Financial Accounting: Reporting, Analysis and Decision Making 6E

Financial accounting: Reporting, analysis and decision making
Brief contents
Contents
Preface
‘Less is more.’
‘Don't just sit there — do something.’
‘I'll believe it when I see it.’
‘You'll need to make a decision.’
‘It's a small world.’
‘Apply what you learn.’
About the authors
Key features
Print text
Interactive eBook
1 An introduction to accounting
Chapter preview
1.1 Introduction to accounting
The business world
1.2 Accounting: the language of business
The accounting process
The diverse roles of accountants
1.3 Forms of business organisation
Sole proprietorship
Partnership
Company
Other forms of business organisation
Not-for-profit organisations
1.4 Introduction to the Conceptual Framework
The objective of general purpose financial reporting
The reporting entity
1.5 Users and uses of financial information
Internal users
External users
Financing activities
Investing activities
Operating activities
Sustainability reporting
1.6 Financial statements
Statement of profit or loss
Statement of changes in equity
Statement of financial position
Statement of cash flows
Interrelationships between the statements
1.7 The financial reporting environment
Australian Securities and Investments Commission
Financial Reporting Council
Australian Accounting Standards Board
Australian Securities Exchange
Regulation in New Zealand
Professional accounting bodies
1.8 Concepts, principles and qualitative characteristics
Concepts and principles
Qualitative characteristics
1.9 Analysing financial statements
Analysis and decision making
Profitability
Liquidity
Solvency
SUMMARY
DECISION-MAKING TOOLKIT— A SUMMARY
KEY TERMS
ACKNOWLEDGEMENTS
2 The recording process
Chapter preview
2.1 Accounting transactions and events
Analysing transactions
Summary of accounting transactions
2.2 The account
2.3 Debits and credits
Debit and credit procedures
Equity relationships
Expansion of the basic accounting equation
2.4 Steps in the recording process
2.5 The journal
Chart of accounts
2.6 The general ledger
2.7 Posting
The recording process illustrated
Summary illustration of journalising and posting
2.8 The trial balance
Limitations of a trial balance
SUMMARY
DECISION-MAKING TOOLKIT— A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENT
3 Accrual accounting concepts
Chapter preview
3.1 Timing issues
Accrual versus cash basis of accounting
3.2 Revenue recognition criteria
New accounting standard for revenue recognition
Expense recognition criteria
3.3 The basics of adjusting entries
Types of adjusting entries
3.4 Adjusting entries for prepayments
Prepaid expenses
Revenues received in advance
Adjusting entries for accruals
Summary of basic relationships
3.5 The adjusted trial balance and financial statements
Preparing the adjusted trial balance
Preparing financial statements
3.6 Closing the books
Preparing closing entries
Preparing a post-closing trial balance
3.7 Summary of the accounting cycle
3.8 Adjusting entries — using a worksheet
SUMMARY
DECISION-MAKING TOOLKIT — A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM 1
DEMONSTRATION PROBLEM 2
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
4 Inventories
Chapter preview
4.1 Merchandising operations
Operating cycles
Inventory systems
4.2 Recording purchases of inventories
Purchase returns and allowances
Freight costs
Purchase discounts
4.3 Recording sales of inventories
Sales returns and allowances
Sales discounts
4.4 Statement of profit or loss presentation
Sales revenue
Gross profit
Other revenue
Operating expenses
4.5 Evaluating profitability
Gross profit ratio
Operating expenses to sales ratio
4.6 The goods and services tax
Overview of the GST process
4.7 Accounting for GST
Purchasing inventory
Purchases returns
Selling inventory
Sales returns and allowances
Settlement discount
Remitting GST to the taxation authority
SUMMARY
DECISION-MAKING TOOLKIT— A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
5 Reporting and analysing inventory
Chapter preview
5.1 Classifying inventory
Periodic inventory system
Recording inventory transactions
Recording purchases of inventory
Recording sales of inventory
Comparison of entries— perpetual vs. periodic
5.2 Cost of sales
Determining cost of goods purchased
5.3 Determining inventory quantities
Counting the physical inventory
Determining ownership of goods
5.4 Statement of profit or loss presentation
5.5 Inventory cost flow methods— periodic system
Specific identification
Cost flow assumptions
5.6 Financial statement effects of cost flow methods
Statement of profit or loss effects
Statement of financial position effects
Taxation effects
Using inventory cost flow methods consistently
5.7 Valuing inventory at the lower of cost and net realisable value
5.8 Analysis of inventory
Inventory turnover
5.9 Inventory cost flow methods— perpetual system
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Average cost
Demonstration problem for section 5.9
5.10 Inventory errors
Effects on profit
Effects on assets and equity
5.11 Closing entries for merchandising entities
Perpetual inventory method
Periodic inventory method
Worksheet
SUMMARY
DECISION-MAKING TOOLKIT — A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
6 Accounting information systems
Chapter preview
6.1 Basic concepts of accounting information systems
Principles of accounting information systems
6.2 Developing an accounting system
6.3 Internal control systems
Internal control
6.4 Managements responsibility for internal control
6.5 Principles of internal control
Establishment of responsibility
Segregation of duties
Documentation procedures
Physical, mechanical and electronic controls
Independent internal verification
Limitations of internal control
Internal control and forensic accounting
6.6 Transformation of financial data
Accounting processes underlying the generation of financial statements
6.7 Sales and receivables, and purchases and payments cycles illustrated
6.8 Internal control principles applied to the sales and receivables cycle and purchases and payments cycle
Sales and receivables cycle
Purchases and payments cycle
6.9 Control accounts, subsidiary ledgers and special journals
Control accounts and subsidiary ledgers illustrated
Advantages of subsidiary ledgers
6.10 Special journals
Posting the special journals
Advantages of special journals
6.11 Computerised accounting information systems
Basic features of computerised systems
6.12 Advantages and disadvantages of computerised systems
Advantages
Disadvantages
6.13 Sales journal
Journalising credit sales
Posting the sales journal
Checking the ledgers
Advantages of the sales journal
6.14 Cash receipts journal
Journalising cash receipts transactions
Posting the cash receipts journal
Purchases journal
Cash payments journal
Effects of special journals on general journal
SUMMARY
DECISION-MAKING TOOLKIT— A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
COMPREHENSIVE PROBLEM: CHAPTERS 3 TO 6
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
7 Reporting and analysing cash and receivables
Chapter preview
7.1 Cash and credit transactions
Business transactions and cash
7.2 Credit and electronic banking
7.3 Safeguarding and managing cash
Internal control over cash
7.4 Bank reconciliation
Reconciling the bank account
7.5 Managing and monitoring cash
Basic principles of cash management
Cash budget
7.6 Assessing cash adequacy
Ratio of cash to daily cash expenses
7.7 Recording and reporting receivables
Accounting for receivables
7.8 Valuing accounts receivable
Direct write-off method for uncollectable accounts
Allowance method for uncollectable accounts
GST and bad debt write-off
Notes receivable
7.9 Financial statement presentation of receivables
7.10 Analysing and managing receivables
Extending credit
Establishing a payment period
Monitoring collections
Evaluating the receivables balance
Accelerating cash receipts
7.11 Operation of the petty cash fund
Establishing the fund
Making payments from petty cash
Replenishing the fund
SUMMARY
DECISION-MAKING TOOLKIT — A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM 1
DEMONSTRATION PROBLEM 2
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
8 Reporting and analysing non-current assets
Chapter preview
8.1 Business context and decision making: overview
8.2 Property, plant and equipment
Determining the cost of property, plant and equipment
8.3 Depreciation
Factors in calculating depreciation
8.4 Depreciation methods
Straight-line depreciation
Diminishing-balance depreciation
Units-of-production depreciation
Managements choice: comparison of methods
Depreciation disclosure in the notes
Revising periodic depreciation
8.5 Subsequent expenditure
8.6 Impairments
Accounting for impairments
Reversal of impairments
8.7 Revaluations
Revaluation journal entries
Reversals of increases and decreases
8.8 Disposals of PPE assets
Sale of PPE assets
Scrapping of PPE assets
8.9 Property, plant and equipment records
8.10 Intangible assets
Accounting for intangible assets
8.11 Types of intangible assets
Patents
Research and development costs
Copyright
Trademarks and brand names
Franchises and licences
Goodwill
8.12 Other non-current assets
Agricultural assets
8.13 Natural resources
Amortisation (depletion)
8.14 Reporting and analysing issues
Reporting non-current assets in the financial statements
Analysis and decision making
SUMMARY
DECISION-MAKING TOOLKIT — A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM 1
DEMONSTRATION PROBLEM 2
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
9 Reporting and analysing liabilities
Chapter preview
9.1 Current liabilities
9.2 Notes payable
Payroll and payroll deductions payable
Revenues received in advance
9.3 Non-current liabilities
Why issue unsecured notes or debentures?
Determining the market value of unsecured notes and debentures
Accounting for issues of unsecured notes and debentures
Redeeming unsecured notes and debentures at maturity
Redeeming unsecured notes and debentures before maturity
9.4 Loans payable by instalment
Accounting for loans payable by instalment
Current and non-current components of long-term debt
9.5 Leasing
What is a lease?
9.6 Accounting for leases
Operating leases
Finance leases
Reporting leases
9.7 Provisions and contingent liabilities
9.8 Recording provisions for warranties
Reporting provisions for warranties
9.9 Financial statement analysis
Liquidity ratios
Solvency ratios
SUMMARY
DECISION-MAKING TOOLKIT— A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
10 Reporting and analysing equity
Chapter preview
10.1 Business context and decision making: overview
10.2 The corporate form of organisation
Characteristics of a corporation
Forming a company
Shareholder rights
10.3 Share issues
Issue of shares
Accounting for the private issue of shares
Accounting for the public issue of shares
10.4 Share splits
10.5 Dividends
Cash dividends
Share dividends
10.6 Earning power and irregular items
Errors
Changes in accounting estimates
Changes in accounting policies
Discontinuing operations
10.7 Reporting on equity
Statement of profit or loss and other comprehensive income
Statement of changes in equity
Statement of financial position — equity section
10.8 Retained earnings
10.9 Financial statement analysis and decision making
Dividend record
Earnings performance
10.10 Debt versus equity financing decision making
SUMMARY
DECISION-MAKING TOOLKIT — A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM 1
DEMONSTRATION PROBLEM 2
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
11 Statement of cash flows
Chapter preview
11.1 The statement of cash flows: purpose
Purpose of the statement of cash flows
11.2 Classification of cash flows
Significant non-cash activities
Format of the statement of cash flows
Usefulness of the statement of cash flows
11.3 Preparing the statement of cash flows
Determining the net increase (decrease) in cash (step 1)
Determining net cash provided (used) by operating activities (step 2)
Determining net cash provided (used) by investing activities (step 3)
Determining net cash provided (used) by financing activities (step 4)
Completing the statement of cash flows
Indirect method for determining cash flows from operating activities
Summary of indirect method for determining cash flows from operating activities
11.4 Using cash flows to evaluate an entity
The entity life cycle
11.5 Free cash flow
Capital expenditure ratio
Assessing liquidity, solvency and profitability using cash flows
SUMMARY
DECISION-MAKING TOOLKIT — A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM 1
DEMONSTRATION PROBLEM 2 — COMPREHENSIVE
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
12 Financial statement analysis and decision making
Chapter preview
12.1 Comparative analysis
12.2 Horizontal analysis
12.3 Vertical analysis
12.4 Ratio analysis
Liquidity ratios
Solvency ratios
Profitability ratios
12.5 Limitations of financial statement analysis
Estimates
Cost
Alternative accounting methods
Atypical data
Diversification
SUMMARY
DECISION-MAKING TOOLKIT — A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
13 Analysing and integrating GAAP
Chapter preview
13.1 Concepts and principles underlying accounting
Monetary principle
Accounting entity concept
Accounting period concept
Going concern principle
Cost principle
Full disclosure principle
13.2 Conceptual frameworks
Historical developments
Future developments
Overview of the Conceptual Framework
13.3 The objective of general purpose financial reporting
Stewardship and accountability objectives
Decision-usefulness objective
The Conceptual Framework
13.4 Users and uses of financial reports
The Conceptual Framework — primary users
The Conceptual Framework — other users
13.5 The reporting entity
The reporting entity — defined
The reporting entity — indicators
ED/2010/2 Conceptual Framework for Financial Reporting: The Reporting Entity
Differential financial reporting
13.6 Qualitative characteristics and constraint on financial reporting
Fundamental qualitative characteristics
Enhancing qualitative characteristics
Constraint on financial reporting
13.7 Definition, recognition and measurement of elements in financial reports
Assets — definition and recognition criteria
Liabilities — definition and recognition criteria
Equity — definition
Income — definition and recognition criteria
Standards for revenue recognition
Expenses — definition and recognition criteria
Measurement of the elements of financial reports
13.8 Integrating principles, concepts, standards and the Conceptual Framework
Summarising GAAP
Integrating GAAP
13.9 Future developments in financial reporting
Integrated reporting
SUMMARY
DECISION-MAKING TOOLKIT — A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
14 Technology concepts
Chapter preview
14.1 Computerised accounting information systems
Xero accounting software
14.2 Enterprise resource planning (ERP)
Why an ERP system?
14.3 Business processes supported by ERP systems
14.4 ERP systems—SAP modules
14.5 eXtensible Business Reporting Language (XBRL)
XBRL and its role in reporting systems and decision making
14.6 Different ways to apply XBRL tags
XBRL tags in the accounting system
Tagging accounts after reports have been produced
14.7 Benefits of XBRL
Reduced data manipulation
Paperless reporting
Industry-accepted standards
Reduced accounting time
Recognition by major accounting software vendors
Interchangeable data
Comparisons across companies
Improved audit quality
Stakeholder benefits
14.8 XBRL concepts
14.9 Cloud computing
Cloud Infrastructure as a Service (IaaS)
Cloud Platform as a Service (PaaS)
Software as a Service (SaaS)
14.10 New technologies
Big data
Artificial intelligence
Blockchain
Bitcoin
Other technologies
SUMMARY
KEY TERMS
SELF-STUDY QUESTIONS
QUESTIONS
EXERCISES
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
Managerial accounting supplement
15 Introduction to management accounting
Chapter preview
15.1 Management accounting basics
Comparing management accounting and financial accounting
Ethical standards for management accountants
15.2 Management functions
Management cost concepts
15.3 Manufacturing costs
Direct materials
Direct labour
Manufacturing overhead
15.4 Product vs. period costs
15.5 Manufacturing costs in financial statements
Statement of profit or loss
15.6 Statement of financial position
15.7 Determining the cost of goods manufactured and cost of sales
Cost concepts: a review
15.8 Evolution and improvements in management accounting
Service industry needs
Globalisation
Effects of technological change on business infrastructure
E-commerce
New management systems and concepts
15.9 Accounting cycle for a manufacturing entity
Worksheet
Closing entries
SUMMARY
DECISION-MAKING TOOLKIT— A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
16 Cost accounting systems
Chapter preview
16.1 Cost accounting systems
Non-manufacturing entities
Overhead application
Job order costing and process costing
16.2 Job order costing
Job cost flows
16.3 Job cost sheet
Determining overhead rates
Accounting procedures
Reporting job cost data
Under- or overapplied manufacturing overhead
Non-manufacturing entities
Process costing
16.4 Process cost flow
16.5 Accounting procedures
Assignment of manufacturing costs— journal entries
Equivalent units
16.6 Production cost report
16.7 Activity-based costing (ABC)
Traditional costing systems
The need for a new costing system
Activities and cost drivers
Activity-based costing in manufacturing industries
Activity-based costing in service industries
16.8 Benefits and limitations of activity-based costing
Benefits of ABC
Limitations of ABC
When to switch to ABC
16.9 Value-added vs. non-value-added activities
Hierarchy of activity levels
16.10 Just-in-time processing (JIT)
Objective of JIT processing
Elements of JIT processing
Benefits of JIT processing
SUMMARY
DECISION-MAKING TOOLKIT— A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
17 Cost–volume–profit relationships
Chapter preview
17.1 Cost behaviour analysis
Variable costs
Fixed costs
Mixed costs
17.2 Absorption vs. variable costing
Comparison of statements of profit or loss
Rationale for variable costing
17.3 Cost–volume–profit analysis
Basic assumptions
17.4 Contribution margin
Break-even analysis
Margin of safety
17.5 Target profit
Mathematical equation
Contribution margin technique
Graphic presentation
CVP for profit planning
17.6 Using CVP analysis with multiple products
Break-even sales
Limited resources
17.7 CVP statement of profit or loss
SUMMARY
DECISION-MAKING TOOLKIT — A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
18 Budgeting
Chapter preview
18.1 Budgeting basics
Budgeting and accounting
The benefits of budgeting
Essentials of effective budgeting
Length of the budget period
The budgeting process
Budgeting vs. long-range planning
18.2 The master budget
Preparing the operating budgets
18.3 Cash budget
18.4 Preparing the budgeted financial statements
Budgeted statement of profit or loss
Budgeted statement of financial position
18.5 Budgeting in non-manufacturing entities
Merchandising entities
Service entities
Not-for-profit entities
Government entities
18.6 Budgetary control
Static budget reports
18.7 Flexible budgets
Developing the flexible budget
Flexible budget — a case study
Flexible budget reports
Management by exception
18.8 The concept of responsibility accounting
Controllable vs. non-controllable revenues and costs
Responsibility reporting system
Types of responsibility centres
18.9 Responsibility accounting for cost centres
Responsibility accounting for profit centres
Responsibility accounting for investment centres
Principles of performance evaluation
SUMMARY
DECISION-MAKING TOOLKIT — A SUMMARY
KEY TERMS
DEMONSTRATION PROBLEM
SELF-STUDY QUESTIONS
QUESTIONS
BRIEF EXERCISES
EXERCISES
PROBLEM SET A
PROBLEM SET B
BUILDING BUSINESS SKILLS
ACKNOWLEDGEMENTS
Appendix: Time value of money
Nature of interest
Simple interest
Compound interest
Future value concepts
Future value of a single amount
Future value of an annuity
Present value concepts
Present value variables
Present value of a single amount
Present value of an annuity
Time periods and discounting
Calculating the present values in a capital budgeting decision
SUMMARY
Key Terms
BRIEF EXERCISES (USE TABLES TO SOLVE EXERCISES)
INDEX
EULA