Accounting 12 - Topic 1

Role of the Accountant

The essential role of the accountant is to provide of a business with the information it needs to maximise the organisation’s financial performance and make good decisions about the company.

Management Accounting

The accounting that is produced for the benefit of the company’s managers, to enable them to make planning and controlling judgements that will enable them to improve the company’s financial performance.

Financial Accounting

Primarily deals with the recording and reporting of business transactions to stakeholders outside the business and is based on past performance.

Concepts of Management Accounting

Reports use for internal use and focus on planning, coordinating and controlling

Reports used by managers, sale and production, and finance controllers

Reports are future focused and based on predictions

Reports are produced when required

External Reports Regulations

The Corporations Act 2001, Australian Accounting Standards, and ASX all regulate external financial reporting

ASIC also requires the lodgement of annual reports for all public and large proprietary companies

Annual reports may be required to be audited to verify they are a true and fair view of the entity’s position and performance

ASIC

Australian Securities and Investments Commission

ASX

Australian Securities Exchange

Internal Reports Regulations

There is no regulation of internal reports and no legal obligations involved in meeting internal reporting requirements

Internal Reporting - I U I

Is for management and efficiency purposes

Used for managerial decision making to assist with managing a business’ assets, liabilities, income and expenses

Is important for enabling the business to reach its goal and improve performance

Internal Report Users

managers, CEO, CFO, board of directors, accountants, and major shareholders

External Report Users

potential investors, government agencies, general public, employees, customers, suppliers, and lenders

Types of Reports in Management Accounting

Cash budgets

Cost of production reports

Capital budgeting / cost of asset reports

Cost of volume profit reports

Types of Reports in Financial Accounting

Statement of comprehensive income

Statement of financial position

Statement of changes in equity

Cashflow statement

External Reporting - FEF

For users of information who are removed from the business and not able to make decisions about the business unless they have access to this information

Enables external users to assess the performance, position, and liquidity of an entity

Facilitates accountability of the manager’s decision making and shows how they’ve invested the resources of the business on behalf of the owners / shareholders.

Concepts of Financial Accounting

Reports are made for external users such as ASIC, ATO, investors, and shareholders

Reports are historical in nature

Reports are subject to regulations

There is a prescribed time frame, usually each financial year, and format for reports

Large proprietary and public companies must produce reports

Function of the Accountant - Selection

Selection and maintenance of appropriate financial and recording systems

Function of the Accountant - Recording

Recording financial transactions using computerised accounting systems

Function of the Accountant - Producing

Producing financial reports for the information of managers

Function of the Accountant - Preparation

Preparation of published financial reports for shareholders

Function of the Accountant - Liaisons

Liaisons with the company’s external auditors

Function of the Accountant - Advise

Advise board and senior management on accounting matters

Function of the Accountant - Analysing

Analysing financial reports and interpreting data they contain to advise management on courses of action arising from them.

Function of the Accountant - Planning

Planning and suggesting strategies for future action to improve profitability and security

Function of the Accountant - Internal

Internal auditing including implementing strategies for internal control over an organisation’s asset

Function of the Accountant - Producing cost

Producing cost accounting information to determine standard costs in producing a product

Capital Investment Decisions

Long term business decisions involving the commitment of large sums of money and are usually related to the acquisition of non-current assets

Capital Investment Decisions Characteristics

Long term decisions that relate to large sums of money and expenditures that are used over many years

Cannot be easily reversed as once purchased it is usually costly for the business

has impacts on the generation of future cash flows and profits

Qualitative Factors and Examples

factors that affect a decision about capital investments

Environmental factors, legislation, government regulations, competition, impact on supply and consumer preferences

Quantitative Factors

The numerical data used to help make a capital investment decision and is often data expressed as time or dollar value

Time Value of Money

A dollar in the hand now is better than a dollar in the future

Factors why $1 today is worth more than in a year

interest rates, inflation, liquidity and credit risks

Factors Affecting Capital Investment Decisions - Consumer preferences

consumer preferences shift and if a business doesn’t take into account new customer preferences when making a capital investment decision this could result in a loss of market share

Factors Affecting Capital Investment Decisions - Competition

Competition exists between businesses and capital investment decisions need to ensure that the business will remain competitive in the market

Factors Affecting Capital Investment Decisions - Government Regulation

Government regulations need to be taken into account when making capital investment decisions to ensure that the business is able to comply or meet the regulatory requirements

Payback Method

Calculates how long it will take for net cashflow revenue generated by an investment to cover the cost of a project

Net Present Value

Makes an estimate of all cashflows associated with a potential project and compares the present values with the cost of buying the investment

Payback Advantages

Simple to calculate

Easy to understand

Is a good indicator of risk

A target rate of return does not have to be determined

Payback Disadvantages

Does not take into account the time value of money

Less accurate than NPV as it does not directly measure if a target return or investment yield is achieved

Net Present Value Advantages

Takes into account the time value of money

Directly measures the target return / investment yield

More accurate than payback method

Provides an easy decision rule

Net Present Value Disadvantages

Complex to calculate

Less easily understood than payback

A target rate of return needs to be determined which can be problematic