Most people think of financial data as numbers in a bank statement or credit report, but financial data is more than that. It's the core of any business, large or small. Financial data is a record of the financial transactions of a company.
Financial data is a collection of economic and financial information that can be used to make informed business decisions. Financial data provides an accurate and timely picture of a company's financial performance, including its assets, liabilities, cash flow, and earnings.
There are three types of financial data including historical, current, and projected:
Historical data is information that has already occurred and is used to track past performance.
Current data is up-to-date information and reflects the most recent financial condition of a company.
Projected data includes estimates for future performance, which can be used to plan for future growth or make strategic decisions.
To identify financial data, ask for records of payments, invoices, income, assets, and liabilities.
A complete set of financial statements comprises:
- a statement of financial position at the end of the accounting period
- a statement of profit or loss and other income
- a statement of changes in equity for the period
- a statement of cash flows for the period
- notes, comprising material accounting policy information and other explanations
- comparative information as it relates to the preceding period
- a statement of financial position at the beginning of the preceding period.
A statement of financial position can be presented in the following formats:
Account format
It presents the data in a horizontal format with two columns. The left column outlines the organisation’s assets, and the total value of all assets is shown at the final line of this column. In the right column, liabilities and equity are outlined, and the total combined value of liabilities and equity.
Report format
It presents the data in a vertical format, with one column that extends to the full width of the page. This format starts with assets, showing the total value at the end of the assets section. After the assets section, it lists the liabilities and finishes with equity in the same format. At the final line of this format, the total combined value of liabilities and equity are shown.
Some businesses use different names for their reports. For example, an entity may use the title ‘statement of comprehensive income’ instead of ‘statement of profit or loss and other comprehensive income’.
At Business Victoria, some financial templates are consolidated into one document. Examples are included in topic two.
To avoid confusion, report names and meanings referred to in this unit appear below.
Consolidated financial reports are financial statements for corporations with multiple divisions or subsidiaries. Companies often use the word consolidated to collectively refer to the aggregated reporting of their entire business. In the assessment for this unit, you will need to produce a profit and loss statement, a cash flow statement, and a balance sheet. Instructions to complete a consolidated financial report are included in topic two.
The statement of shareholders' equity is a report that highlights a breakdown of the changes in a company's shareholder's stock between two accounting periods. The report gives stakeholders insight into how the equity accounts have changed, and it’s a key financial document that companies must report according to the International Financial Reporting Standards (IFRS). The standards define equity as the residual interest in the net assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest. Instructions to complete a stakeholders’ equity report are included in topic two.
Standard three in the IRFS establishes the accounting and reporting requirements to disclose assets and liabilities so that the acquirer can make a considered judgement. Instructions to complete a report that aids corporate acquisitions are included in topic two.
Tax effect account reporting is the procedure to adjust the difference between profits in business accounting and taxable income. This is to reasonably match profits before deducting corporate and other taxes. A tax-affected account report could also be a Business Activity Statement (BAS). Instructions to complete a tax-affected account report are included in topic two.
Code and classify data
Codes classify and group items in financial statements, making it easier to compare data between entities over time. For example, codes and classifications are used when maintaining an asset register. Depending on the country and context, several codes can be used in financial reporting. There are standard international codes for currencies and commodities. These codes make it possible to compare prices and values between different countries and markets.
One of the most common codes is the Australian and New Zealand Standard Industrial Classification (ANZSIC). This code is used to classify businesses by their type of activity. It is based on the international standard but has been adapted to suit the Australian and New Zealand economies.
In financial reporting, codes also refer to cost centres. A cost centre usually tracks the costs of a specific activity within a division or department of a company. Companies use cost centres to set budgets, track and report their financial performance.
There are two types of cost centres:
- Direct cost centres are those divisions of a company that incur costs specifically related to the production of a product or service.
- Indirect cost centres are those divisions of a company that do not directly produce a product or service but rather support the production process.
Companies use different methods to allocate costs to cost centres. The most common method is absorption costing, which assigns costs based on the amount of revenue generated by each cost centre. Other methods include marginal costing and activity-based costing.
More about cost centres and how to classify data is available here.1
Check the accuracy and reliability of your data
It's important to ensure the accuracy and reliability of your financial data. After all, this information will be used to make critical business decisions.
To check the accuracy and reliability of your data:
- Compare your data against other sources. Are they saying the same thing? If not, then one of your sources may be inaccurate.
- Check for outliers. Are any values drastically different from the rest of the data? If so, they may be inaccurate.
- Look for patterns. Are there any correlations or trends in the data? If not, then it may not be reliable.
- Verify the source of the data. Make sure it's coming from a credible source before you trust it.
- Follow organisational policies and procedures. If you don’t have access to instructions, ask a supervisor or manager for help.
Follow accounting standards
Australia has long been a global leader in accounting and financial reporting standards. The Australian Accounting Standards Board (AASB) is the independent standard-setting body for financial reporting in Australia. It issues Accounting Standards, which are mandatory for public companies and other entities that prepare financial statements for general purpose reporting purposes.
The AASB's primary objective is to develop high-quality standards that provide transparency and accountability in financial reporting while promoting efficient and effective capital markets. Its standards are based on international best practices and Australia's experience as a leading issuer of debt and equity securities.
The AASB's standards are applied by companies preparing their financial reports for publication and by auditors who review those reports. They also form the basis for ASIC's regulatory requirements for company disclosures.
Access the Australian Standards2 for instructions to comply.
If several subsidiary companies exist, you’ll need to compile or combine data into the combined financial results of the parent company. This method is typically used when a parent company owns more than half of another entity.
The AASB publishes standards that apply to conversion and consolidation accounting processes.
When converting from one business structure to another, you must:
- ensure your reports include all assets, income, liabilities, and expenses
- specify the origin of all amounts
- differentiate between amounts incurred or accumulated prior to the consolidation.
Remember, a change of business structure may affect the tax liability and reporting requirements. Instructions to compile data for consolidated businesses are available from the Australian Taxation Office3.
For example, a sole trader wanting to change to a company structure will have additional reporting obligations, including:
- record-keeping
- lodgment of financial records
- company registrations and fee payments
- notification of changes to company details, including updating ABN details on the Australian Business Register (ABR)
To convert a partnership to a company, you would need to dissolve the partnership and set up the company. You cannot transfer a partnership into a company.
Some additional instructions to compile data are available here4, and the procedure for consolidating financial statements appears below.
More steps to prepare financial reports are included in topic two.
Enter data into a computerised system
When it comes to financial data, accuracy is key. This is especially true when it comes to data entry. Entering information into a computerised system can be tedious and time-consuming, but it’s crucial to ensure the accuracy of your financial records. Financial software can make this process a little easier by automating many tasks associated with data entry. However, even the best software can’t do everything. It’s still important to take the time to ensure that all your financial information is accurate before transferring it to a computerised system.
One way to ensure accuracy is to use a spreadsheet or other tracking tool to organise your data. This will help you catch any errors before they have a chance to cause problems in your financial records.
Most financial accounting software can export data in either an Excel spreadsheet or a CSV (Comma-Separated Values) file, and most reporting software can export data in an Excel spreadsheet.
Once you have confirmed that the software can export the data in the required format, you will need to determine how the data will be transferred. One option is to use a software program that can extract the data from the financial accounting system and import it into the computerised system. Another option is to use an Application Programming Interface (API) to connect the two systems and automate the transfer of data. A third option is to use a data conversion tool to convert the financial accounting data into a format that can be read by the computerised system.
Instructions will vary depending on which method and software your employer uses.
Record financial valuations
Financial statement recording and valuations are critical aspects of any business. The ability to accurately track the value of an organisation's assets and liabilities is essential for financial reporting and taxation purposes. Australian accounting standards require that companies record all financial valuations in a timely and consistent manner, using approved methods and techniques.
The most common valuation method used in Australia is the market approach, which assesses the worth of an asset based on its current selling price in the open market. Another popular technique is the income approach, which values an asset based on its expected future cash flows. The income approach involves calculating the cash inflows and outflows that will occur because of its use.
Both methods have their strengths and weaknesses, so it's important to select the right one for each individual asset or liability.
Recording financial valuations is a complex process, but it's essential for ensuring that businesses operate effectively and comply with statutory requirements. The AASB Standards5 include the minimum requirements.
Depreciation methods
Refer to the TR2022/1 Taxation Ruling Income Tax: effective life of depreciating assets6 from the ATO website.
Common methods used are the straight-line method and the declining-balance method. Other methods include the sum-of-years’-digits method and the units-of-production method.
Straight-line method: This method spreads the cost of the fixed asset evenly over its useful life. It involves the simple allocation of an even rate of depreciation every year over the asset's useful life.
Formula
Straight-line depreciation can be calculated using any of the following formulas:
Annual Depreciation Expense = (Asset cost-Residual value) / Useful life of the asset
Annual Depreciation Expense= (Cost - Residual Value)× Rate of depreciation
Where:
Cost is the initial acquisition or construction costs related to the asset and any subsequent capital expenditure7.
Residual value, also known as its scrap value, is the estimated proceeds expected from the disposal of an asset at the end of its useful life. The portion of an asset’s cost equal to the residual value is not depreciated because it is expected to be recovered at the end of an asset’s useful life.
Useful life is the estimated period that the asset is expected to be used, starting from the date it is available for use, up to the date of its disposal or termination of use. Useful life is usually expressed in units of years or months.
The rate of depreciation is the percentage of useful life that is consumed in a single accounting period. The rate of depreciation can be calculated as follows:
Rate of depreciation = 1 / Useful Life X 100%
e.g. rate of depreciation of an asset having a useful life of 8 years is 12.5% p.a.
1/8 ×100% =12.5% per year
Example
A fixed asset having a useful life of 3 years was purchased on 1 January 2017.
The cost of the asset is $2,000, whereas its residual value is expected to be $500.
Calculate depreciation expenses for the years ending 30 June 2017 and 30 June 2018.
Annual Depreciation Expense=($2000 - $500)/(3 years)=$500
Depreciation expense for the year ended 30 June 2017:
$500 ×6/12=$250
As $500 calculated above represents the depreciation cost for 12 months, it has been reduced to 6 months, equivalent to reflect the number of months the asset was actually available for use.
Depreciation expense for the year ended 30 June 2018:
$500 ×12/12=$500
As the asset was available for the whole period, the annual depreciation expense is not apportioned.
Declining or diminishing balance method: An accelerated method of depreciation results in higher depreciation expense in the earlier years of ownership. As the name suggests, it counts expense twice as much as the asset's book value every year.
Formula
Depreciation = 2 ×straight line depreciation percent × book value at the beginning of the acccounting period
Book value=Cost of the asset-accumulated depreciation
Sum-of-the-years’-digits: Compute depreciation expense by adding all years of the fixed asset’s expected useful life and factoring in which year you are currently in, as compared to the total number of years.
Units-of-production: The total estimated number of units the fixed asset will produce over its expected useful life, as compared to the number of units produced in the current accounting period, is used to calculate depreciation expense.
For the fixed assets of the House of Furniture, the straight-line method is used. Straight-line depreciation method charges cost evenly throughout the useful life of a fixed asset.
This depreciation method8 is appropriate where economic benefits from an asset are expected to be realised evenly over its useful life.
The straight-line method is also convenient to use where no reliable estimate can be made regarding the pattern of economic benefits expected to be derived from an asset’s useful life.
| Fixed Asset | Cost | Useful Life | Computations | Depreciation Expense |
|---|---|---|---|---|
| Office equipment | $56,750.00 | 5 | $56,750.00*95%/5 | $10,782.50 |
| Delivery equipment | $80,000.00 | 15 | $80,000.00*95%/15 | $5,066.67 |
| Warehouse | $150,000.00 | 25 | $150,000.00*95%/25 | $5,700.00 |
*Residual or scrap values are estimated at 5% of acquisition cost.
Additional instructions to record financial valuations in financial reports are included in topic two.
Identify and record the effects of taxation
Taxation records are an essential part of any business in Australia. The Australian Taxation Office (ATO) is responsible for the administration of taxation in Australia, and businesses must comply with a range of minimum requirements to report and pay taxes correctly.
The effects of taxation can be significant for businesses, and it is essential to understand how to report and pay taxes correctly. Businesses that don’t comply with taxation requirements may face penalties, so it is important to seek advice if you are unsure how to proceed.
Instructions to document taxation payments in a BAS statement are included in topic two.
What information is included in a company’s tax return?
A tax return must include:
- company’s taxable income
- tax offsets and credits
- PAYG instalments
- Amount of tax it is liable to pay on that income or the refundable amount.
What types of taxes apply to a business?
The following are types of taxation that may apply to a corporate entity:
- Income Tax: A tax paid to the government from the money earned by the business and employees.
- Fringe Benefit Tax (FBT): A tax payable by employers to an employee (or an employee’s associate, e.g. a family member) in place of salary or wages. This is separate from income tax and is calculated on the taxable value of the amount paid.
- Goods and Services Tax (GST): A broad-based tax of 10% on most goods, services and other items sold or consumed in Australia. GST is included in the price of goods and services sold by the business and in the credits claimed by the business for the cost of goods and services bought for the business.
- Excise tax: Goods manufactured in Australia, such as alcohol, tobacco, petroleum and coal are subjected to excise tax. Rates vary depending on the product type and content volume specified by the ATO.
- Pay As You Go (PAYG) Instalments: A system for making quarterly payments towards your expected income tax obligation on your business and investment income for the current financial year. They are generally paid by business owners, investors and sub-contractors who earn a certain amount of income.
- Pay As You Go (PAYG) Withholding: These are the withheld amounts from payments made to employees and contractors. It is a legal requirement for all employers to keep this portion of payments made to employees and other businesses; this portion is then paid to the ATO.
- Superannuation Tax: Superannuation is money paid by the employer into employees’ superannuation fund for their retirement. Superannuation is taxed when it goes into a fund, while it is in the fund, and when it leaves the fund.
When must a business register for GST?
A business must register for GST:
- when your business or enterprise has a GST turnover (gross income from all businesses minus GST) of $75,000 or more – see Working out your GST turnover9
- when you start a new business and expect your turnover to reach the GST threshold (or more) in the first year of operation
- if you're already in business and have reached the GST threshold
- if your non-profit organisation has a GST turnover of $150,000 per year or more
- when you provide taxi or limousine travel for passengers (including ride-sourcing) regardless of your GST turnover – this applies to both owner drivers and if you lease or rent a taxi
- if you want to claim fuel tax credits for your business or enterprise.
Registering for GST10 is optional if your business or enterprise doesn’t fit into one of these categories. If you choose to register, generally, you must stay registered for at least 12 months.
When must a business report GST?
GST must be reported monthly if the GST turnover is $20 million or more or quarterly if the GST turnover is less than $20 million.
After the introduction of the Pay-As-You-Go (PAYG) instalment system on 1 July 2000, most companies now pay quarterly instalments of tax based on the previous year’s income. Larger companies with an annual income of $2 million will pay monthly instalments. The Australian Taxation Office (ATO) advises each company of the instalment amount to be paid each quarter or month or a rate to be applied for each quarter or month. At the end of the financial year, when the profit and loss account is prepared, the correct amount of income tax to be shown in the accounts is calculated. The taxation return is then lodged, and the ATO issues an assessment.
Access the due dates for lodging and paying reports from the Australian Taxation Office11.
When looking to analyse financial data, it's essential to consider what you want to get out of the analysis. What questions do you hope to answer? What trends do you hope to identify? Once you have a general idea of what you're looking for, there are a few steps you can take to help make sense of the data.
First, look at the overall trend. Is revenue growing or shrinking? Are profits increasing or decreasing? You can understand how the company is performing by identifying these overarching trends.
Next, drill down into specific areas of the company's finances. For example, if you're interested in learning about the company's expenses, look at how they've changed over time. Are they increasing or decreasing? What areas account for the largest portion of expenses?
Use mathematical equations to perform calculations
Accounting equations are a series of mathematical formulas used to calculate financial statement items. The most common equations are those used to calculate net income, earnings per share, and dividends per share. To use these equations, you will need to make estimates and forecasts about future events. For example, a company must estimate its future sales and expenses to calculate net income. Management must also forecast the number of shares that will be outstanding in the future to calculate earnings per share and dividends per share. These estimates and forecasts can be difficult, especially in times of economic uncertainty. However, they are essential for companies to produce accurate financial statements.
Calculations
When it comes to financial calculations, there are a few key formulas that you will need to use. The most important calculation is net income, calculated by subtracting expenses from revenue. Other important calculations include depreciation and amortisation, which are used to calculate the value of an asset over time, and earnings per share, which measures a company's profitability per share. There are many other calculations that can be used to measure a company's financial health, but these are some of the most important ones. By understanding these formulas, you can better understand how a company is performing financially.
Basic accounting formulas are available here.
Estimations
Financial estimates are an important part of the financial reporting process. Several equations and formulas are used to calculate estimates, and it is important to understand how this works to produce accurate reports. One of the most used financial estimates is the Earnings Before Interest and Taxes, or EBIT. This calculation considers a company's earnings before any interest or taxes are paid and can be used to measure a company's profitability. Another common estimate is the free cash flow, which measures the cash available to shareholders after all operating expenses have been paid. This calculation considers both cash flow from operations and capital expenditures. These are just a few examples of the many financial estimates that companies use in their reports.
Additional instructions are included in topic two.
Forecasting
To produce accurate financial forecasts, you will need to understand and use financial reporting equations and formulas. The most important forecasting equation is the income statement equation, which can be used to predict future revenue and expenses. Another key forecasting tool is the balance sheet used to predict a company's future liquidity and solvency. By using these equations and formulas, along with sound business judgment, you will be able to create accurate financial forecasts that will help guide business decisions.
Instructions to complete a balance sheet are included in topic two.
