Accounting for Decision Making

0 · Exam Blueprintread first

Two closed-book sit-downs. This side = the In-Semester Test (25%, 60 min, Modules 1–5 / Ch 1–3) — the management / decision-making half: CVP + budgeting + the intro. MCQ + short answer.

Flip over = the Final (50%, 120 min, Modules 6–13) — the financial half. The final is a MANDATORY 45% hurdle: score <45% on it and you FAIL the unit even if your aggregate is ≥50% (transcript caps at 49).

Both tests are closed book — this is a from-memory revision tool, not a bring-in. Marks come from setting the calculation up right: recognise the type, grab the formula, lay out the schedule.

1 · What Accounting IsM1–2 · Ch1

Accounting = identifying, measuring, recording & communicating economic information so users can make informed decisions — "the language of business."

Financial vs management

CVP & budgeting (this side) are MANAGEMENT accounting; the three statements (flip side) are FINANCIAL. Students mislabel because BUSS1030 teaches them in the reverse of the usual order — management first, financial second.

1b · Structures & ConceptsCh1

Pick on liability, capital access, control, continuity, tax. A sole trader is a separate ACCOUNTING entity but NOT a separate legal entity — entity concept ≠ legal separation.

Five core concepts: entity (business separate from owner) · transaction (exchange, from a source document — invoice, receipt, EFT) · monetary unit (recorded in $) · historical cost (record at the amount exchanged when it occurred). Trap: land bought for $100k stays at $100k even if now worth $130k — cost is verifiable, market value isn't.

Business types: service (sells time) · merchandising (buys & resells goods, holds inventory) · manufacturing (converts raw materials). The structure choice and business type set which budgets and statements apply.

2 · Ethics & the PlanM2–3 · Ch1–2

AU bodies (CAANZ, CPA, IPA) adopt APES 110. Five fundamental principles: Integrity · Objectivity · Professional competence & due care · Confidentiality · Professional behaviour. Apply the framework: spot threats, use the reasonable & informed third-party test.

The business plan

3 purposes: (1) organise the business; (2) be a benchmark for actual performance; (3) help obtain funding.

5 parts: description · marketing plan · operating plan · environmental-management plan · financial plan.

Trap: examiners separate the 3 purposes from the 5 parts — don't conflate them. A short-answer "discuss each" wants a definition plus how it contributes to success.

3 · Cost BehaviourM3 · Ch2 · CVP input

Relevant range · the activity band where these behaviour assumptions hold.

Trap: the word "constant" flips — variable is constant PER UNIT (varies in total); fixed is constant IN TOTAL (varies per unit). Never unitise a fixed cost for a decision. (BUSS1030 does NOT examine high-low or cost-estimation methods.)

4 · CVP AnalysisM3 · Ch2 · HEAVY

A planning tool: how volume, price, variable cost & fixed cost drive profit. Everything hangs off the contribution margin — what each unit gives towards fixed costs first, then profit.

Core CVP formulasCM/unit = Price − VC/unit (P − V)
CM ratio = CM/unit ÷ Price
Profit = CM/unit × units − Fixed costs
BE units = Fixed costs ÷ CM/unit
BE $ = Fixed costs ÷ CM ratio (or BE units × P)
Target units = (Fixed + target profit) ÷ CM/unit
Target $ = (Fixed + target profit) ÷ CM ratio
MoS = actual sales − break-even sales
MoS % = MoS ÷ actual sales

At break-even, total CM exactly = total fixed costs, so profit = 0. Below it = loss; above it, every extra unit adds one CM to profit.

4b · CVP Workedauthor's numbers

Set-up: Harbour Candles sells a boxed candle for $40; variable cost $24/box; fixed costs $240,000/yr.

• (a) CM/unit = 40 − 24 = $16
• (b) CM ratio = 16 ÷ 40 = 0.40 (40%)
• (c) BE units = 240,000 ÷ 16 = 15,000 boxes
• (d) BE $ = 240,000 ÷ 0.40 = $600,000 (= 15,000 × $40 ✓)
• (e) Profit at 20,000 boxes = 16×20,000 − 240,000 = $80,000
• (f) Units for $100,000 profit = (240,000+100,000) ÷ 16 = 21,250 boxes
• (g) MoS at 20,000 = 20,000 − 15,000 = 5,000 boxes (25%)

CM income statement

The contribution-margin format groups by behaviour (variable then fixed), not by function — it's the management view that feeds CVP. Every box past break-even adds its full $16 CM to profit: at 21,250 boxes profit is exactly the $100k target; at 20,000 it is $80k.

After-tax targets (if asked): gross up first — required pre-tax profit = after-tax ÷ (1 − tax rate), then use the normal target-units formula. Want $70k after 30% tax ⇒ pre-tax = 70,000 / 0.70 = $100,000 ⇒ units = (240,000+100,000)/16 = 21,250 boxes. The tax sits outside the core CVP machinery — gross up, then plug in as usual.

4c · Sensitivity Rulesclassic short-answer

Change ONE parameter, hold the rest — state the direction of (a) profit and (b) break-even. Break-even moves opposite to CM.

Worked: if Harbour's VC rises $24→$26, CM falls 16→14 ⇒ BE rises 15,000 → 240,000/14 = 17,143 boxes and profit at 20,000 drops to 14×20,000−240,000 = $40,000. A fixed-cost change moves BE but leaves CM untouched.

Trap: answer BOTH halves — students give profit but forget BE moves the opposite way; and a fixed-cost change does NOT affect CM/unit.

5 · BudgetingM4 · Ch3 · EXAMINED

A budget = a quantitative, forward-looking plan expressing the business plan in $. Why: plan · coordinate · communicate · motivate · control (the benchmark for actual results).

Master-budget sequence

The chain (start with sales)Sales budget
→ Purchases budget (with desired ending inventory)
→ Cash-collection schedule
→ Cash budget
→ Projected income statement

Key identitiesSales $ = units × selling price
Purchases = sales + desired end inv − beg inv
Cash in month = Σ(sales × that month's collect %)
Closing cash = opening + receipts − payments

Trap — cash ≠ revenue. Revenue is recognised when earned (accrual); cash only when received. Credit sales hit revenue now but cash later. Bad-debt % is lost cash — never add it back.

5b · Sales & Purchasesauthor's numbers

Set-up: Ridgeway Bikes expects unit sales of 500 (Apr), 600 (May), 700 (Jun) at $300; ending inventory = 20% of next month's sales; opening April inventory 100 units.

Sales budget

Apr 500×$300 = $150,000; May $180,000; Jun $210,000 ⇒ quarter $540,000. This is revenue earned/billed — NOT cash received.

Purchases (units)

Purchases = sales + desired end inv − beg inv

Trap: ending inventory uses next month's sales; subtract (don't add) beginning inventory. End inv of one month = beg inv of the next.

Rearranged inventory identity: Beginning + Purchases = Sales + Ending. The purchases budget just solves it for purchases — buy enough to cover this month's sales AND restock to the desired ending level. A merchandiser buys finished goods; a service business has no purchases budget at all.

For June: sales 700 + end inv (20% of July, say 20% × 800 = 160) − beg inv 140 = 720 units. Multiply purchase units by cost/unit for the dollar purchases budget that feeds the cash-payments schedule.

5c · Cash Collectionsauthor's numbers

Converts credit sales into cash actually received by applying the collection pattern with a lag. Sum every inflow that LANDS in the target month.

Cash in month M= cash% × Sales(M)
 + Σ over each lag k: credit% × Sales(M−k) × collect%(k)

Set-up: Ridgeway sales $150k (Apr), $180k (May), $210k (Jun); all on credit; collected 60% in the month of sale, 30% next month, 8% third month, 2% bad debt.

The 2% never arrives — it's bad debt, not carried forward. June cash ($192k) ≠ June sales ($210k): the gap is the receivables build-up.

#1 error: mis-lagging — putting "month after sale" collections in the wrong column; or collecting 100% and ignoring the bad-debt remainder; or forgetting the immediate cash-sales portion when some sales are for cash.

Mixed cash & credit: if sales are, say, 50% cash / 50% credit, the cash half is collected in full in the month of sale and only the credit half is lagged. Build the schedule one source-month at a time, then sum down each collection column.

5d · Projected Incomeaccrual basis

The performance benchmark (the cash budget is the liquidity benchmark). Built on accrual sales (from the sales budget), NOT the cash-collection figures.

Trap: never feed the cash-collection numbers into the projected income statement — use accrual sales revenue. Actual vs budget = the variance you investigate (BUSS1030 stays at "compare & explain", no formal variance formulas).

The projected income statement is accrual: revenue when earned, expenses when incurred — so depreciation appears here but not in the cash budget, and credit sales appear in full even though the cash arrives later. Pair it with the cash budget to see both performance and liquidity before the period starts.

5e · Cash Budgetliquidity benchmark

Cash budget identityOpening cash
+ Total receipts (from the collection schedule)
− Total payments
= Closing cash

Worked (June): opening $40,000 + collections $192,000 − payments $200,000 = closing $32,000.

If closing falls below the minimum the budget flags a shortfall → delay payments, accelerate collections, cut spending, draw on finance, or inject owner capital. A surplus ⇒ repay or invest. The cash budget is what tells the owner when they can pay a bill — something the income statement hides.

Then compare actual results to this budget benchmark, investigate the differences, and revise the plan — the planning loop the whole master budget exists to serve.

5f · Budget Trapsdon't lose marks

• Cash ≠ revenue — accrual sales now, cash collected later
• Ending-inventory % uses next month's sales; subtract beginning inventory
• Bad-debt % is lost cash — don't carry it forward
• Line the collection lags up to the right month
• Projected income statement uses earned sales, never collections
• Depreciation is NOT a cash payment in the cash budget

IST Formula Beltmemorise

CM/unit = P − V · CM ratio = CM ÷ P
Profit = CM/unit × units − Fixed
BE units = Fixed ÷ CM/unit
BE $ = Fixed ÷ CM ratio
Target units = (Fixed + profit) ÷ CM/unit
Target $ = (Fixed + profit) ÷ CM ratio
MoS = actual sales − BE sales
MoS % = MoS ÷ actual sales
Sales $ = units × price
Purchases = sales + end inv − beg inv
Cash(M) = Σ(sales × collect %)
Closing cash = open + receipts − payments

Direction CardMCQ reflexes

• VC/unit ↑ ⇒ CM ↓ ⇒ profit ↓, BE ↑
• Price ↑ ⇒ CM ↑ ⇒ profit ↑, BE ↓
• Fixed ↑ ⇒ CM same, profit ↓, BE ↑
• Higher CM ratio ⇒ fewer sales $ to break even
• Variable cost = constant per unit; fixed = constant in total

6 · The EquationM6–7 · Ch4

Basic equationAssets = Liabilities + Owner's Equity
Owner's equity = Assets − Liabilities = Net assets

• Assets — resources controlled, future benefit (cash, receivables, inventory, PPE)
• Liabilities — obligations owed to creditors (payables, loans, unearned revenue)
• Owner's equity — the owner's residual claim (creditors rank first)

Expanded equationA = L + Capital + Revenues − Expenses − Drawings

↑ equity: owner capital, revenues. ↓ equity: expenses, losses, drawings. (Company: drawings→dividends, capital→share capital.)

This unit uses a WORKSHEET, not debits/credits — record each transaction's dual effect in account columns so A = L + OE stays balanced on every line. (Normal-balance Dr/Cr theory is background only; no journals, ledgers or trial balance examined.)

6b · Worksheet Recordingdual effect

Method: (1) identify the two accounts affected; (2) classify each A / L / OE; (3) record the +/− so the equation balances; (4) apply entity, monetary-unit, historical-cost & accrual; (5) total each column → feeds the statements.

Worked · author's transactions

Traps: recording only one side (breaks the equation); treating drawings as an expense (they're equity, not P&L); revaluing an asset above historical cost.

Check the run above: assets +50 +20 +8 −3 −2 = +73k; liabilities +20k; equity +50 (cap) +8 (rev) −3 (exp) −2 (draw) = +53k ⇒ 20 + 53 = 73k = total assets ✓. The worksheet IS the records the statements are built from — column totals feed straight into the income statement (revenue/expense rows) and balance sheet (A / L / OE rows).

Recognition

An asset is recognised when it is a present economic resource controlled from a past event, expected to give future benefit, measurable. A liability when there is a present obligation from a past event needing an outflow. Historical cost makes the figures objective and verifiable.

7 · Adjusting EntriesM7 · Ch4 · accrual

Why: match revenues earned with expenses incurred in the right period, regardless of cash. Accrual: revenue when earned, expense when incurred — BUSS1030's reporting basis. Each adjustment keeps A = L + OE balanced (done in the worksheet, not as journals).

Deferrals: cash moved first, recognition later — a prepaid is an asset until used; unearned revenue is a liability until earned. Accruals: recognition first, cash later. Net income ≠ cash flow precisely because of these timing gaps.

7b · Depreciationcontra-asset

Depreciation = systematic allocation of a non-current asset's cost over its useful life — NOT a valuation and NOT a cash set-aside.

Straight-line (the default)Dep/yr = (Cost − Residual) ÷ Useful life
Book value = Cost − Accumulated depreciation

Worked: van cost $20,000, residual $2,000, 6-yr life ⇒ dep = (20,000−2,000)/6 = $3,000/yr. After 2 yrs accum dep $6,000 ⇒ book value $14,000.

Traps: depreciation is a non-cash expense (never on the cash flow statement); accumulated depreciation is a contra-asset shown in brackets under the asset — NOT a liability; book value is cost-based, not market value.

7c · Recognition & Qualityframework

Revenue = inflows that increase equity, other than owner contributions. Expense = outflows that decrease equity, other than drawings. Income vs gain: income is from ordinary operations; a gain is peripheral (e.g. selling a non-current asset above book value).

Qualitative characteristics: Relevance (makes a difference — predictive/confirmatory, materiality) & Faithful representation (complete, neutral, error-free). Enhancing: comparability, verifiability, timeliness, understandability. Historical cost is more reliable; market value would be more relevant — the trade-off behind the cost concept.

8 · Income StatementM9 · Ch7

Reports performance (profitability) over a period — revenues earned − expenses incurred. Accrual / matching basis.

Structure (merchandising)Net sales − COGS = Gross profit
Gross profit − Operating expenses = Net income

Temporary (nominal) accounts = revenues & expenses — used one period, then closed to zero; net income transfers to owner's equity. Permanent (real) accounts = assets, liabilities, equity — carry forward. You must know the theory of closing but don't perform closing entries in this unit — understand that temporary accounts restart at zero while permanent accounts carry over.

8b · Changes in Equitythe link

Reconciles opening to closing owner's equity and links the income statement to the balance sheet.

Statement of changes in owner's equityClosing capital
= Opening capital
 + Additional investment
 + Net income (from the income statement)
 − Drawings

Worked: opening $50,000 + net income $30,000 − drawings $8,000 = closing capital $72,000 (carried to the balance sheet). An additional owner investment during the period would add in too.

Trap: don't double-count net income — it's already inside closing equity; and drawings reduce equity here, they are NOT an expense in the income statement.

8c · How They Articulatethe flow

The three statements linkIncome statement → Net income
 → Statement of changes in equity → Closing capital
 → Balance sheet (owner's equity line)
Cash flow statement → Closing cash
 → Balance sheet (cash line)

Net income flows into equity; closing capital and closing cash both land on the balance sheet. The statements articulate — they're one connected system, not four separate reports. The balance sheet is the snapshot that ties them together at the period end; the income statement and cash flow statement each span the period between two balance sheets.

9 · Balance SheetM10 · Ch8

Summarises financial position — assets, liabilities, owner's equity — at a point in time. Follows A = L + OE; built from the final worksheet balances.

Classified format

Current = realised/settled within one year (or the operating cycle). PPE shown net: cost less accumulated depreciation (bracketed contra) = book value. Verify Total assets = Total liabilities + Owner's equity.

Traps: mis-classifying current vs non-current; showing PPE at cost without subtracting accumulated depreciation; treating accumulated depreciation as a liability.

9b · Working CapitalM8 · Ch6

Working capital = Current assets − Current liabilities

Managing it = enough liquidity to pay debts as they fall due without tying up idle cash. Accounts receivable = amounts owed by credit customers (current asset); selling on credit risks bad/doubtful debts.

Internal control over receivables/payables/cash: segregation of duties, authorisation, reconciliation, safeguarding — to prevent error & fraud. (BUSS1030 keeps inventory at the conceptual/turnover level — no FIFO / weighted-average cost-flow.)

Bad/doubtful debts (concept): selling on credit means some customers won't pay. The allowance approach estimates doubtful debts, raising an allowance for doubtful debts (a contra-asset) and a bad-debt expense; net receivable = gross receivable − allowance. In this unit it surfaces mainly as the uncollected % in a cash-collection schedule.

9c · Classified Workedauthor's numbers

Ridgeway Bikes at 30 Jun:

Both sides total $134,000 — the equation holds. The van sits net of its bracketed contra-asset; the loan splits current vs non-current by when it falls due.

10 · Cash Flow · DirectM11 · Ch9

Reports cash inflows & outflows over a period — shows whether the business can stay solvent, something accrual statements can hide. BUSS1030 uses the DIRECT METHOD only (ignore the indirect reconciliation).

Direct-method operatingCash from customers = Sales − ↑ in receivables
− Cash to suppliers & employees (adj for payables/prepaid)
= Net operating cash flow
Net change in cash + opening = closing cash

Worked: sales $300k; receivables rose $40k ⇒ cash from customers = $260k. Buy a van = investing; take/repay a loan or owner drawings = financing.

10b · Cash Flow Trapsnet income ≠ cash

• Depreciation appears NOWHERE on the cash flow statement (non-cash; the "add-back" is the excluded indirect method)
• ↑ accounts receivable ⇒ cash collected was less than credit sales
• Buy PPE = investing; loan/owner capital/drawings = financing; only trading flows = operating
• Net income ≠ cash from operations — revenue can be earned with no cash (receivable), expenses incurred with no cash (payable)

Net income is accrual-based and includes non-operating items; operating cash is purely cash from buying/selling/delivering goods & services.

11 · Governance & EthicsM12

Corporate governance (ASX) = the framework of rules, relationships, systems & processes to exercise authority & control — so no single group has unchecked power (balance of power, mutual accountability).

Who decides: shareholders (provide capital, elect directors) · board (strategy, monitors execs) · executives (run operations) · external auditors (assurance the info is reliable). Accounting is the information base; auditors test for a "true and fair view" — independence lets them question objectively. Underpinned by APES 110 (the 5 principles from Module 2). Failures: Qantas (2023–24), PwC Australia (2023). Governance answers want a STRUCTURED response — identify stakeholders, apply the framework/principles, weigh consequences, link to disclosure & accountability — never a one-line opinion.

12 · Ratio AnalysisM9–11 · examinable

Pulled from the income statement & balance sheet. Use average balances ((beg+end)/2) for turnover ratios. A ratio is only meaningful when compared — over time, to peers, to budget.

LiquidityCurrent = Current assets ÷ Current liabilities
Quick = (CA − inventory − prepaid) ÷ CL

Operating capability (activity)Inventory turnover = COGS ÷ avg inventory
AR turnover = net credit sales ÷ avg receivables

ProfitabilityGross profit ratio = Gross profit ÷ Net sales
Profit margin = Net income ÷ Net sales
ROA = Net income ÷ avg total assets
ROE = Net income ÷ avg owner's equity
Op cash flow margin = Op cash flow ÷ Net sales

Financial flexibilityDebt-to-equity = Total liabilities ÷ Owner's equity

12b · Reading Ratiosinterpret, don't just state

• Higher current/quick ⇒ more liquid (short-run)
• Higher turnover ⇒ more efficient — sells/collects faster, less cash tied up
• Higher AR turnover is GOOD (not bad) — collecting faster, fewer non-payers
• Higher op cash flow margin ⇒ more cash per sales $

Trap: the current ratio is SHORT-RUN liquidity, NOT long-term capability — a classic false-statement MCQ. Quick ratio strips inventory & prepayments (least-liquid). Worked: CA $120k, inventory $30k, prepaid $5k, CL $60k ⇒ current = 2.0; quick = (120−30−5)/60 = 1.42.

Final Formula Beltmemorise

A = L + Cap + Rev − Exp − Draw
Book value = Cost − Accum dep
SL dep = (Cost − Residual) ÷ Life
Closing cap = Open + Invest + NI − Draw
Cash from customers = Sales − ↑receivables
Current = CA ÷ CL · Quick = (CA−inv−prepaid)÷CL
Inv turnover = COGS ÷ avg inv
AR turnover = credit sales ÷ avg AR
Profit margin = NI ÷ Sales · ROA = NI ÷ avg assets
Op cash flow margin = Op CF ÷ Sales