Understanding accounting principles

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Full Title Copyright About the authors Preface Table of Contents Chapter 1 Accounting and the New Zealand business environment 1.1 Introduction 1.2 Accounting — a personal view 1.2.1 Xero Limited as a case study 1.2.2 Business history — what is business about? 1.2.3 What is accounting? 1.3 Financial accounting — a professional view 1.3.1 What is financial accounting? 1.3.2 Development of accounting practice — accounting as a profession 1.3.3 Development of accounting practice — legal impacts 1.3.4 Development of accounting practice — taxation impacts 1.3.5 Development of accounting practice — the New Zealand Framework 1.3.6 Objectives, assumptions, and qualitative characteristics of financial statements 1.4 Preliminary look at financial reports 1.4.1 Balance sheet 1.4.2 Statement of changes in equity 1.4.3 Income statement 1.4.4 Statement of cash flows 1.4.5 Notes to the accounts 1.5 Management accounting 1.5.1 Tasks of management accountants 1.5.2 Management accounting failures 1.6 Limitations of accounting 1.7 Conclusion 1.8 Key words 1 1.9 Resource file 1 1.9.1 Accounting scandals 1.9.2 Comparisons 1.9.3 Goods and services tax 1.9.4 Purpose of business 1.10 Mastering accounting — questions 1.10.1 Short answer questions 1.10.2 Paragraph answers 1.10.3 Discussion questions 1.10.4 Writing exercise 1.11 Mastering accounting — solutions 1.11.1 Short answer questions 1.11.2 Paragraph answers Chapter 2 Starting up a business 2.1 Introduction 2.1.1 Case study — Tearaway Paper Recycling 2.1.2 Considerations for business start up 2.2 Most common forms of business ownership 2.2.1 Partnerships 2.2.2 Companies 2.2.3 Sole traders 2.2.4 Some questions for discussion in relation to the case study 2.3 Business professional view 2.3.1 A closer look at the resourcing decision — long-term view 2.3.2 A closer look at the resourcing decision — working capital 2.3.3 The circulation of resources 2.3.4 A closer look at profit 2.4 An information system — the accounting equation 2.4.1 What does the accounting equation tell us? 2.4.2 Changes in the accounting equation 2.4.3 Placing values on assets and liabilities 2.4.4 Purchasing assets 2.5 Detailing what happens in the owner’s equity section 2.6 Conclusion 2.7 Key words 2 2.8 Resource file 2 2.8.1 Case study — Wade Waiwater: A change in the wind … from crew to skipper 2.8.2 Accounting policies 2.9 Mastering accounting — questions 2.9.1 Short answer questions 2.9.2 Paragraph answers 2.9.3 Discussion questions 2.9.4 Research assignments 2.9.5 Internet exercise 2.10 Mastering accounting — solutions 2.10.1 Short answer questions 2.10.2 Paragraph answers 2.10.3 Discussion questions Chapter 3 Determining profit 3.1 Introduction 3.1.1 Case study — Welkom Enterprises expands … so do the profits 3.1.2 Some questions for discussion 3.2 Transactions affecting owner’s equity — a professional view 3.2.1 Selling a service 3.2.2 Selling a service for cash 3.2.3 Selling services on credit 3.2.4 Bad debts 3.2.5 Providing for doubtful debts 3.2.6 Prudence — a degree of caution 3.2.7 Encouraging prompt payment 3.2.8 Attracting new clients 3.2.9 Paying expenses 3.2.10 Effect of GST on the accounting equation 3.2.11 Analysing a range of transactions 3.3 Preparing an income statement 3.3.1 Making adjustments to revenue and expenses 3.3.2 Accrued expenses 3.3.3 Prepaid expenses 3.3.4 Income received in advance 3.3.5 Accrued income 3.4 Accounting for inventories 3.4.1 Physical inventory system 3.4.2 Perpetual inventory system 3.5 Capital and revenue expenditure 3.5.1 Capital expenditure 3.5.2 Revenue expenditure 3.5.3 How do we make the right decision? 3.6 Sorting out our accounting system — a chart of accounts 3.6.1 Classification in the income statement and balance sheet 3.6.2 Classification as a means of decision making 3.6.3 Aiming for consistency 3.7 The impact of information technology 3.8 Conclusion 3.9 Key words 3 3.10 Resource file 3 3.10.1 Case study — Jones’s hire services 3.10.2 Case study — NZ Catering Supplies Ltd: An example of business failure 3.11 Mastering accounting — questions 3.11.1 Short answer questions 3.11.2 Problems 3.11.3 Discussion questions 3.11.4 Research assignments 3.11.5 Integrated case — NZ Catering Supplies Ltd: An example of business failure 3.12 Mastering accounting — solutions 3.12.1 Short answer questions 3.12.2 Problems Chapter 4 Issues in income determination and asset valuation 4.1 Introduction 4.2 Making accounting decisions 4.2.1 Introduction 4.2.2 Case study — new tools … new ways of measuring 4.3 Recognition of revenue and expenses 4.4 Depreciation of property, plant, and equipment 4.4.1 Case study — the working life of a photocopier 4.4.2 What happens when you buy an asset — the recording system 4.4.3 A word or two about estimates 4.4.4 Allocating the depreciable amount 4.4.5 Which method should be used? 4.4.6 How do we disclose depreciation in the accounts? 4.4.7 Taxation law and taxation rates of depreciation 4.4.8 What are the effects of providing for depreciation in the accounts? 4.4.9 A case study — Taghi Derhamy 4.5 Valuation of inventories 4.5.1 What value should be allocated to inventory? 4.5.2 What if the inventory has deteriorated or become obsolete? 4.5.3 What if inventory is acquired at different prices? 4.5.4 How do we disclose inventory valuation in the notes? 4.6 Valuation of accounts receivable 4.6.1 Allowance for doubtful debts 4.6.2 How do we arrive at the figure for doubtful debts? 4.6.3 How important is it to take doubtful debts into account? 4.7 The statement of accounting policies 4.8 Conclusion 4.9 Key words 4 4.10 Resource file 4 4.10.1 Extracts from accounting policies 4.10.2 IRD tax tables — computer equipment 4.10.3 Articles discussing the enticement costs of selling cellphones 4.10.4 Determination of profit — Shoeshine 4.11 Mastering accounting — questions 4.11.1 Short answer questions 4.11.2 Problems 4.11.3 Discussion questions 4.11.4 Research question 4.12 Mastering accounting — solutions 4.12.1 Short answer questions 4.12.2 Problems Chapter 5 Tracking cash and controlling assets 5.1 Introduction 5.1.1 Outline 5.1.2 Case study — Spacemakers Hardware Ltd 5.2 Tracking cash 5.2.1 Elements of a cash flow forecast 5.2.2 Managing shortfalls 5.3 Internal control 5.3.1 Taking control 5.3.2 Modern tools to help internal control — the use of technology 5.4 Statement of cash flows 5.4.1 Description of a statement of cash flows 5.4.2 Preparation of a statement of cash flows 5.5 Conclusion 5.6 Key words 5 5.7 Resource file 5 5.7.1 Cash cycle article — money makes the world go round… 5.7.2 Fraud article — fraudsters a simple, sad bunch 5.7.3 More on internal accounting controls — white collar crime: Cooking the books in corporate us 5.7.4 More on fraud — David Ross gets 10 years, 10 months jail 5.7.5 Internal control — internet resources 5.8 Mastering accounting — questions 5.8.1 Short answer questions 5.8.2 Paragraph answers 5.8.3 Cash flow forecast 5.8.4 Internal control 5.8.5 Statement of cash flows 5.9 Mastering accounting — solutions 5.9.1 Short answer questions 5.9.2 Paragraph answers 5.9.3 Cash flow forecast 5.9.4 Internal control 5.9.5 Statement of cash flows Chapter 6 The internal focus 6.1 Introduction 6.2 Planning for the future — an owner’s view 6.2.1 Case study — Spacemakers Hardware Ltd 6.2.2 Questions for discussion 6.3 Planning for the future — a professional’s view 6.3.1 Purpose of budgeting 6.3.2 Approaches to budgeting 6.3.3 Budgeting — behavioural issues 6.3.4 Handling uncertainty 6.3.5 Example — revenue and expenditure budget for Spacemakers Hardware 6.3.6 So how did we do? 6.4 How costs behave 6.5 Breakeven and beyond 6.6 Allowing flexibility in our budget process 6.6.1 Fixed versus flexible budgets 6.6.2 Preparing a flexible budget 6.7 Conclusion 6.8 Key words 6 6.9 Resource file 6 6.9.1 Formula — target profit after tax 6.9.2 Internet resources 6.10 Mastering accounting — questions 6.10.1 Short answer questions 6.10.2 Problems 6.10.3 Discussion questions 6.11 Mastering accounting — solutions 6.11.1 Short answer questions 6.11.2 Problems Chapter 7 Analysing financial reports 7.1 Introduction 7.2 Case study — Uniforms Renewed 7.3 Analysing and interpreting — the professional view 7.3.1 Non-monetary facts 7.3.2 Economic events 7.3.3 So what do the financial statements tell us? 7.4 Analysing the balance sheet 7.4.1 Short-term solvency — working capital 7.4.2 Short-term solvency — a closer look 7.5 How do we analyse and interpret financial data? 7.5.1 Working capital ratio 7.5.2 Liquidity ratio 7.6 Analysing the statement of cash flows 7.7 Non-cash current assets — some efficiency measures 7.7.1 Rate of stock turn 7.7.2 Age of debtors 7.7.3 Other factors affecting short-term solvency 7.7.4 Concluding comments 7.8 Creditworthiness — how risky is it to lend to an entity? 7.8.1 Proprietorship and debt/equity ratios 7.8.2 Undercapitalisation and overcapitalisation 7.8.3 Capital gearing 7.8.4 Applying the solvency test 7.8.5 Other considerations for lenders 7.9 Profitability — how well did the business perform? 7.9.1 Return on investment 7.9.2 Return on assets 7.9.3 So what causes profit to change? 7.9.4 Changes in sales 7.9.5 Gross profit percentage 7.9.6 Expense percentages 7.9.7 Net profit percentage 7.10 Links between ratios 7.11 Valuing a share market investment 7.11.1 Closing quotes 7.11.2 Dividends per share 7.11.3 Earnings per share 7.11.4 Dividend yield 7.11.5 Price/earnings ratio 7.12 Conclusion 7.13 Key words 7 7.14 Resource file 7 7.14.1 Ratio analysis — a quick reference guide 7.14.2 Analysing financial reports — internet resources 7.14.3 Spacemakers Hardware Ltd 7.14.4 Accounting standards’ impact on earnings 7.15 Mastering accounting — questions 7.15.1 Short answer questions 7.15.2 Problems 7.15.3 Research exercise 7.16 Mastering accounting — solutions 7.16.1 Short answer questions 7.16.2 Problems Appendix 1 Extracts from Xero Limited’s 2013 Annual Report Appendix 2 The accounting cycle — journals and ledgers A2.1 The accounting cycle A2.2 Case study — Welkom Enterprises A2.3 The accounting system A2.3.1 Source documents A2.3.2 Chart of accounts A2.3.3 A set of books A2.4 Journal entries A2.5 Posting to the ledger A2.6 Other journals A2.7 Subsidiary ledgers A2.8 Internal control — reconciliations A2.9 Key words A2 A2.10 Resource file A2 A2.10.1 Solution — Welkom Enterprises A2.10.2 Solution — Crosby & Co A2.11 Mastering accounting — questions A2.11.1 Tom Jones trading as Shy Lock A2.11.2 Broke Ltd A2.11.3 Aimless Accountancy Services A2.11.4 A Starter A2.12 Mastering accounting — solutions A2.12.1 Tom Jones trading as Shy Lock A2.12.2 Broke Ltd A2.12.3 Aimless Accountancy Services A2.12.4 A Starter Appendix 3 NZQA unit standards for accounting Appendix 4 NZQA prescription for Accounting Principles Glossary Index