chapter 1 - 2 Flashcards
Types of Business Entities
Single proprietorship (sole trader): A form of business structure in which the business entity is owned by an individual
Partnership: A form of business structure under which a business entity is owned by two or more people as partners sharing profits and losses
Company (corporation): A form of business structure incorporated to operate as a business entity under the Corporations Act 2001 throughout Australia
Organisation
a group of people who share common goals with a well-defined division of labour
Efficiency:
maintaining a satisfactory relationship between an entity’s resource inputs and its outputs of products or services
Effectiveness:
a measure of how well an entity attains its goals
Management by exception
the concentration only on performance results that deviate significantly from those planned, as management time is a scarce resource
Performance report:
type of financial report issued periodically to inform management of any significant variations from expected results so action can be taken to improve efficiency or effectiveness of future operations, whenever possible
3 Primary Information Types
Financial Performance (income statement): the ability of an entity to utilise its assets efficiently and effectively to generate cash flows in the conduct of its activities, whether for profit or not for profit
Achievement of social and environmental goals should not be overlooked
Financial Position (balance sheet): the economic condition of a reporting entity, with regard to its control over economic resources, financial structure, capacity for adaptation, and liquidity and solvency
Operating activities (cash flows): activities associated with provision of an entity’s goods or services, and other activities that are neither financing nor investing activities
Business Activities
The ability of the entity to generate cash flow, focusing on three areas…
Operating Activities: the provision of and payment for goods and services
Investing Activities: activities associated with the acquisition and sale of an entity’s non-current assets, and with the purchasing and selling of investments that are not part of the definition of cash
Financing Activities: activities relating to the raising of funds for an entity to carry out it’s operating and investing activities, i.e. equity and borrowings that are not part of the definition of cash
Balance sheet (statement of financial position):
A financial statement reporting the financial position of an entity or division by listing the assets, liabilities and equity of a business entity as at a specific date
Represents accounting equation
Assets = Liabilities + Equity
Account Format
[Assets = Liabilities + Equity]
Narrative Format
[Assets – Liabilities = Equity]
Statement of cash flows
a financial statement that reports the cash flows in and out of an equity. The cash flows are classified into operating, investing and financing activities
Necessary to report on cash inflows and outflows of the entity
Income statement reports in income earned and expenses incurred but not on cash flows
Assess liquidity of firm
Allows users to assess sources and applications of cash
Allows the ability of the entity to remain solvent
Accounting entity assumption
Assumption that business entity is separate and distinct from its owners and from other business entities
Identify clearly the boundaries of the entity being accounted for
Personal transactions of the owner must remain separate from the transactions of the entity
Accrual basis assumption
Effects of transactions and events are recognised when they occur, not when cash is received/paid
Accounting is event driven process (receive or payment of cash irrelevant to earning profit)
If entity has provided service/sold goods, then income has been earned
Going concern assumption
Assumption that entity will continue to operate in future unless there is evidence to the contrary
There is a need to charge depreciation as business will outlive oldest assets
Period assumption
Assumption that the economic life of an entity can be divided into arbitrary equal time intervals for reporting purposes
Profit determined and assessed for particular periods of time in order to be comparable
Relevance
Quality of information that influences economic decisions by helping users form predictions, confirm or correct past evaluations and assess rendering of accountability by preparers
Information that is useful for decision making
Can influence the economic decisions made by users
Faithful Representation
Info must be faithful representation of real-world economic phenomena that it purports to represent
Information must be verifiable, neutral and complete
Info presented faithfully without bias or undue error
Verifiability
Different, independent observers can reach consensus that information faithfully represents what it claims to
Understandability
Assumes readers of reports have reasonable knowledge of business and economic activities and accounting
Readers are willing to study info with reasonable diligence
Materiality
Extent to which information can be omitted, misstated or grouped with other information without misleading users in making economic decisions
Benefits and Costs
Benefits of providing info must justify (should exceed) cost of providing
The Accounting Environment
Accounting evolves as society and business changes
Some changes include:
Rapid developments in information and communication technologies
Increasing demand for range of information about organisational impact
Globalisation of business
Demands on organisations to be accountable for corporate behaviour in foreign countries, including abiding by rules and regulations and their impact on society and environment of countries
Globalisation of regulations and standards affecting business organisations
Steps in Decision making
Goals -> information -> consequence -> choose
Economic Decisions
Decisions involve use of economic resources
Economic resources have price as they are scarce
The nature of accounting
Accounting is a service activity
Function is to provide and interpret financial information to assist in decision making
Relevant information needed to be able to make sound economic decisions
Main role of accountant…
To be involved in steps 2 and 3 of decision-making process
To offer advice regarding step 4
To measure the outcomes or consequences of the decision-making process
Accounting:
the process of identifying, measuring, recording and communicating economic information to permit informed judgements and economic decisions by users of the information
