ACCT1110

Cash Dividends

- A cash dividend is a pro rata distribution of profit paid in cash to shareholders - Companies can only pay a cash dividend if: ○ Assets exceed liabilities by more than the amount of dividend proposed. ○ It is fair and reasonable to shareholders as a whole. ○ It does not materially prejudice the company's ability to pay its creditors. - The board of directors has authority to determine the amount of the dividend.

Comparative Analysis

- A comparative analysis provides more information by identifying trends, showing increases or decreases over previous periods, and determining whether profits are adequate in relation to the business's needs. - Three methods: ○ horizontal analysis ○ vertical analysis ○ ratio analysis

Debits and Credits

- A debit increases an asset or expense account, or decreases a liability or equity account. - A credit increases a liability or equity account, or decreases an asset or expense account.

Merchandising Businesses

- A merchandising business buys and sells merchandise (known as inventory). - Businesses that sell inventory directly to consumers are called retailers. - Businesses that sell inventory to retailers are known as wholesalers.

Share Dividends

- A share dividend is a pro rata distribution of the company's shares to shareholders. - Total equity does not change because: ○ Retained earnings decreases, and ○ Share capital increases. - A share dividend signals that this amount of retained earnings is not available to shareholders as cash dividends.

Trial Balance

- A trial balance is a list of all the accounts and their balances (dollar values) for a given time, listed in the order in which they appear in the general ledger. - The trial balance is used to prove the mathematical equality of debits and credits after posting. Here are the steps in preparing a trial balance: 1. List account numbers, titles and balances 2. Total the amounts in the debit and credit columns 3. Verify that there is equality between the debit and credit columns

Profit Margin

- Also called the rate of return sales, the profit margin measures the amount of each dollar in sales that results in profit. - profit after tax / net sales - Note that this is the accrual-based ratio using profit as a numerator, we will discuss its cash-basis counterpart in a moment.

Loans Payable By Instalment

- Another is to take out a loan from a single borrower. Loans can be secured or unsecured, and are generally repaid in instalments. Mortgage Repayments - Mortgage payments (repayment) consist of: ○ interest expense, and ○ reduction of principal amount of loan liability - The interest needs to be noted separately on the journal entry. - Many businesses will prepare a mortgage schedule to show the payments and interest expenses for the entire loan.

Earnings Performance Analysis

- Another way to measure corporate performance is through profitability. - A widely used ratio that measures profitability from the shareholders' perspective is return on ordinary shareholders' equity (ROE). - This ratio shows how many dollars of profit were earned for each dollar invested by ordinary shareholders. - It is calculated by dividing profit available to shareholders (Profit − Preference dividends) by average ordinary shareholders' equity. - (Profit − Preference dividends)/average ordinary shareholders' equity

Using the Statement of Cashflows

- Before investors or creditors decide to invest in or lend funds to a business, the statement of cash flows can guide them in their decision making by shedding light on important information. - The cash flow statement reveals: 1. The business's ability to generate future cash flows, as well as predict the amount, timing, and uncertainty of these cash flows. 2. The business's ability to pay dividends and meet obligations. Insufficient cash means a business cannot pay employees, pay dividends to investors, and repay lenders interest and principal. 3. Reasons for the difference between profit and net cash provided (used) by operating activities. Accrual-based profit indicates a business's success or shortcomings, but it also requires many estimates such as bad debt expenses. Cash, on the other hand, is included in the cash flow statement when it is paid and received regardless of whether its a prepayment or revenue received in advance. 4. Investing and financing transactions during the period. Investing and financing activities give a better indication of how assets and liabilities increase and decrease over a period.

PPE Subsequent Expenditure

- Classified as either ordinary repairs or additions and improvements - Ordinary repairs are expenditures to maintain the expected the operating efficiency of the asset. They are expensed in the statement of profit or loss. - Additions and improvements are expenditures to improve the efficiency and profitability of an asset. They are capitalised and depreciated over the asset's remaining useful life.

Issuing Shares

- Companies usually receive cash in exchange for issuing shares. - When a company decides to issue shares, it must decide how many, how they should be issued and at what price. Shares can be issued privately or publicly. ○ Private Placement: Shares that are issued through private placement are made accessible only to certain people through invitation. A company may use a merchant bank to help target potential investors. The private issue of shares affects the accounting equation by increasing assets and increasing equity. ○ Public Issue: Publicly issued shares are open to everyone and are issued by public companies. Public companies must provide a prospectus to potential investors, which outlines the company's financial position, performance and future plans. It prescribes the number of shares that can be issued and the share price. Companies may require full payment on application or may only require part payment on application with the remainder due on allotment or subsequent callson capital. A call on capital is when a company asks shareholders to pay some or all of the unpaid capital on issued shares.

Reconciliation procedure

- Compare balance per accounting records to the bank statement balance and reconcile to the adjusted or correct balances. - Prepare journal entries for all items on the bank statement that have not been recognised in the accounting records or require correction. - For internal control purposes the reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.

Each accounting journal entry must include the following:

- Date, the date of transaction - Accounts, you will notice the debited account always appears first, and the credit account is indented - Narration, a brief description of the transaction - Posting Reference, this contains the account number as shown in the chart of accounts (a list of all the accounts used by the organisation)

Disclosures on earning power

- Disclosures that aid the determination of earning power (or sustainable profit) are required. - This is achieved by requiring the identification of certain irregular items on the face of the statement of profit or loss or in the notes to the financial statements. - Four types of irregular items are reported: ○ errors ▪ Errors made in a previous period that have resulted in the presentation of incorrect information in financial statements. ○ changes in accounting estimates ▪ revision of estimates used in the preparation of previous-period financial statements. ○ changes in accounting policies ▪ when the policy used in the current year is different from the one used in the preceding year. ○ discontinuing operations. ▪ a component of an entity that is being disposed of or is classified as held for sale. A component of an entity refers to operations and cash flows that can be clearly distinguished from the rest of the entity. - In addition, entities must also disclose revenues and expenses from ordinary activities that, because of their size, nature or incidence, are relevant to understanding financial performance.

Dividends

- Dividends are a proportion of a company's profits that is paid to its shareholders. They operate on a pro rata basis, that is, the dividend received by a shareholder will correspond with the quantity of shares they own. - Two types of Dividends ○ Cash Dividends (paid in cash) ○ Share Dividends (paid in shares) Most companies pay dividends in cash - Public companies often pay 2 dividends: ○ Final dividend determined at end of the year. ○ Interim dividend paid during the year. - Dividends require information concerning three dates: ○ Declaration Date - board authorizes dividends ○ Record Date - Registered shareholders are eligible for a dividend ○ Payment Date - The company issues dividend payments

Current Liabilities - Payroll and Payroll Deductions Payable

- Employers deduct amounts from employees' wages and salaries if they are required to be paid to other parties. - These include tax, superannuation and trade union fees. Employers are responsible for paying these withheld funds to the appropriate parties.

Equity

- Equity is the value of a company after it has paid all monies owed. The business context for equity depends on the nature of the entity, how it is funded, and its ownership structure.

Free cash flow

- Free cash flow describes cash from operations available for expansion or payment of dividends. - Free cash flow is estimated by the formula: ○ Net cash provided by operating activities - capital expenditure - A higher free cash flow indicates a greater potential to finance new investment and pay dividends.

Impairment of Intangible Asset

- Intangibles with indefinite useful lives are not amortised. - Instead they are subject to an annual impairment test. - That means the recoverable amount must be calculated annually.

Significant Non-Cash Activities in Cashflow Statement

- Issues of shares to purchase assets - conversion of debt into ordinary shares - issue of debt to purchase assets - changes of property, plant and equipment

Price/Earning Ratio (P/E Ratio)

- It measures the ratio of the market price of each ordinary share to the earnings per share. - Essentially, the P/E ratio is a reflection of investors' assessments of a business's predicted future earnings, indicating how much an investor would have to pay in the market for each dollar of earnings expected. - market price per share / earnings per share

Horizontal Analysis

- It provides insights into a business that may not be apparent from looking at individual aspects of financial statements. - This method is used by management, potential investors, shareholders, and lenders to decide whether a business' financial position has improved over a number of years. - Horizontal analysis can be used to find both the absolute comparison and the percentage comparison. ○ An absolute comparison compares the absolute amount of different items over a period. For example, how much cash was received at the end of an accounting period compared to other periods. This helps us to see where the biggest changes are occurring. ○ A percentage comparison compares items over a period of time by percentage difference. A percentage comparison is performed by selecting a base-year against which you'd like to compare the current-year amount. In the formula, the percentage can be shown as 10% difference or 110% of the base-year amount. - Change since base period = (current year amount - base year amount)/base year amount

Leasing and Types

- Leases are also liabilities payable by instalment. A lease is an agreement between a lessee and lessor where the lessor (owner of the asset) grants the lessee the right to use the asset for an agreed period of time. - Like loans paid by instalments, there is a current and non-current liability associated with a business' lease obligations. Types of Leases 1. Finance lease - The lessee takes on the risks and rewards of the asset, although the ownership remains with the lessor. Both the asset and liability are recorded on the statement of financial position. 2. Operating lease - In this case, the lessor is retaining the risk and reward of the asset, and the asset is recorded in the lessor's statement of financial position, not the lessee's. Instalment payments are treated as rental payments.

Assessing liquidity, solvency and profitability using cash flows

- Liquidity: The ability of an entity to meet its immediate obligations ○ Current Cash debt coverage = net cash provided by operating activities/average current liabilities - Solvency: The ability of an entity to survive over the long term. ○ Cash debt coverage = net cash provided by operating activities/Average total liabilities - Profitability: The ability of an entity to generate a reasonable return. ○ Cash return on sales ratio = net cash provided by operating activities/net sales

Long Term Notes

- Long-term notes are a common form of non-current liability. - Companies sell long-term notes to finance debts. - These come in two forms: ○ Debentures are notes that are subject to a secured charge on the issuer's assets. ○ Unsecured notes (also known as bonds) are not subject to a security over assets. - Journal entries are required at issue, for interest throughout the life, and on redemption. - Companies may choose to redeem notes and debentures early to reduce interest costs and debt. - Companies generally raise funds through debt financing or through issuing shares. - There are a number of advantages and disadvantages to debt financing when compared to issuing shares. Advantages: ○ Shareholder control is not affected. ○ Tax savings, as interest is deductible. ○ Earnings per share may be higher, as no additional shares are issued. Disadvantages: ○ Company is locked into fixed payments ○ Interest must be paid on periodic basis. ○ Principal must be paid at maturity. ○ These payment must be made in good and bad times. ○ Company with fluctuating earnings and relatively weak cash flow may experience difficulty in meeting interest payments in periods of low earnings.

Dividend Payout Rate

- Measures the percentage of profit distributed in the form of dividends. - If a business has a high growth rate it will have a low payout rate, because often investors reinvest most of their profit back into the business. - dividends paid on ordinary shares / profits

Earning Power

- Profit adjusted for irregular items is referred to as earning power - Earning power is the most likely level of profit to be obtained in the future — that is, to the extent this year's profit is a good predictor of future years' profit. - Earning power differs from actual profit by the amount of irregular revenues and expenses included in this year's profit.

Types of Non-current Assets

- Property, plant, and equipment (PPE) - In-tangible Assets

Provisions and Contingencies

- Provisions are liabilities for which the amount of the future sacrifice is still uncertain on the actual amount or timing. - A good example is a provision of warranty. This involves a significant level of uncertainty but a reliable estimate can be made. - Contingent liabilities are those where the amount of future sacrifice is so uncertain it cannot be measured reliably. Contingent liabilities are not recognised in the accounts, but must be disclosed in the notes to the financial statements.

Step 4: determining net cash provided (used) by financing activities

- Relates to debt and equity of company. - Use net profit and notes payable, issued shares and retained earnings accounts: ○ Cash inflows: issue shares, issue notes. ○ Cash outflows: payment of dividends, repay notes. - Notes payable: ○ Cash inflow = cash received from issue of notes. ○ Cash outflow = cash paid upon redemption of notes. ○ Check additional information for details (e.g. non-cash transactions that are not included in statement). - Increase in ordinary shares: ○ Check additional information for details. ○ If none, assume increase/decrease represents cash received/paid. ○ If non-cash transaction, check that details account for changes to issued share balances. Significant Financing and Investment Activities that do not affect cash are not reported in the body of the statement of cash flows, but are reported in the notes or in a separate schedule at the bottom of the statement of cash flows 1. Issuance of common stock to purchase assets. 2. Conversion of bonds into common stock. 3. Issuance of debt to purchase assets. 4. Exchanges of plant assets.

Retained Earnings

- Retained earnings are a company's accumulated profits that have not been distributed to shareholders. - The retained earnings account is increased by profits and decreased by losses and dividends. Companies are required to report the opening amount of retained earnings, and any changes in the period. - Key change is the addition of profit or loss for current reporting period - Other movements ○ Dividends paid or declared -> distribution of wealth

Items that affect retained earnings

- Retained earnings represent accumulated profits that have not been distributed to shareholders. - The retained earnings account is increased by profits and decreased by losses and dividends. - Amounts can also be transferred to reserve accounts from retained earnings; similarly, amounts can be transferred from reserve accounts to retained earnings. - Accounting standards require companies to report the opening amount of retained earnings and changes to retained earnings during the period. The amount of retained earnings at the end of the reporting period is also shown in the statement of financial position.

Current Liabilities - Notes Payable

- Similar to accounts payable, except they require a written promissory note. - These are frequently issued to meet short-term financing needs and are issued for varying periods, such as 3-6 months. - They normally require the borrower to pay interest or borrowing costs. - Journal entries need to be completed when the note is issued, when interest is paid, and when the liability is settled.

Capital Expenditure Ratio

- The capital expenditure ratio indicates an entity's ability to generate sufficient cash to finance the purchase of new property, plant and equipment (PPE). ○ Net cash provided by operating activities/capital expenditures

Preparing Cashflow Statements

- The cash flow statement is prepared differently to the other financial statements, as it is not prepared using the accrual method. - In order to prepare the statement of cash flows, we must obtain information from our other financial statements. 1. From the statement of financial position we can determine the amount of changes in assets, liabilities and equity during a period. 2. From the statement of profit or loss we gain insights into the amount of cash provided or used by operations during the period. 3. We also use additional information needed to determine how cash was provided or used.

Cash Return on Sales

- The cash-basis counterpart to profit margin, this ratio uses net cash provided by operating activities as the numerator and net sales as the denominator. - Net cash provided by operating activities / net sales

Dividend Analysis

- The dividend payout measures the percentage of profit distributed in the form of cash dividends to ordinary shareholders. It is calculated by dividing total cash dividends declared to ordinary shareholders by profit. - (total cash dividends declared ordinary shareholders)/(profit)

Perpetual Inventory

- The perpetual system is a detailed inventory system in which the cost of inventory is maintained. Records continuously show the inventory that should be on hand. - The use of barcodes and optical scanners has led to the perpetual inventory system being used in many large businesses, such as supermarkets and department stores.

Statement of Changes in Equity

- The statement of changes in equity reflects the net changes in the equity accounts for the period. - It shows the total comprehensive income for the period; the effects of any retrospective adjustments for accounting errors, changes in accounting policies and reclassification of amounts, and the results of transactions with owners/shareholders in their capacity as owners, that is, contributions and distributions. - The details of dividends or other distributions to owners can still be shown in a note to the financial statements. - Lastly, the statement must show, for each equity account, a reconciliation between the opening and closing balances, separately disclosing each change

Statement of Profit or loss and other comprehensive income

- The statement of profit or loss and other comprehensive income, reports total comprehensive income for the period. - This distinguishes changes in equity arising from transactions with owners/shareholders in their capacity as owners, from all the other changes in equity from total comprehensive income representing changes in equity as a result of non-owner transactions. - The statement of profit or loss forms part of the statement of profit or loss and other comprehensive income. - Preparers choose between: ○ presenting all items of profit or loss and other comprehensive income in a single statement divided into two sections, ○ or presenting two separate statements, the first a statement of profit or loss and the second a statement of comprehensive income beginning with profit for the period and then adding other comprehensive income.

Gross Profit Margin

- This ratio indicates the ability for a business to maintain an adequate selling price above its costs. In a more competitive industry like technology, this rate declines and should be closely monitored over time for this reason. - gross profit / net sales

Return on Assets (ROA)

- This ratio indicates the profit earned on each dollar invested in assets, thereby measuring the overall profitability of assets. The higher the return on assets, the more profitable the business. - profit after tax / average total assets - The ROA is then affected by two factors: the profit margin and the asset turnover.

Earnings Per Share (EPS)

- This ratio is a measure of the profit earned on each ordinary share. It is calculated by: - profit available to ordinary shareholders / weighted average number of ordinary share issued - Note: When calculating EPS, any preference dividends declared for the period need to be subtracted from profit to identify the profit available to the ordinary shareholders.

Vertical Analysis

- Vertical analysis allows for a clear comparison between companies and across industries, and is particularly effective when comparing companies of different sizes. - It also helps companies to see the relationship between items in the current year's financial statements and how they compare with other years. For example, whether certain line items are contributing to profitability and whether profitability is increasing over time. - When calculating vertical analysis on a financial statement, the amount of one account is shown as 100% and every other account is shown as a percentage of that total.

Shares

- When a company is registered, they may begin issuing ownership rights. - Different classes of shares carry different ownership rights, as is the case for ordinary shares and preferences shares. - The rights are stated in the company's constitution, and generally include: ○ To vote in the election of board of directors at annual general meetings. To vote on actions that require stakeholder approval. ○ To share the company profit through receipt of dividends. To share in assets on liquidation in proportion to their holdings. This is called a residual claim because owners are paid with assets that remain after all claims have been paid.

Transactions

- defined as external exchanges of something of value between two or more entities. ○ All transactions are events BUT not all events are transactions - Events that can be considered transactions are recorded for accounting purposes, but events that do not bring financial change are not recorded.

Return on Ordinary Shareholder's Equity (ROE)

- profit available to ordinary shareholders / average ordinary shareholders' equity - The ROE is affected by two factors, the degree of leverage, and the return on assets (ROA). We will look at the ROA next.

4 Steps to prepare a Cashflow Statement

1. Determine the Net Increase (Decrease) in Cash ○ The first step in preparing the statement of cash flows is to determine the difference between the beginning and ending cash balances of a period. ○ This information can be found on the statement of financial position, as demonstrated below in an extract from the Domino's Pizza statement of financial position. 2. Determine Net Cash Provided (Used) by Operating Activities ○ The second step is to determine the first section of the statement of cash flows - net cash provided (used) by operating activities. This requires information from the income statement and comparative data from the balance sheet and some additional data. ○ To calculate net cash provided by operating activities using the direct method, we must adjust each item on the income statement from accrual basis to cash basis. To simplify this process, only major cash receipts and payments are reported. The difference between these cash receipts and cash payments is the net cash provided by operating activities. ○ Cash receipts - cash payments = net cash provided by operating activities 3. Determine Net Cash Provided (Used) by Investing Activities ○ The net cash provided by investing activities is the second section on the statement of cash flows and requires information from the income statement and, like step 2, comparative date from the balance sheet and other sources of information. 4. Determine Net Cash Provided (Used) by Financing Activities ○ The final step for the final section of the statement of cash flows involves analysing comparative data from the income statement and the additional information for its effects on cash.

Limitations of financial statement analysis

1. Estimates 2. Cost 3. Alternative accounting methods 4. Atypical data 5. Diversification Ethics: - When uncertainty prevails, conservatism suggests selecting measurement methods that: ○ Understate assets ○ Overstate liabilities ○ Understate Equity (and net income) by § Understating revenue and gains § Overstating expenses and losses - It is unethical to knowingly overstate assets or equity (net income)

Cash Management Principles

1. Increase the speed of receiving receivables 2. Keep inventory levels low 3. Don't pay earlier than necessary 4. Planning the timing of major expenses 5. To invest idle cash

Financial statement analysis

1. Liquidity Ratios: Measure the short-term ability of an entity to pay its maturing obligations and to meet unexpected needs for cash. - Three useful measures: ○ working capital (Current assets - Current liabilities) ○ current ratio (Current assets/Current liabilities) ○ quick ratio. ([Cash + Marketable securities + Net receivables Current]/liabilities) - Provides a measure of immediate short-term liquidity. 2. Solvency Ratios: These measure the ability of an entity to survive over a long period of time. - Two useful measures: ○ debt to total assets ratio (Total liabilities/Total assets) ○ times interest earned. ([Profit before income tax + Interest expense]/Interest expense) Provides an indication of an entity's ability to meet interest payments as they become due.

Classifying Inventory

1. Raw Materials Materials that will be used but have not yet been placed into the production process. 2. Work in Progress Manufactured inventory that has been started but not yet completed in the production process. 3. Finished Goods Completed manufactured items that are ready for sale.

Characteristics of Corporations

1. Separate Legal Existence - A corporation is treated as having its own legal identity, as if it is its own person. - It exists as a separate legal entity from its owners/the shareholders. - This means that the corporation can buy, sell, borrow, sue etc. in its own right, rather than under the names of individuals. 2. Limited Liability of Shareholders - Limited liability means limited losses for shareholders. - Since the corporation exists as a "legal person" it must cover its own debts and losses, and cannot use the private assets of investors to do so. - Therefore, the losses for shareholders is limited to the monetary amount they pay for their shares. 3. Transferable Ownership Rights - The ownership of a corporation is determined by shares. As shares are bought and sold from person to person, ownership rights are also transferred. 4. Continuous Life - Corporations are granted with continuous life - that is, it will continue even when an owner of some or all shares within a company dies. - In other words, the life of a corporation is distinct from the lives of the people who own or manage it. 5. Ability to Acquire Capital - Issuing shares provides corporations with the financial freedom to acquire capital. 6. Company Management - Corporate companies are managed by a board of directors who are elected by the shareholders. This means that while the shareholders legally own the company, their management is employed indirectly.

Cash provided (used) by Operating Activities

2 Methods to determine it: - Direct Method ○ Both methods result in the same amount for 'Net cash provided (used) by operating activities', but what differs is which items are disclosed on the statement of cash flows. ○ The direct method provides a more detailed account of where cash came from and how it is used, and for this reason IAS encourages the use of the direct method for published financial statements. ○ Method used in Australia - Indirect Method

Indirect Method

A method of preparing a statement of cash flows in which net income is adjusted for items that do not affect cash, to determine net cash provided by operating activities. - It is important to know how to use the indirect method even here in Australia. This is because accounting standards in Australia require you to provide the reconciliation of net income to cash flow from operations as a note to the statement of cash flows. - There are three types of items that are adjusted or reconciled: ○ items that have an effect on profit but not cash, for example depreciation ○ timing differences caused by accrual accounting, for example changes in accounts receivable ○ cash flow items that contribute to profit but are not classified as operating activities, such as cash from the sale of land.

Service Businesses

A service business sells things which are not tangible.

Trick to remember how profit is affected in indirect method

ADDAIL - Add: Depreciation expense Decrease in Assets Increase in Liabilities Then reverse: Minus: Gains Increase in Assets Decrease in Liabilities

Accruals

Accruals include: - Accrued revenues - amounts not yet received and not yet recorded, for which the goods or services have been provided. - Accrued expenses - amounts not yet paid and not yet recorded, for which the consumption of economic benefits has occurred.

Credit Risk Ratio

Allowance for Doubtful Accounts/Accounts Receivable

Monitor collections

Businesses should monitor their credit risk ratio. This is calculated by dividing the allowance for doubtful debts by accounts receivable. Over time, this ratio tells stakeholders if the credit risk is increasing or decreasing.

Cashflow Formulas

Cash receipt = Revenue + changes in current liability account - changes in current asset account Cash payment = Expense - changes in current liability account + changes in current asset account

Step 2: Determine net cash provided (used) by operating activities

Cash receipts from customers: - use sales and comparative accounts receivable account balances - assume all sales made on credit - formula to calculate cash receipts from customers below. Formula: ○ Revenue - Increase in Accounts Receivable - bad debts written off ○ Revenue + Decrease in Accounts Receivable - bad debts written off Cash paid to suppliers: - Use cost of sales and comparative accounts payable and inventory. - Assume all purchases made on credit. - Two steps: ○ calculate amount of purchases made during period ○ then the amount of cash paid to suppliers for purchases Formula: ○ Cost of Sales (- Decrease in inventory/+ Increase in Inventory) (+ Decrease in accounts payable/- increase in accounts payable) Continue step 2 until all major classes of operating receipts and payments are completed, for example: - cash receipts from interest or dividends - cash paid for operating expenses ○ Formula: Operating expenses excluding depreciation (+ increase in prepaid expenses/-decrease in prepaid expenses) (+ decrease in accrued expenses payable/- increase in accrued expenses payable) - cash paid for income tax - cash payments for interest.

Indirect Method Profit Determining

Change in Accounts Receivable - Both cash sales and credit sales contribute to revenue. The more customers who have paid on credit, the higher accounts receivable is. This means that although operations for the period led to revenues, not all of these revenues increased the amount of cash. Change in Accounts Payable - Businesses also make purchases themselves on credit, meaning the amount of cash that is paid for purchases often differs from the amount recorded for the purchase. If purchases are greater than the actual amount of cash paid for purchases (i.e an increase in accounts payable), the increase should be added to profit. Conversely, a decrease in accounts payable should be deducted from profit. Depreciation Expense - Depreciation expense, as noted before, needs to be adjusted because it has an effect on profit but not on cash. It is therefore added back to profit to determine net cash provided by operating activities. Gain/loss on the sale of non-current assets - These are cash flow items that contribute to profit, but are not generated by operating activities. When a company sells a non-current asset, this results in the receipt of cash, but is classified as an investing activity, not an operating activity. The gain on the sale of a non-current asset should therefore be deducted from profit to convert it to cash provided by operating activities.

Cost of sales equation

Cost of Sales = Beginning Inventory + Purchases - Final Inventory

Freight Costs - Freight In

Cost of freight is added to the cost of inventory when the freight has been charged to the buyer.

Depreciation Method 1: Straight-line

Depreciation is the same each year as the asset is expected to decline in use or value at the same rate each year.

Direct vs. Indirect Method

Direct Method: - Reports cash inflows and outflows for: ○ operating ○ investing ○ financing. Indirect Method (Reconciliation): - Starts with profit and converts/reconciles to net cash provided (used) by operating activities

Estimating Useful Life of Intangible Asset

Factors such as obsolescence and inadequacy should be considered.

Cash

For accounting purposes we assume that cash includes: • Cash on hand - coin and paper money held by the business • Cash at bank - such as a cheque account used by the business - Cash equivalents - highly liquid investments (quickly converted to cash), such as bank overdrafts, deposits on the money market, and 90-day bank acceptance bills

The Entity Life Cycle

Introductory Phase: In the introductory phase, cash from financing is positive as the business is purchasing plant and equipment. Operating and investing cash flow is negative as the business is only starting to sell their goods and services, and would be unlikely to make investments at this stage. Growth Phase: In the growth phase, the company is expanding its operations. The cash flow from financing is still positive. They begin to generate cash from operations. Investing cash flow would be negative and a company in the growth phase is unlikely to pay dividends as they are investing cash in their operations. Maturity Phase: By now, sales and production have become more consistent, therefore cash from operations and profit are very similar. In this phase, the business can begin to pay down debt and pay dividends to shareholders. Decline Phase: In the decline phase, the business' sales begin to decrease as consumer demand changes. Therefore, cash from operations decreases. As the business sells off excess assets, cash from investing may increase, and cash from financing may decrease as the company pays down debt and buys back shares.

Net Realisable Value

Net realisable value is not necessarily the selling price. AASB 102 defines net realisable value (NRV) as the estimated proceeds of sale, less any costs incurred in completing the sale (such as advertising costs, packaging costs, transport costs).

Non-Current Liabilities

Non-current liabilities are those obligations that are expected to be paid after 1 year, or outside the normal operating cycle. This includes: - Unsecured notes and debentures - Loans payable by instalment (Current and non-current components of long-term debt) - Leasing

Cashflow Statement - 3 sections

Operating - Operating activities are a company's main revenue-generating activities and refers to regular ongoing business activities. This could be from manufacturing, selling goods or providing a service. Investing - Investing activities refers to cash inflows or outflows for long-term assets. ○ Generally, any cash flow that is involves investment, non-current assets or equipment would be listed as an investing activity. Financing - In general, Financing activities relate to changes in non-current liabilities and equity accounts. They allow a company to raise capital either from equity or borrowing. This includes obtaining cash from issuing debt, from shareholders, paying dividends, buying back shares, and repaying amounts borrowed.

Flows

Other variables are measures over a period of time (an accounting period). (Cashflow, Income Statement, Equity Statements)

Stocks

Some variables are measured at a particular point in time. (Balance Sheet)

Solvency Ratios

There are three different solvency ratios: - debt to total assets - times interest earned ○ 3-4 is an acceptable value - cash debt coverage ○ Below 0.2 is considered a cause for additional investigation.

Current Liabilities - Revenue Received in Advance

There are two journal entries to be completed, one when the revenue is received, the other when the service is delivered.

Step 3: determining net cash provided (used) by investing activities

Transactions relating to non-current assets: - property, plant and equipment - Investments - loans to other entities. - Non-cash transactions are not included. - Cash inflows: Sales of PPE. - Cash outflows: Purchase of PPE.

Gross Profit Ratio

gross profit/net sales The gross profit of an organisation can be shown as a percentage known as the gross profit ratio.

Valuing Inventory

- As we've seen in this learning, inventory is usually valued at cost. However, sometimes situations occur where the market value of inventory drops below the cost. - This can happen due to factors such as changes in technology, increased competition, or decreased demand. - When this occurs, the inventory must be written down to the lower of cost and net realisable value.

Balance Sheet Accounts (Debit and Credit)

- Asset accounts: a debit increases the balance and a credit decreases the balance. - Liability accounts: a debit decreases the balance and a credit increases the balance. - Equity accounts: a debit decreases the balance and a credit increases the balance (one exception is dividends, which works in the opposite way, as it reduces equity).

Adjusting Entries

- At the end of the accounting period, adjusting entries are made to ensure the accounts comply with recognition criteria. They ensure that all revenues and expenses are recorded in the correct accounting period. - two types of adjusting entries - prepayments and accruals.

Depreciation of PPE

- Depreciation is the process of allocating the cost of a PPE asset over the duration of its useful life. - In other words, it shows how the value or revenue-generating ability of an asset declines over time. - When depreciation is recorded, the carrying amount should also be reported. Also known as net book value, the carrying amount is the original cost minus the accumulated depreciation.

GST Accounts

- GST collected, Represents the GST payable on revenue earned by the entity. ○ This is the GST collected (10% on all applicable sales/revenues). - GST paid, Represents the GST paid on goods and services by the entity to another entity. - Payment or Refund to ATO: GST collected - GST paid

Goods not accounted for can include:

- Goods in transit: ownership of goods in transit depends on the terms of the sale. If the terms are free on board shipping point, the goods become the buyers' when they are accepted for transit by the delivery company. If the terms are free on board destination, the seller retains ownership until the goods reach the buyer. - Consigned goods: some businesses hold the goods of other companies to sell them on their behalf and take a fee. These are known as consignment goods. The goods are still owned by the original owner.

Alternative to purchasing: Leasing

- In a lease, the owner of the asset allows another party to use the asset for a given period at an agreed price. - There are many advantages of leasing, including: ○ reduced risk of obsolescence ○ little or no deposit ○ shared tax advantages ○ assets and liabilities not reported - Forms of finance that don't require reporting of assets and liabilities is called off-balance-sheet-financing. This is the main accounting issue in leasing; whether or not leases should be reported on the balance sheet.

The business context and the need for decision making

- In order to start and run a business you need not only your creative ideas and marketing plan, but also information on the business environment in order to understand the context of your business. - Accounting provides an economic model of the business world. It plays a key role in the provision of financial information for decisions made by people inside and outside a business.

Perpetual Inventories - Last In, First Out

- In the LIFO method in the periodic system, we calculate the cost of sales based on the latest units purchased during the period. - In the perpetual system, the latest units purchased before each sale are allocated to cost of sales. - Unlike FIFO, the cost allocations for LIFO in the perpetual system will usually be different to the periodic system.

Perpetual Inventories - Average Cost Method

- In the average cost method for the periodic system, we used the weighted average unit cost to calculate the cost of goods available for sale over the whole period. - In the perpetual system, we use the moving weighted average method, where a new weighted average unit cost is calculated after each purchase.

Subsequent Expenditure of Intangible Asset

- It is unlikely that an intangible asset will ever need repairs or replacement parts, so subsequent expenditure is rarely capitalised. - AASB 138 requires subsequent expenditure on intangible assets to be recognised in profit or loss as incurred.

Depreciation Method 3: Units-of-production

- Measures useful life in terms of the total units of production or use expected from the asset. - This method is particularly suited to assets with a useful life that is easily expressed in units of production or the expected use of the asset. - For example, a printer with an expected number of pages it will print in its lifetime, or machinery that is expected to run for a certain number of hours. - You will need two formulas for this method. First you need to find the cost per unit, Then use the second formula to find the depreciation cost. - Formula 1: (Depreciation cost per unit = depreciable cost of asset/total units of production) - Formula 2: (Depreciation cost = depreciation cost per unit X yearly units of production)

Accounting Concepts and Principles

- Monetary Principle - Only those things that can be expressed in terms of money should be included in the accounting records - Accounting entity concept - Every entity can be separately identified and accounted for - Accounting period concept - The economic life of an entity can be divided into artificial time periods - Going concern principle - The entity will continue to operate in the foreseeable future - Cost Principle - Assets should be recorded at cost. - Full disclosure principle Circumstances and events that could make difference to financial statement users' decisions should be disclosed

Amortisation of Intangible Asset

- Much like PPE assets, the cost of intangible assets with a finite life is systematically written off over a period of time. - Rather than depreciation, this process is called amortisation. - Typically, amortisation of intangible assets is done so using the straight-line method. Goodwill is not amortised.

Property, plant, and equipment (PPE)

- Physical assets that will be used by a business for more than one financial year. - Except for land, the future economic benefits of a PPE asset will decline over its lifetime. - Acquiring PPE assets is crucial to the success of most businesses, as they determine the business' capacity to satisfy customers and generate profits.

Assessing cash adequacy

- Ratio of cash to daily cash expenses: Calculates the number of days of cash expenses that cash on hand can cover. Cash to daily expenses ratio: cash/average daily cash expense

Bank Reconciliation

- Reconciling the bank account involves comparing the bank's records and the firm's bank ledger account. - Lack of agreement between firm's books and bank statement can result for two main reasons: ○ timing differences - Items recorded on the company's account but not on bank statement: 1. Unpresented cheques 2. Outstanding deposits - Items recorded on the bank statement but not on company's account: 1. EFT (receipts/payments) 2. Dishonored cheques 3. Bank fees Interest (received/paid) - Errors - Errors by either party in recording transactions.

Income Statement Accounts (Debit and Credit)

- Revenue accounts: a debit decreases the balance and a credit increases the balance. - Expense accounts: a debit increases the balance and a credit decreases the balance.

Accrual Accounting

- Revenue and expenses are recorded in the accounting periods in which they occur. - Under the accrual method, the revenue and expenses are recognised when they are incurred, regardless of when cash is exchanged.

Cash Budget

- Shows anticipated cash receipts (inflows) and cash payment (outflows). - Requires estimates about timing of cash collections and cash expenditure. - Provides an estimate of cash available at the end of the period.

Periodic Inventories - First In, First Out

- The FIFO method assumes that the first goods purchased are the first goods sold. This is designed to align to the actual flow of inventory in many businesses (ie. oldest stock is used first), however in practice it has no relation to whether the goods are actually sold in that order. - Therefore, the cost of the earliest goods purchased are the first to be recognised as cost of sales. The ending inventory is based on the costs of the most recent units purchased.

Periodic Inventories - Last in, First Out

- The LIFO method assumes that the most recently acquired goods are sold first. Therefore, this means that ending inventory is calculated using the lowest prices. - The LIFO method is not allowed under Australian and New Zealand standards, but we'll still review it briefly here so you can understand how it works as it used in some other countries such as in the US.

Periodic Inventories - Average Cost Method

- The average cost method assumes that the goods sold are similar in nature. For example, in our scenario, all of the baseball caps we are recording inventory for are the same. - The cost of goods available for sale is calculated on the weighted average unit cost. - Here is the formula for calculating weighted average unit cost. Weighted average unit cost = (cost goods available for sale) / (total units available for sale)

Ledger

- The general ledger contains all the accounts that are used in recording the transactions that affect a business's assets, liabilities, equity, revenue, and expenses. - Posting refers to the process of transferring journal entries to the ledger accounts. ○ Posting Steps: 1. Enter the date the transaction occurred in the account to be debited 2. Enter the name of the ledger account to be credited 3. Enter the amount to be debited Repeat steps 1-3 for the credit side of the entry

Accounting and its process and different roles

- The primary function of accounting is to provide reliable and relevant financial information for decision making. - Accounting is the process of identifying, measuring, recording and communicating the economic transactions and events of a business operation. Some roles: - Commercial record the business' transactions and prepare information to support decision making for internal or external stakeholders - Financial prepare information for stakeholders outside the business, such as shareholders and creditors - Management accountants prepare information for internal stakeholders. - Public Accountants offer professional services to other businesses, employed directly by the business, public accountants are employed by accounting firms

Periodic Inventories - Specific Identification

- The specific identification method is the most accurate, as it matches the specific inventory cost with the unit sold. - The specific identification method is more appropriate for a business selling a limited variety of high unit cost items that can be identified clearly.

Calculating Depreciation

- There are three methods (straight-line, diminishing-balance and units-of-production). The method should be selected that will best measure the decline of an asset's value over its service life. - While the chosen method should be applied consistently over this period, it should also be reviewed at the end of each reporting period to make sure it is the most appropriate. 3 Factors to consider: 1. Cost, including all expenditures necessary to acquire the asset and make it ready for use. 2. The useful life is the estimated productive life, or service life of an asset. It can be expressed in units of time, activity, or output. 3. The residual value is also an estimated value of an asset at the end of its productive life. This could be based on its scrap, salvage, or trade-in value.

In-tangible Assets

- They lack physical substance but are of extreme importance to a business's future worth. These can be things like patents, brand names, copyrights, and trademarks. - Separated into two categories, identifiable and unidentifiable. Identifiable: - These are intangible assets that can be separated from the entity. They can be sold, licensed, rented, or exchanged. - Intangible assets only show on a company's balance sheet if they are acquired assets or assets with an identifiable value and life-span. - Internally developed assets are not shown on the balance sheet, as they do not have a price that can be used to assign fair market value. - Identifiable intangibles could be patents, copyrights, trademarks, brand names, franchises, and licenses. Unidentifiable: - These are intangible assets that cannot be separated from the entity. They are referred to collectively as goodwill, and must be classified separately from other intangibles in a balance statement. - Unidentifiable intangibles could include customer loyalty, brand equity, brand recognition, reputation, and even the experience of its management team.

Perpetual Inventories - First In, First Out

- Under the periodic system, the cost of sales is calculated at the end of the period only and not with each sales transaction. - In the perpetual system, we calculate the cost of sales for each sale. - Even though the periodic and perpetual systems use different calculations, the cost of sales for the FIFO method across a whole accounting period will be the same in both

Periodic Inventory

- Unlike the perpetual system, in a periodic inventory system, detailed records of the goods on hand are not maintained. - The cost of sales is determined only at end of accounting period by a physical inventory count. - This approach is used more widely by small businesses, such as convenience stores and cafes.

PPE Disposal

- When an asset has reached the end of its useful life, there are three ways in which entities dispose of them 1. Sale - If an entity decides to dispose of an asset by sale, they can make either a gain or a loss on the disposal. - When an asset is sold for more than its carrying amount, a gain on disposal occurs. If it is sold for less than its carrying amount, a loss on disposal occurs. 2. Scrapping - Sometimes an entity will choose to simply scrap an asset rather than sell it. - This method of disposal is recorded as a type of sale where no cash is received. - As the loss on scrapping is equal to the carrying amount at the time of disposal, a gain is not possible. 3. Exchange - In an exchange, the existing asset is traded for a new one.

Managing Receivables

1. Determine to whom to extend credit. 2. Establish a payment period. 3. Monitor collections. 4. Evaluate the receivables balance. 5. Accelerate cash receipts from receivables when necessary.

PPE Stages

1. Purchase ○ When purchasing property the cost includes the purchase price, settlement costs, stamp duty, and accrued property taxes on the land. 2. Depreciation ○ the process of systematically allocating to expenses the original cost over its lifetime. 3. Subsequent expenditure ○ any additional expenditures throughout the assets life that either maintain or improve its operating ability. 4. Disposal

Liabilities

A Liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Current Liabilities: Current liabilities are those which the business expects to settle within one financial year. These include: • accounts payable • notes payable • revenue received in advance • accrued liabilities Non-Current Liabilities: Non current liabilities are obligations the business expects to pay after one year. These mainly include bank loans or long-term notes. - Liabilities are recognised when: ○ It is probable that an outflow of economic benefits will result from the settlement of a present obligation; ○ The amount of liability can be reliably measured. Liabilities are displayed in statement of financial position in order of liquidity.

Purchase Returns and Allowances

A purchase return is the return of goods by the customer. The customer will receive a refund in the form of either credit or cash. A purchase allowance occurs where the customer keeps the goods and a reduction in price is granted.

Valuing Accounts Receivable

Accounts receivable are not always valued at the amount owing. This is because sometimes the amounts become uncollectable. These unrecoverable receivables are known as bad debts. Two accounting methods can be used for these uncollectable accounts: • the direct write-off method • the allowance method

Asset turnover

Asset turnover = (Net sales/average total assets)

Accounting Equation

Assets = Liabilities + Equity This must always balance

Assets

Assets are the resources or items of value that the business owns. They are divided into two categories - current and non current. Current Assets: Current assets are those which are expected to be converted into cash within one financial year. These are generally used to fund business operations and pay current expenses. Non-Current Assets: Non-current assets are assets which have a useful life of over one year. These include: • land • property, plant and equipment • long-term investments • intangible assets such as trademarks and goodwill On the balance sheet, assets are listed in order from most liquid (cash) to least liquid.

Average age of PPE assets

Average age of PPE assets = (Accumulated depreciation/ depreciation expense)

Average useful life of PPE assets

Average useful life of PPE assets = (Average cost of PPE assets/depreciation expense)

Purchasing PPE

Defining Cost - Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset'. - Fair value is the price agreed upon freely and knowledgeably by two parties, the buyer and seller. - Once a non-current asset has been acquired, the business must decide whether it is a capital expenditure and debit it to an asset account, or a revenue expenditure and debit it to an expense account. Capital Expenditure - Large investments of capital in long-term assets that provide income-generating value over a period of years. - These expenditures also include costs to increase an asset's capacity or efficiency, or extend its useful life to generate additional profits. Revenue Expenditure - Expenditure that maintains the asset in its working order. - They are usually shorter-term expenses required to meet the business's ongoing operational costs, or for ordinary repair and maintenance costs. - Revenue expenditure is not recorded as an asset on the balance sheet because it is expected to generate revenue only in the period in which it was incurred.

Equity

Equity is the value attributable to the owners of the business. As you know from earlier in the semester, equity is the difference between assets and liabilities on the balance sheet. - It includes share capital, reserves, and retained earnings.

Expense Recognition Criteria

Expenses are recognised when: - the outflow of future economic benefits associated with the expense is probable, - the expense can be measured reliably.

Business Transactions and Cash

Financing: Inflows: - Borrowing Cash - Proceeds from issuing shares Outflows: - Payment of Dividends - Repaying borrowed cash - Payments to acquire or redeem entity's share Operating: Inflows: - Receipts from customers - Interest Received - Dividends Received Outflows: - Payments to suppliers - Interest Paid - Tax Paid Investing: Inflows: - Sales of other businesses - Receipts of loan payments - Sale of property, plant and equipment Outflows: - Purchase of property, plant and equipment - Making loan repayments - Purchases of other businesses

Freight Costs - Freight Out

Freight costs incurred by the seller are an operating expense to the seller. These costs are included as part of delivery or freight-out expenses.

Recording Sales

In a perpetual inventory system, there are two entries recorded for each sale: • Recording the sale of goods • Recording the cost of sales

Direct Write Off Method

In the direct write-off method, the bad debt expense is recognised when the uncollectable account is specifically identified and written off. The disadvantage of the direct write-off method is that bad debt expense is only recorded in the period where the debt becomes uncollectable (or turns bad), not when the sale is made.

Sales Returns and Allowances Recording

In the perpetual inventory system, two entries were required: • Recording the sales return at the selling price • Recording the return to inventory at cost price In the periodic system, cost of sales does not need to be recorded for returned goods.

Users of financial reports and describe users' information needs

Internal: Those who are in the business, such as employees, managers and board members. - To know whether they can pay increased wages External: Not in the business itself, but are impacted by its performance. - To know whether to invest - To know whether to grant credit - To know whether

Inventory Systems

Inventory systems are used to help businesses keep track of their inventory - what is in stock, and what has been sold. There are two systems - perpetual and periodic.

Financial reporting environment

Key players: 1. The Australian Securities and Investments Commission (ASIC) - Administers the Corporations Act. The Act requires certain companies, such as listed public companies, to prepare financial statements in accordance with Australian accounting standards. 2. Financial Reporting Council (FRC) - Responsible for the broad oversight of the accounting standard-setting process for the private and public sectors. It comprises key stakeholders from the business community, the professional accounting bodies, governments and regulatory agencies. 3. Australian Accounting Standards Board - Issues accounting standards for all types of reporting entities, business, not-for-profit and government (public) sectors. 4. Australian Securities Exchange Another source of regulation for listed public companies

Current Liabilities

Liability is due within one year ○ Notes payable, ○ Accounts payable, ○ Revenue received in advance Accrued Liabilities, such as taxes, salaries and wages, provisions and interest.

Prepayments

Prepayments fall into two categories: - Prepaid expenses - expenses that have been paid in advance. These are recorded as assets until the economic benefits are used or consumed. - Revenues received in advance - revenues received before the goods or services are provided. These are recorded as liabilities until the revenue is recognised.

Conceptual Framework

Principles that people who prepare financial statements follow. 1. The objective of general purpose financial reporting - Why they have to report their financial information. 2. The reporting entity (SAC 1) - Who has to report their financial information 3. Definitions of elements of financial statements - What has to be reported in the statements 4. Qualitative characteristics - Characteristics of the information that has to be presented.

Recording Accounts Receivable

Receivables are recorded when the goods are sold or the service is provided.

Receivables

Receivables are the claims expected to be received in cash from customers and individuals. These are one of a business' most liquid assets, and correct management of receivables is crucial for businesses who sell on credit. • Accounts receivable are amounts owed to the business by customers on account. • Notes receivable are amounts owed to the business for which formal instruments of credit are issued evidencing the debt. • Other receivables include non-trade receivables such as interest receivable, dividend receivable, loans, advances and GST receivable.

Depreciation Method 2: Diminishing-Balance

Results in a greater rate of depreciation at the beginning of an asset's life. This approach may be selected if the asset is expected to lose value quickly. • n = estimated useful life in years • r = estimated residual value in dollars c = original cost of asset in dollars (s should be r in the picture)

Cash-based Accounting System

Revenue is recorded only when the cash is received, and an expense is recorded only when cash is paid.

Revenue Recognition Criteria

Revenues should be recognised when: - it is probable that any future economic benefits associated with the revenue will flow to the entity, - the revenue can be measured with reliability.

Sales Returns and Allowances

Sales returns and allowances occur when a customer returns goods. In this case, two entries are required: - Recording the sales return at the selling price - Recording the return to inventory at cost price

Goods and Services Tax (GST)

The GST is a value-added tax: - i.e. tax is levied on the valued added by a business at each stage of production and distribution chain. - Taxable supplies are goods and services subject to the GST (i.e. GST is charged on the sales invoice).

Allowance Method

The allowance method gives a more accurate picture of the accounts receivable expected to be collected. It involves setting aside a reserve for bad debts, which is then used when an uncollectible debt is written off. Best Method to use is the Allowance Method as it follows the matching principle.

Accrual vs Cash Based Accounting

The key difference is the timing of when the transaction is recorded.

Purchase Discounts

There are two main types of purchase discounts: Trade discounts: these are shown as a percentage reduction in the list price of inventory sold. Discounts are often given to valued customers, or those purchasing large quantities. A trade discount is reflected in net price and does not require any additional entries. Settlement discounts: these discounts are offered to encourage customers to pay their invoices promptly. In this case, the discount needs to be recorded separately.

Evaluate the receivables balance

There are two ratios which are useful for evaluating receivables - receivables turnover and average collection period: A. Receivables Turnover This ratio measures the number of times, on average, receivables are collected during the period. It helps us assess the liquidity of receivables. (Receivables turnover = net credit sales/average net receivables) B. Average Collection Period Receivables turnover is then used to calculate the average collection period. (Average collection period = 365/receivables turnover) - The average collection period helps a business assess the effectiveness of credit and collection policies. Generally, the average collection period should not be more than the business' credit collection terms.

Cost Flow Assumption Methods:

These cost flow methods make assumptions about cost flows that may be unrelated to the actual flow of inventory: • First In, First Out • Last In, First Out - Average Cost

Recording of accounting transactions

Three steps to recording transactions: 1. Analyse each transaction in terms of its effect on the accounts. 2. Enter the transaction information in a journal. 3. Transfer the journal information to the appropriate accounts in the ledger.

GST Exceptions

Two exceptions (i.e. no GST charged) 1. GST-free supplies e.g. basic food, education, health services, exports. 2. Input taxed supplies e.g. financial services and residential rents: For input taxed supplies no input tax credits (GST paid) can be claimed back from the taxation authority for GST paid associated with providing such supplies

Operating expenses to sales ratio

operating expenses / net sales helps us understand how efficient operations are.

Inventory Cost Flow Methods

• Specific Identification • First In, First Out • Last In, First Out - Average Cost

Four Main Financial Statements

○ Income Statement (Statement of Profit or Loss/Statement of Comprehensive Income): The income statement reports the business' financial performance over a period of time, including income and expenses. → The purpose is to report on a business' profit or loss over time. Income and expenses are listed, then profit or loss is determined by subtracting expenses from the income. → Investors use this information to see if an organisation is a worthwhile investment, and credits use it to predict future performance. Internally, resources can be allocated based on projected future performance. ○ Cashflow Statement: The cashflow statement shows the movement in cash and bank balances over a period of time. This is broken down into operating activities, investing activities and financing activities. ○ Statement of Changes in Equity: The statement of changes in equity reports the changes in equity over a period of time, including share capital, dividend payments, and gains or losses. → It tells: the total comprehensive income for the accounting period, changes in equity such as adjustments to retained earnings, share capital movements and dividend payments ○ Balance Sheet (Statement of Financial Position): The balance sheet shows the financial position of a business at a point in time. It includes assets, liabilities and equity. → Assets: Any resource of value the organisation owns with the expectation that it will provide future benefit. → Liabilities: The debt or obligations that the organisation incurs as part of business operations. → Equity: The owners' or stockholders' ownership interest in the company. → It helps external stakeholders understand if the organisation relies on debt or equity to finance its assets, and whether cash on hand is sufficient. Assets must be balanced with liabilities and equity, as shown below in the basic accounting equation. (Assets = Liabilities + Equity)

Main forms of business organisation

○ Sole Trader: Otherwise known as a sole proprietorship, is a business/organisation owned by one person. ○ Partnership: A business that is owned by more than one individual. ○ Company: A company is a separate legal entity and is owned by shareholders. An example of this is a large bank, such as Westpac or the Commonwealth Bank. Companies have limited liability compared to other types of organisations. ○ Other Business Organisations: → Trusts: a relationship between two or more parties where one party holds assets in trust for the other. → Cooperatives: a member-owned and controlled business organisation. Non-for-Profit Organisations: Charities and associations and the public sector.

Four Factors of PPE Depreciation

○ Usage of the asset § Usage is determined by an asset's expected capacity or output. ○ Wear and tear § The future economic value of an asset will also decline through physical use. ○ Technical and commercial obsolescence § Technical obsolescence occurs when equipment becomes obsolete due to technological advances. § Commercial obsolescence occurs when there is a fall in market demand for the good or service produced by the asset, decreasing its revenue-producing ability. ○ Legal life There may be a legal limit to the length of time an entity has access to an asset, meaning its life span ends when the usage rights expire.