ACCOUNTING AND GOVERNANCE – LECTURE 1 Role of accounting: Accounting is language of all businesses. Primary function of accounting is to provide financial information for decision making • Management accg provides info for decision making within business • Financial accg provides info to assist external users’ decisions making Management Accounting vs. Financial Accounting Use of accounting information Diverse roles of accountants • Commercial accountants: o Work in industry and commerce o Undertake roles eg. Management, financial accounting • Public accountants: o Provide professional services to public and work in range of offices, small to multi-national o Auditing is primary service o Taxation and advisory services • Gov accountants: o Employed by local councils, state, fed gov o Variety roles eg. Financial accounting and auditing • Not-for-profit accountants: o Work in not-for-profit sector o Engage in planning, decision making, preparing financial and management reports for both internal external users Major forms of business organisation • Sole proprietorship (sole trader): owned by one person eg. Restaurants, dentist • Partnership: owned by more than one individual Eg. Accountants, solicitors, doctors • Company: organised as a separate legal entity and owner by shareholders o Eg. BHP, WESTPAC o Most companies have limited liability
Transcript
ACCOUNTING AND GOVERNANCE – LECTURE 1
Role of accounting:
Accounting is language of all businesses. Primary function of accounting is to provide financial information for decision making
• Management accg provides info for decision making within business
• Financial accg provides info to assist external users’ decisions making
Management Accounting vs. Financial Accounting
Use of accounting information
Diverse roles of accountants
• Commercial accountants: o Work in industry and commerce o Undertake roles eg. Management, financial accounting
• Public accountants: o Provide professional services to public and work in range of offices, small to multi-national o Auditing is primary service o Taxation and advisory services
• Gov accountants: o Employed by local councils, state, fed gov o Variety roles eg. Financial accounting and auditing
• Not-for-profit accountants: o Work in not-for-profit sector o Engage in planning, decision making, preparing financial and management reports for both internal external users
Major forms of business organisation
• Sole proprietorship (sole trader): owned by one person eg. Restaurants, dentist
• Partnership: owned by more than one individual Eg. Accountants, solicitors, doctors
• Company: organised as a separate legal entity and owner by shareholders o Eg. BHP, WESTPAC o Most companies have limited liability
Accounting and Governance
"Corporations must provide stakeholders with relevant, reliable and timely information to maintain efficient global capital
markets. Accounting, auditing, and the corporate governance environment are essential components in the flow of information
to capital market participants." (Hutchinson, 2009)
Key Concepts
• Corporate governance
• Accountability
• Stakeholder
• Stewardshi
Stakeholder groups
• Staff/ workers/ trade unions
• Customers
• Government/ regulators
• Industry organisations
• Special interest groups/ NGOs
• Local communities
• Suppliers/ business partners
• Shareholders/ investors
Why is governance important?
• Prevent organisational scandals
• Enhance organisational reputation
• Lower cost of capital
• Protect investors' interest and promote investors' confidence
Accounting for Governance
Accounting is an instrument of governance:
• Accounting info is basis for decision-making
• It helps managers discharge accountability to stakeholders (esp shareholders)
• Accounting tracks a company's financial performance
Concepts and principles
• Monetary principle: requires that the items included in the accounting records must be expressed in monetary terms
• Accounting entity concept: every entity can be separately identified and accounted for
• Accounting period concept: the life of a business can be divided into artificial periods and that useful reports covering
those periods can be prepared for the business
• Going concern principle: the business will remain in operation for the foreseeable future
• Cost principle: all assets are initially recorded in the accounts at their purchase price or cost
• Full disclosure principle: requires that all circumstances and events that could make a difference to the decisions financial
statement users might make should be disclosed in the financial statements
ACCOUNTING FOR LIABILITIES – LECTURE 9
Liabilities
• Definition:
o Present obligation to external party o Future outflow of resources embodying economic benefits o Obligation must have resulted from past events
• Recognition:
o Probable that future economic benefits will flow from the entity o Cost or value can be reliably measured
LIABILITIES CURRENT/ NON-CURRENT
Accounts payable Current
GST collected Current
Loan payable Non-current
Mortgage payable Non-current
Notes payable Current
Revenue received in advance Current
Debentures payable Non-current
Payroll and payroll deductions payable Current
Warranty provision Current
Current vs. non-current liabilities
• Liabilities are displayed in Statement of Financial Position in order of liquidity
• Current liability: an obligation hat can reasonably be expected to be paid within 1 year (or within the operating cycle)
• All other liabilities are classified as non-current
Provisions and contingent liabilities
• Provisions
o Type of liabilities for which the amount or timing is uncertain o Future expected outlays where no present obligation exists are excluded
• Contingent liabilities
o Are possible obligations arising from a past event o Whether or not a liability exists depends on the occurrence (or non-occurrence) of an event, which is often beyond the control of the company
Provisions
• Provisions – liabilities for which the amount of
future sacrifice is uncertain
o E.g. long service leave and warranty • Warranty – obligation of the supplier of g/s to
the purchaser that the product will be functional
for a stated period of time
• There is significant uncertainty in measuring the
future sacrifice because:
o It is conditional upon the customer making a claim
o The costs of satisfying the claim depend on the nature of the fault
EQUITY MANAGEMENT – LECTURE 10
Equity
• Residual interest of the owner/s in the assets (less liabilities) of the entity
• ASSETS – LIABILITIES = NET ASSETS
• NET ASSETS = EQUITY
Types of business entities
• Single proprietorship or sole trader
o Owned by one person o Simple to set up o Common form of business structure o Separate accounting entity, not separate legal entity
• Partnership
o Ownership by two or more partners o Simple to set up o Separate accounting entity, not separate legal entity
• Company or corporation
o Owned by shareholders o Separate accounting entity o Separate legal entity o Limited liability o Protection for owners
Categories of equity in a company
• The equity of a typical company split into 3 major categories
o Share capital - ordinary or preference shares o Retained earnings – represents accumulated profits that have not been distributed to shareholders as dividends
o Reserves – e.g (disclose the nature of purposes of reserves): § General reserve
§ Revaluation surplus
Shareholder rights
• A company is owned by its shareholders
• Different classes of shares carry different ownership rights:
o Ordinary shares o Preference shares
• When a company has only one class of shares they are referred to as ordinary shares
• Ordinary shares have 3 major ownership rights:
o To vote in the election of board of directors at annual general meetings + to vote on actions that require shareholder approval
o To share the company profits through receipt of dividends o To share in assets on liquidation in proportion to their holdings
§ Called residual claim because owners are paid with assets that remain after all claims have been paid • Preference shares have priority over ordinary shares with respect to dividends and claims at liquidation
Dividends
• Dividend – a distribution of profit by a company to its shareholders on a pro rate basis
• Directors determine if dividend is payable and fix amount, payment time and payment method
• Forms of dividends (i.e. cash or other assets or shares):
o Cash o Property o Shares
• Public companies often pay 2 dividends
o Final dividend determined at end of year o Interim dividend paid during the year
Cash dividends
• A cash dividend is a pro rate distribution of profit paid in cash to shareholders
• Companies can only pay a cash dividend if:
o Assets exceed liabilities by more than the amount of dividend proposed o It is fair and reasonable to shareholders as a whole o It does not materially prejudice the company’s ability to pay its creditors
• The board of directors has authority to determine the amount of the dividend
Share dividends
• Share dividend – pro rata distribution of the company’s shares to shareholders
• Total equity does not change because:
o Retained earnings or general reserves decreases, and o Share capital increases
• A share dividend signals that this amount of retained earnings is not available to shareholders as cash dividends
Equity section in statement of financial position
• Equity section of the statement of financial position of a corporation includes;
o Share capital: contributed equity (paid and any outstanding amounts) o Retained earnings: prior profits kept within company and not distributed as dividends o Reserves
FINANCIAL STATEMENT ANALYSIS – LECTURE 11
The need for financial statement analysis
• general purpose financial reports are the main source of financial data to external users
• Investors are a major user group, and base their economic decisions on these reports à therefore important to
understand numbers reported
• Financial statement analysis is necessary because:
o Info expressed in monetary terms is limited of use on its own; comparison is key o It reveals relationship between financial statement items and trends in financial data o It enables assessment of past performance and can be used to forecast performance
Comparative analysis
• Types of useful comparative information:
o Intra-entity basis: comparisons within a single entity (detects changes in financial relationships and trends) o Industry averages: between entities in the same industry (determines position relative to others) o Inter-entity basis: between other entities (indicates competitive position)
• Basic comparative analysis techniques:
o Horizontal analysis: evaluates a series of financial data over time o Vertical analysis: evaluates financial items in relation to a base amount o Ratio analysis: evaluates a comprehensive range of financial relationships representing different aspects of an entity’s activities
Horizontal analysis
• Used to evaluate a series of financial statement data over a period of time
• Analyses increases or decreases that have occurred from a particular base year
• Figures are stated as both dollar amounts and percentages
• Percentages removes the effect of size, so relative magnitude of change is revealed
• One year is selected as base year and then increases or decreases are based on formula:
