Need some help from current accounting students (it's for an exam)

[lala2]

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Hey, I've got my exam for pharmacy management on Monday and there's a substantial accounting component. Just got a few questions to ask, any help would be great.

a) What's the relationship between balance, profit-loss and funds (cash-flow) statements?
b) What's drawings in relation to owner's equity?
c) Why are borrowing costs intangible assets? Shouldn't they be tangible? Actually, why aren't they a tangible liability?

Might have more questions, but that's all for now. Thanks!

[blerkles]

Haven't done Accounting for a long time but hope I can help with the limited time left...

a) The bottom line of an accrual P&L gets transferred to the balance sheet in the "Current Years Earnings" bit as the business owes the owner that money (like a liability). Cash flow statement helps to show how fast or slow the invoices are converted to cash exchanges i.e. the difference between an accrual P&L and a cash P&L.

b) Drawings (money the owner takes out) reduce the amount of money the business owes the owner (Owner's Equity). Just because you make a profit doesn't mean the owner takes all that profit out each year (in drawings). If you think of it as a partnership - the profits may be split 50/50 but one partner may take more out than the other over the year and this needs to be accounted for (i.e. the business owes the other partner more money now).

c) If you buy a building (cost $100K) and have the borrowing costs ($10K) - you really have a building that cost you $110K - it adds to the cost of the tangible asset. Bank charges are normally expenses (accounted for as they occur) but because these borrowing costs are directly related to the cost of buying the asset, it needs to beef up the true value of that asset. I'm thinking that the other side of the double entry (you really need to know reasons for double entry accounting) would be an increase to the loan liability - i.e. you now owe the Commonwealth Bank $110K if the borrowing costs were tacked onto the loan. They would be an intangible asset because you can't actually touch and hug borrowing costs (unlike a building).

Hope that helps and doesn't confuse you more...

[lala2]

Thanks That makes sense.

[lala2]

Also, why do you add borrowing costs back on as a non-cash outlay? If you're borrowing money, it shouldn't be an outlay in the first place?

With the drawings, so that means it's under use of funds because the business is using that money to pay the owner back and hence decrease the owner's equity?

[blerkles]

Sorry, didn't get back to answer new questions. How did you go?

[lala2]

It was ok. No balance sheets. Just 90MCQ on accounting *cringes* Haha, accounting is ok it's just a total of 130MCQ with the remaining 40MCQ being on marketing principles, plus 2 short answers in 2.5hrs and here is a pharm student who's never done commerce in her life before....yeah.

But it was ok. Basic things like using the assets=liabilities+equities equation, some things on GP margin, and a few ratios (open book exam, so didn't have to worry about memorising them)--calculating them, interpreting them. They seemed to have a thing for interest cover ratio though. That's just how well the business can earn money to cover the interest on the principal of their loans isn't it?

Also, they had a thing for "risk". WHen they say risk, do they mean long or short term? I interpreted it as long term. One of the questions was like, what ratio tells you risk? and two of the options was current ratio (so obviously liquidity) and I think it was either interest cover or gearing ratio (one of the solvency ratios) so I picked whatever the solvency ratio was. Is that right?!

EDIT: One more thing. The question was the owner's taken drawings out. Which of the following is correct with respect to the balance sheet?

- Increased drawings, increased equity
- Decreased drawings, increased equity
- Decreased drawings, decreased equity
- Something else, but it wasn't increased drawings, decreased equity (which was what I was thinking...is that right?). I picked decreased drawings, decreased equity because the business now owes less to the owner. Either way, none of them were right.