Accounting decisions

Case: Accounting at

MacCloud winery

Accounting at McCloud Winery

Methodological note

We want to distinguish between Economic “facts/data”

– No need to discuss them– Taken for granted

Accounting “issues”– The topic of our discussion– We will follow the order of the case questions

Accounting at McCloud Winery

The MacCloud winery

5 acres of land One building

Accounting at McCloud Winery

1: The building Worth $32,000 Leased for 10 years for $5,000 per year How do we account for it?

Accounting at McCloud Winery

2: The bank loan $180,000 3 years maturity $ 10,000 annual repayment 10% interest rate

Accounting at McCloud Winery

3: The land and the grapevines The vineyard is certainly an asset Cost of this asset? Depreciation?

Accounting at McCloud Winery

4: Vines’ diseases

Highly damaging event Possible, but not certain How do we account for this?

Phylloxera Pierce’s disease

Accounting at McCloud Winery

5: The oak barrels Two types

– High quality (5 + 10 years of economic life)– Low quality (10 years of economic life)

Is it an asset? Depreciation?

Accounting at McCloud Winery

General questions that we have tackled today

What do we mean by “accounting decisions”?

Why is it necessary to make accounting decisions?

What are the consequences of these decisions?

Accounting at McCloud Winery

The accrual principle: an example

Begin. day 1 End of day 1 End of day 2

I/S day 1Wealth

300

BalanceSheet

I/S day 1

BalanceSheet

Wealth

350

BalanceSheet

Wealth

360

Cash flow day 1

Cash flowday 2

Cash

0

Cash

250

Cash

360

Profit = 50 Profit = 10

Cash increase = 250 Cash increase = 110

Cash flow logic

Accrual logic

Different!

Accounting at McCloud Winery

Accounting and Financial Analysis

Raw dataAccounting decisions

FinancialStatements

FinancialAnalysis

Double-entry

Accounting at McCloud Winery

Summing up

The need to make accounting decisions because of– Accrual principle– Uncertainty

Accounting standards guide these decisions, but never eliminate them

Financial statements are “chosen”– Ethical issues– Communication strategy