BAO6504

Accounting for Management

Lecture 1

An Introduction to Accounting
and Financial Reporting
Reference: Chapters 1 & 13
Dr chitra.desilva
Chitra.desilva@vu.edu.au
Tel 9919 9469

INTRODUCTION TO
ACCOUNTING

Primary function of accounting is

to provide financial information for
decision making that is

Reliable
Relevant

Accounting often referred to as

language of business
2

The accounting process

Accounting is the process of identifying,

measuring, recording and
communicating the economic
transactions and events of a business
operation
Transactions are economic activities
relevant to a particular business
e.g., - sale of item to customer
- purchase of office stationery from
supplier
3

The accounting process

continued

Transactions are the basic inputs

into the accounting process

Identifying

Measuring

Recording

Communication

Taking into
consideration
all transactions
which affect
business entity

Quantifying in
monetary terms

Analysing,
recording,
classifying and
summarising
transactions

Preparing
accounting
reports,
analysing and
interpreting

Commonly referred to as
bookkeeping

THE FINANCIAL
REPORTING ENVIRONMENT

Australian Securities and

Investments Commission
Financial Reporting Council
Australian Accounting Standards
Board
Urgent Issues Group
Australian Stock Exchange
Regulation in New Zealand
5
Professional Accounting Bodies

Concepts and principles

Monetary principle
Accounting entity concept
Accounting period concept
Going concern principle
Cost principle
Conservation principle
Full disclosure principle
6

CONCEPTS , PRINCIPLES and

QUALITATIVE
CHARACTERISTICS

Monetary Principle

Items included in accounting records

must be able to be expressed in
monetary terms (e.g. $)

Accounting Entity Concept

Every entity can be separately identified

and accounted for
Owners transactions are separate from
entitys transactions
7

CONCEPTS AND
PRINCIPLES continued

Accounting Period Concept

The life of a business entity can be

divided into artificial periods
Useful reports covering those periods
can be prepared for the entity

Going Concern Principle

Business will remain in operation for the

foreseeable future
8

CONCEPTS AND
PRINCIPLES continued

Cost Principle

All assets are initially recorded in the accounts

at their purchase price or cost
To provide useful information, sometimes
entities need to deviate from cost principle
(e.g. revaluation of non-current assets)

Full Disclosure Principle

All circumstances and events that could make a

difference to decision-making process should
be disclosed in the financial statements
9

QUALITATIVE CHARACTERISTICS
Fundamental qualitative characteristics

Relevance

provides a basis for predictions

confirms or corrects previous expectations

Faithful representation

Complete, neutral and free from material error

depicts the economic substance
unbiased
judgements and estimates reflect best
available information
10

QUALITATIVE
CHARACTERISTICS
Enhancing qualitative characteristics

Comparability
between different companies
between different years of the same company
Verifiability
Independent observer consensus
Timeliness
Preparers should not take so long to prepare financial
reports that the reported information loses its relevance
Understandability
able to be understood by proficient users
11

CONSTRAINTS OF FINANCIAL
REPORTING

Costs versus benefits

Costs of preparing financial reports should not

exceed the benefits to be derived from the
reports

12

FORMS OF BUSINESS
ORGANISATION

Sole Proprietorship

Owned by one person

e.g. restaurants, dentist, panel beaters

Partnership

Owned by more than one partner

e.g. accountants, solicitors, doctors

Corporation

organised as a separate legal entity and owned by

shareholders

BHP, CSR, Westpac, RM Williams

13

USERS AND USES OF

FINANCIAL
INFORMATION

Primary users of general purpose financial

reports are the resource providers
Resource providers are equity investors,
lenders and other creditors

Equity investors contribute resources usually cash for a

return include shareholders (existing and potential),
holders of partnership interests
Lenders contribute by lending resources for the purpose
of receiving a return in form of interest
Other creditors provide resources in the form of credit ;
eg suppliers, employees
14

USERS AND USES OF FINANCIAL

INFORMATION continued

Other Users

Recipients of goods and services

e.g. customers, beneficiaries

Parties performing a review or oversight

function

e.g. regulatory agencies, media,

governments, trade unions, special interest
groups
15

USERS AND USES OF

FINANCIAL INFORMATION
continued

Internal Users

Managers who plan, organise and run

the business
e.g. production supervisors, marketing
managers, and directors

16

GENERAL PURPOSE
FINANCIAL REPORTS

General purpose financial reports are the

published financial statements of an entity
prepared in accordance with applicable
accounting standards
External users have an interest in 3 main
types of activities

financing
investing and
operating
17

GENERAL PURPOSE
FINANCIAL REPORTS

continued

Financing Activities

Outside sources of funds

Borrowing (debt funding) from banks or

investors by debt securities

Unsecured notes
Debentures

Selling shares to investors

Payments to shareholders are called dividends

18

GENERAL PURPOSE
FINANCIAL REPORTS

continued

Investing Activities

Acquisition or sale of resources/assets

needed to operate the business
Examples:

Purchase or sale of property plant and

equipment
Purchase of investments

19

GENERAL PURPOSE
FINANCIAL REPORTS

continued

Operating Activities

Results from operational activities

undertaken to earn income:

Revenue (sale of goods, provision of

services, return from investments)
LESS
Expenses (cost of resources/assets
consumed or services used)

20

SUSTAINABILITY REPORTING

Sustainability -making sure the

social, economic and environmental
needs of our community are met and
kept healthy for future generations
Concerned 3 main areas

Economic
Environmental
Social
21

THE ANNUAL REPORT

Go to
www.ibm.com/investor/help
Provided is a guide on the parts of an
Annual Report prepared by
companies to communicate to
investors, creditors and management
the health of the organisation.
22