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					Accounting decisions
  Case: Accounting at
   MacCloud winery
Methodological note
      We want to distinguish between
 Economic “facts/data”
  – No need to discuss them
  – Taken for granted
 Accounting “issues”
  – The topic of our discussion
  – We will follow the order of the case questions



                  Accounting at McCloud Winery
The MacCloud winery
 5 acres of land
 One building




                    Accounting at McCloud Winery
1: The building
 Worth $32,000
 Leased for 10 years for $5,000 per year
 How do we account for it?




                Accounting at McCloud Winery
Accounting for a lease
 Capital lease
   – Treated as an acquisition of the asset financed by a loan
 Operating lease
   – Treated as a rental agreement
 A leas is a capital lease if
   1.   There exists a bargain purchase option at the end of the lease
   2.   The lease covers more than 75% of the economic life of the asset
   3.   The PV of future lease payments is at least 90% of the market
        value of the asset
   –    Only one condition is sufficient
   –    In this case condition 3. tells that that it should be treated as a
        capital lease (see related excel file)

                          Accounting at McCloud Winery
2: The bank loan
   $180,000
   3 years maturity
   $ 10,000 annual repayment
   10% interest rate




                 Accounting at McCloud Winery
Accounting for the loan
 See the related excel file




                 Accounting at McCloud Winery
3: The land and the grapevines
 The vineyard is certainly an asset
 Cost of this asset?
 Depreciation?




                   Accounting at McCloud Winery
Cost (initial value)
of an assets
 You can include in the cost (initial value) of
  an assets all the costs necessary to put the
  asset into its productive use
 So, in this case, it can be argued that all the
  expenses incurred in the first 5 years are
  part of the initial cost of the asset
 Also the transportation cost can be included
  in the initial cost of the asset

                 Accounting at McCloud Winery
4: Vines’ diseases
 Highly damaging event
 Possible, but not certain
 How do we account for this?




                                Pierce’s disease
    Phylloxera
                 Accounting at McCloud Winery
Provisions
 Provisions are “accounting funds” that are set
  aside in the liabilities side of the balance sheet in
  order to be used in the future to cover for possible
  future costs
 A provision can be created if
   1. The future event is sufficiently likely
   2. The future damage can be reasonably estimated
   – Both conditions are necessary
 It is open to discussion whether in this case the
  two conditions are met
                    Accounting at McCloud Winery
5: The oak barrels
 Two types
   – High quality (5 + 10 years of economic life)
   – Low quality (10 years of economic life)
 Is it an asset?
 Depreciation?




                      Accounting at McCloud Winery
Depreciation
 Depreciation is the accounting way to spread
  the cost of an investment in a fixed asset
  throughout the economic life of the asset
 The depreciation method should reflect the
  usage and the loss in productive value of the
  asset
 It is open to discussion, which is the best
  way to depreciate the oak barrels

                Accounting at McCloud Winery
General questions that
we have tackled today

1. What do we mean by
   “accounting decisions”?
2. Why is it necessary to make
   accounting decisions?
3. What are the consequences of
   these decisions?
              Accounting at McCloud Winery
1. What do we mean by
   “accounting decisions”?
 In every of the issues analyzed in the case
  the management of the vinery has to make
  an “accounting decision”
 Accounting decision = the choice of one
  among the various possible accrual
  representations of the cash flow of the
  transaction



                Accounting at McCloud Winery
2. Why is it necessary to
make accounting decisions?
 Because in the real world we have
  uncertainty
 Better explained by the “Accounting for a
  business project” case




                Accounting at McCloud Winery
3. What are the consequences
of accounting decisions?

 By choosing a certain accrual representation
  of the cash flow of the transaction we choose
  one
  – Income statement
  – Balance sheet
 These two financial statements depend
  crucially on the accounting decisions taken
  by the management
                Accounting at McCloud Winery
 The accrual principle:
 do you remember the example?
Balance           Profit = 50           Balance                Profit = 10     Balance
 Sheet                                   Sheet                                  Sheet
Wealth               Accrual logic       Wealth                                 Wealth
                   I/S day 1                                   I/S day 1
 300                                       350                                   360


Begin. day 1              Different!   End of day 1                    End of day 2



Cash
  0
                  Cash flow logic
                   Cash flow
                   day 1
                                           Cash
                                            250
                                                               Cash flow
                                                               day 2
                                                                                Cash
                                                                                 360

               Cash increase = 250                      Cash increase = 110

                                Accounting at McCloud Winery
Accounting and Financial
Analysis

    Double-entry   Accounting                     Raw data
                   decisions



Financial                  Financial
Statements                 Analysis




                   Accounting at McCloud Winery
Summing up
 The need to make accounting decisions
  because of
  – Accrual principle
  – Uncertainty
 Accounting standards guide these decisions,
  but never eliminate them
 Financial statements are “chosen”
  – Ethical issues
  – Communication strategy
                  Accounting at McCloud Winery

				
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posted:1/8/2012
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