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Accounting decisions
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  1. Accounting decisions Case: Accounting at MacCloud winery

  2. 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

  3. The MacCloud winery • 5 acres of land • One building Accounting at McCloud Winery

  4. 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

  5. 2: The bank loan • $180,000 • 3 years maturity • $ 10,000 annual repayment • 10% interest rate Accounting at McCloud Winery

  6. 3: The land and the grapevines • The vineyard is certainly an asset • Cost of this asset? • Depreciation? Accounting at McCloud Winery

  7. 4: Vines’ diseases • Highly damaging event • Possible, but not certain • How do we account for this? Pierce’s disease Phylloxera Accounting at McCloud Winery

  8. 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

  9. General questions that we have tackled today • What do we mean by “accounting decisions”? • Why is it necessary to make accounting decisions? • What are the consequences of these decisions? Accounting at McCloud Winery

  10. The accrual principle: an example Balance Sheet Balance Sheet Balance Sheet Profit = 50 Profit = 10 Accrual logic Wealth 300 Wealth 350 Wealth 360 I/S day 1 I/S day 1 Different! Begin. day 1 End of day 1 End of day 2 Cash flow logic Cash flow day 1 Cash 0 Cash 250 Cash 360 Cash flow day 2 Cash increase = 250 Cash increase = 110 Accounting at McCloud Winery

  11. Accounting and Financial Analysis Accounting decisions Raw data Double-entry Financial Analysis Financial Statements Accounting at McCloud Winery

  12. 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