test bank

test bank

Chapter 1: Introduction to accounting

 Apply your knowledge

1.1       Provide an example of the different types of activities that would be performed by a management and financial accountant for JB Hi-Fi Ltd.

The management accountant would perform activities such as capital budgeting for future store fit-outs, preparation of budgets and cost-volume-profit analysis for a new business venture e.g. diversifying product range to include books.         working capital management applications

The financial accountant would perform activities such as preparation of financial reports i.e. income statement, balance sheet and the statement of cash flows in accordance with generally accepted accounting principles, which are represented by accounting standards including those issued by both the AASB and the IASB and the Corporations Act.

1.2       What is the difference between a consolidated income statement and a consolidated statement of comprehensive income? Explain with reference to the Qantas Group.

A comprehensive income statement would list the revenue less expenses for Qantas Group.  Expenses would include; fuel, depreciation and amortisation, operating leases, finance costs and income tax expense.

A statement of comprehensive income would include the profit for the year, changes in the fair value of cash flow hedges and exchange differences on translation of foreign operations.

1.3      Carbon accounting is a very important and huge growth area of accounting. Discuss the different stakeholders (and their information needs) that would be interested in the carbon accounting report.

 working capital management applications

	Stakeholder	Information needs
1.	Management	Levels of carbon emissions can provide targets to improve environmental performance, can also be tied to executive remuneration. Significant costs can lead to increased costs and reduced sales.
2.	Investors	Assist in investment decision making. Research has found that firms with higher disclosures of sustainability carbon information can lead to improved financial performance and share price.
3.	General public	Interested in comparing companies to determine if they are managing their carbon risks and reducing emissions.

1.4       The AASB’s role has changed since the introduction of IFRS in 2005.  Most of the Australian accounting standards mandated in Australia are Australian equivalents to IFRSs.  Why do you think Australia has adopted Australian equivalents to IFRS?

  working capital management applications

The Australian standard setter i.e. the AASB has changed its role since the adoption of IFRS in 2005.  It is not solely making accounting standards for use by Australian reporting entities, much of that role is now undertaken by the IASB in its development of IFRS. IFRS adoption means that the AASB can now contribute to the development of global financial reporting standards. Most recently, the AASB provided export support on the IASB’s discussion paper on ‘extractive activities’. Adopting IFRS means that there is a reduction in standard setting costs for Australia. Adopting Australian equivalents of IFRS means that there is still scope for the AASB to tailor the IFRS to meet the needs of Australian entities. For example: certain IFRS standards will be made available to specific Australian entities rather than all Australian entities. Conversely, there will be other IFRS which the intention is for a more narrow group of entities e.g. all listed companies and in Australia it might be applies to both proprietary and limited companies. Adopting Australian equivalents means that there is also the scope to change the wording of certain standards to “fit” the Australian business environment.

 

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1.5       The sustainability report is a recent disclosure by some Australian companies. The Qantas Group’s sustainability report includes disclosures on occupational health and safety, environmental information, customer information including number of on-time arrivals and employee absenteeism. What do you think are the advantages and disadvantages to the company of providing such disclosures?

 

Such disclosures provide a positive signal about the company to various stakeholders such as consumers, investors, general public, employees and suppliers. The disclosures can provide information to investors to determine the future of an entity and to assess the future cash flows for dividends and the possibility of capital growth of investment. Employees can use the information to ascertain job security and future promotional opportunities.  Suppliers of the entity can use the information to determine an entity’s ability to repay debt associated with purchases.

 working capital management applications

 

1.6       The historical cost nature of the annual report is seen as being a limitation of financial accounting information. What do you think are the advantages and disadvantages of using historical costs? Can you think of any alternative ways of measuring assets that my provide advantages over using historical cost?

  working capital management applications

Historical cost accounting requires that items in the annual report such as assets are reported at their original cost. This has various advantages. Historical costs are seen as being reliable figures where there has been evidence of the actual price e.g. invoice, receipt. Other methods of valuation are not always reliable, as management can use their discretion (sometimes opportunistically) to arrive at the value which could be detrimental to the firm.  Disadvantages of using historical costs are that they may not be relevant and for that reason may not reflect the real value of the firm. Lenders most likely would be interested in the historical cost of Balance Sheet items and if there are any impairment losses. Other alternative methods include market value for assets such as land. For assets such as inventory, the net realisable value would be worthwhile knowing (expected selling price less any costs of selling).

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Comprehension Questions

1.7       What is a business transaction and how does it relate to the accounting process? Illustrate the concept of a business transaction with five examples relating to a provider of Chinese therapeutic massages.

 

A business transaction can be defined as external exchanges of resources between the entity and another entity or individual that affects the assets, liabilities and owners’ equity items in an entity. The accounting process is the identifying, measuring and communicating of economic information about an entity to a variety of users for decision-making purposes. The first component of the process is the identification of business transactions which are then measured and communicated to the different users of financial reports.

Business transactions for a provider of Chinese therapeutic massages include the following:

1. The contribution of capital by the owner to commence the business. This transaction would increase cash (asset) and increase capital (equity).
2. The purchase of equipment (massage tables, massage chairs) on credit. This transaction would increase equipment (asset) and increase creditor (liability).
3. The payment of building rent. This transaction would decrease cash (asset) and decrease profit (equity).
4. The purchase of office equipment for cash. This transaction would increase office equipment (asset) and decrease cash (asset).
5. Withdrawal of business funds by owner. This transaction would decrease cash (asset) and increase drawings/decrease capital (equity).

 

1.8       Differentiate between financial and management accounting. Give an example of how management accounting reports would be incorporated into financial accounting reports.

 

In differentiating between financial accounting and management accounting it is important to consider the users of financial information — both internal and external users. Financial accountants prepare and report information for external users (for example prospective investors or the tax office) and as such are subjected to regulation from GAAP, the Corporations Act and in some cases the ASX through their Listing Rules. Management accountants are concerned with the effective use of an entity’s resources, and in so doing assist the manager/s (i.e. internal users) of the entity in achieving their goal of enhancing customer and shareholder value. Therefore the management reports generated need to be up to date to be effective. Regulation in management accounting is much less formal and in some areas rules are basically non-existent. Ultimately there will be interaction between the financing accounting and management accounting areas. The information provided by management accountants will provide information for internal users that will be reflected in the financial reports used by the external users. See Table 1.3, page 10, for a detailed list of the differences between financial and management accounting.

 

 

 

 

 

1.9       Describe how accounting information helps shareholders and lenders to make decisions concerning the operations and performance of the entity.

 

Users of accounting information (both internal and external) require accounting information to assist them in the decision making process. External users such as investors, employees, banks, suppliers, government agencies (e.g. ATO) all have their own specific information needs. A potential investor will require past profits and future profit projections, as well as future growth prospects, to determine if the entity is a good investment proposition or not. Lenders will be seeking details of the level of risk it is exposing itself to by lending money to the entity plus the prospects of the entity repaying its’ debt.

1.10     Provide an example of a company that would produce a GPFS and a company that would produce a SPFS. Who are the likely stakeholders of both types of entities?

An example of a company who would produce a GPFR would be Qantas Group, Qantas Group has various stakeholders such as investors, employees, customers, supplies, banks, regulatory bodies that would all require important information from the Qantas annual report. A company that would prepare a SPFS could be an entity such as a local government association. This type of entity would provide a set of financial statements in accordance with the local government code of accounting practice and financial reporting and relevant Australian accounting standards. The association would not have a diverse range of stakeholders and a special purpose financial statement would fit the requirement of its stakeholders such as lenders and regulatory bodies.

1.11     Refer to the reality check ‘A Glimpse into the future of the accounting profession’. What are the major factors influencing the nature of accounting work?

The major factors influencing accounting work include the following:

• Technological change and globalisation – lower value transactional work is expected to be fully automated and off shored to lower-cost markets. Therefore, tasks that involve human ingenuity, creativity and innovation will be more in demand.
• Retirement of baby boomers – from 2011 onwards, people coming into accounting will be from a different generation and also have different values. There will possibly be less career accountants and more mobile workers who have expertise globally and across different entities.
• Change in the structure of accounting firms – more consolidations in accounting firms and the importance of mid-tier firms who are likely to experience restructuring in terms of services offered to clients.

 

 

 

 

 

 

 

 

 

1.12     List six stakeholders of accounting information. Describe the information requirements for each one; for example, lenders would need information regarding the business’s ability to repay debt and service a loan.

 

STAKEHOLDERS:                                        INFORMATION NEEDS:

Internal Stakeholders:

Managers                                 require information to determine make or buy decisions or whether to expand or close down or whether to change banks.

External Stakeholders:

Investor                                   seek information on capital growth prospects and future dividend payments.

Lenders                                   need information on the ability of the entity to repay its loans.

Suppliers                                 want to know can the entity pay for its supply purchasers.

Consumers                              are interested in the life expectancy of the entity and the entity’s ability to provide appropriate goods and services.

Government agencies              for example, ATO — require information to determine the amount of tax liability of the entity.

Regulatory bodies                   for example, ASX and ASIC need to know whether the entity is following the ASX listing rules and the rules and regulations of the Corporations Act.

 

 

1.13    One of the limitations of accounting information is the historical nature of the financial statements. Provide an example of an asset from the balance sheet of Qantas Ltd where the asset’s historical cost may not reflect its current value.

One example of an asset where the reported historical cost may not reflect its current value is property, plant and equipment. The note to the financial statements state that the property, plant and equipment are stated at cost less accumulated depreciation and impairment (if any). This amount may not reflect its current value. Impairment tests allow for the asset to be written down if its carrying amount exceeds its recoverable amount. However, there is no provision for any revaluation upwards.

 

 

1.14     Darby Davis is considering purchasing a sushi bar in the inner Brisbane suburb of Paddington. Discuss three important issues that Darby would need to talk over with her accountant before she purchases the sushi bar.

Sarah should seek the advice of her accountant regarding the following:

1. Evaluate the purchase — from the accountant’s experience (or with assistance from his/her professional association) advice can be obtained on whether the purchase is a good buy or not e.g. through comparisons of similar recent sales; analysing past financial reports.

2. Prepare budget forecasts e.g. on sales — i.e. target sales of food necessary to make the purchase worthwhile or to compare whether it is better financially to remain in your present job and make passive investments with your capital. This will enable a prospective buyer to evaluate if such sales are feasible by her.

3. Explain the personal qualities required in owning such a business e.g. long hours; tedious work; customer relationships; impact on family life etc.

 

 

1.15     What are the benefits of professional association membership for accounting graduates?

 

Benefits include:

• further education through the CPA, CA and MIPA programs
• technical assistance on accounting standards and the Framework
• support for graduates through the resources on the web, seminars and continuing education programs
• guidance in relation to the code of ethics for professional accountants

1.16     Give an example of the role accounting information plays in the investment planning for a retired cricketer and a retired public servant.

 

Accounting provides us with a language to help understand the decision making process associated with investment planning. A retired cricketer would use accounting to initially work out a strategy for investing earnings and then to help keep track of his/her investments which could include property, shares, luxury cars etc. A retired public servant would have a superannuation fund and possibly other investments. Accounting knowledge would assist in helping to interpret the annual returns and fees from a superannuation policy and the performance of the assets invested by the superannuation fund. It could also assist in choosing investments that would provide most benefits to the retiree

 

 

1.17     What are some of the opportunities and threats for the accounting profession resulting from the large number of corporate collapses in the early 2000s?

 

The large number of corporate collapses in the early 2000s and throughout the last decade provides many opportunities for the accounting profession. Such as:

• employment in areas such as forensic accounting, insolvency, taxation, auditing
• demand generally for accounting and audit services
• demand for accountants with experience working with global accounting standards
• job opportunities overseas with the Big 4 accounting firms and multinational entities

 

Threats

• Accounting professions’ work under more scrutiny
• There has been an increase in litigation against accountants and auditors
• The demise of some accounting firms e.g. Arthur Andersen

 

 

 

 

1.18     Compare and contrast the roles of the Financial Reporting Council (FRC) and the Australian Securities Exchange (ASX).

 

The FRC is a statutory body made up of key stakeholders from the business community, the professional accounting bodies, governments and regulatory agencies. The FRC’s role is to oversee the accounting and auditing standard-setting process for both the public and private sectors in Australia. The ASX contributes to company regulation in Australia as it regulates listed entities on the stock exchange through its Business Rules and Listing Rules which are in addition to the regulations in the Corporations Act.

 

 

1.19     What is the difference between the Conceptual Framework’s fundamental qualitative characteristics of relevance and faithful representation? Can you think of any trade-offs between relevance and faithful representation?

 

Relevance implies that the information should have predictive and confirmatory value for users in making and evaluating economic decisions. Faithful representation implies that the information fully represent the phenomena it purports to represent. This means that the financial information will be complete, neutral and free from error.

A trade-off can occur between relevance and faithful representation. An illustration of this would be the accounting practice of estimating doubtful debts expense. The process of estimating doubtful debts expense is relevant to the decision making process. It is necessary to determine an estimate so that revenues for the period can be appropriately matched with the expenses for the period. However, if you estimate doubtful debts expense the estimate that you use does not faithfully represent the actual amount of bad debts expense i.e. is unlikely to be an amount free from error. However, the process of estimating the expense is useful to the decision maker.

1.20     How can the professional accounting bodies assist in standard setting?

Professional bodies such as CPA Australia and the ICAA provide feedback on exposure drafts and forward any comments on to the AASB. They also inform their members of any accounting standard developments through newsletters and by conducting Continuous Professional Education (CPE) sessions. The professional bodies’ websites provide on-going advice and information on a range of topics including the adoption of IFRS, the Framework and compliance issues.

1.21     Describe the major purpose of the ASX. What types of information does it provide for a novice investor?

The major purpose of the ASX is to provide an orderly and fair market in listed companies’ shares and securities. It also regulates companies through its Business and Listing Rules. The ASX Listing Rules govern the procedures and behaviour of all ASX listed companies and listed trusts.

Three examples of Listing Rules are:

Chapter 5: Additional reporting on mining and exploration activities. This Listing Rule concerns the mining and exploration industry sector and the additional disclosures they must make such as details of the mining production and development activities and details of exploration activities.

Chapter 17: Trading halts, suspension and removal. This Listing Rule explains the information that an entity must provide to the ASX if there is going to be a trading halt. Such as reasons for the halt and how long it will last.

Chapter 14: Meetings. This Listing Rule outlines the ASX requirements for meetings such as general meetings and directors’ meetings.

 

Other information that it provides for a novice investor includes tutorials on how the sharemarket works; learning how to trade in the sharemarket and information on developing an investment strategy.

 

 

1.22     What is the impact of the qualitative characteristic of ‘materiality’ on the preparation of the financial statements?

 

The qualitative characteristic of ‘materiality’ is another important assumption in accounting.  According to the accounting and legal professions, material information is that which affects the decisions made by users of the financial reports in which the information is disclosed. Determining a material item should include a quantitative and qualitative evaluation of that item. The factors that need to be considered are type of entity, size of entity and the industry that the entity is operating in. Significant professional judgment is necessary. The impact of this characteristic on the preparation of financial statements is that information is only disclosed if it affects the decisions made by users of financial reports. Therefore, in financial reports amounts are rounded up to the nearest thousand or ten thousand. Individual assets are not listed in the Balance Sheet – the notes to the financial reports would provide a description of assets under each class of asset on the Balance Sheet.

1.23     The reality check ‘New mechanisms eyed by FASB, IASB in long march toward global comparability’ on pp. 11-13 looks at issues associated with the United States convergence with IFRSs.  What do you think are the advantages and disadvantages of globalised financial reporting?

The advantages of globalised financial reporting include; a single set of global standards, greater consistency in financial reporting, cost savings in producing one set of reports and greater transparency in financial reports.

The disadvantages of globalised financial reporting could be the costs associated with all applicable entities adopting global standards. There are two types of costs: (1) information and processing costs and (2) potential proprietary costs.  For some entities there will be additional costs associated with providing information complying with global standards and some entities may have to disclose more information to comply with the standards and this potentially could involve the release of commercially sensitive information to the market (e.g. additional disclosures on business and geographic segments of operations).