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BAO6504Accounting for Management Lecture 1
An Introduction to Accounting
and Financial ReportingReference: Chapters 1 & 13
Dr chitra.desilva
Tel 9919 9469
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INTRODUCTION TO ACCOUNTING
Primary function of accounting is to provide financial information for decision making that is Reliable Relevant
Accounting often referred to as ‘language of business’
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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 continued
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’
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THE FINANCIAL REPORTING ENVIRONMENT
Australian Securities and Investments Commission
Financial Reporting Council Australian Accounting Standards
Board Urgent Issues Group Australian Stock Exchange Regulation in New Zealand Professional Accounting Bodies
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Concepts and principles
Monetary principle Accounting entity concept Accounting period concept Going concern principle Cost principle Conservation principle Full disclosure principle
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CONCEPTS , PRINCIPLES and QUALITATIVE 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 continued
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 continued
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
QUALITATIVE CHARACTERISTICS
Fundamental qualitative characteristics Relevance
• provides a basis for predictions• confirms or corrects previous expectations
Faithful representation Complete, neutral and free from material error depicts the economic substance unbiased judgements and estimates reflect best
available information 10
QUALITATIVE CHARACTERISTICS
Enhancing qualitative characteristics Comparability
between different companies between different years of the same company
Verifiability Independent observer consensus
Timeliness Preparers should not take so long to prepare financial
reports that the reported information loses its relevance Understandability
able to be understood by proficient users
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CONSTRAINTS OF FINANCIAL REPORTING
Costs versus benefits Costs of preparing financial reports should not
exceed the benefits to be derived from the reports
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FORMS OF BUSINESS ORGANISATION
Sole Proprietorship Owned by one person e.g. restaurants, dentist, panel beaters
Partnership Owned by more than one partner e.g. accountants, solicitors, doctors
Corporation organised as a separate legal entity and owned by
shareholders BHP, CSR, Westpac, RM Williams
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USERS AND USES OF FINANCIAL INFORMATION
Primary users of general purpose financial reports are the resource providers
Resource providers are equity investors, lenders and other creditors
Equity investors contribute resources usually cash for a return include shareholders (existing and potential), holders of partnership interests
Lenders contribute by lending resources for the purpose of receiving a return in form of interest
Other creditors provide resources in the form of credit ; eg suppliers, employees
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USERS AND USES OF FINANCIAL INFORMATION continued
Other Users Recipients of goods and services
e.g. customers, beneficiaries Parties performing a review or oversight
function e.g. regulatory agencies, media,
governments, trade unions, special interest groups
USERS AND USES OF FINANCIAL INFORMATION continued
Internal Users Managers who plan, organise and run
the business e.g. production supervisors, marketing
managers, and directors
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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 continued
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 continued
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 continued
Operating Activities Results from operational activities
undertaken to earn income: Revenue (sale of goods, provision of
services, return from investments)LESS
Expenses (cost of resources/assets consumed or services used)
SUSTAINABILITY REPORTING
Sustainability -making sure the social, economic and environmental needs of our community are met and kept healthy for future generations
Concerned 3 main areas Economic Environmental Social
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THE ANNUAL REPORT
Go to
www.ibm.com/investor/help
Provided is a guide on the parts of an Annual Report prepared by companies to communicate to investors, creditors and management the health of the organisation.
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