Accounting: Business Reporting for Decision Making PDF
Preview Accounting: Business Reporting for Decision Making
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 Typeset in 10/12pt Times LT Std © 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 The moral rights of the authors have been asserted. A catalogue record for this book is available from the National Library of Australia. 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Wiley Terry Burkitt (Director, Publishing and Course Development), Mark Levings (Executive Publisher), Kylie Challenor (Senior Manager, Knowledge & Learning Content Management), Rebecca Campbell (Production Editor), Emily Echlin (Publishing Coordinator), Emily Brain (Production Assistant), Laura Brinums (Copyright & Image Research), Delia Sala (Cover Design) Cover: © Pobytov / Getty Images Australia Typeset in India by diacriTech Printed in Singapore by Markono Print Media Pte Ltd 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
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