Accounting Exam Flashcards
Receivership
-appointed by a secured creditor to take control of and sell secured assets.
- Then pays out the money collected and reports to ASIC any possible offences they come across.
-Ends when they have sold enough secured assets, giving ownership back to directors
exists when a business implements practices and processes for the protection of the environment and the good of society. Concerned not just about profit
CSR( corporate social responsibility)
- Modifications or purchase of new assets eg pollution reducing equipment
- Training of staff
- Accommodating for special needs eg wheelchair ramps
- Monetary costs of donations
- Higher purchase costs for green products
Costs of CSR
involves the purchase of NCA or a significant outlay of cash for a project that is expected to produce a cash inflow over a period of time over one year
Capital investment
measureable amounts eg payback period, NPV
Quantitative aspect of cap invest
Descriptive and conceptual factors.
eg. Consumer preferences
Qualitative aspects of cap invest
Capital investment may be required to comply with local, state and national laws and government regulations such as environment and energy standards, waste management, building regulations and workplace safety.
Gov regulations
A business must keep up with or get ahead of its competitors and this may require additional investment.
Competition
involves the calculation, recording and evaluation of the costs of operating a business and manufacturing goods.
Cost accounting
is able to be traced to a manufactured product or service with a high degree of accuracy.
Direct cost
are not easily traced to a product or service. They are too insignificant to make it worth tracing to the finished product
Indirect costs (OH)
Relate to an accounting period and not to the manufacture of products. They are the general operating costs of the business; finance, selling and general and admin.
Period costs
Relate to the manufacture of a product or provision of a service
Product costs
- Amalgamation of all budgets
- Three main components: Operating budgets, Capital expenditure budget, Finance budgets
- Usually covers a 12 month period
Master budget’s nature
- Strategic direction for achieving business goals
- Coordinating departments work together to achieve goals
- Motivate staff through goals
- Planning, controlling and evaluating of business’s resources by management.
Master budget’s importance
- Highlights problems such as low sales or high expenses
- Will reveal a poor profit so adjustments can be made to avoid it
- Allows comparison with actual outcome to rate performance
- Is budgeted profit acceptable and realistic
Purpose of income statement
- Calculates budgeted profit or loss from estimated income and expenses
- Prepared on accrual basis
- BDA required
- Usually prepared for a longer period than cash budget eg quarter, 6 months, year
Function of income statment
- Development of goals
- Making short and long term objectives to ensure goals are met.
- Determine strategies to meet these objectives:
Business planning stages
Businesses use them as a way to build long term financial stability. With a stronger balance sheet and high NCA financial institutions are more likely to give loans.
Long term investments
Secured loan from the public to a public company that has issued debenture through a prospectus, with a fixed interest rate and principal repayment at a later date
Debentures
Work the same way as debentures but without security over assets. Higher returns than debentures but high risk as unsecured
unsecured bonds
Borrow money, lend money, give advice.
Role of financial institutions
Internal audit
- Review of business policies and procedures: Management put in place policies for employees to follow to minimise risk and ensure efficiency and accuracy in procedures
- Detect and correct errors/ deficiencies: To find errors in a business’s internal system and controls, an internal auditor or any member of staff who is not directly related to the areas being audited is necessary.
Assist the owners, directors and managers with the information needed to make informed decisions and maximise profits.
role of an accountant
Design a financial system, supervise, and record financial transactions, collect information, produce reports, ensure compliance with laws, provide advice, review and suggest strategies for control of assets and financial systems.
Function of accountant
A business is solvent if they can pay all their debts as they become due and payable. A business that is not solvent is insolvent. Regulated by Corporations Act.
Insolvency
: Costs that have already occurred, cant be reversed and hence have no impact on current decisions.
past costs
- Management of cashflow and liquidity
- Ensures cash is available to meet future business needs
- Reveals cash shortages so business can avoid them
- Reveals cash surpluses that may be better utilized
purpose of cash budget
- Estimates all cash received and paid for a time period to determine bank balance at the end of period
- Usually prepared on a short-term basis – weekly, monthly, quarterly
- Short budget period to have better control over cash management as liquidity is crucial for business survival
Function of cash budget
Market where financial institutions including banks trade in short term loans ranging from overnight to a year. Low risk and fairly low fixed income
Money Market
Investors pool their money with other investors in a trust fund invested in securities or investments requiring a high minimum deposit. Low risk option
cash management trusts
T.Curry
Good civilian tbh
Providing information to internal management to support day to day management decisions and facilitate strategic direction
Management accounting
Preparing and presenting general purpose financial statements to external users to help them make sound economic decisions about the entity’s financial performance, position and cashflow.
Financial accounting
Special purpose reports eg financial budgets, sales forecast, market analysis
Flexible format, info is tailored to management needs
Internal reporting , reports
A written document called an annual information statement (FP, Equity, cash flow, CSR report, auditors report) must be issued to shareholders
External reporting, report
Management only- managers, CEO, sole traders, partners
Internal reporting users
Existing and potential investors
Lenders and creditors
Customers, general employees
Regulatory authorities (ATO, ASX)
External reporting users
- Large sum of money
- Long period of time
- Can not be easily reversed
- Substantial risk involved
Nature of capital investments
No regulation
Aren’t required to be audited as they don’t have to comply with accounting standards
Internal report regulation
Highly regulated
Must comply with accounting standards, taxation and corporations law
Must be audited
Must meet ASX disclosure rules if public
External reporting regulation
Cash
Cash on hand and demand deposits
Cash equilvants
Short term, highly liquid with insignifcant risk
-Inspect company share register
- Receive copy of annual financial report
-Receive dividends
-Attend, discuss and vote and general shareholder meetings
Rights of shareholders
To describe the objectives of and concepts for general purpose financial reporting.
Purpose of Conceptual framework
The conceptual framework assits
- The AASB develop accounting standards based on consistent concepts
-prepares to develop accounting policies that are consistent when
no standard exists
- helps all comprehend and interpret the accounting standards
Providing financial information regarding reporting entity that is useful to investors, lenders and other creditors in decisions related to providing resources and economic returns
Objectives of GPFR
Includes both fundamental and enhancing qualities which financial reports should possess to be useful to primary users
Qual characteristics of useful Information
To establish definition of elements (A, L, EQ, I and EX) of financial reports and determine suitable recognition criteria for financial statements
Elements of financial statement
An A or L is included in the financial statement only if income, expenses, or changes in equity provide users with info that is useful. To be recognised an item must be relevant and display faithful representation.
Framework recognition criteria
refers to having low prices through being efficient. The lowest sale price is achieved through low COS and reducing wastage and inefficiencies. Eg. Bunnings
Cost leadership
focuses on having a distinct good or serivce from competing products. Allows a higher price to be charged. E.g David Jones
Differentiation
- are legal guidelines that must be followed by accountants of reporting entities in the preparation and presentation of financial information.
- They ensure the GPFS are consistent among all companies
Accounting Standards
directors in meeting their reporting obligations
to provide fair and transparent reports to shareholders who they are accountable to.
Accounting standards assist
Fundamnetal Qaulities
Relevance: Capable of making a difference in business decisions, meaning it is material and its omission or misstatement will influence decision making
Faithful representation: Information must be complete (all info necessary), neutral (no bias) and free from error.
Enhancing Qaulities
Verifiability: Different people independently agree the economic events info is correct.
Comparability: Information should allow users to see similarities and differences over time. Done through consistency in policies and methods over time.
Understandability: Users with reasonable knowledge can comprehend and interpret the information.
Timeliness: Info is available in time for it to influence decision making. Older means less useful.
providing confidence to investors in the Australian capital markets as there are clear, consistent processes and standards.
Accounting Standards assists
protecting external users
they can rely on financial reports to make informed decisions.
Accounting Standards assists
- an entity that is required to or chooses to prepare financial statements.
-A reporting entity is required to prepare financial statements if it has public accountability.
Reporting Entity
- The AASB develop accounting standards based on consistent concepts
-prepares to develop accounting policies that are consistent when
no standard exists
- helps all comprehend and interpret the accounting standards
What the Conceptual frameworks do
- takes control of the insolvent company so its affairs can be wound up and the company deregistered.
-Involves ceasing operations, selling assets, and distributing the proceeds among its creditors and shareholders according to the Corporations Act.
Liquidator
Order Liquidator pays back
- Liquidator fees
- Secured creditors eg debenture holders
- Employee wages, superannuation, leave
- Unsecured creditors
- Shareholders
Voluntary Administration
- When the company directors or a secured creditor appoints an external administrator who takes over company operations and find the best solution for creditors.
- The voluntary administrator will investigate company affairs and then recommend to creditors whether the company should enter into a deed of company arrangement, go into liquidation or be returned back to the directors control
Public Company differeneces from Propretary
- 1+ Owners
- Min of 3 Directors and 1 secretary
Unrestricted transfer of shares via listing on ASX.
- Once a year within 5 months of financial year ending.
Propreitary company differences from public
-1-50 shareholders
-Min of 1. No secretary needed
-Transfer of shares can be restricted on constitution.
-No AGM needed
The basic rules for internally managing a company included in the Corp Act. Can be overtuned by constiuition
replaceable rules
A document issued by a public company inviting the public to purchase their shares. Must be reviewed by ASIC and ASX before being issued.
Prospectus
- Managing the business of the company
- Hiring and firing senior managers
- Delegating their powers
- Recommend dividends
Powers of directors
- Acting in good faith
- Acting with care and diligence
- No insolvent trading
- No improper use of information or their position for personal gain
Duties of Directors
AASB- Nature
Government body that considers the work of the IASB in issuing Australian standards for all reporting companies. Appointed by FRC.
AASB- Importance
-Develop a Conceptual Framework
-Make Accounting Standards under Corporations Act for Australia
-Contribute to development worldwide accounting standards
ASX- Nature
Publicly listed company that provides facilities for public companies to transfer securities securely
ASX- Importance
-Provide confidence in share trading
-Monitor compliance with Listing Rules
-Concerned with preparation and presentation of financial statements
FRC- Nature
established by the federal government to provide strategic direction and oversee effectiveness of financial reporting and accounting standards in Australia
FRC- Importance
-Monitor development of world accounting standards
-Give federal treasurer reports on the process of standard setting
-Approve and monitor AASB
ASIC- Nature
Government body set up to administer ASIC act and Corporations act
ASIC- Importance- Watchdog
-Check and approve company registration
-Ensures financial markets are fair and transparent
-Monitors audited financial statements to ensure they comply with accounting standards
IASB- Nature
Independent, private body that develops and improves International Financial Reporting Standards
IASB- Importance
-Develop global standards
-Improve world financial reporting
-Approve and issue interpretations of IFRS
An independent examination of the financial records prepared by reporting entities
1. Protect external users of financial statements
2. Promote confidence to stakeholders
External Audit
shareholders of public’s companies are investors and elect directors who appoint managers to manage and run the company
Seperation of ownership and control
be used by internal and external to evaluate business actions and make future decisions
Use of CSD
- Evaluate CSR performance and setting future goals and targets
-Reducing costs by finding and minimising resource use and waste
-Ascertaining if government regulations are being met
CSD assitss
- Assessing the ability of entity to generate CACE
- Users to make decisions based on their evaluation of the entity’s cash position
- Enhancing comparability
Benefits of a Cash Flow Statement
Measures how poriftable($) company is compared to others
-A higher profit after tax ratio go up, more shares would cause the ratio to go down
EPS- profit over average shares
How many times investors are willing to pay for $1 return
-A higher EPS stemming from a higher profit go down, whereas a higher, market price per share would cause ratio to go up.
P/E ratio- share price over EPS
CSD can assist
-Evaluate CSR performance and setting future goals and targets
-Reducing costs by identifying and minimising resource use and waste
-Ascertaining if government regulations are being met
- Histroical cost accounting
- lack of discolsure
- lack of comparability
limitations of ratios
The rate of retrun provided to the investors, the higher the better
Dividend yeild- Div per share over price per share
- All the information about income and expenses
- Manufacturing businesses will make a production budget (DM, DL, OH)
Operating- Master Budget
- States amount and timing of noncurrent asset purchases
- Purchases have a large effect on cash flow and short and long term finance so should be carefully planned.
Capital Expenditure- Master Budget
- “How will all the plans of the business be financed?”
- Shows impact of plans on assets, liabilities and equity.
Financial- Master Budget
- Debts can be paid, good credit rating
- Discounts or cheaper bulk purchases
- Day to day expenses paid so business can actually operate eg electricity
sufficent levels of cash
A present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has potential to produce economic benefit.
Asset- Defenition criteria
-Relevant- information must be useful
-Faithful representation
Asset- Recognition Criteria
A present obligation of the entity to transfer an economic resource as a result of past events.
Liability- Defintion Criteria
increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.
Income- Definition Criteria
The initial recognition of an asset, or an increase in the carrying amount of an asset or a decrease in the carrying amount of liability
Income- Recognition Criteria
decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.
Expense- Definition Criteria
The initial recognition of a liability, or an increase in the carrying amount of a liability or a decrease in the carrying amount of an asset
Expense- Recognition Criteria
Instead of just using the replaceable rules a company may choose to adopt this to regulate the internal operations of a company and to displace, modify or add to the RR.
written constituiton
- Managing the business of the company
- Hiring and firing senior managers
- Delegating their powers
- Recommend dividends
Powers of directors
-Assessing the ability of entity to generate CACE
-Users to make decisions based on their evaluation of the entity’s cash position
-Enhances comparability
Benefits of a Cash flow statment
refers to the policies and procedures a business uses to safeguard assets, increase accountability, increase efficiency and ensure there is compliance with laws, accounting standards and regulations.
Internal controls
Benefits of CSR
- Cost saving due to better management of wastage like water usage
- Competitive edge
- Employee loyalty
- Reputation
- Avoidance of government fines
Company charactheristics
- Separate Legal Entity
- Separation of Ownership/Control
- Transfer of Ownership
- Taxation
- Limited Liability
- Continuity of Existence
sets out laws for dealing with business entities in Australia at federal and state level. Deal primarly with companies and is administered by the AISC
cooperation Act nature
- defining and giving a legal existence to a company
- setting out the duties of the directors of a company
- setting out the external audit requirements of a public company
Coporation act purpose