Session 1, 2012

THE UNIVERSITY OF NEW SOUTH WALES

Australian School of Business

School of Accounting

ACCT 1501: Accounting and Financial Management

1A

Week 1 Introduction to Financial Accounting & Key

Financial Statements

Student Handout

Lecturer: Dr. Youngdeok Lim

School of Accounting UNSW

QUAD 3069

youngdeok.lim@unsw.edu.au

Blackboard: http://telt.unsw.edu.au.

AFM1A 2

WEEK 1: Introduction to Financial Accounting & Key Financial Statements

Welcome to Accounting and Financial Management 1A. In this first lecture you will be introduced to the lecture staff on the course and be given the Course Outline. We will be outlining the objectives of the subject, its structure and requirements as described in the Course Outline and answer any questions you may have about the course. We will be referring to the Woolworths 2007 Annual Report (WW2007) throughout the course. The annual report is included as an appendix in your course textbook (Trotman & Gibbons (T&G) pages 709-748). We will then begin to explore the nature of accounting and introduce general purpose financial reports.

Learning objectives At the end of this topic you will be able to:

Understand the overall course requirements and assessment tasks for this unit. Define Accounting Begin to become familiar with the Woolworths 2007 annual report and the

information it contains.

Be aware of key financial statements and the users of these reports. Understand the foundations of modern accounting practices including the

underlying assumptions of financial reporting

Begin to understand the accrual concept

Required Reading ACCT1501: Accounting and Financial Management 1A: Course Outline Trotman & Gibbins Chapter 1: sections 1.1 to 1.4, & 1.9 - 1.11; Appendix 1 (WW2007)

AFM1A 3

2. Tutorial Questions Week 2 Preparation Questions

You should attempt these questions before the tutorial. The answers to the preparation questions will be made available on the course website at the end of the relevant lecture week. In this way you can check your understanding of these questions before the tutorial class. You are welcome to raise any unresolved issues that you have with the preparation questions with your tutor. This will be important and essential information for you when you complete your reflection task.

DQ 1.1, 1.2, 1.3, 1.7,

P1.6, P1.16,

C1A (1-7)

Tutorial Questions

The answers to tutorial questions are the focus of the tutorial class work:

DQ 1.12, 1.16,

P1.7, P1.15, P1.25

AFM1A 4

ABC faced insolvency in 2007 Colin Kruger May 22, 2010 ABC Learning was staring down the barrel of a $1.78 billion loss for the 2008 financial year when it collapsed, but the company may have been insolvent as early as mid-2007, according to a report from its administrators, led by Ferrier Hodgson's Greg Moloney. In the final drafts of ABC's financial statements prepared for the year ending June 30, 2008, its auditors included impairment charges totalling $1.168 billion, and a $364 million loss on the disposal of a majority stake in ABC's US business. Significant contributors to the loss - $1.2 billion more than previous estimates - are a $686 million cut in the valuation of childcare licences and a $127 million write-down of debts owed by ABC's childcare developer, 123 Group. The massive loss means the net assets on ABC's balance sheet were reduced from $2.22 billion the previous year to just $284.5 million at June 30, 2008, putting the company in breach of its covenants almost five months before administrators were appointed. But the bombshell in the report to creditors is the administrators' analysis that for the 2007 and 2008 financial years ABC had just 30 and 40, respectively, of current assets for every dollar of current liabilities. This equates to a current ratio of 0.3 and 0.4 for those years. The administrator's report notes that ''a current ratio and quick ratio less than one may indicate a potential liquidity crisis''. An analysis of the company's quick ratio showed ABC had just 20 of ''liquid'' assets for every dollar of current liabilities in 2007, and 10 in 2008. The quick ratio is lower because it does not include potential proceeds from assets held for sale. ''This indicates that there was a reliance on the sale of assets to discharge short-term liabilities as at 20 June 2008,'' the report said. In an examination into ABC's collapse, senior executives told the Federal Court last month there were no liquidity concerns when ABC began a fire sale of assets in early 2008, despite evidence to the contrary from junior ABC management. The report also spells out just how reliant ABC was on the banks and investors for its cash. Over the six-year period leading up to its collapse, ABC generated $3.43 billion from debt and equity markets against $375 million cash generated from its childcare operations.

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''This reliance on external capital, combined with failing support by equity and debt investors as well as underwhelming financial performance, led to a liquidity crisis and was a major contributor to the failure of the ABC Group,'' the report said. The administrators said they have yet to determine exactly when ABC became insolvent. The second creditors' meeting, expected to vote to wind up ABC, is scheduled to be held June 2 at the Tattersall's Club in Brisbane. Read more: http://www.smh.com.au/business/abc-faced-insolvency-in-2007-20100521-w1tf.html#ixzz1Rc0qPPKJ

Accounting and Financial Management 1A

Week 1

Session 1 2012Session 1, 2012

Lecturer in Charge

Dr Youngdeok Lim

Quad 3069

Todays lecture objectives:

Ensure you have an understanding of the Course Outline especially what you need to do to beOutline especially what you need to do to be successful in this course,

& the administrative side of the course.

Begin to be familiar with annual report

Develop a brief understanding of the t f tinature of accounting:

the financial statements,

key principles & assumptions

The Course Outline

What you need to know?

Australian School of Business

School of Accounting

ACCT1501

1. Understand the course structure

2. Course objectives

3. Clarify roles and responsibilitiesACCT1501

ACCOUNTING AND FINANCIALMANAGEMENT 1A

COURSE OUTLINESESSION 1 2012

responsibilities

Introduction

Teaching staff Dr. Youngdeok Lim (Lecturer-in-Charge) Jeffrey Knapp (Lecturer) Dr. Tami Dinh Thi (Lecturer) Other tutors Wei, Jo, Radzi, Alex, Carone, Tara,

Amanda, Candice, Sunny, Brent, Wendy, Abarna, Rommo, Li, Bonnie, Cece, Abby, Michelle, Stella, Chloe, Karen, Dominic

Take a couple of minutes and introduce yourself to two people near you. Ask them what tutorial group they are in & what else they are studying.

Required Texts

T & GibbiLecture outlines Practice Set

Trotman & Gibbins 4th Edition

Lecture outlines and additional

readings Available on Blackboard

Practice Set

http://www.perdisco.com.au/home.asp

All the instructions on how to log on and use Perdisco are covered in the Course

Outline

Course schedule (see page 15 in course outline )

Lectures:How do you prepare for lectures

Read the assigned reading materials before the lectureL t l d t b tit t f Lectures are only a summary and are not a substitute for reading

Bring your Lecture Notes to every lecture & tutorials !!!!! The lecture notes follow the lecture outline with space for you to

make your own additional notes during the lecture

Lecture notes will be posted on Blackboard. Lectures will be Podcast recorded with screen captures of the

lecture slides. This is recommended as an additional resource not a substitute for face-to-face interaction in the lectures.

Tutorials:How to maximize the return on yourinvestment (ROI)

Participation in class (both lectures & tutorials)Students do not benefit from copying solutionsAttempting your work is essential to identifying concepts/

issues you do not understand Your tutor will randomly choose 6 weeks to review your written

answers to the assigned tutorial questions and preparation questions and mark the best 5 weeks (no half mark).q ( )

How do you learn to drive or cook, is it by reading only?Help tutors help you, by proactively asking questions! Interaction in the tutorial helps everybody learn it might

even be fun!!!!

Preparation & Tutorial Questions: Work you must do to pass the course !!

Preparation Questions: Attempt all preparation questions and check the solutions on Blackboard before your tutorial. Raise any questions with your tutor in class or your tutors consultation time Refer to Blackboard for thetutor in class or your tutor s consultation time. Refer to Blackboard for the consultation schedule.

Tutorial Questions (also attempt before class): The goal of the tutorial is to discuss the questions and clarify any concerns you may have. The process in an interactive one and you are required to engage with your tutor by asking and answering questions.

Note: DQ1 1 means Chapter 1 discussion questions 1Note: DQ1.1 means Chapter 1, discussion questions 1. P1.6 refers to problems at the end of chapter 1. Let us try these P4.25 &

P6.22 - How will you find these???

Learning Assessment (or how to pass AFM1A)

Assessment Item / Due date Weight

Tutorial participation (complete each week) 10%

Mid i l t t (W k 7) 15%Mid-session class test (Week 7) 15%Multiple Choice Tests 2 quizzes 5% each(Week 5 & 12) 10%

Perdisco Practice Set Assignment(May 11th @ 3pm) 10%

Final examination 55%

TOTAL 100%

You must satisfactorily complete all assessment tasks and score a total mark of at least 50, including a satisfactory pass mark in the final exam.

Two Quizzes YOU must read the instructions!!!!

The quiz will consist of 30 multiple choice questions.

It is recommended to be completed in 60 minutes; however there will be no official time limit. One attempt.

I t t f db k!!!!Important feedback!!!!

For you & us!

This assignment is due May 11th @ 3pm 20 hrs work approx.

Practice Set Assignment (Week 10) Perdisco on-line practice set an individual assignment. A practice set is a comprehensive accounting exercise

designed to integrate your knowledge of accounting systems and the accounting cycle. (Business transactions for 1mth)

This task is expected to take approximately 20 working hours to complete. Start working on this exercise as early as possible (around week 5) to be able to complete it by the due date

DO NOT LEAVE THIS TASK TO THE LAST MINUTE !!!!

Important note

Special Consideration and Supplementary examinations: There is only one opportunity to sit a supplementary

final exam which will be held on 10 July 2012 exams forfinal exam which will be held on 10 July 2012 exams for the School of Accounting after the final exam session.

If you are too ill to perform reasonably on the final exam, do not attend the final and apply for a supplementary instead.

Applying for special consideration does not automatically mean that you will be granted a supplementary exam.y g pp y

Additional resources

ConsultationConsultation PASS (Peer Assistance Support Scheme)

The Course Website

Blackboard http://telt.unsw.edu.au Announcements!!! your responsibility to read View preparation and tutorial solutions Use the Discussion board - 3 Categories

Course ContentCourse Content, Course Administration On-line Practice Set (student only)

overseen by staff members

Use appropriately and with respect for others

Student responsibilities:

Preparation for lectures & tutorials Workload and other commitments balance!!! Attendance 80% rule University & ASB Conduct and behaviour respectful to others at all

times in lectures, tutorials, via email and on Blackboard

Keeping informed !!! Read the course outline; Blackboard Announcements & your university email.

ONLY attend the lecturers and tutorials that you are officially enrolled to attend.

Introduction to Financial Accounting &

Key Financial Statements (Ch 1)

Ground rules in noise control

Be quiet in my lecture for a student who wants to listen. To discourage unnecessary noise in my lecture, there will

be a 1 mark penalty to a student who is not quiet.

What is accounting?

Accounting is the process of id tif i iidentifying, measuring, recording and communicatingeconomic information to assist users to make decisions.

Business language

Grammar

Vocabulary

Practice

Accounting System

Financial Accounting SystemPeriodic financial statements and

related disclosures

Managerial Accounting SystemDetailed plans and continuous

performance reports

External Decision MakersInvestors, creditors,

suppliers, customers, etc.

Internal Decision MakersManagers throughout the

organization

What is financial accounting?

Financial accounting will be the focus of this course. Financial accounting focuses on the provision of

information to users external to the enterprise.

The focus is on reporting financial position and financial performance.

What is management accounting?

Management accounting will be the focus of later part of this coursesthis courses.

Management accounting focuses on the provision of information to users within the enterprise (to aid in operational planning and control decisions).

The rise of economic consequences

Conveys economic information to decision makers This is extremely important!!

The rise of economic consequences relating to financial reporting

Recently we have seen some critical developments in this area which has impacted this relationship.

The introduction of IFRS (International Financial Reporting Standards)

New Corporate Governance laws

Is accounting really important?

Used by:

Management in making business decisions Shareholders for decision making Board of directors in takeover battles Bankers and creditors in lending decisions

Is accounting really important? (cont.)

Used by:

Boards in rewarding and removing executives Management and unions in wage negotiations Impacts communities Impacts workers

Accounting information and share prices Qantas shares dive as profit plunges (February 18, 2010,

Sydney morning herald)

Qantas Airways shares have plunged the most in a year after the airline reported a 72 per cent slide in first-half net profit and said it would pay no dividends as it was forced to slash fares to fill aircraft.

Qantas shares ended the day down 24 cents, or 8.1 per cent, y , p ,to $2.73. The airline, which delivered results within its own forecast range but at the lower end of analysts expectations, said there were some signs of improvement by the end of the second quarter, but increased fuel and depreciation costs would be felt in the second half.

Some examples of an economic consequence

The Accounting Scandals such as Enron, Worldcom,

Misleading reporting Mismanagement ABC learning Collapse of the company Indictments

The nature of accounting(ABC Learning Why is accounting important?)

We have focused mainly on the economic consequences in the equity markets

The decision maker in this situation is the investor / owner Their decisions are based on what value they are willing

to either buy or sell shares in the market

Can you think of other users of accounting information?Can you think of other users of accounting information? And, for what purposes will they use the accounting

information?

Small group (two to 4 people) discussion.

Other users of accounting information:

Can you think of total salary of CEO of Woolworths for the year ended 26 June 2011?

25% 25%25%25%

1.$ 500,0002.$ 1,000,0003.$ 5,000,000

1 2 3 4

4. Above $5M

How can you find the information?Information asymmetry, Voluntary disclosureAnnual reportAnnual report

What is an annual report?

Glossy magazine that contains a lot of descriptive information about the company and the general purpose financial statements.

How to get it?

Financial Statements

The Balance Sheet (Week 2)( ) The Income Statement, (profit & loss, P&L) (Week 2) Statement of Cash Flows (AFM1B will cover in details if you

continue to study Accounting )

Introducing Balance Sheet(1) Shows financial position as of a certain point in time

Creation of income

Assets Liabilities

EquitiesOperating income

Interest expense Creditors

qu es

=

Distribution of income

Investors

Net profit

FinancingInvestment Dividends

Introducing Balance Sheet(2) Assets

Current assets: Converted into cash in 1 year or operating Current assets: Converted into cash in 1 year or operating cycle, whichever is longer

Cash, Account receivables, Inventories, Short-term investments Non current assets

Long-term investment, Property, plant & Equipments, Intangible assets Liabilities Current liabilities Noncurrent liabilities

Stockholders Equity Share capital Retained profits

Introducing Income Statement Shows the results of operation during the period Revenue

Sales revenue Service revenue, fees earned

Expenses Resources or services used to generate revenue Operating and non-operating expenses Includes cost of

goods sold

Revenue Operating expensesOperating income

- Non-operating income and expensesNet profit/loss

Introducing Statement of Cash flows Shows cash flows (inflows and outflows) by activities during the period

Operating activitiesSales, purchase activities Investing activities

Purchase and disposal of non current assetsPurchase and disposal of securities Financing activities

Issuance, retirement of bondsIssuance of stock

Cash flows from operating activities xxxCash flows from investing activities xxxCash flows from financing activities xxx

Change in cash xxxCash, beginning balance xxxCash, ending balance xxx

The key financial statements?

Balance Sheet Resources and Claims

Income Statement Profitability

Cash Flow Statement Receipt and payment of cash

(The next 3 slides are extracts from your textbook view Appendix Woolworths Financial Statements p.709 in your T&G textbook to view the following slides in more detail)

Key principles: Double entry book-keeping What does double entry accounting achieve? For every transaction, there are two sides i.e. there is a

source for every resourcesource for every resource.

RESOURCES = SOURCES Money must come from somewhere--it doesn't just

"appear. A company has to find the money to fund resources.

Double-entry accounting is a method of record-keeping that lets you track:

where the money comes from and where it goes.

Summary

Resources = Sources

What we have What we owe What we contributed= +

Assets Liabilities Shareholders Equity= +

Example

You purchase one bed apartment at $500,000 on 1/7/2011 and rent it1/7/2011 and rent it.

Financing source: Your own money $100,000, Borrowing from bank $400,000

Rent revenue (cash) $400/week, Interest expense (cash) $200/week, Tax expense (cash) $1000/year

Prepare B/S as of 1/7/2011

Financial statement assumptionsFinancial statement assumptions include:

accounting entity accounting period monetary historical cost going concern materiality.

Accounting entity assumption

The entity for which financial statements are prepared Activities of the entity are separate from those of its

owners/members

Includes, but not limited to, legal entities Economic entity a group of entities where the goals of

the controlling entity are pursued:the controlling entity are pursued:

e.g. companies, partnerships, funds, associations, public sector bodies.

Accounting Period assumption

Life of business divided into discrete time periods of equal length to determine financial performance and positionlength to determine financial performance and position.

Production of regular, comparable financial statements.

Monetary assumption

Universally accepted medium of exchange. Measure economic activity by a common denominator.

Historical cost assumption

Transactions are initially recorded at their originalTransactions are initially recorded at their original cost.

Treats assets in terms of their use rather than for resale.

Going concern assumption

Assumes continued operation of accounting entity into foreseeable futureforeseeable future

There is no intention or need to liquidate Produces demand for financial information during life of

entity

Materiality assumption

A sub-factor of relevance A piece of information is said to be material if its

omission or misstatement could influence the economic decisions of users made on the basis of the financial statements

No set rules on determining materiality (auditors use 5% as a guide)5% as a guide)

Financial statements in $million (see Woolworths example in the Appendix)

In profit measurement, private transactions of owners are not taken into account. What

assumption/concept underlies this procedure?25% 25%25%25%

1.Materiality 2.Monetary concept 3.Accounting period

1 2 3 4

4.Accounting entity

Take away and coming upnext week!

Accounting entity assumption, accounting period assumption Balance Sheet Balance Sheet

Assets Liabilities Shareholders equity

Income StatementRevenue (flow of income generated by selling goods or services) Revenue (flow of income generated by selling goods or services) Expense (flow of expenses incurred in providing the goods or services

for sale)

Cash. Vs . Accrual Profit