bao6504 lecture 3, 2014
DESCRIPTION
AccountingTRANSCRIPT
BAO6504Accounting for Management Lecture 3
Assets, Liabilities and EquityReference: Chapters 4,8, 9 and 10
2
Current Assets
Inventory Cash Accounts Receivables Notes Receivables
3
CLASSIFYING INVENTORY
In a manufacturing business, inventories are usually classified into three categories:
Raw materials: materials that will be used but have not yet been placed in the production process
Work in process: manufactured inventory that has been started but not yet completed in the production process
Finished goods: completed manufactured items that are ready for sale
4
Cash
Cash is the most desirable asset because it is readily convertible into any other asset
Cash consists of Cash on hand (notes and coins) Cash at bank Cheque accounts
5
Managing and monitoring cash
Operating cycle of a retail business
6
Accounts Receivable
Accounts receivable are amounts owed by customers on account
3 accounting problems associated with accounts receivable are: Recognising accounts receivable Valuing accounts receivable Accelerating cash receipts from
receivables
7
Accounting for receivables continued
Ageing of Accounts Receivable
8
Managing receivables
1. Determine to whom to extend credit
2. Establish a payment period3. Monitor collections4. Evaluate the receivables balance5. Accelerate cash receipts from
receivables when necessary
9
RECEIVABLES
Notes receivable are claims for which formal instruments of credit are issued evidencing the debt
Other receivables include non-trade receivables such as interest receivable, loans, advances and GST receivable
10
Accounting for receivables continued
Notes receivable A note receivable is a formal credit
instrument It does not always arise from
transactions with customers It is included as an asset in the
financial statements
11
Non-current Assets
Property, Plant and Equipment
Intangible assets
12
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (PPE) are physical assets used in the business to provide future economic benefits for a number of years
According to AASB 116, economic benefits derived from the use of an asset must be recognised on a systematic basis over the asset’s useful life
This decline is recognised as depreciation expense in the income statement
13
PROPERTY, PLANT AND EQUIPMENT continued
Two classes of PPE assets: Property
Includes land and buildings Plant and equipment
Includes cash registers, computers, office furniture, factory machinery, motor vehicles
14
Determining the cost of PPE continued
The cost of an asset Consists of the fair value of all expenditure necessary to acquire the asset and make it ready for use
e.g. For property, Cost of land includes purchase price, settlement costs (e.g. solicitor’s fees), stamp duty, property taxes assumed by purchaser
e.g. For equipment, cost includes purchase price, freight costs paid, installation costs
15
Depreciation
Depreciation is the process of allocating to
expense the cost of a PPE asset over its useful
(service) life in a rational and systematic
manner
Carrying amount equals cost less accumulated
depreciation
16
Depreciation continued
Factors in calculating depreciation Cost
All expenditures necessary to acquire the asset and make it ready for intended use
Useful life Estimate of the expected life based on intended use,
need for repair, vulnerability to obsolescence and legal life
Residual value Estimate of the asset’s value at the end of its useful life
17
Depreciation continued
Depreciation methodsStraight lineReducing balanceUnits of production
ExampleDelivery truck purchased by Bill’s Pizzas
Cost $13 000Expected residual value $ 1 000Estimated useful life (in years) 5Estimated useful life (in kms) 100 000
18
Depreciation continued
1. Straight-line method Depreciation expense same each year as benefits are
consumed at same rate each year Calculation for annual charge:
cost of asset – residual value useful life of the asset
Bill’s Pizzas example: Annual depreciation ($13 000 - $1 000) / 5 = $2 400
19
Depreciation continued
Straight-line depreciation schedule
BILL’S PIZZAS
Calculation End of year Depreciable Depreciation Depreciation Accumulated CarryingYear amount x rate = expense p.a. depreciation amount2010 $12 000 20% $ 2 400 $ 2 400 $10
600 *2011 12 000 20 2 400 4 800 8
2002012 12 000 20 2 400 7 200 5
8002013 12 000 20 2 400 9 600 3
4002014 12 000 20 2 400 12 000 1
000Total $12 000
* Cost $13 000 – Year 1 depreciation $2400 = Carrying amount $10 600
20
INTANGIBLE ASSETS
Intangible assets: non-monetary assets that have no physical substance1. Patents2. Research and development costs3. Copyright4. Trademarks and brand names5. Franchises and licences6. Goodwill
21
Accounting for intangible assets continued
Amortisation This is the term used to describe
the allocation of the cost of an intangible asset to expense
Intangible assets are assumed to have a limited life and are amortised
Patents are amortised over legal or useful life, whichever is shorter
22
Accounting for intangible assets continued
Example Patent costs $60 000 and has an estimated
useful life of 8 years
Annual amortisation expense$60 000 ÷ 8 = $7500
23
Current and Non-current Liabilities
CURRENT LIABILITIES A current liability is an obligation that can
reasonably be expected to be paid within one
year or within the operating cycle, whichever is
the longer.
Examples of current liabilities include: notes payable
accounts payable
revenue received in advance
accrued liabilities
24
Notes Payable
Notes payable record obligations in the form of written notes
Usually require borrower to pay interest or borrowing costs
Frequently issued to meet short-term financing needs
Issued for varying periods of time
25
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 deductions for: Tax (pay-as-you-go or PAYG)
Superannuation
Trade union fees
Health insurance
Employers are responsible to remit these withheld
funds to the appropriate parties
26
Revenues received in advance
Occurs when customers pay ahead
of time for goods or services
e.g. Purchase of plane tickets
Magazine subscriptions
Season passes to sporting
events
27
Accrued Liabilities
Occurs when the firm has incurred
expenses that have not been paid
for, and for which no specific
invoice / claim has been made by
the relevant party.
28
NON-CURRENT LIABILITIES
Obligations expected to be paid after
1 year or outside normal operating cycle
Common forms of these obligations are: Bank loans
Long-term notes
Debentures are notes that are subject to a secured
charge on the issuers assets
Unsecured notes are not subject to a security over
assets
29
LOANS PAYABLE BY INSTALMENT
Entities may borrow money from a single borrower in the form of loan
It is common for such loans to be repayable by instalment, e.g. mortgages
A mortgage is a loan secured by a charge over property
If the borrower is unable to repay the loan, the lender may sell the property and use the proceeds to repay the loan
30
Current and non-current components of long-term debt
Entities often have a portion of long-term debt that falls due within the coming year
This portion of the long-term debt should be classified as a current liability
31
Why issue long-term notes?
Advantages of Debt Financing
Shareholder control is not affected
Current owners retain full control of company
Tax savings result
Interest is deductible for tax purposes; dividends on shares are not
Earnings per share may be higher
Although interest expense reduces net profit, earnings per share may be higher because no additional shares are issued
32
Why issue long-term notes? continued
Disadvantage of Debt Financing
Company is locked into fixed payments.
These must be made in good and bad times
Interest must be paid on periodic basis
Principal must be paid at maturity
Company with fluctuating earnings and relatively weak cash flow may experience difficulty in meeting interest payments in periods of low earnings
33
Equity
A company is owned by its shareholders
Different classes of shares carry different ownership rights Ordinary shares Preference shares
34
Shareholder rights continued
Ordinary shares have 3 major ownership rights: Right to vote Right to share in company’s profit Right to a residual claim if company is
liquidated
Preference shares have priority over ordinary shares with respect to dividends and claims at liquidation
35
DIVIDENDS
A dividend is a distribution of profit by a company to its shareholders on a pro rata basis
Forms of dividends: Cash Property Shares
Public companies often pay 2 dividends: Final dividend determined at end of year Interim dividend paid during the year
36
Cash dividends
A cash dividend is a pro rata distribution of profit paid in cash to shareholders
To pay a cash dividend, a company needs: Adequate retained earnings Adequate cash available to avoid
insolvency Dividends declared by directors
37
Share dividends
A share dividend is a pro rata distribution of the company’s shares to shareholders
Total shareholders’ equity does not change because:
Retained earnings decreases and Share capital increases
A share dividend signals that this amount of retained profits is not available to shareholders as cash dividends
38
REPORTING ON SHAREHOLDERS’ EQUITY
Equity section of balance sheet of a corporation includes: Share capital: contributed equity (paid
and any outstanding amounts) Retained earnings: prior profits kept
within company and not distributed as dividends
Reserves: changes in equity not created through transactions with owners
39
Reserves
Most reserves of Australian companies are classified as revenue reserves and can be distributed as dividends
Companies must:
Show the aggregate amount of reserves on the face of the balance sheet
Disclose the nature and purposes of reserves
Provide a reconciliation that explains movements in each reserve during year
40
Retained earnings
Retained earnings represent accumulated
profits that have not been distributed to
shareholders as dividends
On the balance sheet, companies must
report:
The opening amount of retained earnings
Changes to retained earnings during the year
The amount of retained earnings at balance date