FAC1502 Financial Accounting.Revision_course_2017

FAC1502 Financial Accounting.Revision_course_2017.What is the Framework?  Sets out the objectives & concepts  Provides a theoretical background or general frame of reference Purpose of the Framework:  Assist standard setting bodies;  Assist preparation of financial statements;  Assist auditors;  Assist other users of financial statements. The Conceptual Framework for Financial Reporting The Objective of general purpose financial reporting: 2010 Framework Objective The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors, in making decisions about providing resources to the entity. 2 Study unit 1 FAC1502 © Edge Business School The Conceptual Framework for Financial Reporting Qualitative characteristics 2010 Framework FUNDAMENTAL  Relevance - makes a difference in the decisions made by users  Faithful representation – Complete, neutral, free from error ENHANCING  Comparability – period to period and entity to entity  Verifiability – Different, knowledgeable, independent observers reach consensus  Timeliness - Information available to decision makers in time to influence their decisions  Understandability - Classifying, characterising and presenting information clearly and concisely The Conceptual Framework for Financial Reporting Underlying assumptions ACCRUAL BASIS  Effects of transactions & other events are recognised when they occur (NOT when cash flows!).  Recorded in accounting records and reported in AFS of the periods to which they relate. GOING CONCERN  Financial statements normally prepared on the assumption that entity is, and will continue to operate as a going concern into the foreseeable future.  Entity not expected to liquidate in next 12 months 3 Study unit 1 FAC1502 © Edge Business School The Conceptual Framework for Financial Reporting Elements: Definition FINANCIAL POSITION: ASSETS = EQUITY + LIABILITIES – This is a measure of financial POSITION at a specific date. FINANCIAL PERFORMANCE: INCOME – EXPENSES = PROFIT – This is a measure of financial PERFORMANCE over a period. FINANCIAL POSITION • Asset: – Resource controlled by entity; – Resulting from past event; – Expected inflow of future economic benefits • Liability: – Present obligation – Resulting from past event – Expected outflow of economic resources to settle • Equity: – Residual interest, i.e. – Assets – Liabilities FINANCIAL PERFORMANCE • Income: – Increase in assets; or – Decrease in liabilities • Expenses: – Increase in liabilities; or – Decrease in assets Asset: Future economic benefits Liability: Settlement (FOF) 4 Study unit 1 FAC1502 © Edge Business School The Conceptual Framework for Financial Reporting Elements: Recognition Criteria  First meet the definition of one of the elements!  Then 2 recognition criteria: 1. Is PROBABLE that any FUTURE ECONOMIC BENEFITS will flow 2. COST OR VALUE that can be MEASURED with RELIABILITY 5 Study unit 2 FAC1502 © Edge Business School STUDY UNIT 2 FINANCIAL POSITION The equations: A = OE + L OE = A - L The Elements of the equation Assets  Resource  Controlled by the entity (owner)  Past event  Future economic benefits Liabilities  Present obligation  Past event  Outflow of economic benefits Equity (Owner’s)  A – L 6 Study unit 2 FAC1502 © Edge Business School ASSETS: Non-current assets Property, plant & equipment  Land  Buildings  Vehicles  Equipment  Machinery Financial assets  Investments  Fixed deposit Intangible assets  Goodwill  Franchise  Copy right  Trade mark  Patents Current assets Inventory  Trading Inventory on hand  Consumables on hand e.g. Stationery / materials (unused) Trade and other receivables  Trade debtors  Accrued income  Prepaid expenses (prepayments) SARS VAT refundable Cash and cash equivalents  Bank (favourable)  Cash float  Petty cash  Deposit (refundable) LIABILITIES Non-current liabilities  Mortgage bond  Long term loan  Debentures Current liabilities Trade and other payables  Trade creditors  Accrued expenses  Income received in advance Bank overdraft SARS VAT payable Short term portion of loan 7 Study unit 3 FAC1502 © Edge Business School STUDY UNIT 3 FINANCIAL PERFORMANCE AND THE EFFECT ON EQUITY The equations: Profit = I –E OE = C + (I-E) –D The Elements of the equation Income  Inflow of economic benefits (not from the owner)  Increase in assets or decrease in liabilities – THEREFORE Expenses  Outflow of economic benefits (not to the owner)  Decrease in assets or increase in liabilities - THEREFORE Drawings or distributions  Outflow of economic benefits (to the owner)  Decrease in assets or increase in liabilities – THEREFORE Capital contributions  Inflow of economic benefits (from the owner)  Increase in assets or decrease in liabilities – THEREFORE 8 Study unit 3 FAC1502 © Edge Business School OWNER’S EQUITY: Drawings = anything the owner takes from the business for personal use Expenses Cost of sales:  Cost of goods sold  Carriage inward Operating expenses:  Carriage on sales  Salaries & wages  Telephone  Consumables e.g. stationery(used)  Settlement discount granted(set off)  Rent expense  Advertising  Credit losses  Depreciation Finance costs:  Interest on loans  Interest on overdraft Capital = anything the owner contributes to the business Income  Sales  Services rendered  Rent income  Settlement discount received (set off)  Interest on investments  Credit losses recovered  Etc. 9 Study unit 4 FAC1502 © Edge Business School STUDY UNIT 4 CLASS EXAMPLE 4-1 1. Charles started a business called Edge Traders. The business is to sell music cd’s. He deposited R100 000 into the bank account of the business. 2. A computer was acquired for the business for R6 000 and paid by cheque. 3. Stationery was bought for cash, R300. 4. He opened an account with Best Music Deals and purchased 600 cd’s (on account) for R50 each (R30 000) for resale purposes. 5. Cash sales for the week amounted to R8 000 (80 cd’s for R100 each). 6. Credit sales for the week amounted to R12 000 (120 cd’s for R100 each). 7. A customer (debtor) returned goods that Edge had sold on credit for R1 000 (10 cd’s). 8. Bought listening equipment on credit for R15 000. 9. Returned stock with a cost of R2 000 to Best Music Deals. 10. The owner took a cd as a gift for his child for her birthday. 11. Received R3 000 from debtors and allowed them a settlement discount of R120. 12. Paid R10 000 on account to Best Music Deals, in part payment of our account, and received a further R500 early settlement discount. 10 Study unit 4 FAC1502 © Edge Business School Assets = Equity + Liabilities Capital Income Expenses Drawings 1 + 100 000 + 100 000 2 +/- 6 000 3 - 300 - 300 4 + 30 000 + 30 000 5 + 8 000 + 8 000 - 6 + 12 000 + 12 000 - + 500 + 500 8 + 15 000 + 15 000 10 - 50 - 50 11 +/- 3 000 - 120 - 120 + 500 - 500 11 Study unit 4 FAC1502 © Edge Business School TUTORIAL 4-1 1. Enter the following transactions into the accounting equation 2. Show the journal entries 3. Post to the relevant ledger accounts Transactions: 1. A. Student won R50 000 cash and started a business called Student’s Car Sales. He buys and sells used cars that are ideal for students. He deposited the money into the bank account of the new business. 2. He bought a computer for R8 000 cash to keep accurate records of all his transactions. 3. He took out a cell phone contract for the business and paid the first month’s subscription fees, R350. 4. He bought 5 cars for the purpose of resale for R120 000, on credit from another second-hand car dealer who happened to be a family friend, who allowed him to open an account for this transaction. 5. He sold one of the cars for R40 000 cash (cost price R30 000) 6. One of his father’s friends bought two cars from him on credit for R85 000 (cost price R75 000) 7. His father’s friend brought one of the cars back and said it did not pass the road worthy test and that he had to spend R1 000 in order to get it through the test. A. Student agreed to give him the R1 000 as a rebate on the car 8. A. Student paid R40 000 to his creditor and received a R500 discount for early settlement 9. Received R20 000 from his debtor in part payment of his debt. A Student gave the debtor a discount of R450. 12 Study unit 4 FAC1502 © Edge Business School Assets = Equity + Liabilities Capital Income Expenses Drawings 1 + 50 000 + 50 000 2 +/- 8 000 3 - 350 - 350 4 + 120 000 + 120 000 5 + 40 000 + 40 000 - 6 + 85 000 + 85 000 - + 500 - 500 9 +/- 20 000 - 450 - 450 13 Study unit 5 FAC1502 © Edge Business School Study unit 5 Processing Data The Accounting Cycle ANNUAL FINANCIAL STATEMENTS (AFS) STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (PL) STATEMENT OF CHANGES IN EQUITY (SCE) STATEMENT OF FINANCIAL POSITION (FP) .