Welcome to

Accounting Concepts and Methods

• The journey begins…

• Dr. Wei Li -- course coordinator
• Ms. Nurmalisa Che Ali
• MyUni / Canvas
– Everything you need for this course
– Beware of people offering materials or services for cash!

• Course Outline
– All the official stuff you need to know

ASSESSMENTS DUE DATE WEIGHTING

XERO accounting software

Week 7 5%
exercise

Mid-term exam Weeks 6 (seminar time) 15%

Research Project Week 8 20%

Final Examination Date to be confirmed - 3 hours 60%

TOTAL 100%

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• Assessment Related Requirements
– To gain a pass for this course, a mark of at least 50% must be
obtained on the final examination as well as a total of at least
50% overall result.
– Students not achieving the minimum final examination mark will
be awarded no more than 49 for the course.

Week 1
An introduction to accounting
Ch. 1, Carlon et al.

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Learning objectives
After studying this presentation, you should be able to:
1. Explain the business context and the need for decision
making.
2. Define accounting, describe the accounting process
and define the diverse roles of accountants.
3. Explain the characteristics of the main forms of
business organisation.
4. Understand the Conceptual Framework and the
purpose of financial reporting.

Learning objectives
5. Identify the users of financial reports and describe
users’ information needs.
6. Identify the elements of each of the four main financial
statements.
7. Describe the financial reporting environment.
8. Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial
statements.
9. Calculate and interpret ratios for analysing an entity’s
profitability, liquidity and solvency.

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Introduction to accounting
• Primary function of accounting is to provide financial
information for decision making.
– Management accounting provides information for decision
making within the business.
– Financial accounting provides information to assist external
users’ decision making.

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Accounting: the language of business
• Communication of information.
• Professional terminology and jargon:
– Accounting terms, concepts and symbols.
– Accounting information should be relevant and reliable.

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.
• For example:
– sale of item to customer
– purchase of office stationery from supplier.

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 The accounting process
• Transactions are the basic inputs into the accounting
process.

Identifying Measuring Recording Communication

Taking into Quantifying in Analysing, Preparing
consideration all monetary terms recording, accounting
transactions classifying and reports,
which affect summarising analysing and
business entity transactions interpreting

Commonly referred to as ‘bookkeeping’

Diverse roles of accountants

• Commercial accountants:
– Work in industry and commerce.
– Undertake roles such as management accounting and financial
accounting.

• Public accountants:
– Provide their professional services to the public and work in a
range of offices from small to multi-national.
– Auditing is a primary service.
– Also taxation and advisory services.

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Diverse roles of accountants
• Government accountants:
– Employed by local councils, state government and federal
government.
– Variety of roles such as financial accounting and auditing.

• Not-for-profit accountants:
– Work in the not-for-profit sector.
– Engage in planning, decision making, preparing financial and
management reports for both internal and external users.

Forms of business organisation

• Sole proprietorship (sole trader):
– Owned by one person:
• e.g. restaurants, dentist, panel beaters.

• Partnership:
– Owned by more than one individual:
• e.g. accountants, solicitors, doctors.

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Forms of business organisation
• Company:
– Organised as a separate legal entity and owned by
shareholders:
• e.g. BHP, CSR, Westpac, RM Williams.
– Most companies have limited liability.

Forms of business organisation

• Other forms:
– A trust is a relationship or association between 2 or more parties
whereby one party holds property in trust for the other:
• Corporate trust is a popular business structure for small business.

– A cooperative is member-owned, controlled and used, and must

consist of 5 or more people:
• e.g. Australian Forest Growers, Ballina Fishermen’s Co-operative Ltd.

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Not-for-profit organisations
• Associations:
– Generally formed by small, non-profit, community-based groups.
– May be incorporated:
• e.g. Australian Medical Association, Epilepsy Association of Australia.

• Government (Public Sector):

– Organisations are owned by government: federal, state or local.
• e.g SA Water
– Departments or segments are operated as business enterprises.

Introduction to the Conceptual Framework

• The Conceptual Framework consists of a set of
concepts to be followed by preparers of financial
statements and standard setters.

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Introduction to the Conceptual Framework
• The 1st element and foundation of the conceptual
framework - objective of general purpose financial
reporting (GPFR):
– to provide financial information about the reporting entity to the
resource providers.
– emphasises that primary users of GPFR are existing and
potential shareholders, lenders and other creditors.

The reporting entity

• This section is under development by the IASB.
Currently Australian business entities and standard
setters use the existing Australian SAC 1.
• Definition from SAC 1:
– an entity in which it is reasonable to expect the existence of
users who depend on general-purpose financial reports to
enable them to make economic decisions.
• A reporting entity must prepare external general
purpose financial reports that comply with accounting
standards.

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The reporting entity
• Indicators to help determine whether an entity is a
reporting entity:
– if the entity is managed by individuals who are not owners of the
entity
– if the entity is politically or economically important
– if the entity is considered large in sales, assets, borrowings,
customers, and employees.

• Both reporting entities and non-reporting entities also

produce detailed internal reports.

Users and uses of financial information

• Primary users of general purpose financial reports are

the resource providers:
– Equity investors contribute resources (usually cash) for a return;
includes shareholders (existing and potential), holders of
partnership interests.
– Lenders contribute by lending resources for the purpose of
receiving a return in the form of interest; e.g. banks.
– Other creditors provide resources in the form of credit; e.g.
suppliers, employees.

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Users and uses of financial information
• 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

• Internal users:
– Do not rely on GPFR as they can obtain the information they
need internally.
– Managers who plan, organise and run the business.
– e.g. production supervisors, marketing managers, and directors.

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General purpose financial reports

• External users have an interest in 3 main types

Financing Activities Investing Activities Operating Activities
of business activities:
Two primary outside Acquisition or sale of
Results from operational
sources of funds: resources needed to
activities undertaken to
1. Borrowing from operate the business
earn income.
banks. e.g. purchase or sale of
Revenues less expenses
2. Selling shares to property, plant and
= Profit/Loss.
investors. equipment.

Sustainability reporting
• Sustainability: making sure the social, economic and
environmental needs of our community are met and kept
healthy for future generations.
• Concerned with 3 main areas:
– economic
– environmental
– social
• Currently social and environmental disclosures are
voluntary.

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 Financial statements

• The Conceptual
Statement of
StatementFramework
of defines
Statement of the
Statement of
Changes in Financial
elements Equity
Profit or Lossof financial statements.
Position
Cash Flows

Reports
Reports total Reports assets,
Reports revenues information
comprehensive liabilities and
less expenses for regarding cash
income for the equity at a
a particular period receipts and cash
period and other particular point in
of time. payments for a
changes in equity. time.
particular period
of time.

Statement of profit or loss

• Purpose is to report the entity’s success or failure over a
period time.
• Lists the entity’s income (revenues and gains).
• Lists the entity’s expenses.
• Income less expenses = profit (loss).

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Statement of profit or loss

Statement of changes in equity

• Reports total comprehensive income for the period and
other changes in equity such as adjustments to retained
earnings for:
– changes in accounting standards
– changes in accounting policies
– correction of errors
– gains recognised directly in equity accounts.
• Also reports details of transactions with the owners of
the company.
• Retained earnings refers to accumulated profit which
has not been distributed to shareholders:

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Statement of changes in equity

Statement of financial position

• Reports assets and claims to those assets (liabilities and
equity) at a specific point in time.
• Based on the basic accounting equation.

ASSETS = LIABILITIES + EQUITY

• Assets must balance to the claims on assets.

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 Statement of financial position

$15 200

12 360

Horizontal or ‘T’ format

Statement of financial position

Vertical or narrative format

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Statement of cash flows
• Main purpose is to provide financial information about
cash receipts and cash payments of an entity for a
specific time period.

• Informs users about what is happening to entity’s most

important resource – CASH.

Statement of cash flows

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Interrelationships between the statements
• The financial statements are interrelated:
– The statement of financial position is linked to the statement of
profit or loss and the statement of changes in equity by the
ending retained earnings balance.
– The statement of cash flows is linked to the statement of
financial position by the ending cash balance.

The classified statement of financial position

• The statement of financial position can be classified to
improve user’s understanding.
• Classification means grouping similar assets and
liabilities together.
• Most entities use current and non-current categories to
classify assets and liabilities.

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The classified statement of financial position
• Current assets:
– Assets that are cash, held for the purpose of being traded, or
expected to be converted to cash or used in the business within
one year.

• Non-current assets:
– Assets that are not expected to be sold or consumed within one
year.

The classified statement of financial position

• Current liabilities:
– Obligations that are to be paid within the coming year or the
entity’s operating cycle.

• Non-current liabilities:
– Obligations that are not classified as current.

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 Statement of financial position

$15 200

12 360

Horizontal or ‘T’ format

The financial reporting environment

• A number of institutions and groups regulate and monitor
financial reporting in Australia:
– Australian Securities and Investments Commission
– Financial Reporting Council
– Australian Accounting Standards Board
– Urgent Issues Group
– Australian Securities Exchange
– Professional Accounting Bodies
• Regulation in New Zealand:
– External Reporting Board

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Concepts and principles
• 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.

Concepts and principles

• 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
• 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 Enhancing Constraint of Providing

Qualitative Qualitative Financial Information
Characteristics Characteristics

Relevance Comparability Cost versus benefit

Faithful Representation Verifiability

Timeliness

Understandability

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Analysing financial statements
• Ratio analysis:
– A ratio is the mathematical relationship between two different
quantities.
– Can be used to show relationships among items of financial
statement data.
– Expressed in terms of percentages, rates or proportions.

Profitability ratios
• Measure operating success of an entity for a given time
period.
• Return on assets:
– Indicates amount of net profit generated by each dollar invested
in assets.
• Profit margin:
– Measures percentage each sales dollar that results in profit.

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Profitability ratios

Profitability ratios

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Liquidity ratios
• Measures short-term ability of entity to pay its maturing
obligations and to meet unexpected needs for cash.

• Working Capital

• Current Ratio:
– Measures short ability to meet current obligations.

Liquidity ratios
• Working Capital:
– Current Assets – Current Liabilities

Nick Scali Ltd (year ending 30 June 2013)

Working Capital = $48 545 000 – $24 478 000

= $24 067 000
Good position to pay short-term debts as they fall due

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Liquidity ratios

Liquidity ratios
Using the statement of cash flows:
• Current cash debt coverage:
– Indicates the entity’s ability to generate sufficient cash to meet
short term needs.

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Liquidity ratios

Solvency ratios
• Measures ability of entity to survive over a long period of
time.
• Debt to total assets ratio:
– Measures percentage of assets financed by creditors rather than
shareholders.
• Cash debt coverage:
– Indicates entity’s ability to generate sufficient cash to meet long
term needs.

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Solvency ratios

Solvency ratios

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Using the decision-making toolkit
• Roaming Limited (page 60-63 of the textbook).
• Work through on your own and check your results with
the suggested solution provided.

Demonstration problem
• Footy Camp Pty Ltd (page 68-70 of the textbook).
• Work through on your own and check your results with
the suggested solution provided.

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Key concepts
Can you:
1. Explain the business context and the need for decision
making.
2. Define accounting, describe the accounting process
and define the diverse roles of accountants.
3. Explain the characteristics of the main forms of
business organisation.
4. Understand the Conceptual Framework and the
purpose of financial reporting.

Key concepts
5. Identify the users of financial reports and describe
users’ information needs.
6. Identify the elements of each of the four main financial
statements.
7. Describe the financial reporting environment.
8. Explain the accounting concepts, principles, qualitative
characteristics and constraints underlying financial
statements.
9. Calculate and interpret ratios for analysing an entity’s
profitability, liquidity and solvency.

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