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日期：2024-08-18 08:58

Accounting for Decision

Making (ACCT90004 )

Lecture 1:

(i) Financial statements and business decisions;

(ii) Investing and financing decisions and the Statement of

Financial Position

2Objectives for Week 1

1. Define accounting, describe the accounting process and define the

diverse roles of accountants

2. Explain the characteristics of the main forms of business organisation

3. Understand the conceptual framework and the purpose of financial

reporting

4. Identify the users of financial reports and describe users’ information

needs

5. Identify the elements of each of the four main financial statements

6. Describe the financial reporting environment

7. Explain the accounting concepts, principles, qualitative characteristics

and constraints underlying financial statements

8. Calculate and interpret ratios for analysing an entity’s profitability,

liquidity and solvency

Introduction

Accounting is often referred to as the ‘language of

business’ as it is a means of common communication

where information flows from one party to others.

Accounting:

Primary Function:

‘The primary function of accounting is to provide reliable and

relevant financial information for decision making’.

Model of economic reality of business

The Accounting Process

Accounting is the process of identifying, measuring,

recording and communicating the economic

transactions and events of a business operation.

Transactions are economic activities relevant to a

particular business

e.g., - sale of item to customer

- purchase of office stationery from supplier

The Accounting process

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Transactions are the basic inputs into the

accounting process

Identifying

Taking into

consideration all

transactions

which affect

business entity

Measuring

Quantifying in

monetary terms

Recording

Analysing,

recording,

classifying and

summarising

transactions

Communication

Preparing

accounting

reports,

analysing and

interpreting

Commonly referred to as

‘bookkeeping’

Objective of Financial Reporting

The objective of Financial Reporting is to provide financial

information about a reporting entity that is useful to

existing and potential equity investors, lenders and other

creditors (suppliers who provide a line of credit) in

MAKING DECISIONS about providing resources to the

entity. Those decisions involve decisions about

1. Buying and selling or holding equity and debt

instruments.

2. Providing or selling loans and or other forms of credit.

3. Exercising rights to vote on, or otherwise influence

management’s actions that affect the use of the

entity’s economic resources.

Australian Regulatory Framework

Australian Securities & Investment Commission (ASIC)

Corporate Watchdog - Independent federal Government

agency with widespread powers.

? sole responsibility for administering corporations

legislation throughout Australia.

– enforces and regulates all corporate activity (including

directors and companies, financial markets and financial

services).

? aims to ensure fair and transparent markets supported

by confident and informed investors

The Corporations Act (2001)

Australian Regulatory Framework

The Corporations Act (2001)

The Corporations Act (2001) requires compliance (following the

rules) with Australian Accounting Standards.

S. 292(1) requires the preparation of financial reports for all;

Disclosing entities

With few exceptions, entities whose securities are listed on a securities exchange

are disclosing entities

Public companies

A public company means any company other than a proprietary company.

Large Proprietary companies

A proprietary company is a large proprietary company if it does not satisfy the

definition of a small proprietary company.

Registered schemes (management investment schemes)

Managed investment scheme that is registered under 601EB of the Corporations

Act。

Australian Regulatory Framework

Australian Accounting Standard Board – AASB (Australian

Government)

The AASB is responsible for setting the standards (laws) to be applied in for

financial statements:

For profit

Not for profit

Public sector

Australian Securities Exchange (ASX)

ASX is at the heart of the globally attractive, deep and liquid Australian financial

markets, helping companies grow and investors build wealth. As an integrated

exchange, ASX offers listings, trading, technology, data and post-trade services for

a wide range of asset classes, including equities, fixed income, commodities and

energy.

Recognised as world-leading and innovative, we are a top ten listed global

securities exchange and the largest interest rate derivatives market in Asia. Issuers

and corporates from Australia and around the world engage

Forms of Business Organisation

Business may organise through various forms, including:

– Sole Proprietorship

Owned by one person. It is the simplest form of business structure and

has very few legal formalities.

The owner of the business has no separate legal existence from the

business.

e.g. restaurants, dentist, panel beaters

– Partnership

Owned by more than one partner. A partnership is a relationship

between two or more entities carrying on a business in ‘common’ with

the view to making a profit.

Partnerships have unlimited liability which means that all partners are

responsible for the debts of the partnership.

e.g. accountants, solicitors, doctors

– Corporation

Organised as a separate legal entity and owned by shareholders.

Shareholders have limited liability which means that shareholders are

liable for the debts of the business only to the extent of amounts unpaid

on their shares

Under the jurisdiction of ASIC and must abide by the Corporations Act

(2001), Australian Accounting Standard Board (AASB) and the Australian

Securities Exchange (ASX) if a publicly listed company.

BHP, CSR, Westpac, RM Williams.

Other Forms

– A trust is a relationship or association between 2 or more parties whereby one

party holds property in trust for the other

Corporate trust is a popular business structure for small business.

– A cooperative is member-owned, controlled and used, and must consist of 5 or

more people

e.g. Australian Forest Growers, Ballina Fishermen’s Co-operative Ltd

Forms of Business Organisation

Conceptual Framework - introduction

A Conceptual framework set of concepts to be followed by

preparers of financial statements and standard setters

The Conceptual Framework for Financial Reporting (the

‘Conceptual Framework’) describes the objective of, and the

concepts for, general purpose financial reporting.

It is a practical tool that:

(a) assists the International Accounting Standards Board (IASB) to

develop Standards that are based on consistent concepts;

(b) assists preparers to develop consistent accounting policies

when no Standard applies to a particular transaction or event,

or when a Standard allows a choice of accounting policy; and

(c) assists others to understand and interpret the Standards.

General Purpose Financial Reports - introduction

The objective of general purpose financial reporting

(1st element and foundation of the conceptual

framework)

– To provide financial information about the reporting entity

to the resource providers that is useful in making decisions

about providing resources to the entity.

The reporting entity

This section is still under development by the

IASB - use Australian SAC 1

It is important to determine as a reporting

entity must prepare external general purpose

financial reports that comply with accounting

standards

Definition from SAC 1

– an entity in which it is reasonable to expect

the existence of users who depend on

general-purpose financial reports to enable

them to make economic decisions

The Reporting entity

Indicators

– if the entity is managed by individuals who are not owners

of the entity;

– if the entity is politically or economically important;

– if the entity is considered large in sales, assets,

borrowings, customers, and employees;

then the entity is more likely to be a reporting entity

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Primary users and uses of financial reports

Accounting Information System

External Decision Makers Internal Decision Makers

Lenders

Investors

Suppliers

Customers

Regulators

Managers

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Definition of Asset

An asset is a present economic resource

controlled by the entity as a result of past

events.

An economic resource is a right that has the potential to produce economic

benefits.

Rights established by contract, legislation or similar means such as – (i) rights

arising from a financial instrument; (ii) rights over physical objects, such as

property; (iii) rights to exchange economic resources; and rights to receive

goods and services.

Control links the economic resource to the entity. Assessing control helps to

identify what economic resources the entity should account for.

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The classified statement of financial position

Current assets

– Assets that are cash, held for the purpose of being traded,

or expected to be converted to cash or used in the business

within one year.

Examples: Cash on Hand, Accounts Receivable, Inventory,

Stock of Supplies, Prepayments.

Non-current assets

– Assets that are not expected to be sold or consumed within

one year.

– Examples: Building, Land, Motor Vehicles, Plant &

Equipment.

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Definition of Liability

A liability is a present obligation of the entity to transfer

an economic resource as a result of past events.

If one party has an obligation to transfer an economic resource (a liability), it

follows that another party (or parties) has a right to receive that economic

resource (an asset). The party (or parties) could be a specific person or

entity, a group of people or entities, or society at large.

Present obligation: An entity has a present obligation to transfer an economic

resource if both: (a) the entity has no practical ability to avoid the transfer;

and (b) the obligation has arisen from past events; in other words, the

entity has received the economic benefits, or conducted the activities, that

establish the extent of its obligation.

Past event: An entity has a present obligation as a result of a past event only if

it has already received the economic benefits, or conducted the activities,

that establish the extent of its obligation.

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The classified statement of financial position

Current liabilities

– Obligations that are to be paid within the coming year or

the entity’s operating cycle

– Examples: Accounts Payable, Bank Overdraft, Loan (less

that 12 months), Accrued expenses,

Non-current liabilities

– Obligations that are not classified as current.

– Examples: Mortgage, Loans (greater than 12 months)

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Definition of Equity

The residual interest in the assets of the entity after

deducting all its liabilities.

Equity claims are claims on the residual interest in the assets of the entity after

deducting all its liabilities. In other words, they are claims against the entity that do

not meet the definition of a liability.

Such claims may be established by contract, legislation or similar means, and include

(to the extent that they do not meet the definition of a liability): (a) shares of

various types; and (b) rights to receive an equity claim.

Different equity claims convey to their holders different rights to, for example, receive

some or all of the following: (a) dividends; (b) the repayment of contributed equity

on liquidation; or (c) other equity claims.

To provide useful information, it may be necessary to divide the total carrying

amount of equity if, for example, there are: (a) more than one class of equity claim;

or (b) restrictions on particular components of equity; for example, the rights of

particular equity claims may be affected by legal, regulatory or other restrictions on

the ability of the entity to distribute its economic resources to the holders of those

equity claims.

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CONCEPTS , PRINCIPLES and QUANTITATIVE CHARACTERISTICS

Monetary Principle

– Items included in accounting records must be able

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

Accounting Entity Concept

– Every entity can be separately identified and

accounted for

– Owner’s transactions are separate from entity’s

transactions

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CONCEPTS AND PRINCIPLES

Accounting Period Concept

– The life of a business entity can be divided into

artificial periods

– Useful reports covering those periods can be

prepared for the entity

Going Concern Principle

– Business will remain in operation for the

foreseeable future.

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CONCEPTS AND PRINCIPLES

Cost Principle

– All assets are initially recorded in the accounts at

their purchase price or cost

– To provide useful information, sometimes entities

need to deviate from cost principle (e.g.

revaluation of non-current assets)

Full Disclosure Principle

– All circumstances and events that could make a

difference to decision-making process should be

disclosed in the financial statements

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QUALITATIVE CHARACTERISTICS

Fundamental qualitative characteristics

– Relevance

– Faithful representation

Enhancing qualitative characteristics

– Comparability

– Verifiability

– Timeliness

– Understandability

Constraint- cost versus benefit

Conceptual Framework

The role of accounting is to provide financial

information for decision making that is relevant &

faithful representation.

Information is considered relevant IF IT IS capable of making a difference in the

decisions made by users. Information that has predictive value and /or

confirmatory value is considered to be relevant.

Information is considered to have confirmatory value if it can be used to develop

expectations for the future.

Relevant

Information is a faithful representation of the economic phenomena it purports to

represent if it is complete, neutral and free from material error.

It is important that information depicts the economic substance of the transactions,

events or circumstances.

Faithful Representation

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QUALITATIVE CHARACTERISTICS

Enhancing qualitative characteristics:

Comparability ? Year to year, firm to firm, consistency of

preparation and application

Verifiability ? Achieved if different independent observers arrive

at the same conclusion.

Timeliness ? To be useful, must be available in a timely manner

Understandability ? Presentation is important ? Assumed users

have reasonable knowledge

Constraint- cost versus benefit

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ANALYSING FINANCIAL STATEMENTS

Ratio analysis

Expresses relationship among items of financial

statement data

Expresses mathematical relationship between two

different quantities

Expressed in terms of percentages, rates or

proportions

Rationale for GENERAL PURPOSE FINANCIAL REPORTS

General purpose financial reports are the published

financial statements of an entity prepared in

accordance with applicable accounting standards.

External users have an interest in 3 main types of

activities

– financing

– investing and

– operating

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GENERAL PURPOSE FINANCIAL REPORTS

Financing Activities

– Outside sources of funds

Borrowing (debt funding) from banks or

investors by debt securities

– Unsecured notes

– Debentures

Selling shares to investors

– Payments to shareholders are called dividends

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GENERAL PURPOSE FINANCIAL REPORTS

Investing Activities

– Acquisition or sale of resources/assets needed to

operate the business

– Examples:

Purchase or sale of property plant and equipment

Purchase of investments

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GENERAL PURPOSE FINANCIAL REPORTS

Operating Activities

– Results from operational activities undertaken to earn income:

Revenue(1) (sale of goods, provision of services, return from

investments)

LESS

Expenses(2) (cost of resources/assets consumed or services used)

(1) Revenue:

Under the Conceptual Frameworks revenue should be recognised when and only when:

(a) It is probable that any future economic benefits associated with the revenue will flow to the entity,

and

(b) The revenue can be measured with reliability

(2) Expenses:

Expenses are decreases in economic benefits during the accounting period in the form of outflows or

depletions of assets or incurrences of liabilities that result in decreases in equity, other than those

relating to distributions to equity participants.

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FINANCIAL STATEMENTS