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Financial Information for Decision Making
2016 – S01 – ACC10007 NOTES

WEEK 1 Key Concepts
The Nature and Role of Accounting
Costs and Benefits of Accounting Information
Users of Accounting Information

CHAPTER 1 – Introduction to Accounting
Accounting: The process of identifying, measuring and communicating information to
permit informed judgements and decisions by users of the information
Decisions made with Accounting Information: To develop or terminate new or existing
products or services
To change the price or quantity of existing products
To borrow money to help finance business
To change methods of purchasing, production or distribution
ACCOUNTING AS A SERVICE
Fundamental Qualities: These are the two most important qualities which underline the
preparation of accounting reports; namely, relevance and faithful representation
Relevance: A quality that states that in order to be relevant, accounting information must
be able to influence decisions
Materiality: Something which has the potential to alter the decisions that users make
Faithful Representation: A quality that says that accounting information should represent
what it is supposed to represent – it should be complete, neutral and free from error
Comparability: A quality which helps users identify similarities and differences between
items of information
Verifiability: Something that can be verified and checked
Timeliness: Being available early enough to be of use to users
Understandability: Clearly set out to facilitate understanding

ACCOUNTING AS AN INFORMATION SYSTEM
Role of accounting systems to provide economic and other information
...

The Accounting Information System:
1
...
Recording the information collected in a systematic manner
3
...
Reporting the information in a manner that suits the needs of users
COSTS AND BENEFITS OF ACCOUNTING INFORMATION
A particular piece of accounting information should be produced only if the cost of providing
it is less than the benefits, or value, to be derived from its use
...

USERS OF ACCOUNTING INFORMATION
Owners, customers, competitors, employees and their representatives, government,
community representatives, investment analysts, suppliers, lenders, managers – relative to
a business organisation
FINANCIAL AND MANAGEMENT ACCOUNTING
Management Accounting: An approach which aims to provide managers with the
information they require to run the organisation
Financial Accounting: Financial accounting provides general purpose financial information
for a variety of users, with the information being of a general purpose nature
General Differences between Management and Financial Accounting:
Nature of the reports produced
- General purpose or specific purpose
Level of Detail
- Broad overview or detailed
Restrictions
- Restricted standard or non-restricted (for internal use)
Reporting interval
- Annual, half- yearly, quarterly – As often as is required
Time Horizon
- Generally business to date – forecast
Range of information
- Verifiable – less objective and verifiable

WEEK 2 Key Concepts
Understanding Accounting Terminology
The Main Financial Reports
Types of Accounting Entities

CHAPTER 1 – Introduction to Accounting
Return: The gain that results from a particular event or occurrence
Risk: The likelihood and extent that what is projected to occur will not actually occur
Relationship between Risk and Return
Even at zero risk, a certain level of return will be required
...

THE MAIN FINANCIAL REPORTS
Statement of Cash flows: The statement that shows the sources and uses of cash for a
period
Statement of Financial Performance/ Income Statement: The statement which measures
and reports how much wealth (profit) has been generated in a period
...

Statement of Comprehensive Income: (Used by Limited Companies)
...

Statement of Financial Position (Balance State): A statement that shows the assets of a
business and the claim on those assets at a point in time
...
Assets must always equal claims
...

Statement of Changes in Equity: The statement that shows all changes in the owner’s
interest in the net assets of the business as a result of transactions and events during a

period
...

Equity: The share of the business which represents the owners’ interests
...
50
52
...
50
1027
...
The Statement of Financial Position, however, is
concerned with measuring the stock of wealth at a particular moment in time
...

Partnership: The relationship that exists between two or more persons carrying on a
business with a view to profit
...

Limited Liability: The situation in which an investor in a business (a limited company)
has his or her liability limited to a maximum specified amount; namely, the
maximum that he or she has agreed to subscribe to a business

Australian Securities and Investments Commission (ASIC): The government body
responsible for regulating companies, company borrowings, and investment advisers and
dealers
...

Board of Directors: The team of people chosen by the shareholders to manage a company
on their behalf
...

Characteristics of a Sole Proprietorship:
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No separate legal entity
Limited life (business ceases upon the proprietor’s death)
Unlimited liability (fully responsible for the obligations and debts of the business)
Minimum reporting regulations (though GST has meant increased requirement for
regular detailed reports)
Limited access to funds (Ability to borrow from lenders is hampered)
Cost of establishing a sole proprietorship is much lower than other entity structures

Characteristics of a Partnership:
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No separate legal entity
Limited life
Unlimited liability
Mutual agency (responsible for each other’s actions in regards to the business)
Co-ownership of profits
Limited membership (limited amount of partners [some exceptions])
Increased regulations

Budget: A financial plan for the short-term, typically one year
Control: To compel events to conform to the plan
The Planning and Control Process
1
...

3
...

5
...

7
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Identify business objectives
Consider options
Evaluate options and make a selection
Prepare a long-term plan based on the most appropriate option(s)
Prepare short-term plans (budgets)
Perform and collect information on actual performance
Respond to divergences between plans and actuals, and exercise control
Revise plans (and budgets) if necessary

Not-for-profit Organisation: An organisation whose main aim is not to make a profit, but to
achieve some other clear goal, usually of a social nature
...
g
...

Intangible Assets: Assets which, while providing expected future benefits, have no physical
substance (e
...
copyrights, patents, etc
...

Liabilities: Claims of individuals and organisations, apart from the owner(s), that have arisen from
past transactions or events, such as supplying goods or lending money to the business
...

Equity/ Capital: The share of the business which represents the owners’ interests
...

Contingent Liability: A potential liability that might arise in the event of a particular event occurring
...

The Accounting Equation
𝑨𝑺𝑺𝑬𝑻𝑺 = 𝑶𝑾𝑵𝑬𝑹𝑺′ 𝑬𝑸𝑼𝑰𝑻𝒀 + 𝑳𝑰𝑨𝑩𝑰𝑳𝑰𝑻𝑰𝑬𝑺
SEE NOTEBOOK FOR EXAMPLES

Current Assets: Assets that are not held on a continuing basis
...

Operating Cycle: Normally represents the time between the acquisition of assets and their ultimate
realisation in cash or cash equivalents
...
They can be seen as the tools of a business, and are normally held by the
business on a continuing basis
...

Conditions of a Current Liability
-

They are expected to be settled within the business’s normal operating cycle
They are held principally for trading purposes
They are due to be settled within a year after the date of the relevant statement of financial
position, and/or
There is no right to defer settlement beyond a year after the date of the relevant statement
of financial position

Non-Current Liabilities: Those amount due to other parties which are not liable for repayment
within the next 12 months after the statement of financial position
...

The Classification of Owners’ Equity
Owners’ Equity Contributed: Initial funds plus any specific increase
...

Other Reserves: Profits that are from other events – e
...
revalued assets
...
2
VERTICAL OR NARRATIVE FORMAT – SEE FIGURE EXAMPLE 2
...

Proprietary Approach: An approach to the layout of the statement of financial position which
emphasises that the report is focusing on the proprietors (owners)
...
Traditional accounting conventions and doctrines that have underpinned accounting
practices for decades
...
Continued development of professional and statutory accounting standards
...

Conventions: Rules that have been devised over time in order to deal with practical problems
experienced by preparers and users of financial reports
...

Historic Cost Convention: The accounting convention which holds that assets should be recorder at
their historic (acquisition) cost
...

Going Concern (or Continuity) Convention: The accounting convention which holds that the
business will continue operations for the foreseeable future
...

Dual Aspect Convention: The accounting convention which holds that each financial transaction has
two aspects and that each aspect must be recorded in the financial statements
...

Money Measurement: The accounting convention which holds that accounting should only deal
with those items which are capable of being expressed in monetary terms
...

Examples of Assets which cannot be valued in monetary terms
-

Goodwill and brands [some exceptions]
Human resources

Fair Value: Exchange values in an arm’s length transaction
...
Patents are an example of an intangible asset which is usually
considered to have a finite life
...

Usefulness of the Statement of Financial Position
-

It provides insights about how the business is financed and how the funds are deployed

-

It provides insights into the liquidity of the business
It can provide a basis for assessing the value of the business
It provides insights into the ‘mix’ of assets held by the business
Performance can be assessed

Deficiencies in the Statement of Financial Position
-

The assumption that money is a stable unit of measurement that is not subject to
fluctuations in value
...

Revenues: Increases in owners’ claim as a result of operations
...

Expense: A measure of the outflow of assets (or increase in liabilities) incurred as a result of
generating revenues
...

(Accounting period/ financial period)
...
e
...

Net Assets: The difference between assets and external liabilities
...

Operating Profit: The increase in wealth for a period that is generated from normal operations
...

Cost of Sales: The cost attributed to the sales revenues
...

2
...

4
...
The amount of revenue can be measured reliably
2
...
Ownership and control of the items should pass to the buyer
Long-term Contracts: Measured in stages in order to recognise revenue (reliable measurement)
...
Income is earned when it is realised; realisation
being closely linked to probability of occurrence and reliability of measurement
...

Interest Revenue: Revenue is recognised as the interest accrues… to the net carrying amount of the
financial asset
...

Rental Income Revenue: Rental income arising on investment properties is accounted for on a
straight line basis over the lease term
...

Rendering of Service Revenue: Revenue from rendering of services is recognised in proportion to
the stage of completion of the contract when the stage of contract completion can be reliably
measured
...

Recognition of Expenses
Possibilities:
1
...
The cash payments are less than the expenses incurred
3
...

Accrued Expenses: Expenses which are outstanding at the end of the accounting period
...

ASSET
...
Items not deemed to be important
enough to justify separate disclosure can be grouped together
...


Accruals Accounting: The system of accounting that adheres to the accruals convention
...

Depreciation: A measure of that portion of cost (less residual value) of a fixed asset which has been
expensed during an accounting period
...

The equivalent of depreciation for a non-current asset
...
Did a loss arise? (Loss =
the amount of expenses incurred that exceeds the amount of revenue earned)
...

Accrual Accounting Adjustments:
-

Apportioning costs already recorded
Apportioning unearned revenue
Recording unpaid expenses
Recording unreceived revenue

Residual Value: The expected value at the end of the useful life of a non-current asset
...

Written-down Value: The cost or fair value of an asset less accumulated amount written-off as
depreciation to date
...

Carrying Amount: The net book value shown in the statement of financial position at a point in time
...

Reducing-balance Method: A method of depreciation in which a fixed percentage is applied to the
written-down value of the asset
...

LIFO: Last In, First Out
...


Perpetual Inventory System: A system of recording inventory in detail so as to always be aware of
the current level and value of inventory, and which also enables immediate calculation of the
transfer to cost of sales
...

Net Realisable Value (NRV): The estimated selling price less any further costs that may be necessary
to complete the goods and any costs involved in selling and distributing those goods
...

Bad Debts: Amounts owed to a business that are considered to be irrecoverable

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