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ACCOUNTING UNIT 4 Kram ’ ed

ACCOUNTING UNIT 4 Kram ’ ed. Unit 4. COMPANIES. Companies. A Company is an incorporated body registered under the Corporations Act 2001. They embody the following characteristics: Limited Liability Number of Owners (depending on type) Number of Directors (depending on type)

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ACCOUNTING UNIT 4 Kram ’ ed

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  1. ACCOUNTING UNIT 4Kram’ed

  2. Unit 4

  3. COMPANIES

  4. Companies • A Company is an incorporated body registered under the Corporations Act 2001. They embody the following characteristics: • Limited Liability • Number of Owners (depending on type) • Number of Directors (depending on type) • Continuity of Existence • Seperate Legal Entity • Transfer of Ownership • Seperation of Ownership and Management

  5. Public Company • ‘Limited or ‘Ltd’ in its name • Owner’s equity limited by the shareholders • Minimum 1 Shareholder (no maximum) • Shares and Debentures can be issued to the general public • Minimum 3 Directors (2 being residents of AU) • AGM must be held within 5 months of the end of the financial year: Directors and Shareholders meet an discuss matters such as dividends, bonus share issues and election of board members • Maintain and publish annual financial reports (complying wit AASB) and publish them to shareholders and ASIC on an annual basis • Can seek public public and capital contribution by being listed on the ASX

  6. Proprietary Company… • ‘Proprietary’ or ‘Pty’ in its name • Cannot raise funds from the general public • Between 1 and 50 shareholders • Minimum 1 shareholder and optional secretary (both residents of AU) • Classified into ‘Large’ and ‘Small’

  7. Large/Small Proprietary Company… • Corporations Act 2001 identifies a ‘Large Proprietary Company’ if it meets 2/3 criteria: • Gross Revenue > 25 Million • Gross Assets > 12.5 million • Fulltime Employees > 50 • Large Proprietary companies must produce financial reports annually, lodge them with ASIC and publish them to shareholders • Small Proprietary Companies only need to publish annual financial reports if requested by ASIC or by shareholders with excess of 5% ownership

  8. Company Startup • Submit the following information together with a prescribed fee to ASIC. • ｷName of the Company • ｷNames of Initial Shareholders • ｷThe company’s registered office • ｷThe principal place of business • ｷA copy of the Company’s Constitution and any amendments made to the replaceable rules. • For a Public Company a prospectus is issued to the general public, inviting them to purchase shares or debentures. A prospectus must contain all the information that a potential investor would require in order to make an informed decision. It also should contain an application form so those subscribing can enter into contract after being informed by the document.

  9. Replaceable Rules • The rules for management of a company can either be governed by the Replaceable Rules of the Corporations Act 2001 or by an optional Company Constitution drawn up and agreed upon by the directors and shareholders. The Replaceable Rules concern: • The powers of directors and how they are appointed • How voting procedures are conducted at meetings of shareholders • The procedure for calling and running director’s meetings • How many votes are allocated to each shareholder • Terms and conditions of office of a company secretary • The different transfers, dividend rights and classes of shares

  10. The Company Ledger Ordinary Share Issue is subscribed: Example • 2nd of Feb Company issues prospectus offering 80 000 ordinary shares at issue price of $2 (payable in full on application) • 21st of Feb shares were fully subscribed

  11. The Company Ledger Shares are allotted: Example • 23rd of Feb Shares are allotted

  12. The Company Ledger Issue costs are paid: Example • 24th of Feb Share Issue costs of $700 are paid (printing of prospectus etc) • These are written of against share capital.

  13. The Company Ledger Bonus Share Issue: Example • 28th of Directors decide to make a 1 for 5 bonus share issue out of the General Reserve (80 000 shares at $2 ea = 160 000 share capital) • 160 000 / 5 = 32 000 Note: Bonus Share Issues to not increase the overall equity of a company as there is no additional capital contribution

  14. The Company Ledger Interim Dividend declared and paid: Example • 3rd March Directors declare 5 cents per share dividend be paid to Ordinary Shareholders, this was paid on 20th of March • Note: Sometimes Dividends are made out of other reserves, however if not specified assume ‘Retained Earnings,’ Regular Dividend Payments are entered the same.

  15. The Company Ledger Transfer to Reserves: Example • $5000 is transferred from Retained Earnings to General Reserve on the 4th of July

  16. The Company Ledger Asset Revaluation: Example • Property was revalued up by $100 000 on the 9th of July

  17. External Audit • Public / Large proprietary Companies are required by ASIC to be externally audited. • External Auditors must be registered with ASIC and are called RCA (Registered Company Auditors.) • They must comply with Corporations Act 2001 and the auditing standards as specified by the Auditing and Assurances Standards Board. • Auditors must produce a report depicting the accuracy and reliability of financial reports, inclusive of a qualitative statement • Identified issues will be pointed out to management, if not addressed they will be considered in a qualified report • If independent requirements are met the report is signed off and sent to shareholders

  18. Rights of the Shareholder • Public Company: 1) Should the Company deregister shareholders are entitled to the repayment of their capital after all creditors have been paid 2) The right to vote at annual meetings of shareholders to elect the directors of the company 3) The right to receive annual financial reports of the company Transfer of ownership: • Public Company shareholders may sell shares at will without any restriction • Replaceable Rules may prevent a Propriety Company shareholder from selling shares without the approval of other shareholders

  19. Duties of Directors • Carry out duties with reasonable level of skill and car • Act in the best interest of shareholders • Declare any conflict of interest • Ability to hire or fire senior managers • Approval of share issues and loans

  20. Role of the Conceptual Framework • Australian Accounting Standards Board (AASB) • The AASB is an Australian Government agency under the Australian Securities and Investments Commission Act 2001. • AASB Accounting standards are put in place in order to maintain high-quality financial reporting standards for all sections of the economy. They are a set of rules and regulations that reporting entities must follow.

  21. Reporting Entities • Reporting Entities are those reasonably expected to have users who depend on the entity’s general purpose financial reports for information that will be useful for them for making and evaluating decisions about the allocation of scarce resources. • AASB 101 (paragraph 10) requires public companies and other reporting entities to produce a number of financial reports, accessible to the general public. These include: 1) Statement of financial position at the end of the period 2) Statement of comprehensive income for the period 3) Statement of changes in equity for the period 4) Statement of cash flows for the period • Notes comprising a summary of accounts and other necessary explanations

  22. Accounting Standards cont. • The main purposes of Accounting Standards is to provide protection to the external users of reports, facilitate Australian capital markets and assist managers and directors to discharge their duties. • The Conceptual Framework of Accounting is a body of AASB theory that includes Statement of Accounting Concepts (SAC) • SAC1 defines and identifies a reporting entity with a number of qualities including: The segregation of management and owners, economic and political importance and financial significance. • Upon fulfilling these characteristics Reporting Entities shall produce general purpose financial reports, in a manner that assists in discharging their accountability (SAC 2, paragraph 43.) • General purpose financial reports shall disclose information relevant to the assessment of performance, financial position and financing and investing including information about compliance (.SAC 2, paragraph 44)

  23. COMPANY FINANCIAL REPORTS:CASH FLOWS

  24. The Cash Flow Statement • This statement is not based on Accrual Accounting, instead it recognises transactions as cash changes hands. • This gives an indication of the liquidity of the business and its ability to turn over cash in the given time period.

  25. Cash Flows from Operating Activities Cash Receipts from Customers X Cash Receipts from fees, royalties and commissions X Cash Paid to Suppliers and Employees (X) Cash Generated from Operations X Interest Paid (X) Income Tax paid (X) Net Cash X Cash Flows from Investing Activities Purchase of Investment (Y) Purchases of Property, Plant & Equipment (Y) Proceeds from sales of Investments or Property, Plant & Equipment Y Interest Received Y Dividends Received Y Net Cash (Y) Cash Flows from Financing Activities Proceeds from issue of Share Capital Z Proceeds from long-term borrowings Z Dividends Paid (Z) Net Cash Net (Increase/Decrease) in cash / cash equivalents during period XYZ Cash / cash equivalents at beginning of the period A Cash / cash equivalents at end of the period AXYZ STATEMENT OF CASH FLOWS FOR PERIOD ENDING

  26. Reconstructions • Before completing this statement, cash flows must be derived from accrual reports of the Balance Sheet and Income Statement. • Just because and expense or revenue was incurred it does not mean actual cash was exchanged on the same date. • There fore 5 sets of account reconstructions must be done. • Accounts Receivable • Accounts Payable • Pre-Paid and Accrued • Retained Earnings • Sale of Asset Other cash flows are simply derived from observing the increases / decreases in account balances

  27. Reconstructions Precursor • All figures that are taken from the: • Balance Sheet will be Blue • Income Statement will be Green • Cash figures will be in Red Example figures will be used from the following financial reports:

  28. Income statementFor Bali Hai Traders

  29. Income Statement cont.

  30. Balance Sheet EXTRACT For Bali Hai Traders

  31. Balance Sheet EXTRACT For Bali Hai Traders

  32. Additional Information • Shares in other companies and property, plant and equipment were purchased during the year ended 30 June 2010 using cash • All purchases were made on credit, purchase returns of $130 • An ordinary share issue was made. Application closed fully subscribed • A motor vehicle that had an accumulated depreciation totaling $4320 was sold for $1728 cash. It had a carrying amount of $900. Any new motor vehicles purchased during the year were for cash • Cash dividends were paid during the year • $5000 was transferred from the retained Earnings account to the general Reserve

  33. Recon: Accounts Receivable • Insert Balance for beginning and end of period from balance sheet • Insert Credit Sales on Debit side • Insert reduce effect figures on credit side e.g bad debts, sales returns • Find missing cash figure for cash received from debtors, by subtracting DR and CR sides Accounts Receivable Bal 1200 Discount Allowed 52 Credit sales 105 240 Bad Debts 1044 Purchase Returns 259 CASH 103 585 Bal 1200 This figure will be part of ‘Cash receipts from Customers’ Which will also include ‘Cash Sales’ ( no recon needed)

  34. Recon: Accounts Payable • Insert Balance for beginning and end of period from balance sheet for both ‘Inventory’ and ‘Accounts payable’ • Insert Cost of Sales (COS) on Credit side of ‘Inventory’ • Find missing figure in ‘Inventory’ and insert in ‘Accounts payable’ • Insert reduce effect figures on debit side of ‘Accounts Payable’ e.g discount received • Find missing cash figure for cash paid to creditors, by subtracting DR and CR side Accounts Payable Inventory Bal 648 Bal 2808 Inv. 4 708 Disc. Rec. 210 COS 4406 Acc. Pay. 4708 Returns 130 CASH 3 504 Bal 1 512 Bal 3110 This figure will be part of ‘Cash paid to suppliers and employees

  35. Recon: Prepaid • Insert Balance for beginning and end of period from balance sheet • Insert Expense on credit side • Find missing cash figure for cash paid to advertising, by subtracting DR and CR sides Prepaid Advertising Bal 65 Adv. Expense 985 CASH 1 030 Bal 110 This figure will be part of ‘Cash receipts paid to Suppliers & employees

  36. Recon: Accrued • Insert Balance for beginning and end of period from balance sheet • Insert Expense on credit side • Find missing cash figure for cash paid to advertising, by subtracting DR and CR sides Accrued Wages Bal 389 Wage Expense 5 832 CASH 6 091 Bal 130 This figure will be part of ‘Cash receipts paid to Suppliers & employees

  37. Motor Vehicle Recon: Sale of Asset Bal 21 600 Sale 5220 • Insert Balance for beginning and end of period from balance sheet for ‘Motor Vehicle,’‘Accumulated Depreciation’ and ‘Gain on Sale of Motor Vehicle’ • Credit ‘Motor Vehicle’ at cost to show removal of asset from hands of business, Debit ‘Sale.’ Missing figure is Vehicles purchased • Debit ‘Accumulated Depreciation’ for depreciation accumulated on sold asset, Credit ‘Sale, the missing figure is Depreciation Expense • Find missing cash figure for cash received from sale of motor vehicle, by subtracting DR and CR side CASH 9 540 Bal 25 920 Gain on Sale of Motor Vehicle Accumulated Depreciation Motor 5220 Vehicle Accum. 4320 Dep. Sale 4320 Bal 4500 Dep 4820 Exp. CASH 1 728 Bal 5000 Bal 828 These figures will be part of ‘Investing Activities’

  38. Cash Flow Statement • Figures used from the reconstructions and account figure differences are then used to formulate the aforementioned report • The Net Cash flows from Operating, Investing and Financing activities should equal the net increase or decrease in cash / cash equivalent holdings during the year.

  39. Analyzing the Cash Flow Statement • The statement of cash flows is a vital document that depicts liquidity. It answers the following questions: • How was the purchase of non-current assets financed? • How did the business use its cash flows from operating activities? • How did the company pay a dividend if it made a loss? • Was the company able to repay the debt?

  40. Analyzing the Cash Flow Statement • Step1 : State and detail the overall change in cash holdings and whether this is beneficial for the business (negative cash holdings could be beneficial for expansion) • Step 2/3 : State and examine reasons for the net cash flow in each operating, investing and financing activities and whether they are beneficial for the business. • Step 4 : Draw a final conclusion to whether the company’s cash position has improved or not.

  41. COMPANY FINANCIAL REPORTS

  42. Statement of Comprehensive Income • This is a financial statement that details the total comprehensive income of a company for a given period representing the change in equity over that period, other than changes resulting from transactions with owners in their capacity as owners. • AASB 101 does not prescribe a particular format, however require all recognized income and expense for the period, including income tax payable. A widely accepted format is given on the next slide.

  43. Statement of Comprehensive Income. For year ended

  44. Statement of Comprehensive Income. For year ended

  45. Statement of Financial Position • This is a classified statement that details the assets, liabilities and equity of a financial entity at a point in time. The statement contains information that is summarised for ease of understanding, additional details being included in notes.

  46. Statement of Financial Position. As at

  47. Statement of Financial Position. As at

  48. Statement of Changes in Equity • This is a financial statement that details and explains changes during the period in three elements that make upa company’s equity: share capital, reserves and retained earnings.

  49. Profit for the year Gain on revaluation of assets Comprehensive income for year SHARE CAPITAL Bal at startIssue of Share Capital Bonus Share Issue Share Issue CostsBal at end REVALUATION RESERVE Bal at start Gain on Revaluation Bal at end GENERAL RESERVE Bal at start Transfers from Retained EarningsBal at end RETAINED EARNINGSBal at start Profit for the PeriodTransfers from Retained Earnings Dividends Paid Bal at end Statement of Changes in Equity. For year ended

  50. Qualitative Characteristics Paragraph 24 of the AASB framework identifies the following qualitative characteristics in general purpose financial reports: A good acronym to remember all of them is P R R U M S

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