Marshall2e IRM Ch01

8/11/2019 Marshall2e IRM Ch01

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CHAPTER 1

Accountingpresent and past

CHAPTER OUTLINE

I. What is accounting

A. Definition

B. Users and uses of accounting information

C. Classifications of accounting

1. Financial accounting2. Management accounting and cost accounting3. Auditingpublic accounting4. nternal auditing!. "o#ernment and not$for$profit accounting%. ncome ta& accounting

II. Ho! has accounting de"e#oped

A. 'arl( )istor(

B. *)e accounting profession in Australia

III. $inancia# accounting standard%setting at the present ti&e

A. +tandards for ot)er t(pes of accounting

B. nternational accounting standards

C. 't)ics and t)e accounting profession

D. *)e conceptual frame,or-

'. b/ecti#es of financial reporting

F. b/ecti#es of financial reporting for non$business organisations

TEACHIN' AN( LEARNIN' O)*ECTI+E,

Principa#

To have the student:

define accounting

identify and describe different classifications of accounting

understand that financial accounting standards are not a fixed code of rules, butare established in response to user needs and business developments (accountants

need to apply professional judgment in the application of accounting principles)

nstructor 0esource Manual *aAccounting: What the numbers meanb( Mars)all McCartne( an 0)(n et al. 1$1


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understand the role and sources of ethics for the accounting profession.

,upporting

To have the student: summarise how accounting has evolved over time

identify sources of professional standards for other types of accounting and tocontrast these with financial accounting standards

identify the issues associated with the development of international accountingstandards

describe the context of the Australian Accounting Standards Board (AASB)conceptual framework project

summarise the Statement of Accounting Concepts 2 (SAC 2)Objectives offinancial reporting

describe the relationship between the objectives of financial reporting for non-business organisations and those of business enterprises.

TEACHIN' O),ER+ATION, AN( A,,I'N-ENT ,U''E,TION,

1. Students should be aware of the jargon of accounting, the use of synonymous terms, theimportance of the context within which a term is used and the need for precision in theuse of terminology. The first example of jargon is the term entity. They are learning anew foreign language. This needs active learning to incorporate new terms into theirregular speech patterns.

2. When discussing AuditingPublic Accounting, have students find the auditors'opinion in the CFK Childcare Centres Limited Annual Report 2006 (Appendix 1).Emphasise that a clean opinion is not a clean bill of health and a qualified auditreport is not a reflection of the auditors academic or professional qualifications.

3. Discuss the Summary of SAC 2Objectives of financial reporting in detail. Go overeach item in this section with expanded examples.

4. Exercise 1.1 is designed to familiarise students with the breadth of accounting resourcesincluding those in the university library. Provide students with the library database orcollection location identified in E1.1(a) or encourage them to experiment with Internetsites that are of interest. In addition, or as an alternative to having students request theirown annual reports, distribute reports that have been obtained by the tutor. Financialliteracy requires an ability to both find and then use financial information.

5. Use Exercise 1.11 to generate discussion about the importance of audit independence.Follow up with a brief look at Exercise 1.12 for a discussion of ethical standards ingeneral and independence (in both appearance and fact).

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A,,I'N-ENT O+ER+IEW

This chapter provides a wide variety of assignments ranging from the basic association-type

exercises to the more challenging analytical-type problems. All are designed to beintroductory only. Be careful not to over-assign or under-assign homework in the first week.Consider this a stage setting for the semester so sort out expectations of all parties, introduceavailable tools and avenues for advancing financial literacy independently and encouragepersonal engagement of students by showing the relevance and pervasive nature ofaccounting information for everyone in society.

No. Learning

objectives

Level of

difficulty

Generic

attributes

Other comments

E1.1 1 'as( nterpretati#e Financial statements are used in subseuent uestions

E1. 1 'as( nterpretati#e "uided ,al-$t)roug) of financial statements

E1./ 1 'as( nterpretati#e As per '1.2

E1.0 2 'as( nterpretati#e ntroduction to usefulness of financial statements

E1. 3 'as( Conducting

researc)

ntroduction to accounting profession

E1.2 3 'as( Critical t)in-ing

E1.3 3 'as( Critical t)in-ing ntroduction to accounting careers

E1.4 3 'as( Conducting

researc)

ntroduction to accounting careers

E1.5 ! 'as( Critical t)in-ing ntroduction to different reuirements of financial statements

E1.16 4 ! 'as( Critical t)in-ing

E1.11 % 'as( Conducting

researc)

'&pectations gap

E1.1 5 'as( Critical t)in-ing 't)ical application

E1.1/ 6 'as( Useful for non accounting students to reflect on breadt) of

accounting

E1.10 2 'as( Critical t)in-ing 0ele#ance of accounting information to all aspects of dail( life

for all citi7ens in an( communit(

E1.1 5 'as( Critical t)in-ing 't)ical consideration and its association to professionalism

E1.12 6 'as( nterpretati#e 'ngagement in t)e tas- of reading a set of financial reports

E1.13 6 'as( Critical t)in-ing 0ole of conceptual frame,or- for t)e accounting profession

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,OLUTION,

E1.1 Answers will vary according to the company and the financial statements found by

the student.

E1.2 Answers will vary according to the company and the financial statements found bythe student.

E1.3 CFK Childcare Centres Ltd (2006)

(a) CFO: Christopher Kerr

This officer is mentioned in key management personnel pg 535 and in Note 26 (b)Other key management personnel on pg 577.

(b) Directors during 2006:

Warren Wilson, non-executive and ChairmanJennifer Scoble, non-executive DirectorAnthony Fehon, non-executive DirectorLeslie Wait, non-executive Director,Brian Mathews, non-executive Director, (deceased)Mark Avery, executive and Company Secretary (resigned)Barrie Childs, executive director Chief Executive OfficerNorene Childs, non-executive Director (resigned)

(c) Audit firm: Horwath Sydney PartnershipAudit Partner: Alfred NehamaAuditors Independence Declaration pg 543 and Auditors Repoert pg 590-591 Limited pages audited Remuneration (of Directors and key management

personnel) Report pg 533-540), the financial reports and accompanying notes aswell as Directors Declaration: pp. 551589

(d) Income Statements, Balance Sheets, Cash Flow Statements

(e) No of pages of notes: 33 pages (pp. 556588)

(f) Other reports: Directors report, Directors declaration, Shareholder andcorporate information, Auditors report, Corporate governance statement(report)

E1.4 Suggested discussion strategy:

Q: Why does a business have value?

A: It provides the owners an opportunity to earn a profit, an opportunity for personalfulfilment from being in charge and an opportunity to provide a product orservice that is useful to others.

Q: How can this value be measured?

A: Financial information, from the financial statements, will have the most to dowith evaluating the firms profitability. The value of the business is a function ofthe individual values of the resources it controls and its obligations. Its futureprospects also play a significant part in the valuation process.

Q: How is an asking price for the sale of a business established?

A: The asking price should be a function of the profit, resources and obligationsrelated to the business, as shown on the financial statements.

Note:This exercise also provides an opportunity to point out some of the basiclimitations of the data provided by the accounting process (e.g. historical cost



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informationhow useful are past earnings results in predicting future earnings andcash flows?). Be careful not to get too carried away with details. Let the studentslead this discussion.

E1.5 Answers will vary depending on the article selected by the student. This provides anopportunity to emphasise financial literacy and available resources.

E1.6 Individual answers will vary. This provides an opportunity to get engagement byestablishing relevance.

E1.7 Individual answers will vary, however they should include the breadth of accountingfrom compliance work to sophisticated project management. This provides anopportunity to improve the image of accounting.

E1.8 Institute of Chartered Accountants in Australia (ICAA) and CPA Australia,

professional membership and professional exams. Open the tertiary student linkon both home pages.

National Institute of Accountants (NIA) and Tax Agents Board

Certified Institute of Management Accountants (CIMA)

Financial Planners and asset wealth management organisations

Auditor General

Australian Bankers Association; Financial Services Institute of Australasia (FINSIA)

E1.9 This is an example of when the size of the organisation or business entity doesmatter. Students should address the issue of information needs, who are the users ofthe financial statements. The reporting responsibilities of a public company arecontrolled by the Australian Securities Exchange (ASX) and the AustralianSecurities & Investments Commission (ASIC), whereas there may be no regulatorfor the corner store, indeed with the latter the taxation returns submitted annually tothe ATO may be all the accounting that is ever prepared.

E1.10 3000 BC in Mesopotamia15th century: Pacioli and double-entry bookkeeping16th century: Industrial Revolution, separation of ownership from managementMid-19th century: External audit function introducedLate 19th century: Spread of UK accounting methods to colonies

Australia:1928 Institute of Chartered Accountants (ICA)1946 1st Codified accounting standards1952 ASA1960s Australian Accounting Research Foundation (AARF) and voluntaryaccounting standards1980s Australian Accounting Standards Board (AASB) Rule of law foraccounting standards1990s AASB Conceptual Framework

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2005 Compliance with International Accounting Standards

E1.11 Answers will vary depending on the search engines used by students to locaterequested information.

E1.12 The principal factors, Jennifer Evans must consider, are her competence andindependence. Is she competent to prepare financial statements for a companythat operates in a different industry than the one in which she works? Acontingent-fee arrangement would normally be considered an impairment of herindependence because she would directly benefit if the loan were to be approved.

E1.13 Students should be encouraged to think broadly about the far-reaching aspects ofaccountingits influences from a two-for-one-special offer or a $1 pizza saleto their parents superannuation investment decisions future business aspirationsto financing university studies by adequately understanding tax consequences, thebudgets impact on their life and Centrelink obligations

E1.14 Individual answers will vary. This provides an opportunity to get engagementby establishing relevance. For example, recent cost increases caused by fuel pricerises and interest rate increases. Busineses will eventually pas these increases ontocustomers Consider the impact of the federal budget for opportunities for wealthcreation and tax for compliance work that needs to be completed. Car loans andhome loans require accounting information to be provided. Household budgetsneed to be managed. Increases in allowances are easier to negotiate if supportingobjective data is provided. Sports clubs and social clubs are accountable to theirmembers. Trust can be developed by showing accountability.

E1.15 Competence, independence, integrity, objectivity and confidentiality are the coreingredients required to be upheld in an ethical decision. These are the veryessence of professionalism.

E1.16 The investor needs to read, analyse and reconstruct a full economic picture of thefinancial performance and position of the company in the past so as to moreconfidently predict a probable future. Then the investor is in a position to

consider how this impacts on his/her personal wealth and make appropriatedecisions.

A set of financial statements includes an income statement (for performanceassessment), a balance sheet (for financial position assessment), a cash flowstatement (for liquidity and risk assessment) and the statement of changes inowners equity (for an investor perspective rather than an entity perspective)

E1.17 The conceptual framework is a comprehensive set of core ideas that underlie andprovide the foundations that support the preparation and presentation of financialreports for external users. They help to provide internal consistency and certaintyin the development of new standards and uniformity that helps users makecomparisons over time and between investment vehicles with greater confidence.


Marshall2e IRM Ch01

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