Accounting: Business Reporting for Decision Making

593 Pages·2020·15.265 MB·English

by  Jacqueline Birt, Keryn Chalmers, Suzanne Maloney, Albie Brooks, Judy Oliver, David Bond

BIRT | CHALMERS | MALONEY | BROOKS | OLIVER | BOND
Accounting
BUSINESS REPORTING FOR DECISION MAKING
7TH EDITION
Accounting:
business reporting
for decision making
SEVENTH EDITION
Jacqueline Birt
Keryn Chalmers
Suzanne Maloney
Albie Brooks
Judy Oliver
David Bond
Seventh edition published 2020 by
John Wiley & Sons Australia, Ltd
42 McDougall Street, Milton Qld 4064
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© John Wiley & Sons Australia, Ltd 2014, 2017, 2020
© Jacqueline Birt, Keryn Chalmers, Suzanne Byrne, Albie Brooks, Judy Oliver 2012
© Jacqueline Birt, Keryn Chalmers, Diana Beal, Albie Brooks, Suzanne Byrne, Judy Oliver
2005, 2008, 2010
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10 9 8 7 6 5 4 3 2 1
BRIEF CONTENTS
Preface x
Abouttheauthors xiii
1. Introductiontoaccountingandbusinessdecisionmaking 1
2. Accountinginsociety 45
3. Businessstructures 79
4. Businesstransactions 109
5. Statementoffinancialposition 138
6. Statementofprofitorlossandstatementofchangesinequity 190
7. Statementofcashflows 233
8. Analysisandinterpretationoffinancialstatements 283
9. Budgeting 336
10. Cost–volume–profitanalysis 370
11. Costingandpricinginanentity 408
12. Capitalinvestment 440
13. Financingthebusiness 462
14. Performancemeasurement 491
Appendix 529
Index 571
CONTENTS
Preface x ReserveBankofAustralia(RBA) 47
Abouttheauthors xiii AustralianPrudentialRegulationAuthority
(APRA) 47
CHAPTER 1 AustralianTaxationOffice(ATO) 48
Introduction to accounting Othergovernmentagencies 48
2.2 Australianandinternationalaccounting
and business decision
standards 49
making 1
FinancialReportingCouncil(FRC) 49
Chapterpreview 2 Developmentofaccountingstandards 49
1.1 Theaccountingprocess 2 RegulationinNewZealand 50
1.2 Accountinginformationanditsrolein Roleofprofessionalassociations 51
decisionmaking 3 2.3 RoleoftheConceptualFramework 52
1.3 Financialaccountingandmanagement Objectiveoffinancialreporting 52
accounting 5 Qualitativecharacteristicsoffinancial
reports 52
1.4 Roleofaccountinginformation
Costconstraintonfinancialinformation 54
inbusinessplanning 8
Definitionandrecognitionoftheelementsof
Benefitsofabusinessplan 8
financialstatements 54
Operationofthebusiness 8
2.4 Corporategovernance 55
Evaluationofthebusinessplan 9
Whatiscorporategovernance? 55
1.5 Globalisationofaccounting 9
2.5 Corporategovernanceprinciples,
1.6 Digitaldisruptionandtheimpacton
guidelinesandpractices 56
accounting 9
2.6 Ethicsinbusiness 58
1.7 Businesssustainability,drivers,
Ethicalphilosophies 58
principlesandtheories 10
2.7 Professionalcodesofethicsandethical
Theoriesofbusinesssustainability 12
decision-makingmethods 61
1.8 Reportinganddisclosure 13
Ethicaldecision-makingmethods 63
Triplebottomline 14
2.8 Limitationsofaccounting
Beyondsustainabilityandtowards
information 64
abundance 15
Potentialcostsofprovidingaccounting
Roleofaccountantsinsustainability 16
information 65
Integratedreporting 16
Summaryoflearningobjectives 67
1.9 Careersinaccounting 17
Keyterms 68
Newopportunities 17
Applyyourknowledge 69
Summaryoflearningobjectives 19
Self-evaluationactivities 69
Keyterms 20
Comprehensionquestions 72
Applyyourknowledge 21
Exercises 73
Comprehensionquestions 22
Problems 75
Problems 22
Decision-makingactivities 76
Decision-makingactivities 23
References 77
References 24
Acknowledgements 78
Acknowledgements 25
Appendix1 26
CHAPTER 3
Acknowledgements 44
Business structures 79
Chapterpreview 80
CHAPTER 2
3.1 Formsofbusinessentities 80
Accounting in society 45
3.2 Definitionandfeaturesofasoletrader 80
Chapterpreview 46 3.3 Advantagesanddisadvantagesofa
2.1 Sourcesofcompanyregulation 46 soletrader 81
AustralianSecuritiesandInvestments Advantages 81
Commission(ASIC) 46 Disadvantages 81
AustralianSecuritiesExchange(ASX) 47 3.4 Definitionandfeaturesofa
AustralianCompetitionandConsumer partnership 82
Commission(ACCC) 47 Thepartnershipagreement 83
3.5 Advantagesanddisadvantagesofa Usingtheaccountingequationtosolvefor
partnership 83 missingfigures 122
Advantages 83 Summaryoflearningobjectives 123
Disadvantages 83 Keyterms 124
Applyyourknowledge 124
3.6 Definitionandfeaturesofacompany 84
Self-evaluationactivities 125
Formingacompany 85
Comprehensionquestions 130
3.7 Typesofcompanies 85
Exercises 130
Proprietarycompanies 85
Problems 132
Publiccompanies 86
Decision-makingactivities 136
3.8 Advantagesanddisadvantagesofa References 137
company 88 Acknowledgements 137
Advantages 88
Disadvantages 88 CHAPTER 5
3.9 Definitionandfeaturesofatrust 89 Statement of financial
3.10 Advantagesanddisadvantagesof
position 138
atrust 89
3.11 Comparisonofbusinessreports 89 Chapterpreview 139
Soletraderreports 90 5.1 Financialreportingobligations 139
Partnershipreports 91 Generalpurposeandspecialpurpose
Companyreports—privatecompany 92 financialstatements 139
Companyreports—publiccompany 93 5.2 Natureandpurposeofthestatementof
3.12 Differentialreporting 94 financialposition 141
Summaryoflearningobjectives 96 5.3 Accountingpolicychoices,estimates
Keyterms 97 andjudgements 144
Applyyourknowledge 98 5.4 Thedefinitionofassets 145
Self-evaluationactivities 99
Assetdefinition 145
Comprehensionquestions 101
5.5 Thedefinitionofliabilities 146
Exercises 102
Liabilitydefinition 147
Problems 105
5.6 Thedefinitionandnatureofequity 148
Decision-makingactivities 107
5.7 Assets,liabilitiesandequity 148
References 107
Acknowledgements 108 5.8 Formatandpresentationofthe
statementoffinancialposition 150
5.9 Presentationanddisclosureof
elementsinthestatementoffinancial
CHAPTER 4
position 152
Business transactions 109
Currentandnon-currentassetsand
Chapterpreview 110 liabilities 153
4.1 Recognisingbusinesstransactions 110 Presentationanddisclosureofassets,
Examplesofbusinesstransactions 110 liabilitiesandequity 153
4.2 Businessandpersonaltransactionsand 5.10 Measurementofvariousassetsand
businessevents 111 liabilities 162
4.3 Theaccountingequation 111 Measurementprinciples 162
Theconceptofduality 111 Measuringreceivables 163
4.4 Analysisofbusinesstransactions 112 Measuringinventory 164
4.5 Theaccountingworksheet 114 Measuringnon-currentassets 166
4.6 Capturingaccountinginformation: 5.11 Potentiallimitationsofthestatementof
journalsandledgeraccounts 117 financialposition 169
Summaryoflearningobjectives 171
Thejournal 117
Keyterms 172
Theledger 118
Applyyourknowledge 174
Chartofaccounts 118
Self-evaluationactivities 175
4.7 Rulesofdebitandcredit 119
Comprehensionquestions 178
4.8 Thetrialbalance 120
Exercises 179
4.9 Accountingerrors 121 Problems 184
Single-entryerror 121 Decision-makingactivities 187
Transpositionerror 121 References 189
Incorrectentry 121 Acknowledgements 189
CHAPTER 6 CHAPTER 7
Statement of profit or loss Statement of cash
and statement of changes flows 233
in equity 190 Chapterpreview 234
7.1 Thepurposeandusefulnessof
Chapterpreview 191
astatementofcashflows 234
6.1 Purposeandimportanceofmeasuring
Differencebetweencashandaccrual
financialperformance 191
accounting 235
6.2 Accountingconceptsforfinancial
Relationshipofthestatementofcashflows
reporting 193
tootherfinancialstatements 237
Thereportingperiod 193
7.2 Formatofthestatementofcash
Accrualaccountingversuscash
flows 246
accounting 193
Operatingactivities 247
Depreciation 196
Investingactivities 248
6.3 Effectsofaccountingpolicychoices,
Financingactivities 248
estimatesandjudgements
Reconciliationofcashfromoperating
onfinancialstatements 196
activitieswithoperatingprofit 249
Qualityofearnings 199
Presentationofthestatementof
6.4 Measuringfinancialperformance 199
cashflows 250
6.5 Income 200
7.3 Preparingthestatementofcash
Incomedefinition 200
flows 250
Incomeclassification 200
7.4 Analysingthestatementofcash
6.6 Expenses 201
flows 259
Expensedefinition 201
Trendandratioanalysis 261
Expenseclassification 201
Complexityoftransactions 264
6.7 Applyingrecognitioncriteriatoincome
Summaryoflearningobjectives 266
andexpenses 202 Keyterms 266
Income(revenue)recognition 203 Applyyourknowledge 267
Expenserecognition 204 Self-evaluationactivities 268
6.8 Presentingthestatementofprofitor Comprehensionquestions 272
loss 205 Exercises 273
Prescribedformatforgeneralpurpose Problems 277
financialstatements 206 Decision-makingactivities 281
Materialincomeandexpenses 206 References 282
Acknowledgements 282
Formatforentitiesnotrequiredto
complywithaccounting
CHAPTER 8
standards 208
6.9 Financialperformancemeasures 209 Analysis and interpretation of
Grossprofit 209
financial statements 283
Profit 209
Chapterpreview 284
6.10 Thestatementofcomprehensive
8.1 Usersanddecisionmaking 284
income 211
8.2 Natureandpurposeoffinancial
Thestatementofchangesin
equity 212 analysis 285
6.11 Thelinkbetweenthefinancial 8.3 Analyticalmethods 286
statements 213 Horizontalanalysis 286
Summaryoflearningobjectives 215 Trendanalysis 289
Keyterms 216 Verticalanalysis 290
Applyyourknowledge 217 Ratioanalysis 292
Self-evaluationactivities 218 Benchmarks 293
Comprehensionquestions 220 8.4 Profitabilityanalysis 294
Exercises 221
Returnonequity 294
Problems 225
Returnonassets 295
Decision-makingactivities 229
Profitmarginratios 295
References 232
Analysisofprofitability:
Acknowledgements 232
JBHi-FiLtd 296
8.5 Assetefficiencyanalysis 298 Applyyourknowledge 355
Assetturnoverratio 298 Self-evaluationactivities 355
Daysinventoryanddaysdebtors Comprehensionquestions 356
ratios 298 Exercises 357
Analysisofassetefficiency: Problems 362
JBHi-FiLtd 299 Decision-makingactivities 367
References 369
8.6 Liquidityanalysis 301
Acknowledgements 369
Currentratioandquickratio 301
Cashflowratio 301
CHAPTER 10
Analysisofliquidity:JBHi-FiLtd 302
Cost–volume–profit
8.7 Capitalstructureanalysis 302
Capitalstructureratios 303 analysis 370
Interestservicingratios 304
Chapterpreview 371
Debtcoverageratio 304
10.1 Costbehaviour 371
Analysisofcapitalstructure:
Fixed,variableandmixedcosts 371
JBHi-FiLtd 304
10.2 Break-evenanalysis 373
8.8 Marketperformanceanalysis 305
Break-evenanalysisforasingleproduct
Nettangibleassetspershare 306
orservice 374
Earnings,cashflowanddividend
Break-evenanalysisformultiple
pershare 306
products 377
Priceearningsratio 306
10.3 Contributionmarginratio 379
Analysisofmarketperformance:
10.4 CVPassumptions 380
JBHi-FiLtd 307
10.5 Usingbreak-evendata 380
8.9 Ratiointerrelationships 308
10.6 Operatingleverage 381
8.10 Limitationsofratioanalysis 309
10.7 Contributionmarginperlimiting
Summaryoflearningobjectives 311
Summaryofratios 312 factor 383
Keyterms 314 10.8 Relevantinformationfordecision
Applyyourknowledge 316 making 384
Self-evaluationactivities 316 10.9 Outsourcingdecisions 384
Comprehensionquestions 321 10.10 Specialorderdecisions 387
Exercises 322 Summaryoflearningobjectives 390
Problems 327 Keyterms 391
Decision-makingactivities 333 Applyyourknowledge 391
References 335 Self-evaluationactivities 392
Acknowledgements 335 Comprehensionquestions 393
Exercises 394
CHAPTER 9 Problems 400
Decision-makingactivities 406
Budgeting 336
Acknowledgements 407
Chapterpreview 337
9.1 Strategicplanningand CHAPTER 11
budgeting 337
Costing and pricing in
9.2 Budgets 338
an entity 408
Thebudgetingprocess 339
9.3 Typesofbudgets 340 Chapterpreview 409
9.4 Masterbudget 341 11.1 Useofcostinformation 409
Preparationofanoperatingbudgetfora 11.2 Directcosts 410
serviceentity 341 Indirectcosts 411
Preparationofanoperatingbudgetfora 11.3 Costallocation 412
manufacturingentity 344
Costdrivers 412
9.5 Thecashbudget 347
11.4 Allocationprocess 414
9.6 Budgets:planningandcontrol 350 Determinationoffullcost 415
Improvingcashflow 351
11.5 Inventoriableproductcost 421
9.7 Behaviouralaspectsofbudgeting 352
11.6 Pricingofproductsandservices 426
Stylesofbudgeting 352 Summaryoflearningobjectives 428
Effectofbudgettargetsonbehaviour 352 Keyterms 428
Summaryoflearningobjectives 354 Applyyourknowledge 429
Keyterms 354 Self-evaluationactivities 430
Comprehensionquestions 430 Thetimingofcashflows 465
Exercises 431 Thecostofcash 466
Problems 434 Thecostofnothavingenoughcash 466
Decision-makingactivities 439 13.3 Managingaccountsreceivable 467
Acknowledgements 439
Benefitsandcostsofgrantingcredit 467
Determinantsofthelevelofaccounts
CHAPTER 12
receivable 467
Capital investment 440 13.4 Managinginventories 469
Typesofinventories 470
Chapterpreview 441
Benefitsandcostsofholding
12.1 Thenatureandscopeofinvestment
inventories 470
decisions 441
Inventorymanagementtechniques 471
Theprocessofdecisionmaking 442
13.5 Sourcesofshort-termfinance 472
12.2 Accountingrateofreturn 444
Accruedwagesandtaxes 472
DecisionruleforARR 444
Tradecredit 472
Advantagesanddisadvantagesof
Bankoverdrafts 473
ARR 444
Commercialbillsandpromissory
12.3 Paybackperiod 445
notes 473
Decisionruleforpaybackperiod 445
Factoringordebtor/invoice/trade
AdvantagesanddisadvantagesofPP 446
finance 474
12.4 Netpresentvalue 446
Inventoryloansorfloor-planfinance 474
Timevalueofmoney 446
13.6 Sourcesoflong-termdebtfinance 476
DecisionruleforNPV 447
Intermediatedfinance 476
Discounttables 448
DebtfinancefromtheAustralian
Determiningthediscountrate 448
market 477
Advantagesanddisadvantagesofthe
13.7 Equityfinance 478
NPVmethod 449
Ordinaryshares 478
12.5 Practicalissuesinmakingdecisions 450
Preferenceshares 479
Collectingdata 450
Rightsandoptions 479
Taxationeffects 450
13.8 Hybridfinance 480
Finance 451
Convertiblenotes 480
Humanresources 451
Convertiblepreferenceshares 480
Goodwillandfutureopportunities 451
13.9 Internationalsourcesoffunding 480
Socialresponsibilityandcareofthenatural
13.10 Newfundingopportunitiesfor
environment 451
business 481
Conclusion—CoconutPlantations’potential
Crowdfunding 481
coconutoilmanufacturers’investment
Initialcoinofferings 481
decisions 452
Summaryoflearningobjectives 454 Angelinvestors 481
Keyterms 454 Microcredit(microloans) 481
Applyyourknowledge 455 Summaryoflearningobjectives 482
Self-evaluationactivities 455 Keyterms 483
Comprehensionquestions 456 Applyyourknowledge 484
Exercises 456 Self-evaluationactivities 484
Problems 457 Comprehensionquestions 486
Decision-makingactivities 460 Exercises 486
References 460 Problems 487
Acknowledgements 460 Decision-makingactivities 489
Appendix12A 461 References 490
Appendix12B 461 Acknowledgements 490
CHAPTER 13 CHAPTER 14
Financing the business 462 Performance measurement
Chapterpreview 463 491
13.1 Managingnetworkingcapital 463 Chapterpreview 492
Decidingtheappropriatelevelofnet 14.1 Organisationalperformance
workingcapital 463
measurement 492
13.2 Managingcash 465
Balancedscorecard 492
Theneedtohavesufficientcash 465
14.2 Divisionalperformance 14.6 Non-financialperformance
measurement 497 evaluation 511
Divisionalperformanceevaluation 499 Summaryoflearningobjectives 514
Pricingguide 499 Keyterms 514
Evaluationofinvestmentlevel 501 Applyyourknowledge 515
Self-evaluationactivities 516
14.3 Investmentcentreperformance
Comprehensionquestions 518
evaluation 501
Exercises 519
Residualincome 504
Problems 521
Economicvalueadded 505
Decision-makingactivities 525
ROI,RIandEVAcompared 506
References 527
Theinvestmentbase 506 Acknowledgements 527
14.4 Environmentalandsocial
performance 507 Appendix 529
Index 571
Eco-efficiency 508
Sustainabilityreportcard 509
14.5 Individualperformance
measurement 509