ACCT1501 Accounting and Financial Management A Note

NOTES
ACCT1501: Accounting and Financial

Management 1A
University of New South Wales
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Table of Contents
1 INTRODUCTION TO FINANCIAL ACCOUNTING
1.1
1.2
1.3
1.4
1.5
4
4
4
4
4
USERS OF ACCOUNTING INFORMATION

ACCRUAL ACCOUNTING
CASH ACCOUNTING
ASSUMPTIONS OF FINANCIAL ACCOUNTING
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION
2 THE BALANCE SHEET AND INCOME STATEMENT
2.1 BALANCE SHEET

2.1.1 ASSETS
2.1.2 LIABILITIES
2.1.3 SHAREHOLDERS EQUITY
2.2 INCOME STATEMENT
6
6
7
7
7
3 DOUBLE ENTRY ACCOUNTING
3.1 THE ACCOUNTING EQUATION IN DETAIL

3.1.1 DOUBLE ENTRY ACCOUNTING
3.2 THE ACCOUNTING CYCLE INITIAL STEPS OF THE RECORDING PROCESS
9
9
9
4 RECORD KEEPING
10
4.1 THE FULL ACCOUNTING CYCLE
10
5 ACCRUAL ADJUSTMENTS
11
5.1 ACCRUAL ADJUSTMENTS (STEP 5 AND 6)

5.1.1 EXPIRATION OF ASSETS
5.1.2 UNEARNED REVENUE
5.1.3 ACCRUAL OF UNRECORDED REVENUE
5.1.4 ACCRUAL OF UNRECORDED EXPENSES
5.2 CONTRA ACCOUNTS
5.2.1 ALLOWANCE FOR DOUBTFUL DEBT
11
11
11
11
11
12
12
6 SPECIAL JOURNALS, SUBSIDIARY AND CONTROL ACCOUNTS
13
6.1 WORKSHEETS
6.2 SPECIAL JOURNALS
6.2.1 SALES JOURNAL
6.2.2 PURCHASE JOURNAL
6.2.3 CASH RECEIPTS JOURNAL
6.2.4 CASH PAYMENT JOURNAL
6.3 CLOSING ENTRIES
6.4 POST CLOSING TRIAL BALANCE
6.5 PREPARE FINANCIAL STATEMENTS
6.5.1 BALANCE SHEET
6.5.2 INCOME STATEMENT
6.5.3 CASH FLOW STATEMENT
13
13
13
14
14
14
15
16
16
16
16
17
7 INTERNAL CONTROL
18
7.1 PETTY CASH FUND

7.2 BANK RECONCILIATION
18
18
8 ACCOUNTS RECEIVABLE AND BAD DEBT
21
8.1 ALLOWANCE FOR DOUBTFUL DEBT
21
9 PERPETUAL AND PERIODIC INVENTORY SYSTEM
22
9.1 PERPETUAL INVENTORY CONTROL SYSTEM

9.1.1 PURCHASES
9.1.2 PURCHASE RETURNS AND ALLOWANCES
9.1.3 SALES
9.1.4 SALES RETURNS OR ALLOWANCES
9.2 PERIODIC INVENTORY CONTROL SYSTEM
9.2.1 PURCHASES
9.2.2 PURCHASE RETURNS AND ALLOWANCES
9.2.3 SALES
9.2.4 SALES RETURNS AND ALLOWANCES
9.3 MEASURING THE INVENTORY
9.3.1 FIFO
9.3.2 LIFO
9.3.3 WEIGHTED AVERAGE COST METHOD
22
22
22
22
22
23
23
23
23
23
23
23
23
23
10 DEPRECIATION
25
10.1 DEPRECIATION
25
11 FINANCIAL REPORTING
27
11.1 FINANCIAL REPORTING
27
12 FINANCIAL STATEMENT ANALYSIS
28
12.1
12.2
12.3
12.4
12.5
28
28
28
29
29
PERFORMANCE RATIOS
ACTIVITY RATIOS
LIQUIDITY RATIOS
FINANCIAL STRUCTURE RATIOS
LIMITATIONS ON FINANCIAL STATEMENT ANALYSIS
13 MANAGEMENT ACCOUNTING
30
13.1 COST BEHAVIOUR

13.2 CVP ANALYSIS
13.2.1 BREAK EVEN ANALYSIS TO FIND THE PRICE WE SHOULD SELL A GIVEN AMOUNT OF
PRODUCTION FOR.
13.2.2 HOW TO DETERMINE NET PROFIT BEFORE TAX:
13.2.3 HOW TO DETERMINE THE UNITS NECESSARY TO REACH A PROFIT AFTER TAX GOAL:
30
30
31
31
31
1 Introduction to Financial Accounting

1.1 Users of Accounting Information
Users of accounting information are the people that depend on and use
the financial information (provided by financial statements) to make
economic decisions.
1.2 Accrual Accounting
Recording the economic impact of transactions at the time they occur so

as to not omit information, which may misguide users of financial
statements.
1.3 Cash Accounting
Recording the transaction only at the time cash changes hands.
Although this is helpful for recording the companys cash flows, it does
not reflect the true financial performance and position of the firm.
There is a timing issue, sometimes we record transactions; before, after

and at the same time as cash changes hands.
Good judgement is always required.
1.4 Assumptions of Financial Accounting
Assumptions are the tools and principles that we assume accountant will
always use when presenting and creating financial statements
Relevant assumptions:
Accrual Accounting Measure the performance and position of a

company by recognising economic events regardless of when cash
transactions occur.
Going Concern A business will continue to operate for the foreseeable

future
Monetary Unit - Measured in common denominator
Accounting Period Discrete equal periods
Historical Cost Cost at initial acquisition
1.5 Qualitative Characteristics of Accounting Information

Understandability
Relevance
Materiality
Reliability
Fair representation (represent what really existed/happened)
Neutrality (freedom from bias)
Substance over form (reflects the economic reality)
Prudence (caution in estimates)
Completeness (material info not omitted, not misleading)
Comparability
2 The Balance Sheet and Income Statement

2.1 Balance Sheet
Insert Company Name
Balance Sheet AS AT ______(insert date)
Assets
Liabilities
Current Assets
Current Liabilities
Total for Current
Total for Current Liabilities
Assets
Non-Current
Non-Current Liabilities
Assets
Total for Non-
Total for Non- Current
Current Assets
Liabilities
Total Assets
Total Liabilities
Shareholders Equity
Share Capital
Retained Profit
Total Shareholders Equity
Total Shareholders Equity and
Liabilities
Asset: a resource that is controlled by the entity as a result of a past

event or transaction, which has the potential to generate economic
benefits for the firm.
Liabilities: A present obligation that arises from a past event, and from
which there will be a future sacrifice of economic benefit by the firm to
settle that obligation.
Shareholders equity: The residual interest of assets of the entity funded

by shareholders/ owners.
2.1.1
Assets
Definition:
-
Resources controlled by an entity.
Ability to provide future economic benefit.
As a result of a past event/transaction.
Recognition:
-
Probability item is recognised if it is probable that any future

economic benefit associated with the item will flow to or from the
entity i.e. more likely than less likely, not absolute certainty.
AND
Reliably measured item is recognised if it has a cost/value/$ figure

that can be measured with reliability i.e. if item arises from a
transaction and hence, possesses a cost.
2.1.2
Liabilities
Definition:
Present obligation of an entity.
As a result of a past event/transaction.
Expected to result in an outflow of resources of economic benefit
Recognition:
-
Probability item is recognised if it is probable that any future

economic benefit associated with the item will flow to or from the
entity i.e. more likely than less likely, not absolute certainty.
AND
Reliably measured item is recognised if it has a cost/value/$ figure

that can be measured with reliability i.e. if item arises from a
transaction and hence, possesses a cost.
2.1.3
Shareholders Equity
Definition:
-
Residual interest in the assets.
After liabilities have been deducted.
2.2 Income Statement

Company Name
Income Statement for Year Ended ______
Sales Revenue
Cost of Goods Sold
Gross Profit
Xx
(XX)
XX
Operating Expenses
Expense 1
XX
Expense 2
XX
Net Profit
Tax Expense
Net Profit After Tax
(XX)
XX
(XX)
XX
Revenue: Inflows of economic benefits (as a result of ordinary operating

activities) that result in an increase in total equity (not attributed to
owners contributions).
Expenses: outflow of economic benefits (as a result of ordinary operating
activities that result in a decrease in total equity (not attributed to owners
distributions).
3 Double Entry Accounting

3.1 The Accounting Equation in Detail
= +
( ) = +
= +

Assets are the resources
Liability and Shareholders Equity are the sources of funding for Assets
3.1.1
Double Entry Accounting

Concept of Duality Every business transaction will have a dual effect on
the entity and accounting equation
Golden rule: =
Asset
Liability
Revenue
Increase
Debit
Credit
Credit
Decrease
Credit
Debit
Debit
Balance
Debit
Credit
Credit
Expense
Debit
Shareholders
Equity
Credit
3.2 The Accounting Cycle Initial Steps of the Recording

Process
1) Source document: the documents that prove the transactions occurred

2) Journal entries: record the journal entries in a journal
3) Post to ledgers: post those entries to the ledger of each respective account
to determine the balance.
4) Pre-closing trial balance: Present a balance sheet with the balances in your
ledgers
4 Record Keeping
4.1 The Full Accounting Cycle
1) Source document: the documents that prove the transactions
occurred
2) Journal entries: record the journal entries in a journal
3) Post to ledgers: post those entries to the ledger of each respective
account to determine the balance.
4) Pre-closing trial balance: Present a balance sheet with the balances in
your ledgers
5) Adjusting entries: record any transactions that have been omitted but
are necessary, post them to respective ledger (adjusting the balance
of some accounts)
6) Adjusted trial balance: Using the adjusted balance present an adjusted
balance sheet.
7) Closing entries: Close off temporary accounts, i.e. Revenues and
Expenses, attributing their impact as net profit on retained profit in
Shareholders equity.
8) Post-Closing trial balance: present a balance sheet using the account
balances after all closing entries.
9) Financial statement: Using the data obtained present your financial
statements.
5 Accrual Adjustments
5.1 Accrual Adjustments (step 5 and 6)
Accrual accounting is required instead of cash accounting; transaction

and events will be recorded at the time of economic inflow or outflow.
Accordingly, transactions can be recorded before, after or during the cash
flow.
Accrual adjustments are transactions, which have not been recorded

during the financial year and need to be included to provide a faithful
representation of financial position and performance.
5.1.1
Expiration of Assets
Consumption of a capitalised prepaid expenditure throughout the useful
life of a non-current asset.
E.g.
DR Insurance Expense
CR Prepaid Insurance
5.1.2
Unearned Revenue
Consumption of a prepaid Liability, by providing goods and services to
settle that obligation whilst also recognising revenue as the result of
providing those services or goods.
E.g.
DR Unearned Revenue
CR Service Revenue
5.1.3
Accrual of Unrecorded Revenue

Recognition of revenue that weve earned and owed to us by our
customers, but we havent notified/ or billed them for it yet.
E.g.
DR Accrued Revenue
CR Service Revenue
5.1.4
Accrual of Unrecorded Expenses

Recognition of expenses that weve incurred and remain owing to another
entity, but we have not been formally notified/ or billed for it yet.
E.g.
DR Wages expense
CR Accrued Wages
5.2 Contra Accounts
Contra Account: are accounts that record any detraction from the
historical cost of an asset or liability control account.
5.2.1
Allowance for Doubtful Debt

Allowance for doubtful debt (a contra account that records and
detractions or provisions for bad debt with accounts receivable)
Journals:
Allowance for Doubtful Debt:
Creating the allowance for doubtful debt:

DR Bad Debt Expense
CR Allowance for Doubtful Debt
(Credit balance since it is detracting from the net receivable value of
accounts receivable)
Writing off any bad debt (with adequate evidence)

DR Allowance for Doubtful debt
CR Accounts Receivable
6 Special journals, Subsidiary and Control

Accounts
6.1 Worksheets
Worksheets Advantages:
Allows for visualisation of financial statements after all adjusting and

closing entries.
May be used to determine profit/loss.
Used to prepare financial statements.
Management can receive financial statements at an earlier date when

worksheet is processed.
Steps:
1. Prepare a trial balance
2. Enter adjustments
3. Enter adjustments in adjusted trial balance columns
4. Enter adjusted trial balance to financial statement columns
5. Total statement columns, calculate profit/loss, complete worksheet
6.2 Special Journals

6.2.1
Sales Journal
Records only credit sales during a period.
Format:
Date
Customers
Inv. No.
Ref. No.
Sales
Cost of Sales
####
####
$$$$
$$$$
Name
DD/MM
Account
Name
At end of Month;
Sales:
DR Sales
Cost of Sales:
DR Cost of Sales
CR Inventory
6.2.2
Purchase Journal
Records only credit purchases during a period
Format:
Date
Suppliers
Inv. No.
Ref. No.
Inventory
####
####
$$$$
Name
DD/MM
Account
Name
At end of Month;
Inventory:
DR inventory
CR Accounts Payable
6.2.3
Cash Receipts journal

Records entries which debit cash at bank
Format:
Date
Customers
Post ref.
Rec. No.
Debits
Credits
####
####
Cash, Disc,
Accounts
Expense,
Receivable,
etc.
Sales, Other
Name
DD/MM
Account
Name
Accounts
$$$$
At end of Month;
*Other accounts involved:
Would include Cost of Sales for cash:
$$$$
DR Cost of Sales
CR Inventory
6.2.4
Cash Payment Journal

Records all entries that credit cash at bank
Format:
Date
Customers
Post Ref.
Chq No.
Credits
Debits
####
####
Cash at
Accounts
bank, Disc,
payable Cash
Revenue,
Purchases,
etc.
other
Name
DD/MM
Account
Name
Accounts
$$$$
At end of Month;
*Other accounts involved:
Would include Cost of Sales for cash:
$$$$
DR Cost of Sales
CR Inventory
6.3 Closing Entries
There are TWO types of accounts:
Temporary/nominal accounts accounts relating to a given period i.e.

revenues, expenses, drawings - these accounts are closed*
Permanent/real accounts accounts relating to one or more periods

i.e. assets, liabilities, owners equity these accounts are not closed,
but carried forward to next reporting period
*Closed accounts are closed to leave them with zero balances in

preparation for the next reporting period, as these accounts will not
affect/be affected by revenue, expense, drawings accounts from
future/previous periods.
Entries required for closing
DR All revenue accounts,

CR Profit & Loss Summary
Total = credit column in Income Statement in Worksheet
DR Profit & Loss Summary

CR All expense accounts
Total = debit column in Income Statement in Worksheet
DR Profit & Loss Summary

CR Owners Capital
The above applies for profits, the opposite applies for losses
DR Owners Capital
CR Owners Drawings
Balance in Capital account = total equity for owner at end of period.
6.4 Post Closing Trial Balance
Lists all permanent accounts and their balances.
6.5 Prepare Financial Statements

6.5.1 Balance Sheet
Insert Company Name
Balance Sheet AS AT ______(insert date)
Assets
Liabilities
Current Assets
Current Liabilities
Total for Current
Total for Current Liabilities
Assets
Non-Current
Non-Current Liabilities
Assets
Total for Non-
Total for Non- Current
Current Assets
Liabilities
Total Assets
Total Liabilities
Shareholders Equity
Share Capital
Retained Profit
Total Shareholders Equity
Total Shareholders Equity and
Liabilities
6.5.2
Income Statement
Company Name
Income Statement for Year Ended ______
Sales Revenue
Cost of Goods Sold
Xx
(XX)
Gross Profit
XX
Operating Expenses
Expense 1
XX
Expense 2
XX
Net Profit
XX
Tax Expense
(XX)
Net Profit After Tax
6.5.3
(XX)
XX
Cash Flow Statement

Company Name
Statement of Cash Flows
For Year Ending _____
Cash Flow from

Operating Activities
Net Cash Flows from
XX
Operating Activities
Cash flow from
Investing Activities
Net Cash Flows from
XX
Financing Activities
Cash Flows from
Net Cash Flows from
XX
Net increase/decrease
XX
in cash
Cash at Beginning of
XX
Period
Cash at End of Period
XX
Non- Cash Investing
and Financing Activities
7 Internal Control
7.1 Petty Cash Fund
Internal control is a system implemented by management that seeks to

control how financial information is recorded and presented. The main
objectives are: increasing efficiency, improving reliability of reporting and
ensuring compliance with laws.
Examples of internal control: Petty cash fund, Bank reconciliation
o Petty cash Fund:
o Creation of petty cash:
DR Petty cash
CR Cash
Disbursements: fill out a form and place it in the petty cash box
Topping up a low petty cash fund: This is when we record the expenses.
Since we are replenishing it by the amount that was disbursed, the
amount that we top it up by will be separated into each disbursement.
E.G.
DR Miscellaneous Expense 15
DR Telephone expense 25.40
CR Cash 40.40
7.2 Bank Reconciliation

1. Mark off items that occur in both a journal and bank statement. Also
mark off items that were outstanding in the previous bank
reconciliation that also appear in the current bank statement
2. Circle items that appear in the journals (Cash receipt journal and Cash
payment journal) and previous bank reconciliation but DONT appear
in the bank statement. These differences are due to lag. If the items
are circled in the cash receipt journal these are deposits in transit and
should be ADDED to the cash balance in the BANK STATEMENT
because they should have been added but havent due to timing issue.
If the items are circled in the cash payment journal these are
outstanding cheques and should be SUBTRACTED from the cash
balance in the BANK STATEMENT because they should have been
subtracted but havent due to timing issue.
3. Fix any errors in our records of items, i.e. items that dont match the
value honoured by the bank statement. If the value in our CPJ (cash
payment journal) is greater than what was actually recorded in the
bank statement, it means we recorded more than we actually paid
out; hence we OVERSTATED the reality and should increase the

balance in our cash record. Accordingly we also record an increase in
the amount of debt that we still owe because we didnt actually pay so
much of it off.
I.e.
DR Cash (The Excess)
Flip it around if understated
CR Accounts payable (the Excess)
On the other hand if the amount recorded in our CRJ (cash receipt
journal) is greater than what was actually recorded in our bank
statement, it means we OVERSTATED what was really deposited into
our account, hence we need to decrease the balance in our cash
records. Accordingly we need to record an increase in the amount of
debt that remains owing to us, because we didnt really received as
much as we thought.
I.e.
DR Accounts Receivable (THE excess)
CR Cash (THE Excess)
4. Highlight items that appear in the BANK STATEMENT but DO NOT
appear in either journal. The items are attributed to asymmetrical
information (information that we dont know about until we are
presented with the bank statement). Any items that CREDIT the CASH
BALANCE in the BANK STATEMENT (usually credit as opposed to
Debit) should be ADDED to the CASH BALANCE IN OUR CASH
RECORD (= ADJUSTED CASH BALANCE FROM LAST BANK
RECONCILIATION + TOTAL CASH INFLOW FROM CRJ TOTAL CASH
OUTFLOW FROM CPJ) and recorded in journals to recognise this new
information. Any items that DEBIT the CASH BALANCE IN THE BANK
STATEMENT (usually credit as opposed to Debit) should be
SUBTRACTED from the CASH BALANCE IN OUR CASH RECORDS and
recorded in journals.
5. Bank Reconciliation
Form:
Cash Balance as per Bank Statement
Add: Deposit in Transit
Minus: Outstanding Cheques
Adjusted Cash Balance
Cash Balances as per RECORDS
This should match
Add: Direct Increases in Bank

Statement
Minus: Direct decreases in Bank
Statement
Adjusted Cash Balance
This should match
8 Accounts Receivable and Bad Debt

8.1 Allowance for Doubtful Debt
When we recognise allowance for doubtful debt management needs to
estimate the size of bad debt and/ allowance for doubtful debt. There are
2 methods to do this:
Income statement approach: requires calculating bad debt as a % of
credit sales during the year
Balance sheet approach: requires calculating the total balance of
allowance for doubtful debt and deducing bade debt for the year. They
use the aging of accounts receivable method. This method estimates the
final balance for bad debt by splitting the pool of accounts receivable into
categories (ranging by days).
Journals:
Creating the allowance for doubtful debt:
DR Bad Debt Expense
CR Allowance for Doubtful Debt
(Credit balance since it is detracting from the net receivable value of
accounts receivable)
Writing off any bad debt (with adequate evidence):
DR Allowance for Doubtful Debt
Recovery of an Account Written Off
1. Re-establish part account written off
DR Accounts Receivable
CR Bad Debt Recovered
2. Record Collection of Cash
DR Cash at Bank
9 Perpetual and periodic Inventory System

9.1 Perpetual Inventory Control System
Continually records the impact of transaction on COGS and Inventory

control accounts.
9.1.1
Purchases
DR Inventory
CR Cash/Accounts Payable
9.1.2
Purchase Returns and Allowances

Purchase Returns:
DR Inventory
(amount = purchase)
CR Cash/ Accounts Payable
(amount = purchase)
Purchase Allowances:
DR Purchase Returns and Allowances (amount = size of discount)
CR Accounts Payable
9.1.3
(amount = size of discount)
Sales
DR Cash/ Accounts Receivable
CR Sales Revenue
DR Cost of Goods Sold
CR Inventory
9.1.4
Sales Returns or Allowances

Sales Returns or Allowance:
DR Sales Returns and Allowances
CR cash/ accounts receivable
DR inventory
CR COGS
If write-off
DR Inventory write- down
CR COGS
When an item cannot be sold at its original selling price after it has been
returned, the method for judging its cost is determined by the lower of
cost and Net Realisable Value (NRV).
9.2 Periodic Inventory Control System
In this inventory control system we need to deduce, or work out what

COGS is using the formula:
COGS = O/B INVENTORY + PURCHASES - C/B INVENTORY (AFTER A END
OF YEAR Stock take).
9.2.1
Purchases
DR Purchases
CR Cash/ Accounts Payable
9.2.2
Purchase Returns and Allowances
DR Cash/ Accounts payable
CR Purchase Returns and Allowances
9.2.3
Sales
DR Cash/ Accounts Receivable
CR Sales
9.2.4
Sales Returns and Allowances

Sales Returns or Allowance:
DR Sales Returns and Allowances
CR cash/ accounts receivable
9.3 Measuring the Inventory

9.3.1
FIFO
The value of COGS and ending inventory will be equal to the value of the
oldest inventory purchased or held.
9.3.2
LIFO
The value of COGS and ending inventory will be equal to the value of the
newest inventory purchased or held.
9.3.3
Weighted Average Cost Method

The value of COGS and ending inventory will be equal to the weighted
average of all inventory.
Use the formula:
!"#$ ! ! !"#$ ! ! !"#$ ! ! !"#$ !

!"" !"#$% !" !"#$"%&'(
= Weighted average cost per unit of inventory
sold
10 Depreciation
10.1 Depreciation
Accumulated depreciation accounts (a contra account that records the

consumption of benefits provided by non current assets throughout their
useful life).
Depreciation expenses will begin from the day a depreciable non current
assets begins operating as per managements intentions.
DR Depreciation Expense
CR Accumulated Depreciation
Depreciation aims to allocate the cost of non-current assets over the

useful life of the asset. This reflects the matching principle, which
requires the recognition of expenses (depreciation expense) with the
revenue (revenue generated from use of the non current asset)
generated during the financial period.
Methods of Depreciation:
= !"#$%& !"#$(!" !"#$% !"#$%&'$)
= 1
Gains and Losses
Gains and Losses: Sometimes when depreciable assets are sold, if they
!"#$!!"#$%&'( !"#$%
= !"#$%& !"#$(!" !"#$%)

!"#$!!"#$%&'( !"#$%
!"#$%&'( !"#$%
!"#$
are sold for more/less than their Carrying Amount (historical cost
accumulated depreciation) there will be a gain/loss.
Methods:
1. Write off accumulated depreciation from the corresponding non

current asset to get the carrying amount:
DR Accumulated depreciation
(account balance of accumulated
depreciation)
CR Corresponding Non Current asset
(account balance of
accumulated depreciation)
Carrying Amount = Historical cost all accumulated depreciations
2. If: WHAT THEY PAID > NET VALUE we have made again
IF WHAT THEY PAID < NET VALUE we have made a loss
Gains:
DR Cash (Amount paid)
CR Non current asset (Net value)
CR Gain from sale of Non current Asset (Amount paid Net Value)
Loss:
DR Cash (Amount Paid)
DR Loss from sale of Non current Asset (Amount paid Net Value)
CR Non current asset (Net value)
11 Financial Reporting
11.1 Financial Reporting
GAAP (Generally Accepted Accounting Principle) are made up of

Authoritative accounting standards by the AASB (Australian accounting
standards board) and conceptual principles. Management needs to abide
by GAAP, applying them with good judgement to their business model.
Given management is given free reign to apply GAAP appropriately,
external auditors are brought in to confirm that GAAP has been abided
by.
12 Financial Statement Analysis

12.1 Performance Ratios
Return on Assets =
Return on Equity=
Profit Margin=
!"#$%&'() !"#$%& !"#$%" !"#

!"#$% !""#$"
!"#$%&'() !"#$%& !"#$% !"#

!"#$% !"#$%&
!"#$%&!"# !"#$%& !"#$% !"#
Gross Margin =
!"#$% !"#"$%"
!"#$% !"#"$%"!!"#$
!"#$% !"#"$%"
Earnings per share=

!"#$%&'() !"#$%& !"#$% !"#!!"#$%"&'$"() !" !"#$#"#%!" !!!"#!!"#$%&
!"#$%& !" !"#$%&"' !!!"#$ !""#$%
12.2
Activity Ratios
Asset turnover rate =
!"#$% !"#"$%"
!"#$% !""#$"
Inventory turnover rate =
!"#$ !" !""#$ !"#$ (!"#$)

!"#$%!" !"#$"%&'( (
!" !"#$"%!!" !"#$"%)

!
!"#
Number of Days in inventory =
!"#$"%&'( !"#$%&'# !"#$
Accounts Receivable turnover/ Debtors turnover =

!"#$% !"#$%& !"#$%
!"#$%&# !""#$%&' !"#"$%&'(" (
!" !""#$%&' !"#"$%&'("!!" !""#$%&' !"#"$%&'("

)
!
Number of Days in Accounts Receivable =
12.3
!"#
!""#$%&' !"#"$%&'(" !"#$%&'#
Liquidity Ratios
Current ratio =
Quick Ratio =
!"##$%& !""#$
!"##$%& !"#$"%"&'
!"##$%& !""#$"!!"#$"%&'( (!"#"$%&&')

!"##$%& !"#$"%"&'
12.4
Financial Structure Ratios
Debt to Equity Ratio =

Debt to Asset Ratio =
Leverage Ratio =
!"#$% !!"#!$!%!&'
!"#$% !!!"#!!"#$%& !"#$%&
!"#$% !"#$"%""&'
!"#$% !""#$"
!"#$% !""#$"
!"#$% !"#$%&
Du Pont Analysis:
Return on Equity = Leverage Ratio X Return on Assets
= Leverage ratio X profit margin X Asset turnover
=
!"#$% !""#$"
!"#$% !!!"#!!"#$%& !"#$%&
12.5
!"#$%&'() !"#$%& !"#$% !"#

!"#$% !"#$% !"#"$%"
!"#$% !"!"#
!"#$% !""#$"
Limitations on Financial Statement Analysis
Estimates
-
Financial statements contain estimates.
If such estimates (e.g. depreciation) prove inaccurate, analysis proves

inaccurate. Cost
Atypical data
-
Some end-of-period data may not be typical of financial condition

during the year.
This is because most entities end their financial year at a low point in
the business cycle i.e. low operating/inventory levels.
Balances that are analysed through ratios are often not representative
of balances during the year.
Diversification of entities
-
Global entities are often diverse and cannot be classified into a single
industry.
Comparison against relative industry can therefore be unreliable.
13 Management Accounting
Labour
Direct
Materials
Cost classiMication
Manufacturing
indirect
Behavioural
Non-Manufactuing
Overheads
Sales and Admin
Fixed
Functional
Variable
Mixed
13.1 Cost Behaviour
1. Variable Costs - Costs that vary directly, proportionately with changes in

activity levels
2. Fixed Costs - Costs that remain the same, regardless of changes in activity
levels.
3. Relevant Range: the range at which a business expects to operate during

a year
13.2 CVP Analysis
Contribution Margin = total revenue total variable cost
Contribution Margin per Unit = Unit Selling price Unit variable Cost
Contribution Margin Ratio =
Break- Even Analysis
Break even to find Units Needed to break even, given selling price to
!"#$ !"##$%& !"#$%!!"#$ !"#$"%&' !"#$

!"#$ !"##$%& !"#$%
consumers.
0 = Unit Selling Price X Units needed Fixed Costs Unit Variable Cost X
Units needed
0 = Units Needed (Unit Selling Price Unit Variable Cost) Fixed Costs
Fixed Costs = Units Needed (Unit Selling Price Unit Variable Cost)
!"#$% !"#$
!"#$ !"##$%& !"#$%!!"#$ !"#$"%&' !"#$
= Units needed
13.2.1 Break Even Analysis to find the price we should sell a given amount
of production for.
!"#$% !"#$#
!"#$%&%' !"#$%
+ = Unit Selling Price
13.2.2 How to determine Net profit before tax:

=
=
13.2.3 How to determine the Units necessary to reach a profit after tax
goal:
Profit after tax = Profit before tax tax expense
Profit after tax = profit before tax (1 tax rate)

=
(1 )

=
1

1
=


+
(1 )
=


ACCT1501 Accounting and Financial Management A Note

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NOTES

ACCT1501: Accounting and Financial

USERS OF ACCOUNTING INFORMATION

2 THE BALANCE SHEET AND INCOME STATEMENT

2.1 BALANCE SHEET

3 DOUBLE ENTRY ACCOUNTING

3.1 THE ACCOUNTING EQUATION IN DETAIL

4.1 THE FULL ACCOUNTING CYCLE

5.1 ACCRUAL ADJUSTMENTS (STEP 5 AND 6)

6 SPECIAL JOURNALS, SUBSIDIARY AND CONTROL ACCOUNTS

7.1 PETTY CASH FUND

8 ACCOUNTS RECEIVABLE AND BAD DEBT

8.1 ALLOWANCE FOR DOUBTFUL DEBT

9 PERPETUAL AND PERIODIC INVENTORY SYSTEM

9.1 PERPETUAL INVENTORY CONTROL SYSTEM

11.1 FINANCIAL REPORTING

12 FINANCIAL STATEMENT ANALYSIS

13.1 COST BEHAVIOUR

1 Introduction to Financial Accounting

1.2 Accrual Accounting

Recording the economic impact of transactions at the time they occur so

1.3 Cash Accounting

Recording the transaction only at the time cash changes hands.

There is a timing issue, sometimes we record transactions; before, after

Good judgement is always required.

1.4 Assumptions of Financial Accounting

Accrual Accounting Measure the performance and position of a

Going Concern A business will continue to operate for the foreseeable

Monetary Unit - Measured in common denominator

Accounting Period Discrete equal periods

Historical Cost Cost at initial acquisition

1.5 Qualitative Characteristics of Accounting Information

Fair representation (represent what really existed/happened)

Neutrality (freedom from bias)

Substance over form (reflects the economic reality)

Prudence (caution in estimates)

Completeness (material info not omitted, not misleading)

2 The Balance Sheet and Income Statement

Total for Current

Total for Current Liabilities

Total for Non- Current

Asset: a resource that is controlled by the entity as a result of a past

Shareholders equity: The residual interest of assets of the entity funded

Resources controlled by an entity.

Ability to provide future economic benefit.

As a result of a past event/transaction.

Probability item is recognised if it is probable that any future

Reliably measured item is recognised if it has a cost/value/$ figure

Present obligation of an entity.

As a result of a past event/transaction.

Expected to result in an outflow of resources of economic benefit

Probability item is recognised if it is probable that any future

Reliably measured item is recognised if it has a cost/value/$ figure

Residual interest in the assets.

After liabilities have been deducted.

2.2 Income Statement

Revenue: Inflows of economic benefits (as a result of ordinary operating

3 Double Entry Accounting

Assets are the resources

Double Entry Accounting

3.2 The Accounting Cycle Initial Steps of the Recording

1) Source document: the documents that prove the transactions occurred

Accrual accounting is required instead of cash accounting; transaction