Financial Accounting: Reporting, Analysis and Decision Making 6E

Financial accounting: Reporting, analysis and decision making
Brief contents
Contents
Preface
	‘Less is more.’
	‘Don't just sit there — do something.’
	‘I'll believe it when I see it.’
	‘You'll need to make a decision.’
	‘It's a small world.’
	‘Apply what you learn.’
About the authors
Key features
	Print text
	Interactive eBook
1 An introduction to accounting
	Chapter preview
	1.1 Introduction to accounting
		The business world
	1.2 Accounting: the language of business
		The accounting process
		The diverse roles of accountants
	1.3 Forms of business organisation
		Sole proprietorship
		Partnership
		Company
		Other forms of business organisation
		Not-for-profit organisations
	1.4 Introduction to the Conceptual Framework
		The objective of general purpose financial reporting
		The reporting entity
	1.5 Users and uses of financial information
		Internal users
		External users
		Financing activities
		Investing activities
		Operating activities
		Sustainability reporting
	1.6 Financial statements
		Statement of profit or loss
		Statement of changes in equity
		Statement of financial position
		Statement of cash flows
		Interrelationships between the statements
	1.7 The financial reporting environment
		Australian Securities and Investments Commission
		Financial Reporting Council
		Australian Accounting Standards Board
		Australian Securities Exchange
		Regulation in New Zealand
		Professional accounting bodies
	1.8 Concepts, principles and qualitative characteristics
		Concepts and principles
		Qualitative characteristics
	1.9 Analysing financial statements
		Analysis and decision making
		Profitability
		Liquidity
		Solvency
	SUMMARY
	DECISION-MAKING TOOLKIT— A SUMMARY
	KEY TERMS
	ACKNOWLEDGEMENTS
2 The recording process
	Chapter preview
	2.1 Accounting transactions and events
		Analysing transactions
		Summary of accounting transactions
	2.2 The account
	2.3 Debits and credits
		Debit and credit procedures
		Equity relationships
		Expansion of the basic accounting equation
	2.4 Steps in the recording process
	2.5 The journal
		Chart of accounts
	2.6 The general ledger
	2.7 Posting
		The recording process illustrated
		Summary illustration of journalising and posting
	2.8 The trial balance
		Limitations of a trial balance
	SUMMARY
	DECISION-MAKING TOOLKIT— A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENT
3 Accrual accounting concepts
	Chapter preview
	3.1 Timing issues
		Accrual versus cash basis of accounting
	3.2 Revenue recognition criteria
		New accounting standard for revenue recognition
		Expense recognition criteria
	3.3 The basics of adjusting entries
		Types of adjusting entries
	3.4 Adjusting entries for prepayments
		Prepaid expenses
		Revenues received in advance
		Adjusting entries for accruals
		Summary of basic relationships
	3.5 The adjusted trial balance and financial statements
		Preparing the adjusted trial balance
		Preparing financial statements
	3.6 Closing the books
		Preparing closing entries
		Preparing a post-closing trial balance
	3.7 Summary of the accounting cycle
	3.8 Adjusting entries — using a worksheet
	SUMMARY
	DECISION-MAKING TOOLKIT — A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM 1
	DEMONSTRATION PROBLEM 2
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
4 Inventories
	Chapter preview
	4.1 Merchandising operations
		Operating cycles
		Inventory systems
	4.2 Recording purchases of inventories
		Purchase returns and allowances
		Freight costs
		Purchase discounts
	4.3 Recording sales of inventories
		Sales returns and allowances
		Sales discounts
	4.4 Statement of profit or loss presentation
		Sales revenue
		Gross profit
		Other revenue
		Operating expenses
	4.5 Evaluating profitability
		Gross profit ratio
		Operating expenses to sales ratio
	4.6 The goods and services tax
		Overview of the GST process
	4.7 Accounting for GST
		Purchasing inventory
		Purchases returns
		Selling inventory
		Sales returns and allowances
		Settlement discount
		Remitting GST to the taxation authority
	SUMMARY
	DECISION-MAKING TOOLKIT— A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
5 Reporting and analysing inventory
	Chapter preview
	5.1 Classifying inventory
		Periodic inventory system
		Recording inventory transactions
		Recording purchases of inventory
		Recording sales of inventory
		Comparison of entries— perpetual vs. periodic
	5.2 Cost of sales
		Determining cost of goods purchased
	5.3 Determining inventory quantities
		Counting the physical inventory
		Determining ownership of goods
	5.4 Statement of profit or loss presentation
	5.5 Inventory cost flow methods— periodic system
		Specific identification
		Cost flow assumptions
	5.6 Financial statement effects of cost flow methods
		Statement of profit or loss effects
		Statement of financial position effects
		Taxation effects
		Using inventory cost flow methods consistently
	5.7 Valuing inventory at the lower of cost and net realisable value
	5.8 Analysis of inventory
		Inventory turnover
	5.9 Inventory cost flow methods— perpetual system
		First-in, first-out (FIFO)
		Last-in, first-out (LIFO)
		Average cost
		Demonstration problem for section 5.9
	5.10 Inventory errors
		Effects on profit
		Effects on assets and equity
	5.11 Closing entries for merchandising entities
		Perpetual inventory method
		Periodic inventory method
		Worksheet
	SUMMARY
	DECISION-MAKING TOOLKIT — A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
6 Accounting information systems
	Chapter preview
	6.1 Basic concepts of accounting information systems
		Principles of accounting information systems
	6.2 Developing an accounting system
	6.3 Internal control systems
		Internal control
	6.4 Managements responsibility for internal control
	6.5 Principles of internal control
		Establishment of responsibility
		Segregation of duties
		Documentation procedures
		Physical, mechanical and electronic controls
		Independent internal verification
		Limitations of internal control
		Internal control and forensic accounting
	6.6 Transformation of financial data
		Accounting processes underlying the generation of financial statements
	6.7 Sales and receivables, and purchases and payments cycles illustrated
	6.8 Internal control principles applied to the sales and receivables cycle and purchases and payments cycle
		Sales and receivables cycle
		Purchases and payments cycle
	6.9 Control accounts, subsidiary ledgers and special journals
		Control accounts and subsidiary ledgers illustrated
		Advantages of subsidiary ledgers
	6.10 Special journals
		Posting the special journals
		Advantages of special journals
	6.11 Computerised accounting information systems
		Basic features of computerised systems
	6.12 Advantages and disadvantages of computerised systems
		Advantages
		Disadvantages
	6.13 Sales journal
		Journalising credit sales
		Posting the sales journal
		Checking the ledgers
		Advantages of the sales journal
	6.14 Cash receipts journal
		Journalising cash receipts transactions
		Posting the cash receipts journal
		Purchases journal
		Cash payments journal
		Effects of special journals on general journal
	SUMMARY
	DECISION-MAKING TOOLKIT— A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	COMPREHENSIVE PROBLEM: CHAPTERS 3 TO 6
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
7 Reporting and analysing cash and receivables
	Chapter preview
	7.1 Cash and credit transactions
		Business transactions and cash
	7.2 Credit and electronic banking
	7.3 Safeguarding and managing cash
		Internal control over cash
	7.4 Bank reconciliation
		Reconciling the bank account
	7.5 Managing and monitoring cash
		Basic principles of cash management
		Cash budget
	7.6 Assessing cash adequacy
		Ratio of cash to daily cash expenses
	7.7 Recording and reporting receivables
		Accounting for receivables
	7.8 Valuing accounts receivable
		Direct write-off method for uncollectable accounts
		Allowance method for uncollectable accounts
		GST and bad debt write-off
		Notes receivable
	7.9 Financial statement presentation of receivables
	7.10 Analysing and managing receivables
		Extending credit
		Establishing a payment period
		Monitoring collections
		Evaluating the receivables balance
		Accelerating cash receipts
	7.11 Operation of the petty cash fund
		Establishing the fund
		Making payments from petty cash
		Replenishing the fund
	SUMMARY
	DECISION-MAKING TOOLKIT — A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM 1
	DEMONSTRATION PROBLEM 2
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
8 Reporting and analysing non-current assets
	Chapter preview
	8.1 Business context and decision making: overview
	8.2 Property, plant and equipment
		Determining the cost of property, plant and equipment
	8.3 Depreciation
		Factors in calculating depreciation
	8.4 Depreciation methods
		Straight-line depreciation
		Diminishing-balance depreciation
		Units-of-production depreciation
		Managements choice: comparison of methods
		Depreciation disclosure in the notes
		Revising periodic depreciation
	8.5 Subsequent expenditure
	8.6 Impairments
		Accounting for impairments
		Reversal of impairments
	8.7 Revaluations
		Revaluation journal entries
		Reversals of increases and decreases
	8.8 Disposals of PPE assets
		Sale of PPE assets
		Scrapping of PPE assets
	8.9 Property, plant and equipment records
	8.10 Intangible assets
		Accounting for intangible assets
	8.11 Types of intangible assets
		Patents
		Research and development costs
		Copyright
		Trademarks and brand names
		Franchises and licences
		Goodwill
	8.12 Other non-current assets
		Agricultural assets
	8.13 Natural resources
		Amortisation (depletion)
	8.14 Reporting and analysing issues
		Reporting non-current assets in the financial statements
		Analysis and decision making
	SUMMARY
	DECISION-MAKING TOOLKIT — A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM 1
	DEMONSTRATION PROBLEM 2
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
9 Reporting and analysing liabilities
	Chapter preview
	9.1 Current liabilities
	9.2 Notes payable
		Payroll and payroll deductions payable
		Revenues received in advance
	9.3 Non-current liabilities
		Why issue unsecured notes or debentures?
		Determining the market value of unsecured notes and debentures
		Accounting for issues of unsecured notes and debentures
		Redeeming unsecured notes and debentures at maturity
		Redeeming unsecured notes and debentures before maturity
	9.4 Loans payable by instalment
		Accounting for loans payable by instalment
		Current and non-current components of long-term debt
	9.5 Leasing
		What is a lease?
	9.6 Accounting for leases
		Operating leases
		Finance leases
		Reporting leases
	9.7 Provisions and contingent liabilities
	9.8 Recording provisions for warranties
		Reporting provisions for warranties
	9.9 Financial statement analysis
		Liquidity ratios
		Solvency ratios
	SUMMARY
	DECISION-MAKING TOOLKIT— A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
10 Reporting and analysing equity
	Chapter preview
	10.1 Business context and decision making: overview
	10.2 The corporate form of organisation
		Characteristics of a corporation
		Forming a company
		Shareholder rights
	10.3 Share issues
		Issue of shares
		Accounting for the private issue of shares
		Accounting for the public issue of shares
	10.4 Share splits
	10.5 Dividends
		Cash dividends
		Share dividends
	10.6 Earning power and irregular items
		Errors
		Changes in accounting estimates
		Changes in accounting policies
		Discontinuing operations
	10.7 Reporting on equity
		Statement of profit or loss and other comprehensive income
		Statement of changes in equity
		Statement of financial position — equity section
	10.8 Retained earnings
	10.9 Financial statement analysis and decision making
		Dividend record
		Earnings performance
	10.10 Debt versus equity financing decision making
	SUMMARY
	DECISION-MAKING TOOLKIT — A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM 1
	DEMONSTRATION PROBLEM 2
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
11 Statement of cash flows
	Chapter preview
	11.1 The statement of cash flows: purpose
		Purpose of the statement of cash flows
	11.2 Classification of cash flows
		Significant non-cash activities
		Format of the statement of cash flows
		Usefulness of the statement of cash flows
	11.3 Preparing the statement of cash flows
		Determining the net increase (decrease) in cash (step 1)
		Determining net cash provided (used) by operating activities (step 2)
		Determining net cash provided (used) by investing activities (step 3)
		Determining net cash provided (used) by financing activities (step 4)
		Completing the statement of cash flows
		Indirect method for determining cash flows from operating activities
		Summary of indirect method for determining cash flows from operating activities
	11.4 Using cash flows to evaluate an entity
		The entity life cycle
	11.5 Free cash flow
		Capital expenditure ratio
		Assessing liquidity, solvency and profitability using cash flows
	SUMMARY
	DECISION-MAKING TOOLKIT — A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM 1
	DEMONSTRATION PROBLEM 2 — COMPREHENSIVE
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
12 Financial statement analysis and decision making
	Chapter preview
	12.1 Comparative analysis
	12.2 Horizontal analysis
	12.3 Vertical analysis
	12.4 Ratio analysis
		Liquidity ratios
		Solvency ratios
		Profitability ratios
	12.5 Limitations of financial statement analysis
		Estimates
		Cost
		Alternative accounting methods
		Atypical data
		Diversification
	SUMMARY
	DECISION-MAKING TOOLKIT — A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
13 Analysing and integrating GAAP
	Chapter preview
	13.1 Concepts and principles underlying accounting
		Monetary principle
		Accounting entity concept
		Accounting period concept
		Going concern principle
		Cost principle
		Full disclosure principle
	13.2 Conceptual frameworks
		Historical developments
		Future developments
		Overview of the Conceptual Framework
	13.3 The objective of general purpose financial reporting
		Stewardship and accountability objectives
		Decision-usefulness objective
		The Conceptual Framework
	13.4 Users and uses of financial reports
		The Conceptual Framework — primary users
		The Conceptual Framework — other users
	13.5 The reporting entity
		The reporting entity — defined
		The reporting entity — indicators
		ED/2010/2 Conceptual Framework for Financial Reporting: The Reporting Entity
		Differential financial reporting
	13.6 Qualitative characteristics and constraint on financial reporting
		Fundamental qualitative characteristics
		Enhancing qualitative characteristics
		Constraint on financial reporting
	13.7 Definition, recognition and measurement of elements in financial reports
		Assets — definition and recognition criteria
		Liabilities — definition and recognition criteria
		Equity — definition
		Income — definition and recognition criteria
		Standards for revenue recognition
		Expenses — definition and recognition criteria
		Measurement of the elements of financial reports
	13.8 Integrating principles, concepts, standards and the Conceptual Framework
		Summarising GAAP
		Integrating GAAP
	13.9 Future developments in financial reporting
		Integrated reporting
	SUMMARY
	DECISION-MAKING TOOLKIT — A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
14 Technology concepts
	Chapter preview
	14.1 Computerised accounting information systems
		Xero accounting software
	14.2 Enterprise resource planning (ERP)
		Why an ERP system?
	14.3 Business processes supported by ERP systems
	14.4 ERP systems—SAP modules
	14.5 eXtensible Business Reporting Language (XBRL)
		XBRL and its role in reporting systems and decision making
	14.6 Different ways to apply XBRL tags
		XBRL tags in the accounting system
		Tagging accounts after reports have been produced
	14.7 Benefits of XBRL
		Reduced data manipulation
		Paperless reporting
		Industry-accepted standards
		Reduced accounting time
		Recognition by major accounting software vendors
		Interchangeable data
		Comparisons across companies
		Improved audit quality
		Stakeholder benefits
	14.8 XBRL concepts
	14.9 Cloud computing
		Cloud Infrastructure as a Service (IaaS)
		Cloud Platform as a Service (PaaS)
		Software as a Service (SaaS)
	14.10 New technologies
		Big data
		Artificial intelligence
		Blockchain
		Bitcoin
		Other technologies
	SUMMARY
	KEY TERMS
	SELF-STUDY QUESTIONS
	QUESTIONS
	EXERCISES
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
Managerial accounting supplement
15 Introduction to management accounting
	Chapter preview
	15.1 Management accounting basics
		Comparing management accounting and financial accounting
		Ethical standards for management accountants
	15.2 Management functions
		Management cost concepts
	15.3 Manufacturing costs
		Direct materials
		Direct labour
		Manufacturing overhead
	15.4 Product vs. period costs
	15.5 Manufacturing costs in financial statements
		Statement of profit or loss
	15.6 Statement of financial position
	15.7 Determining the cost of goods manufactured and cost of sales
		Cost concepts: a review
	15.8 Evolution and improvements in management accounting
		Service industry needs
		Globalisation
		Effects of technological change on business infrastructure
		E-commerce
		New management systems and concepts
	15.9 Accounting cycle for a manufacturing entity
		Worksheet
		Closing entries
	SUMMARY
	DECISION-MAKING TOOLKIT— A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
16 Cost accounting systems
	Chapter preview
	16.1 Cost accounting systems
		Non-manufacturing entities
		Overhead application
		Job order costing and process costing
	16.2 Job order costing
		Job cost flows
	16.3 Job cost sheet
		Determining overhead rates
		Accounting procedures
		Reporting job cost data
		Under- or overapplied manufacturing overhead
		Non-manufacturing entities
		Process costing
	16.4 Process cost flow
	16.5 Accounting procedures
		Assignment of manufacturing costs— journal entries
		Equivalent units
	16.6 Production cost report
	16.7 Activity-based costing (ABC)
		Traditional costing systems
		The need for a new costing system
		Activities and cost drivers
		Activity-based costing in manufacturing industries
		Activity-based costing in service industries
	16.8 Benefits and limitations of activity-based costing
		Benefits of ABC
		Limitations of ABC
		When to switch to ABC
	16.9 Value-added vs. non-value-added activities
		Hierarchy of activity levels
	16.10 Just-in-time processing (JIT)
		Objective of JIT processing
		Elements of JIT processing
		Benefits of JIT processing
	SUMMARY
	DECISION-MAKING TOOLKIT— A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
17 Cost–volume–profit relationships
	Chapter preview
	17.1 Cost behaviour analysis
		Variable costs
		Fixed costs
		Mixed costs
	17.2 Absorption vs. variable costing
		Comparison of statements of profit or loss
		Rationale for variable costing
	17.3 Cost–volume–profit analysis
		Basic assumptions
	17.4 Contribution margin
		Break-even analysis
		Margin of safety
	17.5 Target profit
		Mathematical equation
		Contribution margin technique
		Graphic presentation
		CVP for profit planning
	17.6 Using CVP analysis with multiple products
		Break-even sales
		Limited resources
	17.7 CVP statement of profit or loss
	SUMMARY
	DECISION-MAKING TOOLKIT — A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
18 Budgeting
	Chapter preview
	18.1 Budgeting basics
		Budgeting and accounting
		The benefits of budgeting
		Essentials of effective budgeting
		Length of the budget period
		The budgeting process
		Budgeting vs. long-range planning
	18.2 The master budget
		Preparing the operating budgets
	18.3 Cash budget
	18.4 Preparing the budgeted financial statements
		Budgeted statement of profit or loss
		Budgeted statement of financial position
	18.5 Budgeting in non-manufacturing entities
		Merchandising entities
		Service entities
		Not-for-profit entities
		Government entities
	18.6 Budgetary control
		Static budget reports
	18.7 Flexible budgets
		Developing the flexible budget
		Flexible budget — a case study
		Flexible budget reports
		Management by exception
	18.8 The concept of responsibility accounting
		Controllable vs. non-controllable revenues and costs
		Responsibility reporting system
		Types of responsibility centres
	18.9 Responsibility accounting for cost centres
		Responsibility accounting for profit centres
		Responsibility accounting for investment centres
		Principles of performance evaluation
	SUMMARY
	DECISION-MAKING TOOLKIT — A SUMMARY
	KEY TERMS
	DEMONSTRATION PROBLEM
	SELF-STUDY QUESTIONS
	QUESTIONS
	BRIEF EXERCISES
	EXERCISES
	PROBLEM SET A
	PROBLEM SET B
	BUILDING BUSINESS SKILLS
	ACKNOWLEDGEMENTS
Appendix: Time value of money
	Nature of interest
		Simple interest
		Compound interest
	Future value concepts
		Future value of a single amount
	Future value of an annuity
	Present value concepts
		Present value variables
		Present value of a single amount
	Present value of an annuity
		Time periods and discounting
	Calculating the present values in a capital budgeting decision
	SUMMARY
	Key Terms
	BRIEF EXERCISES (USE TABLES TO SOLVE EXERCISES)
INDEX
EULA