ACCT 1501

2011S1

Week 2 Preparation Questions Solutions

Preparation Questions: Discussion Questions 1.1, 1.2, 1.3, 1.7, 1.12; Problems 1.6, 1.7, 1.16, Case 1A part 1-7

1. The basic purpose of financial accounting is to produce useful information which is used in many and varied ways. People use the information generated by financial accounting to improve their decision-making in allocating scarce resources. 2. Financial performance means generating new resources from day-to-day operations over a period of time. Financial position is the organisations set of financial resources and obligations at a point in time. 3. Managerial accounting is a branch of accounting that is oriented towards helping managers and others inside the enterprise. Financial accounting has a more external focus, and is often used by parties external to the enterprise, such as, shareholders, investors, bankers, legislators and employees etc. 7. Users of financial statements do not all have the same information needs. They are all different people, with differing objectives, preferences and capabilities, so they are likely to need different information to meet these differences in decision-making. Probably most users share an interest in fair, timely information, but the details of that information depend on the decision(s) each user is making. 12. Accrual accounting includes the impact of transactions on the financial statements in the time periods where revenues and expenses occur rather than when the cash is received or paid. Cash accounting only accounts for revenues and expenses when cash is paid or received by the enterprise. Problem 1.6 User Bankers Company Management ASIC Shareholders Suppliers Australian Tax Office Trade Unions Type of Information The likelihood of the company meeting its interest payment on time The profitability of each division of the company Financial position and performance of a company issuing shares to the public for the first time Prospects for future dividend payments Probability that the company will be able to pay for its purchases on time Profitability of company based on tax law Profitability of company since last contract with employees was signed

ACCT 1501

2011S1

Problem 1.7 Accrual profit = total sales total expenses = $750 000 + 260 000 580 000 240 000 = $190 000

Problem 1.16 1 2 3 4 5 6 R A L SE E SE 7 8 9 10 11 12 E A L A R E 13 L

Case 1A (parts 1-7 only) 1 Indicators that Woolworths uses accrual accounting: Balance Sheet (pages 81) Receivables (p.81) Accounts payable (p. 81) Provisions (p. 81) Income Statement (p. 54) Cash flow reconciliation (p. 83) Depreciation (p. 94, 103) Note 1 (p.84) Prepayments (p. 102) Provisions (p.110) etc 2 Total assets at 24 June 2007 = 14,416.1m 3 Total Liabilities at 24 June 2007 = 8,901.4 m 4 Shareholders equity at 24 June 2007 = 5,514.7 m 5 Accounting equation in dollar figures at 24 June 2007 A = L + OE 14,416.1m 8,901.4 m + 5,514.7 m 6 Net profit before tax = 1,877.7 m 7 Net profit after tax = 1,311.3 m