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Accounting 102
Module 1 – The Financial Reporting Environment
Ø Purpose of accounting is to identify, record and communicate the economic events
of an entity to interested users
Ø GAAP – Generally Accepted Accounting Principles
Ø Financial accounting information is mainly targeted at external users
Ø IRFS covers many different types of entities – including non-profit – we focus on
large public profit companies as they are required by law to comply with GAAP
Ø Financial statements need to comply with Financial Reporting Act (2013) (FRA) – in
order to make sure all companies comply with the same standards and don’t
manipulate their reports
Ø The entities that are a part of the rule-making process are IASB, XRB and NZASB
Ø Prior to IASB each country had their own GAAP – this did not work when comparing
multinational companies – besides US every developed country uses the IFRS
(International Financial Reporting Standards)
How new standards/revised standards become part of NZ Law
Ø IASB – researchers’ topics and discussion papers – draft reports on how they plan to
implement this
Ø Due process – they issue it to different entities and conduct an analysis on how it will
affect them
Ø Exposure Drafts – give a draft report of what the final standards will look like
Ø Due process
Ø IFRS standard is issued if 9/14 members approve
Ø NZASB receives it and gives it to IFRS and XRB for approval – they may tweak it a
little bit – not a major change
Who must follow GAAP?
Ø If you are publicly accountable – this means an entity that issues securities to the
public – they have taken money from the public markets – issuing bonds and
debentures you take on debt, then you are accountable
Ø Large – Companies Act 1993 – defines large companies as those with revenue more
than $30 million or assets more than $60 million
Ø Tier I – includes those who are publicly accountable or have expenses of more than
$30 million – as if you fail it will have a big impact on the market – this is the IFRS
known as the Gold Standard
Ø Tier II – reduced disclosure IFRS – these include companies who are not publicly
accountable and have revenue under $30 million but more than $2 million
Conceptual Framework
Purpose
Ø To assist standard setters – when IRS is trying to create new standards or revising
old standards, they make sure that is consistent with the conceptual framework
Ø To assist preparers
Ø To assist all in understanding/interpreting Standards

Objective of General-Purpose Financial Reporting
Ø To provide financial information about the reporting entity – it is used by many
external users – it is much less specific than what managers use on a day-to-day
basis
Ø You don’t want to give away commercially sensitive information but can still be used
by investors, lenders and other creditors to assess the prospects of future net cash
inflows and management’s stewardship
Ø In these reports you mention the general how much you receive and pay but you
don’t mention the suppliers, employees or customers in detail
Qualitative Characteristics of Financial Information
Relevance
Ø The information must be able to influence the decision of the
user – it needs to be produced timely
Ø Materiality is relative – depending on the size of the company
certain errors will not affect the statement – such as
Warehouse them missing few hundred dollars’ worth of socks
is not a material
Ø Materiality can also depend on the substance/nature of the transaction – if the
employee steals $100 worth of stuff it wouldn’t be a big deal – but if it is the CEO it
would make a difference
Neutrality and Prudence
Ø Prudence means we should take a conservative approach – sales you under-estimate
and for costs you over-estimate
Ø This is because if your income comes at a lower level you can still cover your
expenses
Ø IFRS – this idea has been removed – as there is a judgement bias involved in this –
the conceptual framework says you have to have neutrality – you can’t be bias
Ø The new CFW introduced it has cautious prudence – you are very careful in choosing
and verifying your estimates
Ø You only put in the higher value of the product once you are able to sell it
Ø Cautious prudence allows you value inventory at a higher value if it is justified
Enhancing qualitative characteristics of financial information
Ø Comparability – easy to compare one company to another – and compare against
previous years
Ø Verifiability – if today we report $2 billion revenue we can go back and see $2 billion
dollars’ worth of receipts and sales
Ø Timeliness – it should not be outdated – companies have to release annual reports
Ø Understandability – reasonable person can understand the information – should not
need an expert
CFW Elements
Ø NZ IAS 1 – when we apply GAAP – we are operating under accrual accounting –
assets, liabilities, equity, income and expenses…when they satisfy the…criteria for
those elements in the NZ Framework

Ø Accrual accounting looks at the substance of the transaction – the substance of cash
accounting looks at the exchange of cash – in the modern society there is a lot of
transaction where there is absence of cash
Ø Accrual accounting – transaction is recognized when there has been an exchange of
economic benefit (does not have to be bilateral) irrespective of whether there has
been an exchange of cash
Ø Cash accounting – transaction is only recognized when there has been an exchange
of cash
Asset
Ø Because of a past event, the entity controls an economic resource,
– An economic resource is a right that has the potential to produce economic
benefit
– Control links the resource to the entity
Liability
Ø Because of a past event, the entity has a present obligation to transfer an economic
resource
Equity
Ø Defined:
– Owners’ residual interest in assets, meaning
– After deducting all liabilities
– Income increases and expenses decrease equity
Income and Expenses
Ø Income is recognised if, during the period,
– There is an increase to total assets and/or a decrease to total liabilities
– So that net assets (and therefore equity) increases
– From events other than owner contributions
Ø Expenses are recognised if, during the period,
– There is a decrease to total assets and/or an increase to total liabilities
– So that net assets (and therefore equity) decreases
– From events other than owner distributions
CFW Assumptions
Ø Explicit assumption – going concern – the assumption is that the entity is going to
continue their operation in the foreseeable future
Ø Implicit assumption – periodicity – divide up the accounting periods into equal
lengths
CFW – Measurement Base
Ø Historical cost – the value is recorded at the time the transaction occurred
Ø Current value – Current Value: the asset or liability value is updated to reflect
conditions at the measurement date
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Value in use (assets) or fulfilment
value (liabilities)
Ø Fair value is applying the market value to land
Economic Events
Ø Accounting transactions exchange of something of value between accounting entity
and another entity

Ø Residual Analysis means that the accounting equation must
always remain in balance – Assets = Liabilities + Equity
Ø You value inventory at what you bought it for or what you can
sell it for – whichever number is lower – if you believe you can
sell the inventory at a higher value than what you buy it for
than if justified you can value it that – this is Net Realisable Value

Module 2 – The Accounting Cycle – The Recording Process
Ø An account must either increase or decrease assets, liabilities, equity, income or
expense item or distribution item
Ø We T-Ledger accounts to record transactions – with debit on the left and credit on
the right
Ø If debits are higher than credit than there will be a debit balance – and if credit is
higher than debit there will be a credit balance
Ø An increase or decrease to an account is recorded with a debit or a credit, depending
on the account
Ø For each recordable event, total dollar debits must equal total dollar credits
Ø A = L + Share Capital + Income – Expenses – Dividends
Ø To use the T-Ledger we can’t have any minus signs in the
accounting equation
Ø So, you will now have A + E + D = L + OE (other reserves) + I
Ø If you want to increase the Assets then you will enter the transaction under debit –
while if you want to decrease it you will enter the transaction under credit
Ø If your retained earnings are positive it will put under credit – if it is negative it will
put under debit
Journalising
Ø A business document such as invoices, cheque or cash register tape provide evidence
of a recordable transaction
Ø Journal is book of original entry – it is recorded in a chronological
order
Ø There can be different types of specialised journals – such as sales or cash – those
accounts that do not fall in a particular journal go into the general journal
Ø You need to indent the 2nd account affected during the transaction – for example
purchasing equipment for cash – you need to indent the cash
Ø Chart of accounts is basically an index of all the accounts
Ø You can have sub-accounts under accounts leading all the way back to each single
transaction that makes up the total
Ø Posting – the process of transferring amounts from the journal to the ledger
accounts
Trial Balance
Ø A list of accounts and their balances at a given time
Ø Proves that debits and credits are equal
Ø The trial balance is set out in the order of your accounting code – which usually goes
assets, liabilities and equity
Ø Limitations
- an event is not journalized,
- a correct journal entry is not posted,
- a journal entry is posted twice,
- incorrect accounts are used in journalizing or posting, or
- offsetting errors are made in recording the amount of a transaction

Module 3 – Accounting Cycle – Adjusting the Accounts
Ø After the trial balance is achieved you need to make certain adjustments – as
otherwise you do not achieve faithful representation
Ø Things can be under/over stated, timing differences or just errors
Ø The financial year is from 1st July to 30th June
Ø The tax year is from 1st April to 31st March
Why Adjusting Entries?
Ø Because events are not recorded everyday such as depreciation
Ø Some events are not certain until the end of accounting period
Ø Some items were not recorded as they are invoice based which may not have arrived
Ø Some may follow cash accounting which may over/under state revenue and
expenses
Depreciation
Ø Depreciation is systematic allocation of the loss in value of an asset over its
estimated useful life due to physical wear and tear and/or obsolescence
Ø Historical cost of an asset – corresponding accumulated depreciation = carrying
value or net book value
Ø If an unexpected one-off event occurs that causes something to lose value such as
fire or natural disaster – that is the impairment of the asset – so you will just write it
off

Module 4 – The Accounting Cycle – Completing the Cycle
Ø The nature of closing journal entries is to reset certain
accounts to zero
Ø The purpose is to start the new period with a clean slate
and you are able to track the performance and compare
performance
Ø The temporary accounts include – all income accounts, all
expense accounts and dividends declared and/or paid –
we close the books for these accounts only for the ending
period
Ø Permanent accounts include – all asset accounts, liability accounts, share capital
accounts and all reserve accounts (retained earnings)
Ø Temporary accounts have balances that relate to a given accounting period
Ø Permanent accounts have balances that are carried forward to future accounting
periods
Ø Retained earnings gets updated through the closing entries
Ø Retained earnings is the accumulation of your previous profits or losses net of any
distributions
Ø Profit = Income – Expenses
Ø When the temporary accounts are closed off they go to retained earnings – to
facilitate this we use the income summary account – so we
NZ

Ø From the business perspective they act on behalf of the
government – and they have to pass the GST to the IRD –
this is treated is a payable – this is claimed back from the
government as current receivable
Ø GST is a current liability – it is added to a new account
called the GST clearing
Ø The terms are written as 2/7, n/30 – this means the top
number means the percentage discount – and the bottom
number is the number they have to pay in to claim the discount
Ø When we are entering the COGS and inventory for the seller – we put it in excluding
GST because the GST will be claimed back from IRD and we would have isolated out
the GST component
Ø Businesses with turnover less than $60,000 need not be GST registered
Ø Some goods and services are exempt, for example:
– Financial transactions
– Including loans, securities transactions, interest, dividends, and bank fees
Ø Some activities are zero-rated such as exports
Ø GST does not apply to income and depreciation
Ø GST is nor an expense or revenue – it is a normal balance – it is not temporary – it is
cleared once all the GST is claimed

Module 6 – Inventories – Choice and Analysis
Ø On the balance sheet you need to show all the inventory owned by the company,
wherever it may be – even if it is not on-site
Ø Goods in transit are still owned by the company if they paid for the freight – so they
need to include that in their balance sheet
Ø Consigned goods – are goods placed off-site by the business for marketing or sales –
but not owner by the consignee (site-owner)
Ø If the goods given to the consignee expire or become obsolete – the consignee does
not have to pay for those goods – they can get a credit – so the consignee only gets a
cut of the sale like a commission or fee
Inventory Costing
Ø Costing methods include – specific identification, first-in first-out (FIFO), weighted
average cost
Ø Specific Identification assigns an inventory unit its actual cost – seldom allowed in
practice – big businesses are not allowed to use this system – as the product may not
be unique such as a hot water bottle – which there can be 100,000s off
Ø The costing here might be different – due to currency as well
Ø If you buy a unique product then that company can use this system – each product is
unique – they have specific costs
Ø Cost-flow assumptions – we purchase goods at different periods and they have
different unit costs – so which unit cost do we assign to the items left at the end of
the period
Ø We can use FIFO – so the first cost to come in is the first to go out –
this does not mean the actual physical good – we are just looking at
the 1st cost that came into our system
Ø As we see from the table if we have 450 units left – we start from
the last cost we got – so we put $13 on 400 units – and 50 units are
valued at $12
Ø Here we assume the 550 units that were sold – were part of the first costs – such as
$10 and $11
Ø Weighted average cost – is done by the total cost available for
sale/number of units available for sale
Ø When average cost is done by the perpetual system it is known
as moving average
Ø Under the perpetual system we also account for when the sales
have occurred
Ø The COGS and Ending inventory for FIFO is the perpetual system
is the same as the periodic system
Ø Under the moving average you
calculate the price as soon as new
inventory is entered into the
system
Ø It is still Total cost of units available/total units of goods available
Ø Under the moving average method – it will give a higher COGS and lower ending
inventory when there are rising prices
Ø Perpetual system is a lot more work but it provides a lot more information

Ø When comparing what method to use – there are two arguments:
- Physical flow argument – suggests that the oldest goods should be the first to go
out so that is why we use FIFO – due to expiration or obsolescence
- The replacement cost argument – what does it cost to replace the good –
typically some goods become more expensive due to inflation
Ø Specific ID must be used when inventory is not interchangeable and must not be
used for interchangeable goods
Ø Valuing inventory at the lower end of NRV and the cost to buy inventory
Ø NRV – is value of asset when you convert into cash
Ø When the inventory value falls, we need to make a journal record of it – so we will
debit inventory write-down loss (expense) and credit inventory – to show the loss in
value of inventory
Ø Inventory management is a double-edged sword:
- High inventory levels – lots of inventory is harder to track, easy to misplace,
higher storage costs, higher risk of expiration and obsolescence, you have
working capital tied up in inventory
- Low inventory levels – risk of running out of stock so loss of sales, risk of not
meeting obligations, last-minute orders are more expensive
Ø We can use ratios to help us analyse how much inventory we should hold
- Inventory Turnover = COGS/Average Inventory
- Day in Inventory = 365/Inventory Turnover

Module 7 – Fraud, Internal Control and Cash
Ø Fraud is - Intentionally deceptive conduct that results in loss due to
misappropriation of assets or materially misleading financial
statements
Ø Fraud can occur due to opportunity, financial pressure and/or
rationalization
Ø Rationalization is comparing the activities of the business to what you are doing –
such as you are thinking that the directors are stealing anyway so you should as well
– or no one will notice
Ø We can control opportunity part of the triangle through internal controls – the
objective is to:
– Safeguard assets
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– Increase efficiency of operations, and
– Ensure compliance with laws and regulations
Ø Internal control systems have five primary components
– A control environment
– Risk assessment
– Control activities
– Information and communication
– Monitoring
Ø Control activities address the internal risks faced by a business
- Establish responsibility – have clear boundaries, so if something goes wrong you
know who to go to
- Segregate duties
- Document effectively
- Create relevant physical controls
- Independently verify records – make sure different people perform different
tasks – such as person approving suppliers should not be the one paying them
- Control human resources – bond employees (if they violate things you cut their
money), rotate duties, background checks
Ø Bank reconciliation means that you find any differences between the journal entry
and what is in the bank – and you try and figure out the mistake or explain why there
are these differences
Ø Due to technology it is easier to do bank reconciliation – cheques and deposits can
take a long time to process – while now with internet banking you can immediately
transfer money
Ø Potential differences:
– Deposits in transit
– Outstanding cheques
– Errors
– Bank memoranda, including EFTs

Ø The bank statements are from the bank’s perspective – so your
deposit will be a credit in their system – and a loan would be a
debit in their system
Ø You would have the Old GL balance and when the bank
statement comes in you update it and then go through the
bank reconciliation process
Ø The only reason your balances should be different after the
reconciliation is due to timing differences
Ø Cash is one of the most important things that needs to be
controlled as well as cash equivalents – as these can easily be
misplaced or manipulated

Module 8 – Receivables
Ø A receivable represents the right to receive cash (from a past event), but what
account to debit and the subsequent reporting requirements depend on the nature
of the past event
Ø On the Balance Sheet, receivables must be shown at their estimated recoverable
amount
Ø Direct write-off method may lead to misrepresentation as you don’t fully know if you
will receive that money
Ø Allowance method allows the organisation to estimate an allowance for doubtful
accounts
Ø If the debt is overdue you can make estima
Ø Idle assets – still need to be depreciated due to obsolescence – but you may need to
review the depreciation rate
Ø In the books – the machine has reached the value of zero, but the company
continues to use it – then you need to revaluate it – or upgrade it
Ø A change in estimate is based on new information not reasonably available in the
earlier accounting period
Ø An error requires a correcting entry
Ø Depreciation can also change due to subsequent expenditure and revaluation
Ø Ordinary Repairs/Maintenance - expenditures to maintain operating efficiency and
estimated productive life – these are not capitalized
Ø Additions and Improvements - expenditures to increase the operating efficiency,
productive capacity, or useful life of the PPE asset

Ø Annual PPE expenditures – recurring expenditures that do not have benefit beyond
the current year – these are just expenses
Ø Revaluation means changing the value of the building to its fair value rather than its
residual value – this will mean making an entry to show its fair value
Ø Any gain/loss on the revaluation will affect your OCI and balance sheet
Ø Revaluation is applied to the carrying value of the asset
Ø First you set the accumulated depreciation to zero by debiting it and crediting
building
Ø Then you add/subtract the value of the building after the revaluation
Disposals
Ø PPE dispose – retirement, sale and exchange
Ø You need to record the total depreciation up to that date – so you would debit the
accumulated depreciation and credit the asset
Ø If you sell the asset then you need to record the gain or loss on sale from its net book
value
Ø Gain/loss on sale is calculated by Cost – Accumulated Depreciation = Carrying Value
Ø Carrying Value – Proceeds from sale
Ø When you exchange an asset – then you debit the new asset cost – and the
accumulated depreciation on the old asset – then you debit the cost of the old asset
and any decrease in cash – finally you would credit/debit any loss/gain on the asset
Statement of Comprehensive Income
Ø Gross Profit Section: Net sales less COGS (show all accounts)
- Omit this section for a service company
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- “Increases” means increasing the zero or credit balance in that account: “OCI,
Gain” later closed to Revaluation Reserve
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Ø Total Comprehensive Income

PPE Financial Statements
Ø Minimum disclosure on balance sheet – is the net book value of the asset
Ø Minimum disclosure on the SOCI – any gain/loss on revaluation
Ø Note disclosures are extensive
- Measurement base used
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- A reconciliation of beginning and ending book values
Intangible Assets
Ø With intangible assets instead of depreciation they amortise – as they lose value
over time – as they don’t possess any physical substance
Ø These are non-current and non-monetary (can’t be converted to cash)
Ø Common types include – patents, franchises and software, trademark/brand,
copyrights and goodwill
Ø Intangibles assets are only included in the balance sheet when they are acquired
externally
Ø We cannot include internal intangible assets because there is no proper way to
calculate its value – it becomes an estimate – it becomes subjective
Ø But if you acquire another brand – then it

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