Accounting Decissions

Accounting decisions
Case: Accounting at MacCloud winery
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
The MacCloud winery

5 acres of land One building
1: The building
Worth $32,000 Leased for 10 years for $5,000 per year How do we account for it?
Accounting for a lease

Capital lease
Treated as an acquisition of the asset financed by a loan
Operating lease
Treated as a rental agreement
A leas is a capital lease if

1. 2. 3.

There exists a bargain purchase option at the end of the lease The lease covers more than 75% of the economic life of the asset The PV of future lease payments is at least 90% of the market value of the asset Only one condition is sufficient In this case condition 3. tells that that it should be treated as a capital lease (see related excel file)
2: The bank loan

$180,000 3 years maturity $ 10,000 annual repayment 10% interest rate
Accounting for the loan

See the related excel file
3: The land and the grapevines

The vineyard is certainly an asset Cost of this asset? Depreciation?
Cost (initial value) of an assets

You can include in the cost (initial value) of an assets all the costs necessary to put the asset into its productive use So, in this case, it can be argued that all the expenses incurred in the first 5 years are part of the initial cost of the asset Also the transportation cost can be included in the initial cost of the asset
4: Vines diseases
Highly damaging event Possible, but not certain How do we account for this?
Phylloxera
Pierces disease
Provisions
Provisions are accounting funds that are set aside in the liabilities side of the balance sheet in order to be used in the future to cover for possible future costs A provision can be created if
1. The future event is sufficiently likely 2. The future damage can be reasonably estimated Both conditions are necessary
It is open to discussion whether in this case the two conditions are met
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?
Depreciation
Depreciation is the accounting way to spread the cost of an investment in a fixed asset throughout the economic life of the asset The depreciation method should reflect the usage and the loss in productive value of the asset It is open to discussion, which is the best way to depreciate the oak barrels
General questions that we have tackled today
1. What do we mean by accounting decisions? 2. Why is it necessary to make accounting decisions? 3. What are the consequences of these decisions?
1. What do we mean by accounting decisions?

In every of the issues analyzed in the case the management of the vinery has to make an accounting decision Accounting decision = the choice of one among the various possible accrual representations of the cash flow of the transaction
2. Why is it necessary to make accounting decisions?

Because in the real world we have uncertainty Better explained by the Accounting for a business project case
3. What are the consequences of accounting decisions?

By choosing a certain accrual representation of the cash flow of the transaction we choose one
Income statement Balance sheet
These two financial statements depend crucially on the accounting decisions taken by the management
The accrual principle: do you remember the example?

Balance Sheet Profit = 50
Wealth
300
Accrual logic
Wealth
350 I/S day 1 I/S day 1
Balance Sheet
Profit = 10
Balance Sheet
Wealth
360
Begin. day 1
Different!
End of day 1
End of day 2
Cash 0
Cash flow logic

Cash flow day 1
Cash 250
Cash flow day 2
Cash 360
Cash increase = 250
Cash increase = 110
Accounting and Financial Analysis

Double-entry Accounting decisions Raw data
Financial Statements
Financial Analysis
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 Decissions

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Accounting Decissions

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Accounting decisions

Case: Accounting at MacCloud winery

Accounting at McCloud Winery

The MacCloud winery

Accounting at McCloud Winery

Accounting at McCloud Winery

Accounting for a lease

A leas is a capital lease if

2: The bank loan

Accounting at McCloud Winery

Accounting for the loan

Accounting at McCloud Winery

3: The land and the grapevines

Accounting at McCloud Winery

Cost (initial value) of an assets

5: The oak barrels

Accounting at McCloud Winery

General questions that we have tackled today

1. What do we mean by accounting decisions?

Accounting at McCloud Winery

2. Why is it necessary to make accounting decisions?

Accounting at McCloud Winery

3. What are the consequences of accounting decisions?

The accrual principle: do you remember the example?

Cash flow logic

Cash flow day 2

Cash increase = 250

Cash increase = 110

Accounting at McCloud Winery

Accounting and Financial Analysis

Accounting at McCloud Winery

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