Financial accounting reporting, analysis and decision making, 5th edition

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