Cash Versus Accrual Accounting and the Availability and Cost of
Quick Learn: concepts accrual accounting and cash flow
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Transcript of Quick Learn: concepts accrual accounting and cash flow
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.’
www.aasb.gov.au/Pronouncements/Glossary-of-defined-terms/Definitions-A.aspx - a great website that you should checkout!
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?