Accounting Concepts and Methods (M)

Overview

THE UNIVERSITY OF ADELAIDE

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BUSINESS SCHOOL

MASTERS PROGRAMS

ACCTING 7019 ACCOUNTING CONCEPTS AND METHODS (M)

Topic 1:

Accounting and decision making, regulatory framework for external

reports, forms of organisation and the conceptual framework.

Week beginning: 2 March 2015

Reading:
Hoggett, J., Edwards, L., Medlin, J., Chalmers, K., Hellmann, A., Beattie, C., and
Maxfield, J. Financial Accounting, 2015, Ninth Edition, John Wiley & Sons: Chapter 1,
pp. 2 15; Chapter 2, pp. 34 35, 37 38 and 44 47; Chapter 8, pp. 343 347;
Chapter 9, pp. 378 382; Chapter 10, pp. 430 436 and 438 448; and Chapter 17, pp.
717 722.
Reading 1: Centro failed to disclose $1bn of debt, The Australian, 21 December 2007,
p.15.
Reading 2: Extracts from the 2014 Annual Report of Woolworths Limited
Reading 3: Auditors Bond bid ends in $1bn suit, The Australian, 22 November 2001,
p.3.
Reading 4: HIH boss saw collapse coming, The Australian, 17 May 2001, p.19.
Reading 5: Andersens strife on disclosures, The Australian Financial Review, 9
November 2001, p.52.
Objectives:
At the end of this topic, students should be able to:

define accounting and explain the accounting process;

discuss the decision making process and the role of accounting in this process;

outline and discuss the users of accounting information and their information
needs;

briefly discuss the accounting information provided to external users;

outline the basic financial statements used to report to users for decision making
purposes;

outline the regulatory environment which controls accounting information for

external users;

outline the key features of the different forms of business organisations;

Accounting Concepts and Methods (M)

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discuss the advantages and disadvantages of use a partnership versus a company

to conduct a business;
explain the role of a conceptual framework in financial reporting and its benefits;
discuss the nature of a reporting entity and its impact on financial reporting;
outline the objectives of a general purpose financial report; and
outline and apply the qualitative characteristics of financial information which make
it useful for decision making.

Lecture outline:
1.0

Accounting defined
the process of identifying, measuring and communicating economic information to
permit informed judgements and decisions by users of the information. American
Accounting Association Statement of Basic Accounting Theory

2.0

The decision making process

3.0

Accounting process

4.0

Figure 1 - The decision making process

Defining the problem
Evaluation of alternatives
Choice and implementation
Review
Case study: Kay the amateur photographer page 6 of handout

Figure 2 - The accounting process

Users of accounting information

Figure 3 - Users of accounting information

4.1

Internal users
Stewardship
Planning
Control
Decision making
4.2 External users
4.2.1 Owners Reading 1 Centro failed to disclose $1bn of debt
4.2.2 Lenders
4.2.3 Suppliers of goods and services (creditors)
4.2.4 Employees
4.2.5 General public
5.0

Overview of external reports

Reading 2 Woolworths Ltd.

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5.0 Assumptions underlying accounting (pp. 44 45 of text)

accounting entity
accrual basis of accounting
going concern
period

7.0

Brief overview of the regulatory environment

6.1 Generally accepted accounting principles
Corporations Law Reading 1 Centro failed to disclose $1bn of debt
Accounting Concepts, Accounting Standards and Interpretations
Australian Securities Exchange (ASX) requirements
6.2 Political nature of developing accounting rules
Case study: refer to Reading 2 Woolworths Ltd.
Discuss which reporting requirements the company has complied with in preparing
the financial statements.

8.0 Forms of organisation

8.1 Partnerships
Defined
Advantages and disadvantages refer text pp. 344 to 346
Formation pp. 346 to 347
8.2 Companies
Defined
Advantages and disadvantages - refer text pp. 380 to 382
9.0 Overview of conceptual framework
What is a conceptual framework?
Benefits of a conceptual framework
Overview of conceptual framework
10.0 Defining the reporting entity
Reporting entities are all entities ........ in respect of which it is reasonable to
expect the existence of users dependent on general purpose financial reports for
information which will be useful to them for making and evaluating decisions about
the allocation of scarce resources (Statement of Accounting Concepts (SAC) 1))

Identifying a reporting entity (separation of management from economic

interest, economic or political importance, financial characteristics).
Importance of reporting entity.

Question:
(a) Why is a company such as Woolworths Limited a reporting entity?
(b) Jane and Bill are in a partnership which runs a hardware store. Explain
whether the partnership is likely to be a reporting entity.

Accounting Concepts and Methods (M)

11.0

Overview

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Objectives of general purpose financial reports

provide information [that is] useful to users for making and evaluating decisions
about the allocation of scarce resources (SAC 2)

12.0 Qualitative characteristics of financial information

Qualitative characteristics of financial information

Fundamental qualitative
characteristics
relevance;
faithful representation;

Enhancing qualitative
characteristics
comparability
verifiability
timeliness;
understandability

Reading 3 Auditors Bond bid ends in $1bn suit

Reading 4 HIH boss saw collapse coming
Reading 5 Andersens strife on disclosures

Case study: refer to the above readings and discuss which qualitative characteristics
concepts have been ignored.

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Tutorial questions and problems (week beginning 9 March 2015):

Prepare before class
1.
2.

Text, page 359, Discussion question 2.

Text, page 409, Discussion question 1.

Complete in class
1.
2.
3.

Text, page 23, Discussion question 1.

Text, page 25, Exercise 1.3, parts A, B, and C.
Text, pages 55 to 56, Exercise 2.7

During the workshop this week important aspects of your assessment in this subject will
be discussed. The research project is a critical element of this course and will require
you to prepare a portfolio of information (with an emphasis on accounting information)
relating to selected companies listed on the Australian Stock Exchange (ASX). As part of
your preparation you should read carefully the information you have been provided with
about the project.

Self study
1.

Text, page pages 460, Discussion question 3.

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Figure 1 - The decision making process

Problem
definition

Evaluation of
alternatives

Objectives
Constraints

Choice and
implementation

Review
Feedback

Solution
method
Prediction

Information
Accounting
information
Other
information

Case study: Kay the amateur photographer

Kay is an amateur photographer who has $30 000 available for investment. She is
considering two options:
Option 1 - retain present job (current salary $25 000) and invest the funds in
government bonds at 6%; or
Option 2 resign from present job and purchase a photographic business.
Kays objective is to maximise her return. Factors which Kay must consider include:
Kay currently has a secure job;
Government bonds (or debt) are guaranteed by the government thereby
ensuring that Kay will receive her 6% return; and
Kay believes there is an 80% probability that the photographic business will be
successful and if this is the case the business will return $40 000 in profit per
year. If the business is unsuccessful, Kay has estimated it will only return
$15 000 per year.
Required: using the decision making process outlined above, discuss which option Kay
should select.

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Figure 2 - The accounting process

Identification

Measurement

Recording

Transactions
and events

Quantification

Classifying
and
summarising

Communication
Accounting
reports
Analysis and
Interpretation

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Figure 3 Users of accounting information

Managers
(internal users)

Managerial (special
purpose) reports

Accounting
information
system

Special purpose
financial reports

e.g. tax return

for government

General
purpose
financial
reports

Resource providers
(employees, lenders,
suppliers, owners)
Recipients of goods
and services
(customers of entity)
Parties performing
oversight function
(government, unions,
environmental groups)