Accounting for Decision

Making (ACCT90004 )

Lecture 1:
(i) Financial statements and business decisions;
(ii) Investing and financing decisions and the Statement of
Financial Position
 Objectives for Week 1

1. Define accounting, describe the accounting process and define the

diverse roles of accountants
2. Explain the characteristics of the main forms of business organisation
3. Understand the conceptual framework and the purpose of financial
reporting
4. Identify the users of financial reports and describe users’ information
needs
5. Identify the elements of each of the four main financial statements
6. Describe the financial reporting environment
7. Explain the accounting concepts, principles, qualitative characteristics
and constraints underlying financial statements
8. Calculate and interpret ratios for analysing an entity’s profitability,
liquidity and solvency

2
 Introduction

Accounting is often referred to as the ‘language of

business’ as it is a means of common communication
where information flows from one party to others.

Accounting:
Primary Function:
‘The primary function of accounting is to provide reliable and
relevant financial information for decision making’.

Model of economic reality of business

 The Accounting Process

• Accounting is the process of identifying, measuring,

recording and communicating the economic
transactions and events of a business operation.

• Transactions are economic activities relevant to a

particular business
e.g., - sale of item to customer (paymeny of the receipt
- purchase of office stationery from supplier
 The Accounting process

• Transactions are the basic inputs into the

accounting process
Identifying Measuring Recording Communication
Taking into Quantifying in Analysing, Preparing
consideration all monetary terms recording, accounting
transactions classifying and reports, analysing
which affect summarising and interpreting
business entity transactions

Commonly referred to as
‘bookkeeping’ 5
 Objective of Financial Reporting

The objective of Financial Reporting is to provide financial

information about a reporting entity that is useful to
existing and potential equity investors, lenders and other
creditors (suppliers who provide a line of credit) in
MAKING DECISIONS about providing resources to the
entity. Those decisions involve decisions about
1. Buying and selling or holding equity and debt
instruments.
2. Providing or selling loans and or other forms of credit.
3. Exercising rights to vote on, or otherwise influence
management’s actions that affect the use of the
entity’s economic resources.
 Australian Regulatory Framework

Australian Securities & Investment Commission (ASIC)

Corporate Watchdog - Independent federal Government agency
with widespread powers.

• sole responsibility for administering corporations legislation

throughout Australia.
– enforces and regulates all corporate activity (including
directors and companies, financial markets and financial
services).

• aims to ensure fair and transparent markets supported by

confident and informed investors
 Australian Regulatory Framework

The Corporations Act (2001)

The Corporations Act (2001) requires compliance (following the
rules) with Australian Accounting Standards.
S. 292(1) requires the preparation of financial reports for all;
• Disclosing entities
With few exceptions, entities whose securities are listed on a securities exchange
are disclosing entities
• Public companies
A public company means any company other than a proprietary company.
• Large Proprietary companies
A proprietary company is a large proprietary company if it does not satisfy the
definition of a small proprietary company.
• Registered schemes (management investment schemes)
Managed investment scheme that is registered under 601EB of the Corporations
Act 。
 Australian Regulatory Framework

Australian Accounting Standard Board – AASB (Australian

Government)
• The AASB is responsible for setting the standards (laws) to be applied in for
financial statements:
• For profit
• Not for profit
• Public sector
Australian Securities Exchange (ASX)
ASX is at the heart of the globally attractive, deep and liquid Australian financial
markets, helping companies grow and investors build wealth. As an integrated
exchange, ASX offers listings, trading, technology, data and post-trade services for
a wide range of asset classes, including equities, fixed income, commodities and
energy.
Recognised as world-leading and innovative, we are a top ten listed global
securities exchange and the largest interest rate derivatives market in Asia. Issuers
and corporates from Australia and around the world engage
 Forms of Business Organisation

• Business may organise through various forms, including:

– Sole Proprietorship
• Owned by one person. It is the simplest form of business structure and
has very few legal formalities.
• The owner of the business has no separate legal existence from the
business.
• e.g. restaurants, dentist, panel beaters

– Partnership
• Owned by more than one partner. A partnership is a relationship
between two or more entities carrying on a business in ‘common’ with
the view to making a profit.
• Partnerships have unlimited liability which means that all partners are
responsible for the debts of the partnership.
• e.g. accountants, solicitors, doctors
 Forms of Business Organisation
– Corporation
• Organised as a separate legal entity and owned by shareholders.
• Shareholders have limited liability which means that shareholders are
liable for the debts of the business only to the extent of amounts unpaid
on their shares
• Under the jurisdiction of ASIC and must abide by the Corporations Act
(2001), Australian Accounting Standard Board (AASB) and the Australian
Securities Exchange (ASX) if a publicly listed company.
• BHP, CSR, Westpac, RM Williams.
• Other Forms
– A trust is a relationship or association between 2 or more parties whereby one
party holds property in trust for the other
• Corporate trust is a popular business structure for small business.
– A cooperative is member-owned, controlled and used, and must consist of 5 or
more people
• e.g. Australian Forest Growers, Ballina Fishermen’s Co-operative Ltd
 Conceptual Framework - introduction

• A Conceptual framework set of concepts to be followed by

preparers of financial statements and standard setters
The Conceptual Framework for Financial Reporting (the
‘Conceptual Framework’) describes the objective of, and the
concepts for, general purpose financial reporting.
It is a practical tool that:
(a) assists the International Accounting Standards Board (IASB) to
develop Standards that are based on consistent concepts;
(b) assists preparers to develop consistent accounting policies
when no Standard applies to a particular transaction or event,
or when a Standard allows a choice of accounting policy; and
(c) assists others to understand and interpret the Standards.
 General Purpose Financial Reports - introduction

• The objective of general purpose financial reporting

(1st element and foundation of the conceptual
framework)

– To provide financial information about the reporting entity

to the resource providers that is useful in making decisions
about providing resources to the entity.
 The reporting entity

• This section is still under development by the

IASB - use Australian SAC 1
• It is important to determine as a reporting
entity must prepare external general purpose
financial reports that comply with accounting
standards
• Definition from SAC 1
– an entity in which it is reasonable to expect
the existence of users who depend on
general-purpose financial reports to enable
them to make economic decisions
 The Reporting entity

Indicators ( 指示器、指示者、标志 )
– if the entity is managed by individuals who are not owners
of the entity;
– if the entity is politically or economically important;
– if the entity is considered large in sales, assets,
borrowings, customers, and employees;

then the entity is more likely to be a reporting entity

 Primary users and uses of financial reports

Accounting Information System

External Decision Makers Internal Decision Makers

Regulators Lenders

Managers
Customers Investors

Suppliers
 Definition of Asset

An asset is a present economic resource

controlled by the entity as a result of past
events.(important thing)

An economic resource is a right that has the potential to produce economic

benefits.

Rights established by contract, legislation or similar means such as – (i) rights

arising from a financial instrument （金融工具） ; (ii) rights over physical
objects, such as property; (iii) rights to exchange economic resources; and
rights to receive goods and services.

Control links the economic resource to the entity. Assessing control helps to
identify what economic resources the entity should account for.
 The classified statement of financial position

Current assets
– Assets that are cash, held for the purpose of being traded,
or expected to be converted to cash or used in the business
within one year.
– account is cuurent asset ,so credit as well
– Examples: Cash on Hand, Accounts Receivable, Inventory,
Stock of Supplies(example of paper storage), Prepayments.
Non-current assets
– Assets that are not expected to be sold or consumed within
one year.
– Examples: Building, Land, Motor Vehicles, Plant &
Equipment.(will create incomes for you in the future)
 Definition of Liability

A liability is a present obligation of the entity to transfer

an economic resource as a result of past events.
If one party has an obligation to transfer an economic resource (a liability), it
follows that another party (or parties) has a right to receive that economic
resource (an asset). The party (or parties) could be a specific person or
entity, a group of people or entities, or society at large.

Present obligation: An entity has a present obligation to transfer an economic

resource if both: (a) the entity has no practical ability to avoid the transfer;
and (b) the obligation has arisen from past events; in other words, the
entity has received the economic benefits, or conducted the activities, that
establish the extent of its obligation.

Past event: An entity has a present obligation as a result of a past event only if
it has already received the economic benefits, or conducted the activities,
that establish the extent of its obligation.
 The classified statement of financial position

Current liabilities
– Obligations that are to be paid within the coming year or
the entity’s operating cycle
– Examples: Accounts Payable(save a loan of credit and pay
later in the future,using the bank money), Bank Overdraft,
Loan (less that 12 months), Accrued expenses,

Non-current liabilities
– Obligations that are not classified as current.
– Examples: Mortgage(cross going on but income not), Loans
(greater than 12 months)
 Definition of Equity

The residual interest （剩余权益） in the assets of the

entity after deducting all its liabilities.
Equity ( 股本 )claims are claims on the residual interest in the assets of the entity after
deducting all its liabilities （股本 = 资产 - 负债） . In other words, they are claims
against the entity that do not meet the definition of a liability.
Such claims may be established by contract, legislation or similar means, and include
(to the extent that they do not meet the definition of a liability): (a) shares of
various types; and (b) rights to receive an equity claim.
Different equity claims convey to their holders different rights to, for example, receive
some or all of the following: (a) dividends; (b) the repayment of contributed equity
on liquidation; or (c) other equity claims.
To provide useful information, it may be necessary to divide （分割，除以） the
total carrying amount of equity if, for example, there are: (a) more than one class of
equity claim 不止一类的权益主张 ; or (b) restrictions on particular components of
equity 对股权特定组成部分进行限制 ; for example, the rights of particular equity
claims may be affected by legal, regulatory or other restrictions on the ability of the
entity to distribute its economic resources to the holders of those equity claims.
CONCEPTS , PRINCIPLES and QUANTITATIVE CHARACTERISTICS

• Monetary Principle
– Items included in accounting records must be able
to be expressed in monetary terms (e.g. $)

• Accounting Entity Concept

– Every entity can be separately identified and
accounted for
– Owner’s transactions are separate from entity’s
transactions
 CONCEPTS AND PRINCIPLES

• Accounting Period Concept

– The life of a business entity can be divided into
artificial periods
– Useful reports covering those periods can be
prepared for the entity

• Going Concern Principle 持续经营原则

– Business will remain in operation for the
foreseeable future.
 CONCEPTS AND PRINCIPLES

• Cost Principle 成本原则

– All assets are initially recorded in the accounts at
their purchase price or cost
– To provide useful information, sometimes entities
need to deviate from cost principle (e.g.
revaluation of non-current assets)

• Full Disclosure Principle 全面揭露原则

– All circumstances and events that could make a
difference to decision-making process should be
disclosed in the financial statements
 QUALITATIVE CHARACTERISTICS

• Fundamental qualitative characteristics

– Relevance
– Faithful representation
• Enhancing qualitative characteristics
– Comparability
– Verifiability （ objective- 提升 subjective-
opinions ）
– Timeliness
– Understandability
• Constraint- cost versus benefit
Information is considered relevant IF IT IS capable of making a difference in the
Conceptual
decisions made by users. Information Framework
that has predictive value and /or confirmatory
value is considered to be relevant.
• Theis considered
Information role of accounting is tovalue
to have confirmatory provide financial
if it can be used to develop
information
expectations for decision making that is relevant &
for the future.
faithful representation.
• Relevant
Information is a faithful representation of the economic phenomena it purports to
represent if it is complete, neutral 中立的 and free from material error.
It is important that information depicts the economic substance of the transactions, events
or circumstances.

• Faithful Representation
 QUALITATIVE CHARACTERISTICS

Enhancing qualitative characteristics:

• Comparability • Year to year, firm to firm, consistency of
preparation and application

• Verifiability • Achieved if different independent observers arrive

at the same conclusion.

• Timeliness • To be useful, must be available in a timely manner

• Understandability • Presentation is important • Assumed users

have reasonable knowledge

• Constraint- cost versus benefit

 ANALYSING FINANCIAL STATEMENTS

Ratio analysis
• Expresses relationship among items of financial
statement data
• Expresses mathematical relationship between two
different quantities
• Expressed in terms of percentages, rates or
proportions
 Rationale for GENERAL PURPOSE FINANCIAL REPORTS

• General purpose financial reports are the published

financial statements of an entity prepared in
accordance with applicable accounting standards.

• External users have an interest in 3 main types of

activities
– financing
– investing and
– operating
 GENERAL PURPOSE FINANCIAL REPORTS

• Financing Activities
– Outside sources of funds
• Borrowing (debt funding) from banks or
investors by debt securities
– Unsecured notes 无担保票据
– Debentures 债券

• Selling shares to investors

– Payments to shareholders are called dividends 股息、
红利
 GENERAL PURPOSE FINANCIAL REPORTS

• Investing Activities
– Acquisition or sale of resources/assets needed to
operate the business

– Examples:
• Purchase or sale of property plant and equipment
• Purchase of investments
 GENERAL PURPOSE FINANCIAL REPORTS

• Operating Activities
– Results from operational activities undertaken to earn income:
• Revenue(1) (sale of goods, provision 提供 of services, return from
investments)
LESS
• Expenses(2) (cost of resources/assets consumed or services used)

(1) Revenue:
Under the Conceptual Frameworks revenue should be recognised when and only when:
(a) It is probable that any future economic benefits associated with the revenue will flow to the entity,
and
(b) The revenue can be measured with reliability

(2) Expenses:
Expenses are decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants 向股权参与者分配不算在费用内 .
 FINANCIAL STATEMENTS

• Income 收入 Statement:
Reports revenues less expenses 收入减去支出 for a
particular period of time.
• Purpose is to report success or failure of the entity’s
operations for a period of time.
• Managers are interested in the bottom line because they
allocate resources based on their beliefs about an entity’s
future performance.

• Statement of Changes in Equity

Reports total comprehensive income for the period
and other changes in equity
 Income statement

WONG PTY LTD

Income Statement
for the month ended 31 October 2018
Service revenues $10
600
Expenses
Salaries expense $3 200
Supplies expense 1 500
Rent expense 900
Insurance expense 50
Interest expense 50
Depreciation expense 40 5
740
Profit before tax 4
860
Tax expense 2 000
Profit after tax $ 2 860
 Statement of changes in equity

WONG PTY LTD

Calculation of Retained Earnings
For the month ended 31 October 2018

Profit $2
860
Retained earnings 1/10/18 0
Dividends
(500)
Retained earnings 31/10/18 $ 2 360
 Statement of changes in equity

• Retained 保留的 earnings 未分配利润 refers to

accumulated profit which has not been distributed to
shareholders

– the statement of changes in equity will show as one

of the items movement in retained earnings
between reporting periods

– Wong Ltd’s movement in retained earnings is

demonstrated so the link between the income
statement and statement of financial position can
be understood
 Statement of changes in equity

• Reports total comprehensive income for period

and other changes in equity such as adjustments
to retained earnings for

– Changes in accounting standards

– Changes in accounting policies (Note)may impact the result of the
decision making
– Correction of errors 误差校正
– Gains 收益、盈利 recognised directly in equity accounts

Note: Something to think about…….

In sport, change the rules it may change the final outcome of the event or game.
Change the accounting policy, profit and equity could be a different result.
Decision making impacts!
 FINANCIAL STATEMENTS

• Statement of Financial Position (Balance Sheet):

– Reports assets and claims to those assets at a
particular point in time

• Cash Flow Statement:

– Reports information regarding cash receipts and
cash payments for a particular period of time
 Statement of Financial Position: (Balance Sheet)

• Reports assets and claims to those assets at a specific

point in time; ‘as at’.
• Based on the basic accounting equation. The Balance
Sheet is simply the accounting equation in a
published report.
Total Assets = Total Equities
ASSETS = LIABILITIES + EQUITY
or

Net Assets = Net Equities

Assets – Liabilities = Equity
 Statement of financial position

WONG PTY LTD

Statement of Financial Position
as at 31 October 2021
Assets
Cash 现金 $15
200
Accounts receivable 应收账款
200
Advertising supplies 广告提供 1
000
Prepaid insurance 预付保险金
550
Office equipment 办公室设备 4 960
Total assets 21 910
Liabilities
Accounts payable 应付账款 $ 2 500
Interest payable 应付利息 50
Revenue received in advance 预收收益 800
Salaries payable 应付职工薪酬 1 200
Bank loan 银行贷款 5 000
Total liabilities 9
550
Net Assets $12 360
Equity
Share capital 实收资本或股本总值 10 000
 Cash Flow Statement

• Main purpose is to provide financial information

about cash receipts (cash inflow) and cash payments
(cash outflow) of an entity for a specific time period

• Users are interested in the statement of cash flows in

order to find out what is happening to entity’s most
important resource
 Cash Flow Statement

WONG PTY LTD

Statement of Cash Flows
for the month ended 31 October 2021

Cash flows from operating activities

Cash receipts from operating activities $11 200
Cash payments from operating activities (5 500)
Net cash provided by operating activities $ 5
700
Cash flows from investing activities
Purchased office equipment (5 000)
Net cash used by investing activities (5
000)
Cash flows from financing activities
Issue of shares 10 000
Proceeds from bank loan 5 000
Payment of dividend (500)
Net cash provided by financing activities 14
500
Net increase in cash 15
200
Cash at beginning of period --
 Interrelationships between the statements

• Statement of financial position depends on results of

the Income statement/Statement of comprehensive
income and the Statement of changes in equity

• Ending amount in the statement of cash flows is

reported in the statement of financial position
 ANALYSING FINANCIAL STATEMENTS

Ratio analysis
• Expresses relationship among items of financial
statement data.

• Expresses mathematical relationship between two

different quantities.

• Expressed in terms of percentages, rates or

proportions
 Profitability

Measures operating success of an entity for a given time

period

• Return on assets
– Indicates amount of net profit generated by each
dollar invested in assets
Profit .

Average Total Assets

($ in thousands) 2021 2020

Fantastic Holdings $18 527 = 11.8% $18 593 = 14.9%

($168 185 + $146 386)/2 ($146 386+ $103 960)/2

Nick Scali $11 255 = 30.7% $4 817 = 15.9%

($41 075 + $32 171)/2 ($32 171+ $28 326)/2
 Profitability

• Profit margin:
Measures percentage each sales dollar that results
in profit
Profit .

Net Sales

($ in thousands) 2021 2020

Fantastic Holdings $18 527 = 4.0% $18 593 =

5.0%
$419 084 $402 073

Nick Scali $11 255 = 12.0% $4 817 = 6.0%

$96 365 $77 507
 Liquidity

• Measures short-term ability of entity to pay its

maturing obligations and to meet unexpected needs
for cash

• Working Capital
Current Assets – Current Liabilities

Fantastic Holdings
Working Capital = $102 111 066 – $58 265 089
= $43 845 977
Good position to pay short-term debts as they fall due
 Liquidity

• Current Ratio:
Measures short term ability to meet current obligations
Current assets .

Current liabilities

($ in thousands) 2021 2020

Fantastic Holdings $102 111 = 1.75:1 $99 186 = 1.80:1

$58 265 $55 227

Nick Scali 1.70:1 1.82:1

 Liquidity

Using the statement of cash flows

• Current cash debt coverage
– Indicates the entity’s ability to generate sufficient cash to
meet short term needs
Net cash provided by operating activities
Average current liabilities

($ in thousands) 2021 2020

Fantastic Holdings $11 011 = 0.19 times $13 297 = 0.31

times
($58 265 + $55 227)/2 ($55 227+ $29 401)/2

Nick Scali 0.94 times 0.66 times

 Solvency

• Measures ability of an entity to survive over a long

period of time

• Debt to total assets ratio

– Measures percentage of assets financed by creditors rather
than shareholders
Total liabilities
Total assets

($ in thousands) 2021 2020

Fantastic Holdings $77 697 = 0.46 $68 851 = 0.46

$168 185 $146 386

Nick Scali 0.48 0.43

 Solvency

• Cash debt coverage

– Indicates entity’s ability to generate sufficient cash to
meet long term needs
Net cash provided by operating activities
Average total liabilities
($ in thousands) 2021 2020

Fantastic Holdings $11 011 = 0.15 times $13 297 = 0.24

times
($77 697+ $66 851)/2 ($66 851+ $42 225)/2

Nick Scali 0.93 times 0.66 times

 Notes to the financial reports

Notes provide supplemental information about the financial

condition of a company.

Three basic types of notes:

(i) Description of accounting rules applied.
(ii) Presentation of additional detail about an item on the
financial statements.
(iii) Provide additional information about an item not on the
financial statements.
 Reviewed BEFORE YOUR WORKSHOP

The following should be reviewed before your workshop:

Text: Financial Accounting – Reporting, Analysis & Decision Making 7 th Edition
Carlon, McAlpine, Lee, Mitrione, Kirk & Wong

Key Terms: Pages 56 - 58

Summary: Pages 60 – 61; 1.1 – 1.9

Demonstration Problem:
Pages 58 - 59
Jeff Andringa – Footy Camp Pty Ltd
Self-Study Questions:
Pages 59 – 61, Question 1.1 – 1.25
Brief Exercises:
Pages 61 – 63 BE 1.1 – BE 1.7
 This Lecture

The main aspects of accounting that were covered this

week are set out below and include the:
• Review the information contained in the four principal financial statements
and the use of this information by various stakeholders;

• Understand key players that shape the environment in which financial

reports are prepared;

• Identify the factors to consider by companies when making the decision to

raise additional funds either through borrowing or through the issue of
shares;

• Determine the impacts of business transactions on the statement of financial

position using journal entries and ledger accounts.