lenders ?
• Unions Welfare of members
• General public existence, purchasing preferences

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Accounting Vocabulary

• FORMS OF BUSINESS
• Sole trader (proprietorship) e.g.?
• total undivided authority no restrictions on
  type of business
• - unlimited liability limitation on size
• Partnership e.g. Parker Parker, Fed State
  Governments
• better credit standing possibly more brain
  power, but consultation with partners required
• - liability? Agreement?
• Company e.g. BHP, Alinta, Qantas
• separate legal existence transferability of
  ownership relatively easy, liability?
• - separation of ownership and control
  regulation?

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Objective 2 GAAP and the Regulatory Framework

• Generally Accepted Accounting Principles
• Defines the nature and function of accounting
• Incorporates basic principles, conventions,
  measurement procedures, calculations, disclosure
  and forms of presentation.
• Various sources
• Corporations legislation
• Australian Stock Exchange
• Professional Bodies ICAA, CPA, NIA, ACCA
• Accounting Standards
• Concept Statements, guidance releases
• Conventions

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GAAP and the Regulatory Framework

• Professional Bodies
• ICAA and CPAAustralia
• Applies accounting standards
• Employs Joint Code of Professional Conduct 8
  Principles that set out minimum standards of
  ethical and professional conduct requires
  ethical judgements
• Statements of Accounting Concepts and the
  Framework
• Provides the basis of concepts, principles and
  definitions for preparation of FS - incorporated
  in Accounting and Auditing Standards

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GAAP and the Regulatory Framework

• Accounting Standards
• Govern measurement and reporting rules in
  financial statements
• Australian Accounting Standards Board (AASB) is
  responsible for technical accounting standards.
  AASB, IAS (by IASC) or IFRS (by IASB)???
• Have the force of law
• Financial Reporting Council (FRC) Federal Govt.
  body oversees standard setting process
• Australian Securities and Investment Commission
  (ASIC) authority responsible for enforcing
  Standards under Corporations Act 2001
• Requires due process

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Objective 3 Principles, Concepts and Standards

• The IASB Framework underpins Accounting
  Standards
• SAC 1 Definition of a Reporting Entity
• SAC 2 Objective of GPFR
• AASB Framework for the Preparation and
  Presentation of Financial Statements
• Qualitative Characteristics of Financial
  Information
• Definition and Recognition of the Elements of
  Financial Statements

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Principles, Concepts and Standards

• SAC 1 Definition of a Reporting Entity
• Reliance on General Purpose Financial Reports for
  decision making
• General Purpose Financial Reports (GPFRs)
• financial information for external users
• Show how the business is performing and where it
  stands
• Includes Balance Sheet Income Statement
  Statement of Owners Equity Statement of Cash
  Flows
• Users cannot request specialised reports
• Characteristics separation of ownership
  control significant economic influence
  financial characteristics

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Principles, Concepts and Standards

• SAC 2 Objective of Financial Reporting
• To provide information that is useful for
  decision making
• Scenario
• Assume that you decide to open up a garage and
  coffee shop.
• The garage made 250,000 in profits, while the
  coffee shop lost 50,000.
• How much money did you make? 200,000??
• Entity Concept
• Establishes the boundaries for the entity and how
  it is perceived for accounting and legal
  perspectives
• Separates the business from other businesses and
  the owner
• Can be an organisation, a section or division
  that needs to be evaluated separately
• Based on the entity concept, the answer to the
  above scenario is ??

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Principles, Concepts and Standards

• SAC 2 cont.
• Accounting Period Concept / Time Period
• Unit of time for which accounting data is
  collected and the financial statements prepared.
• The Cost Principle
• Assets and services acquired should be recorded
  at their transaction (actual) cost
• Matching Principle
• Relates the inputs and outputs of goods and
  services to one another
• Expenses and Revenues

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Principles, Concepts and Standards

• SAC 2 cont.
• Going Concern Principle
• Assumes the firm is staying in business in the
  foreseeable future. Affects how assets etc are
  valued. AASB101 requirement.
• Profit Recognition Principle
• Recognise revenue when it is earned
• AASB101 requirement.
• Principle of Duality
• Every transaction has two opposite equal
  components

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Principles, Concepts and Standards

• AASB Framework for the Preparation and
  Presentation of Financial Statements
• Qualitative Characteristics of Financial
  Information
• Definition and Recognition of the Elements of
  Financial Statements

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Principles, Concepts and Standards

• Framework cont. Qualitative Characteristics of
  Fin. Info.
• Understandability
• Sufficient explanation
• Relevance
• Evaluate past, present or future events)
• Confirm or correct past evaluations
• Assess accountability of preparers
• Materiality
• Omission or Misstatement of information affects
  users decision making
• Depends on size and/or nature of item
• Some issues are material regardless of the dollar
  value and must be disclosed

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Principles, Concepts and Standards

• Framework cont. Qualitative Characteristics of
  Fin. Info.
• Reliability
• Concerned with accuracy, validity and
  verifiability.
• Faithful representation, Substance over form,
  Neutrality, Prudence, Completeness
• Comparability
• Allows evaluation of similarities and differences
  - Spatial (across business) and temporal (over
  time).
• Leads to Standardization (of terms, formats and
  procedures) and Consistency

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Principles, Concepts and Standards

• Framework cont. Qualitative Characteristics of
  Fin. Info.
• Constraints on relevant and reliable information
• Timeliness
• Report without undue delay
• Delays gt ? Relevance Haste gt ? Inaccuracy
  (reliability)
• Costs versus benefits
• A matter of professional judgment.

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Principle, Concepts and Standards

• Methods of Accounting Cash vs. Accrual
• Cash accounting
• events recognised only when cash received
• ignores the existence of receivables (assets),
  payables (liabilities) and the timing of events
• Accrual accounting
• business events are recorded as they occur
• follows the matching principle

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Objective 4 Use the Accounting Equation

• Assets Liabilities Owners Equity
• ? ?
• Economic Claims to Economic
• Resources Resources
• Extension of equation to include revenues
• Assets Liabilities Owners Equity
• (Revenue Expenses)
• Note R-E Net Profit/Loss

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Use the Accounting Equation

• Financial statements contain five elements
• Balance Sheet
• Assets
• Resource controlled by an entity
• Future economic benefits
• As a result of past events
• Liabilities
• Present obligation of an entity
• From past events
• Involves future sacrifices of economic benefits
• Equity (Capital/Owners Equity)
• the residual interest that remains after
  deducting liabilities from assets

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Use the Accounting Equation

• Income Statement
• 4. Income - Increases in economic benefits from
  inflows, enhancements of assets or decreases of
  liabilities that result in increases in equity
• Revenues
• The gross inflow of economic benefits arising in
  the course of the ordinary activities of an
  entity when those inflows result in increases in
  equity
• Amounts received or to be received from sale of
  goods or services
• 5. Expenses Decreases in economic benefits from
  outflows or depletions of assets or incurrences
  of liabilities that result in decreases in
  equity.
• Amounts that have been paid or will be paid for
  costs that have been incurred to earn revenue
• Examples include Wages Telephone/Electricity/Ins
  urance Discount allowed
• Examples do NOT include Asset purchases Loan
  repayments (excluding interest) Payments for
  expenses NOT incurred in the period

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Objective 5 Account for Business Transactions

• Transaction
• Is any event that affects the financial position
  of the business and can be reliably recorded.

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Objective 6 Prepare the Financial Statements

• INCOME STATEMENT
• Revenue
• Fees earned 11,500
• Expenses
• Power Bill 1,500
• Telephone 2,000 3,500
• Net profit 8,000

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Prepare the Financial Statements

• STATEMENT OF CHANGES IN EQUITY
• Owners capital, April 1, 2007 0
• Add
• Investments by owner 50,000
• Net profit 8,000
• Less Drawings by owner 5,000
• Owners capital, April 30, 2007 53,000

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Prepare the Financial Statements

• BALANCE SHEET

Assets Cash 13,000 Supplies
15,000 Land 25,000 Total assets
53,000 (50,000-15,000-25,000-5000 -3,50011,500
16,500)
Liabilities Accounts payable
0 Owners Equity, Paula Lee,
capital 53,000 Total liabilities and owners
equity 53,000
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Prepare the Financial Statements

• CASH FLOW STATEMENT
• Cash flows from Operating activities
• Cash receipts from services rendered 11,500
• Cash payments
• To suppliers 18,500
• Net cash flows from operating activities
  (7,000)
• Cash flows from Investing activities
• Acquisition of land
  (25,000)
• Net cash flow from investing activities
  (25,000)

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Prepare the Financial Statements

• Cash Flows from Financing activities
• Investment by Owner
  50,000
• Drawings by the Owner
  (5,000)
• Net Cash Flows from Financing activities
  45,000
• Net increase in cash 13,000
• Cash at Beginning of April
  0
• Cash at End of April
  13,000