FNSACCT405B Slide Presentation

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Prepare financial statements
Chapter 1: Compile data
   Data is coded, classified and
• Have you heard the saying that one must first
  build the foundations before constructing the
  house? Well, the same can be said about
• It is imperative that a well-designed and suitable
  chart of accounts can enable good financial
  reporting of results and an analysis of these

   Data is coded, classified and
          checked (cont.)
• A chart of accounts is a list of all accounts
  tracked by a single accounting system. It is
  designed to capture financial information to
  make good financial decisions. Each account in
  the chart is assigned a unique identifier, typically
  an account number, followed by a name that is
  'attached' to that account.

  Data is coded, classified and
         checked (cont.)
• The most common reports prepared by
  businesses and used by management and
  external parties are:
  –   Income statement
  –   Balance sheet statement
  –   Cash flow statement
  –   Budgets are also an important management tool and
      should be considered part of the mainstream reports
      issued by management

   Data is coded, classified and
          checked (cont.)
• It is important that data is systematically coded,
  classified and checked for accuracy and
  reliability in accordance with organisational
  policies and procedures and that all internal and
  external financial data is checked to ensure
  consistency and accuracy. This will include
  ensuring, where relevant, that all reports and
  statements meet the requirements of the
  Generally Accepted Accounting Principals
  (GAAP) and relevant accounting standards.
                  The three Cs
•   Coding
•   Classifying
•   Checking
• Coding is the practice of applying an account
  number (and account name) to a chart of
  accounts and within a category and subcategory
  of the chart of accounts.
• When it comes to entering data into the
  accounting system, the 'best fit' approach should
  be adopted. This means using an account from
  the chart of accounts that best describes the
  transaction that is being entered.
• Classifying is the process of including an
  account number in the chart of accounts, in the
  correct position in the chart. A protocol is
  adopted which means each item in a category
  will start with the same number and each
  category will have a different starting number.
  For example, all assets may start with a '1' and
  all liabilities may start with a '2'.

           Classifying (cont.)

• The process is further broken down where
  subcategories are created and a second number
  is added to this subcategory account.
  For example:
  Assets                1
  Current assets        1-1
  Cash at bank          1-11
  Inventory             1-14
  Non-current assets    1-2
  Plant and equipment   1-22
  Motor vehicles        1-23
• The information reported from an accounting system
  needs to be accurate and reliable and must also
  comply with the organisation's policies and
• Accuracy involves correctly matching revenue and
  expenses related to earning that revenue. To get a
  true and accurate picture of the trading results only
  those expenses directly attributable to earning that
  revenue must be recorded.
• There is little point in providing reports to management
  and external parties if these reports cannot be relied
  on. Accounting exists to provide information for users
  and it is therefore imperative that this information be
  timely, accurate, compliant and informative.
             Checking (cont.)
• Policies and procedures of an organisation play a
  large part in the reporting process. Organisations
  have policies and procedures which management
  expect all staff to abide by.
• Some policies and procedures are influenced by
  external parties such as the Australian Taxation
  Office (ATO) and financial institutions (where
  applicable), resulting in obligations to comply with
  the GAAP and relevant accounting standards.
• The Corporations Law only affects incorporated
  bodies (companies) and has no influence over sole
  traders and partnerships.
    Analysing financial reports
• Preparing financial reports is a necessary step in
  the accounting process. Analysing these reports
  is also an important part of this.
• Sometimes the best way to analyse reports is to
  perform an autopsy and one of the best ways to
  do this is by ratio analysis. Financial ratios are
  usually expressed in percentages or times.
  Generally, financial ratios are calculated for the
  purpose of evaluating aspects of a company's
  operations and fall into four categories.
      Financial rates and ratios
• Liquidity ratios: measure an organisation's
  ability to meet its current obligations
• Profitability ratios: measure management's
  ability to control expenses and to earn a return
  on the resources committed to the business
• Leverage ratios: measure the degree of
  protection of suppliers of long-term funds and
  can also aid in judging an organisation's ability
  to raise additional debt and its capacity to pay its
  liabilities on time

Financial rates and ratios (cont.)
• Efficiency, activity or turnover ratios: provide
  information about management's ability to
  control expenses and to earn a return on the
  resources committed to the business
• Ratio analysis is as important to an organisation
  as the financial report itself and may reveal
  information that may otherwise escape
  management and be detrimental in the
  decision-making process.
  Internal and external financial
         data is checked
• Organisations must comply not only with
  organisational policies and procedures but the
  GAAP and relevant accounting standards, where
  applicable. For some not-for-profit organisations,
  strict financial reporting is required as part of
  their funding arrangements.
• 'GAAP' stands for Generally Accepted
  Accounting Principals. It governs the entire
  financial reporting framework specific to a
  particular country including relevant acts of
  parliament, accounting standards and
  pronouncements, stock exchange listing rules,
  internal rules of the accounting professional
  bodies (CPA, ICAA), statements and guidance
  releases issued by regulators, and various
  concept statements and interpretations issued
  by those bodies that set accounting standards.
     Internal and external data
• Data is generally classified according to its
  source, that is, internal and external data.
   – Internal data are the data available from the
     organisation’s own records.
   – External data, on the other hand, originates from
     sources outside the organisation.
• Both types of data are important and are used at
  different stages in the accounting process and
  for different reasons.
• External data can aid in the budgetary process.
  While financial statements are a snapshot of
  past performance, budgets look forward to the
• Managers use budgets to guide them in their
  day-to-day operations, and investors use
  budgets to evaluate future plans and future
• Budgets are based around the organisation’s
  policies and procedures which will be closely
  associated with the organisation’s planning
  stages, that is, its operational, tactical and
  strategic plans.
Chapter 2: Prepare reports
         Charts, diagrams and
           supporting data
• Reports can be presented in a number of ways,
  generally starting with the typical textbook-style
  financial reports such as statements of financial
  position and income statements. They are:
   – A summary of data extracted from the financial
     recording system
   – Expressed in a format predetermined by
     organisational policy and procedure
• Reports are generally the starting point and
  other tools are used to aid in the presentation of
  such data.

        Charts, diagrams and
        supporting data (cont.)
• Statistics are figures that summarise and
  represent factual data. Statistics and other data
  can be expressed in other formats which at
  times, better explain the data. Some of these
  formats may include:
   – Charts
  – Tables
              Charts and tables
• Charts (graphs) and tables are very good
  illustrative ways of expressing data. Sometimes
  charts and tables throw a different light on things
  and, depending on the users of this data, make
  explaining data easier.
• The most common charts and tables are:
   –   Frequency distributions
   –   Tables (sometimes called arrays)
   –   Bar charts
   –   Pie charts
   –   Line charts
       Charts and tables (cont.)
• Frequency distribution is a table in which
  possible values for a variable are grouped into
  classes, and the number of times a value falls into
  each class is recorded.
• A table (sometimes called an array) is a diagram
  that displays information in columns and rows. It is
  most often used to show the relationship between
  two or more related variables.
• A bar chart uses either horizontal or vertical bars
  to measure and compare several values, with the
  longest bar representing the greatest value.
       Charts and tables (cont.)
• A pie chart is a circle (the 'pie') that has been
  divided into sections, each section representing
  (and measuring the value of) a different item. The
  whole pie represents 100 per cent of the value
  being measured, and each 'slice of the pie'
  represents the percentage of the whole for one
  particular item.
• A line graph shows a line by dots at various
  points plotted on a graph. Line graphs are very
  effective for showing changes in the value of a
  variable or trend over a period of time.
       Charts and tables (cont.)
• There are many types of graphs that can be used
  to expressed data in a diagrammatical format. We
  have named just a few.
• Microsoft Excel and Lotus 123 spreadsheets
  provide excellent facilities to construct graphs and
• There is also specific software available which will
  use your data and convert the data to graphs and
• These software programs work well with reports
  and enable you to either copy and paste or export
  the data into other software used to prepare
  reports such as a Word document.
              Data analysis
• Data can be analysed using standard, generally
  accepted methods. An important starting point
  for analysing data is to determine some kind of
  centre point or some measure of central
  tendency. Measures of central tendency
  describe numbers that are 'most representative'
  of the data. The two most common measures of
  central tendency are the:
  – Mean
  – Median

         Data analysis (cont.)
• Mean and median are explained in more detail
  in the Learner’s Guide.
• Spreadsheets are capable of calculating these
  analyses simply and easily.
• A financial calculator also has specific function
  keys that make analysing data by these methods
  simple as well.
         Report structure and
• Financial statements are periodic
  summarisations of an organisation's
• As stated earlier, the most important and most
  common financial statements are:
  – Statement of financial position
  – Income statement
  – Statement of cash flows
           Income statement
• The Income statement is a report which
  summarises the trading results and shows the
  profit or loss for the accounting period.
• Accounting standard AASB 101 Presentation of
  Financial Statements requires that, in a situation
  where a revenue or expense item is of such
  size, nature or incidence that its disclosure is
  relevant in explaining the financial performance
  of the business, its nature and amount must be
  disclosed separately either on the face of the
  income statement or in the notes accompanying
  the financial statements.
           Income statement
• These items are referred to as significant items
  and they are earned or incurred as part of the
  ordinary activities of the business but, because
  of their size or effect on the financial
  performance of the business, are considered
  significant and therefore require further
       Accruals or cash basis
• Businesses may record their revenue and
  expenditure on either an accruals or cash basis.
  – Cash basis: when money is received or paid out
  – Accruals basis: when invoices are raised and sent
    and when invoices are received
• There are cash flow and GST implications for
  each of these methods and it would be prudent
  to seek professional advice from an accountant
  to obtain an understanding of the effects they
  each may have on your accounts. The choice of
  method used will have a direct impact on the
  results shown in the financial statements.
 Statement of financial position
• The formula for the statement of financial
  position may be expressed in a number of ways,
  but they all lead to the same result.
            Assets = Equity + Liabilities
           (or Assets – Liabilities = Equity)
• In this formula, called the accounting equation,
  assets are listed on the left side of the equal
  sign; liabilities and owner's equity are listed on
  the right side. Both sides must equal; that is,
  they must balance.

 Statement of financial position
• Another name for the statement of financial
  position is balance sheet. It shows the financial
  position of the organisation at a specific date—a
  snapshot at that point in time of what it owns and
  what it owes.
• Accounting standard AASB 101 Presentation of
  financial statements sets out the definitions for
  each of the categories and subcategories of the
  statement of financial position.
      Statement of cash flows
• This statement describes the organisation’s cash
  receipts (money coming into the business) and
  cash payments (money going out of the
  business) over a specific time period.
• It provides a detailed picture of the
  organisation’s ability to generate and use cash.
• The statement of cash flows is concerned only
  with actual cash, while the income statement
  also includes non-cash elements such as
  depreciation and credit transactions.

 Statement of cash flows (cont.)
• The statement of cash flows summarises three
  areas in which cash is received and distributed:
  – Operating activities
  – Investing activities
  – Financing activities
• The Learner’s Guide explains each of these in
  more detail.
           Ensuring reliability
• The following are concerned with ensuring
  reliability of accounting statements and reports:
  – Statements and data are error free and
  – Report is cross checked against original data and
    accounting standards
  – Any necessary corrections are made
  – Corrections are verified and authorised by relevant

      Ensuring reliability (cont.)
• Achieving reliability and relevance means, in
  part, that financial statements and reports must
  comply with GAAP, accounting standards and
  other appropriate regulations and legal
  requirements. It also means that the numbers
  reported in financial statements must accurately
  reflect the original transactions that gave rise to
People or organisations reviewing
   data and relying on reports
• Many people or organisations may be entitled to
  review the data and rely on financial reports of
  an organisation. These may include any of the
  – Accountant/financial controller
  – Directors
  – External accountants and internal and external
  – Shareholders
  – Human resources
  – Partner in a partnership
People or organisations reviewing
data and relying on reports (cont.)
  – Partner in a partnership
  – Owner or proprietor
  – Tax authorities
  – Banks/lending institutions
  – Australian Securities and Investments Commission
  – Australian Securities Exchange (ASX)
       Internal control system
• An internal control system comprises two types
  of controls:
  – Administrative controls: concerned with eliminating
    waste in an organisation
  – Accounting controls: concerned with the efficacy of
    accounting records and the protection of assets.

  Internal control system (cont.)
• Administrative controls include:
  – Ensuring management policies and procedures are
    followed and external regulations are complied with
  – Ensuring the efficient operation of the organisation
    and effective use of its assets.
• Accounting controls include:
  – Ensuring the accuracy and reliability of accounting
  – Safeguarding the assets of the organisation
  – Deterring the occurrence of fraud and other
     Achieving internal control
• Organisations achieve internal control by having:
  – An organisational structure that clearly defines roles
    of employees, their levels of responsibility and limits
    of authority.
  – Organisational policies that guide and regulate
    actions of employees to ensure organisational goals
    are met.
  – Organisational procedures that identify rules and
    actions that should be followed to ensure compliance
    with organisational policies.
  – Employees who are honest, well qualified and
    competent to fulfil their particular role in the
Achieving internal control (cont.)
 – An accounting system that accurately records the
   financial activities of the organisation and generates
   reliable and relevant financial reports.
 – A budgeting system that sets the goals of the
   organisation in financial terms and is used as an
   integral part of the reporting system for feedback and
 – A structured reporting system that provides timely and
   relevant financial information to management.
 – Regular internal appraisal and testing of the internal
   control system to ensure it is functioning as intended.
   This may take the form of internal audit, management
   review or the use of external consultants.
    Internal accounting controls
• Internal accounting controls include the following:
  – Segregating duties for particular functions (for example,
    the storeperson who handles stock should not also be
    involved in recording receipts and issues of stock)
  – Using practice and procedure manuals (ensuring
    employees know the correct procedures that must be
    followed, for example when ordering goods)
  – Clearly identifying lines of responsibility and authority
    (so someone is held responsible for completing specific
  – Having a checking system where data is checked and
    double checked by somebody else before it is entered

Internal accounting controls (cont.)
  – Producing error reports (where appropriate) that are
    examined and acted on
  – Preparing analyses of rates and ratios on key data
    that show comparisons to previous years, branches
    or industry benchmarks to highlight irregularities
  – Regularly preparing independent reconciliations and
    promptly investigating any discrepancies (for example
    bank reconciliations, reconciliations of supplier
    account statements to ledger balances)
  – Requiring all transactions be authenticated by correct
    supporting documentation before being entered into
    the accounting system

Internal accounting controls (cont.)
  – Requiring appropriate authorisation for all valid
    transactions and error corrections, thus ensuring
    particular employees are held responsible for these
  – Recording only those transactions that have been
    verified as valid
  – Ensuring all transactions are recorded and reported in
    a timely manner
  – Valuing transactions correctly and protecting records
    from incorrect calculations and recording errors

Internal accounting controls (cont.)
  – Classifying entries correctly in accordance with the
    chart of accounts or other categorising requirements
    and business policies and procedures
  – Strict policing of the matching policy
  – Applying problem-solving skills when checking data
    for accuracy and correct coding
  – Using physical controls to ensure assets are
    safeguarded (for example, stock is stored in a secure
    area accessible only by authorised personnel)
   Accurate and error-free data
• Incorrect data analysis or data entered into an
  accounting system incorrectly could have major
  consequences for the financial reports and
  therefore for decisions based on these, whether
  made by management or other users of the
• Management and external parties rely on the
  information reported in financial reports and
  therefore assume such information is accurate
  and error free.

   Accurate and error-free data
• It is also assumed that these financial
  statements conform to all policies and
  procedures that affect them, including those
  imposed by external authorities.
• Data entered incorrectly can also influence
  reports prepared for external parties such as the
  Business Activity Statement (BAS) for the ATO,
  leave entitlements relating to employee payslips
  and various tax returns which are prepared for
  the ATO or State tax authorities.
Management and internal controls
• It is up to management to impose adequate and
  suitable internal controls for staff to follow.
  These should be supported by organisational
  policies and procedures.
• There is little point in having internal controls if
  they are not strictly followed, enforced and
• The best way to have staff made aware of the
  internal controls is to make it part of their regular
• In summary, to get value out of financial reports
  it is imperative that the data that make up the
  reports be accurate. This includes ensuring the
  coding is correct and that the data is checked for
  accuracy and reliability.
• Presentation of reports can consist of graphs
  and tables and any other illustrative tools that
  add value to the presentation or make
  understanding the data easier.

            Summary (cont.)
• The reports will need to be prepared and
  structured in accordance with organisational
  requirements, including those imposed by
  outside authorities.
• Finally, statements and data must be error free
  and comprehensive.

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