REVISION LECTURE INTRO TO ACCOUNTING A

Revision Areas Be able to prepare and explain: –trial balance & balance sheet –profit and loss account –cash flow statement –selection of accounting ratios Be able to explain: –the importance of cash –methods of working capital control –the use and users of accounting ratios –fundamental accounting concepts

Discussion Qs What do balance sheets/profit and loss accounts/cash flow statements show? –See p. 7 & p. 12 of blue lecture handout (unit A) –Note importance of cash - businesses fail through lack of cash, profit is not the same as cash (can make profit but still run out of money) –Need all 3 financial statements for balanced view of business

Working capital control –working capital is cash tied up in day-to-day operations of the business (= net current assets) - remember cash outlay in NPV questions? –important to keep to minimum in order to free up cash for investment/reduce borrowings –can keep stocks low, get debtors to pay quickly, delay payment of creditors –note problems e.g. stockouts, loss of goodwill

Users of accounting information –management (require frequent info, not necessarily all financial, future-looking - hence management accounting is different to financial accounting!) –shareholders/lenders - interested in returns on investment (dividends/interest), going-concern e.g. financial risk (gearing), cash –government - for taxation, policy research –suppliers - going-concern/credit risk, cash

Fundamental accounting concepts –accruals –prudence –consistency –going-concern –substance over form

Book-Keeping Areas Depreciation Sale of fixed assets Bad and doubtful debts Prepayments and accruals Missing figures (sales/purchases) - T accounts useful but not mandatory Bank reconciliations

Depreciation Need to be able to calculate both straight- line and reducing balance depreciation Net book value is original cost less ACCUMULATED depreciation Balance sheet shows assets at NBV Profit and loss account shows depreciation FOR THAT PERIOD ONLY Cash flow statement adds back depreciation in reconciliation as it is a non-cash item

Disposal of Fixed Assets Remove from balance sheet Profit and loss account shows profit/loss on disposal = (cash + trade-in allowance) - NBV Cash flow statement shows cash received from sale

Bad and doubtful debts Irrecoverable (bad) debts - write-off (i.e. remove from debtors balance, cost to P&L) Possibly irrecoverable (doubtful) debts - provide for (create provision in balance sheet, difference between this years and last years provision is cost/credit in P&L)

Missing Figures Remember - cash received from debtors is NOT the same as sales, and cash paid to suppliers is NOT the same as purchases. These figures are often missing. Need to work out the correct figures using opening and closing debtors/creditors figures, and cash receipts/payments. May also need to use information on sales margins/mark-ups - mark-up is % on COST, margin is % on SALE

Bank Reconciliations Cash balance in accounts comes from accounting records Can check to bank statement - some differences are acceptable, others reveal errors Acceptable differences are cheques that havent yet cleared (whether payments in or out)

Questions to Practise All past exam questions Qs 4, 5, 8, 9, 10, 11, 12, and 13 from yellow tutorial exercises Daphne Ltd, Basil Brush and Chippendale lecture examples, in blue lecture handouts

Additional Resources Can be found on AccountingWeb via: Keep the money working Case study: Interpretation of Accounting Statements Depreciation - Methods of Accounting Fundamental to the Subject