Financial Accounting

annual slaes-fun run enterprises

(graph) using tge variance analysis to assist in the understanding of account information. A variance report is used to show the difference between budgeted and actual figures. In doing so this may reflect on the performance of the firm. The variance report may be used for the cash budget, profit and loss statement and balance sheet. Management may seek to explain the reasons for the difference between the budgeted and actyal report. There may be valid reasons for the differences that serve to excuse the person repsonsible for that particular area. These reaons should be offered. You should firstly indicate weather the actual figures are favorable of unfavorable when compared with the budgeted figures. A favorable result is when the result is better then expected by management. For instance, if cash sales are $40,000 in the actual amount when they were expected to be only $35,000. It would be an unfavorable result if an expense if actually $20,000 more then budgeted for. This does create some problems in reality. For instance if the expense was $2,000 above budget as it may indicate that sales were also above budget. Budget variances may be linked to the responsibility given to a person or deprtmennt and their performance compaired with this budget .

information debtors (accounts recievable) ageing analysis provides

-it shares for how long each individual accounts recievable has owed money to the business -individual accounts recievable may be matched against the terms offerede to see how they are responding -when matched against discount offered the analysis reveals that accounts recievable (debtors) are eligible for discount. -over time the analysis provides a history of each accounts recieable, which may be matched against the cost of carrying and collecting those debts. -further analysis into special groups may help decisions- making -enables comparion with previous periods to asess performance. enables estimate of cash flow int othe business for cash budget purposes. -renables estimate of future bad debts for profit and loss bydget purposes.

Obsolecense

-only the diminishing balance method allows for possible obsolescense by attempting to write off the bulk of the asset cost as depreciaiton in the earlier years of the assets life.

merits/ disadvantages straight line method

-simple to operate/calulate -does not allow for obsolesence or the premature end of the economic life of the asset. -helps long term planning as you know what is going to be the amount allocated in future periods to depreciaiton.

Matching cost with revenue

-the straight line method assumes a consistent return over the life of the assets. -diminishing balance assumes the asset earns greater revenue in the earlier years of the asset's life. i

Disposal Value

-the straight line method deducts the disposal value of the asset prior to calculations, whereas the diminishing method does not.

Calculation of deprciaiton

-the straight line method is most simple to calculate, providing the same amount each year. -diminishing balance is based on the written down value of the asset and requires deduction of previous accumulated depreciaiton prior to calculation of depreciaiton. for this accounting period.

Essential elements of revenue recognition

1. There must be verifiable evidence of the money amount invovled. 2. The process invovled in earning that reneue must be substantiously complete. August the paiting is commissioned septemeber- the paiting is completed october- the painting is delivered novermber payment is made

Revenue regognition points

1. point of sale ussually applied where merchanidise is considered sold when the price is agreed upon, and a contract enforable by both parties is made. Revenue is recognised at this point, the goods passing to the owner.

the accounting equation illustration of use

A difficult question to ask would be to describe the effect of failing to make the reversing entry for prepaid rent expense of $400. The question can be approached as follows step 1 draw the see saw that is A+E=R+L+P step 2 use arrows pointing upward or down ward under the item calssification to show the effect of the original adjusting entry. 3 reverse the arrrows to show the effect of the reversing entry. 4 change terminology to overstate (o/s) and understate (U/S) 5. For failure to act to decrease o/s will occur and to increase U/S takes place. 6 the student must then state the effect on both the profit and loss balance sheet. (graph) Response: Expenses are understated, keading to profit being overstated by $400 in the profit and loss statement. In the balance sheet assets are overstated and owner's equity (proprietership) is overstated (that is profit increases by $400. Stock loss or gain, and the disposal of non-current assets with an accompanying profit or loss; must also be accounted for in the relevant journal, ledger record and report. These items fall under the topic of balance day adjustments apart from the traditional adjustments students may well be examned on the 'asset approach for recording transactions where payment precedes benifit recieved'. When adopting this approach the payment is initiaylly recognised as an asset rather then as an expense. The end of each period part of this asset is allocated as an expense and posted to the profit and loss accoount. No reversing entries are required. It should be noted that the treament of the liability approach for revenye is not required.

Accouting Issues

Accounting Issues can apply to -depreciaiton -revenue/epsnese regognition (point of sale) or point of cash transfer) -stock valuation (lower of cost and net realisable value) -historical cost and non-current asset valuation. These accouting issues take effect in terms of valuation, recording and reporting. These issues may be considered in terms of citeria such as control, planning, time, cost and simplicty.

Arbitary allocation of expenses

Arbitrary allocation of expenses between departments is inteneded to assist in providing information about the contribution of each department to the earning of profits but this objective will not be achieved unless the allocation provides a good approximation of the true cost invovled. Sales may be the basis for the allocation of epxnese, however, the expense has to be directly linked to sales. Floor space is another way of allocating expense. However, the floowing expample indicates the problem in using that as a basis for expense allocation. Two departments may have equal floor space yet one dpeartment is one the top floor and the other is at ground level. The ground level location has more chance of going from passing traffic, people browsing and son on, and so would be a more valuable location.

Profit and loss statements

Classification is another area for discussion. The benifits of classification may be linked to departmental profit and loss statements. They include: -enabling the assigning of responsibility to deparment managers. -measuring perormance of particular departments -helping recording-specialised journals save time and effort. -assisting control-performance figures may be compared with budget figrues -providing information for decsision making the benifits of preparing accounting reports more frequently than once a year include: -they assist planning and control by enabling compariosons with budgeted figures; for example, a change in prices -more effective monitoring of the performance of the business.

contraint of timeliness

Consratin of timeinless acts as a constrinat to achieiving the above qualities in reporting. Timeliness indicates that reports are only of value if available within a reasonable time period. Check chapter images.

Accured Expenses

In this example wages have been paid for the three months ending of $3600. At 31 March there is $300 owning. The accured expenses are a curerent liability. (graph)

Limitations in use of accounting information

Problems in using historical information -the nature of the business may have changed. -the hisotorical infromation may have been obtained from unreliable data -the business may be in an industry which is changing. -the data may not reflect the state of the economy, either specific or the industry in general -the quality of leadership may not be shown -not all infromation may be available for example, the intention to introduce new technology. The qualities or good information include: -comparability -relevance -reliability materability -understandability the limits to provdiing this infromation result from timeliness and cost.

Decline in profit

Reasons for decline in profit- -excessive stock loss -increased competition -loss of traditional customers -increase in expenses without a commensurate increase in sales. there are numerous other possiuble reaons, however they must fit the senario

Liquidity rates working cpaital (current assets currrent liabilties)

There is a optimum amount for working capital it may be too high or too low. A working (WC) that is too high means an ineffeicent use of funds reflected by excessive stock or cash. It may also indicate an inability to obtain stock or credit. A WC that is too low means the inability to take advantage of credit terms offered with the loss of discount. BUsineeses are engaged in 'hand to mouth' buyuing and may be forced to rely on bank overdrafts and other credit, which is expensive. This ratio is easily manipulated for instance, borrowing long term debts will improve the ratio without being of benifit to the business.

Balance day adjustments

When using the 'asset' approach to expense recgonition the intitial payment is treated as an asset rather than an expense. A consequence to this approach is that there are no reversing entries invovled as only portion of the payment to be treated as an expense is deducted from the 'asset.' Example Stan Jones from the vieo and cd store pays $6000 on January for an advertising program which whill extend over the next three years. Required show how this will apear in the general journal and general ledger for the next accouting periods. Stan's business has accouting periods of six months. General Journal (graph)

Case study depreciation

a pizza oven is bought on 30 september 2001 for $10,000. It costs a further $5000 to install. The residual value is estimated at $30,000 and the estimated life is 6 years. Required: calculate depreciaiton for the year ended 30.6.2003 using both the straight line method and the diminishing balance 25% per annum. -present these calculations in the general journal. -show the affect on the profit and loss statement (extract provided) -show how an extract may appear in the balance sheet. (graph) a related theory question would ask students to explain the relative affects on profit of the selection of the depreiciation method. (view link)

cash varience analysis

a variance report shows the difference between actual figures and budgeted figures for a period of time. Variance reports may be applied to any tpye of finaincial report. The cash variance report brings together the statement of reciepts and payments and the cash budget. (graph) The preparation of the cash variancde report requires the format set out. This is ussualuy provided in the answer bookelt in the examination. Many figures are also provided. Reconstruction of accounts may be necessary to determine amounts paid/received, opening or closing blanances. You will also have to determine arithmetically the amount of the variance and weather it has been favoravble or unfavorable. Marks are hard and showing all cash recipts entries correct in all clumns may only earn a single mark. Many students loos marks by not showing totals for cash receipts, payments and the bank balance. From the above variance you may be asked: -to comment on liquidity and to suggest strategies to help improve liquidity. -to explain the deteruiraution in liquidity. -to comment on weather the increased spening on vehicles is necessarily unfavorable. -to link the decline in sales to other expenses and suggest reasons why this occurs.

relevance

accounting information must be based on information directly related to the business being reported on.

consistency

accounting reports form one period to the next should be subject to stringent internal control. Breach: the owqner uses one method of depreciation for a particular asset in one period and an alternative method in the secound period.

Variance reports

advice to complete the variance reports the followig steps are necessary. Cash budget 1. Take the opening bank balance and add that to the total of cash reciepts. 2. total cash payments. 3. deduct item 2 from item 1 to arrive at the closing bank balance. 4. Transfer the closing bank balance to the balance sheet as the amount for 'Bank'. Profit and loss statement 1. determine net profit by deducating the total expenses from adjusted gross profit. 2. transfer the net profit to the owner's equity section of the balance sheet. Balance sheet 1. total current assets (after the inclusion of bank.) 2, determine the new figure for matchnery 3. add depreciaiton from the profit and loss statement to accumulated depreciaiton ($4,000 on 1 July 2002) to get the new figyre for that item. 4. total non-current assets. 5. add current and non-current assets to get total assets. 6. total current liabitlies. 7. inset net profit. 8. inset drawings 9. determine total equities in preparing this problem the following accounts had to be reconstructed -debtors -creditors -stock control -advertising -salaries -loan (link)

historical cost

all items are recorded at the orgiinal cost, that is the cost at which they were acquired.

verifiability

all transcations recoreded in the books of the business are supported by documentary evidence breach: payments are made and recorded without support evidence such as invoices on chque butts.

diversity

allows for the fact that no two firms are the same and therefore may use diffrent accounting methods. breach: the owner decides that becuase the business down the road uses the straight line method of depreciation his business should do the same.

asset register

an asset register includes details about the non-current assets owned by a business. The main reason for keeping an asset register is to enable the easy access to and retreival of detailes relating to the asset. This is possible becuase they are kept as seperate records. These types of details that are included in a record are: -the make and supplier of the asset -the purchase price and date -the model number -the estimated life of the asset -the depreciation rate and method used. -the insurance value, compnauy and policy the estimated disposal value (graph)

understanding and using accounting information

an understanding of the accounting system is an important first step in this topic. (check the graph) accounting system three basic steps basically this topic is about output. This data (input) has been collected and sorted into records form which reports have been prepared (process) and now it is up to you to use that information to make decisions (output). THere are several steps in using output. Analysis and interpretation directing attention to the signifivance of various figures and relationships. FOr instance this could invovle comparing this years sales revenue with the previous yea's. Evaluation- to assess the worth or value of what is shown by step 1. deciesion making- to make decisions based on conclusions reached on the value of that information.- using output.

going concern

assumes that the life of the business is ongoing, indefinit and continuous. ALso knonw as the continuity principle. breach: the owner does not wish to prepare a balance sheet but rather reports non-current assets as costs in the period they were acquired.

bad debts

bad debts derive from debtors have been identified by management as being unable to pay outstanding debts once management determines that certain debtors are not going to pay the asset debtors is reduced and the expense had debt is recognised. (graph) Bad debts will be shown as a finaincial expense in the profit and loss statement Bad debts may well be assessed in the context of control accounts or seperately. You must be able to seperate the treatment of bad debts, firstly when the bad debts occur in the same period as the credit sale, and secoundly, when the bad debt happens in the later period. Doubtful debts are an estimate of the amount not likely to be recovered from debtors. It is general from debtors. It is general and nont linked to any specific debtor. It is allowed to try to match the expense associated with a revenue (credit sale) in the same reporting period in which the revenue was earned. Doubtful debts are the anticipation of bad debts.

depreciation

basil braveheart and sophie solitair each buy a new four wheel drive on the same day, 1 July 1998. They each pay $43000 plus $2000 on road costs. Basil intends to use his vehicle to deliver antique furniture. Nearby suburbs while sophie will drive her vehicles to remote locations in her work as a geolist. At the end of the finaincial year they both vifist an accountant for assitance with their income tax. Given the nature of their work, being self-employed they are both able to lcaim the depreicaiton onf their vehicles as a work related expense for their respective small business. THe accountant suggests that Basil calculates depreciaiton using the straight line method. While suggesting that Sophie may wish to use the diminishing balance method. The suggested rate of depreiciaton is 20% prime cost for Basil. Basil asks what prime cost is and is told it means 'striaght line'. THe accountant then informs sophie that the diminshing balance method hs a rate of one and a half times straight line, in this case 30% when the vehicles were brought the estimated trade in or disposal value was $15,000. Both Basil and Sophie ask for projected depreciation figures for the next threee years. Required: Calculate the depreciaiton and accumulated depreiciaiton figrues for the next three years both straight line and diminishing balance methods. Sophie asks for her figures to be recalculated for six months accounting periods. Complete this task and comment on changes in the depreiciaiotn and axxumulated depreiciaiton amounts Sophie asks for her figures to be recalculated for six months accounting periods. Complete this taszk and comment on changes in the depreciaiton and accumulated depreciation amounts. what accounting principle is breached if, after the first year, Brasil chooses to change to the diminishing balance method? What accounting princiiple supports the use of alternative depreiciaiotn methods? State the principle and describe its meaning. SOphie and Basil are using diffrent methods of depreciaiton. Give two reasons why each method may be used. Explain the benifits to Sophie of reporting more frequently then once a year. (work document link answers)

Revenue and expense recognition

cash and actual accrual accouting these alternative accouting systgems should be treated in two seperate stages: recognising and recording transactions: a transaction is defined as "an external event involving the transfer of something of value between two or more entities" the accounting system records the effects of the tranactions. It follows that the point(s) at which a firm records depends upon the type(s )of transactions it recognizes. There are two methods for recognizing and hence recording transactions. a. the cash method which recognises and records only the reciepts and payment of cash b. the accrual method; which recognisies and records both when they are entered into (earned or incurred) ande when the cash is recieved and/ or paid. This method recognises and recordds both credit and cash transactions. View the (video link on smal businesses. Determining periodic profit Determination of profit by time periods is a primary function of accounting. The reasons for the determination of accounting profit periodicaly include the needs of management/proprieters for financial information and legal requirements for individeuals to submit personal tax returns. Two bases of determing periodic profit are possible: a. the modified cash bassis; under which periodic profit/loss arrived at after matching revenue (defined as all cash recieved from operations against expenses (defined as all cash paid on operation excpet for the inclusion of adjustments for stock on hand and depreciaiton of fixed assets.) This basis, whuch is a mixture of the cash and a accrual bases, has been developed and used to satisy the provisions of the income tax assetment act. Where th firm reguarly gives or recieves credit, the finaincial information provided by using this basis of determining periodic profits is not regarded as being suffiecently relaible for management purposes. b. the accrual basis; under which periodic profit/loss is arrived at by matching revnue earned in the period with expenses incurred in that period. The matching principle is important for reliable periodic profit determination. Note: the basis used to determine periodic profit has no necessary connection to the method used for recognizing and recording transactions. Balance day adjustments can convert cash transaction records into the accrual basis of profit measurement. Merits modified cash basis -simple to prepare and operate -less time consuming -tax is only paid on income received not earned -less skill required in preparation accrual basis reports are more accurate, particular where the reporting period is less than year. -more accurate reports then led to better planning for the future -performance can be more accurately evaluated -in the balance seet more detailed list of assets and liabilities are provided. Note: when discussing records only talk in terms of journals and ledgers whereas reports include profit and loss, cash budgets and balance sheet.

Reporting historical cash flow statement

cash flow statements are not to be confused with cash budgets or statements of reciepts and payments. The cash flow statement is more than a simple listing of cash recipts and payments. It classifies cash flow into: -operating -investing -financial There are two approadhes to cash flow statements: -information is presented in the form of a cash bookm cash journals, or a statement of recipts and payments, and you have to classify into the appropriate format -a profit and loss statement and a balance sheet with opening and closing balances are provided. After account reconstruction cash amountsw are determined and are classified in the cash flow statement. cash flow statements report on the amound of cash inward and outward from the business. The cash flow statement is classified into three areas. Operating relates to the trading of goods of the provision of services by the business and the resulting cash flows investing-relates to the buying and selling of non-current assets for cash. This includes shared, bonds and other investments. Financing- relates to the obtaining of funds both internally (owner's equity) and externally (non-current liabilities) and the subsequent repayment or withdrawl of these funds from the business. examples of cash flow items (graph) there are three essential skills required in preparing a cash flow statement: -determining where the item is a cash flow -if yes, classifying that item -reconstructing accounts to determine the money amount invovled. Cash flow statements should be studied in conjunction with other reports shuch as the profit and loss statment and the balance sheet. At all times it is important that you indicate that only 'cash' items apply. In the table aboce it is the proceeds from the sale of a non-current asset' from the sale of a non-current asset' plan that is reported as an investing inflow. The cash paid for a non-current asset is reported as an investing outflow.

control for debtors and creditors

control accounts are prepared in the general ledger and are used where there are a number of subsidary items invovlved in business transactions such as indidivudal debtors, stock or non-current assets and the business desires group these items into one ledger account. What is the purpose of a control account? -the control account is summarized information located in the general ledger. More detailed information is held in the subsidiary ledger. -a control account enables a seperation of duties between the bookeeping department (or section) responsible for the general ledger and booking department (or section) responsible for subsidary ledger. -interla control is maintained by checking the balance of the controll account with the total of balances shown in the schedule taken from the subsidary ledger.

Dependability

data used in accounting should be subject to sringent internal control breach: price caulcations are based on outdated information.

Efficiency Ratios

debtors turnover 9credit sales/average debtors) -creedit sales -extension of credit terms offered to potential credit customers -offering of credit to a greater range of potential cusomters -debtors the reduction of average debtors will also improve this ratio -discount offered to debtors -reduction in credit offered. -incentives to buy for cash -changing of interest (must be a term of the contract) -more careful selection of credit cusotmer. i -refusal of further credit until payment. -factoring of debtors -more frequent invocing stock turnover (cost of goods sodl/average invetory) the cost of sales will improve with greater sales. This is favorable to the business. One the other hand a business may face a increase in cost of sales with increased unit costs and be unable to increase selling pri9ce accordingly. THis would be unfavorable to the business. stock -carrying of less stock-this is supported by strategies such as 'just in time' stock is brought to meet immediate needs and minimal stock is carried by the business. -immediate sale/disposal of obselete or slow moving lines -monitoring of stock levels and turnover of individual lines. Creditors turnover (credit purchase/average creditors) These terms offered by creditors must be noted when measruring the success in dealing with this ratio. If creditors offer 30 days this would indicate that the bus9iness is taking advatage of discounts and mainting a happy relationship with creditors. By taking longer to pay then the terms offered means that the business is " -jeopordiing future supplies -influencing the quality of service, such as being informed about new products and so on. -reducing discoutn recieved.

Depreciaiton

depreciaition is defined as the alocation of the cost of a non-ccurrent asset over the economic life of that asset. It is charged at the end of the accounting period. At the end of the accounting period depreciation accumulates and it, is the 'accumulated depreciaiton' account, which is posted to the balance sheet as a deduction from the relevent non-current asset. When preparing to tackle the question, the following points must be ascertained. -the cost of the asset -the life of the asset -the nature of use, revenue pattern -the residyal value of the asset.

how changes to the numerator and demoninator impacts on the ratio

each of the ratios stated above has a numberator and a deonominator. For example: net profit/(average) total assets. The net profit is the numerator and the total assets the denominator. The ratio will be improved by increasing net profit at faster rate then total assets of decreasing netg profit at a slower rate. When discussing a change in a ratio you should: -measure the ratio -show how it was calculated -explain the changes to the numerator and deonimator that casued the ratio to change. Looking at key items in the ratios in the tables above. Net profit may be increased by (for decreases reverse the increase/decrease below) -an increase in sales -a decrease in price, which may simulated extra demand. -an improved location. Increased spending on advertising and sales wages. Advertising -better quality -type -range customer focus -after sales service -pre sales service -extra services such as training cost of goods sold buying in bulk-a decrease in buying costs, an increase in carrying costs -cheaper items, risk of sacrifising quality -more expensive items may have greater appeal leading to increase in sales. The margin between the cost price and the selling price is an important factor in the success of a business. Expenses increased effeciency should be sought in use of expenses all expesnes should be linked to the contribution they make to profit.

understand and using account infromation exmaple

for example let us select the profit to sales ratio. In a hypothetical example, net profit to sales may fall in the budgeted year. This may be due to a fall in profit or a rise in sales and reasons include -an increase in the unit cost of items sold -reduced prices; for example discounting -increased operating expenses -an increase in competition the profit and loss statement may be broke up to show both a vertical and horizoneal anayalsis. For instance the revenue may be presented as follows. (graph) This process may be repeated for the entire prfoti and loss statement. Several other graphs and table may be presented to complete the identification task. Profitability ratios may be shown as: (graph) legend NP/OE=net prfoit to owner's equity ROI GP/Sales=Gross profit to sales NP/Sales= Net profit to sales It is important to notes that the percentage change is not arrived at by direct deducation alone. For Np/Owner's equity the percentage in 2000 is 80.02% and say that this ratio has decrease by 39.30% however the 39.3% must then be divided by 80.2% to find the actual percentage change. Having completed the table above you should show this data in a graph for each profitability measure. Suppose the issue is liquidity. Once again table 1 would be repeatred, this time selecting ratios relevant to liquidity. The ratios to select include -working captial -quick asset ratio -creditiors turnover -debtors turnover -stock turnover -bank balance not a ratio but could be plotted These figures can then be converted into line graphs. Remeber tp correctly label all graphs. Relevant reasons have to be given for changes to liquitify. Reaosns for deteriroration of liquitiy include: -buying of non-current assets for cash -ecessive cash drawings. -loan repayments -specific costs such as unexpected legal expenses -new and increased exepsnes without commensurate selling price increases

Credit Note accounting equation

for the party returning the goods (Stewart) the affect on the accounting equation is: -a decrease in asset stock -a decrease in the liability creditors For the party recieving the returned goods (Alex) the effect on the accounting equation is -an increase in the asset stock -a decrease in the asset debtors. Transactions may be recorded in the general journal in the manner stated above Reasons for these goods being returned include: -the goods are damaged -the goods are not in the quantitiy ordered -the goods do not match the description -the goods do not meet the quality required

A budgeting problem fun run enterprises

fun run enterprises commenced business in 2002. The following budgeting information for the year ending 30.6.2003 has been provided. Sales -total sales for the year is expected to be $400,000 -40% of sales are for cash -staff are expected to be paid $50,000 in salaries -sales returns are anticipated at $3000 Goods sols -cost of goods sold is to be set at 60% of (gross) sales. All goods are brought on credit. -creditors are paid -stock loss is expected to be $2400 -stock on hand at 30.6.2003 is anticipated to be $34,000 Anticipated payments -advertsiging: $16,000 -cleaning: $6000 -drawings: $45000 -loan: repayment: $10000 other items discount expense $500 bad debts $2000 (graph) Required -prepare a cash budget -prepare a profit and loss statement (budgeted)- functional classification not required -prepare a classified balance sheet. (link)

comparability

if accounting reports are to be compared from one reporting period to the next then the methods of accounting used must be incosistend from one period to the next.

Historical cost and non-current asset valuation

in preparing reports, we are currently guided by the historical cost principle. This principle states that non-current assets should be valued at the cost at which the asset was acquired. This cost includes costs involved in getting the assets ready for use. For instance, if you were to buy a combustion stove for your restuarant at a cost of $1500 it may also cost you a further $400 to have you a $400 to have the stove installed. The deprcicable cost of the stove becomes $1900. The advantage of using historical cost is that it is based on objective evidence rather than sivjective opionon. However, the problem with some non-current assets such as property is that they usually increase in value over a number of years. This creates problems when assessing the performce of a business. Supposing a business has a net profit of $300,000. The ROA (Return on Assets) is 10% and in the absense of other information may be regarded as satisfactory. However, the $300,000 in assets may include premises valued (historical cost) at $200,000. The assets may have been brought in 1979 and may be 'worth' seven times that amount today, $140,000. If that infromation was reported in the balance sheet total assets would be $150,000. The ROA would be 2% and much less likely to be regarded as satisfactory. The infromation may substationally affect decision making in the business. The business may now consider selling the premises and ending the business, renting elsewhere or seeking a more profitble activity. The decision to reflect more current values for non-current assets is an aspect of current cost accouting. Using this approach the business attempts to show the non-current asset at current or replaced values. This has certain ramificaitons. Depreicaiotn also has to be adjusted to allow for charges in current values. This brings into question the purpose of depcriation itself. Is it intended to allocate the cost of the assets over the life of the asset? This is the definition currently used. If the depreciaiton is based on current or replacement values when this suggests the purpose is to provide for the replacement of the asset. This is a purpose not currently met. What happens if you do not intend to replace the asset or if you do, with a more expensive asset? There are no ready answers for those questions. Assesstment of performance becomes more difficult in the bvase against which profit is measured constantly changes. Is the improvement in performance due to increased profit of decreased asset validation? The use of ratios, as validation? The use of ratios, as a measure of performance, loses a measure of performanc, loses its value with these changes and careful examination of actual reports becomes important. FInally who carries out these valuations and is the expense for a sole trader justified? (graph)

point of production

in some cases the scale of the product is assured at the known price before any final contract of sale is made. This happens in some primary indsitries, such as where a firm has a governemnt contract.

sales return-in the general journal

in the example for the previous page "credit note", ALex Fine Furniture would record the sales return by Stewart Retail Furniture as follows. (graph)

Materialbility

is concered with which data should be disclosed in financial reports. All transactions regardless of size should be recorded. Breach: the owner does not bother to record minor withdrawls of stock from the business.

owner's equity

is relevant as the deonimator of ROA (Return on Owners Investments) OE (Owner's equity) is the residual value of assets minus liabilties. If excess assets are carried by the business then OE is excessive and the return on investment is diminished. To reduce OE the owner may dispose of excess assets and take the excess funds out of the business and invest elsewhere. Alternatively new, more productive assets may be aquired. By dimissioning of unnceccessary assets the sales/ assets will also be improved.

Reporting-historical cash flow statement table

it is important to be aware that not all transactions and the resultant account belong on the cash flow statement. In the table below columns have been prepared. In the first column are examples of items that belong in the profit and loss statment but not in the cash flow statement. In the secound coulumn are items that relate to the same transactions but are reported under diffrent titles and usually diffrent amounts in both the profit and loss statement and the cash flow statement. In the third column are items that belong in the cash flow statement but not the profit and loss stamtent. (graph) (link)

Trent analsysi

it is important to recognize trends or patterns relating to particular businesses. These trends may relate to sales, margins, expenses, or profit. All of these items may be measured in amount or as a percentage of some other relevant figure. When measured over more than one period it may show trends or movements in these figures. Businesses may then act by making decisions relating to those statistics.

Understandability

it is of no value to present accounting reports which users are simply unable to understand.

recipt of payment

it is possible to daly the relaizsation of revenue until cash has been recieved. This assimption is often used by people providing a service using this point in the operating cycle as the revenue realization point avoids complicaitons caused by clients not paying.

presentation

it is recommended that you use graphs to improve presentation and understanding of information. This presentation may be classsifified by computer programs. Thewy may be interspered between parpgraphs as they become relevant to the particular accounting task. There is no doubt graphs add to the report and help the explanartion. I would further recommend the use of graphs when carryuing out trend analyssis. The plotting of a series of graphs over several years for each of the profitability measure may more clearly show changes in profitability. The problem with using graphs is that you will often rely on the grpahs alone. While this does identify the change which has taken place it does not necessarily show the amount involved. TO fully satify the particular criteria you may have tro explain why the change has taken place. The use of horizontal and variance analsysis is encouraged. Like graphs they tend to focus your response, however they share the common problem with graphs of identifying but not explaining. It is very important the you support graphs with an explantation. You are invariably required to give 'reasons for teh change.' It is also important to note that 'the reasons must be relevant to the hypothetical business.' Reasons will be found in data and in the preamble provided by the task. A preabmble is preliminary information.

liquidity

liquidity if the ability of the firm to meet its short term debts. (graph)

Conserversion

may also be known as preudence. Losses should be recognised as soon as the business is aware of their liekly event whilst profits should not be recognised until they actually occur. Breach: the net realisable value of stock has fallen below cost yet the owner refuses to adjust cost of goods sold calculations.

case study

michelle grows persimmons a type of fruit in her orchard. This activity includes a number of tasks; she was has to prune in winder, water in summer, and pick polish and pack in may. The bulk of the fruit is sold in June. Last year she averaged $5 per carton on the 300 cartons she sent to market. However this year has been a good year for growing and with a glut of fruit the price may fall. Disscuss the appropraite realizartion point for Michell, assumping accounting period for one month. 2. Craig has a contract to build 40 prefabricated huts for the army at $30,000 per hut. His accounting period is for three months. On June, the first day of the new period he has completed 50% three huts. During June, July August he commenses building work on 10 huts, in addition to completing the three in progress at the begining of the 10 huts he commensed building in this period, two remain uncompleted (50%) on 31 August. 3. Mealanie contracts to make woolen jumpers. She charges $100 per jumper. Her accounting period extends from January to June. She presents you with the table below and ask you to determine her revenue using each of the diffrent realisation points. (graph) (link)

what strategies can a business employ to improve debt collection?

offer discounts for promot payment. charge interest-myst be a term of the contract. Frequent and early invoicing/telephone communications. Factor debtors by selling to a devt collection agency. Refuse further credit until payment. Legal action, Service benifits for prompt payers. -what is more important then the actions stated above is to carefully monitor potential credit customers to avoid legal risk. -Having a good relationship with credit customers may help to minimise the neeed for the less pleasant strategies listed above. calculating recipts from debtors -All sales on credit are collected as flollows: -50% in the month following sale -30% in the secound month -20% in the third month complete the table showing cash recieved in the month of october, NOvember and December. (graph) (link)

monetary

only eventrs whose impacts can be measured in money terms can be treated as a financial transcations and thus entered in the books of the business. breach: stock is shown in finaincial reports in quantity amounts.

Recording prepaid and accuried revnenue and expenses in the general ledger

prepaid expenses in this example, $3000 advertiusing has been paid on 1 January 2000 for ten advertisments in a magazine. At the end of the accoutning period, three months later, only severn advertisments have been placed. The prepaid expense is a current asset. You will have to be able to record in both the general journal and ledger showing the adjusting, closing and reversing entries. (graph)

breach

property owned by the business is shown at the higher market value rather than for the amount at which it was acquired.

Likely errors

questions often concern the posting of data from journals to the general and subsidiary ledger. The task may be focused on the debtors controls account and debtors subsidairy ledger. Some errors that students make when completing this task include the following: Likely include -entries recorded to the wrong side of the ledger. -inability to treat conra entries and bills recievable/payable -failure to include opening balances -omission of sales/purchases return -inability to treat bad debts -inclusion of items such as cash sales/ purchases which do not belong. -double counting of discount. -recording of entries on a individual basis -failure to total the debtors/creditors schedule.

quick asset ratio

quick asset ratio (current assets less stock and prepaid expenses/current liabilities les bank over draft) ZThere is not the same certainty these days taht the bank overdraft will not be immeditaely called in, some businesses do not deduct bank overdraft from current liabilties when calculating this ratio. THis ratio should always be at least 100%

entity-

recognises that the bsuiness, from an accounting viewpoiint, is seperate from the owner. breach: the owner includes in the business sheet personal assets such as golf clubs.

debtors (accounting recievable) ageing analysis

relates to budgeting in thaqt is a process designed to enable a business to more accurately predict recipet of funds from invidiaul debtors. (graph)

the relationship between concepts and principles

relevance accounting period disclose accounting entity conservation going concern. reliability- verifiability historical cost objectifying accounting period. materialability-materialbility comparability- consistency disclosyure accounting period conservation understandability

Accrued revenue

revenue may be owning (accrued) accrued revenue in this example, rent of $2000 has been recieved with $400 owning. This accrued revenue is a current asset (graph)

prepaid revenue

revenue may be recieved in advance (prepaid) prepaid revenue in this exmpale commission of $4000 has been recieved with $500 prepaid. The prepaid revnue is a current laibility. (graph)

Long term stability

selection of the key ratios is again important. It is easy to use a multiple of 'gearing' ratios, however only one is necessary. Most people favor liabilities to total assets as a measure of gearing. The reference are not consistent in the dfentgiiton of ratios items. For instance some define the rate of return ratio using 'owners equity' whilst others use 'average owner's equity'. Either is acceptable providing you are consistent in the application of these measures where relvant you should use a 'average' figure. Two other possible ratio used are -debt ratio=interest bearing debt/total assetrs -interest coverage ratio= net cash flow from operations+interest/interest expense It if important that you graph the ratios stated along with liabilities: total assets-the movement of these ratios must be explained and, if provided compared with a benchmark. By reffering to the finaincial reports you should attempt to explainj why changes have occured. Before condemming a business in respect of its long form stability check the nature of the non-current assets. If these assets have been aquired some time agoand are shown as hhistorical cost then it may be possible that they are considerably understated in value, which means that gearing situation is not as bad as it appears. On the other hand a bysiness, which has a reasonable gearing, may still fail if it looses a major account or suffers the failuyre of a major customer/debtor. An areas you may wish to pursue in your report concerns items which are certainly not measureable but vital in performance evaluation. one such example is the quality of the managmeent of the business you are evaluating. The advice you provide to management may be non-financial such as providing better stafff training, improved customer relations and use of the internet. You may also suggest the business widen or contract operations.

Matching

sets out the point of time at which revnue may be recognised. breach: a contract is signed for advertising in your magazine although you will not include any advertising in this period's work you still include the revenue paid in advance.

Source documents

source documents are ussually linked to control accounts. The important documents for students to understand are the invoice and the credit note. Invoice THis document is an invoice delivered by seller and the buyer along with the goods as evidence of the transaction. The invoice duplicate is used by the seller (Alex) to record that this has happened in their credit sales journal. The buyer (Stewart retail stores) uses the invoice to record the transaction in their credit purchases journal. For the party sellling the good the effect on the accounting equation is -a decrease in the asset stock (show dollar cost) -an increase in the expense cost of goods sold which is recorded at the cost price, follwed by (show dollar cost) -an increase in the asset debtors (show dollar selling.) For the party buying the goods the effect on the accounting equation is -an increase in the asset stock -an increase in the liability creditors

case study-cash flow statements

stevens computer sales has supplied the following list of transactions for his business. The accounting period commenced 1 July 2002 and continues until 30 June 2003. -Steven commenced business with $20,000 cash contribution to the business. -Steven bought a motor vehicles for $15,000 cash on 31.12.2002. -the motor vehicle is to be depreciaited at 10% per annum. -$8,000 is borrowed. It is to be repaired by installment at $2,000 per annum. -Cash sales are $65,000 -Credit sales are $45,000 with $40,000 being recieved by the end of the final year from debtors. -wages paid are $37,500, with $2,500 still owing. -Steven recievves $600 per year from a magazine commission. To date he has recieved $400. -rent is $200 per month and steven had paid elven months in the financial year. -Steven bought $15,000 worth of computers and has sold $13,600 worth. -Advertising is $2,000 per quarter. In this finaincial year Steven has paid $10,000. -other expenses total $13,000 and they have paid in cash. a. prepare a cash flow statement for the year ended 30.6.2003 b. prepare a profit and loss statment for the same period. c. prepare a balance sheet as at 30.6.2003 In preparing the report in the cash flow statement Likely erros include failure to: -classify cash inflows and outflows into -operating -investing -finaincial terms -reconstruct the accounts to determin revenue recieved and expenses paid rather than revneuye earned and expenses incurred. -failure to include all items; for example; loan repayement may be overlooked. -corectly reconsutrct accounts -include opeing bank balance into the cash flow statement -exclude non-cash items -correct classification of items. (link)

reliability

the accounting reports should represent an effective and faithful representation of finaincial events relating tho the businesses

1 Budgeting

the cash budget is a report designed to show future movements of cash info and out of a business. The purpose of a cash budget is to plan and controlfuture cash movements. The cash budget may indicate shortages of cash, in which case the business may: -arrange additional finance -postpone intended spending on noncyrrent assets. -delay payment of outstanding debts -attempt to improve debt collection -change the price at which goods and services are sold. The cash budget also indicates excess cash. THis enabled the business to make decisions such as: -ealy repayment of debits to reduce interest expense. -investment in longer term projects offering bvetter interest rates in preferance to hodling the cash in the bank. -a reduction in owner's equity, imporving return on invesment example: (graph)

The cash cycle

the cash cycle measures the time it takes to buy and sell stock, collect money form debtors and reutnr that money to the business. To complete the measurements the time allowed by creditors to pay is deducted. For instance , if stock turnover is 65 days and turnover is 40 days this adds to 105 days if creditors turnover is 30 days then the cash cycle is said to be 75 days.

cost of the asset

the cost of the asset is more than just that, it also includes costs involved in bringing the asset into the business for example, if you buy pizza oven then it may cost over $10,000 to buy (invoice price), however there may also be a $5000 cost of installation-electric charges, the conrete and so on. The cost of the Pizza Oven is $15,000.

a task on variance analysis

the following reports include the budgeted figures for Fun Run: the first step in the process of variance analyssis is to state the amount of vairance. For instance, if cleaning is budgeted for $6,000 and you actually pay $7,000 then the variance is $1,000. The second step is to state this if favorable. (F) or unfavorable (UF). THis process is "mathematical" in that it does not allow you to subject opinion. An increase in spending on advertising would be regarded as "unfavorable" yet it may result in a substational increase in sales. That would be regarded as a favorable. The example for cleaning is shown. The third step is to 'explain' why the variation took place. When making this explnation youy may have to consider an interrelationship with other item. Often these items are contained in the relveant ledger accounts. Take the case od debtors. The clsoing balance in the debtors account will be affected by credit sales. An increase in credit sales. Has the potential to increase the closing balance however, cash recieved from debtors, bad debts and discounts reduce the debtors closing balance. AN increase in discount should encourage debtors to pay more quickly. Improvements in sales may be related to increases in selling expenses such as sales, salaries and advertising. It may also be due to an increase in non-current assets, in particular new premise, motor vehicles or equipment. In fact if certain expenses or non-current assets increase and sales do not respond you have to chanlange why the expensiture was undertaken. Learn to think in poosopsites. The explanaation for debtors given above applies in the same way to creditors. Becuase we are using the perpetyal stock approach you must link creditors you must link crediditors to stock control. In a similoar way cost of sales, which reduces the stock control valance is linked to sales. Sales may increase as a result of more units being sold, or as a result of increased prices. If more units are sold then we would expect an increase in cost of sales. This leads to changes in stock control and creditors (if the stock is bought on credit.) (link)

Accounting time lines

the following strategy is useful when dealing with balance day adjustments suich as depreciation accounting time lines it is often the case that the time line given for the exercise or report does not match that of the finaincial year. This will mean that the balance day adjustments, in particular depreciation, prepaid and accrued items, need to be matched against the actual reporting period. step 1 draw a time line for the financial year. 2 draw the time line for the actual reporting period. 3 write the secound time line. 4 If dealing with depreciation the number of months over 12 is what you need to calculate depreciation for. 5 For accured or prepaid items drraw a further time line representing the time accured or prepaid. For example if the actual reporting period. is 3 months and an expense item has been paid for 4 months draw that line under the 3 month line. (graph)

Accounting Principles

the impact of accounting principles (otherwise known as conventions, doctorines or assumptions) on the preparation and presenation of finaincial information is an important aspect of all accounting units. These principles support the general accounting concepts.

key ratios profitability

the key ratios used in the previous course are repeated here. Several ratios have been added and are indicated by an asterick. Profiability is the measure of profit against sales, assets capital or other figures. (graph)

List of the asset and the residual value

the life of an asset is ussually an estimate. This is to be remembered while discussing questions relating to asset valuation. Firstly we are using the historical cost of the asset; secoundly the life is only an estimate, thirdly, estimates are made as to residual, disposal or scrap value of the asset; and finaly assets differ in the nature of their use. At no time during the life of the business is the balance sheets a valuation statement. When discussing the 'life' of an asset it is important that the life be reguarded as the 'economic life'. That is to say that the asset is only of value to the business whilst generating revenue. The residual value is what the business expects to get from the asset when it is disposed of, for example, traded in.

Accounting period

the life of the business is broken up inot abitary periods for the purpose of measuring profit. Breach: the owner decides to wait until the project is completed before preparing the finaincial reports.

nature of use

the nature of use of an asset differs considerbly. The use creates a revenue patten and the method of depreciation chosen should match that pattern. For instance, if an asset generates revenue evenly over its life then the straight line method may be regarded as appropriate. Striaght line method of depreciaiton invovles the equal allocation of depreciaiton expense to each reporting period. This method is simple to calculate and assumes that a non current asset contributes equally to revenye in each reporting period. It may be allocated on the basis of time. However, should it generate more revenye in the early years then the diminishing before balance method may be more suitable. Dimishing balance method allocates greater amounts of depreciaition in the earlier years of an assets life. This method is used where assets generate greater revenye in the earlier years of the asset life. Some asse3ts are more effeient in those early years if the asset requires time consuming maitenance in later years then this is a reason for diminishing balance approach. Fear of the asset becoming obsolete is another reason for the yse of this method.

disclosure

the owner is obl.igated to disclose any transaction of a significant financial nature in their reports breach: the owner determines not to include the recent sale of property in the financial reports as this may deter potential buyers of the business.

Revenue Realism

the realization assumption sets out the point of time at which revenue is to be recognised. Generally, firms will recognise revenue at this point of sale or for the provision of servicde. For example, a car is sold by a car dealer on 23 December and payment is on 15 January. The accounting periods are for one calander month. If revenue is regosnised at the point of sale then this reveue would be reported in the month of demeber. At the point of cash the revenue would be reported in january. In fact there are four points regognised.

subsidary ledgers

the subsdiary ledger is a supploement to the general ledger, continiung specific information about the individual debtorsk creditors, stock and other items. The advantage of preparing a subsudairy ledger are: -it removes bulky detail from the general ledger. This streamlines posting procedures to the general ledger. -it enables a check to occur between the balance of the control account and the total balances of the indidivdual accounts-usually shown in a schedule. -it allows the seperaiton of duties between the person completing the general ledger and the person dealing with the subsidiary, this improving security. It shows the individual transactions invovling that particular item. For instance, in the case of debtors, it invovles the amount of stock brought on credit, cash recieved from the debtors and the amount outsnading. The date of which all these indidivdeual transactions occurred is also shown.

reporting-profit and loss statements.

the three major accounting reports are: -cash flow statement -profit and loss statement -balance sheet when preparing reports the profit and loss statment requires both vertical and horizontal classification. the multi column profit and loss statement must indicate both gross margin and contributing margin. Make sure that you classify expenses. Liekly errors when compiling reports include the display of aliens such as drawings, loan repyament and petty cash as expenses and the incorrect calculation of depreciaition. THis takes place when depreciaiton is shown for one year and the reporting period is only one month. THe profit and loss statmenet may be: -a trading profit and loss statement with functional classification -a departmental profit and loss statement the rpeorts are included in the following excersies titled 'Horse People' you should use the solution as sa template. For the reports mentioned above. (link)

Bad and doubtful debts

there are two possible situations for bad debts 1. where a bad debt occurs in the same period as the credit sales then the entry is: (graph) this is all that is invovled. At the end of the period bad debt is posted to the profit and loss account. Where the bad debts occurs in in a later period, when the credit sale is made in the first period, it is anticipated that part of the funds owning on the credit sale will not be recieved. the business setup an allowance account. (graph) in period 2 the actual bad debt occurs. Let us suppose it is $450, then the following transaction occurs: (graph)

materiality

this concept requires that all significant events be included in financial reports. An event is regarded as material if it is likely to effect financial decisions.

credit note

this document is a credit note. The seller delivers the credit note to the buyer following the return of the goods, which in this case have been damaged. The credit note duplicate is used by the seller (Alex) to record that this has happened in their sales return journal. The buyer (stewart retail stores) uses the credit note original to record the transaction in their purchase returns journal.

the accounting equation

this is another strategy which is useful when dealing with balance day adjustments. THis particular approach emphasises the importance of recognising the dual effect of transactions on the accounting equation. The accounting equation-the seesaw effect the accounting equation represents a state of balance. Initialyy assets are equal to liabilities plus owner's equity (proprietership). Once the business commences operatoins this equation extends to assets+expenses=revenue+liabilities+owners equitiy (propriepership) This may be present in the form of a playground see saw. If the seesaw is to be fun it myst be kept in balance. There myst be equal weight in each end. The left hand side of the see saw is the debit side and the right hand side is the credit side. Any decrease in the credit side, or an increase in the debit sidee. All changes myst be of equal effect.

Benchmarks

this may be a target internally determined by a business or an industry gained by the collection of data from a number of similar firms. Benchmarks are also known as yardsticks. They may be based on comparisons and may include comparisons with -previous reports -budgeted reports -indsustry averages -reprorts of similar firms -opportunity cost-the value of the best alternative

evaluating account infromation

this may be done in three stages -select appropriate ratios and other criteria to identify significant change over the two historical years and that expected for the budgeted year. -fully expali9n the identidied changes -give reasons for the changes. You must indicate the direction, magnitude and effects of changes where appropriate. The reasons must be relevant to the scenario chosen. Unfortunately many students fail to go past ratios when selecting criteria for assessing a business. When assessing a business-three other areas are also important: 1.comparitive data (C) 2. actual plan (A) 3. economic data (E)

Depreciation

two methods of depreciaiton are 1. Straight line method 2. Diminishing balance method (graph) the methods differ in variation and in the impact valuation has on the profit reported and subsequent effect on the balance sheet. The results of the application of the diffrent method apply in the following ways.

departmental profit an loss statement

welcome to media world. This business sells DVD players (DVD's) and tevevsiion setsw (TVS) at the beginging of Novemeber media world have the following assets and liabilties. Assets -stock $6,000 -prepared rent $1,000 -workshop equipement $36,000 -land and buildings $180,000 Liabilties -bank overdraft $10,000 -accrured wages $700 -loan $40,000 -accumulated depreciaiton on workshop equipment is $30,000. You have to determine capital at 1 Novemeber. Information -media world sells DVD's and TVs. Workshop equipment is only invovloed in reparing TV's, service costs are only for the DVDs. -MEdia world employs three sales staff, who spend two thirds of their time selling DVDs and one-third selling TVs. Two other people work at rpearing TVs and another person works in servicing. THere are two staff memebrs employed in the office. -the business has four cost centres: workshop, office and finance. -each person employed by media world is paid $100 per day and works a five day week. The prepaid and accrued expenses must be reversed for each month. -the calendar for Novemeber is shown below. Dates shown in bold are the days on which staff are padi. Staff do not work on monday and tuesday as media worl operates in a tourist area are quiet days. They do work on weekends. (graph) -workshop equipment is depreciated at 12% per annum on cost. -interest is paid annually in December. It is $1,200 for the year on the bank overdraft and $3,600 for the year for the loan. -rent is $3000 per month and is allocated in equal proprtions to sales workshop and office. -advertising is allocated according to sales. -cash sales are $40 of total sales. Cash sales are $20,000 for the DVD players and $10,000 for TVs. -there is a mark up of 100% on all goods sold. -stock loss is $500 (all DVDs) -bad debts are $1000 -at the end of November prepaid rent is $600. -you will have to caluculate accrued wages at 30 Novemeber. After expenses include: -advertising is $3,000 -service costs are $1,000 -cleaning $2,000 (link)

The accouting period

when balance day adjustments are made using the 'expense aproach' the payment or reciept is intitally as an expense or revenue. That portion of the payments or revenue not used or recieved, of the end of the accouting period is then treated as an asset or a liability. strategy the following stragties proposed to deal with advetising, closing and reversing entries for prepaid and accured expense and renvue. This strategy is based on the idea of thinking in opposites (graph) the ledger account, above are designed to act as a template for students responding to a need to reconstruct accoutns invvoling balance day adjustments. The words in cpaital state what you should know. For instance, you should have little difficulty recording the amount paid, that is , bank, for an expense on the debit side of the actual expense account. The amount expenses, as shown by profit and loss a/c is shown on the credit side of that account. These two entries will appear on opposite sides in the revenue accounts. If you are confident that prepaid expenses appear on the credit side of the expense account then the opposite entry must apply for accured expenses at the end, appearing on the debit side for that exspense. By working in 'opposites' all the remianing entries may be filled in for the reversin entries to the expense account and the other entries in the revenue account.

budgeting requirements

when seperating cash and profit it is important to recognise what is: -a recipts but not revenye -revenue but not a recipts -a payments but not an expense -an expense but not a payment reasons for having shorter budget periods include: -to provide more accurate information in the budget for the busuiness to act on -to better identify periods of cash shortage leading to decisions to improve cash flow -to better identify cash surplus maximising the return on excess funds -to enable quicker reation to previously unforseen events -to have better planning and control as a response to reviews of the budget with actual results.

degree of contract completion

where a firm is engaged in large scale construction project that take years to complete, for instanse a large office block, payment may be one a progressive basis. The revenue will be matched to each accouting period extneing over the life of the project. The main problem with this method is the subjectivity invovled in arriving at an estimate of the degree of contract completion.

key ratios efficency

(graph)

key ratios stability

(graph)

Diminishing balance method

-allows for obsolesence -enables the recovery of cost of the asset at the earliest opportunity -tendency to overstate depreciation and therfore understate profit) in the early years of the asset life.