Business School

ACCT1501 Accounting and Financial Management 1A

Session 1 2016

Week 1

Introduction to Financial Accounting

Student Handout

Lecturer:
Dr. Youngdeok Lim
School of Accounting
UNSW
QUAD 3069
youngdeok.lim@unsw.edu.au

Moodle: https://moodle.telt.unsw.edu.au/login/index.php

Session 1, 2016

ACCT1501

WEEK 1: Introduction to Financial Accounting

Welcome to Accounting and Financial Management 1A.
In this first lecture you will be introduced to the lecture staff on the course and be
given the Course Outline. We will be outlining the objectives of the subject, its
structure and requirements as described in the Course Outline and answer any
questions you may have about the course.
We will then begin to explore the nature of accounting and introduce general purpose
financial reports. We will be referring to the Woolworths 2014 Annual Report
throughout the course. The annual report is included as an appendix in your course
textbook (6th edition, Trotman Gibbons & Carson, pages 688-733).

Learning objectives
At the end of this topic you will be able to:
Understand the overall course requirements and assessment tasks for this unit.
Define Accounting
Begin to become familiar with the Woolworths 2014 annual report and the
information it contains.
Be aware of key financial statements and the users of these reports.
Begin to understand the accrual concept
Understand the foundations of modern accounting practices including the
underlying assumptions of financial reporting

Required Reading
1. ACCT 1501, 2016S1 Course Outline
2. Trotman, Gibbins & Carson Chapter 1
3. Woolworths 2014 Annual Report (familiarise yourself with the contents)
(Appendix 1)

ACCT1501

2.

Tutorial Questions Week 2

Preparation Questions
You should attempt these questions before the tutorial. The answers to the preparation
questions will be made available on the course website at the end of the relevant
lecture week. In this way you can check your understanding of these questions before
the tutorial class. You are welcome to raise any unresolved issues that you have with
the preparation questions with your tutor.
This will be important and essential information for you when you complete your
reflection task.

DQ1.1, 1.3, 1.7, 1.11,

P1.5, P1.14,
Case 1A

Tutorial Questions
The answers to tutorial questions are the focus of the tutorial class work:

DQ1.2, 1.15,
P1.7, P1.12, P1.24

ACCT1501

ABC faced insolvency in 2007

Colin Kruger
May 22, 2010
ABC Learning was staring down the barrel of a $1.78 billion loss for the 2008
financial year when it collapsed, but the company may have been insolvent as early as
mid-2007, according to a report from its administrators, led by Ferrier Hodgson's
Greg Moloney.
In the final drafts of ABC's financial statements prepared for the year ending June 30,
2008, its auditors included impairment charges totalling $1.168 billion, and a $364
million loss on the disposal of a majority stake in ABC's US business.
Significant contributors to the loss - $1.2 billion more than previous estimates - are a
$686 million cut in the valuation of childcare licences and a $127 million write-down
of debts owed by ABC's childcare developer, 123 Group.
The massive loss means the net assets on ABC's balance sheet were reduced from
$2.22 billion the previous year to just $284.5 million at June 30, 2008, putting the
company in breach of its covenants almost five months before administrators were
appointed.
But the bombshell in the report to creditors is the administrators' analysis that for the
2007 and 2008 financial years ABC had just 30 and 40, respectively, of current
assets for every dollar of current liabilities.
This equates to a current ratio of 0.3 and 0.4 for those years. The administrator's
report notes that ''a current ratio and quick ratio less than one may indicate a potential
liquidity crisis''.
An analysis of the company's quick ratio showed ABC had just 20 of ''liquid'' assets
for every dollar of current liabilities in 2007, and 10 in 2008.
The quick ratio is lower because it does not include potential proceeds from assets
held for sale.
''This indicates that there was a reliance on the sale of assets to discharge short-term
liabilities as at 20 June 2008,'' the report said.
In an examination into ABC's collapse, senior executives told the Federal Court last
month there were no liquidity concerns when ABC began a fire sale of assets in early
2008, despite evidence to the contrary from junior ABC management.
The report also spells out just how reliant ABC was on the banks and investors for its
cash. Over the six-year period leading up to its collapse, ABC generated $3.43 billion
from debt and equity markets against $375 million cash generated from its childcare
operations.

ACCT1501

''This reliance on external capital, combined with failing support by equity and debt
investors as well as underwhelming financial performance, led to a liquidity crisis and
was a major contributor to the failure of the ABC Group,'' the report said.
The administrators said they have yet to determine exactly when ABC became
insolvent.
The second creditors' meeting, expected to vote to wind up ABC, is scheduled to be
held June 2 at the Tattersall's Club in Brisbane.

Read more: http://www.smh.com.au/business/abc-faced-insolvency-in-200720100521-w1tf.html#ixzz1Rc0qPPKJ

ACCT1501

ACCT1501
Semester 1, 2016

Week 1: Introduction
Lecturer: Dr Youngdeok Lim
Lecturer in Charge
Quad 3069

Todays lecture objectives:

At the end of this topic you will be able to:
1. Understand the overall course requirements and assessment tasks for
this unit.
2. Define Accounting
3. Begin to become familiar with the Woolworths 2014 annual report and
the information it contains.
4. Be aware of key financial statements (Balance sheet, Income statement,
and Cashflow statement) and the users of these reports.
5.

Begin to understand the accrual concept

6. Understand the foundations of modern accounting practices including

the underlying assumptions of financial reporting
2

1. The Course Outline

What you need to know?

1. Understand the course
structure
2. Course objectives
3. Clarify roles and
responsibilities

Introduction
Teaching staff
Dr. Youngdeok Lim (Lecturer-in-Charge)
Dr. Radzi Jidin (Lecturer)
Jeffrey Knapp (Lecturer)
Other tutors Anthony, Chi, Chuan, Darshi, Dickson,
Doris, Lucy, Jason, Jenny, Justin, Hien, Kevin, Sarah, Phuc,
Tanya, Timmy, Tyler, and Yichelle
PASS Leaders Arthur, Jessica, Andries, Jonathan, and Annie
Take a couple of minutes and introduce yourself to two people near you. Ask
them what tutorial group they are in & what else they are studying.

Required Texts

Financial accounting: An Integrated approach

6th edition
(Paperback price: $149.95, eBook price: $59.95)

Lecture notes, tutorial material

and additional readings
Available on Moodle

+
Management Accounting Supplement
(eBook price: $19.95)
eBook purchase: www.cengagebrain.com.au

Management Accounting Supplement

The management supplement can
be purchased independently online
and will be available through
Cengage brain website
www.cengagebrain.com.au for
$19.95.
Comes in an e-book format

Course schedule (see page 15 in course

outline )

Lectures: How do you prepare for lectures

Read the assigned reading materials before the lecture
Lectures are only a summary and are not a substitute for reading
Bring your Lecture Notes to every lecture & tutorials !!!!!
The lecture notes follow the lecture outline with space for you to
make your own additional notes during the lecture
Lecture notes will be posted on Moodle.
Lectures will be Podcast recorded with screen captures of the
lecture slides (EchoCenter). This is recommended as an
additional resource not a substitute for face-to-face interaction
in the lectures.

How to maximize the return on your investment (ROI)

Participation in class (both lectures & tutorials)
Students do not benefit from copying solutions
Attempting your work is essential to identifying concepts/ issues you do
not understand
Tutorial homework (Max. 4 marks)
Your tutor will randomly choose 5 weeks to review your written
answers to the assigned tutorial questions (not preparation
questions) and mark the best 4 weeks (no half mark).
Tutorial individual participation (max 3 marks)
80% attendance rule - a student that attends less than 10 classes
will receive a mark of 0/3.
Tutorial group participation (max 3 marks)
Help tutors help you, by proactively asking questions!
Interaction in the tutorial helps everybody learn it might even be fun!!!!

Preparation & Tutorial Questions:

Work you must do to pass the course !!
Preparation Questions: Attempt all preparation questions and
check the solutions on Moodle before your tutorial.
Tutorial Questions (also attempt before class): The goal of
the tutorial is to discuss the questions and clarify any concerns
you may have. The process in an interactive one and you are
required to engage with your tutor by asking and answering
questions.
Note:
DQ1.1 means Chapter 1, discussion question 1.
P1.6 refers to problem 6 at the end of chapter 1.

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Learning Assessment (or how to pass ACCT1501)

Assessment Item / Due date

Weight

Tutorial participation (complete each week)

10%

Mid-session class test (Week 7)

20%

Multiple Choice Tests 3 quizzes 5% each

(Quiz 1 due on April 15 @ 3pm;
Quiz 2 due on May 6 @ 3pm;
Quiz 3 due on May 28 @ 3pm)

15%

Final examination

55%

TOTAL

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100%

In order to pass, students must

Achieve a composite mark of at least 50% AND
Achieve a satisfactory level of performance in
the final exam, usually means a minimum mark of
50%

12

Three Quizzes YOU must read the instructions!!!!

Each quiz will be open for 1 week.

Each quiz will consist of 20 multiple choice questions.
It is recommended to be completed in 40 minutes; however
there will be no official time limit. One attempt.
Important feedback!!!!
For you & us!

13

Special Consideration and Supplementary examinations:

There will be a very limited opportunity to sit a
supplementary mid-session exam. To apply for this, see
Part B. 4 regarding general information on special
consideration.
There is only one opportunity to sit for a supplementary
final exam which will be held on 12 July 2016 exams for
the School of Accounting after the final exam session.
If you are too ill to perform reasonably on the final exam, do
not attend the final and apply for a supplementary instead.
Applying for special consideration does not automatically
mean that you will be granted a supplementary exam.
No special consideration will be granted for the on-line MCQ
quizzes.
14

Additional resources
Face to face consultation with lecturers (from week 2)
Tutors will hold extra consultation for mid-session exam
and final exam (to be announced).
PASS (Peer Assistance Support Scheme) from week 2
Discussion boards on Moodle
For questions of a private/personal nature, please email
ACCT1501@unsw.edu.au
Email policy: Use UNSW student email by identifying
yourself with ID & full name

15

The Course Website

Moodle:
https://moodle.telt.unsw.edu.au/login/index.php
Announcements!!! your responsibility to read
View preparation and tutorial solutions
Use the Discussion board - 2 Categories
Course Content,
Course Administration
- overseen by staff members
Use appropriately and with respect for others

16

Student responsibilities:
Preparation for lectures & tutorials
Workload and other commitments balance!!!
Attendance 80% rule University & UNSW Business
School
Conduct and behaviour respectful to others at all times
in lectures, tutorials, via email and on Moodle
Keeping informed !!! Read the course outline; Moddle
Announcements & your university email.
ONLY attend the lectures and tutorials that you are
officially enrolled to attend.

17

Introduction to Financial Accounting (Ch 1)

18

2. What is accounting?
Accounting is the process of
identifying, measuring,
recording and communicating
economic information to assist
users to make decisions.

Accounting is the language of business. by Warren Buffett

Grammar e.g. accounting principle, assumptions
Vocabulary e.g. accounts receivable, prepayment,
debit/credit, balance sheet, income statement etc.
Practice e.g. accounting cycle
19

Dont forget to use the Glossary! (textbook, p. 734)

In the course of your study you will be introduced to many key
Accounting terms; it is like learning a new language.
You should refer to the glossary as often as needed until you
get to know all the new terms.
Practice using the glossary - look up the new terms each
week and try to explain them in your terms or think of an example
to explain it. (Tip: Define, explain, example!)

20

Accounting System

Financial Accounting System

Managerial Accounting System

Periodic financial statements and

related disclosures

Detailed plans and continuous

performance reports

External Decision Makers

Internal Decision Makers

Investors, creditors,
suppliers, customers, etc.

Managers throughout the

organization

Reporting standard:
AASB standards (GAAP)

Reporting standard:
N/A

21

How ACCT1501 is positioned within an accounting major

ACCT 1501 & 1511

Providing the foundation & Setting the scene
Basic terminology, record keeping, understanding & preparing basic
financial statements, exposure to management accounting

ACCT 2A & 3B

ACCT 2B & 3A

Management Accounting

Financial Accounting

Information gathering & reporting

for people inside the organisation

Also
Exciting
electives!

Information gathering & reporting for

people outside the organisation

AUDIT: checking that procedures are in place to prepare financial statements that
are true and fair reflection of company position & performance

22

What is financial accounting?

Financial accounting will be the focus of this course.
Financial accounting focuses on the provision of
information to users external to the enterprise.
The focus is on reporting financial position and financial
performance.
We discuss financial accounting in weeks 1 to 10.

23

What is management accounting?

Management accounting will be the focus of later part of this
courses.
Management accounting focuses on the provision of
information to users within the enterprise (to aid in
operational planning and control decisions).
We start to look at management accounting in weeks 11 &
12

24

Some examples of an economic

consequence

25

The Accounting Scandals such as Enron, Worldcom,

Misleading reporting
Mismanagement ABC learning
Collapse of the company
Indictments

The nature of accounting

(ABC Learning Why is accounting important?)

March, 2001: stock price=$2

December, 2006: stock price=$8.6
August, 2009: stock price=$0.54
http://www.youtube.com/watch?v=YYF6JW9vJKo

26

We have focused mainly on the economic consequences in

the equity markets
The decision maker in this situation is the investor / owner
Their decisions are based on what value they are willing to
either buy or sell shares in the market
Can you think of other users of accounting information?
And, for what purposes will they use the accounting information?
Small group (two to 4 people) discussion.

27

Other users of accounting information:

User

Type of Information

Bankers

The likelihood of the company meeting its

interest payment on time
Financial position and performance of a
company issuing shares to the public for the first
time

ASIC

Suppliers

28

Australian Tax Office

Profitability of company based on tax law

Trade Unions

Profitability of company since last contract with

employees was signed

Is accounting really important?

Used by:
Management in making business decisions
Shareholders for decision making
Board of directors in takeover battles
Bankers and creditors in lending decisions

29

Is accounting really important? (cont.)

Used by:
Boards in rewarding and removing executives
Management and unions in wage negotiations
Impacts communities
Impacts workers

30

Revision Question 1
Which of the following organisations may use
financial statements?
1. Australian Taxation Office
2. A church congregation
3. A university
A.
1 and 2 only.
B.
2 and 3 only.
C.
1 and 3 only.
D.
1, 2 and 3.
31

3. What is an annual report?

Glossy magazine that contains
a lot of descriptive information
about the company and the
general purpose financial
statements.
How to get it?

4. Key financial statements

Balance sheet
Financial position of an enterprise at a particular point in time.
Financial position: Enterprises set of financial resources and
obligations at a point in time
What are the entitys resources and how were they financed?
Income statement
Financial performance of an enterprise over a period of time.
Financial performance: Generating new resources from operations
over a period of time
Has the entity used its resources efficiently and effectively?
Sometimes referred to as the Profit and Loss Statement (P&L)
Cash flow statement: (To be covered in 1B)
Cash inflows and outflows.
Notes to the financial statements (additional detail)
33

Introduction to the Balance Sheet

The balance sheet reports the financial position of an entity
at a point in time.

Jan 1 2013

Dec 31
2013
Balance
Sheet

Dec 31
2014
Balance
Sheet

Dec 31
2015
Balance
Sheet

Used to assess financial structure and ability to pay debt

34

Balance sheet
Three main elements:
Assets
Resources - they will benefit the company this year
(current) or in future years (non-current)
e.g., cash, property, equipment, inventory
Liabilities
What the company owes
e.g., accounts payable, loan payable
Equity (net assets)
What belongs to the owners, the residual i.e. what
is left after liabilities are taken care of e.g., share
capital, retained profits
35

Balance sheet
Assets are due to debt or equity!
The balance sheet shows resources (assets), and claims
on those resources (liabilities and equity) at a point in time.
We can represent this with the accounting equation:
Assets
Resources

Liabilities + Equity
Sources

This will be very important to us in later weeks when we

consider double-entry book keeping
There are always two aspects of a transaction
36

Example (To be continued)

You purchased one bed room apartment at $500,000 on
1/7/2013 and rented it.
Financing source: Your own money $100,000, Borrowing
from bank $400,000 (maturity: 3 years, Principal will be
paid at the end of maturity)
Rent revenue (cash) $400/week, Interest expense (cash)
$200/week, Tax expense (cash) $1000/year
Assume 52 weeks per year and no depreciation.
Prepare your B/S as of 1/7/2013.

37

Consolidated Balance Sheet Woolworths limited (2015)

38

Appendix: Consolidated financial statement

Financial statements that factor the holding company (parent
company)'s subsidiaries into its aggregated accounting figure.
A subsidiary is a company controlled by parent company. Control exists
when the parent company has the power, directly or indirectly, to govern
the financial and operating policies of an entity so as to obtain benefits
from its activities.
Intragroup balances, and any unrealised gains and losses or income and
expenses arising from intragroup transactions, are eliminated

It shows how the holding company is doing as a group. The

consolidated accounts should provide a true and fair view of the
financial and operating conditions of the group.

39

Income Statement
Shows the results of business operations over a specific
time period
Reports revenues earned, and any expenses incurred
Revenue: inflows of economic benefits that increase owners equity
e.g., sales revenue, service revenue, fees earned
Expenses: Use or loss of economic benefits that decrease owners
equity.
Incurred when you use resources to generate revenue
(matching principle)

If revenues are greater than expenses, there is a net profit

If revenues are less than expenses, there is a net loss

40

Income Statement
Revenues & Expenses are recognised when an
economically meaningful event has occurred
This is called Accrual Accounting
It does not have to involve cash!

41

Consolidated Income Statement Woolworths limited (2015)

42

Statement of cash flows (To be covered in 1B)

Statements of cash flows provide details of movements
in an entitys cash balance over a specific time period.
The cash flows are normally categorised into:
operating activities: main revenue producing activities
investing activities: acquisition and disposal of long term
assets
financing activities: equity capital and borrowing

43

Business Model (Week 3 slide)

Investors (e.g. banks,
shareholders)
Financing activities
Sale

Purchase

Suppliers
(e.g. farmers)

Operating
activities

Company
(e.g. Woolworths)

Payment
(Cash/Accounts
Payable)

Operating
activities

Payment
(Cash/Accounts
Investing activities

Receivable)

Property Plant and Equipment,

financial securities etc

44

Customers
(e.g. You)

Consolidated Cash Flow Statement Woolworths limited (2015)

45

5. Accrual vs. Cash Accounting (Week 2)

An income statement reports revenues and expenses
Accrual accounting
A cash flow statement reports cash inflows and outflows
Cash accounting

46

5. Accrual vs. Cash Accounting (Week 2)

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.

47

A Key objective for this session: begin

to understand the Accrual concept***
In June, a company makes cash sales of $10,000 and credit
sales of $20,000 (all to be collected in July)
What are sales using accrual accounting in June?
What are cash inflows using cash accounting in June?
What are total sales using accrual accounting in June and July?
What are total cash inflows using cash accounting in June and
July?

48

6. Financial statement assumptions

Financial statement assumptions include:
accrual basis
accounting entity
accounting period
monetary
historical cost
going concern

49

Accrual basis
Revenues and expenses are recognised at the
time they occur rather than when the cash is
received or paid.

Accounting entity assumption

The entity for which financial statements are prepared
Activities of the entity are separate from those of its
owners/members
Includes, but not limited to, legal entities (e.g.
consolidated entity)
Economic entity a group of entities where the goals of
the controlling entity are pursued: (e.g. consolidated entity)
e.g. companies, partnerships, funds, associations, public sector
bodies.

51

Accounting Period assumption

Life of business is divided into discrete time periods of
equal length to determine financial performance and
position.
Production of regular, comparable financial statements.
Income statement

Jan 1 2014

52

Income statement

Dec 31
2014
Balance
Sheet

Income statement

Dec 31
2015
Balance
Sheet

Dec 31
2016
Balance
Sheet

Monetary assumption
Universally accepted medium of exchange.
Measure economic activity by a common denominator.

53

Historical cost assumption

Transactions are initially recorded at their original cost.
Treats assets in terms of their use rather than for resale.
Example: Land purchased in 1995 at cost of $50,000 and
still owned by the buyer will be reported on the buyer's
balance sheet at its historical cost of $50,000 even though
its market value of $500,000.

54

Going concern assumption

Assumes continued operation of accounting entity into
foreseeable future
There is no intention or need to liquidate
Produces demand for financial information during life of
entity

55

Revision Question 2
In profit measurement, private transactions of
owners are not taken into account. What
assumption/concept underlies this procedure?
1. Materiality
2. Monetary concept
3. Accounting period
4. Accounting entity

56

Take away and coming upnext week!

Accounting entity assumption, accounting period assumption
Balance Sheet
Assets
Liabilities
Shareholders equity
Income Statement
Revenue
Expense
Cash profit versus accrual profit

57