Collaborate Session 1Accounting 1Accrual Accounting B/S & P&L Example

Cash Flows

Accrual Accounting

Accrual accountingAASB Framework definition of accrual accounting:

‘The effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial reports of the periods to which they relate.’

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Income is recognised in the accounting period in which the right to receive the income arises – i.e. when the income is actually earned.

Accrued income

Income that is earned in an accounting period but not recorded before the end of the accounting period.

An example of accrued income

Charlie’s Doors has $100,000 in the bank. Interest on the investment is paid quarterly, with the April - June instalment due to be paid on the 26th July.

The interest is deemed to be income applicable to the period ending 30 June as it was earned in that period.

Beginning of Qtr – 1st April

End of period – 30th June

Interest actually received – 26th July

An expense is recognised in the accounting period in which the economic benefits are consumed – i.e. when the expense is incurred.

Expenses incurred during an accounting period but not recorded before the end of the period.

Accrued expenses

An example of accrued expenses• Mary’s Wholesale Flowers receives its electricity account

from ABC Power every 3 months• Last account of $6600 (inc GST) for the period 1

February to 30 April was received on 15 May • Estimation of electricity usage for 3 months ending 31

July similar to previous account • Electricity consumed during May/June must be

recognised as expense for year ended 30 June – an amount of $4400 (inc GST) is calculated for 2 months

BS & PL Questions

After the first few weeks, you should make sure you are able to prepare, analyse, interpret the 3 basic financial statements: Balance Sheet (Statement of Financial Position or BS) - Ch 3

Format (p90-92)

Income Statement (Statement of Financial Performance or P&L) – Ch 4 Format of Classified Income Statement (p148)

Statement of Cash Flows – Ch 5 Format (p230-231)

We have had a lot of questions about P&Ls and BS in the past few weeks so we are including a work through of an old exam question first – Eastern Pet Supplies

  $Cash at bank 12,000Accounts Receivable 9,000Drawings 6,900Discount expense 600Discount received 900Sales 98,000Inventory, 1 July 2011 16,200Sales returns 300Shop fittings & equipment 28,000Purchase returns 1 800Interest paid 2,500Advertising 1,600Sales staff salaries 10,700Office expenses 4,800Rates 3,600Shop fittings & equipment - accumulated depreciation 5,000

Long term loan 30,000Purchases 56,000Accounts Payable 6,800Capital 29,7003 year investment with bank 20,000

• The following information relates to Eastern Pet Supplies for the year ending 30 June 2012:

Prepare:• a classified Income Statement and • a classified Statement of Financial

Position for the year ending 30 June 2012.(11 + 10 = 21 marks)

End of year additional information and adjustments:• Inventory on hand, 30 June 2012 is

$9,700• Advertising paid in advance amounted to

$300• Sales staff salaries owing at 30 June 2012

totalled $2,500• Depreciation of shop fittings and

equipment is calculated as 10% of cost per year

• Interest income receivable at 30 June 2012 is $1,400

Cash at bank 12,000Accounts Receivable 9,000Drawings 6,900Discount expense 600Discount received 900Sales 98,000Inventory, 1 July 2011 16,200Sales returns 300Shop fittings & equipment 28,000Purchase returns 1 800Interest paid 2,500Advertising (1600 – 300) 1,300Sales staff salaries (10700 + 2500) 13,200Office expenses 4,800Rates 3,600Shop fittings & equipment – acc. Depn. (5000 + 2800) 7,800Long term loan 30,000Purchases 56,000Accounts Payable 6,800Capital 29,7003 year investment with bankClosing InventoryInventory on HandPrepaid AdvertisingSalaries OwingDepreciation ExpenseInterest IncomeInterest Receivable

20,0009,7009,700

3002,5002,8001,4001,400

AdjustmentsEnd of year additional information and adjustments:•Inventory on hand, 30 June 2012 is $9,700•Advertising paid in advance amounted to $300•Sales staff salaries owing at 30 June 2012 totalled $2,500•Depreciation of shop fittings and equipment is calculated as 10% of cost per year (28000 x 10%)•Interest income receivable at 30 June 2012 is $1,400

Cash at bank 12,000Accounts Receivable 9,000Drawings 6,900Discount expense 600Discount received 900Sales 98,000Inventory, 1 July 2011 16,200Sales returns 300Shop fittings & equipment 28,000Purchase returns 1 800Interest paid 2,500Advertising 1,300Sales staff salaries 13,200Office expenses 4,800Rates 3,600Shop fittings & equipment – acc. Depn. 7,800Long term loan 30,000Purchases 56,000Accounts Payable 6,800Capital 29,7003 year investment with bankClosing InventoryInventory on HandPrepaid AdvertisingSalaries OwingDepreciation ExpenseInterest IncomeInterest Receivable

20,0009,7009,700

3002,5002,8001,4001,400

Allocate items to Income Statement and Statement of Financial Position.

Eastern Pet Supplies Income Statement for the year ended 30 June 2012

Income Sales 98,000 Less Sales Returns 300 Net Sales 97,700 Less Cost of Goods Sold Inventory 1/7/2011 16,200 Purchases 56,000 Less Purchase Returns 1,800 54,200 70,400 Inventory 30/6/2012 9,700 60,700 Gross Profit 37,000 Other Income Interest Received 1,400 Discount Received 900 2,300 Total Income 39,300 Less Operating Expenses Selling Expenses Advertising Expenses 1,300 Sales Staff Salaries 13,200 Depreciation – Shop Fittings 2,800 Total Selling Expenses 17,300 Administration Expenses Office Expenses 4,800 Rates 3,600 Total Administration Expenses 8,400 Finance Expenses Discount Expense 600 Interest Paid 2,500 Total Finance Expenses 3,100 Total Operating Expenses 28,800 Net Profit 10,500

Eastern Pet Supplies Statement of Financial Position as at 30 June 2012

Assets Current Assets Cash at Bank 12,000 Accounts Receivable 9,000 Prepaid Advertising 300 Interest Receivable 1,400 Inventory on Hand 9,700 Total Current Assets 32,400 Non Current Assets Shop Fittings and Equipment 28,000 Accumulated Depreciation (7,800) 20,200 Bank Investment 20,000 Total Non Current Assets 40,200 Total Assets 72,600 Liabilities Current Liabilities Accounts Payable 6,800 Salaries Owing 2,500 Total Current Liabilities 9,300 Non Current Liabilities Long Term Loan 30,000 Total Liabilities 39,300 Owners Equity Capital 29,700 Net Profit 10,500 Drawings (6,900) Total Owners Equity 33,300 Total Liabilities and Owners Equity 72,600

Cash Flow Accounting 1

Cash Flow statement

Cash flow statement records the amounts of cash and cash equivalents entering and leaving a company

Assists in understanding where money is coming from and how it is being spent

Cash Vs ProfitCash Profit

Movement of cash (money going in or out)

Revenue less expenses

Cash flow statement will record transactions when money is actually paid or received

Based on accrual concept-transactions recorded in the period in which they occur regardless of whether cash is received or not

Preparation of Cash Flow Statement

Pages 236-244

3 steps

(a) Arriving at the cash flow from operating activities

(b) Arriving at the cash flow from investing activities

(c) Arriving at the cash flow from financing activities

Cash flow from operating activities

Main items :

Cash receipts from customers

Cash paid to suppliers

Cash paid to employees

Interest paid

Income taxes paid

Cash flow from Investing activities

Main items:Purchase of PPE

Proceeds from sale of PPE

Cash flow from Financing activities

Main items:Issue of share capital

Long term borrowings

Repayment of borrowings

Dividends

Payment of finance lease

Arriving at Cash flow from Operating activities

Let’s look at how to compute some of the items in the cash flow from operating activities

Cash receipts from customers

Start with: Opening balance of accounts receivable

Add: Sales for the period

Less: closing balance of accounts receivable

Cash paid to suppliersStart with: Opening balance of accounts payable

Add: Purchases

Less: Closing balance of accounts payable

If the figure for purchases is not available but only cost of sales is given, you need to work out the purchases as below.

Cost of sales=Opening stock+ purchases-closing stock

X=x1+?+x2

Interest paid

If there is Interest payable:

Start with :Opening balance of interest payable

Add: Interest expenses for the period

Less: closing balance of interest payable

If there is Interest prepaid:

• Start with: Closing balance of pre-paid interest

• Add: interest expenses for the period

• Less: opening balance of prepaid interest

Income tax

• Actual payment of tax usually lags behind profits

• Tax of the previous year usually gets paid in the current year

We have looked at the computation involved in arriving at the cash flow from operating activities

Any questions up to this point?

Reconciliation of operating profit to cash flow from operating activities

Pages 244-248

You are only required to know that this reconciliation exists

However let’s discuss a couple of points to assist your understanding of the concept

We know that cash flow and operating profit are two different items

The differences could be caused by,Non cash items such as depreciation

Increase or decrease in current assets

Increase or decrease in current liabilities

The effects of changes of assets & liabilities on cash flow

The below table summarizes the effect of changes of assets/liabilities on cash flow

Item Movement  Effect on cash flow

Current assets IncreaseDecrease

DecreaseIncrease

Current liabilities IncreaseDecrease

IncreaseDecrease

Past exam question 3 – ASSESSMENTS – REVISION EXAM QUESTIONS

Sales calculation

P & L

Cash paidCalculation

P & L

Wages paidcalculation

General exp calculation Notes

Questions?