Accounting (Esp. Theory)

Cost Accounting - Relevant income

Income that differs between alternatives

Capital Investment Techniques - Taxation Effects

interest is an expense for tax purposes.

CVP Analysis - Capacity Constraints

A business may have the capacity only to manufacture one product at a time and must be able to choose between two alternative products using CVP analysis. Usually the fixed costs remain the same, so the calculation can be made using the contribution margin approach. In addition, a business's production and sales may sometimes be limited by a factor that affects profitability. This can be a resource constraint, such as limited supplies of labour or raw materials. This, too, would require management to decide between various alternatives.

Budgeting - Controlling

A performance report compares budget targets to actual results. Any major differences can be investigated and corrective action taken. A variance between budget and actual figures may be the result of: • poor management - action must be taken to improve efficiency • invalid budget estimates - budget figures must be revised • changes in economic circumstances - budgets must be revised to reflect economic conditions. Budgeting also allows businesses to: • provide a basis of responsibility accounting • formally authorise future expenditure from senior management to the individuals responsible for the expenditure • motivate employees to reach certain levels of attainment

Budgeting - Planning

A budget is a written plan for future activities. People from all sections of a business develop their own budget, set targets and discuss how their section contributes to budget targets and overall business performance. Preparing a budget requires owners and managers to think ahead, set goals and plan for their achievement.

Companies - Number of Members and Directors

A proprietary company must have at least one director that resides in Australia and no more than fifty members (shareholders) that aren't employees of the company. A public company must have at least three directors with at least two residing in Australia and there is no maximum number of members.

Capital Investment Techniques - Government Regulation

A business must consider the attitude of regulators, such as governments, when considering the acquisition of assets or investment in a project. Capital investments may be required in order to comply with government regulations. For example, if governments introduce or change regulations regarding emissions, recycling and pollution management, businesses will have to comply. Businesses will have to invest capital to comply with the regulations by modifying or replacing existing infrastructure such as machinery, factories and waste processors. There are regulations for capital investments involving foreign companies and individuals. The regulations apply to foreign companies or individuals that plan to invest substantial capital in such things as an Australian business, urban land or to establish a new business in Australia. Governments have subsidies and tax rebates to encourage businesses to make capital investments. Whether a business makes a capital investment may depend on the level of financial support available from state and federal governments.

Fundamental Concepts Part 1 -Internal and External Reporting

A business produces reports for those working in the business (internal reporting) and different reports for those interested parties outside of the business (external reporting).

Companies - Continuity of Existence

A company has perpetual existence, ie it is unaffected by changes in ownership when shares are transferred, shareholders die, etc. A company can only be brought to an end by a formal legal process.

Companies - Legal Entity

A company is a separate entity from the owners. This means that a company can enter into legal agreements in its own name, can own property and can sue and be sued in its own name. Any personal debts incurred to set up a company cannot be recorded in the company accounts.

Companies - Appointed by the Shareholders and Reappointed at the Annual General Meeting (AGM)

A company or any large organisation will have an audit committee. Such a committee will be made up of directors or senior managers. When an internal audit is conducted, the report is given to the audit committee to review and take action to correct any problems. The audit committee also works with the external auditors. An external auditor is chosen by the board of directors or senior managers. A selection process is conducted to nominate an external auditor. The nomination is presented to the shareholders at a general meeting and the shareholders vote on whether or not to confirm the appointment. When the contract with the external auditor ends, shareholders vote on whether to extend the contract or appoint a new auditor.

Cost Accounting - Concept of Mark Up

An aim of business is to make profit. When selling products and services, business owners and mangers must set a unit price that will at least cover the costs of manufacturing the product or service. An important issue that confronts all businesses is what selling price of quote price they should charge for their product. A business must be competitive and it must charge a selling price that customers are willing to pay. From an accountant's perspective, it is important to cover costs and to make a profit when selling a product or service. This approach to setting the selling price is called cost-based pricing or cost-plus pricing. In this case the selling price is determined using a mark-up.

Companies -The Role and Function of External Auditors

An external audit involves a review and evaluation of accounting processes and financial reports by an independent external auditor. The role of external auditors is to underwrite the financial reports and guarantee report users that they can rely on the information to make decisions. Users are assured that accounting standards have been adhered to and that the requirements of the Corporations Act 2001 have been complied with. The external auditor will state whether they think the reports give a true and fair representation of the affairs of the reporting entity. Companies undertake an external audit in addition to their own regular internal audits. If a company conducts internal audits and corrects any problems or errors in their accounting systems, then they are well prepared for an external audit.

Cost Accounting - Future Costs

Are also called relevant costs. They are relevant to current decisions and need to be considered when accounting for costs.

Cost Accounting - Past Costs

Are also called sunk costs. They are costs that have been accounted for int eh past and have no impact on current decisions.

Cost Accounting - Indirect Costs

Are not so easily trace to a product or service. These are items that are not incorporated in the product or are too insignificant to make it worth tracing the cost of the finished product. An example of indirect costs is indirect manufacturing overheads. These are all costs indirectly related to the manufacture of products such as salary of the factory manager, insurance of factory, local government rates and taxes.

Budgeting - Strategic Planning

Are those that determine the long-term policies of the business. Is often done at a high level by directors or senior executives.

Companies - Liability of Owners

Because a company is a separate legal entity, it is responsible for its own debts. The liability of shareholders is limited to the unpaid portion of the shares they hold. Company directors can be held personally responsible for company debts only if they have acted negligently or in breach of the Corporations Act 2001.

CVP Analysis - Product Mixes

Businesses do not sell just one product or service but multiple items. To maximise profits a business can review the products it sells. If cost-volume-profit analysis shows that a product is unprofitable the business may decide to drop the product or replace it with one that will sell more. Analysis will compare the contribution margins, margins of safety and break-even points of products. Management can use this information to determine which product or service is more profitable.

Analysis & Interpretation - Key Performance Indicators

Businesses may report, internally and externally, other measures of business activity called key performance indicators (KPIs). These can be financial or non-financial quantifiable measures and they assist the company to evaluate how successful it has been in achieving its goals. The philosophy behind the use of KPIs is: • reducing costs • motivating employees by the way they are measured • ensuring success through measurement The annual reports of companies will usually include some details on its KPIs. This information may be explicitly detailed and highlighted, or simply contained within the directors' report or other information within the annual report. Companies may include in their annual report a section on performance highlights, which will contain information relating to their KPIs. This will often link in with the company's goals, objectives and strategies. Some examples of KPIs: Financial • share prices • price-earnings ratios • sales growth • sales figures • operating cash flow Non-Financial • market share • turnover of employees • sick days taken • greenhouse gas emissions • customer satisfaction ratings There is no accounting or reporting standards for the presentation of this type of information. Therefore, it is sometimes difficult to assess and compare.

CVP Analysis - Closing Down a Product or Department

Businesses operate in an ever-changing environment. Sometimes they may need to make a decision to discontinue a product or close down an existing department. The contribution margin concept is the tool used to evaluate these types of decisions.

Capital Investment Techniques - Factors Affecting Capital Investment Decisions

Capital investment decisions are based on assumptions and predictions about long-term market conditions, income and costs. The predictions are made assuming that market conditions and government regulations remain stable over the life of a capital investment. If the business environment changes over the life of an investment it may not earn as much income as predicted, costs may be higher or customer demand may fall. When making decisions to invest in capital expenditure, management will want to ensure that the business: • meets customer expectations • remains competitive in the marketplace • meets all legal and political requirements.

Capital Investment Techniques - Competition

Capital investment options are analysed in terms of the existing market. Future costs and income are estimated based on current competitive activity in the market. In any industry, competition is intense and a business must keep up with or get ahead of its competitors. To achieve this, a business will analyse its: • market approach • productivity • technology • resources • financial investments • environmental impact. Competition impacts on sales and if a business loses market share the predictions about future income will be invalid. It is essential to look for innovations, keep costs to a minimum and maximise revenue-earning potential. These aspects will affect the decisions that managers make.

Cash Flows Statements - Investing Activities

Cash flows from this are cash transactions involving the purchase or sale of non-current assets. Analysis of these cash flows is considered important in assessing the ability of the entity to use its major resources to generate future cash flows. They include: Cash Inflows: Cash receipts from the sale of non-current assets Interest received Dividends received Cash Outflows: Cash payments to purchase non-current assets Cash payments for the purchase of shares in other companies Lending money to other companies

Capital Investment Techniques - Appropriate Management of Cash

Cash is vital to the liquidity of a business. Sufficient cash must be held to meet normal operational demands so that debts can be repaid, assets acquired, expenses paid and advantage taken of discounts. The main consideration is managing liquidity and cash flow, while making sure that operating costs can still be met. Cash budgeting is a very important part of this process so that the credit rating of the business is not damaged. If too little cash is held, then this can lead to liquidity problems and, in some circumstances, it may be necessary to arrange overdraft facilities. Maintaining too much cash in a cheque account is costly as there are fees such as bank charges and a very low interest rate applies. Surplus cash should be invested in marketable securities and long-term investments, where possible, as they provide a better rate of return. Internal controls will ensure that cash is kept secure and will prevent loss, theft and fraud.

CVP Analysis - Make or Buy Decisions

Cost-volume-profit analysis is used when deciding to manufacture or buy a part or product. Making the part or product will give a business control over quality, costs and price. Buying the part or product is simpler, but the business has little control over costs or quality. Cost-volume-profit analysis compares the costs expected from making a part or product to the costs of buying the part or product. Other considerations that may influence the make or buy decision are: • the loss of employees under the buy option, • the reliability of the supplier, and • the supplier's capacity to maintain continuity of supply.

Cost Accounting - Period Costs

Costs that are not product costs are period costs. They are the general operating costs of the business and are recognized as expenses in the period in which the costs were incurred. Examples of period costs include: -Marketing and selling expenses - such as advertising and wages to sales personnel -Administrative expenses - such as office rent, office salaries, insurance

CVP Analysis - Avoidable costs

Costs that could be eliminated if a particular course of action is selected or an option is chosen

CVP Analysis - Interpretation of CVP Results and Testing of Sensitivity to Changing Decisions

Differential analysis is a process that uses relevant information to evaluate alternative options available to the business. Differential analysis can be used to evaluate special orders, make or buy decisions, whether to close a department or drop a product line and to assess options where resource constraints may exist.

Capital Investment Techniques - Appropriate Levels of Investment in Non-Current Assets

Every business requires appropriate levels of investment in non-current assets because it is these assets that are at the heart of its operations and lead to future growth. A business must decide whether to invest in real assets (such as property) or financial assets (such as shares) or intangible assets (such as trademarks). An under-investment in non-current assets can lead to stifling business growth, an inability of the business to operate effectively and failure to provide for customer needs. An over-investment in non-current assets can result in a lack of productivity, inability to repay debt and a poor rate of return to the owners. Asset management of non-current assets is the process of managing the acquisition, use and disposal of these assets to make the most of their future economic benefits and manage the related costs over their entire useful life. Planning and budgeting should include depreciation, maintenance, income and the disposal of an asset, not just the initial purchase cost. The costs of acquisition and ongoing operating costs should be compared to the estimated income generated by the use of the asset. The finance for the purchase needs to be planned, including whether cash, debt or a combination is used. Alternatives need to be compared, such as outright purchase or leasing. Internal controls will ensure that assets are kept secure, prevent loss and record-keeping is complete and accurate.

Cash Flows Statements - Interpretation of the movements in Cash Flow Items - Step 3

Examine and explain the change that has occurred within each of the operating, investing and financing activities classifications. Some of the questions that you could answer are: • What was the largest item in each of the categories of operating, investing and financing activities? • Did the company repay debt during the period? • Did the company purchase or sell non-current assets? • How was the purchase of non-current assets paid for? • Are the sales of the business reflected in the cash inflow from customers? • Did the company issue shares during the period? • What were the proceeds of new shares used for?

CVP Analysis - Cost-volume-profit (CVP) analysis

Examines the interrelationships between cost, volume and profit at differing activity levels. CVP analysis can assist management in making decisions on: • what the selling price of a product should be • how profit changes if any of the variable or the fixed costs change • how profit changes if the selling price changes • at what volume of production a business will break even • what volume of production a business needs to achieve to make a profit of a set amount

Companies -To Perform an Independent Audit of the Financial Statements

External auditors focus on accounting processes and reports. They do not give general business advice or an opinion on the likelihood of success of business activities. External auditors must be independent so they can give a thorough audit report which is free from bias, or influence of the company directors and management. This ensures that the financial reports that users rely on to make decisions are reliable, relevant and give a clear and accurate view of company finances.

Fundamental Concepts Part 1 -External reporting

External reporting enables users to assess the performance, position and liquidity of an entity. It therefore serves to allow the custodians of the business management to be accountable for the decisions they have made and to show how they have invested the resources at their disposal. They are able to show how they have fulfilled their legal obligations and compliance with statutory requirements. External reporting must produce general purpose reports that are suitable and useful to a wide variety of external users. The full financial report produced by reporting entities must include an Income Statement, Balance Sheet and Cash Flow Statement. Reporting entities - notably public companies - are required to have their accounts checked by a qualified expert accountant who is independent of the company, known as an auditor. The auditor is essentially acting on behalf of shareholders and is appointed by them. They are required to check the company's systems and records to make sure that they have been properly maintained and that the reports at the end of the financial period accurately represent the company's performance and position for that period. A formal report to that effect must be attached to the accounts, which are sent out to the shareholders and approved by them at the company's annual general meeting.

Companies -Protection of External Users

External users depend on the financial reports of a company to make decisions about investing capital. External users do not have access to internal documents or management meetings, so they have to rely on the financial reports for their information. The financial reports will be clear, understandable, relevant and reliable if they comply with accounting standards and the qualitative characteristics of reports. External auditors guarantee users that the financial reports are free from error and bias, contain all material information and are able to be compared with those of previous years and similar companies. External auditors also ensure that companies disclose all changes to accounting policies, such as depreciation methods and asset valuations, by providing explanatory notes. External users can be confident that they are relying on good information about profitability and liquidity when making decisions. If an auditor finds that accounting standards have not been followed, they are required to notify the Australian Securities and Investments Commission (ASIC).

Budgeting - Objective

Is a specific target for a business. Objectives must be specific, attainable, measurable, consistent and related to time. The objective of most businesses is to maximise profit. Other objectives include quality of service to customers and social and community objectives. Businesses normally set short-term, medium-term and long-term objectives.

Cash Flows Statements - Interpretation of the movements in Cash Flow Items - Step 4

Finally, draw an overall conclusion as to whether the company situation has improved or not and make any recommendations for the future. Some of the questions that you could answer are: • Should the company have paid its dividends? • Should the company have purchased all the non-current assets it did? • Were the purchased non-current assets financed in an appropriate way, eg with long-term debt? • Should the company consider repaying more debt in the future? • Does the company need to improve the performance of its major operating activities?

Fundamental Concepts Part 1 -Distinguish Between Management Accounting and Financial Accounting

Financial and management accounting both reflect the same underlying economic transactions. However, their focus differs. Management Accounting The process of producing reports and providing financial information useful for decision-making purposes used by the managers of an enterprise in the day-to-day management of its trading operations. Reports will often be detailed, frequent and compare actual with budget predictions. Financial Accounting The process of producing general purpose financial reports used by parties external to the entity such as shareholders, investors, lenders, suppliers, customers, employees and government. Both management accounting reports and financial accounting reports share the same foundation - the accrual basis of accounting. But managers enjoy more leeway in preparing management accounting reports.

Budgeting - Purpose and Function of Performance Reports

Having prepared the required budgets for a business, it is vital that the performance of the firm is compared with the budgets as the budget period progresses. A performance report is prepared to show the differences between the budget estimates and actual results. To prepare a performance report, two columns are added to the cash budget and the budgeted income statement - one column to show actual results and a variance column. The variance column shows the difference between the budget and actual figures. A favourable variance is when a payment is lower than predicted or a receipt is higher than predicted. An unfavourable variance is when a payment is higher than predicted or a receipt result is lower than the budget figure. The performance report identifies areas for further investigation and corrective action within the business. Business owners and managers will find out why the actual result was significantly different from what was planned and whether there is a trend or if it is due to a once-off event.

Capital Investment Techniques - Appropriate Level of Equity Capital

Funds for businesses can come from the owners. Owners may organise loans on a personal basis and invest the proceeds in the business, or a company will offer shares to the public. What the appropriate level is for equity capital depends on the demands and rights of the owners. Owners will expect to receive an appropriate return on their equity. For a sole trader, investing personal funds will impact on their personal lives. Taking on partners to increase equity capital will bring with it demands for salaries, interest on capital and profit splitting. Selling shares to the public involves dividends and the loss of control of the business. Equity finance can also refer to the profits and reserves earned by the owners but not withdrawn - in effect reinvested in the business. Again, the costs and risks must be analysed in terms of the impact on liquidity and compared to sourcing the same amount of funds through debt.

CVP Analysis - Relevant Costs

Future costs that differ between competing options

Capital Investment Techniques - Appropriate Management of Accounts Receivable

Giving credit to customers provides increased sales because financing options attract new customers. Customers may purchase immediately instead of delaying because of a lack of funds and customers may purchase more because they receive credit. However, large accounts receivable totals can lead to bad debts, opportunity cost due to the loss of investment potential and the liquidity of the business can be adversely affected. The objectives must be the identification of poor credit risks and the encouragement of prompt payment by all debtors.

Budgeting - Cost Leadership

Is a strategy to position a business as being price sensitive. It involves a systematic process to eliminate waste and inefficiencies and lower purchasing costs. This will enable the business to sell products more cheaply than its competitors.

Companies - Replaceable Rules

If a company does not have a constitution the replaceable rules in the Corporations Act 2001 will apply. The rules are replaceable because a written constitution will override them. Aspects of internal management governed by the rules in the Act or a constitution include the appointment, powers, remuneration and removal of directors, organising and voting at meetings, dividends and share transfers.

Cost Accounting - Direct cost

Is able to be traced to a product or service with a high degree of accuracy. This means that the cost can be physically and easily traced to the finished product. Examples of direct costs include: -Direct materials - raw materials that go into the making of a product -Direct labour - wages and other payroll costs of the employees that directly work to manufacture the product.

CVP Analysis - Special Orders

If a customer requests modifications to the standard product, these set up costs are incurred again as materials are purchased and the production process is interrupted. The standard costs set in the budget may not be achieved because of the additional costs incurred by filling the special order. It may be the case that the additional costs to make the special order result in it being unprofitable. On occasions management may be asked to produce a special order for a customer at a price less than the normal selling price. If the number of units in the special order is less than the unused capacity of the production facility then, as long as the selling price of the special order is greater than the variable costs, it will create additional income. By accepting the special order, the business might have to cut production of some existing products (which will have a higher contribution margin) and may lose loyal existing customers if their orders are not being met. Or existing customers may want to receive the special price themselves? Cost-volume-profit analysis is used to decide whether it is worthwhile for a business to accept a special order.

Fundamental Concepts Part 1 - Internal Audit and Control

In addition to external controls imposed on some types of business entity, all businesses will implement systems of internal control to increase the effectiveness and efficiency of operations, the reliability and accuracy of financial reporting and to ensure that there is compliance with laws, accounting standards and regulations. The extent to which internal control systems need to be formalised and structured will depend on the size and complexity of the business. The principles of internal control are: • Accuracy - accounting systems record all transactions correctly • Completion - ensures that all transactions are recorded and all explanatory notes and reports are prepared • Identification of errors - identifies errors and assists in correcting and preventing further errors • Separation of duties - separates the handling and recording of transactions to prevent theft and fraud • Safeguarding of assets - identifies risks and prevents loss, theft and fraud • Authorisation - sets rules for the authorisation of payments and credit, and access to information and assets • Compliance - assesses staff compliance with business policies and the compliance of accounting systems with standards and regulations.

Cost Accounting - Product Costs

Includes all those costs that are attributable to a product. They are recorded as an expense in the period in which the product is sold and this will be recorded as the cost of goods. Before the product is sold the item is an asset recorded as finished goods or work in progress Examples of product costs include: -Direct materials - raw materials that go into the making of a product -Direct labour - wages and other payroll costs of the employees that directly work to manufacture the product -Indirect manufacturing overheads - all costs indirectly related to the manufacture of products, eg depreciation of equipment

Budgeting - Financial Budget

Includes the cash budget, projected cash flows and a budgeted balance sheet. The cash budget details how the business intends to go from the beginning cash balance to the desired ending balance. The projected cash flow statement shows the expected cash inflows and cash outflows for the budget period. Both documents reveal cash shortfalls and surpluses. They allow businesses to take steps to avoid or deal with cash problems.

Budgeting - Master Budget

Integrates the budgeting from all sections of the business. Its purpose is to show business owners and managers a complete overview of planned business activities and changes. The budgets from all sections of the business are presented addressing three areas of the business. The three areas are:

Fundamental Concepts Part 1 -Internal reporting

Internal reporting supports the managerial decision-making process. It assists in the management of the business assets, liabilities, income and expenses and is important in enabling the business to reach its goals and improve performance. The information provided can be in the same format as that produced for external reporting purposes such as the Balance Sheet and Income Statement. However, there are no legal obligations involved in meeting the requirements of the Accounting Standards. Other internal reporting can be a Performance Report relating to such aspects as expenses and income or a specific report requested by the manager on any area of the business operations such as the cost of a product. In addition, internal reports usually contain much more information than external reports. This is because outside parties do not need the same amount of information for decision-making as does management, nor does management wish to give competitors detailed information about the company's internal financial arrangements.

Capital Investment Techniques - Nature and Importance of Capital Investment Techniques

Investing capital involves selecting investments or projects that provide the best return on the capital outlay. Businesses may have many projects that could go ahead but with limited capital the aim is to choose the investments that will provide the greatest benefit. Businesses rely on capital investments to: 1. increase competitiveness - buy a competitor, launch a new product, run an advertising campaign 2. increase capacity - open new factory space, buy an office building 3. improve efficiency - replace machinery, buy new equipment, upgrade a computer network 4. expand - open a branch interstate or overseas. Long-term business success is influenced by the capital investments made.

Companies - Company definition

Is a body of persons joined together for the purposes of business as a separate legal entity under the provisions of the Corporations Act 2001 (a Federal Law). There are several different types of companies, but they all share the same essential characteristics.

Cash Flows Statements - Purpose and Nature of the Cash Flow Statement

Is a document that sets out the cash holdings of an entity at the beginning and end of a period, and identifies the reasons for the changes in holdings by disclosing the cash inflows and cash outflows of that entity during the period. A cash flow statement is included in a company's annual report with the statement of comprehensive income (income statement) and balance sheet to assist report users to: • assess the liquidity and solvency of the company • identify the sources of cash • identify how the company spent its funds • predict future cash flows • explain how cash and cash equivalents changed over the period • see if there are surplus funds for the business to use in the future.

Cost Accounting - Costs definition

Is an economic sacrifice of resources for a particular purpose, such as making a product or proving a service. It can be something other than an expense. Costs can be classified in several ways according to: -their relationship to a cost object (ie are they a direct or indirect cost?) -their behavior in relation to levels of activity (ie are they a fixed, variable or mixed cost?) -whether they result in an asset or an expense (ie are they a product or a period cost?)

Budgeting - Cash Budget

Is an internal control that forecasts the expected receipts, expected payments and anticipated cash position of a business over a period of time. It is prepared on a cash basis and includes all expected cash inflows and outflows, even if they relate to a transaction from a different accounting period. It is important to a business because it illustrates a business's ability to generate cash for timely repayment of debts and to achieve future objectives. It can predict cash flow peaks and troughs and enable business owners and managers to plan to take advantage of a surplus or find funds to fill the cash flow gaps.

Cost Accounting - Cost object

Is any object for which we require a value or any object for which costs are measured and assigned. Examples of cost objects are a product,, a service, a process, an activity and customer. Costs can be examined in relationship to a cost object and be classified as either direct or indirect.

Fundamental Concepts Part 1 -Regulation (Accounting Standards)

It is a well-established principle in our society that people should be protected to some degree from exploitation from others who may be better informed or more expert than they are. In the world of business this is achieved broadly in three ways: 1. the development of an accounting conceptual framework, with associated accounting standards, which sets out principles and rules with which all producers of financial reports are encouraged and some are required by law, to comply 2. legislation governing the operations of certain forms of business entity, notably the Corporations Act 2001 3. the requirement that certain entities must have their accounting systems and reports checked by an independent expert The group most in need of protection provided by these means are those who hold shares and other securities in public companies, so it is these forms of business entity that are required by law to comply with accounting standards. From the start of 2005, Australia adopted the Framework for the Preparation and Presentation of Financial Reports set out by the International Accounting Standards Board (ISAB) which, together with the former SACs 1 and 2, constitutes the conceptual outline which Australian businesses must operate. That Australian Accounting Standards Board (AASB) has issued a number of Accounting Standards that deal with specific items of preparation or presentation. Generally, Standards comply with the principles contained in the Framework though, if there is a conflict, the Standard prevails. Although compliance with Accounting Standards is not mandatory for all business financial reports, it does extend well beyond the bounds of legal requirements. For example, the professional accounting bodies in Australia expect their members to comply with standards in all reports for whose preparation they are responsible, regardless of whether their compliance is compulsory.

Analysis & Interpretation - Lack of Comparability Between Entities

It is not always possible to compare ratios between companies as different accounting policies may have been chosen that will affect ratio calculations. The preparation of financial statements involves non-comparable accounting methods and estimates. The choice of accounting methods will cause variations in different business's statements, and these differences in accounting policies could be in regards to such items as: • cash or accrual accounting • balance day adjustments • different methods of inventory valuation • different depreciation methods (straight line or reducing balance) or rates of depreciation • historic or fair value accounting - most figures on reports would be at the historic cost values, but some may have been adjusted to fair value • different balance date - Australia uses 30 June as the end of its financial year, but other countries use a different date for the end of their financial year.

Capital Investment Techniques - Consumer Preferences

Marketing is a complex area involving analysis of the price, product, place and promotion of a business's product or service. Critical in this process is the fact that the customer and their demand for a product or service is influenced by their perceptions of the business. The customer's preferences will alter according to such influences as: • changing fashion • habits • social values. Businesses may try to use advertising and discounts to change consumer preferences but these involve increased costs that were not anticipated when choosing the capital investment.

Analysis & Interpretation - Historical Cost Accounting

Most financial statements have been prepared based on the historical cost accounting concept. There are some exceptions to this when assets and liabilities may be valued based on fair value, net present value or net realisable value. Historical cost accounting is widely used, easily understood and is a reliable approach as it is based on factual evidence. However, the other side of this is the question of whether it is relevant. Historical cost accounting is not a good basis for assessing the performance of an entity. The criticism of historical cost accounting is that it does not give the real value or profit of the business as it is not based on appropriate measurement values for the elements of financial statements. Some of the reasons for this are: • It does not show the current value of assets, particularly non-current assets • It does not calculate the loss of value of monetary assets in times of inflation • It overstates profits in times of inflation • Depreciation under historical cost accounting is based on cost allocations and not the current value of the assets Historical cost accounting means that users are basing their decisions on financial information that is not necessarily up-to-date in regards to the value of the elements shown in the financial statements.

Companies - The Nature and Importance of the Lobby Groups

Professional associations and industry groups lobby Treasury and the FRC. Their aim is to ensure that accounting standards reflect current and anticipated issues in accounting practice and capital markets. The 'Group of 100' is an association of the chief financial managers from Australia's 100 largest companies. The group is very active in making submissions to the standard setters. They may lobby in the general interest (eg to ensure that financial statements provide useful information) or they may be more narrowly focused on the interests of the companies for which they work. The impact of lobbyists on the standard-setting process is that it is recognised as a political process.

Budgeting - Importance of Business Planning

Planning involves working out the goals and objectives of a business and expressing how they are to be attained. It involves a series of stages: • the development of business goals, often expressed as a mission statement or vision statement. A mission statement is a statement of purpose that serves to guide the business. • the setting of objectives to achieved these goals. An important part of the planning process is for a business to undertake a SWOT (strengths, weaknesses, opportunities, threats) analysis of itself and its environment. From this a business can develop its objectives and priorities. • determining strategies to meet the objectives. • taking the operational decisions necessary to put the strategies into effect. Business planning is important to the success of any business. Budgeting is a vital part of this process. A budget can: • give purpose and direction • anticipate future events and plan how to deal with them • connect and coordinate business activity • encourage the challenging of accepted practice • galvanise the energy of all staff, focus their activity and give employees a sense of belonging • improve decision-making processes and bring forth creativity • provide a business with a competitive advantage and improved market recognition. One of the main purposes of business planning is to reduce risk and costs. By anticipating what might occur in the future, a business can prepare itself to respond to future changes. The planning process should highlight those areas of the business that are not operating effectively or that need to improve efficiency and productivity.

Budgeting - Purpose

Planning is an important activity in business. It involves understanding the business environment, knowing the strengths and weaknesses of the business and preparing for the future. Budgets are prepared to show estimations and forecasts of how the planned activities and changes in a business will impact on profitability and liquidity. Budgets are used by business owners and managers to help them with planning, coordinating and controlling the business.

Budgeting - Operating Budget

Provides all the information necessary to prepare a budgeted income statement. It includes: • revenue projections • cost of goods sold projections including projected costs of materials, labour, and overheads for a manufacturing firm or costs of purchases for a merchandising firm • estimated selling and distribution expenses • estimated general and administrative expenses • estimated financial expenses. The separate budgets for sales, production, purchasing, administrative and others are combined into an overall operating budget and a projected income statement showing expected profit at the end of the period.

Analysis & Interpretation - Limitations in Assessing Performance from Financial Statement Analysis and from Financial Accounting

Ratios are only as good as the underlying figures used in their calculation. If the accounting reports have not been prepared properly or there have been differences in accounting methods, then the ratios will also be inaccurate. When using ratios to assess business performance and position it is important to remember the following limitations in using this approach to financial analysis: 1. Ratios may need to be calculated for a number of years before a trend becomes apparent. Like any statistical analysis, the smaller the sample size the great the standard deviation possible. 2. Ratios need to be compared to an industry-wide standard to be further evaluated. These standards are not readily available. 3. Ratios do not identify the causes of problems. A change in a particular ratio may have a number of different explanations that the external user of the report may be unable to identify. 4. Most media-reported market ratios use data from the previous year in calculating certain ratios. This can lead to incorrect interpretations of the published ratios as future profits or dividends may not be the same as the previous period. 5. The market price of listed company shares varies because of many factors not related to a specific company. This may be because of government policy, economic factors or the actions of similar companies. 6. General purpose financial reports (and the relevant ratios) are produced some time after the end of the financial period. To be useful, financial information needs to be available quickly. 7. Companies can sometimes manipulate data at the balance date (eg run down creditors to an unrealistic level) to create a false impression when the ratios are calculated.

CVP Analysis - Purpose of Financial accounting

Reports total sales, costs of sales and expenses. This information is useful for external users, investors, lenders and suppliers to make decisions about a company. Internally business owners and managers need detailed product information and careful analysis to make decisions about their business (eg whether to buy in or manufacture a product, what volume to produce and what the selling prices should be).

Budgeting - Responsibility Accounting

Responsibility accounting occurs when an entity is structured into strategic business units and the performance of these units is measured in terms of accounting results. The responsibility accounting process involves: • assigning responsibility to strategic business units • establishing performance measures or benchmarks • evaluating performance • assigning rewards. The more common types of strategic business units are cost centres, profit centres and investment centres. The objective of assessing performance should be to reward managers who have performed well. The measures used to assess performance should focus on areas over which a manager has the capacity to influence the outcome. It is important that the measure of performance is consistent with the goals of the entity. Management can use both financial and non-financial measures to assess performance. Financial measures can be absolute measures such as profit or ratios such as the return on assets. Non-financial measures relate to aspects of performance that are difficult to measure and assign numbers to. They include such things as customer satisfaction, supplier reliability, quality of production, level of customer complaints, employee morale and delivery time.

Budgeting - Capital Expenditure Budget

Reviews and plans the capital expenditure the business needs to achieve its goals. It includes planned purchases, replacements and upgrades to non-current assets such as buildings, office equipment, machinery and vehicles. It may also include the costs associated with business expansion and the launch of new products.

Companies - Separation of Ownership and Management

Shareholders are not involved in the day-to-day management of the company. A board of directors controls the company on behalf of shareholders. The board appoints managers to do the work of running the company. By appointing managers that have experience and expertise, the company can be run well, and shareholders will benefit by an increasing share price and regular dividends.

Companies - Rights of Shareholders

Shareholders have the right to vote at general meetings in order to participate in the decisions made by the board of directors. These decisions include changes to the constitution and matters such as the number of directors, director remuneration and the appointment and removal of directors. An example of a shareholder vote is when a company needs to appoint an external auditor. The board of directors conducts a selection process and nominates an auditor. Their proposed auditor is presented to the shareholders at a general meeting and the shareholders vote on the appointment. Shareholders who want to inspect the company records have the right to apply in court for the company to make the records available. This may occur if a shareholder believes there are undisclosed conflicts of interest, or if they want to see the details of director's pay.

Companies - Transferability of Ownership

Shares represent ownership of a company, and ownership can be transferred easily through the buying and selling of shares. Shareholders do not need prior approval from the company to buy and sell shares. It is also much easier to transfer part-ownership of a business by transferring some of the shares.

Cost Accounting - Calculation of the Unit Price of a Product

The mark-up is the amount added tot eh unit cost to determine the selling price and will include a profit margin. This mark-up is usually a percentage of the unit cost of the product. For example, if it cost $200 to manufacture a product and the business has set their mark-up at 40%, this means the selling price will be $29-

Cash Flows Statements - Interpretation of the movements in Cash Flow Items - Step 1

State and detail the change that has occurred in the starting balance and ending balance of cash and cash equivalents for the period. Some of the questions that you could answer are: • Did the balance increase or decrease? • Is the change a positive or negative result for the business?

Cash Flows Statements - Interpretation of the movements in Cash Flow Items - Step 2

State the net cash inflow or outflow for each of the operating, investing and financing activities for the period, examine the link between each classification. Some of the questions that you could answer are: • Was there a net cash inflow or outflow for each of the operating, investing and financing activities? • How do you think the net cash inflow or outflow for operating activities was used? Was it used to purchase assets, repay debt or reward owners? • Is the net cash flow from operating activities reflected in the profit or loss for the period? • Is the net cash flow from operating activities sufficient to pay the dividends? • How do you think the net cash inflow or outflow for financing activities was used? Was it used in investing activities to purchase assets? • How do you think the net cash inflow or outflow for investing activities was used? Was it used in operating or financial activities?

Companies - The Nature and Importance of the Australian Accounting Standards Board (AASB)

The Australian Accounting Standards Board (AASB) is a body established by the federal government, with representatives from accounting bodies, industry and the Australian Securities Exchange. The AASB: • develops and updates accounting standards and works to adopt international standards • ensures that standards in Australia are aligned with international standards • participates in the development of the conceptual framework and a set of international accounting standards.

Companies - The Nature and Importance of the Australian Securities and Investments Commission (ASIC)

The Australian Securities and Investments Commission (ASIC) is responsible for scrutinising and approving applications to form companies. The ASIC: • maintains records of the essential details of a company and will ensure that companies comply with the Corporations Act 2001 • enforces the standards set out by the AASB for all reporting entities • reviews accounting standards and corporate legislation and releases 'Accounting Practice Notes' which clarify how the regulations change accounting practices.

Fundamental Concepts Part 1 -Differences Between Internal and External Reporting

Users of financial information about a business may be divided into two broad categories - internal users and external users.

Analysis & Interpretation - Company Annual Reports

The Corporations Act 2001 and the ASX Listing Rules require that all listed public companies prepare an annual financial report for shareholders. They require this annual report to contain: • the financial statements for the year • a directors' declaration about the financial statements and notes, that they give a true and fair view of the company's results, that they have been prepared in accordance with accounting standards and that the company is solvent • the notes to the financial reports • the directors' report, which must contain details regarding remuneration of directors' and senior executives as well as a review of operations • a corporate governance statement • an audit report on the financial statements. The information in the Annual Report can be useful for investors, lenders and all stakeholders in making decisions about the company, such as whether to buy or sell shares in the company.

Companies - Powers and Duties of Directors

The Corporations Act 2001gives directors the power to act on behalf of the company in all matters such as issuing debentures and shares, buying assets and borrowing money. The powers of directors are detailed in the replaceable rules in the Act and the written constitution of the company. The duties expected of directors include: • Duty of care and diligence - directors should take their responsibilities seriously and be properly informed about the operations and financial position of the company • Duty of good faith - directors must always act honestly and in the best interests of the company • Duty not to improperly use the position, or information, to gain a personal advantage, or to cause harm to the company • Duty to disclose conflicts of interest - directors must tell the board about any conflict of interest regarding the activities and decisions of the company. • Duty to not trade while insolvent - a company is insolvent if it is unable to pay its debts when they are due. It is illegal for a company to carry on trading while insolvent. It is a duty of directors to be aware of the financial position of the company and to prevent insolvent trading. • Duty to keep books and records - a company must maintain adequate financial records to record and explain transactions, the company's financial position and profit. A director is in breach of the Corporations Act 2001 if adequate financial records are not maintained.

Companies - The Nature and Importance of the Financial Reporting Council (FRC)

The Financial Reporting Council (FRC) was established in 2000 to act as a governing body to oversee and advise the AASB. Representatives from professional associations and industry groups are on the Council. The FRC: • appoints people to the AASB • reviews and approves the activities of the AASB, including budgets and staffing • sets the strategic direction of the AASB (it was the FRC that instructed the AASB to work towards the adoption of international accounting standards in Australia).

Companies - The Nature and Importance of the International Accounting Standards Board (IASB)

The International Accounting Standards Board (IASB) is an international body that develops accounting standards on a global basis. The AASB has worked with the IASB to align Australian accounting practice with international accounting standards.

Capital Investment Techniques - The Important Financial Principles of Asset Management

The assets of a business are extremely important to its success. They are usually costly and expected to generate sufficient cash flow to ensure ongoing liquidity and a good rate of return to maximise the wealth of the owners. Business failure is largely caused by poor asset management. When making decisions about financing and using business capital, important aspects to manage are: • how to maintain cash flows • how to manage cash, debt and equity in a business • the mix of debt and equity capital to be used • the combination of long-term and short-term debt • internal controls to guide and monitor assets, debt and equity.

Companies - A Written Constitution

The constitution of a company is a set of rules for the internal management of the company. The constitution can be used to modify or replace completely the replaceable rules contained in the Corporations Act 2001. It must be drawn up using legal advice. The constitution (and any replaceable rules that the company has chosen to retain) is a contract between the company and the shareholders and the company and the directors. All parties agree to follow the rules set out in the constitution. The constitution covers such matters as the: • rights of shareholders • powers of directors • voting procedures at meetings of shareholders or directors

Cost Accounting - Differential income

The difference between relevant income of two alternative products or services

Analysis & Interpretation - Lack of Disclosure

The financial statements of a company are a summary of events and transactions that have occurred over a period of time. In addition, these financial statements provide an overall view of the company's results rather than giving specific and detailed information. This is somewhat overcome by the extra information provided in the notes to the financial statements and in the annual report. However, the reporting is selective in reporting economic events and involves estimates and choices in accounting methods. These estimates and choices in accounting methods are not always disclosed in the annual report or notes to the financial accounts. If only some of the information is in the reports, it makes it difficult to calculate the ratios. This lack of disclosure is particularly evident when the information is not good. Companies like to project 'good news', so if the information shows the company in a bad light, it will only provide what is required by law or the ASX.

CVP Analysis - Opportunity costs

The future potential benefits not gained from producing one product by choosing to produce an alternative or by choosing one course of action instead of another option

Companies -The Nature and Importance of the Australian Securities Exchange (ASX)

The influence of the Australian Securities Exchange (ASX) extends to public companies listed on the stock exchange. Before a company can be listed it must satisfy the disclosure and listing rules set out by the ASX. Once listed: • audited annual reports must be lodged with the ASX • company reports must be shown to comply with accounting standards and reports must disclose all material changes, such as changes to the dividends, the rights of shareholders and other significant events that could affect the share price • companies that do not adhere to the disclosure and listing rules, can be suspended from trading.

Fundamental Concepts Part 1 - Internal Users

The managers of the firm (who may also be the owners) need information that will assist them to plan, coordinate and control the business on a day-to-day basis and make decisions that will maximise the profitability of the firm and ensure the security and integrity of its assets.

Companies - The Purpose and Nature of the Corporations Act, and Its Impact on Company Formation and Operations

The purpose of the Corporations Act 2001 is to set clear rules for the formation and operation of companies in Australia. The Australian Securities and Investments Commission (ASIC) administers the Act. The Corporations Act 2001: • is a federal statute making compliance with accounting standards mandatory on a national basis. It creates consistent regulations for companies in Australia. • establishes the role of ASIC, the Financial Reporting Council (FRC) and AASB and regulates the Australian Securities Exchange (ASX). • sets rules for the registration of companies and other incorporated bodies. It also protects the interests of all who have a business relationship with a company, such as shareholders, creditors, employees and customers. • recognises accounting standards issued by the AASB and their enforcement by ASIC as being part of the Act. The Corporations Act 2001 governs issues that include: • the incorporation of companies, company constitution, membership and share capital • duties of officers, shareholders' meetings, accounting and auditing requirements • regulation of company names and registration numbers • the winding-up and receivership of companies • takeovers of companies • the conduct of securities business and prospectus requirements • registration of auditors and liquidators.

Analysis & Interpretation - Analysis and Interpretation of Financial Reports

The users of financial reports require different types of information about the company in order to be able to make decisions about future investment opportunities. Some common information needs that can be readily identified are: 1. Liquidity - information that enables analysis of the ability of the company to meet debts as they fall due. 2. Measures of efficiency - information that can assist with gauging how effectively the company is using its investments in assets and the profits that are resulting from the use of assets. 3. Profitability - this information shows the proportion of income that is being made over expenses, and compares this with relevant investment levels. 4. Leverage - this information indicates how financially viable the business is and the amount of pressure that is being placed on the company to meet external debt obligations. 5. Market - this information allows investors to determine future prospects using a measure that is related to the company's current market value, rather than the use of historical data.

Fundamental Concepts Part 1 -three main purposes governing internal control

There are three main purposes governing internal control: 1. Accounting controls aim to detect and correct errors and deficiencies in accounting systems and to ensure that accounting records and reports are complete and accurate. 2. Administrative controls involve the review of procedures and policies in business, identification of risks and aim to improve business efficiency. 3. Internal audit used to review and improve their internal controls. The effectiveness of controls is examined and any risks and improvements are identified. The risks that internal controls try to minimise are opportunities for fraud, theft and loss of assets and information. For example, where it may be easy to falsify records to steal assets, access information for fraud or lose source documents. As mentioned earlier, publicly listed companies are required by law to conduct an external audit on their annual reports. It is good advice for all businesses to have their accounting systems and records assessed by an independent party. An external auditor focuses on the reliability and accuracy of the financial statements and the accounting and business systems that can affect the statements. The external audit can highlight deficiencies in an accounting system and evaluates compliance with accounting standards and regulations. If a business conducts internal audits and maintains good internal controls, accounting and business systems will be consistent with regulations and accounting standards. It is less likely that an external auditor will find errors and deficiencies. It is possible that an external audit may take less time and therefore the business will pay less fees to the auditor.

Capital Investment Techniques - Business Financing

There are two methods of financing a business: 1. equity financing or money contributed by the owner(s), and 2. debt financing, borrowings or money provided for a limited term by somebody else. When considering equity or debt financing, a business must consider a number of issues, such as: -The cost of finance -The purpose of finance -The need to repay the finance -Taxation effects -Effect on the capital structure The relationship between the two forms of financing is known as gearing or leverage. A firm that has a relatively high proportion of equity in its financial structure is said to be lowly geared and one that has a relatively high proportion of borrowings is said to be highly geared. Borrowings must be repaid and regular interest payments made to the lenders, regardless of the firm's profitability. The possibility that a business may not meet a loan repayment on time is called 'financial risk'. This makes a highly geared business more vulnerable.

Capital Investment Techniques - Appropriate Management of Inventory

There is a significant cost in maintaining inventory. If the type or quantity of inventory is incorrect this can result in slow moving items, stock being out of date or deteriorating. A business must maintain an appropriate level of inventory turnover, not only to be profitable but also to create the cash inflows necessary to repay the debt. Maintaining inventory levels involves costs associated with purchase, storage, security and insurance. An additional cost that must be considered is the impact of liquidity when maintaining inventory levels. Business owners and operators must balance inventory requirements dictated by customer demand, sales budgets and short-term cash needs. An over-investment in inventory can lead to opportunity cost in that the funds could have been utilised in some other type of investment. An under-investment in inventory can lead to a loss of sales or disruption to production.

Fundamental Concepts Part 1 -External Users

There is a wide variety of external users of financial information. These may include: Owners - With larger firms, especially public companies, the owners are remote from the management and usually have no wish to be involved in the day-to-day operations. The shareholders of such companies (and their advisors) need information to enable them to evaluate the performance of the business, compare it with alternative investments and identify trends that may impact on the future value of their investment. Customers and suppliers - Those relying on a business as a market for their product or as a source of stock or components for manufacture need to know whether that business is likely to remain in existence. They will therefore have a general interest in its continuing profitability and stability. Lenders - Both at the time of borrowing and later during the currency of the loan, lenders (banks, finance companies, etc) will rely on financial information to assess the financial viability of the borrower and its capacity to repay the loan and meet interest payment obligations. Employees - Those working for a business obviously have an interest in the firm's future viability and thus the likelihood that they will continue to be employed. Governments - The federal government, and to a lesser extent state governments, need financial information from businesses. Sometimes this is in the form of specific report such as a BAS. General profit reports will be used by government to assess the income tax liability.

Analysis & Interpretation - Liquidity

These ratios assist in assessing the business's ability to meet its financial commitments in the short term. Ratios are: - Working Capital - Quick Asset Actions to improve liquidity: • A share issue • Non-current assets sold for cash • Using cheaper suppliers • Using credit terms for debtors • Increasing collections from debtors

Capital Investment Techniques - Time Value of Money

This concept is that money today does not have the same value in the future and this is due to the impact of inflation and interest rates. Over a period of time, prices usually increase and this is called inflation. The result is that $1 in the future will not buy the same as it does today. Therefore, cash received or paid in the future does not have the same buying power as it does today. Moreover, money received today can be invested and earn interest or a rate of return, which will attempt to keep pace with inflation and also make the business a 'profit'.

Budgeting - Differentiation

This strategy is about positioning the business so that it is recognised as providing a good or service that is distinct from competing products. The product itself does not need to be unique but some aspect of it should be exclusive or distinct.

Budgeting - Coordinating

To achieve budget goals all sections must work together. Business decisions are based in part on the budgets. Achieving budget targets in one section of the business will depend on other sections meeting their targets. For example, the sales budget impacts on purchases, production and stock levels while the production budget must meet targets to have the stock to sell.

CVP Analysis -Method of Financial Accounting

To do this, they need to calculate the various costs that go into making a product or providing a service. Although the information is based on historical data, decisions also require estimates to be made so that future products and processes can be costed. This evaluation and decision-making process is assisted by the tools of cost-volume-profit (CVP) and differential analysis.

Budgeting - Cash

Under this method, income and expenses are recognised when cash is received or cash is paid. Profit represents a surplus of cash - cash inflows are greater than cash outflows. • based on income earned and expenses incurred • only includes items that are recognised in the current period • balance day adjustments are needed to ensure all items reflect the business activities of the current accounting period • reports include adjusted cash and non-cash items.

Budgeting - Accrual

Under this method, income and expenses are recognised when they can be reliably measured and they are likely to occur. The aim is to produce a profit figure that accurately measures the profit earned in an accounting period. • based on cash receipts and payments in a period • cash flows included even if it relates to a different period • does not include balance day adjustments. Items can include amounts relating to business activities from different accounting periods • reports do not include items that are not cash flows, such as discounts, credit sales, depreciation and doubtful debts.

Companies - Prospectus

When a company is starting up it conducts an Initial Public Offering (IPO). This is when shares are offered to the public for the first time. The Corporations Act 2001 requires companies to use a prospectus when making an IPO. The function of the prospectus is to give potential investors information regarding the assets and liabilities, profits and expected performance of the company and details about the share offer so they can make an informed decision. The prospectus will have an auditor's report showing that financial records comply with the Corporations Act 2001 and accounting standards. The prospectus contains descriptions of current and planned activities, how the funds from the share issue will be used, financial reports and an application form. The prospectus must be reviewed and approved by ASIC and the ASX before it can be issued to the public.

Cost Accounting - Changes to Prices and Costs

When business owners and managers make decisions about managing costs and changing prices they conduct cost-volume-profit analysis. A business may be planning a sale to increase costs. The cut in unit price will decrease the contribution margin and the break-even point will be higher. If the price is lower the business will have to sell more to cover costs. Fixed costs will increase if the business pays for an advertising campaign to promote the sale. Looking at the margin of safety will indicate how big the discounts can be.

Capital Investment Techniques - Long-term finance

Would normally be used to fund the purchase of assets that can be expected to generate returns over a long period of time, such as land and plant. When taking on long-term debt, the costs of the debt should be compared to the income generated by what is done with the funds. For example, a mortgage on new premises or a long-term loan to replace or upgrade equipment should result in an income stream that will help pay the ongoing costs of the debt. Analysis can involve the calculation of how long it will take the income earned to pay off the debt. Examples of long-term debt include long-term loans, leasing, hire-purchase, debentures, unsecured notes and convertible notes. The cost of short-term and long-term debts must be planned for and included in the budgeting process.

CVP Analysis - Cost Behaviour - Variable Costs

are costs that vary with changes in the level of production. An increase in production or sales will result in an increase in variable costs. Examples: Materials and labour costs increase as production increases. Supplies costs such as fuel, stationery and parts.

Capital Investment Techniques - Capital investment decisions

are long-term business decisions involving the commitment of large sums of money and usually entail the acquisition of non-current assets. When making capital investment decisions, managers must consider the purpose of the investment, the options available, the implementation process and the impact on the business. Capital investment decisions have the following characteristics: • they involve large sums of money relative to the size of the business • expenditures are usually long-term • the decision is difficult to reverse, and • they are high risk. Capital expenditures take time to mature but are vital to the long-term effectiveness and efficiency of the business. Investors, lenders, employees and customers are all interested in the capital investment decision as it will affect them in some way. It is expected that such expenditure will: • earn a reasonable rate of return • improve productivity • enable the growth of the business • advance product or service quality.

Cash Flows Statements - Financing activities

are those cash inflows and outflows that relate to a change in the share capital and loans of a business. These items include: Cash Inflows: Cash receipts from issuing shares Cash receipts from issuing debentures Cash received from borrowings Cash Outflows: Cash payment of dividends to shareholders Repayment of borrowings

Cash Flows Statements - Operating activities

are those cash inflows and outflows which relate to the main income raising activities of a business. These include: Cash Inflows: Cash receipts from the sale of goods/services Cash receipts from fees and commissions Cash Outflows: Cash payments to suppliers of goods/services Cash payments to employees Cash payments for income tax Cash payments for other expenses Interest paid

CVP Analysis - Cost Behaviour - Fixed Costs

costs are those costs that do not change with the level of business activity. Examples: Rent, insurance, salaries, depreciation, interest on loans.

CVP Analysis - Cost Behaviour - Mixed Costs

costs are those that contain elements of both fixed and variable costs. These will therefore change to some extent with variations in business activity. Examples: Telephone - fixed line rental and variable usage costs. Hire vehicle - fixed rental payments plus variable usage costs. Sales staff - a fixed base salary plus commission on sales.

Capital Investment Techniques - The need to repay the finance

debt requires repayment while equity normally does not. The ability of the business to generate the necessary cash for repayment of debt is an important consideration.

Cash Flows Statements - Cash Definition

defined as cash on hand and demand deposits. The term 'cash' includes notes and coins held on the business premises and deposits held at call with a financial institution eg a bank. The term 'at call' means money that a business can withdraw from a financial institution at any time. The term 'cash equivalents' means: • short-term investments with short periods to maturity (usually within three months) which are readily convertible to cash on hand at the investor's option and are subject to an insignificant risk of changes in value, and • borrowings which are essential to the cash management function and which are not subject to a term facility.

Capital Investment Techniques - Purpose of finance

for example, is it to be used for the purchase of long-term assets or to meet short-term needs?

CVP Analysis - Differential analysis

is a technique that enables an accountant to evaluate the differences in income and expenses between different alternatives. It can assist management to make decisions such as: • whether the business should buy in or produce a particular product or service in-house • whether a business should take on a special order • whether a business should stop producing a product line or close down an unprofitable department • which products to produce within the constraints of limited resource inputs

Cost Accounting - Cost Account definition

is an approach to calculating and evaluating the costs of operating a business and manufacturing goods. It shows the costs involved in producing a product/service and assists management to determine the selling price required to recoup production and operating costs associated with the product/service, and reach a desired profit margin. Cost accounting can also be used to model changes to the business such as introducing new equipment, new processing and/or new products.

CVP Analysis - Contribution Margin

is the selling price of a unit less the direct variable costs per unit. This amount is the financial contribution each unit makes to cover the fixed costs. Calculations: Selling price per unit - variable costs per unit Total sales - total variable costs If the volume of sales is sufficient after the fixed costs have been covered the excess is profit.

CVP Analysis - Break-Even Point

is where total sales equals total costs (variable and fixed). At the break-even point, profit is zero. Profit will be earned for each sale above the break-even point. Until the break-even point is reached, the business is operating at a loss. Businesses are interested in knowing their break-even point for two main reasons: • to know what level of sales (volume) they must achieve as a minimum to cover costs • to assess whether the current price structure is appropriate (Does it need to increase, decrease or remain at its current level? Is the profit generated by the sales sufficient?) The break-even point can be calculated in units (ie the number of sales required to break even) or as a dollar value (ie value of sales to break even).

Analysis & Interpretation - Ratio analysis

method of evaluating the health and performance of a business. Ratios show the relationship between two different numbers, and in accounting and finance, provide a common base to information about different business entities or different accounting periods. Ratios can be used to compare the results: • of two different businesses, one which has income in the hundreds of thousands of dollars, and the other with income of hundreds of dollars • achieved by a business between two years, when the business might have had major changes occurring. The analysis of financial information is used in the following ways: 1. Management assesses the financial strengths and weaknesses of its own company and in comparison with other like companies. 2. Management uses ratios over time to identify trends in the financial position of the company. 3. Investors use ratios to decide whether or not a company is a good investment. 4. Suppliers use ratios to determine whether or not a company is a good credit risk.

Analysis & Interpretation - Quick Asset

ratio is a measure of the ability of a business to pay its short term debts using only its more liquid current assets. Results • The higher the ratio the better, as it indicates a stronger liquidity • The ideal level is 1:1 or more, which means they business should be able to pay its immediate debts • If the ratio is less than 1:1 then it means that in an emergency a business may not be able to pay its immediate debts Trend: Increasing (↑) or above ideal • Debtors, short-term investments or cash might have increased • Creditors might have decreased Decreasing (↓) or below ideal • Debtors, short-term investments or cash might have decreased • Creditors might have increased

Analysis & Interpretation -Debt to Equity

ratio measures how the business has funded its assets comparing the total liabilities to the amount of contributed equity. Results • The lower the safer financially • The ideal result is a ratio below 100% as this indicates that the business is less reliant on external financing pressures Trend: Increasing (↑) or above ideal • A higher level of borrowed external funds • Liabilities might have increased • Interest rate pressures might cause problems for the business Decreasing (↓) or below ideal • A lower level of borrowed external funds • Equity might have increased • Interest rates are less of a concern

CVP Analysis - Margin of Safety

of a product or service is the amount by which expected sales are greater than the break-even point. It shows how far sales can decrease before a loss occurs. The higher the margin of safety, the better when comparing alternative products. The margin of safety can be expressed in dollars or units.

Analysis & Interpretation - Leverage

or gearing describes the extent to which a business has funded its operations from borrowed funds rather than equity. ratios are: - Debt to Equity • Paying off debt • Increasing the amount of earnings retained in the business as reserves • Conducting a share issue • Cutbacks on inventory purchases • Delaying a major capital investment

Capital Investment Techniques - Cost of Finance

this includes the cost of arranging the finance and the ongoing costs in the form of interest or dividends. Interest is an expense that must be paid regardless of profit, unlike dividends which are a share of profit.

Analysis & Interpretation - Price/Earnings

ratio measures the amount the investors on the stock market are prepared to pay for each dollar of profit. Results • The higher the better as this indicates that the company has good prospects for growth and expansion • The ratio can be inflated through speculative investors in the stock market Trend: Increasing (↑) • Shareholders are more willing to pay more for each dollar of profits being produced by the company • The shares have a higher value to the market • Investors believe that the future growth in profit is likely to be very good • Investors may be over-confident about the company's future profitability Decreasing (↓) • Shareholders are reluctant to pay more for each dollar of profits being made by the company • The market does not value the shares highly • Investors believe that the company has poor growth prospects • Investors may have under-estimated the profit potential of the company

Analysis & Interpretation - Debtors' Collection

ratio measures the average time it takes debtors to pay their accounts. Results • The least number of days the better • The ideal for this ratio is 30 days (or within the terms given to debtors) Trend: Increasing (↑) or above ideal • Debtors taking too long to pay • Debt collection procedures are poor • Slow processing invoices • Failing to check credit rating of customers Decreasing (↓) or below ideal • Debtors paying more promptly • Credit control procedures have improved • Collection procedures have improved

Analysis & Interpretation -Dividend Yield

ratio measures the current return to an investor on buying a share on the stock market Results • The higher the better as this is the investors' return on their investment • An investor can compare the dividend yield of a company with the interest received from investing in a fixed term bank deposit Trend: Increasing (↑) • Shareholders would feel the company is a good investment Decreasing (↓) • Shareholders may be reluctant to invest in the company

Analysis & Interpretation - Earnings per Share

ratio measures the profit available to ordinary shareholders expressed as an amount per share. Results • The higher the better as it indicates that the company is producing more earnings, or profit, per share Trend: Increasing (↑) • The company has returned a higher amount to shareholders for their investment • Likely that the company is expanding or growing Decreasing (↓) • The company is returning less to shareholders for their investment

Analysis & Interpretation - Inventory/Stock Turnover

ratio shows how often the average inventory is replaced each year. Results • The greater the number of times the better • The ideal for this ratio is very dependent on the type of business Trend: Increasing (↑) or above ideal • Inventory management is improving • There should be less out-of-date or expired stock problems • Cash flow might be improving Decreasing (↓) or below ideal • Inventory management needs to be improved • Out-of-date or expired stock problems • Cash flow could be a concern

Analysis & Interpretation - Working Capital

ratio shows short-term debt paying ability. It answers the question of whether the business can meets it debts as they fall due in the normal course of business. Results • The higher the ratio the better, as it indicates a stronger liquidity • The ideal level is 2:1 as this indicates that for every $1 of current liabilities the business has $2 in current assets to meet that obligation • If the ratio is bigger than 2:1 the business may be missing investment opportunities Trend: Increasing (↑) or above ideal • Inventory might be being sold more slowly • Debtors may be taking longer to pay • There may be idle cash Decreasing (↓) or below ideal • Inventory being sold more quickly • Debtors may be paying more promptly

Analysis & Interpretation - Rate of Return on Assets

ratio shows the overall earning power of total assets before any payments to equity or debt providers. Results • The higher the better • The ideal is a positive amount, as a negative result indicates that a loss has been made Trend Increasing (↑) • Money invested is being used more efficiently • Greater return earned from the same quantity of assets Decreasing (↓) • Business is using assets less efficiently • The business might need to consider reducing the amount invested in assets - assets may be idle

Analysis & Interpretation - Profit

ratio shows the profit produced by each dollar of sales/revenue after income tax. Results • The higher the better • The ideal is any positive amount as a negative amount indicates that a loss has been made Trend Increasing (↑) • Selling a greater proportion of high profit items • Cost of sales may have decreased • Expenses may have decreased Decreasing (↓) • Selling a higher proportion of low profit items • Cost of sales may have increased • Expenses may have increased

Analysis & Interpretation - Times Interest Earned

ratio shows the protection of lenders from a default on interest payments. Results • The higher the better • The ideal is a ratio of approximately 4 times - this means the company can cover the interest payments four times over Trend Increasing (↑) or above ideal • The company is more able to cover its interest payments • The company can meet this period's interest charges • Leverage could be too low Decreasing (↓) or below ideal • The company is less able to cover interest payments

Analysis & Interpretation - Market

ratios are used by share investors and provide a comparison of how much the company is returning to investors through dividends and growth. Ratios are: Earnings per Share Price/Earnings Dividend/Yield

Analysis & Interpretation - Efficiency

ratios evaluate the performance of the management of a company in areas of inventory and accounts receivable. They measure how effective the business is at collecting income and paying costs. Ratios are: - Debtor's Collection - Inventory/Stock Turnover Actions to improve efficiency: • Offer discounts to debtors to encourage payment of accounts • Offer discounts to customers who pay with cash • Remind debtors to pay by calling and/or sending reminder letters • Review inventory and eliminate products with low demand • Launch products with potential for sales • Spend more on advertising to increase demand for products

CVP Analysis - Cost Behaviour

refers to how a cost changes over an accounting period. Total costs of production usually fall into two distinct groups - variable costs and fixed costs, although some costs have elements of both categories and can be called mixed costs.

Analysis & Interpretation - Profitability

refers to the earning capacity of the business during the accounting period. Ratios are: -Profit -Rate of Return on Asset -Times Interest Earned Actions to improve profitability: • Locating cheaper suppliers • Increasing prices • Cutting operating costs such as wages and utilities

CVP Analysis - Differential costs

the difference between the relevant costs of two options

Capital Investment Techniques - Effect on the capital structure

this impacts on the leverage of the business. Lenders will often restrict a business from further borrowing by stipulating the gearing ratio that the business must not exceed.

Budgeting - Purpose of Budgeted income statement

used to examine the predicted income and expenses of a business over a given period of time. Details from the sales, purchasing, marketing and administrative operating budgets are included to show a projected profit figure for the period. Unlike the cash budget, the budgeted income statement is prepared on an accrual basis. Balance day adjustments and items such as depreciation, credit sales and discounts are included to give a more accurate and realistic profit projection. The value of a budgeted income statement is that it forces management to consider the future of the business. It can then be used to set goals for the firm, as well as goals for departments and individuals within the firm. Having set budget targets, management can use them in the future to measure performance of the business in terms of how successful management has been in achieving its set objectives. Once the budgeted income statement has been prepared, it should then be reviewed by management in terms of a desired profit level. If the results predicted by the budget fit in with management's overall objectives, the budget should be adopted and put into action. If it is seen as unsatisfactory, it should be reviewed and changes introduced until management is happy with the goals contained in the budget.

Capital Investment Techniques - Short term debt

will give a business an injection of funds that will cover operating costs but it involves the added costs of repayments of the loan plus interest. Its purpose is to deal with temporary cash shortfalls that may arise in the normal course of trading. An appropriate level of short-term debt is one that will provide the funds necessary but one that will not impact on liquidity so that debts cannot be paid as they fall due. Examples of short-term finance include bank overdraft, short-term loans and supplier credit.

Budgeting - Reasons to prepare a Cash Budget

• The budget will allow management to see when its commitments are due and make sure that money is available at that time. • The budget will reveal periods when the business has excess funds. Any excess money can be invested to earn interest. • The cash budget can reveal weaknesses in the business's debt collection policy. • Adjustments for seasonal fluctuations can be made. Seasonal fluctuations in sales mean that in some businesses a large amount of money is received in one part of the year and very little in another part of the year. • The budget reveals those periods when shortages of funds may occur. Some firms rely on borrowed funds (such as bank overdrafts) to finance their activities. The budget enables management to see what amount the overdraft will be have to be. • Budgets are an important form of control over the business. When actual figures are available, a comparison with the budget is made and the results are evaluated.

Budgeting - Example Question - Examining the estimated receipts

• Are debtors paying their debts on time? • How can debtors be encouraged to pay earlier? • How can customers be encouraged to pay cash? • Is the income from investments sustainable? Can it be increased? • Can business income be maintained or increased? • Are there other assets that can be sold? Will asset sales impact on business operations?

Budgeting - Example Question - Examining the estimated payments

• Are increases in expenses explained by business activities? • Can cheaper suppliers be found? • Is it possible to take advantage of credit terms and discounts when dealing with suppliers? • Can payments to creditors be delayed? • Should capital expenditure be cut in order to meet immediate cash needs?

Budgeting - Example Question - Examining the final balance

• Is there enough cash in the bank to maintain solvency? • Does the business need to obtain funding to fill a cash shortage? • What strategies could be put in place to improve the cash situation? • What should the business do with surplus cash - buy assets, pay off debt, invest it, distribute it to owners or employees as bonuses?