FINM7409
Tutorial 1 Solutions
Comprehension questions
1.1 What is a business transaction and how does it relate to the accounting process?
Illustrate the concept of a business transaction with five examples relating to an
SME such as a provider of naturopathic services.
A business transaction can be defined as external exchanges of resources between the entity
and another entity or individual that affects the assets, liabilities and owners’ equity items in
an entity. The accounting process is the identifying, measuring and communicating of
economic information about an entity to a variety of users for decision-making purposes. The
first component of the process is the identification of business transactions which are then
measured and communicated to the different users of financial reports.
Business transactions for a provider of naturopathic services include the following.
1. The contribution of capital by the owner to commence the business. This transaction
would increase cash (asset) and increase capital (equity).
2. The purchase of equipment (stethoscope, cupping jars) on credit. This transaction would
increase equipment (asset) and increase creditor (liability).
3. The payment of building rent. This transaction would decrease cash (asset) and decrease
profit (equity).
4. The purchase of office equipment for cash. This transaction would increase office
equipment (asset) and decrease cash (asset).
5. Withdrawal of business funds by owner. This transaction would decrease cash (asset) and
increase drawings/decrease capital (equity).
1.2 Differentiate between financial and management accounting. Provide an example
of how a management accounting report would be incorporated into financial
accounting reports.
In differentiating between financial accounting and management accounting, it is important to
consider the users of financial information — both internal and external users. Financial
accountants prepare and report information for external users (for example prospective
investors or the tax office) and as such are subjected to regulation from GAAP, the
Corporations Act and in some cases the ASX through their Listing Rules. Management
accountants are concerned with the effective use of an entity’s resources, and in so doing assist
the manager/s (i.e. internal users) of the entity in achieving their goal of enhancing customer
and shareholder value. Therefore, the management reports generated need to be up-to-date to
be effective. Regulation in management accounting is much less formal and in some areas rules
are basically non-existent. Ultimately, there will be interaction between the financial
accounting and management accounting areas. The information provided by management
accountants will provide information for internal users that will be reflected in the financial
reports used by the external users. See table 1.3 for a detailed list of the differences between
financial and management accounting.
1.3 Describe how accounting information helps shareholders and lenders to make
decisions concerning the operations and performance of an entity.
Users of accounting information (both internal and external) require accounting information to
assist them in the decision-making process. External users such as investors, employees, banks,
suppliers and government agencies (e.g. ATO) all have their own specific information needs.
A potential investor will require past profits and future profit projections, as well as future
growth prospects, to determine if the entity is a good investment proposition or not. Lenders
will be seeking details of the level of risk it is exposing itself to by lending money to the entity
plus the prospects of the entity repaying its debt.
1.6 List five stakeholders of accounting information. Describe the information
requirements for each one; for example, lenders would need information
regarding the business's ability to repay debt and service a loan.
Any five of the following:
STAKEHOLDERS: INFORMATION NEEDS:
Managers require information to determine make or buy decisions or
whether to expand or close down or whether to change banks.
Investors seek information on capital growth prospects and future
dividend payments.
Lenders need information on the ability of the entity to repay its loans.
Suppliers want to know if the entity can pay for its supply purchases.
Consumers are interested in the life expectancy of the entity and the entity’s
ability to provide appropriate goods and services.
Government agencies for example, ATO — require information to determine the
amount of tax liability of the entity.
Regulatory bodies for example, ASX and ASIC need to know whether the entity
is following the ASX listing rules and the rules and regulations
of the Corporations Act.
1.7 Charlie Chan is considering purchasing a cafe in the inner Sydney suburb of Surry
Hills. Outline the importance of a business plan for Charlie and the type of
accounting information she will require to assist her in making the decision.
For Charlie, the business plan would provide a clear, formal statement of direction and purpose.
It would allow her to work towards a set of clearly defined goals in the daily operations of the
business. It also helps her in evaluating the business.
Charlie should seek the advice of her accountant regarding the following.
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1. Evaluate the purchase — from the accountant’s experience (or with assistance from her
professional association) advice can be obtained on whether the purchase is a good buy
or not (e.g. through comparisons of similar recent sales; analysing past financial reports).
2. Prepare budget forecasts (e.g. on sales — i.e. target sales of food necessary to make the
purchase worthwhile or to compare whether it is better financially to remain in your
present job and make passive investments with your capital). This will enable a
prospective buyer to evaluate if such sales are feasible.
3. Explain the personal qualities required in owning such a business (e.g. long hours;
tedious work; customer relationships; impact on family life).
1.8 What is stakeholder theory and how is it related to corporate governance?
Stakeholder theory suggests that many groups other than shareholders have a stake in the
activities and performance of an entity, and that corporate governance needs to reflect the
wider duty of care that society is placing on the decision makers of entities.
The IIRC's stated ob jective is to develop an international ly accepted integrated reporting framework by 2014 to create the foundations for a new reporting model to enable organisat ions to provide concise communications of how they create value over time.
1.16 What is meant by business sustainability?
Business sustainability is considering the long term (multi-generational) in business decisions.
It is about thinking of solutions to the world’s problems and in trying to change business
practices and processes to ensure a respect for the environment and people. It is about
integrating sustainability into the business and about being transparent and accountable via
business sustainability reporting.
1.21 Outline some ways that accountants could contribute to the sustainability efforts
of organisations.
In 2015, IFAC President, Olivia Kirtley, stated: ‘Accountants working in the public and private
sectors have a significant role to play in supporting and making the decisions that guide an
organisation’s ability to be resilient.’ The IFAC suggests eight practical ways for accountants
to make a difference and fulfil their role as business partners.
1. Identify and connect key trends and impacts to the organisation’s strategy, business
model and performance.
2. Integrate significant natural and social capital issues into decision-making processes.
3. Assess the benefits of tackling environmental and social issues (e.g. cost reduction;
revenue generation).
4. Organise internal systems and processes to ensure what matters is measured and
managed.
5. Link the strategy and resources to the creation of value for stakeholders.
6. Drive efficiency by reducing waste and controlling costs.
7. Provide credibility to the information and data produce through effective oversight and
governance.
8. Communicate clearly to ensure transparency.
Source: Adrian, A 2015, Eight ways accountants can contribute to sustainability, 8 August, ICAS, viewed 3
December 2018, available at https://www.icas.com/ca-today-news/eight-ways-accountants-can-contribute-to-
sustainability.
Additional ways that accountants could contribute to the sustainability efforts of organisations
include the following.
• Reporting. Accountants are well versed in the application of standards for reporting.
Their skills in this area can be applied to the reporting of a firm’s sustainability
performance. Their systems could also be modified to incorporate environmental and
social information. This could be used for both external and internal reporting
purposes.
• Cost analysis. Comparison of two competing investment projects would require an
analysis of economic profits, so to do decisions relating to social and environmental
initiatives. For example, a development may require land to be brought back to its
original condition, a decision as to what tyres to purchase given the costs and impacts
on company maintained roads, or the cost of implementing energy efficient devices
compared to the energy consumption costs.
• Audit and assurance services. The concept, process and practice of audit and
assurance services are familiar ground for accountants. This makes them ideal
candidates to help provide audit and assurance on the corporate social responsibility
reports that are issued by organisations.
1.22 Suggest what the most important driver of sustainability would be and explain
your rationale for its selection.
Sustainability is about meeting today’s needs without compromising the ability of future
generations to meet their own needs. For a business to be sustained over time it needs to be
profitable, it needs to maintain customer satisfaction, it needs to maintain product/service
quality and it needs to maintain a good relationship with suppliers and to have sustained
responsibility for its actions that impact on the environment and community.
Key drivers include the competition for resources, climate change, economic globalisation,
and connectivity and communication. Students are likely to provide a range of answers which
will provide an opportunity for a debate on the topic. Examples are shown below.
Competition for resources
The world’s population is projected to increase to more than 9 billion people by 2050. Rising
living standards will result in both expanded markets for goods and services and unprecedented
demands on the planet’s natural resources. Many of the resources once considered
renewable — like forests and fresh water — have become finite when we consider that human
demands are growing more quickly than the ability of natural processes to replenish them.
While exhaustion of commodities can be monitored and measured, the impact of depletion on
ecosystems is harder to gauge and often impossible to remedy. With resource depletion comes
risk of conflict as people struggle to meet their basic needs. Take water — population growth,
economic development and climate change are straining access to fresh water globally. By
2025, two-thirds of the world’s population will live in water-stressed countries, posing
significant risks to the economic and social stability of entire regions and to the corporate
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operations in those regions.
Climate change
Our current fossil-fuel based economy has led to a growing concentration of greenhouse gases
in the atmosphere that is driving more extreme weather events, more severe and frequent cycles
of drought and flood, and rising sea levels. These phenomena are being met with new policies
and regulations including those designed to limit and put a cost on carbon emissions.
Businesses need to plan for a policy environment increasingly hostile toward carbon emissions
and for the costs of adaptation to climate change. A large number of businesses and investors
have come together to call on governments at the national and global level to implement
comprehensive climate policy. These groups include Business for Innovative Climate and
Energy Policy (BICEP), US CAP, The Prince of Wales Corporate Leaders Group on Climate
Change, the Investor Network on Climate Risk (INCR) and the Institutional Investors Group
on Climate Change (II GCC), among others. These businesses recognise the opportunity to
profit from technologies that reduce emissions and create solutions to global warming.
Economic globalisation
The integration of national economies into the global economy brings opportunities for
business, but often with significant risks. More and more companies operate in or source from
multiple countries with wide disparities in enforced environmental and social standards.
Whatever the local enforced standard, many stakeholder groups demand, at a minimum, that
companies meet international expectations.
Connectivity and communication
Advances in digital communication over the last two decades have reduced not only the time
it takes to build a reputation, but also the time it takes to destroy one. Communication is
increasingly disaggregated across multiple social networks. Facebook has over 65 million
users, and is growing by more than 200 per cent per year. Twitter, while having a ‘mere’
7 million users, has shown year-to-year growth of over 1000 per cent. Using these types of
tools, it has never been easier for people to track a company’s sustainability performance and
to widely disseminate their perspectives on it. We have entered an era of ‘radical transparency’.
Decision-making activities
1.34 Go to the CSL website (https://www.csl.com) and locate the segment report in the
company’s latest financial statements.
a. What do you think is the purpose of the segment report?
b. What operating segments does CSL have?
c. How do you think this information would benefit stakeholders of financial
statements?
d. Can you think of any disadvantages of disclosing this information for CSL Ltd?
a. What do you think is the purpose of the segment report?
The purpose of the segment report is to inform users of financial reports of information relating
to the various revenue earnings segments of the business. The segment report also provides
a description and definition of each of the segments including the physical location of that
segment. The segment report also provides the EBIT, funds employed and return on funds
employed for each segment.

b. What operating segments does CSL have?

The operating segments of CSL Ltd are CSL Behring and Seqirus.

c. How do you think this information would benefit stakeholders of financial statements?
This information would benefit various stakeholders of the company. Understanding the
different profits of the operating segments will assist users in forecasting future profits as it
allows users to gain insight into the relative risks and returns of the different segments,
compared to a consolidated report which would just focus on the total figure and not enable
individual assessment of each of the sections of the business.
d. Can you think of any disadvantages of disclosing this information for CSL Ltd?
The disadvantages of disclosing this type of information by the firm would include the
additional costs in preparing and disseminating this information and also potential proprietary
costs arising from disclosing potentially sensitive information to market competitors.
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1.35 Refer to the latest financial statements for JB Hi-Fi Ltd (the notes to the 2021
consolidated financial statements of JB Hi-Fi Ltd appear appendix 2 at the end of
this text and the statements are available online at http://investors.jbhifi.com.au ).
For each of the following stakeholders, give an illustration of a report or a note
that would be useful for decision-making purposes, state why the information is
useful and give an example of how that information would be used.
a. Prospective shareholders
b. Customers
c. Employees
d. Suppliers to JB Hi-Fi Ltd
e. Auditors
f. Charity organisations
g. Australian Taxation Office
a. JB Hi-Fi Ltd’s prospective shareholders. All financial statements, auditor’s report and
directors’ report. This information would be useful to help them assess the performance
and position of the entity at the end of the financial period and what their future potential
investment opportunities are.
b. Customers. Statement of profit or loss, notes on income and also notes on provisions such
as warranties. This information can assist in determining the profitability of the business
and by looking in the notes, the main sources of income for the business. Product warranty
information may provide them with estimates on the percentage of products returned to
the entity.
c. Employees of JB Hi-Fi Ltd. All financial statements. Employees are going to be interested
in future profitability and cash flow. Job security and promotional opportunities will be of
interest to employees. They will also seek information on remunerations such as employee
share based plans.
d. Suppliers of JB Hi-Fi Ltd. Suppliers would be interested in the statement of profit or loss,
statement of financial position and notes to the financial reports to determine the entity’s
ability to meet future cash obligations. They would be concerned with repayment and the
business meeting any interest charges. They would also like information to enable the
calculation of certain ratios such as liquidity and financial structure ratios to determine
what the debt situation currently is for JB Hi-Fi Ltd.
e. Deloitte (auditors). All financial statements and accompanying notes on policies. Auditors
need to closely scrutinise the financial statements and the notes on accounting policies to
determine what policies the firm has implemented during the period, which accounting
standards have been early adopted (if any) and this combined will allow them to assess the
accuracy of the amounts disclosed in the financial statements.
f. Charity organisations. The sustainability report. The sustainability report discusses the
voluntary initiatives and charitable associations that the entity is involved in. This
information would provide charity groups with information to ascertain whether JB Hi-Fi
Ltd is a good corporate citizen.
g. Australian Taxation Office. The ATO would be interested in the statement of profit or
loss of the company, the statement of financial position, statement of cash flows and the
associated notes to determine what the obligations of JB Hi-Fi Ltd are in relation to tax.