Topic 1 Revision Notes
Topic 1 Revision Notes What is Accounting? •Defined as: Identifying, recording and communicating economic information to permit informed decisions by users. Why is Accounting Important? •Accounting is a communication tool and helps people make decisions:
How to ensure the quality of financial reporting: •Corporate Governance is a system in which the business is controlled or managed -It influences how the objectives of a company are set and hence the decisions made by the management to ensure their goals are aligned with those of shareholders -Good corporate governance protects investors from managers who may not always act in the best interests of stakeholders -EG increased disclosure of information, effective monitoring of information Users of Accounting information: Internal Users:
External Users:
•Managers who plan, organize and run a business -The reports generated are not regulated, are not time constrained, and have no strict format •Investors (owners) use accounting information to make decisions to buy, hold, or sell shares •Creditors such as suppliers and banks use accounting information to evaluate risks of granting credit or lending money •Tax authorities such as the ATO use accounting information to know whether the entity is complying with tax laws •Regulatory agencies such as ASIC •Customers •Employees and labour unions
Ethical behaviour: •Ethics are defined as: the standards of conduct by which your actions are judged as right or wrong, honest or dishonest, fair or not fair -Ethics are important so you know that the accounting information has credibility •Three steps for solving ethical dilemma: 1. Recognize situation (use your personal ethics and companies written codes of ethics) 2. Identify and analyze elements (identify who may be harmed and benefited + all stakeholders) 3. Identify and weigh alternatives (select the most ethical alternative) •CPA and ICAA have joint codes of professional conduct relating to ethics Sustainability reporting (reporting of non-financial information): •There has been a strong requirement from users for the reporting of information on non-financial performance. EG: -Working conditions of employees -How does the business deal with pollution and waste •Sustainability means to meet the needs of the present without compromising the ability of future generations to meet their own needs •Triple Bottom Line approach is made up of three components: 1. Social 2. Environmental 3. Economic •The Global Reporting Initiative has useful benchmarks and guidelines for companies to facilitate comparisons with other entities to help with sustainability reporting •Recent initiative: Integrated reporting. Involves integrating sustainability reporting closely with financial reporting to increase quality Generally Accepted Accounting Principles (GAAP): •GAAP is a set of rules and standards for financial reporting -In Australia the national standard-setting body is the Australian Accounting Standards board (AASB) -The Financial Reporting Council (FRC) is responsible for the overall administration and management of the ASSB -The International Financial Reporting Standards (IFRS) is the national standard setting board
The Conceptual Framework: •Sets out the concepts that underline the preperation and presentation of financial statements for external users •It is broken into 6 areas: 1. Objective of Financial reporting
2. Assumptions
3. Qualitative characteristics
4. Elements
5. Recognition criteria
6. Measurement
•Primary purpose is to define the nature, scope and purpose of financial accounting and reporting •Enable people to make economic decisions •Makes management accountable •Monetary unit assumption: transactions only include data in terms of money •Economic entity assumption: activities of entity must be kept separate from activities of owner and other entities •Going concern: business will continue to operate in the future in order to carry out its objectives (has an implication for value of assets) •Accrual accounting: record transaction it occurs •General purpose reports must be: -Understandable -Relevant -Reliable -Comparable •The elements are: -Assets -Liabilities -Owner’s equity -Revenue -Expenses •Possible EXAM QUESTION: How would you classify good will? -Goodwill would be classified as an asset as it provides future economic benefit. But it would be an intangible asset •An item that meets the definition of an element should be recognized if: -It is probable that any future economic benefit associated with the item will flow to or from the enterprize, and -The item has a cost or value that can be measured with reliability •Employees are not disclosed as assets as the reliability of measurement is difficult •Goodwill is only usually shown in assets if it is already paid for through acquiring business. But if goodwill is generated internally it will not be shown in assets due to reliability. •Assets should be recorded at their original purchase cost. This information needs to be: -Reliable: accurate, timely and without bias, and -Relevant: to the decisions that are to be made •However, some problems may arise: -Some relevant information may be unreliable -Some reliable information might not be relevant •In accounting it is important to CHOOSE RELIABILITY OVER RELEVANCE
Accounting terms: Asset: Liability: Owner’s Equity: Income: Expense:
•Resources controlled by business to provide future services or benefit to the business •Existing debts or obligations; creditors claim’s on assets •Owner’s claim on assets •Increase in owner’s equity from business activities •Costs incurred in the process of generating income
How to ensure the quality of financial reporting: •Corporate Governance is a system in which the business is controlled or managed -It influences how the objectives of a company are set and hence the decisions made by the management to ensure their goals are aligned with those of shareholders -Good corporate governance protects investors from managers who may not always act in the best interests of stakeholders -EG increased disclosure of information, effective monitoring of information Users of Accounting information: Internal Users:
External Users:
•Managers who plan, organize and run a business -The reports generated are not regulated, are not time constrained, and have no strict format •Investors (owners) use accounting information to make decisions to buy, hold, or sell shares •Creditors such as suppliers and banks use accounting information to evaluate risks of granting credit or lending money •Tax authorities such as the ATO use accounting information to know whether the entity is complying with tax laws •Regulatory agencies such as ASIC •Customers •Employees and labour unions
Ethical behaviour: •Ethics are defined as: the standards of conduct by which your actions are judged as right or wrong, honest or dishonest, fair or not fair -Ethics are important so you know that the accounting information has credibility •Three steps for solving ethical dilemma: 1. Recognize situation (use your personal ethics and companies written codes of ethics) 2. Identify and analyze elements (identify who may be harmed and benefited + all stakeholders) 3. Identify and weigh alternatives (select the most ethical alternative) •CPA and ICAA have joint codes of professional conduct relating to ethics Sustainability reporting (reporting of non-financial information): •There has been a strong requirement from users for the reporting of information on non-financial performance. EG: -Working conditions of employees -How does the business deal with pollution and waste •Sustainability means to meet the needs of the present without compromising the ability of future generations to meet their own needs •Triple Bottom Line approach is made up of three components: 1. Social 2. Environmental 3. Economic •The Global Reporting Initiative has useful benchmarks and guidelines for companies to facilitate comparisons with other entities to help with sustainability reporting •Recent initiative: Integrated reporting. Involves integrating sustainability reporting closely with financial reporting to increase quality Generally Accepted Accounting Principles (GAAP): •GAAP is a set of rules and standards for financial reporting -In Australia the national standard-setting body is the Australian Accounting Standards board (AASB) -The Financial Reporting Council (FRC) is responsible for the overall administration and management of the ASSB -The International Financial Reporting Standards (IFRS) is the national standard setting board
The Conceptual Framework: •Sets out the concepts that underline the preperation and presentation of financial statements for external users •It is broken into 6 areas: 1. Objective of Financial reporting
2. Assumptions
3. Qualitative characteristics
4. Elements
5. Recognition criteria
6. Measurement
•Primary purpose is to define the nature, scope and purpose of financial accounting and reporting •Enable people to make economic decisions •Makes management accountable •Monetary unit assumption: transactions only include data in terms of money •Economic entity assumption: activities of entity must be kept separate from activities of owner and other entities •Going concern: business will continue to operate in the future in order to carry out its objectives (has an implication for value of assets) •Accrual accounting: record transaction it occurs •General purpose reports must be: -Understandable -Relevant -Reliable -Comparable •The elements are: -Assets -Liabilities -Owner’s equity -Revenue -Expenses •Possible EXAM QUESTION: How would you classify good will? -Goodwill would be classified as an asset as it provides future economic benefit. But it would be an intangible asset •An item that meets the definition of an element should be recognized if: -It is probable that any future economic benefit associated with the item will flow to or from the enterprize, and -The item has a cost or value that can be measured with reliability •Employees are not disclosed as assets as the reliability of measurement is difficult •Goodwill is only usually shown in assets if it is already paid for through acquiring business. But if goodwill is generated internally it will not be shown in assets due to reliability. •Assets should be recorded at their original purchase cost. This information needs to be: -Reliable: accurate, timely and without bias, and -Relevant: to the decisions that are to be made •However, some problems may arise: -Some relevant information may be unreliable -Some reliable information might not be relevant •In accounting it is important to CHOOSE RELIABILITY OVER RELEVANCE
Accounting terms: Asset: Liability: Owner’s Equity: Income: Expense:
•Resources controlled by business to provide future services or benefit to the business •Existing debts or obligations; creditors claim’s on assets •Owner’s claim on assets •Increase in owner’s equity from business activities •Costs incurred in the process of generating income
