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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

Accounting at McCloud Winery

1: The building
Worth $32,000 Leased for 10 years for $5,000 per year How do we account for it?

Accounting at McCloud Winery

2: The bank loan


$180,000 3 years maturity $ 10,000 annual repayment 10% interest rate

Accounting at McCloud Winery

3: The land and the grapevines


The vineyard is certainly an asset Cost of this asset? Depreciation?

Accounting at McCloud Winery

4: Vines diseases
Highly damaging event Possible, but not certain How do we account for this?

Phylloxera

Pierces disease
Accounting at McCloud Winery

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?

Accounting at McCloud Winery

General questions that we have tackled today

What do we mean by accounting decisions? Why is it necessary to make accounting decisions? What are the consequences of these decisions?
Accounting at McCloud Winery

The accrual principle: an 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 at McCloud Winery

Accounting and Financial Analysis


Double-entry Accounting decisions Raw data

Financial Statements

Financial Analysis

Accounting at McCloud Winery

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 at McCloud Winery