Professional Documents
Culture Documents
2. Timeliness
3. Level of Detail
Management
accounting
Much less formal and
without any prescribed
rules. The reports are
constructed to be of use
to the managers.
Management reports
can be both a historical
record and a projection,
e.g., a budget.
4. Main users
different segments of
the business.
Prepared to suit a
variety of users
including management,
suppliers, consumers,
employers, banks,
taxation authorities,
interested groups,
investors and
prospective investors.
Regulation
ASIC (Australian securities and investments commission) acts as
the company watchdog, and enforces company and financial laws
such as the Corporations Act 2001- national scheme of legislation,
administered by ASIC, dealing with the regulation of companies and
the securities and futures industries in Australia. Government body
which regulates company borrowings, and investments advisers and
dealers.
The ASX (Australian securities exchange- Australian market place
for trading equities, government bonds and other fixed-interest
securities) regulates companies through the market rules (rules
governing the operations and behaviour of participating entities of
the ASX and affiliates) and listing rules (rules governing the
procedures and behaviour of all ASX listed companies).
APRA (Australian Prudential Regulation Authority) is responsible for
ensuring that financial institutes honour their commitments to their
stakeholders.
The ACCC (Australian competition and consumer commission)
administers the Competition and Consumer Act 2010, which coves
for anti-competitive behaviour and unfair market practices, mergers
and acquisitions of companies, and product safety and liability.
Qualitative Characteristics
Duality -> describes how every business transaction has at least two effects on
the accounting equation.
Goodwill cannot be revalued and must be tested for impairment at least
annually. Identifiable intangibles can only be revalued an active and liquid
market exists.
Explain the nature and purpose of the balance sheet: The balance sheet
lists the entitys assets, the external claims on the assets (the liabilities) and the
internal claim on the assets (the equity). The balance sheet reports the entitys
financial position at a point in time. The financial position of the entity refers to
the entitys economic resources (assets), economic obligations (liabilities),
financial solvency and financial structure.
Discuss the limitations of the balance sheet: When analysing the financial
numbers in the balance sheet, it is necessary to consider issues associated with
the preparation of the statement that potentially limit the inferences made. The
balance sheet is a historical snapshot of the entitys economic resources and
obligations at a point in time only, and this may not be representative of its
resources and obligations throughout the reporting period. Further, the balance
sheet does not represent the value of the entity. That is due to the existence of
assets and liabilities that are not reported on the balance sheet, and the
measurement systems used to recognise assets and liabilities. Finally, the
definition and recognition of items on the balance sheet involve management
choices, estimations and judgements.
Contingent
liability- conditions existing at balance date where
uncertainty exists as to: outcome, valuation. Future benefit is
beyond entitys control. Can be either and asset or liability.
Provisions- liability
class involving more
uncertainty regarding
the monetary
value to be
assigned to the
future sacrifice
of economic benefits.
E.g. Employee
benefits, warranty,
lease provisionsreturning stores to
original
condition at the
end of the lease.
Derivative financial liability- financial liability whose value depends on the
value of underlying security, reference rate or index.
Financial liability- Liability that is a contractual obligation to deliver cash or
another financial asset to another entity or a contractual obligation to exchange
financial assets or financial liabilities with another entity under conditions that
are potentially unfavourable to the
entity.
Present value (value in use) - used to value and asset. Future profit
from using the equipment in todays dollar value.
The purpose of the statement is to show the cash flows of an entity over a
set period, in order to enable users of the financial statements to evaluate
the entitys ability to generate positive cash flows in the future, pay
dividends and finance growth.
A statement of cash flows is needed as it summarises the cash and types
of cash flows coming into and flowing out of the entity.
Relationship to other financial statements: The income statement shows
the result of an entitys performance for a particular period of time, and
the balance sheet shows the entitys financial position at a particular point
in time. The statement of cash flows shows the cash flows relating to the
entitys performance and helps to identify the changes in the balance
sheet items.
Define cash: The definition of cash includes cash and cash equivalents.
Cash includes cash on hand and demand deposits and cash equivalents
are highly liquid investments and short-term borrowings.
Direct method: Method of preparing a statement of cash flows that
discloses major classes of gross cash receipts and gross cash payments.
Indirect method: Method of preparing a statement of cash flows that
adjusts profit or loss for the effects of transactions of a non-cash nature
and deferrals or accruals of operating revenue and expenses. (The
indirect method is the reconciliation or the profit/loss with the cash flows
from operating activities).
Usefulness: The statement of cash flows is useful in assessing an entitys
ability to generate cash and to meet future obligations. The heightened
awareness of the management of earnings in the income statement has
elevated the performance of reviewing the statement of cash flows in
conjunction with the income statement. Limitations- since it only shows
cash position, it is not possible to arrive at actual profit or loss of the
company by just looking at the statement alone, in isolation this is of no
use and it requires other financial statements like balance sheet, profit
and loss etc.., and therefore limiting its use.
The interpretation of the statement of cash flows requires a general
evaluation, as well as the use of trend and ratio analysis. Cash flow
warning signals can also indicate a cash flow problem. Cash-based ratios
include the cash adequacy ratio, the cash flow ratio, the debt coverage
ratio, the cash flow to sales ratio, and free cash flow. Despite the
Classify costs into direct and indirect costs for individual cost objects.
A direct cost is traceable to a particular cost object. The tracing is made possible
by the implementation of a tracking system to link the cost to the cost object. An
indirect cost (costs that are not economically feasible (cost/benefit test- assesses
the costs and benefits of tracing costs to cost objects) to trace to the cost object)
is used for the benefit of multiple costs, and the cost is linked to the individual
cost objects by the identification of an appropriate cost driver- measure of the
activity, related to cost pool (collection of similar costs), that is used to allocate
costs.
Discuss the allocation process of indirect costs:
An indirect cost (also referred to as overhead) is used for the benefit of multiple
cost objects. Therefore, an allocation of costs is necessary to enable the cost to
be assigned to the many cost objects that make use of the resource. By
allocating indirect costs, an entity is able to determine the full cost (direct costs
plus allocated indirect costs) of the cost object.
Calculate the full cost of a cost object:
Full cost is equal to direct costs plus indirect costs. The accuracy of the cost is
strengthened by the choice of cost driver for indirect cost allocation. Cost drivers
can be based on either volume or activity. Volume drivers assign indirect costs
based on the same measure of the volume of output; for example, units of
output, direct labour hours or machine hours. In contrast, activity drivers
recognise that factors other than volume will cause indirect costs to be
consumed; for example, number of invoices processed, number of orders
processed, or time taken to set up machines.
Calculate and inventoriable product cost:
An inventoriable product cost (costs of converting raw material into finished
products) is calculated by manufacturing entities to satisfy the requirements of
having and inventory value in financial reports, in line with the International
Financial Reporting Standards (IFRSs). An inventoriable product cost includes
only manufacturing costs (e.g. direct labour, direct material, manufacturing
overhead). All non-manufacturing (e.g. selling expenses, administrative
expenses, advertising, corporate salaries, office rent) costs are expensed in the
current accounting period.
Define a cost object and explain how cost information is used:
A cost object is anything for which a separate measurement of cost is required.
Examples are customers and individual business units. Cost information is used
for a variety of purposes to assist in day-to-day management and strategic
management- in determining inventory values, analysing product profitability,
identifying relevant costs for outsourcing decisions and so on.
Discuss pricing issues for products and services:
An entity has the option of applying either a cost-based or market-based pricing
strategy for its products or services. A cost-based price will add a mark-up to the
calculated cost of the product or service. A market-based price will be set at the
higher possible price that a customer will pay and this will be dependent on the
degree of product differentiation and competition.
When
budgets
the
involvement in decision
making. They include: the
budgeting process used, such
participative; attempts by senior
targets that are too difficult to
unit managers to set targets that are too
human
style of
as authoritarian or
management to set
achieve; and attempts by
low.
how transactions will be classified and recorded in the financial reporting system.
It is important that the budget is developed in line with this classification
structure, otherwise those within the entity will be unable to identify any budget
variances by comparing actuals against budget.
Explain the link between strategic planning and budgeting
Strategic planning focusses on a longer time horizon (perhaps three to five
years), and relates to the direction of the entity. It is carried out by senior
management, and generates strategic plans for the entity that further influence
shorter term aspects of the planning process. Budgeting focusses on a shorter
time horizon (commonly 12 months), and results in the
production of budgets that set the financial framework for the
year ahead.