things i dont know Flashcards
sales budget
Its pivotal to the budgeting process because it sets the activity levels for other functions such as purchases, variables costs, operating cash flows.
why complete share buy backs?
Buy own shares back. Issue shares, increased contributed equity -> then buy them back to reduce contributed equity. Its done to increase share price because less shares in the market / improves. Or changes return on equity calculation, the proportion of debt to equity has increased. Increase the amount of debt of as a percentage of equity -> increase ROE / get rid of a shareholder.
purchases budget
Determines the volume of units required to be purchased to meet expected sales.
inventory at start + purchases - cost of sales = inventory at end
Why use EBIT and not Profit
Use EBIT because an assets ability to generate profit is not based on how its financed. Interest = financing decision not an operating decision .
How an asset is financed or taxes does not impact its performance. Finance costs and tax expenses are not operating expenses.
Incremental budgeting
using the previous years results as a starting point and justify the increase or decrease for the upcoming year.
Every individual line based off zero. You provide all the individual detail that makes up the budget. E.g. persons wages, + stationary + work trips; rather than just setting 2% of budget(=incremental) takes more time to do but when make cut/not meat expectation -s> can look at specifics, e.g. MO’s trips to Sydney = 10 but can’t afford that so reduce to 5. Incremental budget - more decentralised.
Zero based approach
resets all budgets to zero and then each figure is justified on a cost-benefit basis.
Every individual line based off zero. You provide all the individual detail that makes up the budget. E.g. persons wages, + stationary + work trips; rather than just setting 2% of budget(=incremental) takes more time to do but when making cuts/not meeting expectations -> can look at specifics, e.g. MO’s trips to Sydney = 10 but can’t afford that so reduce to 5. Incremental budget - more decentralised.
whats other comprehensive income
changes in fair value of assets
E.g. Melbourne uni buildings may increase in fair value -> this change is represented as other comprehensive income. When sold however and fair value is crystallised, then accounted for as retained earnings.
it increases reserves
reserves
e.g. reavulation reserve (type 2) / capital reserve
A revaluation surplus will arise if an entity is using fair value rather than cost to measure its long-term assets such as property. The reserve reflects the increase in the fair value of the long-term assets. This increase is not a revenue item, so it is not part of retained earnings. Rather, the transaction involves increasing the asset and increasing the reserve account in recognition that additional funds are available to the owners as a result of this valuation adjustment.
A capital reserve can be created by transferring funds from retained earnings to the capital reserve. This is signalling that the entity is isolating funds for the purpose of future capital investment/not available for distribution to shareholders.
type 1 reserves
come from retained earnings + transfers of retained earnings (can be distributed to shareholders because can be transferred back)
type 2 reserves
fair value (revaluation) / hedging (can’t distribute profits out of it because currency going up and down daily) / foreign currency translation (entity in UK -> consolidating / changes currency) -» Haven’t been realised.
provisions
Provisions are liabilities of uncertain timing or amount
Contingent Liabilities
In a general sense, all provisions are contingent due to existence uncertainty (if/when) or
measurement uncertainty ($)
In Accounting Standards, the term contingent is used for liabilities (and assets) that are not
recognised because:
* their existence will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the entity, OR (existence uncertainty or measurement uncertainty)
* they do not meet the recognition criteria (probable outflow of economic benefit and reliable estimate)
goodwill
Arises from the acquisition another business.
* Measured by the difference between consideration (i.e the purchase price) and the fair value identifiable of net assets required
- Internally generated goodwill shall not be recognised
“calculated as the excess of the consideration paid for a business over the fair value of the net assets aquired”
consolidated company
parent company plus subsidiary companies
operating leverage
- Refers to the relative mix between fixed and variable costs in the entities cost structure’
- Entities with higher levels of fixed costs relative to variable costs are said to have higher operating leverage
- High operating leverage -> higher operating risk
CVP assumptions
- All costs can be classified as fixed or variable and mixed costs can be separated into their variable and fixed components.
- Cost and revenue behaviours will hold constant over the period and over the relevant range of activity
- All unit selling prices, unit variable costs, fixed costs and sales mix are as expected and remain constant
- Production / purchases during the period = sales volume
o If unsold inventory cant be sold in subsequent period -> sunk cost
o If it can be sold in a subsequent period -> not an expense and carried over
o Production / purchase costs incurred in a prior period may have a different unit cost -> different VC to purchases / production in current period.
capital reserves
it reserve can be created by transferring funds from retained earnings to the capital reserve. This is signalling that the entity is isolating funds for the purpose of future capital investment.
conservatism
anticipate losses, x account profit
solvency
the ability of a company to meet its long-term debts and other financial obligations.
what should you consider when determining whether something should be recorded?
if it meets the definition?
if it meets the recognition criteria?
- existence certainty (the probability of an inflow/outflow of resources)
- measurement certainty (faith rep? can it be reasonably measured)
- recognition consideration (if uncertainty is high - scope to disclose useful information in notes)
contingent liabilities
all provisions are contingent due to existence uncertainty (if/when) or
measurement uncertainty ($)
In Accounting Standards, the term contingent is used for liabilities (and assets) that are not
recognised because:
* their existence will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the entity, OR (existence uncertainty or measurement uncertainty)
* they do not meet the recognition criteria (probable outflow of economic benefit and reliable estimate)
e.g. litigation
they’re disclosed in the notes
‘value in use’ valuation method of an asset
net present value of the the future inflows and outflows
fair value
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
earnings management -> key part is agency theory
when CEO makes decisions based on own interests rather than catering to the needs of shareholders.
cash cycle
days inventory + days debtors - days creditors
agency issues?
Managers of a company may receive a benefit that diverts from the best interests of the business/shareholders. Act in own best interest. Directors are agents of shareholders.
the cost of inventory comprises of
the purchase price
conversion costs (e.g packaging and manufacturing costs of inventory)
Other costs incurred to bring inventory to its present location and condition such as transport costs, modifications and enhancements or get the inventory ready for sale (excludes storage costs and selling costs)
what would cause NRV so fall below cost
damage / past use by date
obsolete
poor management
other current assets include
prepayments and accrued revenue
ordinary vs preference shares
Ordinary shares are the most common class of shares in Australia, but preference shares rank ahead of ordinary shares if an entity goes into liquidation. The preference shares usually receive a fixed rate of dividend which is paid out before the ordinary shareholders dividend is paid. Preference shares are legally regarded as equity, even if the economic substance for accounting purpose deems them to be debt, and preference dividends are regarded as a distribution of profits, not as a tax-deductible expense.
limited by guarentee
- Applies to non-for-profit organisations. Eg. charities, sporting clubs
- Liability extends to an amount guaranteed by members
- Owners guarantee to contribute an agreed amount of cash or other assets to the company in the event that is winds up. Typically a very small amount but would assist in costs associated with winding up the company and paying the outstanding debts.
by nature versus by function
By nature: wages & salaries, depreciation
By function: selling, distribution, administrative
ROE relationship
ROE = interest and tax impact X EBIT PM X ATO X leverage
agency theory
creates a principal-agent relationship
the agents are expected to act in the best interests of the principals.
e.g. shareholders appoint directors to run the company on their behalf.
agents = directors
principals = shareholders
what is value in use
the net present value of all future net cash flows that attribute to the asset over its useful life.
it’s used to measure assets.
Recoverable amount (RA)
- For some assets, RA is simply the expected realisable value
- For others, RA is the higher of what the entity would receive from selling the asset (its fair value less costs to sell) and the value derived from its use over its useful life (value in use)
if CA> recoverable amount. Asset must be written down. but whats the recoverable amount?
the higher of the amount expected to be recovered from the asset’s use or through its sale.
it’s the higher of (a) fair value less costs to sell and (b) value in use.
