Вы находитесь на странице: 1из 40

THE UNIVERSITY OF

NEW SOUTH WALES

Australian School of Business


School of Accounting
ACCT 1501: Accounting and Financial Management
1A
Week 2

Measuring & Evaluating Financial Position & Performance

Student Handout

Lecturer:
Dr. Youngdeok Lim
School of Accounting
UNSW
QUAD 3069
youngdeok.lim@unsw.edu.au
Blackboard: http://telt.unsw.edu.au

Session 1, 2012

WEEK 2: Measuring & Evaluating Financial Position &


Performance
1.

Introduction

Every commercial entity engages in transactions with other parties. Woolworths buys
products from suppliers, employs shop assistants, builds new stores, sells groceries and
each individual transaction is recorded and reported in the Balance Sheet. Individual
retail stores would report their profitability and the costs of running each store
categorising their expenses so management are fully informed of the cost involved in
running each service or retail store. They will even have information about the individual
products they sell through internal reporting and cost profit sales analysis. In this lecture
we will examine the communication of financial information in the Income Statement
through to the Balance Sheet.

Learning objectives
At the end of this topic, you should be able to:

Understand the terms, format and function of the Balance Sheet & the Income
Statement

Identify the components of financial statements

Prepare your own simple Balance Sheet & Income Statement

Describe the relationship between the balance sheet and the income statement

Understand the implications of the decision to record expenditure as an asset or as


an expense

Understand the differences between cash profit and accrual profit

Required Reading
Trotman & Gibbons
AASB

Session 1, 2012

Chapter 2: except section 2.3 pages 55 - 61


Appendix 2: pp92- 97
Framework for the Preparation and Presentation of
Financial Statements (downloadable from
http://www.aasb.com.au)

2.

Tutorial Questions Week 3

Preparation Questions

DQ 2.1,

P2.17, C2A

Tutorial Questions

DQ 2.6, 2.10,

P2.7, P2.22, P2.27

Session 1, 2012

Accounting and Financial


Management 1A

Week 2, Session 1, 2012


Measuring & Evaluating Financial
Position & Performance.

Dr Youngdeok Lim

Building the foundations of accounting


over the next few weeks
Week 2: The Balance Sheet and Income
Statement (Ch. 2)
Week 3: The Double Entry System (Ch. 3)
Week 4: Record Keeping (Ch. 4)
Week 5: Accrual Accounting Adjustments
5)

(Ch
(Ch.

Week 6: Special Journal, Subsidiary & Control


Accounts (Ch. 5 Appendix)

Week 2 The Balance Sheet &


Income Statement.
This weeks lecture objectives are:
1.

2.

3.
4.

5.

To understand the terms, format, function and content of


the Balance Sheet & Income Statement
Be able to define assets, liabilities and shareholders
equity &
indentify the difference between revenue & expenses.
Be able to prepare your own simple Balance Sheet &
Income Statement
Describe the relationship between the balance sheet
and the income statement

HOT (higher order thinking) concepts:


6. Understand the implications of the decision to record
expenditure as an asset or as an expense

7. Understand the differences between cash & accrual profit

Dont forget to use the Glossary!!! (T&G p. 749)

In the course of your study you will be introduced to many key


Accounting terms, it is like learning a new foreign language.
To assist you acquire a quick grasp of this new language, I
recommend that you refer to the glossary often until you get
to know all the new terms.
I guarantee there will always be new terms introduced each
week. You will need to build on yyour knowledge
g and
understanding. Tag this section in the book so you can refer to
it easily & often.
Practice using the glossary - look up the new terms each
week and try to explain them in your terms or think of an
example to explain it. (Tip: Define, explain, example!)

Recap: Financial Statements...


Balance Sheet
Income Statement
Cash Flows Statement

are the final


product of the
accounting process.
tell how the
business is performing
and where it stands.

1. Balance Sheet
Historically, the most important financial statement showing an organisations
resources & claims on resources at a particular point in time
Reflects the accountability of managers to owners (shareholders)
a statement
...
statement, at one point in time
time, which shows all the resources controlled by
the enterprise and all the obligations due by the enterprise.

balance
Resources

Claims/Sources
Liabilities
Equities

Assets

snapshotas at

Recap - The balance sheet equation:


A=L+SE
Resources = Sources
What we have = What we owe + What we contributed

Assets = Liabilities + Shareholders Equity

SE

Resources = Sources
Basis of accounting entity assumption

Click to edit Master title style


Click to edit Master text styles
- Second level
Third level
Fourth level
Fifth level

What is on the Balance Sheet

Examine closely the Balance Sheet in the appendix p.711 T&G

Name of the reporting entity

Woolworths Limited

Consolidated

Date at which the statement is drawn

as at

Eg.
g Woolworths as at 24 June 2007

represents a point in time

Currency used

$m, $AUD

What is on the Balance Sheet cont...


AASB 101 Presentation of Financial Statements requires at a
minimum that these items be shown on the face of the BS

Assets

Liabilities

Cash and cash equivalents

Trade and other payables

Trade and other receivables

Interest-bearing liabilities

Inventories

Tax liabilities

Biological assets

Provisions

Investments accounted for using the


equity method

Other financial assets

Contributed equity/Issued capital

Tax assets

Reserves

Property, plant and equipment

Retained profits

Investment property

Minority interest/Outside equity

Intangible assets

Shareholders
Shareholder
s Equity

Purpose of Balance Sheet

Information on financial
position

Solvency

level of debt/equity - how the


assets are financed and solvency
and liquidity

ability to pay debts when they fall


d (l
due
(long-term)
t
)

Liquidity

the ease with which assets can


be converted to cash in the
normal course of business (in the
short-term)

Which of the following statements about a


balance sheet is true?
1.

2.

3
3.

4.

a balance sheet presents the financial


performance of a company for a period
of time
a balance sheet presents the financial
position at a point in time
a balance sheet shows which source of
finance produced each asset
a balance sheet includes all the
resources of a company

0%
1

0%

0%

0%
4

A simple example of a Balance Sheet

Assets
Current Assets
Cash
Notes receivable
Accounts receivable
Supplies
Non Current Assets
Land
Building
Office equipment
Total

The Beach Shack


Balance Sheet
as at December 31,
Liabilities & Owners' Equity
Curent Liabilities
$ 22,500 Liabilities:
10,000
Notes payable
$ 41,000
60,500
Accounts payable
36,000
2,000
Salaries payable
3,000
100,000
90,000
15,000
$300,000

Total liabilities
$ 80,000
Shareholder's Equity
Contribued capital
150,000
Retained earnings
70,000
Total
$300,000

Assets
The Beach Shack
Balance Sheet
as at December 31,
Current Assets
Cash
Notes receivable
Accounts receivable
Supplies
N
Non
C
Currentt A
Assets
t
Land
Building
Office equipment

$ 22,500
10,000
60,500
2,000
100,000
90,000
15,000

A resource controlled by
the entity as a result of
past events from which
future economic
benefits are expected to
flow to the entity

Assets - Recognition

Definition:

Future economic benefits (FEB)

Legal ownership and control

useful for business now and in future


Most assets typically owned BUT ownership is not a precondition

Past transaction or other events


purchase made of asset, contract signed

A
Asset
t recognition
iti criteria:
it i

An asset should be recognised when and only when:

a.

it is probable that the future economic benefits associated with the item
will flow to the entity, and

b.

the item has a cost or value that can be measured with reliability.

Current assets

These are:
cash

and cash equivalents; or

assets

expected to be realised in,


or held for sale or consumption in,
the normal course of the entitys
operating cycle; or

assets

held primarily for trading


and expected to be realised within
12 months after the end of the last
financial period.

Non-current assets

Non-current
Non
current assets (NCA)
are all assets other than
current assets
Examples:
property,

plant and
equipment

long

term investments

Are these assets ?

Do they meet the definition requirements? future


economic benefit? control? Past event?

Cash

in the bank?

Land

and Buildings?

WHAT IF?
What

if you had a bank overdraft would that also be an


asset?

What

if the land or buildings changed in value does this


effect the balance sheet?

Is it a cost or value???
What are the possible ways in which an asset could be
measured?

How much did it cost to purchase? - Historical cost

How much could you sell it for? - Realizable value

How much money could you make by using it in your


business? - Present value
What would it cost to purchase or replace today? Current cost
Historic Cost Rule: All assets are initially recorded at their
historical cost /original cost (what it cost to acquire)

Liabilities
The Beach Shack
Balance Sheet
as att December
D
b 31,
31
Liabilities & Owners' Equity
A present obligation of the
Liabilities:
entity arising from past
Notes payable
$ 41,000
events, the settlement of
Accounts payable
36,000
which is expected to result
Salaries payable
3,000
in an outflow from the
T t l liabilities
Total
li biliti
$ 80,000
80 000
entity of resources
Owners' Equity:
embodying economic
Contributed capital
150,000
benefits
Retained earnings
70,000
Total
$ 300,000

Liabilities Recognition

Definition:

Future sacrifice of economic benefits

Present obligation

currently owed by business


Past transaction or other events
purchase of asset on credit, contract signed

Liability recognition criteria:


A liability should be recognised when and only when:
a it is probable that the future sacrifice of economic benefits will be required,
and
b the amount of the liability can be measured reliably.

Current liabilities

These are expected to


be settled in the normal
course of the entitys
operating cycle; or
Due to be settled within
12 months of the end of
the accounting period.

Non-current liabilities

Non-current
Non
current liabilities
are all liabilities other
than current liabilities
Examples:
debentures
mortgage

payable

loan

Shareholders Equity

The Beach Shack


Balance Sheet
as at December 31,
Liabilities & Owners' Equity
Shareholders Equity is The
Liabilities:
residual interest in the
Notes payable
$ 41,000
assets of the entity after
Accounts payable
36,000
deducting all its liabilities
Salaries payable
3,000
T t l liabilities
Total
li biliti
$ 80,000
80 000
Shareholders' Equity:
Contributed capital
150,000
Retained earnings
70,000
Total
$300,000

Equity

Equity is the residual


interest in the assets of the
entity after deduction of its
liabilities (SE A - L)
Common components:
Share

capital

Retained

profits

Expanding the Accounting equation


Rearranging the equation
Assets = Liabilities + Shareholders Equity
can be expressed as:
Assets - Liabilities = Shareholders Equity

Net Assets

= Shareholder (Owners) Equity

Now we will begin to explore the measurement of changes


in shareholder wealth (or changes in Net Assets).

The Accounting Equation

Assets = Liabilities + Shareholders Equity


$300 000 =
$300,000

$80
$80,000
000 +

Assets
Cash
Notes receivable
Accounts receivable
Supplies
L d
Land
Building
Office equipment

$ 22,500
10,000
60,500
2,000
100 000
100,000
90,000
15,000

Total

$ 300,000

$220
$220,000
000
Liabilities & Owners' Equity
Liabilities:
Notes payable
$ 41,000
Accounts payable
36,000
Salaries payable
3,000
T t l liabilities
Total
li biliti
$ 80,000
80 000
Owners' Equity
Share capital
150,000
Retained earnings
70,000
Total
$ 300,000

Example (continued)

You purchase one bed room unit at $500,000 on 1/7/2011


and rent itit.
Financing source: Your own money $100,000, Borrowing
from bank $400,000
Rent revenue (cash) $400/week, Interest expense (cash)
$200/week, Tax expense (cash) $1000/year

Assume 52 weeks per year

Prepare B/S as of 1/7/2011, 30/6/2012 and 30/6/2013

Prepare I/S for the year ended on 30/6/2012 and


30/6/2013

The Accounting Equation

A = L + SE
The basic accounting equation can
be expanded to include revenues
and expenses.
expenses

The Accounting Equation

A = L + SE
Share capital

Retained profits

Retained
Net profit -Dividend
profits
beginning =Revenue
expenses
of period

Shareholders equity

Traditional view - A company exists for the benefit of its shareholders.

There are alternative views i.e.


i e other Stakeholders: Society?
Community? Economy ? Environment?

In this course we will concentrate (owners) shareholders wealth

An increase in a companys wealth means an increase in owners equity

A L

= SE

A closer look at shareholders equity

Shareholders (Owners) Equity


Contributions

by owners (Share capital)

Profit

Revenues
Expenses
Distribution

to owners (Dividend)

Increasing shareholders equity

Owners:
Contributions

by owners, Share Capital

All other transactions & events:


Net

profit

Increasing shareholders equity


Owners:
Contributions
Issued

by owners

Shares for $300,000 cash


Cash

A = L + SE

Share
Capital

Increasing Shareholders equity


All other transactions & events:

Company receives $3,000


$
interest on bank deposit.

Cash

Revenue

A = L + SE

Decreasing Shareholders equity

Owners:
Distributions

to owners, Dividends

All other transactions & events:


Net

loss

Decreasing Shareholders equity


All other transactions & events:
Company pays $3,000
$
interest on a bank loan.

A = L + SE
C h
Cash

Interest
Expense

Retained profit

When a company earns a profit, that profit can be


distributed to shareholders as dividends or kept
p in the
business to grow the business.

Profit (Revenues Expenses)


less

Distributions (Dividends)

Retained Profit

Remember: Dividends are NOT AN EXPENSE!

The Accounting Equation expanded!!!

A = L + SE
A = L + SC +RP + R E - D
Where:
CC
RE
R
E
D

=
=
=
=
=

share capital
retained
t i d profits
fit beginning
b i i
revenue
expenses
dividend (declared)

Your own Balance Sheet!

Prepare your own Personal Balance Sheet.


Use the correct format, write a title, and date, i.e. Student Xs
Balance Sheet as at 29 February 2012.

Please take a black sheet of paper or use your laptop!

Lets start with listing your assets: what do you own!


You

may like to use categories i.e. clothing; books; CD


collection; phone; ipod; camera; computer; cash etc
Estimate a value based on historical cost for each item.
Record the amount beside the items you listed.
For this exercise you dont need to use your real actual
items if you do not wish to you can make this up.
Classify the assets into:

Current - items you will keep/use within 12 months;


Non-Current - items which you will have for longer than 12 mths

Your Balance Sheet may look


something like this
Student Xs Balance Sheet
As at 30 June 2011

Assets
CURRENT

320
NON CURRENT

3,800
Total Assets

4,120

Your own personal Balance Sheet!


Continued

Now list your liabilities what you owe!


This may include money you need to repay i.e. a loan, rent,
phone bill, any bill you have received but not yet paid.
Make a heading on you Balance Sheet and list the items with
values, split into Current & Non Current as demonstrated in
our simple example.
The difference between your assets & your liabilities is your
residue, basically it is your Owners Equity (capital).
We will look at your Income Statement a little later in this
session to demonstrate the difference between the BS & IS.

Balance Sheet elements?


How do these events impact the BS?

The company has bought a new machine

The company has sold some inventory

A major competitor has gone broke

The company has hired a new manager

There was a fire in the main factory

Given only the following information, what is the balance


of shareholders equity?
Cash
Inventory
Equipment
Accounts payable
Taxes payable
Loans to the company
1.
2.
3.
4.

10 000
30 000
200 000
50 000
40 000
100 000

$40 000
$50 000
$100 000
none of the above

Watch ICAA clip which provides an overview of the


financial statements

Income Statement

The Income Statement shows the profit or loss for the


period of time under consideration.

It is sometimes called:
Statement of financial performance
Statement of earnings
g
Profit and loss statement
Statement of operations
profit = revenues expenses

Income Statement
Main Street Store, Inc.
Income Statement
For the Year Ended 30 June 2009

Revenues result from the


entitys
y operating
p
g activities
(e.g. selling inventory,
sometimes referred to as
Sales/Revenue/Income).

Net Sales
Cost of goods sold
Gross profit
Selling, general, and admin. expenses
Profit from operations
Interest expense
Profit before taxes
Income taxes
Net profit

1,200,000
850,000
350,000
311,000
39,000
9,000
30,000
12,000
18,000

Net profit per ordinary share

1.80

$
$
$

Revenue

Revenue is gross inflows of economic


benefits during the period arising in
the ordinary activities of an entity
when those inflows result in increases
in equity other than those relating to
contributions from equity participants.
(AASB 118, para 7)

48

The Revenue Recognition Principle

Recognise revenue when


it is earned.
GAAP recommends the
accrual basis of accounting
accounting.

So, when is REVENUE earned?


Devising
an idea

Receipt
of cash

Making
purchases

Delivery of
goods to
customers

Receipt of
orders before
production

Receipt of
orders

Commencing
production

Completion
of production

Progressing
through
production

50

What is total revenue for the period?


(a) Credit sales of $10 000
(b) Cash sales of $8000
(c) $7000 cash received from a customer as a deposit
for work done in the next period
1.
2
2.
3.
4.

$17 000
$18 000
$25 000
none of the above
0%
1

0%
2

0%

0%

Income Statement
Main Street Store, Inc.
Income Statement
For the Year Ended 30 June 2009

Costs and expenses


are incurred in
generating
ti revenues
and operating the
entity.

Net Sales
Cost of goods sold
Gross profit
Selling, general, and admin. expenses
Profit from operations
Interest expense
Profit before taxes
Income taxes
Net profit

1,200,000
850,000
350,000
311,000
39,000
9,000
30,000
12,000
18 000
18,000

Net profit per ordinary share

1.80

$
$
$

Expenses

Definition opposite to revenue


Recognition probable outflows
& reliability of measurement
Consider:
Realised

versus unrealised losses

Matching

problems

Prepaid and accrued expenses


Allocation of costs

Expenses

Expenses are decreases in economic


benefits during the accounting period in
the form of outflows or depletions of
assets or incurrence of liabilities that
result in decreases in equity other than
those relating to distributions to equity
participants.
(IASB Framework, para 70b)
54

Income Statement
Explanation of income statement accounts:

N t sales
Net
l

Cost of goods sold

Gross profit

Amountt off sales


A
l off merchandise
h di tto customers,
t
less the amount of customer returns of
merchandise
Represents the total cost of merchandise
removed from inventory and delivered to
customers as a result of sales
Difference between net sales and cost of goods
sold; Represents the seller's maximum amount of
"cushion" from which all other expenses of the
business must be met before it is possible to
have net profit

Income Statement
Explanation of income statement accounts:
Account
Explanation
Selling general
Selling,
general, and
Represent the operating expenses of the entity
administrative expenses
Profit from operations
Interest expense
Income taxes

Represents one of the most important measures


of the firm's activities
Represents the cost of using borrowed funds
Shown after all of the other income statement
items have been reported because income taxes
are a function of the firm's income before taxes

Net profit per share of A significant item in evaluating the market value
ordinary share in issue of an ordinary share; Often referred to as
"earnings per share" or EPS

Appendix: Income, revenue and gains

Income = revenue + gains

R
Revenue
= iinflows
fl
ffrom ordinary
di
activities
ti iti

Gains = all other inflows.

57

Income

Revenue
Arises

entity

in the course of the ordinary activities of an

Include

sales, fees, interest recd, dividends


recd, royalties, rent

Gains
No
N

diff
differentt in
i nature
t
f
from
revenues

May
Eg.

or may not arise in the ordinary activities

Gain from sale of non-current assets

Usually

making

displayed separately useful in decision

Your personal Income Statement

Let us prepare your personal Income Statement a


summary of your income and expenses.
Often you prepare something like this for your tax return, or
applying for a bank loan or other form of credit.
Companies prepare these annually & they prepare monthly
ones for operational reasons.

Prepare the IS in the correct format


format, ii.e.
e title & date
date.

List you income sources first,

Then list your expenses. Lets prepare for the month so


you get the idea of what you are doing and how it is
different from the Balance Sheet.

Your Income Statement may look


something like this:
Income Statement for Student X
for the month ending 29 February 2012
Revenue

Wages
Interest recd
Scholarship

410

Less Expenses
Rent
Food
Electricity & utilities
Phone

340

Profit

70

(this figure is added to RE)

Income Statement

Did not become formal report until 1830s with beginning of


annual reports of railroads. However, income account used
for internal management control since 1300s
It is a Summary of organisations revenues and expenses
over a period of time it measures financial performance over
that period of time. Basically, the change in financial position.
Accrual accounting principle!!!! (remember our principles
from last week!!! effects both revenue & expenses )
Presents the difference between revenues and expenses
Profit = Revenues - Expenses

5. The link between the BS & the IS

Balance Sheet
CA + NCA = CL + NCL +

SE

CA + NCA = CL + NCL + SC + Opening RP +

R- E

- D

Income Statement

The connecting link between the balance sheet


and the income statement is:
1.

2.

3.

4.

dividends paid to
shareholders
the opening
balance of
retained profits
total shareholders
equity
net profit after tax

0%
1

0%
2

0%
3

0%
4

6. Capitalise v. expense

A couple of interesting issues


Has the business bought an asset in the following situations?

Spend $50,000 cash for new plant equipment?

Borrow $50,000 to buy new plant equipment?

Spend $12,000 on 12 months rent in advance?

Spend $3,000,000 on research to develop a drug to cure


hangovers?

Spend $500 on 3 months of photocopy ink?

Pay $4,000 for telephone calls this month?

Capitalize v. expense why is this important???

It can make a large


difference!!

An example
Spend $3,000,000 on research to develop a drug to cure hangovers?
Do they Capitalize or expense? Which

A
cash

option would a company prefer?

SE

asset CAPITALISE

v.s.
EXPENSE

cash

expense

Classifying assets and expenses


Has a cost
been incurred?

No

Unlikely to be an
accounting event

Yes

Is there a benefit
to the business?

No

Yes

Has the benefit been


used in this period?

No

Relates to the owner or


someone else and should
be charged appropriately

Show the future


benefit as an asset

Yes

Charge as an expense
68

7. Cash v accrual profit

The earning of a revenue is not necessarily


accompanied by an inflow of cash.
cash
The incurrence of an expense is not necessarily
accompanied by an outflow of cash
Accrual profit is not the same as cash profit.

A Key objective for this session: begin


to understand the Accrual concept***

Cash sales $100

Credit sales $100


$

Total sales =

Total cash inflow at the time of sales =

A Key objective for this session: begin


to understand the Accrual concept***
Threshold Concept think about the difference between a
business operating
p
g on a cash accounting
g bases & one
using accrual accounting!
What do we mean by this ????
What impact would this have on the figures in the Balance
Sheet and Income Statement????

The threshold concept:


Cash v Accrual Profit
Use the information given below to answer the following 2
questions.
During 2009, a company makes credit sales of $500 000,
off which
hi h $375 000 iis collected
ll t d att year-end.
d It pays $200
000 in expenses and owes $25 000 for electricity used
during 2009.
Accrual profit is:
1.
2.
3.
4.

$300 000
$275 000
$175 000
$150 000

Accrual profit is:

0%
1

0%
2

0%
3

0%
4

The threshold concept:


Cash v Accrual Profit
What would the profit be if cash accounting rather
than accrual accounting was used?
1.
2.
3.
4
4.

$300 000
$275 000
$175 000
$150 000

0%
1

0%
2

0%
3

0%
4

Dont forget the practice Quiz!!!


Next Lecture

You will study the Double


Double Entry System (chapter 3)
and work through practice questions.