Deakin University: MAA101 (Accounting for Decision Making)

1. MAA 103Accounting for Decision MakingDeakin University Mohammad Ataullah Date Time Venue Disclaimer: This information is the strictly confidential. Please do no disseminate this information in any way without the consent of its proprietors. If you are an unintended recipient of this information, please destroy it as soon as possible. This information is copyrighted to LOGIA MANAGEMENT SERVICES (2013). Please noteLOGIA MANAGEMENT SERVICES assumes no responsibility for errors, inaccuracies or omissions in these materials/information.LOGIA MANAGEMENT SERVICESdoes not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials.LOGIA MANAGEMENT SERVICESshall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials.

2. About the Class Everything that will be covered in this class aims to help you get through your final exam for MAA103. You will be given tips, specific topics you need to focus on, and some sample exam questions that we will go through together.

3. Important Topics for the Exam • Difference between Management and Financial Accounting • Difference between costs (Indirect, Direct, Fixed and Variable) • Types of Entities • Calculation and Analysis of Ratios • Income Statement and Balance Sheet • Contribution Margin Statement • Cash Budgets / Sales Budgets • Calculation of Break Even Point

4. Topics to be Covered

5. Session 1:Introduction to Accounting Disclaimer: This information is the strictly confidential. Please do no disseminate this information in any way without the consent of its proprietors. If you are an unintended recipient of this information, please destroy it as soon as possible. This information is copyrighted to LOGIA MANAGEMENT SERVICES (2013). Please noteLOGIA MANAGEMENT SERVICES assumes no responsibility for errors, inaccuracies or omissions in these materials/information.LOGIA MANAGEMENT SERVICESdoes not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials.LOGIA MANAGEMENT SERVICESshall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials.

6. Accounting: A Brief Introduction “Identifying, measuring and communicating economic information to permit informed decisions by users.” Types of Accounting?Financial Accounting( External users) • Production of financial statements (general purpose) • Production of special reports (specific purpose) e.g. tax • Focus on past Management Accounting (Internal users) • Production of specific purpose reports • Not regulated, not time constrained, no strict format • Focus on current and future

7. The Accounting Equation Assets = Liabilities + Owners’ Equity ORIncome – Expenses = Profit • Profit is the owners’ return on investment, thus is part of owners’ equity Assets = Liabilities + Opening Equity+ Income - Expenses

8. The Elements of the Equation • Asset - A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise • Liabilities - Present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits • Equity - The residual interest in the assets of the enterprise after deducting all its liabilities

9. The Elements of the Equation (Cont’d) • Income - The increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants • Expenses - decreases in economic benefits in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants

10. Accounting Entities (Important for Theory) • Sole proprietor - A business run by one single owner • Partnership - A business owned between 2-20 people and responsibilities, profit etc are divided amongst the partners • Companies - A legal entity (An artificial person)

11. Types of Companies • Proprietary Companies (Pty Limited) also know as private companies, cannot offer their shares to the public, 1-50 shareholders. • Public Companies 4 types of public companies: 1. Limited by shares: offer shares to the public 2. Limited by guarantee: shareholders agree to contribute a set amount of cash if business winds up. Eg sporting clubs and not for profit 3. No liability company: shareholders not liable for debts, normally mining companies 4. Unlimited company: no limit placed on their liability

12. Two Forms of Accounting (Important for Theory) • Financial Accounting (external users) • Production of financial statements (general purpose) • Production of special reports (specific purpose) e.g. tax • Focus on past • Management Accounting (internal users) • Production of specific purpose reports • Not regulated, not time constrained, no strict format • Focus on current and future

13. Session 2:Financial Statements Disclaimer: This information is the strictly confidential. Please do no disseminate this information in any way without the consent of its proprietors. If you are an unintended recipient of this information, please destroy it as soon as possible. This information is copyrighted to LOGIA MANAGEMENT SERVICES (2013). Please noteLOGIA MANAGEMENT SERVICES assumes no responsibility for errors, inaccuracies or omissions in these materials/information.LOGIA MANAGEMENT SERVICESdoes not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials.LOGIA MANAGEMENT SERVICESshall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials.

14. Financial Statements • Balance SheetASSETS = LIABILITIES + OWNERS’ EQUITY • Income StatementIncome - Cost of goods sold= Gross profitGross profit - expenses = Net profit • Cash Flow Statements Balance of Cash at Start of Period + Inflows of Cash for Period - Outflows of Cash for Period= Balance of Cash at End of Period

15. Simple Balance Sheet

16. Simple Income Statement

17. Cash Flow Statement (Less Important)

18. Some Notes • Assets and Liabilities are measured at their book value (Carrying amount) • Stock is valued at Lower of cost or Net realizable value • Depreciation can be both straight line method or Reducing balance method

19. Example of Depreciation Machine: estimated useful life 10 years Cost: $10,000 End of Year 1: Depreciation Expense $1,000 Accumulated Depreciation $1,000 • Accumulated depreciation in year 2 will be depreciation for the two years.i.e. $ 2000

20. Question on Income Statement and Balance sheet

21. Practice Question on Income Statement • Cash $ 52 000 • Receivables 28 000 • Office supplies 2 400 • Prepaid insurance 1 300 • Plant & equipment 250 000 • Accumulated depreciations (plant & equipment) 58 600 • Accounts payable 41 200 • Salaries payable 12 000 • Rent received in advance 24 000 • Share capital 150 000 • Retained earnings 32 000 • Service revenue 356 000 • Rent revenues 28 000 • Supplies expense 35 000 • Rent expense 59 000 • Insurance expense 4 200 • Depreciation expense 41 300 • Salaries expense 228 600

22. Statement in Changes in Financial Position Share Capital in the beginning of the year + Retained earning in the beginning of the period + profit for the year = Share capital at the end of the year

23. Session 3:Analyzing Accounting Statements Disclaimer: This information is the strictly confidential. Please do no disseminate this information in any way without the consent of its proprietors. If you are an unintended recipient of this information, please destroy it as soon as possible. This information is copyrighted to LOGIA MANAGEMENT SERVICES (2013). Please noteLOGIA MANAGEMENT SERVICES assumes no responsibility for errors, inaccuracies or omissions in these materials/information.LOGIA MANAGEMENT SERVICESdoes not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials.LOGIA MANAGEMENT SERVICESshall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials.

24. Ratio Analysis of Financial Statements Analysing financial statements involves evaluating three characteristics of an entity: • Liquidity a measure of how quickly an entity can convert its current assets into cash • Profitability earning profit for the company and its owners

25. Liquidity Ratios • Measure the short-term ability of an entity to pay its maturing obligations and to meet unexpected needs for cash. • Ratios include: • Current ratio • Acid-test ratio • Cash flow from operations

26. Formulas • Current Ratio = Current Assets/ Current LiabilitiesIdeal ratio for a company is 2:1. The closer to this ratio the better it is for the company. • Asset test ratio= Current Assets- Stock/ Current LiabilitiesIdeal ratio for a company is 1.5 : 1A more realistic ratio. • Cash flow ratio= Cash flow from operation/ Current Liabilities

27. Profitability Ratio • Gross Profit Margin • Expense ratios • Net Profit Margin • Asset Turnover • Cash Return on Assets • Return on Assets • Return on Equity

28. Formulas for Profitability Ratios • Gross profit margin= Gross profit/Sales • Net profit Margin= Net profit/ Sales • Expenses ratio = Expenses/ Sales • Asset turnover= Sales/ Total Assets

29. Formulas for Profitability Ratios (Cont’d) • Return on Assets = EBIT/ Average total Assets • Return on owners equity = Profit/ Average owners' equity

30. Asset Efficiency Ratios • Debtors turnover= Net credit sales/Average net receivables • Creditors turnover= Net credit purchases/ Average net payables • Inventory turnover= Cost of goods sold/ Average inventory

31. Interpreting Ratios • Interpreting financial information requires the application of judgement. • Need criteria (i.e. benchmarks) against which to judge performance.

32. Benchmarks • Consider the trend in the ratio over 2 or more years (intra-entity basis). • Consider industry averages (broader economic trends) in the analysis of each ratio • i.e., A stable current ratio can deteriorate quickly if economic conditions deteriorate. • Compare with one or more major competitors (inter-entity basis)

33. Limitations of Ratios 1. Estimates Financial statements contain many estimates (e.g depreciation). The reliability of ratios analysis depend on the accuracy of estimates. 2. Cost Many assets carried at historic cost. Does not account for price-level changes.

34. Limitations of Ratios (Cont’d) 3. Atypical data Some end-of-period data may not represent normal business conditions. 4. Diversification of entities Global entities are often diversified, limiting the usefulness of analysis as they may not be able to be classified in a single industry.

35. Question on Ratios

36. Calculate • Current Asset Ratio • Gross Profit Margin • Return on Assets • Debt to Assets

37. Let’s now comment on these ratios for the year 2010

38. Session 4:Cost Concepts for Decision Making For this session materials has been used from Various lectures from Monash University and I am not the owner of the material. Disclaimer: This information is the strictly confidential. Please do no disseminate this information in any way without the consent of its proprietors. If you are an unintended recipient of this information, please destroy it as soon as possible. This information is copyrighted to LOGIA MANAGEMENT SERVICES (2013). Please noteLOGIA MANAGEMENT SERVICES assumes no responsibility for errors, inaccuracies or omissions in these materials/information.LOGIA MANAGEMENT SERVICESdoes not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials.LOGIA MANAGEMENT SERVICESshall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials.

39. Costs • Fixed costs • A cost that remains constant despite changes in the volume of activity (e.g. Sales) • Variable costs • A cost that varies in proportion to changes in the volume of activity • Mixed costs • Costs that have both fixed and variable elements • Average costs • Total costs divided by total activity (cost per unit) • Cost behaviour • How costs respond to changes in the level of business activity

40. Contribution • The difference between selling price and variable costs • Contribution is the contribution made by the sale of a product/service towards • First, fixed costs, and • Second, profit

41. Contribution Margin Statement Sales $1,000,000 Less variable cost of sales 650,000 Contribution 350,000 Less fixed cost of sales 100,000 Gross profit 250,000 less period costs 150,000 Net profit $100,000

42. Breakeven • The point at which total costs equal total revenue – there is neither a profit or loss • Unit contribution = selling price per unit – variable cost per unit Breakeven sales (in units) = Fixed costs Unit contribution • Contribution margin ratio = contribution per unit/selling price per unit Breakeven sales (in $) = Fixed costs Contribution margin ratioContribution margin ratio = Total contribution/Sales

43. Illustration • Fixed costs $200,000 • Selling price $20 per unit • Variable costs $10 per unit

44. Illustration (Cont’d) Breakeven (in units): Unit contribution = $20 - $10 = $10 Fixed costs Unit contribution $200,000 10 = 20,000 units Breakeven (in $ sales): Contribution margin ratio is Unit Contribution $10 Selling price $20 = 50% or 0.5 Fixed costs Contribution margin ratio $200,000 0.5 = $400,000 Or 20,000 units @ $20

45. CVP with Target Profit Breakeven sales (in units) = Fixed costs + Target profit Unit contribution Breakeven sales (in $) = Fixed costs + Target profit Contribution margin ratio

46. Illustration with Target Profit • Fixed costs $200,000 • Selling price $20 per unit • Variable costs $10 per unit • Target profit $100,000

47. CVP with Target Profit Breakeven (in $ sales): Contribution margin ratio = 0.5 Fixed costs + Target profit Contribution margin ratio $200,000 + $100,000 0.5 = $600,000 Or 30,000 units @ $20 Breakeven (in units): Unit contribution = $20 - $10 = $10 Fixed costs + Target profit Unit contribution $200,000 + $100,000 10 = 30,000 units

48. Data for Practice Question • Annual volume 32 000 units • Selling price per unit $60 • Variable manufacturing cost per unit $28 • Annual fixed manufacturing costs $120 000 • Variable marketing and distribution $12 • Annual fixed non-manufacturing costs $360 000

49. Required? • Calculate the break-even units for 2012. • Calculate the margin of safety in both units and dollars. • Calculate the profit achieved in 2012.

50. Direct / Indirect Costs • Direct costs are traceable to products/ services • Goods bought for resale (when sold) • Labour involved in providing services • Indirect costs (overhead) are not readily traceable • Rent • Depreciation • Management