Post on 02-Jun-2018
transcript
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
1/42
The accounting equation and the
analysis of transactionsBEA1007 Accounting II
Dr Petros Vourvachis
p.vourvachis@exeter.ac.uk
Ofice !"# 1.$%& hours'
(ri)a*s 11+1
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
2/42
2
About today
Overview of the regulatory frameworkin the UK and of the development ofinternational accounting standards
Discussion of the accounting equation,with particular objectives to
! define the elements and theirrecognition requirements in financial
statements, and,! consider the effects of transactions onthe accounting equation
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
3/42
Many national dierences in
FA Reasonsfor differences in financial reporting include"but are not limited to#! $he character of the national legal "and ta%# system
! $he way in which industries are financed, which affects the
&relevance' of the provided information! $he e%istence of a strong accounting profession
! &(ccidents' of historye)g) scandals surrounding corporatefailures, colonisation, memberships of organisations such as*U
! +anguage $hese have considerable costsfor "particularly
international# companies
-eed for global standards ".U$ harmonisation vs)
standardisation/# 3
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
4/42
0egulatory framework is a key element to ensurerelevant and reliable financial reporting "i)e) meet userneeds#
1((2 includes all the rules, from whichever source,that govern accounting! +ocal or national legislation
! "3nter#national accounting standards
! 4tatutory requirementsin other countries "e)g) 4O5#
! 4tock e%change requirements! UK 1((2 vs) i1((2/
6ithout agreed regulatory body "i)e) 3(4.# andframework of principles "i)e) the 78# there is no way toenforce 1((2 compliance !room forcreativeaccounting!
Need for regulation
4
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
5/42
3t has been defined as9use:abuse of accountingtechniques:principles toachieve financial results
which, intentionally, donot provide a true andfair view;
&True and fair view' has
no official definitionmanagers should followthe rules to show fairlythe financial position andperformance
Creative accounting
5
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
6/42
( number of motivationsboost profits for personal
gain, manage gearing,
smooth profits, reduce ta%,
create reserves to be used inthe future, etc)
$here is a long history of
accounting scandals, which
have initiated a series of
accounting standard setting
bodies' responses
Creative accounting
6
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
7/42
1*7:(*3 < 2ergamon 2ressscandals forced the professionin =>?>, via 37*(6, toannounce that there was apressing need for the formation
of a standard setting body)4ubsequently, (447 "=>@A#,
(47 "=>@?#, 44(2s etc) *nron and 6orld7om initiated
U4 4arbanesBO%ley (ct "CAAC#
! greater power to 4*7, andchanges to the 807, revisionson the 7ombined 7ode forcorporate governance etc)
6ays out accounting ethics/2rinciples vs) rules/
Creative accounting
7
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
8/42
8
Accounting scandals
are also evident in the natural world
! http::athensvoice)gr:article:videoBgallery:fun:E78
EFAE7*E.>E7*E.GE7*E.(E7*E.8E78EFHE7*E(8E7*E.DE7*E.8E78EFCBE7*
E.(E7*E..E7*E.HE78EF?E78EFIE78
EF=E78EF7E7*E.DE7*E.>
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
9/42
Principles vs. rules
9
( principles-based system"such as theone adopted by 3(4.# works with acertain set of established principles! $he 78 provides the background of principles
within which standards can be developed, withthe aim to eliminate conflict
! (ny departure can be judged based on whetherit is consistent with 78 principles
( rules-based system"such as that of8(4.# regulates for issues as an whenthey arise ! uses many detailed standards
(dvantages and disadvantages in both
http://archive.iasb.org.uk/index.asphttp://archive.iasb.org.uk/index.asp8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
10/42
2rincipleBbased system have beenwith us for a while) 2rincipleBbased3804s are running ahead of 78
0ulesBbased system deals withissues that arise between reviews! the use of precise standardshowever makes it relatively easierto get around them
3(4. and 8(4. are working on ajoint 78 combining the twoapproaches! (im is 78 to be principlesBbased
and internationally converged
Principles vs. rules
10
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
11/42
3ndependent, privatelyBfunded standard setting body"based in +ondon#
IASC Foundationis parent company of 3(4. "based inU4#
3(47 was established in =>@G and 3(4. assumedstandard setting responsibility from it in CAA=
Standards Advisory Council"now called 3804 advisorycouncil! http::www)ifrs)org:$heJorganisation:(dvisoryJbodies:$heJ4(7:
4tandardsJ(dvisoryJ7ouncil)htm# International Financial Reporting Interpretations
Committeereviews issues that could receive divergenttreatment! http::www)ifrs)org:owJweJdevelopJ3nterpretations:owJweJd
evelopJ3nterpretations)htm
history
11
http://archive.iasb.org.uk/index.asphttp://archive.iasb.org.uk/index.asp8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
12/42
structure
12
http://archive.iasb.org.uk/index.asphttp://archive.iasb.org.uk/index.asp8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
13/42
$he 3(47 issued 4 IASsas on = (pril CAA=
$heir successor, the 3(4. has issued IFRS
to date! http::www)iasb)org:3804s:3804)htm
Other current projectsinclude consolidation, fair
value measurement, emissions trading schemes
etc
! http::www)ifrs)org:7urrentJ2rojects:3(4.J2r
ojects:3(4.J6orkJ2lan)htm
and current standards
13
http://archive.iasb.org.uk/index.asphttp://archive.iasb.org.uk/index.asp8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
14/42
=) ( needfor new standard is identified
C) 3(4. publishes discussion document
G) 7ommentand reviewprocess follows
I) 3(4. publishes e%posure draft "*D# -ational standard setters also publish *Ds and can vote on
3(4.'s preferred solution
H) 3(4. issues 3804
"http::www)ifrs)org:owJweJdevelopJstandards:owJweJde
velopJstandards)htm# ! could take a long time
setting
14
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
15/42
4tandards reduce variations
2rovide focal point for debate
Obligedisclosure
+ess rigidthan legislation
Organisations disclose moreinformationthan they would otherwise
have done e)g) 3(4GG *24
pros
15
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
16/42
= set of rules may be inappropriate !what if it has a fundamental flaw/
+obbyingstill e%istent) *)g) 8(4=> oiland gas was suspended
4ome national standards are not basedon 78) 3804 are! but how about developing 3804 and 78 at
the same time/
Lore rigidity less fle%ibility
cons
16
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
17/42
ow do we get international consensus/! *)g) developing countriesbelieve 3(4. is dominated
by U4
UK:U4 model focuses on investor reporting,*uropean model of ta%
*urope still issues relevant directivesand U4and Mapan have been reluctantto accept 3804s,although joint projects with 3(4. have beenlaunched to achieve convergence! once convergence is achieved, who's going to be
responsible for issuing global accounting standards/17
political problems
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
18/42
"#issue a number of relevantdirectives "e)g) I,@,F#
! (ll listed entities in *U states must use
3804 in their consolidated accounts from
=:=:CAAH) UK +tds may chose to adopt3804 or UK 804
#$7ommission and 7entre on
$ransnational 0eporting 7orporations
gather info re activities and reporting ofLultiBnational 7ompanies "L-7s#
"http::unctc)unctad)org:asp%:commissi
on$itle)asp%#
18
ther organisational in!uences
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
19/42
International Federation of Accountants"38(7# is a private sector body establishedin =>@@ with over =AA professional bodies"www)ifac)org:#! (im is to issue international standards on
auditing, management accounting, ethics,education and training, e)g) 38(7 Code of Ethicsfor Professional Accountants"**@, p) =?H#
%"C&"www)O*7D)org# was established in=>?= and 9provides a setting wheregovernments compare policy e%periences,
seek answers to common problems,identify good practice and coordinatedomestic and international policies;)! (im is to achieve the highest sustainable
economic growth and employmentand a risingstandard of living in member countries whilemaintaining financial stability and, thus, to
contribute to world economy 19
ther organisational in!uences
http://www.oecd.org/home/0,3305,en_2649_201185_1_1_1_1_1,00.htmlhttp://www.ifac.org/http://www.ifac.org/8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
20/42
Channel Setting Instructions
=) 2ress the 97h; or &1o' button
C) *nter the channel number
G) 2ress the 97h; or &1o' button
I) 2ress and release the N=:(N button)
$he light should flash amber to confirm)
20
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
21/42
"et#s chec$ if it %or$s&
' (o you recognise this man)
*. +es
,. No"another not particularly interestingquestion 2etros#
21
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
22/42
-n the /0 the level of disclosure in 1nancial statements
is primarily in!uenced by a combination of2
a3 accounting standardsb3 Financial 4ervices Authority listing rulesc3 employers# desires to give additional information to
their employeesd3 legislation0 such as the Companies Act *567
=) a#, b# and c#
C) a#, b# and d#
G) a# and b#
I) b# and d#
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
23/42
Arguments in favour of international accountingstandards include to2
a3 improve comparabilityb3 increase o%ners# interestc3 increase competition amongst auditorsd3 improve user con1dence in 1nancial information
=) a#, b# and c#
C) a#, b# and d#
G) b# and c#
I) a# and d#
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
24/42
8hich of the follo%ing bodies no% issue -nternational
Financial 9eporting 4tandards 2
a3 the -nternational Accounting 4tandards :oard ;-A4:3b3 the -nternational Accounting 4tandards Committee;-A4C3
c3 The -nternational Federation of Accountants ;-FAC3d3 The rganisation for
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
25/42
8hich of the follo%ing is a correct
statement of the accounting equation)
=) (ssets equals liability equals equity
C) (ssets equals liabilities minus equity
G) (ssets minus liabilities equals equity
I) (ssets plus liabilities equals equity
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
26/42
26
The accounting equation is&
3t can be reBarranged so that Assets ' (iabilities )"*uity)$his highlights the fact that equity represents the residualinterest of the owners after deducting all liabilities of thebusiness)
(nd can further be e%panded when you distinguish acrosstypes of these elements "as reflected on the .alance sheet# $on current assets + current assets ' current liabilities ' non
current liabilities ) e*uity
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
27/42
8hich of the follo%ing does the -A4: regard as the
essential features of an asset)
a3 the item is acquired at a cost %hich can be reliablymeasuredb3 rights to future economic bene1ts from the item
must be legally enforceablec3 rights to future economic bene1ts from the itemmust be controlled by the entity
=) a# and c#
C) b# only
G) a#, b# and c#
I) b# and c#
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
28/42
28
Assets2 de1nition and recognition
&a resource controlledby the entity as a result of pasteventsand from which future economic benefitsare
e%pected to flow to the entity'
! 7an we restrict access/! as an agreement or event taken place that has resulted in
the organisation obtaining control of the item/
! 6ill cash be generated in the future/
0ecognised if
! 3t is probablethat the future economic benefits will flow to the
entity, and,
! $he asset has a cost or value that can be measured reliably
7an be current or nonBcurrent)
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
29/42
8hich of the follo%ing possible descriptions of items
that appear in balance sheets are correct)
a3 Cash0 described as current assetb3 -nventory0 described as non'current assetc3
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
30/42
(lso termed Fi,ed assets, these are assets eld for
continuing usewithin the business, -O$ held for
immediate resale) $hey include
20O2*0$, 2+(-$ < *PU32L*-$ : $(-13.+* 835*D
(44*$4"e)g) land, buildings, machinery, equipment,
computers, fi%tures < fittings, motor vehicles#
835*D (44*$ 3-Q*4$L*-$4! a holding in the
securities of another organisation that is intended tocontinue rather than be sold
3-$(-13.+* 835*D (44*$4B "e)g) goodwill, brands,
research and development#
./
30
Non'current assets
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
31/42
Assets not eld for continuing use, normally realised
within one year of the balance sheet date) $hey include
3-Q*-$O03*4 : 4$O7K4e)g) goods for resale, workin progress, raw materials
$0(D* 0*7*3Q(.+*4 : D*.$O04"amounts owing
from customers#
O$*0 0*7*3Q(.+*4 : 20*2(L*-$4"e%penses
already paid for the following period#
7(4 < 7(4 *PU3Q(+*-$4"held in bank accounts
< notes < coins# ! a slide on asset recognition
.
31
Current assets
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
32/42
8hich of the follo%ing does the -A4: regard as the
essential features of a liability)
a3 the amount of obligation must be certainb3 the obligation must be legally enforceablec3 settlement of the obligation must involve an out!o%
of cashd3 the obligation must arise from past events
=) a# and b#
C) d# only
G) a# and d# only
I) c# and d#
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
33/42
33
"iabilities2 de1nition andrecognition
&a present obligationof the entity arising from pastevents, the settlement of which is e%pected to result inan outflow from te entityof resources embodyingeconomic benefits'
! 3s there a legal obligation or any other as a result ofcommercial practice/
! 6ill cash or other resource leave the business/
0ecognised if
! 3t is probablethat an outflow of resources embodyingeconomic benefits will result from the settlement of a presentobligation, and,
! $he amount at which the settlement will take place can bemeasured reliably
7an be current or nonBcurrent)
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
34/42
(lso termed Creditors0 amounts falling due witin one
year, and include
.(-K OQ*0D0(8$4
$0(D* 2((.+*4 : $0(D* 70*D3$O04B owing to
suppliers
O$*0 2((.+*4 : (770U*D *52*-4*4B not yet
invoiced
$(5 2((.+*
D3Q3D*-D4"declared but not yet paid to shareholders#20OQ343O-4"estimates of uncertain liabilities that are
thought likely to be paid#
.4
Current liabilities
34
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
35/42
(lso termed Creditors0 amounts falling due in
more tan one year, and include
+O(-4B that are repayable in more than one yearfrom the balance sheet date
20OQ343O-4B for uncertain liabilities that are likely
to be paid in more than one year from the balance
sheet date
.1
35
Non'currentliabilities
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
36/42
(lso termed &Capital and reserves' or &%wnersip
interest') 4ometimes it includes nonBequity shares e)g)
preference shares, in addition to
4(0* 7(23$(+B the -OL3-(+ Q(+U* of shares
issued by the company since its formation
4(0* 20*L3ULB the amount received by a
company when issuing shares above nominal value
0*Q(+U($3O- 0*4*0Q*B arises when fi%edassets
are revalued to replacement cost or market value
0*$(3-*D *(0-3-14! accumulated profits
.2
36
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
37/42
37
4ome e=amples of transactions
&and their eect on accounting equation2
Owner invests fundsin the business ("Jcash# R + J *"Jcapital#
.usiness borrows fundsfrom lender ( "Jcash# R + "Jloans# J *
.usiness buys inventory for cash ("J inventory ! cash# R + J *
.usiness buys inventory on credit
("J inventory# R +"J creditors# J * .usiness receives cashfrom a customer
("Jcash ! debtors# R + J *
Owner withdraws fundsfrom the business
("B cash# R + J *"B capital#
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
38/42
4unrise +td is set up in 4eptember CA=A, "=#raises 3////
from its shareholders and puts the money into a new bank
account) During the month it
56 #sesS?,AAA of its bank account to buy a delivery van
.6 7uysinventory for SG,AAA on credit agreeing to pay thesuppliers in October
46 Ta8es outa loan from the bank for S?,AAA to be repaid in
CA=H
16 Sellsgoods costing S=,AAA for SC,AAA on credit
26 7uysa computer for SHAA, paying by cheque
0equired
Demonstrate the effect of these transactions on accounting
equation and prepare a .alance 4heet as at GA:A>:CA=A)
.9
A simple e=ercise
38
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
39/42
.
The accounting equation
No. Total Assets = Total Liabilities + Equity
Non-current
Assets
CurrentAssets
Non-current
liabilities
CurrentLiabiliti
es
Capital Prot
!. + !"#"""
$ban%&
+!"#""
"
'. +(#"""
$)an&
- (#"""
$ban%&*. +*#"""
$in)entory&
+*#"""
$creito
r&
,. +(#"""
$ban%&
+(#"""
$loan&
. -!#"""$in)entory&
+'#"""
$ebtor&
+!#"""
(. +""
$coput
er&
-"" $ban%&
Tota ( "" !* "" ( """ * """ !" """ ! """
39
h l h ; 3
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
40/42
4/
The :alance 4heet ;-3
Sunrise Lt
/alance sheet as at *" Septeber '"!">
Non-current assetsProperty0 Plant and
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
41/42
4
The :alance 4heet ;--3
Current liabilities
Trade and other payables $*#"""&
Current ta= payable $-&
Total current liabilities $*#"""&
Non-current liabilities
"ong'term borro%ings $(#"""&ther provisions $-&
Total non-current liabilities $(#"""&
Total liabilities $0#"""&
Net assets !!#"""
Equity
4hare capital !"#"""
9etained earnings !#"""
Total Equity !!#""" 41
8/9/2019 Week 2 the Accounting Equation and Analysis of Transactions
42/42
42
-ndependent study for ne=t%ee$
2art of chapter C "not all#,
2ages
(ttempt self assessment question
C)= "on p) HA ! answer is on p) I@C#
7hapter = from Lelvile "on *+*#
omework essay
94tandardisation is the only way forward
for 8inancial 0eporting;) Discuss this
statement in the light of efforts that have
been made to harmonise company law
and financial accounting in *urope)
.2 49