week 1 lecture notes (1 slide)

7/21/2019 Week 1 Lecture Notes (1 Slide)

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Week 1

Introduction to Financial Accounting & Key

Financial Statements

Student Handout

Lecturer:Dr. Youngdeok Lim

School of AccountingUNSW

QUAD [email protected]

Business School

ACCT1501 Accounting and Financial Management 1A

Session 1 2015


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WEEK 1: Introduction to Financial Accounting & Key Financial

Statements

Welcome to Accounting and Financial Management 1A.

In this first lecture you will be introduced to the lecture staff on the course and begiven the Course Outline. We will be outlining the objectives of the subject, its

structure and requirements as described in the Course Outline and answer anyquestions you may have about the course. We will be referring to the Woolworths2011 Annual Report throughout the course. The annual report is included as anappendix in your course textbook (5thedition, Trotman Gibbons & Carson, pages 746-787). We will then begin to explore the nature of accounting and introduce generalpurpose financial reports.

Learning objectives

At the end of this topic you will be able to:

Understand the overall course requirements and assessment tasks for this unit.

Define Accounting

Begin to become familiar with the Woolworths 2011 annual report and the

information it contains.

Be aware of key financial statements and the users of these reports.

Begin to understand the accrual concept

Understand the foundations of modern accounting practices including the

underlying assumptions of financial reporting

Required Reading

1. ACCT 1501, 2015S1 Course Outline


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ABC faced insolvency in 2007

Colin KrugerMay 22, 2010

ABC Learning was staring down the barrel of a $1.78 billion lossfor the 2008financial year when it collapsed, but the company may have been insolvent as early asmid-2007, according to a report from its administrators, led by Ferrier Hodgson'sGreg Moloney.

In the final drafts of ABC's financial statementsprepared for the year ending June 30,2008, its auditors included impairment charges totalling $1.168 billion, and a $364million loss on the disposal of a majority stakein ABC's US business.

Significant contributors to the loss - $1.2 billion more than previous estimates - are a$686 million cut in the valuation of childcare licences and a $127 million write-downof debtsowed by ABC's childcare developer, 123 Group.

The massive loss means the net assets on ABC's balance sheetwere reduced from$2.22 billion the previous year to just $284.5 million at June 30, 2008, putting thecompany in breach of its covenants almost five months before administrators wereappointed.

But the bombshell in the report to creditorsis the administrators' analysis that for the

2007 and 2008 financial yearsABC had just 30 and 40, respectively, of currentassets for every dollar of current liabilities.

This equates to a current ratioof 0.3 and 0.4 for those years. The administrator'sreport notes that ''a current ratio and quick ratio less than one may indicate a potentialliquidity crisis''.

An analysis of the company's quick ratioshowed ABC had just 20 of ''liquid'' assets

for every dollar of current liabilities in 2007, and 10 in 2008.

The quick ratio is lower because it does not include potential proceeds from assetsheld for sale.

''This indicates that there was a reliance on the sale of assets to discharge short-term


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''This reliance on external capital, combined with failing support by equity and debtinvestors as well as underwhelming financial performance, led to a liquidity crisisand

was a major contributor to the failure of the ABC Group,'' the report said.

The administrators said they have yet to determine exactly when ABC becameinsolvent.

The second creditors' meeting, expected to vote to wind up ABC, is scheduled to beheld June 2 at the Tattersall's Club in Brisbane.

Read more: http://www.smh.com.au/business/abc-faced-insolvency-in-2007-20100521-w1tf.html#ixzz1Rc0qPPKJ

If you are interested in what comes after the ABC collapse, read more:http://www.smh.com.au/national/what-comes-after-abc-20120519-1yxf2.html


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Todays lecture objectives:At the end of this topic you will be able to:

1. Understand the overall course requirements and assessment tasks for

this unit.

2. Define Accounting

3. Begin to become familiar with the Woolworths 2011 annual report and the

information it contains.

4. Be aware of key financial statements (Balance sheet, Income statement,and Cashflow statement) and the users of these reports.

5. Begin to understand the accrual concept

6. Understand the foundations of modern accounting practices includingthe underlying assumptions of financial reporting

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1. The Course Outline

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What you need to know?

1. Understand the coursestructure

2. Course objectives

3. Clarify roles andresponsibilities


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Introduction

Teaching staff

(

Other tutors Abarna, Alice, Brian, Carmel, Chi, Derek,

Dickson, Hien, Jason, Katherine, Kevin L, Kevin W, Mary,Nathalie, Phuc, Sudipta, Susan, Tyler

&

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Required Texts

Lecture outlinesand additionalreadings

Available on Moodle

Practice Set

http://www.perdisco.com.au/home.asp

All the instructions on how to log on anduse Perdisco are covered in the Course

Outline+

Management Accounting Supplement

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Totally re-written ManagementAccounting Supplement

Bundled in with the Text when

purchased new from thebookstore (a separate code isprovided)

The management supplement can

be purchased independentlyonline for $19.95 (seehttps://www.cengagebrain.com.au/shop/search/9780170351973).

Comes in an e-book format

New Management Accounting Supplement

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Course schedule (see page 16 in courseoutline )

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Lectures: How do you prepare for lectures

Read the assigned reading materials before the lecture

Lectures are only a summaryand are not a substitute for reading

Bring your Lecture Notes to every lecture & tutorials !!!!!

The lecture notes follow the lecture outline with space for you tomake your own additional notes during the lecture

Lecture notes will be posted on Moodle.

Lectures will be Podcast recorded with screen captures of the

lecture slides (EchoCenter). This is recommended as anadditional resource not a substitute for face-to-face interactionin the lectures.

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How to maximize the return on your investment (ROI)

Participation in class (both lectures & tutorials) Students do not benefit from copying solutions

Attempting your work is essential to identifying concepts/ issues you donot understand

Tutorial homework (Max. 4 marks)

Your tutor will randomly choose 5 weeks to review your writtenanswers to the assigned tutorial questions (not preparationquestions) and mark the best 4 weeks (no half mark).

Tutorial individual participation (max 3 marks)

Tutorial group participation (max 3 marks)

Help tutors help you, by proactively asking questions!

Interaction in the tutorial helps everybody learn it might even be fun!!!!

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Preparation & Tutorial Questions:Work you must do to pass the course !!

Preparation Questions: Attempt all preparation questions andcheck the solutions on Moodle before your tutorial.

Tutorial Questions (also attempt before class): The goal ofthe tutorial is to discuss the questions and clarify any concernsyou may have. The process in an interactive one and you are

required to engage with your tutor by asking and answeringquestions.

Note: DQ1.1 means Chapter 1, discussion question 1.

P1.6 refers to problems at the end of chapter 1. Let us try these

P4.25 & P6.22 - How will you find these???

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Learning Assessment (or how to pass ACCT1501)

Assessment Item / Due date Weight

Tutorial participation (complete each week) 10%

Mid-session class test (Week 8) 15%Multiple Choice Tests 3 quizzes 5% each(Quiz 1 due on March 27 @ 3pm;

Quiz 2 due on April 24 @ 3pm;

Quiz 3 due on May 29 @ 3pm) 15%

Perdisco Practice Set Assignment(Monday May 18 @ 3pm) 10%

Final examination 50%

TOTAL 100%

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In order to pass, students must

Achieve a composite mark of at least 50% AND

Achieve a satisfactory level of performance inthe final exam, usually means a minimum mark of50%

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Each quiz will be open for 1 week.

Each quiz will consist of 20 multiple choice questions.

It is recommended to be completed in 40 minutes; howeverthere will be no official time limit. One attempt.

Important feedback!!!!

For you & us!

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Three Quizzes YOU must read the instructions!!!!


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Practice Set Assignment (10%, due Monday May 18 @ 3pm)

Perdisco on-line practice set an individual assignment. This assignment is a comprehensive accounting exercisedesigned to integrate your knowledge of accounting systems

and the accounting cycle. This task is expected to take approximately 20 workinghours to complete. The practice set will be made available toyou on 20 April 2015 at 9am in week 7. When you have

sufficient information (e.g. special journal), you can start workingon this exercise.

DO NOT LEAVE THIS TASK TO THE LAST MINUTE !!!!

I do think the perdisco is very good exercise, which give mea overview of the real accounting practice. (excepted from oneof student comments)

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Special Consideration and Supplementary examinations:

There will be a very limited opportunity to sit asupplementary mid-session exam. To apply for this, seePart B. 4 regarding general information on specialconsideration.

There is only one opportunity to sit for a supplementaryfinal exam which will be held on 14 July 2015 exams forthe School of Accounting after the final exam session.

If you are too ill to perform reasonably on the final exam, donot attend the final and apply for a supplementary instead.

Applying for special consideration does not automaticallymean that you will be granted a supplementary exam.

No special consideration will be granted for the Perdisco on-line Practice Set or the on-line MCQ quizzes.

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Additional resources

Face to face consultation with full-time staff Tutors will hold extra consultation for mid-session exam

and final exam (to be announced).

PASS (Peer Assistance Support Scheme)

Discussion boards on Moodle

For questions of a private/personal nature, please [email protected]

Email policy: Use UNSW student email by identifyingyourself with ID & full name

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The Course Website

Moodle:https://moodle.telt.unsw.edu.au/login/index.php

Announcements!!! your responsibility to read

View preparation and tutorial solutions

Use the Discussion board - 3 Categories

Course Content, Course Administration

On-line Practice Set (student only)

- overseen by staff members Use appropriately and with respect for others

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Student responsibilities:

Preparation for lectures & tutorials

Workload and other commitments balance!!!

Attendance 80% rule University & UNSW BusinessSchool

Conduct and behaviour respectful to others at all timesin lectures, tutorials, via email and on Moodle

Keeping informed !!! Read the course outline; ModdleAnnouncements & your university email.

ONLY attend the lectures and tutorials that you are

officially enrolled to attend.

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Introduction to Financial Accounting &Key Financial Statements (Ch 1)

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Some ground rules

Please put your mobile phone on SILENT

Lectures start at 5 minutes past the hour, and finish at 5minutes to the hour

Well aim to have a 5-10 minute break half waythrough

Be considerate This means no talking!

If you are late, come in quietly, with minimal disruption

to others

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2. What is accounting?

Accounting is the process ofidentifying, measuring,

recording and communicatingeconomic information to assistusers to make decisions.

Accounting is the language ofbusiness. by Warren Buffett

Grammar

Vocabulary

Practice

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Dont forget to use the Glossary! (T,G&C, p. 788)

In the course of your study you will be introduced to many keyAccounting terms; it is like learning a new language.

You should refer to the glossary as often as needed until youget to know all the new terms.

Practice using the glossary - look up the new terms eachweek and try to explain them in your terms or think of an example

to explain it. (Tip: Define, explain, example!)

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What is your estimate for total salary of CEO inWoolworths for the year ended 30 June 2014?

1. 0-$ 500,000

2. $500,001-$ 1,000,0003. $1,000,001-$ 5,000,000

4. $5,000,001 or above

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Accounting System

Financial Accounting SystemPeriodic financial statements and

related disclosures

Managerial Accounting SystemDetailed plans and continuous

performance reports

External Decision MakersInvestors, creditors,

suppliers, customers, etc.

Internal Decision MakersManagers throughout the

organization

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0 & &

&

&

&

&

&

&

!

How ACCT1501 is positioned within an accounting major

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What is financial accounting?

Financial accounting will be the focus of this course.

Financial accounting focuses on the provision of

information to users external to the enterprise.

The focus is on reporting financial position and financialperformance.

We discuss financial accounting in weeks 1 to 10.

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What is management accounting?Management accounting will be the focus of later part of this

courses.

Management accounting focuses on the provision ofinformation to users within the enterprise (to aid inoperational planning and control decisions).

We start to look at management accounting in weeks 11 &12

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Accounting information and share prices: Facebook's revenue


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Accounting information and share prices: Facebook s revenuesurges higher, stock hits record high (July 24, 2014, SMH)

Facebook Inc's fast-growing mobile advertising businesshelped drive a 61 per cent increase in revenue during the secondquarter, beating Wall Street's financial targets and sending shares

to a record-high in after-hours trading on Wednesday. The world's No.1 Internet social network said on Wednesdaythat it saw increased interest from both advertisers and fromusers during the second quarter.

Facebook now counts 1.5 million advertising customers andthe company's ad business saw strong growth across all of itsgeographic regions in the second quarter, Chief Operating Officer

Sheryl Sandberg told Reuters in an interview on Wednesday."We're seeing our existing advertisers spend more and we'reseeing new people come on to the platform," Sandberg said.

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A i i f i d h i F b k'


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Accounting information and share prices: Facebook'revenue surges higher, stock hits record high (July24, 2014, SMH)

Facebook said that mobile advertising revenue represented 62

per cent of its ad revenue in the second quarter, up from 41 percent in the year-ago period and 59 per cent in the first quarter of2014.

Shares of Facebook were up roughly 4 per cent at $US74.10in after-hours trading on Wednesday.

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Some examples of an economic

consequence The Accounting Scandals such as Enron, Worldcom,

Misleading reporting

Mismanagement ABC learning Collapse of the company

Indictments

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The nature of accounting


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The nature of accounting(ABC Learning Why is accounting important?)

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March, 2001: stock price=$2

December, 2006: stock price=$8.6

August, 2009: stock price=$0.54http://www.youtube.com/watch?v=YYF6JW9vJKo


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We have focused mainly on theeconomic consequences

inthe equity markets

The decision maker in this situation is the investor / owner

Their decisions are based on what value they are willing to

either buy or sell shares in the market

Can you think of other users of accounting information?

And, for what purposes will they use the accounting information?

Small group (two to 4 people) discussion.

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Other users of accounting information:

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User Type of Information

Bankers The likelihood of the company meeting its

interest payment on time

ASIC Financial position and performance of a

company issuing shares to the public for the first

time

Suppliers

Australian Tax Office Profitability of company based on tax law

Trade Unions Profitability of company since last contract withemployees was signed


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Is accounting really important?

Used by:

Management in making business decisions

Shareholders for decision making

Board of directors in takeover battles

Bankers and creditors in lending decisions

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Is accounting really important? (cont.)

Used by:

Boards in rewarding and removing executives

Management and unions in wage negotiations

Impacts communities

Impacts workers

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3. What is an annual report?

Glossy magazine that containsa lot of descriptive informationabout the company and the

general purpose financialstatements.

How to get it?


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4. Key financial statements

Balance sheet

Financial position of an enterprise at a particular point in time.

What are the entitys resources and how were they financed?

Income statement

Financial performance of an enterprise over a period of time.

Has the entity used its resources efficiently and effectively?

Sometimes referred to as the Profit and Loss Statement (P&L)

Cash flow statement: (To be covered in 1B)

Cash inflows and outflows.

Notes to the financial statements (additional detail)

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Introduction to the Balance Sheet

The balance sheet reports the financial position of an entityat a point in time.

Used to assess financial structure and ability to pay debt

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Dec 312014

BalanceSheet

Dec 312013

BalanceSheet

Jan 1 2013 Dec 312015

BalanceSheet


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Balance sheet

Three main elements:

Assets

Resources - they will benefit the company this year

(current) or in future years (non-current)

e.g., cash, property, equipment, inventory

Liabilities

What the company owes

e.g., accounts payable, loan payable

Equity (net assets)

What belongs to the owners, the residual i.e. whatis left after liabilities are taken care of e.g., sharecapital, retained profits

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B l h t


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Balance sheet

Assets are due to debt or equity! The balance sheet shows resources (assets), and claimson those resources (liabilities and equity) at a point in time.

We can represent this with the accounting equation:

Assets = Liabilities + EquityResources Sources

This will be very important to us in later weeks when we

consider double-entry book keeping

There are always two aspects of a transaction

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Example (To be continued)

You purchased one bed room apartment at $500,000 on1/7/2011 and rented it.

Financing source: Your own money $100,000, Borrowingfrom bank $400,000 (maturity: 3 years, Principal will bepaid at the end of maturity)

Rent revenue (cash) $400/week, Interest expense (cash)

$200/week, Tax expense (cash) $1000/year

Assume 52 weeks per year and no depreciation

Prepare B/S as of 1/7/2011

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Consolidated Balance Sheet Woolworths limited (2014)


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Appendix: Consolidated financial statement


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Appendix: Consolidated financial statement

Financial statements that factor the holding company (parentcompany)'s subsidiaries into its aggregated accounting figure.

A subsidiary is a company controlled by parent company. Control exists

when the parent company has the power, directly or indirectly, to governthe financial and operating policies of an entity so as to obtain benefitsfrom its activities.

Intragroup balances, and any unrealised gains and losses or income and

expenses arising from intragroup transactions, are eliminated It shows how the holding company is doing as a group. Theconsolidated accounts should provide a true and fair view of thefinancial and operating conditions of the group.

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I St t t


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Income Statement

Shows the results of business operations over a specifictime period

Reports revenues earned, and any expenses incurred

Revenue: inflows of economic benefits that increase owners equity e.g., sales revenue, service revenue, fees earned

Expenses: Use or loss of economic benefits that decrease ownersequity.

Incurred when you use resources to generate revenue(matching principle)

If revenues are greater than expenses, there is a profit

If revenues are less than expenses, there is a loss

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Income Statement

Revenues & Expenses are recognised when aneconomically meaningful event has occurred

This is called Accrual Accounting

It does not have to involve cash!

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Consolidated Income Statement Woolworths limited (2014)


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Statement of cash flows (To be covered in 1B)

Statements of cash flows provide details of movementsin an entitys cash balance over a specific time period.

The cash flows are normally categorised into:

operating activities: main revenue producing activities

investing activities: acquisition and disposal of long termassets

financing activities: equity capital and borrowing

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Business Model (Week 3 slide)


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Business Model (Week 3 slide)

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Company

(e.g. Woolworths)

Customers

(e.g. You)

Suppliers

(e.g. farmers)

Purchase Sale

Payment

(Cash/Accounts

Payable)

Payment

(Cash/Accounts

Receivable)

Investors (e.g. banks,shareholders)

Financing activities

Property Plant and Equipment,financial securities etc

Investing activities

Operating

activities

Operating

activities

Consolidated Cash Flow Statement Woolworths limited (2014)


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5. Accrual vs. Cash Accounting (Week 2)


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g ( )

An income statements reports revenues and expenses

Accrual accounting

A cash flow statement reports cash inflows and outflows

Cash accounting

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A Key objective for this session: beginto understand the Accrual concept***


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to understand the Accrual concept***

In June, a company makes cash sales of $10,000 and creditsales of $20,000 (all to be collected in July)

What are sales using accrual accounting in June?

What are cash inflows using cash accounting in June?

What are total sales using accrual accounting in June and July?

What are total cash inflows using cash accounting in June and

July?

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6 Financial statement assumptions


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6. Financial statement assumptions

Financial statement assumptions include:

accounting entity

accounting period monetary

historical cost

going concern

materiality.

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Accounting entity assumption


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Accounting entity assumption

The entity for which financial statements are prepared

Activities of the entity are separate from those of its

owners/members Includes, but not limited to, legal entities

Economic entity a group of entities where the goals ofthe controlling entity are pursued:

e.g. companies, partnerships, funds, associations, public sectorbodies.

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Accounting Period assumption


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Accounting Period assumption

Life of business is divided into discrete time periods ofequal length to determine financial performance and

position. Production of regular, comparable financial statements.

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Dec 312015

Balance

Sheet

Dec 312014

Balance

Sheet

Jan 1 2014 Dec 312016

Balance

Sheet

Monetary assumption


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Monetary assumption

Universally accepted medium of exchange.

Measure economic activity by a common denominator.

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Historical cost assumption


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Historical cost assumption

Transactions are initially recorded at their original cost.

Treats assets in terms of their use rather than for resale.

Example: Land purchased in 1995 at cost of $50,000 andstill owned by the buyer will be reported on the buyer's

balance sheet at its historical cost of $50,000 even thoughits market value of $500,000.

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Going concern assumption


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Going concern assumption

Assumes continued operation of accounting entity intoforeseeable future

There is no intention or need to liquidate

Produces demand for financial information during life ofentity

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Materiality assumption


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Materiality assumption

A piece of information is said to be material if itsomission or misstatement could influence the economic

decisions of users made on the basis of the financialstatements

No set rules on determining materiality (auditors use

5% as a guide) e.g. Financial statements in $million (seeWoolworths example in the Appendix)

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Revision Question


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Revision Question

In profit measurement, private transactions ofowners are not taken into account. What

assumption/concept underlies this procedure?

1. Materiality

2. Monetary concept3. Accounting period

4. Accounting entity

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Take away and coming upnext week!


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Accounting entity assumption, accounting period assumption

Balance Sheet

Assets

Liabilities

Shareholders equity

Income Statement

Revenue (flow of income generated by selling goods or services)

Expense (flow of expenses incurred in providing the goods or servicesfor sale)

Cash. Vs . Accrual Profit

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week 1 lecture notes (1 slide)

Documents