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AccountingEnglish Topic 1 Lecture Lecture 龚玲玲龚玲玲

The accounting environment and accounting reports

大连职业技术学院

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Administration Lecturer

Ms 龚玲玲 mechelle_gong@hotmail.com

Important Information Assessment results – You MUST complete assignments to our

satisfaction AND MUST achieve a Pass grade or better in the Exam READ the Unit Guide on DSO The Study Guide is provided in hard-copy and CD formats, and on DSO Course Software – CAL programs Accounting Equation & General

Ledger are available on Web via DSO Resources page, QuickBooks on lab PCs

Weeks 4 - 7 one hour in computer labs in lieu of third hour of seminars Quicken’s QuickBooks software package – QuickBooks CD should be

purchased just like the textbook – There is an Assessment Task Prescribed textbook – Jackling et al (2004)

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Administration

In weeks 4, 5, 6 & 7 one hour of class time will be spent in a computer lab. Two computer labs have been booked for each seminar group.

In these classes students will use the Accounting Equation Program, the General Ledger program and QuickBooks.

QuickBooks knowledge will be tested via a case study due 4th September.

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Topic Introduction

An introduction to the environment of accounting in the business context

The fundamental ideas that underpin accounting practice The nature of accounting, it’s function and purpose Study Habits:

You read the Topic in the Study Guide You read each reading suggested You try to answer each question suggested You check with the suggested answers at the end of each topic You log-on to the prescribed textbook publisher website and attempt the

available multiple-choice (MC) questions. MC are a KEY component of assessment and final exam

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Accounting Defined

the process of identifying, measuring and communication economic information to permit informed judgements and decisions by users of the information.

identify (record and classify) measure (analyse, compare) communicate (report) economic information (income, exp., profit/loss, assets, liabilities,

owners equity, etc, etc.) users (managers, shareholders, investors, employees, government

bodies, customers, economic analysts, etc)

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Key Financial Statements

Statement of Financial Performance (Profit and Loss Statement). Reports revenue and expenditure for a given period and determines the profits earned or losses made for that period

Statement of Financial Position (Balance Sheet). Reports the resources of value, called Assets, the Debts, and the Owners Claim on Equity, as at a specific point in time)

Statement of Cash Flow Reports the cash flows for a given period from operating, investing and financing activities.

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Accounting Entities

An Accounting Entity is a discrete unit of substance. – what does this mean?

Is considered separate and distinct from it’s owners

Could be a business, division, department, cost-centre, group of businesses, government or non-profit entity

Could be a sole owner, partnership or company

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Owners – non-legal entities

Sole Proprietorships For accounting purposes the business and the proprietor

(owner) are separate entities For legal purposes the 2 are the same, the business is not a

legal entity, and the owner is legally responsible for business debt

Partnerships For accounting purposes the business and the proprietors

(owners) are separate entities For legal purposes the 2 are the same, the business is not a

legal entity, and the owners are individually legally responsible for business debt

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Owners – legal entities

Shareholders in Companies A Company is both a legal and an accounting entity Shareholders liability is limited to their investment. They could

lose part or all of that but cannot be held responsible for company debt

As a legal entity a company can form contract, sue and be sued, own assets etc, etc

Public Sector Proprietorship Government entities that operate similar to private sector

entities. Consider the sorts of reasons they might have been created for?

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The Environment of Accounting

Accounting is a part of Society accounting influences, and is influenced by, the

environment that surrounds it. Regulatory Economic decision-making International

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The Environment of AccountingThe Regulatory Environment

Accounting Regulations govern structure, content, audit and disclosure of information

Accounting Regulations are designed to protect investors, creditors, and other users

Who are the Regulators? Jackling et al pp 11-14 Company legislation Stock Exchange Listing Requirements Accounting Standards

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Accounting and SocietyThe Regulatory Environment

Organisations are an integral part of society Companies provide much of the

World’s employment, products, services and technology Are major sources of Government revenue Such actions contribute to standards of living But such actions also contribute to environmental problems

through pollution, land degradation etc, and Companies fail adversely affecting communities, employment, investment etc

Regulatory Authorities exist To offer society a degree of protection through law-making,

monitoring and action disciplinary where required

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Accounting and SocietyThe Regulatory Environment (cont)

Accounting information and the regulatory environment can also Provide employer group, unions and governments with

information to drive their economic agendas Give the government influence over essential services such as

banks, utilities etc Encourage struggling industries through targeted government

support and subsidies Provide information for political decisions on government

services such as health, transport and education Provide data for redistribution of wealth through society via

government intervention

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The Environment of AccountingThe Economic Decision-making Environment

A focus on the relationship between financial statements and the USERS who make resultant economic decisions

Shareholders (Investors) make decisions about:- Dividend returns, Capital Gains on their investment, should they

buy, hold, or sell shares, being risk adverse, or choosing a level of risk

Lenders (Creditors) make decisions about:- Short-tern, long-term, level of risk, rate of return

Other Users - Discuss

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Accounting and SocietyEconomic Decision-Making

Decision-Making concerned with the allocation of scarce economic resources to achieve growth

An efficient well-functioning economy delivers Higher standards of living Better technologies Higher employment levels Better healthcare and education Many other social benefits to the community

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The Environment of AccountingThe International Accounting Environment

Different countries employ accounting regulations and practices distinct to their environment

The state of economic development The state of business complexity The state of political persuasion Reliance on a system of law

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Accounting and SocietyThe International Environment

Foreign investment in Australia is an important part of the economy and many companies seek overseas capital in order to grow their business.

The quality of financial statements and their compatibility with those of other advanced industrialised nations is a vital part of international capital and trade

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Session Objectives – Section B- Chapter 2 Jackling et al Explain the differences between FINANCIAL and

MANAGEMENT Accounting Identify the elements of financial statements Describe the structure, content and uses of the major

financial statements Discuss the concept of financial ratio analysis Describe the historical cost basis of accounting Explain the nature and use of estimation and judgements

in accounting

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Accounting Reports2 major forms of accounting

FINANCIAL ACCOUNTING Primarily reporting to external users of accounting information

Investors, employees, lenders, suppliers, creditors, customers, governments, community groups and other interested parties

Use of General Purpose Financial Reports and Special Purpose Financial Reports

MANAGEMENT ACCOUNTING Primarily reporting to internal users of accounting information at

all levels of the organisation to aid in the functions of business management

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Accounting ReportsFinancial Reporting

General purpose financial reporting Reports to external users who do NOT have influence to

demand special reports These reports assist users to make economic decisions Are usually periodic – for example half-yearly or annually

Special purpose financial reporting Reports for external users who DO have influence to demand

special reports Users such as taxation authorities, central banks, credit

agencies etc Are usually periodic but might also be on-demand

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The Major Financial Statements

3 major questions asked by Users How well has the entity performed What is the financial position of the entity What is the ability of the entity to generate cash to pay it’s debts

The 3 major financial statements available to Users on a periodic basis to answer the above are Statement of Financial Performance (Profit and Loss Statement) Statement of Financial Position (the Balance Sheet) Statement of Cash Flow

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The Major Financial StatementsStatement of Financial Performance (P&L)

A calculation of an entities Profits or Losses for a particular accounting period by deducting periodic Expenses from periodic Revenue

Emphasis is on earning Revenue and does not depend on having received that Revenue. Expenses must be matched to Revenue in the same period

Operating items arise from ordinary course of business Review page 41 of Jackling et al - Performance Report

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The Major Financial StatementsStatement of Financial Position (Balance Sheet)

A financial statement of the entities Assets and Liabilities at a specific point in time

It shows the resources of value controlled by the entity Value does not necessarily mean the original cost price

of a resource but represents a considered value of that resource at a specific point in time

It is a measure of the owners net claim on the resources of the entity. This is called shareholders equity

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The Major Financial StatementsStatement of Financial Position (Balance Sheet)

Assets are something considered of economic benefit to the entity and are classified as being current or as being non-current depending on the time it might take to convert them into cash

Liabilities are the debts of the entity and are classified as being current or as being non-current depending on the time it might take to discharge them

More detailed review in Topic 2 Review page 43 Jackling et al Statement of Financial Position

Segment reporting Information by geographical location or business group Jackling et al p. 45

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The Major Financial StatementsStatement of Cash Flow

Most enterprises fail because of Cash Flow problems Statement of Cash Flow

The flow of funds from all sources in and out of an entity during a specific accounting period

Users can analyse an entities liquidity/short-term cash position

A business entity may be asset rich yet fail because of lack of cash to pay short-term debt

Review page 46-47 Jackling et al Statement of Cash Flow

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Recognition Criteria When and how should certain things be

recorded in financial accounts? Before recording assets liabilities, revenues and

expenses they must meet certain criteria Must be capable of reliable measurement Their existence must be probable

If they fail these tests they are not recorded

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Valuation Issues Items may be valued in many ways:

Their original purchase price (historical cost) The original price modified for inflation The current replacement price The current selling price The current market price

The difficulty is determining which value is both the most relevant and useful and the most reliable

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Estimation and Judgement

The accrual accounting system involves substantial estimation and judgment in arriving at figures

In preparing reports accountants are required to make a numbers of choices, estimates and approximations Different estimates and assumptions can result in

different results

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Discussion IssuesJackling et al page 49 Case 2.1

Discuss the Brasco Opal valuation case