This new accounting

Question 1

Management accounting

Answer 1

Management accounting is the process of producing reports and providing financial information useful for decision making purposes used by the managers of an enterprise in the day to day management of its trading operations. Reports will often be detailed and frequent and compare actual performance with budget predictions.

Question 2

Financial accounting

Answer 2

• Wide range of external users of financial information.
• Includes owners, customers and suppliers, governments and investors
• Financial accounting is the process of documenting, analysing and reporting every transaction of a business in order to assess the financial health and stability of the same.
• Produce financial reports to be used by parties external to the entity, such as shareholders

Question 3

What is external reporting?

Answer 3

External reporting is the purpose of financial accounting. It enables users to assess the performance, position and liquidity of an entity. It serves to allow the custodians of the business management to be accountable for the decisions they have made and to show how they have fulfilled their legal obligations and compliance with other statutory requirements. Legally controlled by ASIC and ASX.

Question 4

What is an external report?

Answer 4

An external report must follow under the accounting standards set by the Australian Accounting standards board (AASB), outlined under SAC1 and SAC2 determining what a reporting entity is SAC1, and how for these business how they must structure a general purpose report (GPFR) which is a report that allows:
- Users to assess the financial performance position and liquidity of the business
- Users to assess the financial and investing decisions of the company
- Those charged with the responsibility of managing the entity to show compliance with statutory requirements.

Question 5

Internal reporting

Answer 5

Internal reporting supports the managerial decision making process. It assists in the management of the business assets, liabilities, income and expenses and is important in enabling businesses to reach its goals and improve performance.

Question 6

Regulation - Accounting Standards

Answer 6

People should be protected from exploitation from more experienced people.
Achieved by:
- The development of an accounting conceptual framework, with associated accounting standards, which sets out principles and rules with which all producers of financial reports are encouraged and some are required by law, to comply.
- Legislation governing the operation of certain forms of business entities, notably the Corporations Act 2001.
- The requirement that certain entities must have their accounting systems and reports checked by an independent expert - external audit.

Question 7

Purpose of internal audit

Answer 7

Internal audit is the continual review of the procedures, systems, and policies of the business to ensure they are being adhered to and working efficiently and effectively.

Its purpose is to detect and correct errors and to identify deficiencies in the business operation so that improvements can be made.

Question 8

Review of business procedures and policies

Answer 8

Internal audit is the continual review of the procedures, systems and policies of the business to ensure they are being adhered to and working efficiently and effectively.

It monitors, examines and tests the effectiveness of established internal control systems.

Question 9

Detection and correction of errors and deficiencies

Answer 9

Its purpose is to detect and correct errors and to identify deficiencies in the business operation so that improvements can be made.

Question 10

The role and function of the accountant in managing business operations -
Professional accounting firms

Answer 10

• Taxation affairs
• Audit and assurance services – checking financial systems and records and reporting on them to the management and/or company shareholders
• Financial planning and advice
• Maintenance of financial records and production of reports
• Insolvency and administration services – the management of liquidation, voluntary administration or receivership of a business

Question 11

The role and function of the accountant in managing business operations -
Working directly for a business
6 points

Answer 11

• The selection or design and maintenance of appropriate financial systems
• Recording financial transactions
• Producing financial reports for the information of managers and external users where necessary
• Analysing the reports, interpreting the data they contain and advising management on analysis and capital budgeting
• Implementing strategies for the control of the firm’s assets and for the internal review and control of the firms financial systems – this is part of the role and function of internal auditing
• Cost accounting – the determination and analysis of the cost of a product or service

Question 12

Appropriate levels of investment in non-current assets
5 points
- Heart, future growth
- three types
- how financed
- under
- over

Answer 12

• Every business needs appropriate levels of investment in non-current assets because it is these assets that are the heart of its operations and lead to future growth
• A business may decide whether to invest in real assets (such as property), financial assets (such as shares), or intangible assets (such as trademarks).
• The purchase of non-current assets should be financed by long term debt or equity finance and therefore sufficient cash flow must be generated to ensure debts are repaid.
• An underinvestment in non-current assets can lead to stifling business growth, an inability of the business to operate effectively and failure to provide for customer needs.
• An overinvestment in non-current assets can result in a lack of productivity, inability to repay debt and a poor rate of return to the owners.

Question 13

Appropriate management of accounts receivable, inventory and cash
3 points
- cost
- slow, turnover
- Over, under

Answer 13

• There is a significant cost in maintaining inventory.
• If the type or quantity of inventory is incorrect this can result in slow moving items or stock being out of date or deteriorating. To ensure a good inventory turnover and keep costs to a minimum, it is necessary to have appropriate reorder points and reorder quantities and to take advantage of bulk purchase and discounts.
• An overinvestment in inventory can lead to opportunity cost in that the funds could have been better utilised in some other type of investment, while an underinvestment in inventory can lead to a loss of sales or disruption to production.

Question 14

Appropriate management of short and long term debt
2 points
- large totals, bad debt
- CC is costly, identification

Answer 14

• Large accounts receivable totals can lead to bad debts, opportunity cost due to the loss of investment potential and an adverse effect on the liquidity of the business. However, the lack of credit facilities for customers can lead to potential loss of sales.
• Credit control is costly and time consuming, but necessary. The objectives must be the identification of poor credit risks and the encouragement of prompt payment by all debtors.

Question 15

Necessary measures for Appropriate management of short and long term debt

Answer 15

Vetting credit customers to avoid selling to those with poor credit histories
Identifying, by means of regular debtors’ reports, those who are not paying within the required period
Promptly following up slow payers with reminders of increasing severity, which may culminate in legal action and/or refusal to sell to the customer until the debt is paid

Question 16

Appropriate level of equity capital
7 points
- cash vital
- operational demands
- Cash budgeting
- Too much
- Surplus
- little cash
- bank overdraft

Answer 16

• Cash is vital to the liquidity of a business.
• Sufficient cash must be held to meet normal operational demands so that debts can be repaid, expenses paid, assets acquired and advantage taken of discounts.
• Cash budgeting is very important so that the credit rating of the business is not damaged.
• Maintaining too much cash in a cheque account is costly as there are fees, such as bank charges and a very low interest rate rate applies. -
• Surplus cash should be invested in marketable securities and long term investments where possible, as they provide a better rate of return.
• If too little cash is held, this can lead to liquidity problems and in some circumstances, it is important to arrange overdraft facilities in advance. - A bank overdraft will allow the business to borrow funds as required rather than having to borrow on a long term basis.