Solutions Manual - © John Wiley & Sons Australia, Ltd 2015 1.1 N...

Solutions Manual to accompany Financial Accounting 9e by John Hoggett Lew Edwards John Medlin Keryn Chalmers Andreas Hellmann Claire Beattie Jodie Maxfield 1 / 4

Chapter 1:Decision making and the role of accounting

© John Wiley & Sons Australia, Ltd 2015 1.1 Note: Please help Wiley to retain the security of our solutions for this text by not distributing the Solutions Manual in its entirety or selected chapters thereof. We would be grateful if you would restrict distribution to the individual solutions for questions that you set as homework or ask students to attempt in workshops or other lecturer/tutor mediated forums.

CHAPTER 1

DECISION MAKING AND THE ROLE OF ACCOUNTING

DISCUSSION QUESTIONS

SOLUTIONS

Suggested topics for discussions are provided for each question. Discussion need not be confined to the topics indicated.

• You are considering buying an apartment. Outline the information you would like to

assist you to make this decision. Identify how much of this information is accounting information?▪Considerations when buying an apartment include factors such as location, type (studio, one bedroom, two or three bedrooms), size (bigger rooms, additional bathroom, balcony), age of the apartment, and available funds. Information to assist the purchase decision includes whether the apartment is for residential or investment purpose, personal taste (e.g. interior design, view), distance to workplace or train stations, funds to meet ongoing costs like repairs and maintenance required after purchase, body corporate fees, council rates, and insurance. Initial purchase considerations include whether the apartment is to be purchased outright or through a home loan taken with a financial institution, stamp duty to be paid, and the eligibility of obtaining first-home buyer grant from the federal/state government. Purchase considerations and ongoing costs represent accounting information relevant to the decision-making process.

• Simone Taylor (in the scene setter p. 3) is involved in helping to make many different

types of decisions as part of her employment. List examples of the types of consumption, investment and financing decisions that she would be involved with.

As stated in the scene setter (p. 3):

‘In 2009, Taylor accepted a position at OrotonGroup. The company has approximately 85 stores throughout Australia and Asia. Her role is to assist steering the finance function. The role is diverse, from an early morning sales meeting to product reports and cashflow, as well as rolling out a new Asia strategy, which includes setting up new structures from payroll through to audit – keeps things interesting. The role also involves implementing finance support services for strategic decisions, such as online shopping, acquisitions, and partnerships, to adapt to the business and economic environment to the brand’s advantage.’ At this early stage in the student’s introduction to accounting, ask each student (or groups of students) to consider what they believe are examples of the types of decisions and accounting issues that Simone would face, based on the excerpt above.Also ask them to classify the decisions as consumption (e.g. where to get materials for the company’s products, how many staff to be employed in each store), investment (e.g. purchasing an outlet to set up a new store, acquiring other apparel retail companies) and financing (e.g. using more leverage through higher borrowings). The 2 / 4

Solutions Manual to accompany Financial Accounting 9e by Hoggett et al © John Wiley & Sons Australia, Ltd 2015 1.2 nature of consumption, investment and financing decisions is discussed on p. 0 of the text.

• Accounting is described as the language of business, and everyone is affected by the

business world. Discuss if everyone should be required to study accounting.

Suggested topics of discussion:

▪ Adults are affected by business activity but not all adults carry on a business; ▪ ‘Accounting is the process of identifying, measuring, recording and communicating economic information to permit informed judgements and decisions by users of the information.’ The ‘language of business’ is the communication of accounting information, not the identifying, measuring and recording of accounting information that all adults may not necessarily deal with. Language includes the terminology (jargon) used by accountants in accounting and business reports. Communicating accounting information consists of preparing of financial reports and other interpretative disclosures necessary to make the accounting data understandable. It is up to the accountant to communicate in a language that the client can understand.▪ Part of an accountant’s role is to communicate financial information to adults. It is not necessary for everyone to study accounting as it is part of the duty of an accountant to communicate.

• Describe the differences between accounting information and other information.

▪ Accounting information comprises financial information summarised in the form of financial reports. Accounting information is used to provide information about the financial costs of business decisions. It differs from other information used in the business decision-making process due to the financial nature of measuring economic resources used in business transactions. Other information which may be used in the decision making process includes personal preferences, social factors like the effect on unemployment, environmental factors (like pollution and waste management) and government policy effects on decision making in business entities. Should accountants also report social and environmental information, or is this the task of others?

• ‘Accounting is irrelevant in decision making because the information it provides

relates only to the past.’ Evaluate this remark.▪ Accounting is relevant to the decision-making process as it helps provide financial information as to the most efficient use of available economic resources. Although accounting provides financial information based on past financial transactions, it is useful in giving details on how efficiently an organisation has been using its available resources. For example, what profit has the accounting entity reported based on the assets used? A reported profit of $50 000 where an entity has total assets of $200 000, appears more favourable when compared to an entity which has total assets of $1 000 000. Accounting information is useful in providing decision makers with information about the outcomes of their past business decisions. Past performance also gives insight to the future trends for the entity. Accounting information is also used as part of the budgeting process of a business entity. 3 / 4

Chapter 1:Decision making and the role of accounting

© John Wiley & Sons Australia, Ltd 2015 1.3

• Describe how you would identify if a financial statement is a special purpose

financial statement or a general purpose financial statement.

Suggested topics of discussion:

▪ The difference between a general purpose financial statement and a special purpose financial statement lies in the ability of users of those reports to command the preparation of reports tailored to satisfy their needs for particular information.▪ General purpose financial statements are prepared by reporting entities for users who do not have access to special purpose financial statements. General purpose financial statements contain information which, while general in nature, is relevant to many of the individual decisions made by the many different types of users, e.g. a shareholder will decide to sell or retain his/her shares based on the information in the general purpose financial statements. Other users such as lenders suppliers and employees will make individual decisions based on these general purpose financial statements.▪ Regulators attempt to prescribe the disclosure requirements in the general purpose financial statements to ensure that individual users have access to reliable information.▪ General purpose financial statements do not satisfy all of the needs of users for information. Users will also add their personal, social, political and environmental preferences to any decision. General purpose financial statements do not even provide all of the financial information that users may need. For example, budget information is not provided.▪ Special purpose financial statements are specifically tailored to provide the special information needs of users for decision-making purposes. Unlike general purpose financial statement users, special purpose financial statements users have the power to require/insist that the information generated is specifically suited to their needs. For example, a bank may require special information from an entity before it grants the entity a loan.

• Users of accounting information can be identified as internal and external users. List

examples of users in each category and the type of information they require.

Firstly, distinguish internal and external users.The following are examples of internal users and the type of information they require: • Section/line managers need to know the impact of increasing or decreasing selling price on profitability.• Chief Executive Officers and directors need accounting information to make a decision of whether it would be beneficial for the company to acquire another company.• General managers of divisions need to know if their divisions should make new products.• Account managers require information about how much the company owes suppliers.• Production supervisors need to know the most efficient production process to be implemented.

External users are often classified as being resource providers, recipients of goods and services, and reviewers and overseers. The following are examples of external users, who mainly receive general purpose financial statements which are commonly available to the general public on an entity’s website, and the type of information they

require:

• Shareholders want to know the return on their investments.

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