Answers for end-of-chapter exercises

Chapter 1 Financial accounting Table of contents Chapter overview Key concepts Learning objectives Lecture outline Answers for end-of-chapter exercises Answers for end-of-chapter problems

Enrichment modules:

Exercises Problems Cases

Enrichment module solutions:

Exercises Problems Cases Chapter overview To understand the financial health of a business, one needs to understand the language of business, and that language is accounting. The more eloquent you are in accounting, the better you will be able to understand business health. Keeping this overall purpose in mind, this chapter introduces the basic terms, principles and rules of accounting that constitute the grammar of accounting.ACCT2 Financial, Asia-Pacific 2e Jonathan Tyler (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) 1 / 4

Tyler ACCT2 Financial Instructor’s Manual © Cengage Learning Australia 2016 2 Key concepts

 Accounting information is generated based on four basic assumptions: economic entity assumption, time period assumption, monetary unit assumption and going concern assumption. The income statement (more correctly called the statement of comprehensive i ncome, and sometimes referred to as the profit and loss statement) is of paramount importance because it depicts the performance of a business over a period of time. (Students should be aware that the nouns we use in accounting v ary between countries, textbooks and, as we will see, financial reports of Australian companies.Students need to get used to different terms being used for the same items.)  A balance sheet (sometimes called the statement of financial position) is a snapshot of a business, as it shows the financial position at a particular point in time. (The ‘equity’ section is sometimes called ‘shareholders equity’, and the amount contributed by the owners ‘contributed capital’ or ‘ordinary shares’. The latter is sometimes even referred to as ‘common stock’.)  The statement of changes in equity is the nexus between income statement and the balance sheet. (We are concerned with the statement of retained earnings part.)  The cash flow statement is critical because it answers where the cash is generated from and how it has been utilised during a particular period of time. Mere quantity of accounting information is of no use, since it is the quality that adds efficacy to it. The conceptual framework of accounting is the collection of concepts that guides the manner in which accounting is practised.

Le arning objectives

LO1: Examine the four assumptions made when communicating accounting

information.LO2: Describe the purpose and structure of an income statement and the terms and principles used to create it.

LO3: Describe the purpose and structure of a balance sheet and the terms and

principles used to create it. 2 / 4

Tyler ACCT2 Financial Instructor’s Manual © Cengage Learning Australia 2016 3 LO4: Describe the purpose and structure of a statement of changes in equity and how it links the income statement and the balance sheet.LO5: Describe the purpose and structure of a cash flow statement and the terms and p rinciples used to create it.LO6: Question the qualitative characteristics that make accounting information useful.

LO7: Study the conceptual framework of accounting.

Lecture outline

LO1: Basic accounting assumptions

 Economic entity assumption: The financial activities of the business need to be separated from the financial activities of its owner. Example: Contributions made by the owner into the business are treated as his or her capital, which is nothing but an internal liability for the business.

 Time period assumption: Accounting information can be communicated

effectively over short periods of time. Example: Most companies report their financial performance and position on a quarterly, half-yearly and annual basis.

 Monetary unit assumption: The dollar, unadjusted for inflation, is the best

means of communicating accounting information in Australia. Example: The quality of service, the morale of employees and the health of the owner cannot be quantified in terms of money.

 Going concern assumption: A company will continue to operate into the

foreseeable future.

 Example: All fixed assets are shown at their cost (net of accumulated

depreciation), but not at their liquidation values.Key concept

Accounting information is generated based on four basic assumptions:

• economic entity assumption
• time period assumption
• monetary unit assumption
• going concern assumption.
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Tyler ACCT2 Financial Instructor’s Manual © Cengage Learning Australia 2016 4 Teaching tip Ask students to analyse the financial statements of a company and identify the implications of the four basic assumptions.

LO2: Reporting profitability: the income statement

 Revenue is an increase in resources resulting from the sale of goods or the provision of services; for example, sales revenues or investment incomes.

 Revenue recognition principle: Revenues are recognis

ed when they are earned. Expense is a decrease in resources resulting from the sale of goods or the provision of services; for example, the cost of goods sold or interest expense. Matching principle: Profit for a particular period is a function of the revenues and expenses of that period. Thus, profit for a particular period is found out by matching the expenses against the revenues of the same period. An income statement is a financial statement that shows a company’s revenues and expenses over a specific period of time. (The ‘comprehensive’ part of the statement is beyond what we consider in the earlier chapters of the text.) Key concept The incom e tatement is of paramount importance as it depicts the performance of a business over a period of time.Key formula Revenues – Expenses = Net Profit or Net Loss (Net Income or Income) Teaching tip  A magazine publisher sells two-year subscriptions. Ask students whether the publisher will treat this as revenue on the date of the transaction. Why or why not? A shipbuilding company uses 500 tonnes of steel in the month of January to build a ship that will be delivered 30 months from now. Ask students to explain the treatment of January’s expenses using the matching principle.

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