7/03/2017

ACCT10001
Accounting Reports and Analysis

Lecture 2: Transaction Analysis & Financial

Statements

Reading for Week 2

• Chapter 4 – Business Transactions
– LO 1 to 5
• Also Ch 5 LO 9 covers format and presentation of a
balance sheet, and
• Ch 6 LO 8 covers format and presentation of a
statement of profit or loss
• Financial Statement Exercise
– Students should complete the JB Hi‐Fi
interrogation exercise and read through the
suggested solution

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Learning objectives
By the end of this session you should be able to:
• Explain the relationship between the accounting
elements and the concept of duality
• Identify and classify transactions and adjustments
• Record transactions and adjustments in a worksheet
• Prepare an income statement and a balance sheet
from summarised transaction data

The Accounting Equation

The relationship between the elements

ASSETS – LIABILITIES = EQUITY

CONTRIBUTED RETAINED
ASSETS – LIABILITIES = EQUITY
+ EARNINGS

PROFIT INCOME
– DIVIDENDS
(earnings) – EXPENSES

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Assets
Reported in St of
Cash Week 7
Cash Flows
Other assets

Reported in
Liabilities Balance Sheet
Business
Activities Equity

Income
Reported in
Income
Expenses Statement

Transaction Analysis
• Lecture Illustration
– Refer to the Lecture Illustration ARA Galleries Pty
Ltd
– Note that in order to simplify this illustration, GST
as it would normally apply will be ignored
– Consider the transactions and events occurring in
June 2015 and the effect, if any, they have on the
assets, the liabilities and the equity of ARA Galleries
Pty Ltd

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Transactions and events during June 2015

Issued shares for $20,000
↑ Cash $20k, ↑ Contributed equity $20k
Received $60,000 from a bank loan
↑ Cash $60k, ↑ Loan $60k
Arranged a lease for $2,000 per month
Nothing to record (yet)
Purchased fixtures & fittings for $30,000 cash
↑ PPE $30k, ↓ Cash $30k
Bought inventory for $25,000 (cash $10,000)
↑ Inventory $25k, ↓ Cash $10k
↑ Accounts payable $15k
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Assets, Liabilities & Equity as at 30 June 2015

Assets $ Liabilities $

Cash on hand 40,000

80,000
20,000
50,000 Accounts payable 15,000

Inventory 25,000 Loan 60,000

PPE 30,000 Total liabilities 75,000

Equity

Contributed equity 20,000

95,000
20,000
80,000 95,000
20,000
80,000
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Cash A/R InventoryOther CA PPE A/P Other CL Loan Cont Eq Retained earnings
Opening balance ‐
40 ‐ 25 ‐ 30 15 ‐ 60 20
Income Expenses Div
(7) (7) Adv
(20) 20 F&F
40 40 Inv
(26) 2 (24) Rent
55 95 150 Sales
(50) (50) CoS
(8) (8) Utils
(32) 1 (33) Wages
65 (65) A/R
(13) (10) (3) L & Int
(35) (35) A/P
(5) (5) Depn
(10) (10)
6 (6) Tax
150 (136) (10)
9 30 15 2 45 20 7 50 20
Retained earnings 4

Gross profit
• Service firms generate revenue by providing a skill or
expertise e.g. fees revenue
• Trading firms generate revenue by buying and selling
goods e.g. sales
– Manufacturing firms produce and sell goods
• Net profit measures the difference between all revenue
and all expenses
• Gross profit measures the difference between the revenue
generated from selling goods i.e. Sales and the cost of that
inventory sold i.e. Cost of sales
– Note: the cost of the inventory sold, not purchased

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Gross profit
Example
• Purchased 10 items @ $5 = $50
• Sold 6 of these items @ $15

• Revenue 6 @ $15 = $90

• Cost of sales (expense) 6 @ $5 = $30
• Gross profit 6 @ $10 = $60

• Inventory on hand (asset) 4 @ $5 = $20

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Preparing Financial Statements

• Accounting Standards prescribe the basis for presentation
of general purpose financial statements
– ensures comparability with previous years and other entities
• … an entity shall clearly identify each financial statement
[… and … ] the following information prominently:
– The name of the reporting entity
– The date of the end of the reporting period or the period covered
• Specifically, the income statement must disclose:
– Revenue
Minimum disclosure
– Finance costs
requirements
– Tax expense
– Additional line items, headings and sub‐totals relevant to
understanding the entity’s financial performance
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ARA Galleries Pty Ltd

Income Statement for the year ended 30 June 2016
$
Sales revenue 150 000 *
Cost of sales (50 000)
Gross profit 100 000
Advertising (7 000)
Rent Alternatively: (24 000)
Utilities • Selling expenses (8 000)
• Administrative expenses
Wages (33 000)
• Occupancy expenses
Finance costs • Finance expenses (3 000) *
Depreciation (5 000)
Profit before tax 20 000
Income tax expense (6 000) *
NET PROFIT / (LOSS) 14 000 *

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ARA Galleries Pty Ltd

Income Statement for 30/6/16

Sales revenue $150000

Cost of sales -$50000
gross profit $100000
Advertising -$7000
Rent -$24000
Utilities -$8000
Wages -$33000
Finance costs -$3000
Depreciation -$5000
Profit before tax $20000
Income tax expense -$6000
Profit $14000

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Preparing Financial Statements

• The balance sheet must disclose:
– Property, plant and equipment
– Inventories
Minimum disclosure
– Trade and other receivables requirements
– Cash and cash equivalents
– Trade and other payables
– Issued capital and reserves
– Additional line items, headings and sub‐totals relevant to
understanding the entity’s financial position
– Current and non‐current assets and current and non‐current
liabilities as separate classifications

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Current & Non‐current Assets

• Assets
– A key characteristic of an asset is that it has FEB
– Current assets are those:
• whose FEB is expected to be realised, or is intended
to be sold or consumed, in the entity’s normal
operating cycle (typically assumed to be within 12
months after the reporting period), or
• are cash or cash equivalents
– All other assets are non‐current

The convention is to list current assets in order of liquidity

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ARA Galleries Pty Ltd

Balance Sheet as at 30 June 2016
$
Current assets
Cash and cash equivalents 9 000
Trade receivables 30 000
Inventories 15 000
Other current assets 2 000
Total current assets 56 000
Non-current assets
Property, plant and equipment 45 000
Total non-current assets 45 000
TOTAL ASSETS 101 000

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Current & Non‐current Liabilities

• Liabilities
– A key characteristic of a liability is that it requires
settlement by way of an outflow of FEB
– Current liabilities are those that are expected or
due to be settled in the entity’s normal operating
cycle (typically assumed to be within 12 months
after the reporting period)
– All other liabilities are non‐current

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ARA Galleries Pty Ltd

Balance Sheet (continued) as at 30 June 2016
$
TOTAL ASSETS 101 000
Current liabilities
Trade payables 20 000
Borrowings 10 000
Other current liabilities 7 000
Total current liabilities 37 000
Non-current liabilities
Borrowings 40 000
Total non-current liabilities 40 000
TOTAL LIABILITIES 77 000
NET ASSETS 24 000

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ARA Galleries Pty Ltd

Balance Sheet (continued) as at 30 June 2016

NET ASSETS 24 000

Equity
Contributed equity 20 000
Retained earnings 4 000
TOTAL EQUITY 24 000

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What’s next?
• Tutorials will continue with ARA Galleries recording
transactions and preparing financial statement for
FY17
• Assignment One will require you to record
transactions for a single reporting period and
prepare an income statement and balance sheet
from summarised data (released via the LMS)
– This will be submitted online using excel functions
– The LMS will provide links to online excel ‘tutorials’
• Next topic ‐ Assets
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