FINANCIAL ACCOUNTING REPORTING, A N A LYSIS A ND DECISION M A K ING 5TH EDITION CARLON | ML ADENOVIC | PA LM | MITRIONE | K IRK | WONG FINANCIAL ACCOUNTING REPORTING, A N A LYSIS A ND DECISION M A K ING 5TH EDITION FINANCIAL ACCOUNTING REPORTING, A N A LYSIS A ND DECISION M A K ING 5TH EDITION Shirley CARLON Rosina MCA LPINE-ML ADENOVIC Chrisann PA LM Lorena MITRIONE Ngaire K IRK Lily WONG Fifth edition published 2016 by John Wiley & Sons Australia, Ltd 42 McDougall Street, Milton Qld 4064 Typeset in 10/11.5 pt ITC Garamond Std Australian edition © John Wiley & Sons Australia, Ltd 2003, 2006, 2009, 2012, 2016 Authorised adaptation of Financial Accounting: Tools for Business Decision Making, 2nd edition (ISBN 978-0-471-34774-3), published by John Wiley & Sons, Inc., New York, United States of America © 2000 in the United States of America by John Wiley & Sons, Inc All rights reserved; Managerial Accounting: Tools for Business Decision Making (ISBN 978-0-471-34588-6), published by John Wiley & Sons, Inc New York, United States of America © 1999 in the United States of America by John Wiley & Sons, Inc All rights reserved The moral rights of the authors have been asserted National Library of Australia Cataloguing-in-Publication entry Creator: Carlon, Shirley, author Title: Financial accounting : reporting, analysis and decision making / Shirley Carlon, Rosina Mladenovic, Chrisann Palm, Lorena Mitrione, Ngaire Kirk, Lily Wong Edition: 5th edition ISBN: 9780730313748 (paperback) 9780730324881 (e-text) Notes: Includes index Subjects: Accounting — Textbooks Bookkeeping — Textbooks Other Creators/ Contributors: Mladenovic-McAlpine, Rosina, author Palm, Chrisann, author Mitrione, Lorena, author Kirk, Ngaire, author Wong, Lily, author Dewey Number: 657 Reproduction and Communication for educational purposes The Australian Copyright Act 1968 (the Act) allows a maximum of 10% of the pages of this work or — where this work is divided into chapters — one chapter, whichever is the greater, to be reproduced and/or communicated by any educational institution for its educational purposes provided that the educational institution (or the body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) Reproduction and Communication for other purposes Except as permitted under the Act (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission All inquiries should be made to the publisher Cover and internal design images: © Shutterstock.com/cluckva; PhotoDisc, Inc.; Image Source; Digital Vision; Image 100 Typset in India by Aptara Printed in China by Printplus Limited 10 9 8 7 6 5 about the authors Shirley Carlon MCom (Hons), CA, is a senior lecturer in the Business School at the University of New South Wales Her teaching interests include financial and managerial accounting, auditing and tax Shirley has considerable experience in the delivery of both external and internal programs, including web-based courses Shirley has received a national teaching citation award for outstanding contributions to student learning for innovations in curriculum development and the creation of peer support mechanisms for off-campus students She has taught extensively in China and has been a guest speaker on accounting issues at government functions Shirley’s research interests are in financial reporting where she has published several articles on peer mentoring, risk reporting, intangible assets, accounting policy choice and tax in Australian and international journals She is a chartered accountant with experience in both large and medium-sized audit firms Rosina McAlpine-Mladenovic BCom, MCom (Hons), MHEd, PhD, is an associate professor at the University of Sydney Business School and has a Masters degree and a PhD in education She is an internationally recognised, award-winning researcher and educator receiving outstanding teaching awards at the faculty, university and national levels as well as international best paper awards Rosina’s research interests include navigating and negotiating work–life balance and gender equality Since becoming a parent, she has been developing programs to help parents overcome the challenges of modern-day parenting using the latest research in child development A keen researcher, Rosina has edited a book with chapters from leading minds around the world in psychology, neuro-science and biology entitled Inspired children: how the leading minds of today raise their children Chrisann Palm is a lecturer in accountancy at Queensland University of Technology She is a CPA and has a PhD (QUT), a Master of Commerce (CSU) and a Graduate Diploma in Management (AGSM) She lectures in introductory accounting, management accounting, superannuation and personal financial planning Prior to joining the tertiary sector in 2004, Chrisann worked as a management accountant for a manufacturing company in Hong Kong as well as in the financial services industry in Sydney Chrisann is passionate about teaching and learning She was awarded the QUT Vice-Chancellor’s Performance Award 2009 in teaching excellence Her research interests are in the areas of accounting education, financial literacy and superannuation where she has published numerous articles in Australian and international journals and has received several grants and awards Lorena Mitrione BCom, MBus, PGrad DipEc&Comm, is a lecturer in accounting at the Monash Business School Prior to joining Monash in 2009, Lorena worked at CPA Australia From 2001 she was the CPA Program Manager responsible for the development and maintenance of CPA Program materials and examinations In this role Lorena developed a sound sense of the requirements for accounting learning materials while maintaining an up-todate knowledge of accounting standards, accounting research, technical accounting matters and business practices She is currently enrolled in a PhD Her thesis title is ‘Motivation and self-regulated learning processes applied by accounting students in a blended learning environment’ Ngaire Kirk BBS, BBS (Honours), MBS, CA, has a background in sheep and cattle farming and in the public and private health sectors Ngaire’s teaching responsibilities include coordinating and teaching introductory and intermediate financial accounting papers and teaching advanced auditing Her research interests focus mainly on financial accounting, financial reporting and accounting education, in particular the use of electronic and online resources to enhance both internal and distance learning She is a member of two key Massey Business College committees whose role is to enhance assurance of learning, and teaching and learning development across the college Lily Wong relate to improving the learning experience and academic outcomes for first-year accounting students Current areas of interest include blended learning, development of online teaching resources and examining the impact of technology-enhanced teaching options on student learning outcomes BBus, MBus, PhD, CPA, is an associate professor in the College of Business, Victoria University, Australia Lily is a recipient of international best paper awards, as well as university and national teaching excellence awards for her contribution to student learning in accounting education Lily’s key research interests About the authors v brief contents An introduction to accounting 2 The recording process 92 Accrual accounting concepts 152 4 Inventories 220 Reporting and analysing inventory 268 Accounting information systems 324 Reporting and analysing cash and receivables 404 Reporting and analysing non-current assets 474 Reporting and analysing liabilities 534 10 Reporting and analysing equity 588 11 Statement of cash flows 642 12 Financial statement analysis and decision making 720 13 Analysing and integrating GAAP 790 CA S E S T U D I E S Chapters 1–12, prepared by Wendy Pabst 859 APPENDICES A Domino’s Pizza annual report 2013 (abridged) 879 B Time value of money 917 contents Preface xiv Acknowledgements xviii CHAPTER AN INTRODUCTION TO ACCOUNTING 2 Introduction to accounting The business world Accounting: the language of business The accounting process The diverse roles of accountants Forms of business organisation Sole proprietorship Analysing financial statements 48 Analysis and decision making 48 Profitability 49 Liquidity 53 Solvency 57 Using the decision-making toolkit 60 END-OF-CHAPTER MATERIAL Glossary 65 Demonstration problem 68 Self-study questions 70 Questions 72 Brief exercises 72 Exercises 73 Problem set A 77 Problem set B 82 Building business skills 87 Partnership 9 Company 10 Other forms of business organisation 11 Not-for-profit organisations 12 Introduction to the Conceptual Framework 13 The objective of general purpose financial reporting 13 The reporting entity 14 Users and uses of financial information 15 Internal users 16 External users 17 Financing activities 18 Investing activities 18 Operating activities 19 Sustainability reporting 19 Financial statements 20 Statement of profit or loss 23 Statement of changes in equity 23 Statement of financial position 24 Statement of cash flows 25 Interrelationships between the statements 26 The financial reporting environment 40 Australian Securities and Investments Commission 40 Financial Reporting Council 41 Australian Accounting Standards Board 41 Australian Securities Exchange 42 Regulation in New Zealand 42 Professional accounting bodies 43 Concepts, principles and qualitative characteristics 44 Concepts and principles 44 Qualitative characteristics 45 CHAPTER THE RECORDING PROCESS 92 Accounting transactions and events 94 Analysing transactions 95 Summary of accounting transactions 100 The account 101 Debits and credits 101 Debit and credit procedures 102 Equity relationships 105 Expansion of the basic accounting equation 106 Steps in the recording process 107 The journal 108 Chart of accounts 110 The general ledger 111 Posting 111 The recording process illustrated 112 Summary illustration of journalising and posting 118 The trial balance 122 Limitations of a trial balance 122 Using the decision-making toolkit 123 END-OF-CHAPTER MATERIAL Glossary 126 Demonstration problem 126 Self-study questions 129 Questions 130 Brief exercises 130 Exercises 131 Problem set A 135 Problem set B 141 Building business skills 147 CHAPTER ACCRUAL ACCOUNTING CONCEPTS 152 Timing issues 154 Accrual versus cash basis of accounting 155 Revenue recognition criteria 156 New accounting standard for revenue recognition 158 Expense recognition criteria 159 The basics of adjusting entries 161 Types of adjusting entries 162 Adjusting entries for prepayments 162 Prepaid expenses 163 Revenues received in advance 167 Adjusting entries for accruals 169 Summary of basic relationships 174 The adjusted trial balance and financial statements 178 Preparing the adjusted trial balance 178 Preparing financial statements 179 Closing the books 180 Preparing closing entries 181 Preparing a post-closing trial balance 182 Summary of the accounting cycle 182 Using the decision-making toolkit 184 Appendix: Adjusting entries — using a worksheet 187 END-OF-CHAPTER MATERIAL Glossary 188 Demonstration problem 1 189 Demonstration problem 2 190 Self-study questions 191 Questions 193 Brief exercises 193 Exercises 194 Problem set A 199 Problem set B 207 Building business skills 216 CHAPTER INVENTORIES 220 Merchandising operations 222 Operating cycles 222 Inventory systems 222 Recording purchases of inventories 225 Purchase returns and allowances 226 Freight costs 226 Purchase discounts 227 viii Contents Recording sales of inventories 229 Sales returns and allowances 230 Sales discounts 231 Statement of profit or loss presentation 232 Sales revenue 232 Gross profit 233 Other revenue 233 Operating expenses 233 Evaluating profitability 234 Gross profit ratio 234 Operating expenses to sales ratio 236 Using the decision-making toolkit 237 Appendix: The goods and services tax 239 END-OF-CHAPTER MATERIAL Glossary 245 Demonstration problem 246 Self-study questions 247 Questions 248 Brief exercises 249 Exercises 250 Problem set A 252 Problem set B 257 Building business skills 263 CHAPTER REPORTING AND ANALYSING INVENTORY 268 Classifying inventory 270 Periodic inventory system 271 Recording inventory transactions 271 Recording purchases of inventory 272 Recording sales of inventory 273 Comparison of entries — perpetual vs periodic 273 Cost of sales 274 Determining cost of goods purchased 274 Determining inventory quantities 275 Statement of profit or loss presentation 277 Inventory cost flow methods — periodic system 278 Specific identification 279 Cost flow assumptions 279 Financial statement effects of cost flow methods 284 Statement of profit or loss effects 284 Statement of financial position effects 285 Taxation effects 285 Using inventory cost flow methods consistently 286 business environments and decision making 4–6 business organisations case study 860–1 main forms of 9–11, 590 other forms of 11–13 sustainability and environmental tracking 20 business transactions and cash 406–8 call on capital 597 Canada and GST 239 capital expenditure ratios 673–4 capitalising interest 480 Carbon Disclosure Leadership Index (CDLI) 828 Carbon Disclosure Project (CDP) 828 Carbon Performance Leadership Index (CPLI) 828 CarbonSystems 20 See also Envizi Cardrona Alpine Resorts 677 carrying amounts 166, 484 See also book value cash assessing adequacy 426–7 bank reconciliation internal controls 412–19 business transactions and 406–8 case study 869–70 effect of major accounting transactions on 407 inflows 408 internal control 409–27 outflows 408 payments internal control 410–11 petty cash internal control 412 receipts internal control 409–10 cash accounts 418 cash budgets 422–5 collection from customers 424 materials 424 payments for materials 424 sales 423 selling and administrative expense 424 cash debt coverage 58, 59, 676, 736 cash disbursements journals 367 cash discounts 227 See also settlement discounts cash dividend declared accounts 600 cash dividends 599–600 cash equivalents 426 cash flow management of small businesses 421 cash flow statement See statement of cash flows cash flows 642 cash in advance from customer transactions 97, 114 cash ledger accounts 118 cash management principles 420–2 cash over and short 449 cash payment transactions 98, 99 cash payments for employee transactions 100, 117 cash payments journals 367–9 See also cash disbursements journals bank reconciliations 418 checking ledgers 369 posting procedures 367–8 cash payments transactions 115 cash puchase transactions 97, 113 cash receipts journals 361–4 bank reconciliations 417 checking ledgers 364, 369 journalising and posting 363 posting procedures 364 cash return on sales ratios 676–7, 740–1 cash-based accounting versus accrual-based 155–6 cash-generating units 492 Catchafire 8 Centro Group 592 Certified Practising Accountants (CPAs) 43 changes in accounting estimates 606 changes in accounting policies 606–7 chart of accounts 110, 113 Chartered Accountants Australia and New Zealand 43 Chartered Accountants (CA program) 43 cheques 411 clearing 412 dishonoured 413, 417 unpresented 413, 415 chief executive officers (CEOs) 593 chief financial officers (CFOs) claims of creditors and owners 24 classification processes classified statement of financial position 26–7 Clive Peeters 335 closing entries journalising 181 periodic inventory systems 298–9 perpetual inventory systems 297–8 posting procedures 182 closing the books 180–2 cloud accounting systems 333, 352 See also MYOB AccountRight Plus; Xero Coca Cola Amatil 268–9 cost flow methods 279, 284 depreciation expenses 485 dividend payments 105 percentage of intangibles to total assets 498 percentage of PPE to total assets 478 receivables turnover and average collection period 442 Coca-Cola Bottles (Perth) Pty Ltd 268 Coles 44 cost flow methods 284 Colorado Group Ltd 11 See also Fusion Retail Brands Pty Ltd commercial accountants Commonwealth Bank of Australia 828 communication of financial information companies 10–11, 591 See also corporations advantages and disadvantages 594 organisational structure 593 process of forming 595 sources of funds 18 sources of information about 50 Companies Act 592 Companies Act 1856 40 Companies Act 1993 (NZ) 10 comparability of information 47, 811 Index 933 computerised accounting information systems 349–54 See also cloud accounting systems advantages and disadvantages 353–4 basic features of 350–3 e-commerce considerations 354 modules 350 computerised accounting systems 103 computerised inventory systems 223 Conceptual Framework 13–15, 825–6 current content of 800–1 current developments in 790–1 development of 42 developments and improvements to 799 financial statements 20–40 general purpose financial reporting objectives 13–14 issues with 800 qualitative characteristics 45–8 reporting entities 14–15 revisions proposed for 800, 824 users of 804–5 Conceptual Framework for Financial Reporting 2010 21, 800, 802–3, 831 See also Conceptual Framework conceptual frameworks, history and development 797–801 consigned goods 276 consignment stock 276 Consumer Price Index (CPI) 271 contingent liabilities 555–8 disclosures 795 continuous life 592 contra accounts 484 contra asset accounts 166 contra equity accounts 598 contra revenue accounts 230–1 contract interest rates 542, 543 contributed equity 96 reporting 612–14 control accounts 344 relationship with subsidiary ledgers 345 convertible notes 541 cooperatives 12 copyrights 502 corporate collapses 330, 592 corporate fraud 335–6 corporate governance 329–30 Corporate Governance Principles and Recommendations (2nd edition) 330 Corporate Governance Principles and Recommendations (3rd edition) 330 corporate governance statements 34 corporations 591–5 ability to acquire capital 592–3 advantages and disadvantages 594 characteristics of 591–4 company management 593 continuous life 592 government regulations 594 limited liability of shareholders 591 organisational structure 593 separate legal existence 591 transfer of shares 591–2 934 Index Corporations Act 2001 (Cwlth) 10, 40, 592, 595 cost constraints on information 47–8 cost flow methods consistency of application 286 effect on statement of financial position 285 effect on tax 285 effects on financial statements 284–6 cost of goods purchased 274–5 cost of sales (COS) 222 calculating 276–7 using periodic systems 274–7, 280 cost principles 45, 795 Country Road’s cost flow methods 284 CPA Australia 8, 43 credit cards, advantages of 443–4 credit purchase transactions 99, 116 credit purchases 225 credit rating agencies 543 credit risk 439–40 disclosures 441 reporting 440–1 credit risk ratios 440 creditors’ subsidiary ledgers See accounts payable subsidiary ledgers credits 101 cross-references in ledger accounts 111–12, 113 Crown Resorts Ltd 739 CSR Ltd 44 changes in accounting policies 607 depreciation expenses 166 Dividend Reinvestment Plan (DRP) 602 share buybacks 594 current assets 27, 429 current cash debt coverage 675, 732–3 Fantastic Holdings and Nick Scali Limited 56–7 current cost measurements 824 current liabilities 28, 536 calculating mortgage liabilities 550 Domino’s Pizza Enterprises Ltd 29 current ratios 54–5, 561, 675, 731–2 customers’ subsidiary ledgers 344 Dare Gallery 51 data security 409 David Jones 828 days in inventory 287–8 debentures 18, 541 accounting issues 543–4 determining market value of 542–3 disadvantages 542, 619 redeeming at maturity 544 redeeming before maturity 544–5 debit and credit procedures assets and liabilities 103 dividends 104 expenses 104–5 hiring employees 99 retained earnings 104 revenues 104–5 share capital 103–4 debits 101 debt financing 58, 97, 534–5 advantages over ordinary shares 541 versus equity financing 618–20 debt securities 18 debt to equity ratios 736 debt to total assets ratios 57–9, 535, 562, 735–6 debtors’ subsidiary ledgers See accounts receivable subsidiary ledgers decision-making processes in business 4–6 decision-usefulness objectives 802, 808 declaration dates and cash dividends 600 deferrals See prepayments delivery dockets 340 Deloitte 7 Deloitte Touche Tohmatsu 36 depletion of natural resources 505–6 deposit in transit See outstanding deposits depreciable amounts 486–7 depreciation 28 case study 871 disclosures 490, 491 methods for PPE 486–9 periodic 490–1 PPE 483–91 prepayments adjusting entries 165–7 DEXUS Property Group 12 Diana Ferrari 11 differential financial reporting 807–8 diminishing-balance method 486, 487–8 See also accelerated depreciation methods direct method for statement of cash flows 647, 648, 654–62, 663 direct write-off methods 664 case study 870, 872 effects of 430 uncollectable accounts 429–30 directors’ reports 34–5, 101, 744 Domino’s Pizza Enterprises Ltd 35 disclosures biological assets 504 change in depreciation methods 491 changes in accounting estimates 606 changes in accounting policies 606–7 changes in equity 613 contingent liabilities 795 credit risk 441 depreciation 490 intangible assets accounting policies 500 prior period errors 604 reserves and retained earnings disclosure 614–15 discontinued operations 608 discount allowed 231 discount received 227 discounting processes 542 discounts cash 227 purchase settlement 237 sales 231, 273 settlement 227–8, 242–3 trade 228 discussion papers 800, 818, 823, 824 dishonoured cheques 413, 417 dividend payout ratios 617, 742 dividend payouts 616–17 variability among companies 617 dividends 18, 24, 590, 599–603 case study 874–5 corporations’ payments 105 debit and credit procedures 104 forms of 599–603 dividends payment transactions 99, 117 Domino’s Pizza College 330 Domino’s Pizza Enterprises Ltd 2–3, 17 auditor’s reports 36–8 cost flow methods 284 credit risk note in financial statement 441 credit risk ratios 440 current assets 27 current liabilities 29 debt and equity financing 97 depreciation expenses 166 depreciation policy disclosures 490 developments in accounting systems 94 directors’ reports 35 financial reports frequency intangible assets 28, 499 non-current assets 28 notes on accounts receivable 431 notes to the financial statements 34 percentage of intangibles to total assets 498 percentage of PPE to total assets 478 PPE 28 presenting receivables in notes of financial statements 439 ratio of cash to daily cash expenses 427 receivables as percentage of assets 428 reserves and retained earnings disclosure 614–15 retained earnings 31 Safe Delivery Program 330 statement of cash flows 32, 33 statement of changes in equity 30 statement of financial position 30–2 statement of profit or loss 30, 31 double-entry systems 102–5 Dow Jones Sustainability World Index 828 Dun & Bradstreet 722 earning power 603 earnings before interest and tax (EBIT) 562 earnings management 168, 296 earnings per share (EPS) 741 e-banking 408 e-commerce accounting software considerations 354 data security 409 ED/2010/2 Conceptual Framework for Financial Reporting: The Reporting Entity 791, 794, 807 Index 935 electronic banking 408–9, 420 electronic funds transfer (EFT) 409, 411 electronic spreadsheets 353 mortgage schedules 548 employees hire transactions 99, 116 end of reporting period 44 enterprise resource planning (ERP) systems 353 entity theories 790, 806 environmentally sensitive businesses 830 Envizi 20 Epilepsy Association of Australia 12 equation analyses 226 equity 24 case study 873–5 changes in accounting estimates 606 changes in accounting policies 606–7 debt versus equity financing 618–20 decision-making processes 590 defining 818 discontinuing operations 608 dividends 599–603 dividends record analysis 616–17 earning power 603 earnings performance analysis 617–18 effect of inventory errors on 296–7 effect of share dividends on 602 prior period errors 603–6 relationships of accounts affecting 105 share issues 596–8 statement of changes in equity reporting 611–12 statement of financial position reporting 612–16 statement of profit or loss and other comprehensive income reporting 609–11 equity financing 97 versus debt financing 618–20 equity investors 16 errors bank 413, 419 inventory 295–7 posting 122 prior period 603–6 rounding 549 ethical investments 828 events 94–5 Excel spreadsheets 353 mortgage schedules 548 exempt supplies 240 expense recognition criteria 159–60, 821–3 relationship with revenue recognition, accounting period concepts and 160 expenses 19 concepts of capital 823 debit and credit procedures 104–5 defining 821 relationship between revenues, accounting period concept and 822 exposure drafts 791, 794, 799–800, 807 eXtensible Business Reporting Language (XBRL) 19, 829, 830–1 External Reporting Board (XRB) 42, 808 936 Index face value notes payable 537 unsecured notes 542 factoring 443 fair value accounting 495 faithful representation of information 47, 810 Fantastic Holdings 49 asset turnovers 508–9 average age of PPE 508 average useful life analysis 507 cash debt coverage 59 cost flow methods 284 current ratios 54 debt to total assets ratios 58 dividend payouts 617 gross profit ratios 235 inventory turnover and days in inventory 288 liquidity ratios 561 operating expenses to sales ratios 236 profit margins 51–2 return on assets 50–1 fast food industry See Domino’s Pizza Enterprises Ltd Fernwood 152 FIFO methods See first-in, first-out (FIFO) method finance leases 482, 551, 815 accounting for 553–4 financial accounting financial accounting records, maintaining accurate Financial Accounting Standards Board (FASB) 798 Concept Statement 1 802 General Standards 280 joint projects with IASB 799, 826–7 financial capital concepts 823 financial controllers 593 financial data 743 financial information categories of primay users 15–16 comparability of 811 enhancing qualitative characteristics 47, 48, 810–12 external users 17–20, 45–6 external users and needs 16 faithful representation 47, 810 fundamental qualitative characteristics 46–7, 48, 809–10 internal users of 16–17 relevancy of 46–7, 809–10 sources of information about 50, 742–3 timeliness of 812 understandability of 812 verifiability of 811 Financial Market Authority (FMA) 592 financial ratio classifications 49 financial reporting constraints of 47–8, 813–14 defining and recognising elements in 814–23 differential 807–8 enhancing qualitative characteristics 810–12, 813 fundamental qualitative characteristics 809–10, 813 future developments for 826–31 measuring elements of 823–4 social and environmental aspects 649–50 tiered systems 807–8 users of 804–5 XBRL lodgements 831 Financial Reporting Act 1993 42, 592 Financial Reporting Act 2013 42, 808 Financial Reporting Board (FRC) 41 Financial Reporting Council 745 financial reporting environment 40–3 financial statements 20–40 See also notes to the financial statements accounting processes for generating 337–8 analysis and decision making 48–9 case study 876–8 effect of cost flow methods 284–6 elements in 814 external users 334 fraudulent reporting 168 horizontal analysis 723–6 liquidity ratios analysis 559–61 non-current assets reporting 506 prepared from adjusted trial balance 179–80 presenting receivables in 438–9 financial statements analysis common-size format 730 limitations of 743–5 ratio analysis 731–43 types of comparative analysis 722–30 vertical analysis 727–30 financial year 154 financing activities 18, 645 cash inflows and outflows 646 determining net cash used 662 effect on cash 407 finished goods inventory 270 first-in, first-out (FIFO) methods 279, 280–1, 284–5 advantages of 285 perpetual inventory systems 291–2 Fisher & Paykel 44 receivables as percentage of assets 428 Fitness First 152 fixed assets 18 FOB destination 276 FOB shipping point 276 Fonterra Co-operative Group Limited 404–5 percentage of PPE to total assets 478 segment reporting 478 foreign currencies 369 Foreign Investment Review Board 592 forensic accounting 335–6 Fortescue Metals Group 592 The Framework (1989) 798, 799 Framework for the Preparation and Presentation of Financial Statements See Framework (1989) franchises 2–3, 4, 502–3 fraud e-commerce 409 inventories 275–6 occupational 276, 335 fraudulent reporting 168 free cash flows 672–3, 736–7 ‘free from’ food businesses’ complex recording processes 92–3 free on board (FOB) shipping point 276 Freedom Foods Group Limited 92, 110 debt and equity financing 97 developments in accounting systems 94 Freedom Nutritional Products 18 freight costs 226–7 recording (periodic system) 272 freight-in accounts 226 freight-out accounts 227 full disclosure principles 45, 795 furniture retailers See Fantastic Holdings; Nick Scali Limited Fusion Retail Brands Pty Ltd 11 GAAP See generally accepted accounting principles (GAAP) gain on sale 496 gains 156, 819 general expenses 233 general journals 108, 119 adjusting entries 175 effect of special journals on 369–70 journalising and posting 370 using 347 general ledgers 111, 119–20, 337 after write-offs 432 cross-references 111–12 recording adjustments 176–7 relationship with subsidiary ledgers 344 general purpose financial reporting 13–14 objectives of 801–3 users of 15–16, 803 generally accepted accounting principles (GAAP) 40, 48, 793, 798 integrating and applying 826 summary of various aspects of 825–6 global financial crisis (GFC) 18 Global Manufacturing Purchasing Manager Index (PMI) 271 Global Reporting Initiative (GRI) 828–9 going concern principles 44–5, 794–5 Goodlife Health Clubs and recognising accounting periods 152–3 goods and services tax (GST) 239–44 bad debt write-offs 435 case study 864–6 exemptions to 240, 361 impact on non-current assets 481–2 inventories puchase 241 overview of processes 239–40 purchase returns 241–2 remitting to taxation authorities 243–4 sales 242 sales returns and allowances 242 settlement discounts 242–3 goods in transit 276 goods on consignment 276 Index 937 goodwill 28, 499, 503 Google 502 government accountants government sectors 12–13 See also public sectors GRI 828–9 Grinders Coffee 268 gross margin 233 gross profit, presentation in profit or loss statements 233 gross profit margins 739–40 gross profit ratios 234–6 GST See goods and services tax (GST) GST-free supplies 240 Harris Scarfe 296 Harvey Norman Holdings 222 purchase settlement discounts 237 value of inventories 231 health and fitness businesses, accounting periods in 152–3 health foods businesses’ complex recording processes 92–3 high turnover businesses 51 HIH 330 historical cost measurements 824 horizontal analysis 723–6 case study 878 HP 475 IAS Presentation of Financial Statements 26, 27, 537, 603 revisions to 609, 648 IAS Inventories 279, 284, 286, 504 IAS Statement of Cash Flows 645, 648 IAS Accounting Policies, Changes in Accounting Estimates and Errors 603, 607 IAS 15 Information Reflecting the Effects of Changing Prices 158 IAS 16 Property, Plant and Equipment 477, 484, 493, 795 IAS 17 Leases 482, 483, 550, 555 IAS 18 Revenue 157, 820 IAS 19 Employee Benefits 607 IAS 23 Borrowing Costs 481 IAS 33 Earnings per Share 741 IAS 36 Impairments of Assets 492 IAS 37 Provisions, Contingent Liabilities and Contingent Assets 430, 536, 816 IAS 38 Intangible Assets 498, 499, 501, 607 IAS 41 Agriculture 503, 504 IASB See International Accounting Standards Board (IASB) IASB Staff Paper July 2014, Effect of Board Redeliberations on DP A Review of the Conceptual Framework for Financial Reporting 800, 802, 803, 818, 824 iFLYflat 8, 671 IFRS Business Combinations 499 IFRS Non-current Assets Held for Sale and Discounted Operations 603, 608 IFRS Exploration for and Evaluation of Mineral Resources 505 938 Index IFRS 15 Revenue from Contracts with Customers 158, 229, 820, 823 impairment losses 492 implicit interest rates 553 income See also gains; revenues alternative presentations of 610 concepts of capital 823 defining 819 recognition criteria 819–20 incorporated associations 12 incorporation of companies 10 incremental borrowing rates 553 independent internal verification 333–4 indirect method adjustments 667 cash flows from operating activities 662–7 statement of cash flows 647 industry averages comparisons 722 information technology’s impact on inventory systems 224 input tax credit 240 input taxed supplies 240 Institute of Public Accountants (IPA) 43 Institute of Supply Management 271 insurance, prepayments adjusting entries 164–5 intangible assets 498–503 See also goodwill amortising 499–500 Domino’s Pizza Enterprises Ltd 28 identifiable 499 impairment tests 501 subsequent expenditures 500–1 types of 501–3 unidentifiable 499 integrated accounting systems 350 inter-entity basis comparisons 722, 731 interest adjusting accrued 171–2 formula for 171 interest coverage 562, 736 interest expenses 546 interim/final cash dividend declared accounts 600 internal auditors 330, 334 internal control systems accounting information systems 328–36 bank reconciliation internal controls 412–19 cash payments 410–11 cash receipts 409–10 documentation procedures 332 establishing responsibilities 330 independent internal verification 333–4 limitations of 335 management’s responsibilities 329–30 petty cash funds 448–9 physical, mechanical and electronic controls 332–3 PPE 497 principles of 330–4 purchases and payments cycle 342–3 sales and receivables cycle 342 segregation of duties 331–2 types of 329 use of forensic accounting 335–6 internal reports 234 internal sales orders 338 See also picking slips International Accounting Standards Board (IASB) 41, 797 Conceptual Framework 799–800 Effect of Board Redeliberations on DP A Review of the Conceptual Framework for Financial Reporting 800 Framework for the Preparation and Presentation of Financial Statements 798 International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) 807 joint projects with FASB 799, 826–7 A Review of the Conceptual Framework for Financial Reporting (DP/2013/1) 800 International Farm Comparison Network 404 International Federation of Accountants (IFAC) 43 International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) 807 International Financial Reporting Standards (IFRS), countries currently considering 798 International Financial Reporting Standards (NZ IFRS) 42, 808 International Public Sector Accounting Standards Board (IPASB) 807 International Public Sector Accounting Standards (IPSAS) 42, 807, 808 internet and data security 409 internet banking 408 intra-entity basis comparisons 722, 731 inventories analysis of turnover 287–8 case study 864–7 classifying 270–1 closing entries for merchandising (periodic method) 298–9 closing entries for merchandising (perpetual method) 297–8 consistency of cost flow method application 286 cost flow methods 278–84, 291–4 determining quantities (periodic system) 275–6 effect of errors on assets and equity 296–7 effect of errors on profit 295–6 fraud 275–6 managing 220–1 merchandising businesses 270 profitability measures for 234–8 purchase returns GST 241–2 purchases GST 241 recording cost of goods purchased (periodic system) 274–5 recording purchases 225–8 recording purchases (periodic system) 272 recording sales of 229–32 recording sales (periodic system) 273 recording transactions (periodic system) 271 sales GST 242 sales returns and allowances GST 242 settlement discounts GST 242–3 valuing at lower of cost and net realisable value 286 inventory systems 222–4 See also computerised inventory systems; periodic inventory systems; perpetual inventory systems impact of information technology on 224 integrated 342 inventory turnover 287–8, 734–5 investing activities 18–19, 645 cash inflows and outflows 646 determining net cash used 661 effect on cash 407 IP Australia 501 IPONZ 501 irregular items 603 issue price 542, 596 Jag 11 James Hardie 592 JB Hi-Fi 220–1, 222 asset turnovers 739 financial statements analysis 727 journalising 108, 118–20 cash payments journals 367, 368 cash receipts transactions 361–3 purchases journals 365–6 revaluations 494–5 journals 108–9, 337 recording transactions 108–9 JP Morgan 271 Kathmandu’s cost flow methods 284 KeepCups 830 Kiwi Co-operative Dairies 404 KPMG 7 language of business See also accounting last-in, first-out (LIFO) methods 279, 280, 281–3, 285 perpetual inventory systems 292 Le Cornu 51 leases 551–5 See also finance leases; operating leases advantages of 551 popularity with local and state governments 552 repayment schedules 554 reporting 555 ledgers See general ledgers lenders 16 lessees 482, 551 lessors 482, 551 LG Electronics, Inc 474–5 percentage of intangibles to total assets 498 percentage of PPE to total assets 478 research and development costs 501–2 liabilities 21, 24 See also contingent liabilities; non-current liabilities case study 871–3 classifications based on uncertainties 556 debit and credit procedures 103 defining 816–17 normal balances 103 recognition criteria 817–18 recording payroll and deductions payable 538–9 revenues received in advance 539–41 Index 939 licences 503 LIFO conformity rule 285 LIFO methods See last-in, first-out (LIFO) method limited liability partnerships 10 limited liability shareholders 10, 591 LinkedIn 8 liquid investments 421 liquidity ratios 49, 53–7, 731–5 assessing 675 financial statements analysis 559–61 loans payable by instalment 545–50 accounting for 546–9 local governments and leasing options 552 long service leave 539 loss 19 loss on sale 496–7 lower of cost and net realisable value (LCNRV) 286 low-turnover businesses 51 Mainland 404 management accounting management and internal controls responsibilities 329–30 management remuneration 153 manual accounting systems 350 manufacturing businesses inventories 270 operating cycles 420 market interest rates 542, 543 market value 542 bonds 543 matching technique 160, 822 materiality of information 46–7, 809–10 Mathers 11 measurement processes merchandising businesses 222 accrual-based accounting 155 closing entries (periodic method) 298–9 closing entries (perpetual method) 297–8 expense recognition criteria 160 inventories 270–1 inventory systems in 222–4 operating cycles 222, 223, 420 revenue recognition criteria 159 worksheets for closing entries 299–300 Michael Hill International Limited 588, 591 dividend payouts 616–17 interim dividends 599 return on ordinary shareholders’ equity 618 share issues 592–3 share splits 598 shareholder rights 595 statement of changes in equity 611–12 statement of comprehensive income 610–11 statement of financial position 612 Microsoft 475, 502 product life cycle 671 mining industries calculating depleting natural resources 505–6 reducing debt 619 940 Index monetary principles 44, 793 Moody’s 722 mortgages 545–9 rounding errors 549 schedule 547–9 moving weighted average methods 292 Myer, theft and impact on business 275 MYOB 103, 346, 413 MYOB AccountRight Live 325, 333, 352 MYOB AccountRight Plus 325, 350–3 invoices 352 receipts payments 353 sales commands 351 MYOB Australia Ltd 324 narration 108, 115 National Broadband Network (NBN) 534 natural resources 505–6 NBN Co 534 net purchases 274–5 net realisable value (NRV) 286 net sales 232 New Zealand accounting and auditing standards boards 42–3 changes to financial reporting requirements 808 exempt supplies 240 financial year end in 44 GAAP 48 GST 239 GST Return 240 IRD numbers 595 milk production industry 404–5 partnerships legislation 10 Rural Broadband Initiative (RBI) 534 Ultra Fast Broadband (UFB) 534 zero rated supplies 240 New Zealand Banking Group (ANZ) 828 New Zealand Dairy Board 404 New Zealand Dairy Group 404 New Zealand Inland Revenue (NZIR) 7, 240 New Zealand Stock Exchange (NZX) 43, 596 Nick Scali Limited asset turnovers 508–9 average age of PPE 508 capital expenditure ratios 674 cash debt coverage 59, 676 cash return on sales ratios 677 current cash debt coverage 675 current ratios 54 debt to total assets ratios 58 dividend payouts 617 free cash flows 672–3 gross profit ratios 235 inventory turnover and days in inventory 288 liquidity ratios 561 operating expenses to sales ratios 236 profit margins 51–2 profitability ratios 49–50 return on assets 50–1 statement of cash flows 55–6 statement of financial position 53 Nike’s accounting systems 94 nominal accounts See temporary accounts non-current assets 18 case study 870–1 decision making regarding 476–7 Domino’s Pizza Enterprises Ltd 28 generating profit from 477 impact of GST on 481–2 other 503–6 reporting in financial statements 506 non-current liabilities 28–9, 541–5 calculating mortgage liabilities 550 determining market value of unsecured notes 542–3 Domino’s Pizza Enterprises Ltd 29 issuing unsecured notes 543–4 redeeming unsecured notes at maturity 544 redeeming unsecured notes before maturity 544–5 unsecured notes 541–2 non-financial information sources 744 non-profit entities 591 non-reporting entities 807 normal balances assets and liabilities 103 expenses and revenues 105 Nortel 475 notes 542 See also bonds notes payable 537–8 notes receivable 428, 436–8 disposing of 437–8 exchanging 438 honouring 437–8 recognising 437 valuing 437 notes to the financial statements 33–4 Domino’s Pizza Enterprises Ltd 34 not-for-profit accountants not-for-profit entities not-for-profit organisations 12–13 novated leases 554–5 occupational fraud 276, 335 off-balance-sheet financing 482 on account 98 on credit 98 One.Tel 330, 592 online banking 408 operating activities 19, 645–6 cash inflows and outflows 646 determining cash flow (indirect method) 662–7 determining net cash used (direct method) 654–62 effect on cash 407 operating cycles 27, 156–7 merchandising businesses 222, 223 service businesses 223 operating expenses, presentation in profit or loss statements 233–4 operating expenses to sales ratios 236–67, 740 operating leases 482, 551 accounting for 552 ordinary repairs 491 ordinary shares 595 compared with debt financing 541, 618 Original Mattress Factory 51 other revenue, presentation in profit or loss statements 233 outstanding deposits 413 ownership rights of shareholders 591–2, 595 Pacioli, Luca 102 Pactum 92 Paramount 92 Partnership Act 10 Partnership Act 1908 (NZ) 10 partnerships 9–10, 11 limited liability 10 patents 501 pay-as-you-go (PAYG) withheld tax payable 538 payment dates and cash dividends 600 payroll and payroll deductions payable 538–9 PBE standards 808 periodic inventory systems 223, 271–8 case study 866–7 closing entries (merchandising business) 298–9 compared with perpetual 224, 273–4 cost of goods purchased 274–5 determining cost of sales 274–7 determining inventory quantities 275–6 inventory cost flow methods 278–86 presentation of statement of profit or loss 277–8 recording purchases 272 recording sales 273 recording transactions 271 permanent accounts 180 perpetual inventory systems 222–3 average cost method 292 closing entries (merchandising business) 297–8 compared with periodic 224, 273–4 FIFO method 291–2 LIFO method 292 recording purchases 226 recording sales 229 sales journals 358–9 petty cash funds 412, 448–9 physical capital concepts 823 physical inventory counts 275 picking slips 338 Plush 51 positive accounting theories 790 post-closing trial balances 182 posting errors 122 posting procedures 111–12, 119–20 cash payments journals 367–8 cash receipts journals 363, 364 purchases journals 366 sales journals 359, 360 special journals 348–9 PPE See property, plant and equipment (PPE) Prada 475 preference shares 595 Index 941 prepaid expenses 162 adjusting entries 163, 175 prepayments 162 prepayments adjusting entries 162–9 depreciation 165–7 insurance 164–5 prepaid expenses 163 revenues received in advance 167 service revenue accounts 167–8 supplies 163–4 present value measurements 824 present value of payments 542, 543 price/earnings ratio (P/E ratio) 741–2 Principles of Good Corporate Governance and Best Practice Recommendations 330 prior period errors 603–6 adjusting 606 effect on financial statements 604–6 private companies 591 case study 860–78 private placements 596 case study 874–5 product life cycles 670–2 professional accounting bodies 43 profit 19 compared with net cash 648, 663 effect of inventory errors on 295–6 profit margin ratios 52 profit margins 51–2, 738–9 profit or loss summary 181 profitability ratios 49, 50, 676–7, 731, 737–43 relationships among 737 promissory notes 436–7 property, plant and equipment (PPE) 18, 477–98 See also fixed assets; intangible assets; non-current assets asset turnovers 508–9 average age analysis 507–8 average useful life analysis 506–7 calculating cost of land 480 calculating cost of machinery 482 calculating cost of vehicle 481 calculating impairments 492–3 comparing various depreciation methods 489–90 depreciation 483–91 depreciation case study 871 depreciation disclosures 490 depreciation factors 484 depreciation methods 486–9 determining cost of plant and equipment 481 determining cost of property 479–81 disposing of assets 495–7 Domino’s Pizza Enterprises Ltd 28 effects of capitalising versus expensing 480 factors in calculating depreciation 485 impact of GST on non-current assets 481–2 leasing considerations 482–3 loss on sale 496–7 percentage in relation to total assets 478 recording process 497 revaluation journal entries 494–5 942 Index revaluations 493–5, 795 reversing impairments 493 reversing revaluations 495 revising depreciation methods 490–1 sale of assets 496 scrapping assets 497 subsequent expenditures 491–2 types of 478 proprietary companies 591 See also private companies proprietary theories 790–1, 806 prospectus 596 provision for doubtful debts 431 provisions 555–8, 816 recording for warranties 557–8 reporting for warranties 558 public accountants 7–8 public benefit entities (PBE) standards 808 public companies 591 debt financing 541 public sectors 12–13 accounting standards 807 bad debts write-offs 435 purchase allowances 226 purchase discounts 227–8 recording (periodic system) 272 purchase orders 340 purchase returns 226 purchase returns and allowances, recording (periodic system) 272 purchase settlement discounts 237 purchases and payments cycle 340–3 internal control systems 342–3 purchases journals 365–6 checking ledgers 369 expanding 366 posting procedures 366 Qantas Airways Limited 828 aircraft maintenance expenses 491 debt and equity financing 97 depreciation expenses 166 hold on dividends during GFC 18 percentage of PPE to total assets 478 receivables as percentage of assets 428 revenues received in advance 539–40 quick ratios 559, 561, 732 See also acid tests QuickBooks 103, 352, 413, 420 Quicken 324 ratio analysis 48, 50 financial statements 731–43 ratio of cash to daily cash expenses 426 ratios 48 raw materials 270 Readify 673 realisable (settlement) value measurements 824 receivables accelerating cash receipts 443 analysing and managing 439–44 basic principles of managing 444 case study 869–70 credit card sales 443 debt collection strategies 442–3 establishing payment periods 439 estimating allowances for uncollectables 433–5 evaluating balance 441–2 extending credit 439 monitoring collections 439–40 notes receivable 436–8 other 429 as percentage of assets 428 presentation in financial statements 438–9 recording and reporting 428–44 recording estimated uncollectables 431–2 recording write-off of uncollectable accounts 432 recovering uncollectable accounts 433 uncollectable accounts (allowance method) 430–5 uncollectable accounts (direct write-off method) 429–30 using factors 443 receivables turnover 441–2, 733–4 case study 870 recoverable amounts 492 related activities 331–2, 343 related purchasing activities 331, 343 related sales activities 331 relevancy of information 46–7, 809–10 reporting entities 14–15, 805–8 defining 805–6 differential financial reporting 807–8 indicators for 806 reporting entity concepts 794 research and development costs 501–2 reserves reporting 614 residual value 485 See also salvage value; trade-in value resource providers 804 retail businesses 222 determining inventory costs 284 lobby to tax goods bought overseas 361 operating cycles 420 retail inventory methods 284 retained earnings 23–4, 40, 612 See also retained profits debit and credit procedures 104 Domino’s Pizza Enterprises Ltd 31 reporting 614 retained earnings accounts 105 retained profits 604 return on assets (ROA) 50–1, 738 return on ordinary shareholders’ equity (ROE) 617–20, 737–8 revaluations impact on bottom line 495 non-current assets 493–5 PPE 795 revenue cycle 338–41 revenue recognition criteria 156–8 merchandising businesses 159 new standards for 158–9 relationship with expense recognition and accounting, period concepts and 160 revenue reserves 614 revenues 19, 663–4, 819 debit and credit procedures 104–5 new standards for 820 recognition criteria for service businesses 157–8 relationship between expenses, accounting period concept and 822 when to recognise 152–3 revenues received in advance 162, 539–41 See also unearned revenue adjusting entries 175 prepayments adjusting entries 167 reversing entries 173 A Review of the Conceptual Framework for Financial Reporting (DP/2013/1) 800, 818, 823, 824 Appendix B 805 revolving charge accounts 733 Rio Tinto 828 risk management systems 328 risk-free investments 421 Rivers (Australia) Pty Ltd 591 R.M Williams Pty Ltd 11, 591 rotation of duties 334 running balance accounts 101, 102 SaaS companies 588 SACs See Statement of Accounting Concepts (SACs) Sage ACCPAC 352 salaries, adjusting accrued 172–3 salary packaging 554–5 sales and receivables cycle 338–42 See also revenue cycle internal control systems 342 sales discounts 231 recording (periodic system) 273 sales invoices 107, 225, 229 sales journals 358–61 advantages of 359 checking ledgers 369 checking postings 359, 360 journalising credit sales 358–9 sales returns and allowances 230–1 recording (periodic system) 273 sales revenue 222 presentation in profit or loss statements 232–3 salvage value 485 Santos Ltd depreciation expenses 485 dividend payouts 617 SAP 353, 413 SBR initiatives 17, 831 schedule of accounts payable 345 schedule of accounts receivable 345 segmental data 745 segregation of duties 331–2, 342, 410 Select Harvests’ biological assets disclosures 504 service businesses accrual-based accounting 155 expense recognition criteria 160 operating cycles 223 revenue recognition criteria 157–8 Index 943 service revenue accounts 167–8 services rendered for cash transactions 98, 114 settlement discounts 227–8 calculating GST 242–3 Seven Media Group 745 share buybacks 594 share capital 18, 96 See also contributed equity; stock case study 874–5 debit and credit procedures 103–4 reporting 612–14 share dividends 601–2 case study 874–5 effect on equity 602 recording bonus shares 601 share issues 596–8 private 596 public 597–8 share splits 598 shareholders equity 24 limited liability 10, 591 ownership rights 591–2, 595 shares for cash transactions 96, 112 Six Degrees Executive 673 small businesses benefits of cloud accounting 333 cash flow management 421 smooth earnings 173 SofasToGo 52 Software as a Service (SaaS) companies 588 sole proprietorships 9–13 sole traders 9, 11 solvency 57–9 solvency ratios 49, 57, 562–3, 676, 731, 735–7 source documents 107, 337 South Gippsland Herd Improvement Association Inc. 12 special journals 347–9 advantages 349 effect on general journals 369–70 posting procedures 348–9 specific identification methods 279 Standard & Poor 543 Standard Business Reporting (SBR) initiatives 17, 831 Star Track Express’ inventory systems 224 state governments and leasing options 552 Statement of Accounting Concept (SAC 1) 14, 42, 799, 800, 802, 805, 806 Statement of Accounting Concept (SAC 2) 42, 799 withdrawal of 802 Statement of Accounting Concept (SAC 3) 42, 799 Statement of Accounting Concept (SAC 4) 42, 799 Statements of Accounting Concepts (SACs) 798–9 statement of cash flows 21, 25–6, 337 adjustments for current assets and liabilities 667 adjustments for non-cash items 667 assessing liquidity, solvency and profitability 674–7 calculating cash payments for income tax 660–1 calculating cash payments for operating expenses 658–60 calculating cash payments to suppliers 657–8 944 Index calculating cash receipts from customers 654–7 calculating change in accounts payable 665 calculating change in accounts receivable 663–4 calculating change in accrued expenses payable 665 calculating change in income tax payable 665–6 calculating change in inventory 664–5 calculating change in prepaid expenses 665 calculating depreciation expense 666 calculating depreciation expense and loss on sale of equipment 660 calculating gain/loss on sale of non-current assets 666 calculating increase in equipment 661 calculating increase in land 661 calculating increase in notes payable 662 calculating increase in ordinary shares 662 calculating increase in retained earnings 662 classifying 645–6 completing preparation for 662 determining cash flow from operating activities 662–7 determining net cash used by financing activities 662 determining net cash used by investing activities 661 determining net cash used by operating activities 654–64 determining net increase and decrease 654 Domino’s Pizza Enterprises Ltd 32, 33 evaluating capital expenditure ratios 673–4 evaluating free cash flow 672–3 formatting 647–8 impact of product life cycles on 670–2 interrelationship between statement of financial position and 26 Nick Scali Limited 55–6 preparing 651, 653 preparing statement of financial position for 651 preparing statement of profit or loss for 652 purpose of 644–5 significant non-cash activities 646–7 sources of information for 650–1 usefulness of 649–50 statement of changes in equity 21, 23–4, 337 Domino’s Pizza Enterprises Ltd 30 equity 611–12 statement of financial position 21, 24–5, 39 after write-offs 432 disclosures 27 Domino’s Pizza Enterprises Ltd 30–2 effect of cost flow methods on 285 equity 612–16 formats of 728 horizontal format 25 interrelationship between statement of cash flows and 26 Nick Scali Limited 53 prepared from adjusted trial balance 180 reporting leases 555 as source of information for statement of cash flows 652 statement of profit or loss 23, 39, 337 case study 866–7 Domino’s Pizza Enterprises Ltd 30, 31 effect of cost flow methods on 284–5 fully classified 234 prepared from adjusted trial balance 179 presentation in periodic system 277–8 presenting gross profit 233 presenting operating expenses 233–4 presenting other revenue 233 presenting sales revenue 232–3 as source of information for statement of cash flows 652 statement of profit or loss and other comprehensive income 23, 609–11 stewardship 802, 804 stock 96 stocktakes 275 Storm Financial Limited 592 straight-line depreciation 486–7, 507 subprime mortgage crisis 546 subsidiary ledgers 344 advantages 346 PPE 497 relationship with control accounts 345 relationship with general ledgers 344 summarisation processes 6–7 suppliers’ invoices 225 suppliers’ subsidiary ledgers 344 supplies, prepayments adjusting entries 163–4 sustainability and environmental tracking 20 sustainability reporting 19–20, 827–30 Sybiz 352 tabular summaries 102 T-account forms 101, 102, 118 tax invoices 107 taxable supplies 240 taxation authorities 240 technology Bluetooth and information sharing 94 fast food industry impact of product cycles 286 impact on business environment Telecom NZ 534 intangible assets policies disclosures 500 percentage of intangibles to total assets 498, 499 state of financial stability 537 telecommunications industry’s growth and debt financing 534–5 Telstra Group 534 debt to total assets ratios 562 dividend payments 105 free cash flows 672 liquidity ratios 560 statement of financial position 559–60 working capital 561 temporary accounts 180 Ten Network Holdings 745 The Dun & Bradstreet Reference Book 439 The Hyperfactory 649–50 theft and impact on business 275 Thomson Inc. 475 Tiger Holdings 592 Tigerair Australia 592 time value of money 542 timeliness of information 47, 812 times interest earned 562, 736 See also interest coverage Tip Top 404 total comprehensive income 609 trade debtors 428 trade discounts 228 trade-in value 485 trademarks 502 transactions 6, 94 See also accounting transactions treasurers 593 trial balances compared with adjusted trial balances 178 limitations 122 preparing post-closing 182 triple bottom line reporting 827 trustees 12 trusts 12 unadjusted trial balance 178 understandability of information 47, 812 unearned revenue 97, 540 United Kingdom, value-added tax (VAT) 239 United States conceptual framework developments 798 LIFO conformity rule 285 subprime mortgage crisis 546 units-of-production method 486, 488–9 unlimited liability 10 unpresented cheques 413, 415 unsecured notes 18, 541 accounting issues 543–4 determining market value of 542–3 disadvantages 542, 619 redeeming at maturity 544 redeeming before maturity 544–5 useful life 485 value in use 492 value-added tax (VAT) 239 See also goods and services tax (GST) verifiability of information 47, 811 vertical analysis 727–30 case study 878 Virgin Australia 592 virtual banking 408 Vodafone 110 receivables as percentage of assets 428 warranties 816 recording provisions 557–8 reporting 558 weighted average unit costs 283 Wesfarmers Ltd 110, 740–1 asset turnovers 739 average collection period 734 average days in inventory 735 business diversification 720–1 Index 945 Wesfarmers Ltd (continued) cash debt coverage 736 current cash debt coverage 733 current ratios 731 debt to total assets ratios 735 dividend payout ratios 742 earnings per share (EPS) 741 free cash flows 737 gross profit margins 739–40 inventory turnover 734 operating expenses to sales ratios 740 price/earnings ratio (P/E ratio) 741–2 profit margins 739 quick ratios 732 receivables turnover 733 return on assets (ROA) 738 return on ordinary shareholders’ equity (ROE) 738 statement of financial position (vertical analysis) 729–30 times interest earned 736 Western Star 404 Westfield Group’s debt and equity financing 97 Westpac Banking Corporation 828 Westpoint Corporation 592 White Sky wholesalers 222 Williams the Shoemen 11 Woolworths Limited 222, 828 asset turnovers 739 average collection period 734 average days in inventory 735 business diversification 720–1 cash debt coverage 736 cash return on sales ratios 740–1 cost flow methods 284 current cash debt coverage 733 current ratios 731 debt to total assets ratios 735 directors’ reports 744 946 Index dividend payout ratios 742 dividend payouts 617 earnings per share (EPS) 741 free cash flows 737 gross profit margins 739–40 inventory turnover 734 operating expenses to sales ratios 740 price/earnings ratio (P/E ratio) 741–2 profit margins 739 receivables turnover 733, 734 retail inventory method 284 return on assets (ROA) 738 return on ordinary shareholders’ equity (ROE) 738 statement of cash flows 733 statement of financial position (horizontal analysis) 724 statement of financial position (vertical analysis) 728–9 statement of profit or loss (horizontal analysis) 725 statement of profit or loss (vertical analysis) 727 theft and impact on business 275 times interest earned 736 total group sales (horizontal analysis) 723 work in process 270 work in progress 270 workers compensation 539 working capital 54, 561 worksheets adjusting entries 187–8 closing entries (merchandising business) 299–300 XBRL 19, 829, 830–1 Xero 324, 352 Xero Ltd 588 contributed equity note disclosures 613–14 share listing 598 zero rated supplies 240 WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... FINANCIAL ACCOUNTING REPORTING, A N A LYSIS A ND DECISION M A K ING 5TH EDITION FINANCIAL ACCOUNTING REPORTING, A N A LYSIS A ND DECISION M A K ING 5TH EDITION Shirley CARLON... Domino’s brand in Australia, New Zealand, Belgium, France and the Netherlands Franchising is a way of doing business where the franchisor allows Financial Accounting: Reporting, analysis and decision. .. presented in financial reports for decision making by a variety of users These reports summarise business information for a Financial Accounting: Reporting, analysis and decision making — 5th edition