Académique Documents
Professionnel Documents
Culture Documents
General Ledger
Sales return:
Debit Credit
Purchase Return
Debit Credit
Income Statement
Revenue
Sales
Less sales returns
=Net sales
Chapter 14
Cost of Stock: all costs incurred in order to bring stock into a location and condition ready for sale.
Product Cost: a cost incurred in order to bring stock into a condition and location ready for sale that can be
logically allocated to individual units of stock.
● Stock is valued on a stock card at its product cost.
● Product costs are accounted for in the Income statement as part of Cost of Sales
Period Cost: a cost incurred in order to bring stock into a condition and location ready for sale that cannot be
logically allocated to individual
● Period costs are included in the income statement as part of Cost of Goods Sold(e.g freight in)
● If product costs are classified as period costs then:
○ Assets(stock value) are understated
○ Owner’s equity is understated(as COGS is overstated, and profit understated)
Net Realisable Value(NRV) rule: Stock must be valued at the lower of ‘cost’ and ‘Net Realisable Value’
NRV: estimated selling price - direct selling expenses(any costs involved in its selling, marketing or
distribution)
● Therefore stock should be valued at NRV when it is lower than cost price.
Stock Write-down: the expense incurred when the NRV of an item falls below its original purchase price.
● Stock write-down = HC - NRV
Stock write down is reported in the Income Statement under Gross Profit, hence changing Adjusted Gross
Profit.
Chapter 15
Credit purchase of non-current asset
General Journal
● Debit: NCA
● Debit: GST clearing
● Credit: Sundry Creditor - ____(name)
● Narration: credit purchase of __(name of NCA, eg. fittings)
Cost of a non-current asset: all costs involved in getting a NCA into a condition and location ready for use
that will provide a benefit for the life of the asset. (e.g installation, modification, delivery costs)
Depreciation: the allocation of the cost of a NCA over its useful life.
Accumulated depreciation: the value of the NCA that is that has been consumed over its life so far.
Carrying Value: the value of the NCA that is yet to be consumed/allocated as an expense + any RV.
Purpose of Depreciation
● Ensure that accurate profit is calculated, by comparing revenue earned against expenses incurred in
the current Reporting Period
● Depreciation recognises only the part of the asset that has been consumed within the Reporting
Period as an expense, ensuring the Income Statement upholds Relevance by including all information
useful in decision making.
Methods of Depreciation
Reducing Balance Method:
Depreciation expense($) = Carrying Value x Depreciation Rate
● Used when assets contribute to more revenue at the start of its life than its end.
● Usually has movable parts.
● Depreciation expense is greater as start of assets life, and less later on.
● Ensures that revenue earned by the NCA is matched with the expenses incurred so that a more
accurate profit can be calculated in each Reporting Period.
Disposal of NCA
Three steps:
1. Transfer the Carrying Value
2. Record proceeds from the sale(selling price of asset)
3. Transfer profit or loss on disposal of asset
Equipment 12000
Trade-in of NCA
● Same General Journal entries with additional general journal entry instead of CRJ entry.
● Normal credits purchase of NCA entries added
General Ledger Subsidiary Ledger
Date Details Debit Credit Debit Credit
Under-depreciation(reason for loss on disposal): occurs when insufficient depreciation has been allocated
over the life of the asset, so that the carrying value of the asset is overstated
● Because RV or Useful Life was overstated
Possible reasons:
● Damage
● Outdated(superseded by newer model)
Over-depreciation(reason for profit on disposal): occurs when excess depreciation has been allocated over
the life of the asset, so that the carrying value of the asset is understated
● Because RV or Useful Life was understated
Possible Reasons:
● Good condition/better than expected → longer useful life
● High demand(rare)
Chapter 16
● Balance day adjustments are made so that all revenue earned and expenses incurred in the Reporting
Period are reported in the income statement of the Reporting Period.
● This ensures Relevance as Balance day adjustments include information that is useful in decision
making in the the reports and records.
Chapter 17
Budgeting: the process of predicting/estimating the financial consequences of future events
Purpose of Budgeting
● Assist planning by predicting what is likely to occur in the future.
○ Allows owner to prepare for possible problems and take on possible opportunities
● Aid decision making by providing a standard or benchmark which actual performance can be
measured
○ Allow owner to identify areas where performance is unsatisfactory, so corrective action can be
taken
Budgeting Process
Budgeted Cash Flow Statement
● Ideally the budgeted Net Cash Flows from Operations will be positive.
● This means that the business is able to generate sufficient cash from Operations to meet its ongoing
obligations
● If operations are expected to be negative the owner can
○ Increase inflows by..
■ Increasing sales(by discounting goods, increases advertising)
■ Increasing receipts from debtors(by contacting slow payers or discounting early
payment)
○ Decrease outflows by..
■ Deferring payments to creditors.. Or paying early to get a discount
■ Cut back on cash paid for expenses(however, owner must be mindful as decreasing
outflows may also consequently decrease inflows by decreasing sales)
● Investing Net Cash Flows are expected to be negative, as the sale of a NCA is pretty rare.
● Whether Net Cash Flows are positive or negative for Financing Activities depends on whether
business is expanding or simply continuing operations
● There is a relationship between Financing and Investing Activities; negative Investing cash flows
could be financed by a positive Financing cash flows(i.e loan or capital contribution).
Consecutive Budgets
+ Allows owner to identify monthly and seasonal trends
+ Allows owner to identify problems earlier and take corrective action earlier, minimizing losses and
maximising gains
+ Greater accuracy of reports(more useful comparison) so gains will not be overstated and losses not
understated
- Time consuming(mostly computerized however some parts of budgeting may still require more time for
the owner, which they could be spending to earn more revenue/improve the business)
Account Reconstruction
1. Identify the entries we would expect to see in a particular ledger account(use template)
2. Match these entries with known figures
3. Complete the ledger account to calculate the figures that are not known.
Variance Reports
● Favourable(F) means that cash(for cash budget variance) or profit(for income statement variance) is
higher than expected
● Unfavourable(U) means that cash or profit is lower than expected.
Profit vs Profitability
● Profit is simply Revenue less Expenses.
● However, sales, assets and owner’s equity all contribute to determining the firm’s profitability(ability to
earn profit)
Analysing: examining the financial reports in detail to identify changes or differences in performance.
Interpreting: examining the relationships between the items in the financial reports in order to explain the
cause and effect of changes or differences in performance.
Profitability Indicators
● ROI
● ROA
● ATO
● NPM
● GPM
● ROI =
● ROI should be measured with Debt Ratio
● Debt Ratio: a stability indicator that measures the percentage of the firm’s assets that are financed by
liabilities.
● Debt ratio =
● Higher debt ratio → higher ROI
● Lower debt ratio → lower ROI
● The owner must judge carefully that the Debt Ratio is high enough to maximise the Return on Owner’s
Investment, but not too high that it will create difficulties for the business in relation to its debt burden.
● ROA =
● ROI will always be higher than ROA, because OE will always be lower than total assets, due its
liabilities
● Assuming assets do not change, an improvement in the ROA may be the result of an improved ability
to earn revenue or expense control.
● ATO =
● ATO and ROA are similar as they both assess the firm’s ability to use its assets
● Difference is ROA relates to profit, ATO only relates to revenue.
● Where the ATO and ROA move in different directions, or differing degrees, it indicates a change in
expense control.
Expense control: the firm’s ability to manage its expenses to that they either decrease or, in the case of
variable expenses, increase no faster than sales revenue.
● Variable expenses: Cost of Sales, Wages, Advertising
● If expense control improves, profitability should also improve.
● The ‘margins’ help evaluate expense control
● NPM=
● ROA depends on both the ATO and NPM
● ATO * NPM = ROA
● GPM =
● Increasing selling price will increase the average mark-up, but it carries the risk of lowering demand,
and thus reducing the volume of sales.
● However finding a cheaper supplier may reduce the quality of the stock, causing a decrease in sales, or
an increase in sales returns or stock losses(through damage).
Vertical analysis: a report that expresses every item as a percentage of a base figure; in this case, Sales
Rev.
Non financial information: any information that cannot be found in the financial statements, and is not
expressed in dollars and cents, or reliant on dollars and cents for its calculation
● Number of repeat sales
● Number of sales & purchase returns
● Number of customer complains
● Staff turnover/average length of employment
● Number of days lost due to sick leave
● Interest rates
● Number of competitors
Earning Revenue
● Change in selling price
● Increase Advertising, or target more accurately at prospective customers
● Stock mix: remove slow lines of stock, replace with faster moving lines
● NCAs: increased/updated to enable an increase in Sales
● Customer service: staff training, extra services, internal procedures made more customer friendly
Controlling Expenses
● Management of stock: security cameras to prevent theft, purchase better quality stock/train staff to
prevent damage, cheaper stock to decrease cost of sales.
● Management of staff: make sure firm is not under/over staffed, train staff to improve productivity
● Management of NCAs: unused, inefficient, unreliable NCAs should be replaced/removed.
Chapter 19
Liquidity: the ability of the firm to meet its short term debts as they fall due.
Assessing liquidity
● Trends: from budgeted cash flow statement, and cash flow statement.
● Liquidity indicators
○ Level of Liquidity
■ Working Capital Ratio
■ Quick Asset Ratio
■ Cash Flow Cover
○ Speed of Liquidity
■ Stock Turnover
■ Debtors Turnover
■ Creditors Turnover
● CFC =
● If the business cannot re-generate sufficient cash from its day-to-day operating activities, it will require
regular contributions from the owner or external financiers in order to meet its loan repayments and
provide cash for the owner’s drawings.
● There is no set benchmark for CFC but it can be compared to previous and budgeted cash flow
statements as well as the CFC of similar businesses.
○ More times = better
● STO =
Assessing STO
If STO is too slow
● Firm will be less able to generate sales, and therefore less able to generate cash inflows in time to
meet debts as they fall due
● The business may need to:
○ Employ strategies to increase sales(e.g increase advertising, decrease selling price, change
stock mix by adding more fast moving lines and removing slow moving lines of stock)
○ Decrease level of stock on hand(e.g ordering less stock more frequently, or replacing slow
moving lines of stock)
If STO is too fast
● Means that firm is selling stock for too low a selling price(missing out on extra revenue)
● Or is not holding enough stock(missing out on discounts for bulk purchases, or extra delivery costs due
to constant deliveries)
● Owner should also analyse at stock cards to identify slow and fast moving lines
Stock management
Ways to manage stock wisely to maximise the potential for sales
● Review Sales to maintain appropriate stock mix
○ Fast lines expanded, slow lines reduced/removed
● Promote the sale of complementary goods
○ E.g customers buying shoes will often want socks, so socks should be offered to increase sales
● Ensure stock is up to date
○ older/out-of-date versions should be discounted for quick sale
● Rotate stock
○ Older stock(i.e food) placed in front of newer stock
○ Most up to date/popular items at the front of the shop to attract more customers
● Determine an appropriate level of stock on hand
● Strong marketing
● DTO =
Assessing DTO
● Compared to credit terms given to customers and budgeted DTO to be determined as
satisfactory/unsatisfactory
● Can be compared to previous periods DTO
● Owner should also analyse Debtors Schedule so each individual debtor can be managed as DTO is
only an average
Debtor management
If DTO is too slow
● Offer a discount for early payment
● Give invoice at point of sale rather than later(because debtor would not even think of paying before
invoice)
● Extensive credit checks(so only reliable customers will be provided credit)
● Reminder notices
● Threats of legal action
● Debt collection agency
● Threats of not providing credit in the future
● CTO =
● Credit purchases of stock allow the firm some time to sell the stock and collect the cash before the
creditor must be paid
Assessing CTO
● Should be compared against credit terms or budgeted CTO
● Paying early may be beneficial due to discounts
● If there is no discount, it should be paid as close to credit terms as possible(without going over), so the
firm has cash for longer and can use it to repay other debts that are due
● Penalties of not paying on time
○ Interest charge on late accounts
○ Removal of credit facilities
○ Reduction in credit rating