things i dont know

Question 1

sales budget

Answer 1

Its pivotal to the budgeting process because it sets the activity levels for other functions such as purchases, variables costs, operating cash flows.

Question 2

why complete share buy backs?

Answer 2

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.

Question 3

purchases budget

Answer 3

Determines the volume of units required to be purchased to meet expected sales.

inventory at start + purchases - cost of sales = inventory at end

Question 4

Why use EBIT and not Profit

Answer 4

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.

Question 5

Incremental budgeting

Answer 5

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.

Question 6

Zero based approach

Answer 6

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.

Question 7

whats other comprehensive income

Answer 7

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

Question 8

reserves

Answer 8

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.

Question 9

type 1 reserves

Answer 9

come from retained earnings + transfers of retained earnings (can be distributed to shareholders because can be transferred back)

Question 10

type 2 reserves

Answer 10

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.

Question 11

provisions

Answer 11

Provisions are liabilities of uncertain timing or amount

Question 12

Contingent Liabilities

Answer 12

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)

Question 13

goodwill

Answer 13

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”

Question 14

consolidated company

Answer 14

parent company plus subsidiary companies

Question 15

operating leverage

Answer 15

• 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

Question 16

CVP assumptions

Answer 16

• 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.

Question 17

capital reserves

Answer 17

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.

Question 18

conservatism

Answer 18

anticipate losses, x account profit

Question 19

solvency

Answer 19

the ability of a company to meet its long-term debts and other financial obligations.

Question 20

what should you consider when determining whether something should be recorded?

Answer 20

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)

Question 21

contingent liabilities

Answer 21

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

Question 22

‘value in use’ valuation method of an asset

Answer 22

net present value of the the future inflows and outflows

Question 23

fair value

Answer 23

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.

Question 24

earnings management -> key part is agency theory

Answer 24

when CEO makes decisions based on own interests rather than catering to the needs of shareholders.

Question 25

cash cycle

Answer 25

days inventory + days debtors - days creditors

Question 26

agency issues?

Answer 26

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.

Question 27

the cost of inventory comprises of

Answer 27

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)

Question 28

what would cause NRV so fall below cost

Answer 28

damage / past use by date
obsolete
poor management

Question 29

other current assets include

Answer 29

prepayments and accrued revenue

Question 30

ordinary vs preference shares

Answer 30

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.

Question 31

limited by guarentee

Answer 31

• 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.

Question 32

by nature versus by function

Answer 32

By nature: wages & salaries, depreciation
By function: selling, distribution, administrative

Question 33

ROE relationship

Answer 33

ROE = interest and tax impact X EBIT PM X ATO X leverage

Question 34

agency theory

Answer 34

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

Question 35

what is value in use

Answer 35

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.

Question 36

Recoverable amount (RA)

Answer 36

• 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)

Question 37

if CA> recoverable amount. Asset must be written down. but whats the recoverable amount?

Answer 37

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.