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PREPARE FINANCIAL STATEMENTS

D1.HFI.CL8.06 D1HFA.CL7.04 D2.TFA.CL7.06. PREPARE FINANCIAL STATEMENTS. Introduction. Prepare financial statements Classroom schedule Trainer contact details Assessments Resources: Calculator, pen and paper. Introduction. Ice breaker: What is your name? Where do you live?

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PREPARE FINANCIAL STATEMENTS

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  1. D1.HFI.CL8.06D1HFA.CL7.04D2.TFA.CL7.06 PREPARE FINANCIAL STATEMENTS

  2. Introduction Prepare financial statements • Classroom schedule • Trainer contact details • Assessments • Resources: • Calculator, pen and paper

  3. Introduction Ice breaker: • What is your name? • Where do you live? • Why are you doing this course? • Where do you work? • What do you like most about your workplace? • Have you studied a module or unit similar to this before?

  4. The Accounting system • A Definition of Accounting: “The systematic recording, reporting and analysis of financial transactions of a business.” • The Accounting System The people and the processes by which an organisation records, reports and analyses financial transactions

  5. The Accounting system FINANCIAL STATEMENTS

  6. Financial statements – the theory • What are financial statements? • Financial transactions, activities and events • Summary • Why are financial statements prepared? • Financial performance and position • Growth and the future • Who prepares financial statements • Personnel involved

  7. Financial statements – the theory Key characteristics of the tourism and hospitality industry • Sales volatility • Seasonal • Daily turnover • Product perishability • Food and beverage outlets • Accommodation venues

  8. Financial statements – the theory Key characteristics (continued) • High fixed costs • Accommodation venues • Relationship to profit • Labour intensive activities • People business • Cost

  9. Financial Statements – the theory Two categories of financial statements • Financial accounting • Management accounting

  10. Financial Statements – the theory Financial accounting reports: • Terminology differences • Location • External and internal requirements • Profit and loss statement • Balance sheet • Statement of changes in equity • Statement of cash flows

  11. Financial Statements – the theory Management accounting reports: • Profit and loss summary • Balance sheet • Revenue report • Bank reconciliation statement • Fixed asset register

  12. Financial Statements – the theory How often are financial statements produced? • Arbitrary reporting periods of equal length • Ownership • Financial and management accounting reports

  13. Financial Statements – the theory Financial accounting reports: • Regulatory requirements • Annually • Interim reports • Internal users • Threshold guidelines • Monitor, review and evaluate financial transactions • Support decision making

  14. Financial Statements – the theory Management accounting reports: • Internal use only • Address key characteristics of the industry • Size and scope of organisation • Information required by interested parties

  15. Financial Statements – the theory True and Fair View: • What does this mean? • Accounting standards • Implication for hospitality and tourism • Revenue • Assets • Costs

  16. Financial Statements – the theory Considerations: • Disclosure • Factors • Relevant reports • Confidentiality • Work practices • Preparation of financial data • Distribution of reports

  17. Financial Statements – the theory Considerations (continued): • Access to information • Outside the organisation • Statistical data for analysis • Market value or trading data

  18. Financial Statements – the theory Assumptions underlying financial reports: • Jigsaw activity • Discuss and provide an explanation for the key assumptions given to your group. Use examples where you can • Create a class set of explanations and examples based on this activity

  19. Financial Statements – the theory The format for financial reports: • Accounting standards and principles • GAAP • Local guidelines • Uniform system of accounts – USALI • Guided by activity • Location or region • External requirements

  20. Prepare the Fixed Assets Register Fixed Assets Register

  21. Prepare the Fixed assets register Key concepts: • Relationship to revenue • Current and non-current assets • Examples from tourism and hospitality • Internal control to safeguard assets • Substantial investment • Cost principle

  22. Prepare the Fixed assets register What does a fixed asset register look like? • Activity • Create an example of a fixed asset register to share with the group for a hospitality or tourism organisation

  23. Prepare the Fixed assets register Format of a register should include: • Administrative details • Unique asset code • Description of the asset • Location of the asset • General ledger code • General ledger sub-category details

  24. Prepare the Fixed assets register Format of a register should include: • Purchase details • Date of purchase • Purchase price • Valuation details • Residual value • Useful life • Depreciation rate and method

  25. Prepare the Fixed assets register Format of a register should include: • Cumulative values • Accumulated depreciation • Book value or Net Book Value • Disposal details (where relevant) • Disposal date • Disposal price • General ledger adjustments

  26. Prepare the Fixed assets register Depreciation: • It may not be what you think… • Why is it calculated? • When is the calculation performed? • Remember there is no monetary exchange!

  27. Prepare the Fixed assets register Key terms and phrases: • Depreciation methods • Depreciation rate • Useful life • Residual or salvage value • Book value or Net book value • Accumulated depreciation

  28. Prepare the Fixed assets register Depreciation methods: • Straight-line depreciation • Equal charge across life of the asset • Always calculates annual depreciation charge • Method 1 – Depreciation rate • Purchase price X Depreciation rate = Annual depreciation charge

  29. Prepare the fixed assets register Depreciation methods: • Method 2 – Useful life Purchase price – residual value Useful life of the asset = Annual depreciation charge • Remember that residual value and useful life are estimates • CAUTION : ANNUAL CHARGE

  30. Prepare the Fixed assets register Depreciation methods: • Reduced balance method • Use asset more in earlier years • Always calculates annual depreciation charge • Only one method but two steps • Calculate Net book value • Calculate depreciation charge

  31. Prepare the Fixed assets register Reduced balance method: • Calculate Net Book Value • Book Value – Accumulated depreciation = Net Book Value • Previous period data used • Depreciation charge • Net Book Value X Depreciation rate = Annual Depreciation charge

  32. Prepare the Fixed assets register Useful life Residual value

  33. Prepare the Fixed assets register Maintaining the fixed assets register: • Why? • Accurate and timely information • Valuation • Integrity and security of data • Secure access • Authorised changes • Assets sighted

  34. Prepare the Fixed assets register Maintaining the fixed assets register: • Periodic updates • Financial reports • Physical count • Annual reviews • Purchases of fixed assets • Asset sighted • Asset categorised • Depreciation details

  35. Prepare the Fixed assets register Maintaining the fixed assets register: • Disposal of fixed assets • Authorisation • Valuations • Adjustments

  36. Prepare the Fixed assets register Produce the fixed assets register report: • Format • To meet internal requirements • Frequency • Reconcile to the general ledger • Significant updates • Other internal time requirements

  37. Prepare the Fixed assets register Produce the fixed assets register report: • Examples • Annual review • Record of changes • Depreciation schedule • Management decision making

  38. Maintain the General Ledger TRANSACTIONS • The Accounting cycle SOURCE DOCUMENTS JOURNALS LEDGERS TRIAL BALANCE FINANCIAL ACCOUNTING REPORTS MANAGEMENT ACCOUNTING REPORTS

  39. Maintain the general ledger Principles for recording transactions in the general ledger: • Double entry accounting

  40. Maintain the general ledger Principles for recording transactions in the general ledger: • Double entry accounting

  41. Maintain the general ledger Principles for recording transactions in the general ledger: • Journals • Cash receipts journals • Cash payments journal • Sales journal • Purchases journal • General journal

  42. Maintain the general ledger Principles for recording transactions in the general ledger: • An example of the cash receipts journal • Note that each amount is entered twice: • Payment has been received (1) for a room charge (2) • Payment has been received (3) for restaurant sales (4) • The total amount in the bank is the sum of (1) and (3) and will be posted to the ledger account called Cash at Bank. • The total amount for each sale will be posted to their individual ledger accounts

  43. Maintain the general ledger Principles for recording transactions in the general ledger: • An example of the general journal format

  44. Maintain the general ledger Principles for recording transactions in the general ledger: • Ledger accounts • Classified into revenue, expense, asset, liabilities and equity • Unique code • Current balance maintained • Subsidiary ledger accounts • Different from journals • Reconciled to the main ledger account

  45. Maintain the general ledger Principles for recording transactions in the general ledger: • External transactions • Source document recorded • Journal totals “posted” to the appropriate general ledger accounts • Subsidiary ledgers balanced, reconciled and details posted • Internal transactions • General journal • Subsidiary ledgers

  46. Maintain the general ledger Activity Record the following transactions in the general journal for an accommodation venue: • 2,500 cash received for room sales • Cash paid of 400 to staff for wages • Rent paid for one month of 1,000 • 400 paid for advertising expenses

  47. Maintain the general ledger The trial balance: Activity • What is the trial balance? • Why is a trial balance prepared? • Format for the trial balance • When is the trial balance prepared?

  48. Maintain the general ledger Key concepts when preparing the trial balance: • Debits must equal Credits • BEWARE the computerised accounting system • Checklist for locating and adjusting errors • General journal records adjustments

  49. Maintain the general ledger Adjusting entries • What is an adjusting entry? • Tourism and hospitality examples • Accounting principles • Accrual assumption • Matching principle • Revenue recognition principle • General journal • Posted to the general ledger

  50. Maintain the general ledger Activity

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