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1. Collaborate Session 1
Accounting 1
Accrual Accounting
B/S & P&L Example
Cash Flows

2. Accrual
Accounting

3. Accrual accounting
AASB Framework definition of accrual accounting:
‘The effects of transactions and other events are recognized when they
occur (and not as cash or its equivalent is received or paid) and they are
recorded in the accounting records and reported in the financial reports
of the periods to which they relate.’
www.aasb.gov.au/Pronouncements/Glossary-of-defined-terms/Definitions-A.aspx - a great
website that you should checkout!

4. Income is recognised in the accounting period in which
the right to receive the income arises – i.e. when the
income is actually earned.
Accrued income
Income that is earned in an accounting period but not
recorded before the end of the accounting period.

5. An example of accrued income
Charlie’s Doors has $100,000 in the bank. Interest on
the investment is paid quarterly, with the April - June
instalment due to be paid on the 26th July.
The interest is deemed to be income applicable to the
period ending 30 June as it was earned in that period.
Beginning of Qtr
– 1st April
End of period –
30th June
Interest actually received
– 26th July

6. An expense is recognised in the accounting period in
which the economic benefits are consumed – i.e. when
the expense is incurred.
Expenses incurred during an accounting period but
not recorded before the end of the period.
Accrued expenses

7. An example of accrued expenses
• Mary’s Wholesale Flowers receives its electricity account
from ABC Power every 3 months
• Last account of $6600 (inc GST) for the period 1
February to 30 April was received on 15 May
• Estimation of electricity usage for 3 months ending 31
July similar to previous account
• Electricity consumed during May/June must be
recognised as expense for year ended 30 June – an
amount of $4400 (inc GST) is calculated for 2 months

8. BS & PL Questions

9. After the first few weeks, you should make sure you are
able to prepare, analyse, interpret the 3 basic financial
statements:
 Balance Sheet (Statement of Financial Position or BS) - Ch 3
 Format (p90-92)
 Income Statement (Statement of Financial Performance or P&L) – Ch 4
 Format of Classified Income Statement (p148)
 Statement of Cash Flows – Ch 5
 Format (p230-231)
 We have had a lot of questions about P&Ls and BS in the past few weeks so we are
including a work through of an old exam question first – Eastern Pet Supplies

10. $
Cash at bank 12,000
Accounts Receivable 9,000
Drawings 6,900
Discount expense 600
Discount received 900
Sales 98,000
Inventory, 1 July 2011 16,200
Sales returns 300
Shop fittings & equipment 28,000
Purchase returns 1 800
Interest paid 2,500
Advertising 1,600
Sales staff salaries 10,700
Office expenses 4,800
Rates 3,600
Shop fittings & equipment - accumulated depreciation 5,000
Long term loan 30,000
Purchases 56,000
Accounts Payable 6,800
Capital 29,700
3 year investment with bank 20,000
• The following information relates to
Eastern Pet Supplies for the year ending
30 June 2012:
Prepare:
• a classified Income Statement and
• a classified Statement of Financial
Position for the year ending 30 June 2012.
(11 + 10 = 21 marks)
End of year additional information and
adjustments:
• Inventory on hand, 30 June 2012 is
$9,700
• Advertising paid in advance amounted to
$300
• Sales staff salaries owing at 30 June 2012
totalled $2,500
• Depreciation of shop fittings and
equipment is calculated as 10% of cost
per year
• Interest income receivable at 30 June
2012 is $1,400

11. Cash at bank 12,000
Accounts Receivable 9,000
Drawings 6,900
Discount expense 600
Discount received 900
Sales 98,000
Inventory, 1 July 2011 16,200
Sales returns 300
Shop fittings & equipment 28,000
Purchase returns 1 800
Interest paid 2,500
Advertising (1600 – 300) 1,300
Sales staff salaries (10700 + 2500) 13,200
Office expenses 4,800
Rates 3,600
Shop fittings & equipment – acc. Depn. (5000 + 2800) 7,800
Long term loan 30,000
Purchases 56,000
Accounts Payable 6,800
Capital 29,700
3 year investment with bank
Closing Inventory
Inventory on Hand
Prepaid Advertising
Salaries Owing
Depreciation Expense
Interest Income
Interest Receivable
20,000
9,700
9,700
300
2,500
2,800
1,400
1,400
Adjustments
End of year additional information and
adjustments:
•Inventory on hand, 30 June 2012 is $9,700
•Advertising paid in advance amounted to $300
•Sales staff salaries owing at 30 June 2012 totalled
$2,500
•Depreciation of shop fittings and equipment is
calculated as 10% of cost per year (28000 x 10%)
•Interest income receivable at 30 June 2012 is $1,400

12. Cash at bank 12,000
Accounts Receivable 9,000
Drawings 6,900
Discount expense 600
Discount received 900
Sales 98,000
Inventory, 1 July 2011 16,200
Sales returns 300
Shop fittings & equipment 28,000
Purchase returns 1 800
Interest paid 2,500
Advertising 1,300
Sales staff salaries 13,200
Office expenses 4,800
Rates 3,600
Shop fittings & equipment – acc. Depn. 7,800
Long term loan 30,000
Purchases 56,000
Accounts Payable 6,800
Capital 29,700
3 year investment with bank
Closing Inventory
Inventory on Hand
Prepaid Advertising
Salaries Owing
Depreciation Expense
Interest Income
Interest Receivable
20,000
9,700
9,700
300
2,500
2,800
1,400
1,400
Allocate items to Income Statement and Statement of
Financial Position.

13. Eastern Pet Supplies
Income Statement for the year ended 30 June 2012
Income
Sales 98,000
Less Sales Returns 300
Net Sales 97,700
Less Cost of Goods Sold
Inventory 1/7/2011 16,200
Purchases 56,000
Less Purchase Returns 1,800
54,200
70,400
Inventory 30/6/2012 9,700 60,700
Gross Profit 37,000
Other Income
Interest Received 1,400
Discount Received 900 2,300
Total Income 39,300
Less Operating Expenses
Selling Expenses
Advertising Expenses 1,300
Sales Staff Salaries 13,200
Depreciation – Shop Fittings 2,800
Total Selling Expenses 17,300
Administration Expenses
Office Expenses 4,800
Rates 3,600
Total Administration Expenses 8,400
Finance Expenses
Discount Expense 600
Interest Paid 2,500
Total Finance Expenses 3,100
Total Operating Expenses 28,800
Net Profit 10,500

14. Eastern Pet Supplies
Statement of Financial Position as at 30 June 2012
Assets
Current Assets
Cash at Bank 12,000
Accounts Receivable 9,000
Prepaid Advertising 300
Interest Receivable 1,400
Inventory on Hand 9,700
Total Current Assets 32,400
Non Current Assets
Shop Fittings and Equipment 28,000
Accumulated Depreciation (7,800)
20,200
Bank Investment 20,000
Total Non Current Assets 40,200
Total Assets 72,600
Liabilities
Current Liabilities
Accounts Payable 6,800
Salaries Owing 2,500
Total Current Liabilities 9,300
Non Current Liabilities
Long Term Loan 30,000
Total Liabilities 39,300
Owners Equity
Capital 29,700
Net Profit 10,500
Drawings (6,900)
Total Owners Equity 33,300
Total Liabilities and Owners Equity 72,600

15. Cash Flow
Accounting 1

16. Cash Flow statement
 Cash flow statement records the amounts of cash and
cash equivalents entering and leaving a company
 Assists in understanding where money is coming from
and how it is being spent

17. Cash Vs Profit
Cash Profit
Movement of cash (money going in or
out)
Revenue less expenses
Cash flow statement will record
transactions when money is actually
paid or received
Based on accrual concept-transactions
recorded in the period in which they
occur regardless of whether cash is
received or not

18. Preparation of Cash Flow Statement
 Pages 236-244
3 steps
 (a) Arriving at the cash flow from operating activities
 (b) Arriving at the cash flow from investing activities
 (c) Arriving at the cash flow from financing activities

19. Cash flow from operating activities
Main items :
 Cash receipts from customers
 Cash paid to suppliers
 Cash paid to employees
 Interest paid
 Income taxes paid

20. Cash flow from Investing activities
Main items:
 Purchase of PPE
 Proceeds from sale of PPE

21. Cash flow from Financing activities
Main items:
 Issue of share capital
 Long term borrowings
 Repayment of borrowings
 Dividends
 Payment of finance lease

22. Arriving at Cash flow from Operating activities
 Let’s look at how to compute some of the items in the cash
flow from operating activities

23. Cash receipts from customers
Start with: Opening balance of accounts receivable
Add: Sales for the period
Less: closing balance of accounts receivable

24.  Cash paid to suppliers
 Start with: Opening balance of accounts payable
 Add: Purchases
 Less: Closing balance of accounts payable
If the figure for purchases is not available but only cost of sales is
given, you need to work out the purchases as below.
 Cost of sales=Opening stock+ purchases-closing stock
 X=x1+?+x2

25. Interest paid
If there is Interest payable:
Start with :Opening balance of interest payable
Add: Interest expenses for the period
Less: closing balance of interest payable

26. If there is Interest prepaid:
• Start with: Closing balance of pre-paid
interest
• Add: interest expenses for the period
• Less: opening balance of prepaid interest

27. Income tax
• Actual payment of tax usually lags behind
profits
• Tax of the previous year usually gets paid in
the current year

28. We have looked at the computation involved in
arriving at the cash flow from operating activities
Any questions up to this point?

29. Reconciliation of operating profit to cash flow
from operating activities
Pages 244-248
 You are only required to know that
this reconciliation exists
 However let’s discuss a couple of points to
assist your understanding of the concept

30. We know that cash flow and operating profit are
two different items
The differences could be caused by,
Non cash items such as depreciation
Increase or decrease in current assets
Increase or decrease in current liabilities

31. The effects of changes of assets & liabilities
on cash flow
The below table summarizes the effect of
changes of assets/liabilities on cash flow
Item Movement Effect on cash flow
Current assets Increase
Decrease
Decrease
Increase
Current liabilities Increase
Decrease
Increase
Decrease

32. Past exam question 3 – ASSESSMENTS – REVISION EXAM QUESTIONS

34. Sales calculation
P & L
Cash paid
Calculation
P & L
Wages paid
calculation
General exp
calculation
Notes

36. Questions?