Sarinie Ning
ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
Week 1 1.Define the nature and purpose of accounting Bookkeeping represents the first two stages：
The underlying economic reality of the entity Nature: The process of identifying, measuring and communicating economic info about an entity for decision making and transactions. It requires judgement. Perfection in ACCT quality is unattainable: relevance and faithful representation. For multiple users/stateholders and multiple needs. Purpose: Enable organised economic activity to take place. • It enables the description of economic activity : – resource flows and exchanges, – resources controlled, – claims against resources, – transformation of resources so as to inform decision making.
1
ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
Currently, more than 120 countries worldwide prepare their financial statements following global accounting standards, known as International Financial Reporting Standards (IFRSs). 2.Critically discuss the qualitative characteristics of financial statements and the inherent tensions amongst them. Relevance: relevant financial info is capable of making a difference in decision made by uses. – Not necessarily new information. – Only has to be capable, not actually make a difference. – Capability is about predictive and/or confirmatory value – Materiality (how much of a difference) matters (in nature and/or amount) A financial report should include all information which is material to a particular entity. Faithful representation – Complete: all information necessary for a user to understand the phenomenon including descriptions and explanations – Neutral: without bias in the selection or presentation of financial information – Free from error: does not mean accurate in all respects Comparability: enables comparisons between entities and for the same entity over a period of time. Verifiability: potential for consensus among knowledgeable and independent observers Understandability: with reasonable of business and economic knowledge analyse and interpret the information (note this does not exclude reporting on complex situations). Timeliness: ties in with relevance (i.e timely enough to be relevant).
2
ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
Critically discuss the role of judgment in accounting (including reference to the impacts of agency theory on judgment) Agency theory Theory which describes the relationship where one party (the principal) employs another (the agent) to perform some activity on their behalf. Agents (A) are self-interested，Principals (P) have incomplete information. So Potential for Conflict of interest between (P) & (A) The Fundamental Qualitative Characteristics are in conflict. Judgement Briefly discuss the role of regulation in accounting. ACCT is based on judgement. Subjective. The Conceptual Framework establishes the concepts that underlie those estimates, judgments and models. • Provides guidance to standard setters in developing standards, and to practice when no standard exists. • Makes the trade-offs explicit. • Improves consistency of standards • Improves efficiency of standards development. Entities
Unlimited liability: When the individual or partnership is fully liable for all the debts of the entity. Limited liability Shareholder liability is limited to the extent of the value of their shares or guarantee. Sole trader NOT a seperate legal entity, fully liable for all debts Need to apply for Australian Business Number If GST turnover $75000, must register GST Adv: -quick, inexpensive and easy to establish, and can be inexpensive to wind down -not subject to company regulation -does not pay separate income tax -owner has total autonomy over business decisions, and is therefore free to choose the direction of the business and its strategies and policies. -all the profits of the business and all after-tax gains if the sole trader business is sold. Dis: -Unlimited liability -Taxation can be a disadvantage — the sole trader can pay more tax on business income because individual income tax rates are often higher than the rate applied to companies
3
ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
-limited by the skill, time and investment Partnership does not pay separate taxation; lodge an annual partnership income tax return to the ATO Need to write partnership agreement ： name of partnership, contributions of cash and assets made by each, profit and loss sharing agreement If not written, law assumes all profits or losses shared equally Adv: easy to set up, with minimal costs and resources required to commence operations. not required to prepare financial statements in accordance with accounting standards Combined skills and knowledge of more people does not pay tax on the income earned by the partnership Dis: Unlimited liability disagreement Automatic dissolution if one of the partners dies or withdraw or irresolvable dispute Company independent legal entity Limited liability owners pay individual taxes only on the company profits paid out to them in the form of salaries, bonuses and dividends Adv: Limited liabbility Taxation-- company tax is lower than top personal tax rate access to additional capital from the shareholders Dis: Limited liabtility could be bad because it preclude certain suppliers and financiers--can be overcome by personal guarantees from the company directiors. More complicated to form(tmie and money needed) Complex regulatiory requirements.
Dis of going public: Increase disclosure, cost of IPOs, potential loss of control, separation of ownership and control, meeting investor expectations
4
ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
Proprietary Company = Private Company SMEs (Small and medium-sized entities) largely family owned Pty Limited / Pty Ltd Cannot offer shares to public Easier to set up : $1000, at least one shareholder, no more than 50 Large proprietary companies must lodge audited financial statements with ASIC. Small ones dont't have to. Public Company 1. (focus)Limited by shares: Offer shares to the public, at least three directors and at least one shareholder can be either listed on the stock exchange or not Ordinary shares The most commonly traded type of shares in Australia. Holders of ordinary shares are part-owners of a company and may receive payments in cash (called dividends). This class of shares has no preferential rights to dividends or capital on winding up. Preference shares Shares that rank before ordinary shares in the event of liquidation of the issuing company and usually receive a fixed rate of return. 2. Limited by guarantee owners guarantee to contribute an agreed amount of cash or other assets to the company in the event of the company winding up. 2. No-lliability company Shareholders have no liability for the outstanding debts. If insolvent, no further responsibility. 3. Unlimited Company no limit placed on their liability (and usually restricted to investment-type entities).
Trust A business structure in which a person holds property for others who are intended to benefit from the property or income of that property. Trustee：A person or persons, or a proprietary limited company, personally liable for all debts and other liabilities incurred on behalf of the trust. Family (or discretionary) trust A business structure usually established for the benefit of one family and its members. Unit trust A business structure that is established for the benefit of various parties rather than family members
5
ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
Adv: the beneficiaries pay tax on the amount of income distributed to them limited liability Dis: Complexity of the law relating to trusts.
6
Week 1 1.Define the nature and purpose of accounting Bookkeeping represents the first two stages：
The underlying economic reality of the entity Nature: The process of identifying, measuring and communicating economic info about an entity for decision making and transactions. It requires judgement. Perfection in ACCT quality is unattainable: relevance and faithful representation. For multiple users/stateholders and multiple needs. Purpose: Enable organised economic activity to take place. • It enables the description of economic activity : – resource flows and exchanges, – resources controlled, – claims against resources, – transformation of resources so as to inform decision making.
1
ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
Currently, more than 120 countries worldwide prepare their financial statements following global accounting standards, known as International Financial Reporting Standards (IFRSs). 2.Critically discuss the qualitative characteristics of financial statements and the inherent tensions amongst them. Relevance: relevant financial info is capable of making a difference in decision made by uses. – Not necessarily new information. – Only has to be capable, not actually make a difference. – Capability is about predictive and/or confirmatory value – Materiality (how much of a difference) matters (in nature and/or amount) A financial report should include all information which is material to a particular entity. Faithful representation – Complete: all information necessary for a user to understand the phenomenon including descriptions and explanations – Neutral: without bias in the selection or presentation of financial information – Free from error: does not mean accurate in all respects Comparability: enables comparisons between entities and for the same entity over a period of time. Verifiability: potential for consensus among knowledgeable and independent observers Understandability: with reasonable of business and economic knowledge analyse and interpret the information (note this does not exclude reporting on complex situations). Timeliness: ties in with relevance (i.e timely enough to be relevant).
2
ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
Critically discuss the role of judgment in accounting (including reference to the impacts of agency theory on judgment) Agency theory Theory which describes the relationship where one party (the principal) employs another (the agent) to perform some activity on their behalf. Agents (A) are self-interested，Principals (P) have incomplete information. So Potential for Conflict of interest between (P) & (A) The Fundamental Qualitative Characteristics are in conflict. Judgement Briefly discuss the role of regulation in accounting. ACCT is based on judgement. Subjective. The Conceptual Framework establishes the concepts that underlie those estimates, judgments and models. • Provides guidance to standard setters in developing standards, and to practice when no standard exists. • Makes the trade-offs explicit. • Improves consistency of standards • Improves efficiency of standards development. Entities
Unlimited liability: When the individual or partnership is fully liable for all the debts of the entity. Limited liability Shareholder liability is limited to the extent of the value of their shares or guarantee. Sole trader NOT a seperate legal entity, fully liable for all debts Need to apply for Australian Business Number If GST turnover $75000, must register GST Adv: -quick, inexpensive and easy to establish, and can be inexpensive to wind down -not subject to company regulation -does not pay separate income tax -owner has total autonomy over business decisions, and is therefore free to choose the direction of the business and its strategies and policies. -all the profits of the business and all after-tax gains if the sole trader business is sold. Dis: -Unlimited liability -Taxation can be a disadvantage — the sole trader can pay more tax on business income because individual income tax rates are often higher than the rate applied to companies
3
ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
-limited by the skill, time and investment Partnership does not pay separate taxation; lodge an annual partnership income tax return to the ATO Need to write partnership agreement ： name of partnership, contributions of cash and assets made by each, profit and loss sharing agreement If not written, law assumes all profits or losses shared equally Adv: easy to set up, with minimal costs and resources required to commence operations. not required to prepare financial statements in accordance with accounting standards Combined skills and knowledge of more people does not pay tax on the income earned by the partnership Dis: Unlimited liability disagreement Automatic dissolution if one of the partners dies or withdraw or irresolvable dispute Company independent legal entity Limited liability owners pay individual taxes only on the company profits paid out to them in the form of salaries, bonuses and dividends Adv: Limited liabbility Taxation-- company tax is lower than top personal tax rate access to additional capital from the shareholders Dis: Limited liabtility could be bad because it preclude certain suppliers and financiers--can be overcome by personal guarantees from the company directiors. More complicated to form(tmie and money needed) Complex regulatiory requirements.
Dis of going public: Increase disclosure, cost of IPOs, potential loss of control, separation of ownership and control, meeting investor expectations
4
ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
Proprietary Company = Private Company SMEs (Small and medium-sized entities) largely family owned Pty Limited / Pty Ltd Cannot offer shares to public Easier to set up : $1000, at least one shareholder, no more than 50 Large proprietary companies must lodge audited financial statements with ASIC. Small ones dont't have to. Public Company 1. (focus)Limited by shares: Offer shares to the public, at least three directors and at least one shareholder can be either listed on the stock exchange or not Ordinary shares The most commonly traded type of shares in Australia. Holders of ordinary shares are part-owners of a company and may receive payments in cash (called dividends). This class of shares has no preferential rights to dividends or capital on winding up. Preference shares Shares that rank before ordinary shares in the event of liquidation of the issuing company and usually receive a fixed rate of return. 2. Limited by guarantee owners guarantee to contribute an agreed amount of cash or other assets to the company in the event of the company winding up. 2. No-lliability company Shareholders have no liability for the outstanding debts. If insolvent, no further responsibility. 3. Unlimited Company no limit placed on their liability (and usually restricted to investment-type entities).
Trust A business structure in which a person holds property for others who are intended to benefit from the property or income of that property. Trustee：A person or persons, or a proprietary limited company, personally liable for all debts and other liabilities incurred on behalf of the trust. Family (or discretionary) trust A business structure usually established for the benefit of one family and its members. Unit trust A business structure that is established for the benefit of various parties rather than family members
5
ACCT10001 ARA 2014 Semester 1 Summary Sarinie Ning
Adv: the beneficiaries pay tax on the amount of income distributed to them limited liability Dis: Complexity of the law relating to trusts.
6
