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4T H E DI T I ON
Accounting
I n f o r m at io n f o r B u s in e s s D e ci s io n s
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
4T H E DI T I ON
Accounting
I n f o r m at io n f o r B u s in e s s D e ci s io n s
Billie M Cunningham
Loren A Nikolai
John D Bazley
Marie Kavanagh
Sharelle Simmons
Christina James
Accounting: Information for business decisions © 2021 Cengage Learning Australia Pty Limited
4th Edition
Billie M Cunningham Copyright Notice
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Adaptation of ACP Accounting: Information for business decisions Volumes 1, 2nd Cengage Learning Australia
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Cengage © 2008 South Melbourne, Victoria Australia 3205
Acknowledgements Cengage Learning New Zealand

Prelim images: iStock.com/Eva-Katalin; iStock.com/Cecilie_Arcurs; iStock. Unit 4B Rosedale Office Park
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Rentea
End-of-Chapter image: Tolimir
BRIEF CONTENT S
1 Introduction to business accounting and the role of professional skills ...................................... 1
2 Developing a business plan: Cost–volume–profit analysis ...................................................... 44
Appendix: CVP analysis for cups of coffee .......................................................................86
3 Developing a business plan: Applied budgeting..................................................................... 94
4 The accounting system: Concepts and applications............................................................... 132
5 Recording, storing and reporting accounting information ..................................................... 179
6 Internal control: Managing and reporting working capital ................................................... 226
7 The income statement: Components and applications........................................................... 263
Appendix: Calculating the cost and the amount of inventory .............................................299
8 The balance sheet: Components and applications ................................................................ 308
9 The cash flow statement: Components and applications ....................................................... 352
Appendix: Indirect method for reporting cash flows from operating activities ......................390
10 Sustainable and profitable business practices ...................................................................... 398
11 Short-term planning decisions ............................................................................................. 440
12 Capital expenditure decisions.............................................................................................. 473
v
CONTENT S
Guide to the text ....................................................... x
Guide to the online resources ....................................xiv
Preface ...................................................................xvi
About the authors...................................................xxiii
Acknowledgements ................................................. xxv
Chapter 1 Introduction to business accounting and the role of professional skills...................... 1

1.1 Factors affecting the complexity of a changing business environment ............... 4
1.2 Business enterprise categories..................................................................... 7
1.3 Business structures ..................................................................................... 9
1.4 The accounting system ............................................................................. 15
1.5 Ethics in business and accounting.............................................................. 24
1.6 The accountant in a changing society ........................................................ 26
Study tools ................................................................................................... 36
Chapter 2 Developing a business plan: Cost–volume–profit analysis ...................................... 44

2.1 Planning in a new business....................................................................... 45
2.2 Cost–volume–profit (CVP) planning ............................................................ 54
2.3 Using CVP analysis.................................................................................. 65
2.4 Other planning issues and effects .............................................................. 69
Study tools ................................................................................................... 71
Appendix: CVP analysis for cups of coffee ........................................................ 86
Chapter 3 Developing a business plan: Applied budgeting .................................................... 94

3.1 Why budget? ......................................................................................... 95
3.2 Operating cycles..................................................................................... 97
3.3 The budget as a framework for planning .................................................... 99
3.4 Using the master budget in evaluating the business’s performance ............... 117
Study tools ................................................................................................. 121
Chapter 4 The accounting system: Concepts and applications .............................................. 132

4.1 Financial accounting information and decision making............................... 134
4.2 Basic concepts and terms used in accounting ............................................ 136
4.3 Components of the accounting equation ................................................... 139
4.4 Accounting for transactions to start a business........................................... 143
4.5 Expanding the accounting equation ......................................................... 148
4.6 Recording daily operations..................................................................... 150
4.7 End-of-period adjustments....................................................................... 160
Study tools ................................................................................................. 166
vi
Contents
Chapter 5 Recording, storing and reporting accounting information .................................... 179

5.1 Accounts .............................................................................................. 180
5.2 Accounting cycle................................................................................... 183
5.3 Recording (journalising) transactions........................................................ 183
5.4 Posting from journals to the accounts ....................................................... 190
5.5 Trial balance ........................................................................................ 196
5.6 Preparing adjusting entries ..................................................................... 197
5.7 Adjusted trial balance............................................................................ 202
5.8 Preparing the financial statements............................................................ 203
5.9 Preparation of closing entries .................................................................. 205
5.10 Modifications for companies................................................................. 209
5.11 Other journal entries............................................................................ 212
Study tools ................................................................................................. 214
Chapter 6 Internal control: Managing and reporting working capital.................................. 226

6.1 Working capital.................................................................................... 228
6.2 Cash ................................................................................................... 230
6.3 Accounts receivable .............................................................................. 241
6.4 Inventory .............................................................................................. 244
6.5 Accounts payable ................................................................................. 248
Study tools ................................................................................................. 251
Chapter 7 The income statement: Components and applications .......................................... 263

7.1 Why the income statement is important .................................................... 265
7.2 Measuring financial performance: The income statement ............................ 267
7.3 Defining and classifying revenues/income ................................................ 269
vii
Contents
7.4 Defining and classifying expenses ........................................................... 274

7.5 Evaluating the income statement using ratios............................................. 279
7.6 Linking profit to owner’s equity and closing the accounts ............................ 283
Study tools ................................................................................................. 287
Appendix: Calculating the cost and the amount of inventory .............................. 299
Chapter 8 The balance sheet: Components and applications................................................ 308

8.1 Why the balance sheet is important ......................................................... 310
8.2 The accounting equation and the balance sheet ........................................ 312
8.3 Using the balance sheet figures for evaluation........................................... 318
8.4 Evaluating financial flexibility.................................................................. 321
8.5 Limitations of the income statement and the balance sheet .......................... 329
8.6 Business activity statements (BAS) ............................................................ 331
Study tools ................................................................................................. 336
Chapter 9 The cash flow statement: Components and applications....................................... 352

9.1 Understand the importance of the cash flow statements to
organisations and users ............................................................................... 354
9.2 Identify the types of transactions that generate cash inflows and outflows ..... 355
9.3 The organisation of the cash flow statement .............................................. 357
9.4 Construct cash flow statements based on the direct method ......................... 360
9.5 Analysis of the cash flow statement .......................................................... 367
9.6 Calculate the relevant cash flow ratios ..................................................... 370
Study tools ................................................................................................. 374
Appendix: Indirect method for reporting cash flows from operating activities ....... 390
viii
Contents
Chapter 10 Sustainable and profitable business practices ..................................................... 398

10.1 Corporate social responsibility (CSR) ..................................................... 400
10.2 The triple bottom line ........................................................................... 401
10.3 Triple-bottom-line accounting: Practical measures..................................... 409
10.4 Environmental project appraisal ............................................................ 415
10.5 Social accounting................................................................................ 426
10.6 Sustainability as a business strategy ...................................................... 429
Study tools ................................................................................................. 431
Chapter 11 Short-term planning decisions ............................................................................ 440

11.1 Relevant costs and revenues.................................................................. 442
11.2 Other cost (and revenue) concepts for short-term decisions........................ 445
11.3 Calculating short-term decisions ............................................................ 449
11.4 Non-financial issues in decision making ................................................. 460
Study tools ................................................................................................. 461
Chapter 12 Capital expenditure decisions............................................................................. 473

12.1 Capital expenditure decisions ............................................................... 474
12.2 Making a capital expenditure decision .................................................. 475
12.3 Net present value (NPV) method ........................................................... 483
12.4 Alternative methods for evaluating capital expenditure proposals .............. 491
12.5 Selecting alternative proposals for investment.......................................... 494
Study tools ................................................................................................. 497
Glossary ..............................................................510
Index ...................................................................518
ix
x
Guide to the text
xi
Guide to the text
xii
Guide to the text
xiii
xiv
Guide to the online resources
xv
PREFACE
For students
There is a saying that ‘knowledge is power’, and in business and our own personal lives this is
true. Those who have knowledge hold a competitive advantage over those who don’t. Those who
understand business information, and know how to interpret and use it, make the best business
decisions. Furthermore, what we know continually evolves as new information and ideas emerge
through media and technology. Change is a very exciting and necessary component of our
business life.
Financial reports, generated by the accounting system of a business, are a major source of
business information for both business and personal use. When reading these reports, you
must evaluate the information they contain by looking for supporting evidence, assumptions
and bias, and by considering other points of view. Furthermore, you must know how to
interpret the information contained in these reports and be able to analyse and project future
change and growth to manage sustainability of your business or your own personal finances.
To do this, you must understand how a business’s accounting system develops these reports,
and what concepts, principles and assumptions underlie the accounting process used to
produce the information in these reports. With this in mind, we designed this book to
address these issues.
After you graduate, you may work in business and use accounting information to make
decisions as an ‘internal user’. Alternatively, you may consider investing in a business or have
some other reason to use its accounting information to make decisions as an ‘external user’.
Your ability to use the material in this book to later help you make effective business
decisions (regardless of your career choice) depends on you making it a part of your own
knowledge base. This means that you should reflect on the issues and ideas as you read about
them, making sure that you understand them before you read further. This will require some
effort on your part. Make sure you read this book critically. Test it in your mind. Does it
make sense to you?
To help you learn this material and think about what you are learning, throughout the book we
have placed questions labelled ‘Stop’ (identified by a hand gesture) that we think are worth your
time and effort to answer. Each time you encounter one of these questions, stop, reflect, think
through the question and answer it honestly. Base your answer on what you have learned in your
life experiences, on your knowledge of accounting, business and the world – and on your own
common sense. By pausing in your reading and answering these questions, you will have time to
process what you are reading and an opportunity to build new knowledge into your existing
knowledge base. This edition also includes ‘Discussion’ questions that are aimed to spur problem
solving, critical thinking and judgement, and to test your development of these skills.
Besides answering these questions as you read the book, think about questions you have, or what
else you would like to know about the subject at hand. Pursuing the answers to these questions in
class or online will help you add to your knowledge base and the quality of your later decisions.
We hope you find this book interesting and easy to read, and that the examples based around
coffee add relevance to your accounting experience! We also hope you find the book useful not
only by increasing your personal capacity to manage financially through an appreciation of the
power of being financially literate, but also by enhancing your ability as a business professional
now and in the future.
xvi
Preface
For educators
Caution – hot contents
This textbook has a number of themes that revolve around coffee, and this preface is no exception. As
well as the brew of all the classic accounting topics that you will need, this book also percolates a blend
of a number of phrases and terms well known to coffee lovers (and we know that includes accountants!).
We hope that this preface serves as an enticing aroma, that once inhaled, draws you to take measured
sips from the chapters beyond, guiding your students to extract knowledge along the way.
Two great ingredients that brew one great text

In the real world, today’s students face an accounting environment where management accounting
and financial accounting issues are integrated and inter-related every day. Modern textbooks need
to emphasise accounting information as a basis for general business decisions, maintain students’
interest through relevant case scenarios, and dispense with the perception that accounting is best
left solely to accountants. In fact, financial literacy skills are life skills that we all need.
This textbook integrates management accounting and financial accounting topics in a way that
is more reflective of the world the students in your first year accounting class will face outside of
the classroom.
Sometimes you feel like a debit, sometimes you don’t

A major focus of this textbook is about understanding and applying information in various business
settings. We wrote this book at a non-technical level for all business and non-business students – not
just those intending to be accounting majors. Because all of the authors are heavily involved in
teaching first, second and third level accounting, we are aware of the needs of your accounting majors.
So we discuss recording, storing and reporting accounting information.
We begin with a non-procedural approach to explain transactions in terms of the accounting
equation (with entries into account columns) to illustrate the effect of these transactions on the
financial statements. In Chapter 5 we discuss the rules for double entry and cover the
accounting cycle, from journal entries (using debits and credits) through the post- closing trial
balance. We designed it so that you may use it in as much depth as you see fit in the process of
teaching from this book. Accounting majors who have used this elementary accounting text are
well prepared to enter second and third level accounting classes. For non-accounting students
they will have a basic understanding of the process behind the financial reports produced by
accounting systems.
The house roast (the approach of this text)

An introduction to business approach
Chapter 1 takes an ‘introduction to business’ approach that orients students to the business
environment, that is, the operations of a business, the different functions of business, managers’
responsibilities, and the types of information, management reports, and financial statements the
business’s accounting system provides for use in internal and external decision making. Unique for
xvii
Preface
an accounting textbook, this chapter provides students with a basic understanding of business so
they can more effectively envision the context in which accounting information is collected and
used, and the types of decisions users make in this context. This approach allows students to see
the ‘big picture’ more clearly.
Professional skills
Another unique feature of this book is the introduction it gives students to professional skills
such as critical thinking, and demonstrates how they are used in decision making and problem
solving. This book emphasises the type of analytical and critical thinking that successful
accountants and other business people use in a world that is constantly changing and increasing
in complexity.
‘Stop questions’ throughout the textbook ask students to take a break from reading to think
about an issue and/or consider the outcome of a situation. We also ask them why they think
what they think. The end-of-chapter materials include both structured and unstructured
questions and problems that strengthen students’ problem-solving capabilities by emphasing the
use of reflective and critical thinking skills. Therefore, some of the questions and problems do
not have a ‘correct’ answer; rather the focus is on the approach or process that students use to
solve them.
With the increasing complexity of business activities, the inclusion of critical thinking materials
better prepares students to understand the substantive issues involved in new or unusual business
practices, and guides them to understand that today’s accountants need to ‘think outside the box’.
New ‘Sustainability’ icons draw attention to sections that discuss environmental and ethical
issues and how they relate to students’ understanding of triple bottom line accounting.
First things first

The chapters are designed to reflect actual practice in that a business must plan and
understand its activities before it communicates its plans to external users, and it must perform
and evaluate its operations (internal decision making) before it communicates the results of its
operations to external users. Therefore, in keeping with the ‘introduction to business’ theme and
the logical sequencing of business activities, we discuss accounting for planning first, and then
operating and evaluating (controlling) – discussing management accounting and financial
accounting where they logically fit into this framework.
For instance, Chapter 2 covers cost–profit–volume (CVP) analysis for planning purposes. After
students have an understanding of cost and revenue relationships, we introduce them to budgeting in
Chapter 3. The discussion of the master budget includes projected financial statements, which links
the coverage back to the financial statements in Chapter 1. Chapter 4 then introduces accounting for
the operations of a business. Chapters 7 to 9 describe a business’ major financial statements, and
discuss how internal and external users would use these statements to analysis the business.
Chapters 1, 10 and 11 evaluate results and use short and long term financing and investment tools to
plan for sustainable growth of the business.
Factors affecting a business and its reputation such as sustainable practice and business ethics
are highlighted throughout the chapters. This approach reinforces the idea that societal,
environmental and global issues are not topics that can or should be dealt with separately from
the other issues, but rather are an integral and significant part of business in a world where
immediate access to information is available.
xviii
Preface
The simpler things

Earlier we mentioned a ‘non-technical’ approach. Although we explain identifying, measuring,
recording and reporting of economic information, we discuss these activities at a basic level in
Chapter 4 (increases and decreases in account balances) and do not include a discussion of debit
and credit rules and journal entries in the main body of the text.
We use account columns to record transactions, but we explain the increases or decreases
in relation to the accounting equation (Assets = Liabilities + Owners’ equity), rather than as
debits and credits. At the same time, we also emphasise the effects of the transactions on a
business’ financial statements and the impact they have on analysis of the business, for
example its risk, liquidity, financial flexibility, and operating capability. We chose this
approach to better help students gain an understanding of the logic of the accounting system
and its interrelationships, the effects of transactions on a business’s financial statements, and
the use of accounting information in decision making without getting ‘bogged down’ in the
mechanics of the system.
For those wanting to incorporate the mechanics of the system we do provide thorough coverage of
the double entry system, through the use of the accounting equation and its linkage to the income
equation (Income = Revenues – Expenses), as well as the complete accounting cycle in Chapter 5.
Short black or cappuccino with extra foam (a scaffolded approach)

This textbook also uses a building-block approach. It begins with starting and operating a small
retail cafe – a sole proprietorship – and then progresses learning to an understanding of a more
complex business in the form of a company. This allows students to learn basic concepts first, and
then to broaden and reinforce those concepts later in a more complex setting. Several of the same
topics re-emerge, but each time they are refined or enhanced by a different business structure or a
different user perspective. For example, because of its location at the beginning of the semester,
the Chapter 2 discussion of CVP analysis is simple. This topic would be covered again in greater
depth in second and third year courses after students have a better understanding of costs in a
manufacturing setting. Each time we revisit an issue, we discuss the uses of accounting
information for both internal and external decision making, as appropriate.
Likewise, we use a scaffolded approach to arranging the end-of-chapter materials according to
levels of learning. To indicate these levels, we have divided these materials into sections on Testing
your knowledge, Applying your knowledge, and Making evaluations. These categories are arranged so
that the answers to questions require students to use increasingly higher-order thinking skills as
they move from one category of question to the next.
• The Testing your knowledge section includes questions that test students’ knowledge of specifics –
terminology, specific facts, concepts and principles, classifications, and so forth.
• The Applying your knowledge section includes questions, problems, and situations that test
students’ abilities to translate, interpret, extrapolate and apply their knowledge.
xix
Preface
• The Making evaluations section includes questions, problems, and cases that not only test
students’ abilities to apply their knowledge but also their abilities to analysis elements,
relationships and principles, to synthesise a variety of information, and to make judgments
based on evidence and accounting criteria.
New and improved flavour

In this new edition, and as a result of our own use of the book and feedback from other users, we
have further developed the key features of the textbook including:
1 The opportunity for students to experience what it is like to start up, run, and grow a small
business as they assist Emily Della to operate and make decisions about her business, Café
Revive. Each chapter scaffolds knowledge about financial records and reports of the business
and the decision-making processes that flow from evaluation of the results. Students assist
Emily to plan, operate and evaluate the business as though it was their own.
2 Issues and real-life examples relating to ethical issues in triple bottom line accounting have
been woven into this new edition. The sustainability theme that runs through the text is
another key feature that differentiates it from other introductory accounting texts.
3 Chapter 10 has been specifically designed to give students a taste of the impact of environmental
and energy issues on business, and how to record and manage them. It also broadens their
perspectives by introducing them to the Global Reporting Initiative (GRI) to make them truly
aware of the knowledge and skills they will need in the global business arena.
4 This edition of the text highlights the importance of developing a range of skills other than
technical skills, such as judgement, critical thinking, ethical and sustainability skills, self-
management and teamwork using activities throughout each chapter, the end-of-chapter
materials and case studies.
5 We moved some topics to chapter appendices to keep them available to those who wish to
teach them, including periodic and perpetual inventory.
6 We have revised ‘real’ business examples in the text, and have updated the ‘real’ business
problems in the end-of-chapter materials.
We believe these features enhance the ‘flavour’ of the book and make its topics even more
relevant and understandable to our students.
Real-world/worldwide/total world
Life is not a ‘textbook case’. That’s why we not only integrate management accounting and financial
accounting topics, but also include information about real-world businesses as examples for many of
these topics. We include analyses of the financial information of some of these businesses in the
text and in the end of chapter materials. The list of company URLs at the end of each chapter gives
students the opportunity to connect to some of these businesses.
Students will navigate to various sections of a business’s website such as pages titled: About
Us, Business Information, Investors, Investor Information, Financial Statements, Annual Reports
and other financial information. They will be able to read about real world businesses and their
activities for each financial year.
Navigating to the financial information of an organisation, such as the CPA, can follow a less
logical path and may involve more trial and error.
xx
Preface
Orientation of the Book

In the rapidly changing business environment, the businessperson must interpret, evaluate,
synthesise and apply new information and technology. With this new information and technology
come new problems, many of which have several reasonable solutions and many of which may not
have obvious solutions, or in fact any solutions at all. In this environment, businesspeople and
accountants are not operating in a ’textbook world’ where there are clearcut, right-and-wrong
answers, and where the relevant facts for making decisions are neatly laid out. Therefore, to help
you prepare for this challenging environment, throughout this book we will illustrate the use of
critical thinking and judgement skills for solving accounting-related problems. Then, in the
’Integrated business and accounting situations’ at the end of each chapter, we will give you the
opportunity to enhance your own thinking and judgement skills.
In addition to solving problems that have specific ’correct’ solutions, we will ask you to make
decisions and to solve problems that may have several reasonable solutions or obscure solutions.
We will also ask you to interpret, evaluate and synthesise information, and to apply new
information to new and different situations.
xxi
Preface
Framework of the Book

Now that you have been introduced to business and accounting, and to the skills required to be a
good business manager or accountant in a global business environment, it is time to begin a more
in-depth study of the use of accounting information in the business environment. Beginning in
Chapter 2, we will discuss in more depth accounting and its use in the management activities of
planning, operating and evaluating, starting with a simple business. In later chapters, we will
progress through more complex businesses. We will also discuss the use of accounting by decision
makers outside the business.
As you read through the book, you will begin to notice that the same topics re-emerge, but
each time a topic recurs, it is refined or enhanced by a different business structure, a different
type of business or a different user perspective. You will also notice that we frequently discuss
ethical and sustainability considerations. That is because these considerations exist in all aspects
of business and accounting. By constantly practising critical thinking, judgement and problem
solving, you will also be developing self-management skills.
You will also notice that international issues appear again and again. Many businesses
operating in Australia and New Zealand have home offices, branches and subsidiaries in other
countries, or simply trade with businesses in foreign countries. Managers must know the
implications of conducting business in foreign countries and with foreign businesses. External
users of accounting information must also know the effects of these business connections.
xxii
ABOUT THE AUTHORS
Professor Marie Kavanagh, University of Southern Queensland
Marie (DipTeach, BCom, AdvDipFinAcctg, MFinMgmt, PhD, CPA) works in accounting education at
the University of Southern Queensland, and has taught accounting for many years across all levels of
secondary and tertiary education. Marie’s research interests are in the areas of accounting and business
education, particularly online business education. She is well known for her involvement in several
large ALTC/OLT grants, as both a leader and a team member, working in collaboration with other
universities to further knowledge and improve practice in business and accounting education.
Marie is an active member of several NFP Boards and remains a member of the Accounting
Education Special Interest Group for the Accounting and Finance Association of Australia and
New Zealand (AFAANZ) after chairing that group for 10 years. She has been engaged for 18 years
as an academic advisor for Enactus (Entrepreneurship and Action through Us) Australia working
with teams of students from several universities to deliver relevant entrepreneurial projects in
their communities. She was a has won individual and national team awards for Contribution to
Student Learning and Student Support. She is a Fellow of the Business Educators Association of
Queensland and an active member of local Chambers of Commerce, and delivers community
outreach projects that develop financial literacy skills in young people.
Sharelle Simmons, Leaders Institute

Sharelle (BA, BEd, MCom, CPA) is the Program Director at Leaders Institute Pty Ltd and former
Academic Director at Charles Sturt University (CSU) Study Centre Brisbane. She has had extensive
teaching experience, having held positions at Griffith University, University of Queensland,
Newcastle University and Avondale University College. Her primary areas of teaching are Financial
xxiii
About the authors
Accounting, Management Accounting, Strategic Management Accounting, Accounting Information

Systems and Business Statistics
Sharelle’s research interests include the adoption of Performance Measurement Systems,
especially in the public sector, and the choice of and functioning of networks within the healthcare
sector. Sharelle has been the recipient of a large ARC Linkage Grant for research into networks in
the healthcare sector. Her PhD research into the adoption of the Balanced Scorecard in the
Australian healthcare sector has been presented at an EIASM conference. She is a co-recipient of an
ALTC teaching award for the Professional Development Program conducted at Griffith University.
Doctor Christina James, University of Southern Queensland Christina (BA(Hons),

GDipEd, MFinMgt , PhD, FCCA) works in accounting and finance education at the University of
Southern Queensland, and has taught accounting at both secondary and tertiary levels, and at a
number of Australian universities. Christina’s research interests are in the areas of corporate
governance, climate change mitigation, accounting for sustainability and Triple Bottom Line (TBL)
reporting.
Prior to working in education, Christina worked as an auditor and company accountant in the
United Kingdom and in Australia. She has also done voluntary work as a Treasurer for a number
of not for profit organisations.
xxiv
ACKNOWLEDGEMENTS
The authors and Cengage would like to thank the following reviewers for their incisive and helpful
feedback:
• Peter Baxter – University of the Sunshine Coast
• Carol Cheong – Lincoln University
• Kirsty Dunbar – University Southern Queensland
• Pandula Gamage – Australian Catholic University, Melbourne
• Abdel K Halabi – Federation University
• Nicole Ibbett – Western Sydney University
• Dr Amid Khosa – Monash University
• Amy McCormack – Flinders University
• Terri Trireksani – Murdoch University
• Basil Tucker – University of South Australia
Every effort has been made to trace and acknowledge copyright. However, if any infringement has
occurred, the publishers tender their apologies and invite the copyright holders to contact them.
xxv
1
INTRODUCTION TO BUSINESS
ACCOUNTING AND THE ROLE OF
PROFESSIONAL SKILLS
‘Business is a game, the greatest game in the world if you know how to
play it.’
Thomas J Watson Sra
Learning objectives
After reading this chapter, students should be able to do the following:
1.1 Have an understanding of business, and the skills and knowledge
required for success in a complex business environment.
1.2 Explain the categories of business.
1.3 Know the three common business structures and the regulations
faced by each.
1.4 Outline how accounting systems play a role in providing
information to enable informed business decisions.
1.5 Understand how ethics and sustainability impact business outcomes.
1.6 Discuss the skills required by accountants and those involved in
business to solve problems and make decisions.
1
Accounting Information for Business Decisions
Understanding the learning objectives is assisted in the chapter by asking key questions:
Key questions
1 Why is it necessary to have an understanding of business before trying to learn about
accounting?
2 What factors are affecting the complexity of a changing business environment?
3 What are three characteristics that someone might require to become a successful
businessperson in a complex business environment?
4 What are the three main categories of business enterprise?
5 What are the three most common forms of business organisation and their basic
characteristics?
6 What types of regulations do businesses face?
7 What information does the accounting system provide to support management activities?
8 How does accounting provide support and information to people who are external to the
business when they are making decisions?
9 What roles do ethics and sustainability play in the business environment?
10 What skills are required from accountants of the twenty-first century?
11 How can people learn to think critically?
12 How can critical thinking help people to make better business decisions?
13 What are the logical stages in problem solving and decision making?
What are you planning to do when you graduate from university? Maybe become an entrepreneur, own your
own business, work your way up to marketing manager for a multinational business, manage the local corner
store or manage a sporting goods store? Regardless of your career choice, you will be making business
decisions, both in your personal life and at work. We have oriented this book to students like you, who are
interested in business and the role of accounting in business. You will see that, when used properly,
accounting information is a powerful tool for making good business decisions. People inside a business use
accounting information to help them to determine and manage costs, set selling prices and control the
operations of the business. People outside the business use accounting information to help them make
investment and credit decisions about the business. So what kinds of businesses use accounting? All of
them! Let’s take a little time to look at what business means.
Business affects almost every aspect of our lives. Think for a moment about your normal daily
activities. How many businesses do you usually encounter? How many did you directly encounter today?
Suppose you started the day with a quick trip to the local convenience store for milk and eggs. While you
were out, you noticed that your car was low on petrol so you stopped at the local petrol station. On the
way to class, you dropped off some clothes at the dry-cleaners. After your first class, you skipped lunch so
that you could go to the bookshop and buy the calculator you needed; then, after buying a cappuccino
from Café Revive to keep yourself awake in lectures, you headed to your next class. In just half a day, you
have already interacted with five businesses – the convenience store, the petrol station, the drycleaners,
the bookshop and the campus café. You have also managed your own personal financial requirements –
that is, had enough money to pay for these things.
Discussion
Do you view your university as a business? Why or why not?
2
Chapter 1 Introduction to business accounting and the role of professional skills
Although, in this scenario, you were directly involved with five businesses, you were also probably
1
affected by hundreds of others. For example, two different businesses manufactured the calculator you
Why is it necessary to
purchased from the bookshop and the coffee you purchased from Café Revive. Suppose DeFlava Coffee
have an understanding of
Corporation roasted and ground the coffee beans used in the cappuccino you purchased. As we illustrate business before trying to
in Case Exhibit 1.1, DeFlava purchased the ingredients from other businesses (suppliers). Each supplier learn about accounting?
provided DeFlava with particular goods. Shipping businesses (carriers) moved the goods from the
suppliers’ warehouses to DeFlava’s factory, where the coffee beans were roasted and ground. A different
carrier then moved the coffee from the factory to DeFlava’s outlets, such as Café Revive.
Case Exhibit 1.1 Businesses involved in the manufacture and sale of coffee
Suppliers Carriers Manufacturer Carrier Coffee shop
Coffee
Farmers
Gas on Tap
DeFlava
Coffee
State
Packing
Company
Boxes’n
Café Revive
Bits
The making and shipping of the coffee would follow the same process. You can see that many
businesses are involved in manufacturing, shipping and selling products. Now think about all the other
products that you used during the morning and all the businesses that were involved in the
manufacturing and delivery of each product. Before leaving your home this morning, you could easily
have been affected by hundreds of businesses. All these businesses have a role to play in providing goods
and services to final customers.
Products and services affect almost every minute of our lives, and businesses provide us with these
products and services. As you will soon see, accounting plays a vital role for businesses by keeping track of
a business’s economic resources and activities, and nowadays by measuring the environmental and social
impacts of the business (these will be discussed throughout this text). The financial position of the
business and the results of its activities are then reported to people who are interested in how well it is
doing, similar to the way statistics are gathered and reported for cricket players and other athletes.
Stop & think

What do you think is the role of accounting and accountants in operating a business?
In this chapter, we will introduce you to accounting by first looking at different forms of business
enterprise and the environments within which they operate. Regulatory issues associated with forming,
operating and reporting on the activities of a business, and the role of ethics and sustainability in the
management of a business, are discussed. We will highlight the need to understand the language of
business in order to develop and apply business knowledge and build a range of skills to enable you to
practise professionally in business. The role that accounting information plays in problem solving, making
judgements and decision making within a business will be outlined.
3
What factors are affecting

1.1 Factors affecting the
the complexity of a
changing business
environment?
complexity of a changing
business environment
Why is the business environment changing so rapidly? As Exhibit 1.2 illustrates, a combination of many
interwoven factors in this environment contribute to its complexity and excitement.
Exhibit 1.2 Factors affecting the complexity of the business environment
Information
explosion
Evolving forms Technological

of business advances
Business
environment
More complex
Globalisation
business activities
Increased
regulations
One contributor to the rapidly evolving business environment is the information explosion. More
information is being generated than ever before, and this information is available to far more people than
in the past. On the information superhighway, networks such as the internet make available an almost
endless bank of information that includes library listings, books, journal articles, financial reports,
catalogues and directories of businesses, organisations and people with similar interests. Because of the
amount and accessibility of information, and because new information may replace existing information,
business managers must be able to use their skills to evaluate and manage this information to their
advantage. We will discuss this idea more thoroughly later in the chapter.
Consider how technological advances have affected the transmission and sharing of information. Most
businesspeople have adapted their workday habits to include the use of smartphones, text messaging, web
conferences or online meetings using Zoom, and Skype or WhatsApp for conducting business online.
Email, SMS, scanners and online data-drop boxes for sharing documents facilitate information
transmission to and from multiple global sites. Huge databases, such as airline flight schedules and rate
structures, are now stored online and accessed by millions of users around the world every day. The
impact of social media has changed the ways firms communicate and involve their clients and customers
using Facebook and other social media. All these developments have made the world more competitive.
Businesses and individuals who in the past had difficulty travelling or communicating internationally
(perhaps because the infrastructures of their countries could not accommodate their needs) have
enthusiastically ‘thrown their hats in the ring’.
Technological advances have affected not only the products we use and the way business is conducted
but also how products are manufactured. For example, advanced technologies have allowed the
production process in many businesses to become fully automated. In many modern factories, computers
are used to plan, operate and monitor manufacturing processes, and to make adjustments to these as
4
needed. Robots are now common workers on many production lines. Apps are now a popular means of
capturing customer or client interest, securing business and delivering goods or services.
This book uses
The globalisation of business activities and economies is providing more opportunities for businesses and alphabetic endnotes
individuals to conduct business by creating a larger, more diverse marketplace. At the same time, it is to denote reference
material related to
providing new business challenges. For example, when businesses begin to sell or source their products in
the discussion. Find
other countries, they must translate their product names and advertising slogans into different languages. This the corresponding
is not as straightforward as it might first appear to be. Consider the dilemma KFC (http://www.kfc.com.au) references at the end
of the chapter.
faced when it tried to translate its slogan ‘finger-lickin’ good’ into Taiwanese: the literal translation was ‘Eat
your fingers off’.b Globalisation also means that pandemics like
COVID-19 impact businesses all over the world.
Businesspeople must also translate transactions involving
foreign currencies – for example, Japanese yen to Australian
dollars. Furthermore, they must learn to negotiate other
cultures, economies, laws and ways of conducting business.
Another factor adding to the complexity of the business
Getty Images/Monty Rakusen

environment is the increase in the number of regulations that
companies must address. These are discussed later in the chapter.
More complex business activities also contribute to the
changing business environment. For example, business owners and
managers are finding more creative methods to finance their
activities, new outlets for investing their excess cash, a larger
variety of alternatives for compensating their employees and more
Machines at work in an automated factory.
complicated tax laws with which they must comply. In addition, the
way companies conduct business is evolving. Where businesses used to be ‘bricks and mortar’, many now exist
on the internet. It is now common and convenient for firms to conduct business using e-commerce, where e-commerce
businesses and consumers buy and sell goods and services over the internet. E-commerce takes three forms: A method of conducting
business-to-business, or B2B (e.g. Cisco Systems, Inc – http://www.cisco.com), business-to-consumer, or business where
companies and
B2C (e.g. Amazon – http://www.amazon.com.au), and consumer-to-consumer, or C2C (e.g. eBay – http:// consumers buy and sell
www.ebay.com.au). goods and services
online
Businesses also need to factor in the effect that climate change is having, and monitor the impact of
business activities on greenhouse gas emissions. Businesses need to consider disclosure frameworks so as to
keep their stakeholders informed about physical risks to the business associated with climate change, and
details of any compliance obligations – for example, in Australia those dictated by the National Greenhouse and
Ethics and Sustainability
Energy Reporting Scheme introduced in 2007, and amended in 2017. In November 2019, the New Zealand
Government passed the Climate Change Response (Zero Carbon) Amendment Bill to establish historic climate
change laws. Similarly, in 2019 the Australian environment and climate change legislation was introduced.
Finally, evolving forms of business are cropping up in the new business environment. For example,
numerous variations of the simple business organisation (i.e. sole proprietorships, partnerships and
companies) now exist. Each of these forms of organisation has legal advantages and disadvantages that
the others do not have, and each addresses a particular aspect of the business environment. A business
owner chooses the form of business that most closely meets the needs of their business.
Discussion
Has social media improved the way we conduct business? Give examples.
The successful businessperson What are three

characteristics that
someone might require to
The factors discussed above not only contribute to the complexity and excitement of the business become a successful
environment, but also challenge the assumptions on which businesses and their employees operate. For businessperson in a
example, the assumption that a university graduate will go out into the world, pursue a lifelong career and complex business
environment?
never return to university is no longer valid. Many people now change careers – careers, not just jobs! –
5
several times before they retire. People live and work longer. Often, in order to make a change, they
return to study between careers to ‘retool’ or expand their education to learn new skills. Even people who
stay in the same career expand their education (through continuing professional education, short courses,
conferences and seminars) in order to improve their knowledge and abilities.
It is easy to see that a person entering or remaining in this dynamic environment must also be
dynamic. In the following sections, we will discuss the characteristics, attitudes and skills that help people
to succeed in the business world. While reading these sections, keep in mind that these are attributes and
abilities that people learn over a period of time and continue to develop throughout their lives (similar to
the way athletes continuously learn and improve their athletic skills).
Adapting to change
Imagine a successful businessperson. Perhaps the person, with sleeves rolled up and hands dirty, is
working hard on some project. Or maybe, dressed in a business suit and with a briefcase in hand, they are
heading for a meeting. You may have a picture of what this businessperson looks like, but what really
determines success is harder to see. This is more a matter of approach than of image.
The successful businessperson thrives on change, seeing it as an opportunity rather than an obstacle.
However, treating change as an opportunity is more than just a matter of attitude – it is not simply seeing
the glass as ‘half full’. It also involves being prepared for the opportunity; the successful businessperson is
both willing and able to change. Therefore, this person is devoted to lifelong learning, realising that
continuous learning is the only way to keep up with, and be prepared for, the fast-paced change we
described earlier. This means that the businessperson must be willing to read industry or professional
journals, network with others by attending conferences and/or take courses to stay up to date.
Stop & think

What qualities can people develop to better prepare themselves for problem solving and
decision making in today’s rapidly changing business environment?
To be able to adapt to change (or ‘go with the flow’), the successful businessperson also needs to
develop certain other qualities. They welcome others’ viewpoints, appreciate differences among people,
take educated and thoughtful risks, anticipate environmental trends – and identify the potential problems
and opportunities associated with these trends – and willingly abandon old plans to pivot their business if
new information, circumstances or technology makes existing methods less workable. This does not mean
that the successful businessperson is a chameleon, changing colour every time the business environment
changes, but it does mean that they are flexible and adaptable. In addition, the successful businessperson
must understand the language of business as discussed in the next section and, more importantly, be able
to develop a business plan to guide the operations and direction of their business.
The language of business

To be successful in business, you must also understand the language of business. For example, what is a
‘transaction’, or what does it mean when a car ‘depreciates’? How do you know if a business is ‘solvent’?
For many people, the concepts and terminology of business are not part of their normal vocabulary.
When you begin to study your first course in business, you will be engaged with many new words and
terms. In some ways, learning the language of business can be compared with learning a foreign language.
Accounting and financial concepts may be alien to you. Still, the ability to understand and communicate
financial information is critical not only to every entrepreneur and those engaged in business but to all of us,
as a personal skill that allows us to survive our own financial journey through life. For example, if we borrow
money to buy textbooks or a bigger asset such as a house, we become aware of the word ‘debt’. Every debt we
have, we will need to pay back. So communication among owners, managers and investors is essential.
Accounting fills the need for a common language of business. It records and processes financial information
into an easily accessible format that can be understood by any person in the business world. Many people’s
6
first encounter with accounting might be completing and submitting a tax return. Accounting is what
accountants or certified public accountants (CPAs) do to prepare your taxes. Bookkeeping is what bookkeepers
or business owners do to keep your business running smoothly. Bookkeeping is made up of two things:
(1) payables – that is, paying bills, and paying your employees, contractors and yourself; and (2) receivables –
that is, sending invoices to people who owe you money (debtors or accounts receivable) and making sure your
invoices get paid. You can add to it things like categorising income and/or expenses to see how you’re
spending money and how you’re making money. Underpinning all these activities is the need to manage and
monitor cash flow. Regardless, as you progress through this text, you will encounter and become familiar with
many new terms as your business vocabulary grows.
1.2 Business enterprise categories 4
What are the three main

Business in Australia, New Zealand and most other countries operates within an economic system based on categories of business
private enterprise. In this system, individuals – that is, people like us, rather than public institutions like the enterprise?
government – own businesses that produce and sell services and/or goods for a profit. These businesses
generally fall into three categories: service businesses, merchandising businesses and manufacturing businesses.
Service businesses
A service business performs services or activities that benefit individuals or business customers. The dry- service business
cleaning establishment where you dropped off your clothes this provides the service of cleaning and pressing A business that
your clothes for you. Businesses like Stefan Hair Fashions (http://www.stefan.com.au), LJ Hooker (http:// performs services or
activities that benefit
www.ljhooker.com.au) and Qantas Airlines Limited (http://www.qantas.com.au), and professional practices individuals or business
such as those in accounting, law, architecture and medicine, are all service businesses. customers
Merchandising businesses
Other businesses in the private enterprise system produce or provide goods or tangible/physical products.
These businesses can be either merchandising businesses or manufacturing businesses. A merchandising merchandising
business purchases goods (sometimes referred to as merchandise or products) for resale to its customers. business
A business that
Some merchandising businesses, such as plumbing supply shops, electrical suppliers or beverage distributors, purchases goods
are wholesalers. Wholesalers primarily sell their goods to retailers or other commercial users, like plumbers or (sometimes referred to
electricians. Some merchandising businesses, such as the bookshop where you bought your calculator and as merchandise or
products) for resale to
chocolate bar, or the convenience store where you bought your milk and eggs, are retailers. Retailers its customers
sell their goods directly to the final customer or consumer. Woolworths Supermarkets (http://
www.woolworths.com.au) and The Good Guys (http://www.thegoodguys.com.au) are retailers. Other
examples of retailers include shoe shops, furniture outlets, online bookshops and car dealerships.
Manufacturing businesses
A manufacturing business makes products and then sells these products to their customers. Therefore, manufacturing
a basic difference between merchandising businesses and manufacturing businesses involves the products business
A business that makes
that they sell. Merchandising businesses buy products that are physically ready for sale and then sell these its products and then
products to their customers, whereas manufacturing businesses make their products first and then sell the sells these products to
products to their customers. For example, the university café is a merchandising business that uses the its customers
coffee it purchased from DeFlava, a manufacturing business. The DeFlava factory, though, purchases (from
suppliers) the coffee beans, essences and other ingredients needed to make the coffee, which it then sells to
the university café and other retail stores. Ford Australia (http://www.ford.com.au), Black & Decker
(http://www.blackanddecker.com.au) and BlueScope Steel Ltd (http://www.bluescopesteel.com.au) are
examples of manufacturing businesses.
7
The relationship between types of

private enterprises
Exhibit 1.3 shows the relationship between manufacturing businesses and merchandising businesses and
how these businesses relate to their customers.
Exhibit 1.3 Relationship of manufacturing and merchandising businesses
Suppliers
Manufacturing
business
Merchandising
business
(wholesaler)
Merchandising Merchandising
business business
(retailer) (retailer)
Final
customer
The line of distinction between service, merchandising and manufacturing businesses is sometimes
blurry because a business can be undertaking activities in more than one area. For example, Dell Inc.
(http://www.dell.com.au) manufactures personal computers, directly sells the computers it manufactures
to business customers, government agencies, educational institutions and individuals, and services those
computers through installation, technology transition and management.
Stop & think

What sort of business do you think Café Revive is? Justify your decision.
Whether a business is a service, merchandising or manufacturing business (or all three), for it to
succeed in a private enterprise system, it must be able to obtain cash to begin to operate and then grow.
As we will discuss in the following sections, businesses have several sources of cash.
Entrepreneurship and sources of capital

capital
Owning a business involves a level of risk, along with a continuing need for capital. Although capital has
Funds a business uses several meanings, we use the term here to mean the funds a business needs to operate or to expand
to operate or expand its operations. In the next two sections, we will discuss the risk involved in owning a business, and possible
operations
sources of capital.
8
Entrepreneurship
Businesses in a private enterprise system produce and sell services and goods for a profit. So profit is the
primary objective of the business. Profit rewards the owner or owners of the business for having a
business idea, and for following through with that idea by investing time, talent and money in the
business. The owner hires employees, purchases land and a building (or signs a lease for space in a
building) and purchases (or leases) any tools, equipment, machinery and furniture necessary to produce or
sell services or goods – expecting, but not knowing for sure, that customers will buy what the business
provides. An individual who is willing to risk this uncertainty in exchange for the reward of earning a
profit (and the personal reward of seeing the business succeed) is called an entrepreneur. entrepreneur
Entrepreneurship, then, is a combination of three factors: the business owner’s idea, the willingness of the Individual who is willing
business’s owner to take a risk and the abilities of the owner and employees to use capital to produce and to risk the uncertainty
of starting a business
sell goods or services. But where does the business get its capital? in exchange for the
reward of earning a
profit (and the personal
Sources of capital reward of seeing the
business succeed)
One source of capital for a business is the entrepreneur’s (or business owner’s) investment in the business.
An entrepreneur invests money ‘up front’ so that the business can get started. The business uses this
money to acquire the resources it needs to function. Then, as the business operates, the resources of the
business – the capital – will increase or decrease through the profits and losses of the business. It is
important to the sustainability of the business that it generates sufficient funds to allow expansion as
opportunities arise.
When an entrepreneur invests money in a business, they hope to eventually get back the money that
they have contributed to the business (a return on investment). Furthermore, the entrepreneur hopes to
periodically receive additional money above the amount they originally contributed to the business (a
return on the contribution). The entrepreneur would like the return on the contribution to be higher than
the return that could have been earned with that same money on a different investment, such as an
interest-bearing savings account.
Borrowing is another source of capital for a business. To acquire the resources necessary to grow or to
expand the types of products or services it sells, a business may have to borrow money from institutions
like banks (called creditors or lenders). This occurs when the cash from the business’s profits, combined
with the business owner’s contributions to the business, is not large enough to finance its growth. But
borrowing by a business can be risky for the owner or owners. In some cases, if the business is unable to
pay back the debt that it owes, the owner(s) must personally assume this responsibility, or liability (i.e.
something that is owed).
Borrowing in general can also be risky for a business. If the business cannot repay its debts, it will be
unable to borrow more money and will soon find itself unable to continue operating. In addition to
earning a profit, then, another objective of a business is solvency, meaning that the business can pay off solvency
its debts. A business’s long-term
ability to pay off its
debts
Stop & think
Why are accessible and affordable sources of capital important to the sustainability of a
business?
1.3 Business structures

In this text, we emphasise business organisations. These organisations, or businesses, are a significant
aspect of the Australian, New Zealand and world economies. As Exhibit 1.4 shows, a business may be
organised as one of the following general types of business organisations: (1) sole proprietorship; (2)
partnership; or (3) company.
9
Exhibit 1.4 General characteristics of each form of business organisation
Characteristic Sole proprietorships Partnerships Company/corporations
Number of owner(s) Single owner Two or more owners (partners) Usually many owners (shareholders)
Size of business Small Most are small; some professional Many are very large; some may have
partnerships e.g. law firms) have stock traded on an exchange
several hundred partners
Examples of Small retail shops; local service or repair Law firms; CPA firms; realestate agencies; Manufacturing companies; multinational
businesses that shops; single practitioners such as CPAs, family-owned businesses companies; retail store chains; fast-food
typically have this lawyers,doctors chains
legal form
Who makes business Owner Depends on partnership agreement; small Decided by board of directors; large
decisions partnerships will have all partners involved companies/corporations are managed by
in business decisions; large partnerships business professionals who often own
will have managing partners. Partners are little or no stock
agents
Liability of owner(s) Unlimited Unlimited Limited
Life of organisation Limited Limited Continuous
Choosing the legal form of a business is an important decision for the owners to make. As a business
owner, this decision determines, for example, how laws and regulations affect your personal responsibility
to pay the business’s debts. When choosing among legal forms, you need to know the characteristics, and
the advantages and disadvantages, of each of them. Once you select a legal form and start operating your
business, laws and regulations specific to your type of organisation will affect some of your business
decisions. In reality, choosing how to operate your business will often be determined by the size of the
operation and the requirements for capital. Most small businesses operate as sole proprietors or
partnerships, while large businesses will become companies/corporations. In the following sections, we will
discuss the three most common forms of business organisations: sole proprietorships, partnerships and
companies or corporations.
Stop & think

What percentage of business is conducted by small businesses in (a) Australia; and (b) New
Zealand?
What are the three most

Sole proprietorship
common forms of business A sole proprietorship or sole trader is a business owned by one person, who is the sole investor of
organisation and their
basic characteristics? capital into the business. Café Revive is a coffee shop (i.e. a retail business) run by Emily Della. It sells
good coffee and coffee products manufactured by DeFlava Coffee Corporation. Because Emily is the only
sole proprietorship or investor in Café Revive, this business is an example of a sole proprietorship. In general, sole
sole trader proprietorships are small businesses that focus on either selling merchandise or performing a service.
Business owned by one
individual who is the Many of the small shops you come across are sole proprietorships.
sole investor of capital The owner of a sole proprietorship usually also manages the business. The owner makes the business’s
into the business
important decisions, such as when to purchase equipment, how much debt to incur and which customers are
extended credit and allowed to pay later (as mentioned earlier, these customers are known as the business’s
debtors or accounts receivable). In Australia and New Zealand, tax laws and regulations require each owner of
a sole proprietorship to report and pay taxes on their business’s taxable income. The business’s taxable income
is included in the owner’s individual income tax return; there is no separate income tax return for a sole
10
proprietor. So the owner adds the income from the sole proprietorship to their other sources of income, such
as wages earned from other jobs and interest received from bank deposits. In the case of Café Revive, Emily
Della includes with her personal income tax return a schedule that reports Café Revive’s taxable income. She
includes this amount in her total personal taxable income. Emily calculates her personal income tax liability
based on all her sources of income.
Australian and New Zealand laws state that an owner of a sole proprietorship must assume personal unlimited liability
responsibility for the debts incurred by the business. This requirement is referred to as unlimited Indefinite or unlimited
personal liability for the
liability. Unlimited liability may be a problem for the owner of a sole proprietorship because if the debts incurred by the
business cannot pay its debts, the business’s creditors may force the owner to use their personal assets to business. For a sole
proprietorship, this
pay them. So if the sole proprietorship becomes insolvent, the owner may lose more than the amount of
means that the owner’s
capital they invested in the business. Unlimited liability thus adds additional financial risk for the owner personal assets may be
of a sole proprietorship. at risk if things go
wrong in the business
The life of a sole proprietorship is linked directly to its individual owner. Basically, a sole
proprietorship ceases to exist when the owner decides to stop operating as a sole proprietor. If the owner
limited life
of a sole proprietorship decides to sell the business, the owner’s sole proprietorship dissolves and the new Business that will
owner(s) must choose the new business’s form of business organisation. Because of these characteristics, a cease when the
sole proprietorship is said to have a limited life. business is sold or
when a specific project
is completed is said to
have a limited life. For
Partnership example, a sole
proprietorship has a
limited life because it
By definition, a sole proprietorship is owned by only one person. What if two or three people come up with a ceases to exist if the
great idea and want to start a business? What if the owner of a sole proprietorship wants someone else to business is sold.
invest in their business? One option is for the individuals to operate their business as a partnership. A
partnership is a business owned by two or more individuals, who each invest capital into the business. partnership
Business owned by two
or more individuals
Discussion who each invest capital,
time and/or talent into
Have you ever shared the purchase and use of an item with someone? Maybe you share a the business and share
in its profits and losses
computer or an apartment. How do you decide how much money each person contributes?
How do you split the costs of software, rent or insurance?
Individuals must make many decisions before starting a partnership. These decisions include:
• the dollar amount each partner will invest
• the percentage of the partnership each individual will own
• how to allocate and distribute partnership income to each partner
• how business decisions will be made
• the steps to be taken if a partner withdraws from the partnership or if a new partner is added.
To limit disagreements, partners should always sign a contract, called a partnership agreement, partnership
before their business begins operating. This is a good idea even if the partners are best friends or close agreement
relatives. This agreement specifies the terms of the formation, operation and termination of the Contract signed by
partners of a partnership
partnership. It defines the nature of the business, the types and number of partners, the capital before the business
contributions required of each partner, the duties of each partner, the conditions for admission or begins operations
withdrawal of a partner, the method of allocating income to each partner, and the distribution of assets
when the partnership is terminated.c
Characteristics of partnerships
Partnerships have many characteristics similar to those of sole proprietorships. Each partner is required
by tax laws and regulations to report their share of the partnership income on their individual income tax
return. Laws and regulations regarding unlimited liability also apply to partnerships. In addition, a
partnership has a limited life. It terminates whenever the partners change that is, when a partner leaves
the partnership or when a new partner is added.
11
Stop & think

What concerns would you have about joining a partnership? Why?
There is a basic difference between partnerships and sole proprietorships, in that a partnership
requires two or more owners. Several characteristics of partnerships relate to the co-ownership feature. To
understand these, assume that Emily Della invites you to commence Café Revive as a partnership. If you
are like most other people, the first thing you would think is, ‘What would I be getting myself into?’
Because of a partnership’s legal and business characteristics, you may be getting into more than you
realise. One important characteristic to understand is that all the partners jointly own all the assets
joint ownership
owned by a partnership; this is called joint ownership. Therefore, if you contribute your property to the
The idea that all partnership, it no longer belongs to you alone.
partners jointly own all Before entering a partnership, you should also know that each partner is an agent of the partnership. An
the assets of a
partnership agent is a person who has the authority to act for another. A partner thus has the power to enter into and
bind the partnership – and, therefore, all the partners – to any contract within the scope of the business. For
agent example, either you or Emily can bind the partnership to contracts for purchasing inventory, hiring employees,
A person who has the
authority to act for
leasing a building, purchasing fixtures or borrowing money. All these activities are within the normal scope of
another person a coffee shop or café.
The fact that each partner can obligate the partnership to honour contracts affects unlimited liability
requirements. Unlimited liability for a partnership means that each partner is liable for all the debts of the
partnership. A creditor’s claim is on the partnership, but if there are not enough assets to pay the debt,
each partner’s personal assets may be used to pay the debt. The only personal assets that are excluded are
a partner’s assets protected by bankruptcy laws, such as a personal residence. If one of the partners uses
personal assets to pay the debts of the partnership, that partner has a right to claim a share of the
payment from the other partner(s).
Stop & think

Given the partnership characteristics we just discussed, if you were about to form a
partnership, what specific items would you want to include in your partnership agreement?
Partnership equity
equity
Accounting for the owner’s equity of a partnership differs from accounting for the owner’s equity of
Claims by creditors and a sole proprietorship (and for a company/corporation). Business transactions that do not affect
owner(s) against the owner’s equity are recorded in the same way, regardless of the organisational form. But because a
assets of a business
partnership’s ownership is divided among the partners, its accounting system has a capital account for
each partner in which it records the partner’s investments, withdrawals and share of the partnership’s
net income.
A partnership’s net income is computed in the same way as the net income for a sole
proprietorship. However, because there is more than one owner in a partnership, the net income must
be allocated to each partner. Before their business begins operations, the partners need to decide how
to split the partnership’s net income among themselves and how to list this allocation in the
partnership agreement. Two factors that usually affect the distribution of income among partners are:
(1) the dollar amount of capital contributed by each partner; and (2) the dollar value of the time each
partner spends working for the partnership. These factors are important because the portion of net
income allocated to each partner represents the return on their investment of capital or time. A
partnership includes a schedule at the bottom of its income statement that shows how, and how much,
net income is allocated to each partner.
12
Company/corporation
Recall that DeFlava Coffee Corporation is a company that manufactures coffee products and sells them to
businesses like Café Revive. Although a company is made up of individual owners, the law treats it as a
separate ‘being’. A company/corporation is a separate legal entity that is independent of its owners and company/corporation
is run by a board of directors. Hence, it has a continuous life beyond that of any particular owner. This has A business entity that
has been incorporated
a number of advantages. Because of the legal separation of the owners and the company, ownership in a and registered by the
company may be passed easily from one individual to another. Briefly, here’s how it works. In exchange Australian Securities
and Investments
for contributing capital to the company, the owners of a company receive shares of the company’s share
Commission (ASIC)
capital. Hence, they are called shareholders. These shares of stock are the ‘ownership units’ of the under the Corporations
company and are transferable. That is, the current shareholders can transfer or sell their shares to new Act 2001
owners. The share capital of many companies can be sold on organised stock markets, such as the
shareholders
ASX Group (http://www.asx.com.au), the New Zealand Stock Exchange NZX (http://www.nzx.com),
Individuals who own
the New York Stock Exchange (http://www.nyse.com), the London Stock Exchange (http:// shares (stock) in a
www.londonstockexchange.com) and the NASDAQ Stock Market, Inc. (http://www.nasdaq.com), so that company
shareholders of these companies can sell their shares to new owners more easily.
Because a company is a separate legal entity, a shareholder has no personal liability for the company’s
debts. Therefore, each shareholder’s liability is limited to their investment. Companies tend to be larger
than sole proprietorships and partnerships, so to operate they need more capital invested by owners.
Since transferring ownership is easy, and since shareholders have limited liability, companies can usually
attract a large number of diverse investors and the large amounts of capital needed to operate. Companies
can also attract top-quality managers to operate the different departments, so that shareholders are not
involved in the company’s operating decisions.
But companies also have several disadvantages. As a separate legal entity, a company must pay income
taxes on its taxable income. It reports this income on a company income tax return. The maximum income
tax rate for companies in Australia, for example, is currently 30 per cent. If some, or all, of the after-tax
income of the company is distributed to shareholders as dividends, the shareholders may be taxed on this
personal income, but only pay tax on that portion of their income in tax brackets higher than the 30 per
cent corporation tax already paid.
Because the owners (shareholders) of a company have limited liability, a company (particularly a smaller
one) may find it more difficult to borrow money. Since the creditors cannot go to the owners for payment,
they may think there is more risk of not being paid. Companies are also subject to more government
regulation. In Australia, the federal and state/territory governments have laws in place to protect creditors
and owners – for example, the laws of the state or territory in which a company is incorporated usually limit
the payment of dividends by the company. Since creditors cannot go to the owners of a company for
payment of debts, limiting the company’s dividend payments is a way of protecting creditors – the company
may then have more resources with which to pay its debts. In addition, if a company’s share capital is traded
on the share market, the company must file specified reports with the Australian Securities and Investments
Commission (ASIC). However, the advantages of a company usually exceed the disadvantages when a
business grows to a reasonable size.
Stop & think

With reference to the three most common forms of business organisation and their basic
characteristics, what sort of business do you think Café Revive is? What sort of business do
you think DeFlava Coffee is? Why?
Several types of organisations use accounting information in their decision-making functions but do
not have profit making as a goal. These organisations are called not-for-profit organisations; they include
many educational institutions, religious institutions, charitable organisations, councils, governments and
some hospitals. Since making a profit is not a goal of these organisations, some aspects of accounting for
these organisations’ activities are unique and beyond the scope of this book.
13
Stop & think

Can you list two not-for-profit organisations?
6 The regulatory environment of business

What types of regulations
Businesses affect each of us every day, but they also affect each other, the economy and the environment.
do businesses face?
Just as individuals must abide by the laws and regulations of the cities, states and countries in which they
live and work, all businesses, regardless of type, size or complexity, must deal with regulatory issues.
Think again about that coffee you had today. When DeFlava Corporation was formed, the business
had to do more than build a factory, purchase equipment and ingredients, hire employees, find retail
outlets to sell the coffee and begin operations. It also had to deal with the regulatory issues involved in
opening and operating even the smallest of businesses. Furthermore, its managers must continue to
address regulatory issues as long as they continue to operate the business.
Stop & think

Suppose a business is about to open a factory down the street from your house. What
concerns do you have? What regulations might help reduce your concerns?
Many different laws and authorities regulate the business environment, covering issues such as
business registration and reporting requirements, consumer protection, environmental protection,
employee safety, employment practices and taxes. Businesses must comply with different sets of
regulations, depending on where their factories and offices are located. These regulations are imposed by
local, state/territory and federal governments.
In Australia, taxation is regulated by the Australian Taxation Office (ATO). Each business must withhold
taxes from its employees’ pay and send them to the ATO. Furthermore, the ATO also collects the 10 per cent
goods and services tax (GST) from business activities through a business activity statement (BAS). Businesses
offset the GST they pay on business inputs, such as inventory, against the GST they collect on the sales of
goods to customers. The ATO also taxes the profits of the businesses themselves. The type of business
determines who actually pays the taxes on profits. Companies must pay their own income taxes to the ATO
because, from a legal standpoint, they are viewed as being separate from their owners. Sole proprietorships
and partnerships, on the other hand, do not pay taxes on their profits. Rather, owners of these types of
businesses include their share of the business profits along with their other taxable income on their personal
income tax returns. This is because tax law does not distinguish the owners of sole proprietorships and
partnerships from the businesses themselves.
Stop & think

Is GST the same as income tax? Do different countries use GST as tax?
Laws and other government agencies

Similarly, in Australia, a variety of laws and government departments and agencies (in addition to the
ATO) regulate businesses. Federal departments and agencies oversee the administration of laws governing
areas such as competition (the Australian Competition and Consumer Commission, or ACCC, which
administers the Competition and Consumer Act 2010), fair work practices (Fair Work Australia), work health
and safety (Safe Work Australia), workplace discrimination (the Australian Human Rights Commission),
Ethics and Sustainability
sustainability and control of pollution to air, land and water (environmental protection agencies in each
state/territory), and the like.
14
International regulations
When a business conducts business internationally, it must abide by the laws and regulations of the
countries in which it operates. These address such issues as foreign licensing, export and import
documentation requirements, tax laws, multinational production and marketing regulations, domestic
ownership of business property, and expatriation of cash (i.e. how much of the business’s cash can leave
the country). Of course, these laws and regulations differ from country to country, so a business operating Ethics and Sustainability
in several countries must abide by many laws and regulations. Exhibit 1.5 lists some of the more common
regulatory issues facing businesses operating in different jurisdictions.
Exhibit 1.5 Common regulatory issues faced by Australian businesses
Local government issues State/territory issues Federal issues International issues
• Zoning/planning restrictions • Stamp duty • Federal taxes, including GST • Foreign licensing
• Council rates (taxes) • Payroll tax • Competition • Exports and imports
• Environmental regulations • Work health and safety • Work health and safety • Taxes/customs duties
• Council by-laws • Professional or occupational • Fair work standards • Multinational production and
licences • Workplace discrimination marketing
• Industry-specific regulations • Company name and • Property ownership
• Workplace discrimination registration (including ABNs • Cash restrictions
and ACNs)
Stop & think

Suppose that, as a manager of a manufacturing business, you have the opportunity to have
many parts of your product manufactured in another country, where the labour is much
cheaper and the environmental regulations less stringent. What are the pros and cons of
taking advantage of this opportunity?
1.4 The accounting system 7
What information does

A business is responsible to many diverse groups of people, both inside and outside the business. For the accounting system
provide to support
example, its managers and employees depend on the business for their livelihood. Customers expect a management activities?
dependable product or service at a reasonable cost. The community expects the business to be a good citizen
and to be mindful of the impact of the business’s activities on the environment. Owners want returns on
their investments and creditors expect to be paid back. Governmental agencies expect businesses to abide by
their rules.
People in all of these groups use accounting information about a business to help them assess the
ability of the business to carry out its responsibilities and to help them make decisions involving the
business. This information comes from the business’s accounting system. An accounting system is a accounting system
means by which accounting information about a business’s activities is identified, measured, recorded and Process used to
summarised so it can be communicated in an accounting report. Two branches of accounting, management identify, measure,
record and retain
accounting and financial accounting, use the information in the accounting system to produce reports for information about a
different groups of people. Management accounting provides vital information about a business to business’s activities so
that the business can
internal users; financial accounting gives information about a business to external users. These two terms
prepare its financial
will be discussed in more detail later in this chapter. statements
Stop & think

What are the main functions of an accounting system?
15
Management accounting information

Management accounting information helps managers inside the business to plan, operate and evaluate a
business’s activities. Managers must operate the business in a changing environment. They need information
to help them compete in a global market in which technology and methods of production are changing
constantly. Therefore, managers can request ‘tailor-made’ information in whatever form is useful for their
decision making, such as in dollars, units, hours worked, products manufactured, numbers of defective units
or service agreements signed. Moreover, in a world exploding with new information, managers must manage
this information in a way that will let them use it more efficiently and effectively. The accounting system
provides information about segments of the business, including products, tasks, plants or individual activities,
depending on what information is important for the decisions managers are making.
Financial accounting information

Financial accounting information is organised for the use of interested people outside the business.
External users analyse the business’s financial reports as one source of useful financial information about
the business. For these users to be able to interpret the reports, businesses reporting to outsiders follow
specific guidelines, or rules, known as generally accepted accounting principles (GAAP), discussed in more
detail later. Financial accounting information developed by the accounting system is expressed in dollars
in Australia, New Zealand and the United States, and in different currencies (e.g. the yen, euro and peso)
in other countries.
Stop & think

What is the difference between financial accounting and management accounting?
Management activities
In small businesses, owners are often also the managers. In larger businesses, owners sometimes employ
managers to drive the operations of the business. Regardless, managers play a vital role in the success of a
business – by setting goals, making decisions, committing the resources of the business to achieving these
goals and then achieving them. To help ensure the achievement of these goals and the success of the
business, managers use accounting information as they perform the activities of planning the operations
of the business, operating the business and evaluating the operations of the business for future planning
and operating decisions. Exhibit 1.6 shows these activities.
Exhibit 1.6 Management activities
Planning
Operating Feedback
Evaluating
(controlling)
16
Planning
Management begins with planning. At a strategic level, every business must have a business plan. Planning
planning
establishes the business’s goals and the means of achieving these goals, and is a key requirement for business Management activity
sustainability. Managers use the planning process to identify what resources and employees the business that establishes a
business’s goals and
needs, and to set standards, or benchmarks, against which they can later measure the business’s progress the means of achieving
towards its goals. Once written, the business plan becomes a ‘living document’, in that managers will report to these goals
owners in relation to the plan. Because the business environment changes so rapidly, plans must be ongoing
and flexible enough to deal with change before it occurs or as it is happening.
Managers of multinational businesses must also consider such factors as multiple languages, economic
systems, political systems, monetary systems, markets and legal systems. In such businesses, managers
must also plan and encourage online communication between and among branches in different countries.
Operating
Operating refers to the set of activities in which a business engages to conduct its business according to its operating
plan. For DeFlava Coffee, these are the activities that will ensure that coffee products are made and sold. Management activity
In operating the business, managers and work teams must make day-to-day decisions about how best that enables a business
to conduct its business
to achieve goals. For example, accounting information gives them valuable data about a product’s according to its plan
performance. With this information, they can decide which products to continue to sell and when to add
new products or drop old ones. In a manufacturing business, managers and work teams can decide which
products to produce and whether there is a better way to produce them. With accounting information,
managers can also make decisions about how to set product selling prices, whether to advertise and how
much to spend on advertising, and whether to buy new equipment or expand facilities. These decisions
are ongoing, and depend on managers’ evaluations of the progress being made towards the business’s
goals and on changes in the business’s plans and goals.
Evaluating
Evaluating is the management activity that measures the actual
operations and progress of a business against standards or
benchmarks. It provides feedback for managers to use to correct
deviations from those standards or benchmarks, and to plan for
Shutterstock.com/Lana K
the business’s future operations. Evaluating is a continuous
process that attempts to prevent problems, and to detect and
correct problems as quickly as possible.
The more countries in which a business operates, the more
interesting the evaluating activity becomes. Managers must pay
particular attention to the cultural effects of evaluation methods
and feedback in order to achieve effective control. Businesses engage in planning, operating and evaluating activities.
evaluating
Stop & think Management activity
that measures a
Which of the three functions of management do you think is the most important, and why? business’s actual
operations and
progress against
standards or
Discussion benchmarks
Even coaches of professional sports teams perform the activities of planning, operating and
evaluating. If a team’s goal is to win the grand final, how would the head coach implement
each of these activities?
Planning, operating and evaluating all require information about the business. The business’s
accounting system provides much of the quantitative information used by managers.
17
Accounting support for

management activities
The accounting system identifies, measures, records, summarises and then communicates economic
internal users
information about a business to internal users for management decision making. Internal users include
Managers within a individual employees, work groups or teams, departmental supervisors, divisional and regional managers,
business who use and ‘top management’. Management accountants then provide information to internal users for planning
information about the
business for decision the operations of the business, for operating the business and for evaluating the operations of the
making business.
Management accounting responsibilities and activities may vary widely from business to business and
continue to evolve as management accountants respond to the need for new information need caused by
the changing business environment.
Stop & think

Are there any guidelines for reporting to business managers?
Basic management accounting reports

Budgets, cost analyses and manufacturing cost reports are examples of the management tools the
accounting system provides. Exhibit 1.7 illustrates the relationships among management activities and
these reports.
Exhibit 1.7 Activities of managers and related accounting reports
Accounting report Management activities
Budget Planning
Cost analysis Operating Feedback
Evaluating
Cost reports for products/services
(controlling)
Stop & think

Suppose you are the manager of your business’s sales force. What type of information would
you want to help you do your job?
budgeting
Process of quantifying
managers’ plans and
showing the impact of
these plans on a Budgets
business’s operating Budgeting is the process of quantifying managers’ plans and showing the impact of these plans on the
activities
operating activities and financial position of the business. Managers present this information in a report
18
Another random document with
no related content on Scribd:
his brother. At seeing this small ka holopapa; no kuu aloha ia oe,
fellow Kaeha asked: “Who is this nolaila au i huli mai nei.” I aku o
small boy?” “I am Kaulu, your Kaeha: “E inu awa ana makou
youngest brother, whom you me ke akua.” Olelo aku o Kaulu:
placed on the shelf. Because I “Ae, olelo aku oe, o lakou mua
love you I came to look for you.” ke inu i ka awa, a mahope oe. A
Kaeha then said: “We are going inu oe i ko awa, e kaumaha ae
to drink awa with the spirits.” oe ia’u i akua nou, penei oe e
Kaulu said: “Yes, tell the spirits to olelo ai: “Eia ka awa o kaua.”
drink their awa first and you take
yours after them. Before you Kahea aku au: “Inu hia, o ka ona
drink yours offer a little to me as ko onei ea.” A pau ko laua olelo
your god by repeating the ana, hoi aku la o Kaulu a ka ao
following words: “Here is our loulu, hoi hoi o Kaeha a loko o
awa.” I will then answer back: ka hale me ke akua. Olelo mai
“Drink it and let me have the ke akua ia Kaeha: “O kou awa
portion that is intoxicating.” At ke inu mua.” Hoole aku o Kaeha.
the close of the conference held Inu iho la ke ’kua a pau ka awa,
by the two Kaulu returned to the koe o Kaeha a mahope; olelo
palm leaf, while Kaeha returned aku la o Kaeha i ke akua: “E
to the house to join the spirits. noho malie oukou a pau kuu
Upon entering the house the awa i ka inu.” Lalau aku la o
spirits said to Kaeha: “Drink your Kaeha i ka apu awa a kaumaha
awa first.” Kaeha replied: “No.” ae la:
The spirits then drank theirs up.
After the spirits had finished,
Kaeha said to the spirits: “Now
you be quiet until after I have
taken my awa.” Kaeha then took
up his cup of awa and offered up
a prayer:
Here is our awa. Eia ka awa o kaua.

[A loud voice was then heard to Inu hia, o ka ona ko’u ea.
call out:]
Drink it and may I have the

portion that is intoxicating.
When the spirits heard this loud I ka lohe ana o ke akua i keia leo
call they began pinching one nui e hea ana, iniki aku iniki mai:
another and said: “What a “Ka! Kupanaha ke akua leo nui o
wonderfully loud-voiced god you kou e Kaeha.” Ma keia hana a
have, Kaeha.” Because of this Kaeha a me Kaulu, haohao o
trick played by Kaeha and Kaulu, Kane laua o Kanaloa, hoouna ia
Kane and Kanaloa were puzzled, Kolea ma e lele iluna i o Makalii
so they sent Kolea and his mate la. A hiki o Kolea ma i o Makalii
to fly up to Makalii and inquire of la, ninau mai o Makalii: “Heaha
him as to the meaning of the ka olua?” “I hoouna mai nei o
loud-voiced god of Kaeha. Upon Kane a me Kanaloa ia maua, e
the arrival of Kolea and his mate ninau aku ia oe no ke akua leo
in the presence of Makalii, nui o Kaeha, ke hea mai i ka po.”
Makalii asked them: “What do I mai o Makalii: “O Kaulu na ke
you two want?” “We have been kaikaina o Kaeha; he mana, he
sent by Kane and Kanaloa to ask ikaika, aia nae i loko o ka ao
you about the loud-voiced god loulu kahi i pee ai.”
that calls out at night.” Makalii
replied: “That is Kaulu the
youngest brother of Kaeha. He is
all-powerful and strong and he is
hiding in the palm leaf.”
Upon the return of Kolea and his A hiki o Kolea ma i o Kane laua
mate in the presence of Kane o Kanaloa, hai aku la i na olelo a
and Kanaloa, they repeated what Makalii, alaila, hele aku la ke
they had been told by Makalii. akua e huli ia Kaulu, i loko o ka
On hearing the report, the spirits ao loulu aole nae he loaa. He
went out and searched for Kaulu mea mau i ke akua ka ona
in the palm leaf, but could not pinepine i ka awa i na po a pau
find him. After this it became a loa, i kekahi po lawe mai la o
general thing for the spirit to get Kaulu i na pohaku nui a kau ae
intoxicated on awa. One night la maluna o kahi moe o ke ’kua,
Kaulu brought in some large pela na akua a pau loa; i waena
stones and placed them on the o ka po, ala ae la lakou, kuia ke
place where the spirits slept at poo i ka pohaku, kahea aku ke
night. In the middle of the night ’kua i ke ’kua no keia pohaku.
the spirits woke up and bumped No keia mau hana a Kaulu, imi
their heads against them. The hala ke akua ia Kaeha, i mea e
gods called to one another make ai. [527]
regarding these stones.
Because of these tricks played Olelo aku ke ’kua ia Kaeha: “E

by Kaulu on the spirits, they tried imi oe i momona nau, no ka mea
to find fault about Kaeha in order ua pau ka makou momona ia oe
to find cause for putting him to i ka ai ia. Nolaila, hele aku la o
death; so one day the spirits said Kaeha me ka maopopo ole o
[526]to Kaeha: “You must find kahi e loaa ai o ka momona. Ike
your own food 3 after this as you mai la o Kaulu ia Kaeha, hahai
have eaten all of ours.” So aku la; lalau ihola o Kaulu ia
Kaeha was forced to go about Kaeha, a lele aku la i
from place to place looking for Manowaikeoo. No Kane laua o
food. When Kaulu saw Kaeha Kanaloa ia aina, a ma laila na
going from place to place he momona a pau loa a ke ’kua.
knew what he wanted so he took Eha kiai, o Uweliki, o Uweleka, o
Kaeha with him and flew to Maalaka, o Maalaki. Ma kekahi
Manowaikeoo, a land owned by aoao o Maalaka a me Maalaki, i
Kane and Kanaloa, where all the ko laua ike ana mai ia Kaulu ma,
food belonging to the spirits was e awa iho ana laua i lalo, nanao
raised. The place was guarded kahako kapali, haule o Kaulu ma
by four men, Uweliki, Uweleka, i lalo loa. A ike o Kaulu i ko laua
Maalaka and Maalaki. These pilikia, kahea ae o Kaulu:
men watched in pairs. In the
watch of Maalaka and Maalaki
Kaulu and Kaeha were seen so
they turned the face of the land
downward causing a deep
depression in the land whereby
Kaulu and Kaeha fell off the land
into space. When Kaulu saw that
they were in trouble he called
out:
Say, Kaulu, turn down; E Kaulu-e, awa ia,

Say, Kaulu, stretch out; 4 E Kaulu-e, kikoo-lia.
Say, Kaulu, double up. E Kaulu-e, pupuu-lia.
[There are] four single ones Eha kaukahi, eha kaulua.
[And] four double ones.
Through the reaching powers of Kau ana laua nei i luna, a hopu
Kaulu they were able once more ana ia Maalaka me Maalaki:
to land when Kaulu grabbed “Make olua ia’u.” Olelo mai laua
Maalaka and Maalaki, saying: “I la: “Ina maua e make, aohe kiai
am going to kill you two.” They o ka aina e pono ai.” Ae aku o
answered: “If we die there will be Kaulu. Hele aku la o Kaulu ma a
no guards fit to watch the land.” loaa o Uweleki a me Uweleka
This, Kaulu acknowledged. ma kekahi aoao, ninau mai la:
Kaulu and Kaeha then continued “Heaha ka olua?” I aku o Kaulu:
on their way until they found “He momona.” I loko o ko laua la
Uweleki and Uweleka on the manao, aole e pau ka momona
other side of the land, who ia Kaulu no ka uuku o ke kino ke
asked: “What do you two want?” nana aku, nolaila, haawi laua i
Kaulu replied: “All the good ka momona ia Kaulu. E hao ae
things to eat.” The guards ana o Kaulu i ka momona, pau
thinking that Kaulu could in no ka ai, ka ia, ka puaa ka moa, na
way take all the good things as mea ulu, na mea kanu; noke ia e
he was a very small fellow, Kaulu a pau loa, lele ae ana o
allowed Kaulu to have all he Kaulu i luna, pouli ka la poeleele.
wanted. At this Kaulu took all he
could find and eat up all the Nolaila, nonoi aku na kiai ia
things he could lay his hands on: Kaulu i mea hoopulapula hou no
the food, the fish, the pork, the ka aina; haawi mai o Kaulu,
chickens, all the things that were hookahi huli kalo, hookahi lau
growing and all that had been uala, hookahi puaa, hookahi
planted; Kaulu took everything moa, a pela aku no. A hiki o
that could be found and then Kaulu ma i o Kane a me
flew up and hid the rays of the Kanaloa, haawi i ka moana,
sun causing darkness. At this the haohao laua i keia momona, i ka
guards begged of Kaulu to give like loa me ka laua momona o
them back some of the food as Manowaikeoo. No keia haohao o
seed for propagation, so he gave Kane a me Kanaloa, hoouna
them one taro top, one potato laua ia Kolea ma e lele i luna e
leaf, one hog, one chicken and ninau ia Makalii; a hiki laua i
so on to the end of the good luna, hai mai no o Makalii, o ka
things, so Kaulu and Kaeha momona no ia o Manowaikeoo a
returned to Kane and Kanaloa. Kaulu i lawe mai ai. A hiki laua i
o Kane laua o Kanaloa, hai aku
After tasting the different things, la i ko laua lohe ia Makalii;
Kane and Kanaloa were sure the nolaila, huhu na akua a pau loa
things tasted just like the good ia Kaulu a me Kaeha.
things of of Manowaikeoo. Upon
making this discovery Kane and Nolaila, hoowalewale ke akua ia
Kanaloa sent Kolea and his mate Kaeha, e hele i ka heenalu. A
to fly and inquire of Makalii 5 hiki lakou i kahi o ka nalu, kahea
where these good things had ke akua i na mano a pau loa, e
come from. Upon their arrival, hopu a paa o Kaeha haawi aku
Makalii told them that these good na ke ’lii. O Kukamaulunuiakea
things were from Manowaikeoo ke ’lii o na mano a pau loa, he
which place had been invaded mano nui, aole ike ia kona loa a
by Kaulu. On their arrival in the me kona laula; ina hamama ka
presence of Kane and Kanaloa, waha, pili o luna i ka lani, o ke a
they reported what they had malalo i ka honua; ulu ke koa i
heard from Makalii. Upon luna a manamana, nana i ale o
hearing the report all the spirits Kaeha a noho i loko o ka opu.
got angry with Kaulu and Kaeha, [529]Ua walewale o Kaulu i keia
so all the spirits began to tempt make ana o kona kaikuaana, a
Kaeha and urged him to go surf- mahope noonoo o Kaulu, i kona
riding. When they arrived at the ninau ana i ke ’kua, hoole mai ke
place where the surf was ’kua, nolaila, manao iho la o
breaking, the spirits called for all Kaulu ua make.
the sharks to come together and
take Kaeha and carry him to Hele aku la o Kaulu i kahi o ke
their king, Kukamaulunuiakea. kai e poi ana, a hiki o Kaulu,
This was a very large shark, his wehe i kona mai a hou i ke kai,
length and breadth were ua omo ia ke kai a pau i loko
unknown. When his mouth was ona, nolaila, waiho wale na ia i
opened the top jaw would reach ka maloo. Noke aku ana o Kaulu
to heaven while the bottom jaw i ka huli i na ia a pau loa, oia na
would be in the bottom of the mano, ka niuhi, ka lalakea, ka
sea; its body was entirely hihimanu, aohe loaa; noke keia
covered over with coral. As ma Kahiki-ku me Kahiki-moe i ka
Kaeha came in the presence of huli, aole loaa o Kaeha. Lele o
the shark, he was swallowed Kaulu a luna i o Makalii la, ninau;
whole. Kaulu at this time was not ia ia i hiki ai i o Makalii la, e moe
on his guard which was the ana o Makalii i luna ke alo, iniki
reason [528]why his brother was ana o Kaulu i ka puukole. Olelo
successfully carried away. After iho: “Make e Makalii; heaha kau
a while Kaulu discovered that his huaolelo?” “O ko kaikuaana aia i
brother was missing, so he
inquired of the spirits where his loko o ka mano. I aku o Kaulu:
brother had gone to. Upon being “E hai mai oe ia’u?”
told that they knew nothing about
him, Kaulu then felt that he was Ia Kaulu e ninau ana ia Makalii,
dead. He then proceeded to the ku ana o Koeleele me ka pohaku
seashore, stooped down and nui (ua oi ae mamua o Maui
drank up the sea so that all the kona nui), o Ikuwa ka inoa, he
fish were stranded, dry. Kaulu kaikaina no Makalii, he kanaka
then began to make a search for huhu a me ka ikaika loa. Hoolei
his brother in all the different iho la ia i ka pohaku i luna o
man-eating fish, the common Kaulu. Koo ae ana o Kaulu i ka
shark, the tiger shark and the manamana miki poi, paa ka
hihimanu, but he was unable to pohaku i luna. Olelo aku o
find him. He then searched in all Kaulu: “Ea, paa ka hoi ka
the four corners of the sea and pohaku a ua kanaka ikaika?”
still Kaeha was not to be found. Lohe o Koeleele, holo, oia kona
Kaulu then flew up to Makalii to mea i pakele ai ia Kaulu. Olelo
enquire of him for the aku o Kaulu: “E hai mai oe ia’u i
whereabouts of Kaeha. When he ka mano nana i nahu, a me kona
came up to Makalii he found him wahi i noho ai.” Nana o Makalii,
lying down with his face turned aohe ike ia o lalo nei, nolaila,
up. Kaulu then pinched his mons pupuhi ia i ke kukui a malino o
veneris at the same time calling lalo nei, ike ia ka mano nana i
him: “Dead you are, Makalii. nahu; kuhikuhi mai o Makalii, aia
What have you to say?” Makalii i ke koa e ulu ana a manamana.
replied: “Your oldest brother is in
a shark.” Kaulu asked: “Tell me
of him.” While Kaulu was asking
these questions of Makalii,
Koeleele, a younger brother of
Makalii, came in with a large
rock, called Ikuwa, which was
larger than the island of Maui.
Koeleele was a man who had a
very bad temper and he was a
very powerful man. At sight of
Kaulu he threw the rock at him,
but Kaulu braced up his fore- or
poi finger and held the rock up
and then said: “Say, the rock
from the mighty one is held up,
isn’t it?” When Koeleele heard
this he ran away, thus saving
himself from Kaulu.
Kaulu then asked of Makalii: “Tell

me the shark that swallowed my
brother and also the place where
the shark lives.” Makalii then
looked, but he was unable to see
anything below them, so he
chewed some kukui nuts and
blew the oily substance over the
atmosphere beneath them which
caused it to be clear and he was
thus enabled to locate the shark
which had swallowed Kaeha.
Makalii then pointed him out to
Kaulu at the same time saying:
“It is the one overgrown 6 with
coral.”
Upon the arrival of Kaulu at the A hiki o Kaulu, ninau iho la i ke

place and found the mass of koa e waiho ana: “Ua ike anei oe
coral, he asked: “Have you seen i kuu kaikuaana?” Olelo mai ka
my brother?” The king of the mano alii, o Kukamaulunuiakea:
sharks, Kukamaulunuiakea, said: “Ua pau ia’u, eia i loko o’u ia e
“I have swallowed him, he is now waiho nei, ua lepo, ua kukae?” I
within me all digested.” Kaulu aku o Kaulu: “He ikaika no?” Ae
again asked the shark: “Are you mai ka mano: “Ae, o ko’u ikaika,
strong?” “Yes, I can reach the pili ke a luna i ka lani, o ke a lalo
heaven with my upper jaw and i ka honua.” E hamama mai ana
the bottom of the ocean with my o Kukamaulunuiakea, e koo ae
lower jaw.” Kukamaulunuiakea ana o Kaulu, paa o luna i ka lani,
then opened its mouth. As soon paa ke a lalo i ka honua. Kahea
as this was done Kaulu propped aku o Kaulu ia loko o ka opu o
it open while he called for his ka mano, e hele mai o loko i
brother to come out. Kaeha then waho, oili mai ana o Kaeha, ua
came out. His hair had all fallen helelei ka lauoha, ua ohule ke
off making him bald headed. poo. Make o Kukamaulunuiakea
Kukamaulunuiakea was ia Kaulu, lele kona hauli a kau i
thereupon slain by Kaulu and its ka lani, oia kela ia e kau nei o ka
spirit flew up to heaven and it huli ana o ke kau, i ke aumoe o
turned into the Milky Way 7 as ka po. Malaila e nana mau nei
seen at midnight, from ancient ko Hawaii nei mau kamaaina
time to the present day. Kaulu mai kawa kahiko a hiki i keia wa.
and Kaeha then returned and
Kaulu vomited out the sea water.
Kaeha was in front and Kaulu in
the rear, as the ocean was
restored. It is said that owing to
this action of Kaulu the sea
water became salty to this day.
When the spirits looked and saw Hoi mai la o Kaulu me Kaeha;
Kaulu and Kaeha returning, they mamua o Kaeha mahope o
said amongst themselves: “So Kaulu, ia wa, kuu o Kaulu i ka
Kaeha is not dead.” After this the wai i omo ia ai e ka mai ona, hoi
spirit again tempted Kaeha and hou ke kai a like me mamua. Ua
enticed him to go and play olelo ia ma keia kaao, ua
swing. So the spirits and Kaeha awaawa ke kai no keia hana ana
proceeded to where a swing was a Kaulu pela, oia kona awaawa
rigged up, when they remarked a hiki i keia la a kakou e ike nei.
to Kaeha: “You take the first ride Nana mai la ke ’kua ia Kaulu a
while we push the swing for me Kaeha e hoi aku ana, olelo
you.” While this conversation iho ke ’kua: “Aole ka i make o
was going on, Kaulu arrived and Kaeha.” Nolaila, hoopunipuni
in a cunning way said: “Say, if hou ke ’kua ia Kaeha, e hele e
you all wish to take a ride on the lele kowali. Hele aku la ke ’kua
swing, I will pull the [530]rope.” 8 me Kaeha a hiki i ke kowali, i
He then proceeded to instruct aku ke ’kua ia Kaeha: “O oe mua
them how to ride the swing. “In ke lele, e ka makou ia oe.” Ia
my country we ride the swing by lakou e olelo ana, ku ana o
sitting facing one another to the Kaulu, a olelo aku la me ka
full length or top of the rope; then maalea: “Ea ina oukou e
the swing is pulled and the makemake e lele kowali, na’u
pleasure begins.” In this way all [531]oukou e ka.” Penei ka Kaulu
those spirits were killed, by the olelo i ke ’kua: “Ka lele kowali o
swing breaking. When the ko makou aina, he huli alo ka
remaining spirits saw this trick noho ana o luna o ke kowali, he
played on them by Kaulu, they alo he alo, pela no e hoonoho ai
thought they would get even with a hiki i ka paa ana o luna, alaila,
him by again enticing Kaeha to ka ke kowali, lealea.” Ma keia
go with them for rod-fishing. On hana a Kaulu, ua pau loa ia poe
this fishing excursion Kaeha was akua i ka make, no ka moku o ke
killed and he was put in the shell kowali. Ike iho la ke ’kua i keia
of a bitter opihi, 9 the kind that hana a Kaulu, hoopunipuni hou
sticks to the smooth boulders. lakou ia Kaeha, e hele i ke
On missing Kaeha, Kaulu went paeaea, ka makoi. Ia hele ana o
in search of him until he Kaeha me ke ’kua, make o
discovered him in an opihi; but Kaeha, hoopili ia i loko o ka opihi
on account of its smooth surface awa, oia kela opihi kau i ka
he was unable to get the opihi paala. Huli o Kaulu a loaa o
from the boulder, so he urinated Kaeha i loko o ka opihi, oi hamo
on the opihi, which released wale o Kaulu aohe hemo o ka
Kaeha. This action caused all opihi, e mimi aku ana o Kaulu,
the opihi of this kind to become hemo o Kaeha, awaawa ia opihi
bitter to this day, and it has a hiki i keia la, nolaila, kapaia ka
always been known from that opihi awa, oia kela opihi e pili
day as the bitter opihi. ana i ka ala maloo, e olelo ia ana
he kukae la.
After Kaeha was brought to life
again by Kaulu they returned to Mahope o keia ola hou ana o
live on Oahu. When they arrived Kaeha ia Kaulu, hoi mai la laua i
at Papakolea, Moanalua, Kaulu Oahu nei e noho ai. A hiki laua
left Kaeha at this place while he ma Moanalua, i Papakolea,
continued on his way to hoonoho o Kaulu ia Kaeha ilaila;
Kapalama in search of Haumea. hele mai la o Kaulu a loaa o
Haumea was a spirit that lived at Haumea i Kapalama. He ’kua o
Niuhelewai, Oahu. It was a Haumea no Oahu nei, e noho
female spirit. Upon the arrival of ana ia i Niuhelewai, he wahine o
Kaulu he found Haumea asleep. Haumea. A hiki o Kaulu, e moe
Kaulu then called: “Say, ana o Haumea, olelo iho o Kaulu
Haumea, why don’t you get up, me ke kahea. “E Haumea, e
cook your food and afterwards Haumea, ka i no he ala, kahu ke
fight with Kaulu?” Haumea then o a moa, hakaka me Kaulu.”
sat up while Kaulu returned Noho o Haumea hoi kela. Lele o
home and then flew up to Makalii Kaulu a hiki i luna i o Makalii la,
who asked him: “What is it you ninau mai o Makalii: “Heaha kau
want, Kaulu?” “I have come for e Kaulu?” “He koko ka’u i kii mai
the net. 10 Give it to me so that I nei, e haawi mai oe ia’u i make o
will be able to kill Haumea.” Haumea.” Haawi mai la o Makalii
Makalii then gave him his nets, i na koko ana, ia Maoleha ma.
Maoleha and its mate. Kaulu
then returned and again found
Haumea asleep. Kaulu then Hoi mai la o Kaulu a hiki, e moe
surrounded the house with the ana o Haumea; hoopuni o Kaulu
nets, after which he called out to i ke koko a puni ka hale, kahea
Haumea: “Are you to continue on iho o Kaulu ia Haumea: “O ka
sleeping? Why don’t you get up moe no ka kau, ka i no o ke ala
and let us fight?” Haumea then ae e kaua kaua.” Ala ae la o
woke up and tried this way and Haumea, hou aku la ma kela
that to get out of the house. wahi keia wahi o ka hale,
Kaulu kept at some distance hoowalewale o Kaulu me ka holo
away from the house and ran ma o a ma o o ka hale o
around it. At seeing Kaulu Haumea; pela o Haumea i hou
running around, Haumea hewa ai a loaa na koko o
attempted to get after him and Maoleha ma, paa o Haumea i ka
was entangled in the net where puliki ia, a make iho la. Kii aku la
she was caught and killed. Kaulu o Kaulu ia Kaeha, a hoi aku la i
then went for Kaeha and they Kailua, ko laua aina hanau, kahi
returned to Kailua [Oahu] their o na makua e noho ana.
birthplace where their parents
were then living.
Lonokaeho was the king of O Lonokaeho ke ’lii o Koolau a

Koolau at this time and he was me Kailua, nona ka lae oi o
living at Kailua. He had a very Piokeanuenue. A hiki o Kaulu
prominent forehead and was imua o na kahu o Lonokaeho,
called Piokeanuenue. Soon after ninau aku la ia i na kahu: “Owai
the return of Kaulu to Kailua he hoi kela kanaka lae lapalapa?”
went to the king’s house and “O Lonokaeho.” Kahea aku la na
asked the king’s attendants: kahu ia Lonokaeho: “Kupanaha
“Who is that man with the sharp keia wahi keiki i amuamu mai nei
forehead?” “Lonokaeho,” replied ia oe.” “Pehea?” “Owai kela
one of the attendants. They then kanaka lae lapalapa?” I mai o
called for Lonokaeho, saying: Lonokaeho: “He ikaika no, o ka
“Here is a youngster who is hele ana mai i ko Lonokaeho
calling you names.” “What did he wahi?” I aku o Kaulu: “He wahi
say?” “Who is that man with the ikaika no, aole nae i mahuahua.”
sharp forehead?” Lonokaeho Pii ka lae o Lonokaeho a kiekie i
then said: “Are you strong, luna i ka lani, iho iho e make o
coming to Lonokaeho’s place in Kaulu, olelo ae o Kaulu penei:
this way?” Kaulu replied: “I have
a little strength but not much.”
Lonokaeho’s forehead then
ascended to heaven and came
down again, with the idea of
striking Kaulu and killing him; but
Kaulu said:
Say, Kaulu, turn down. E Kaulu e, awaa ia.

Say, Kaulu, stretch out. E Kaulu-e, kikoo-lia.
Say, Kaulu, double up. E Kaulu e, pupuu lia.
[There are] four single ones Eha kaukahi,
[And] four double ones. Eha kaulua.
[532] [533]
Kaulu’s hands then asked: “What Ninau ae na lima o Kaulu: “E

is it?” Kaulu replied: “The upper aha la?” “O ke a luna i luna, o ke
jaw, hold it up; the lower jaw, a lalo i lalo.” Paa ka lae o
hold it down.” Lonokaeho’s Lonokaeho i ka honua, ulu ka
forehead was thus made fast to ohia, ka mauu i luna, a make iho
the ground; the ohia trees and la o Lonokaeho, ma kela puu
the grass grew over him and kaulana o Olomana, e ku nei a
Lonokaeho was killed on that hiki i keia la.
famous hill of Olomana, which
stands to this day.
Kaulu and Kaeha then lived Noho iho la o Kaulu me Kaeha,

together until the death of a mahope make iho la o Kaeha,
Kaeha, when Kaulu took unto noho iho la o Kaulu a hoao me
himself a wife, Kekele by name. kana wahine, o Kekele ka inoa.
Kekele was a very handsome He wahine maikai o Kekele,
woman whose breath and skin aohe puu, aohe kee, he ala kona
were as sweet as the inamona. 11 hanu a me ka ili, ua like me ka
She was a very quiet woman. inamona, a he wahine noho
Her favorite flowers and vines malie loa ia. O kana puni ka
were the hala, maile, ieie and all hala, ka maile, ka ieie, na mea
the fragrant leaves. When she aala a pau loa. Ina e moe, lei pu
retired at night she used to sleep no me ka lei hala, ina e maloo ka
with her hala wreaths and would lei, lei no, a hiki i ka helelei ana.
wear them until they were dried Nolaila, ulu ka hala o Kekele a
up; therefore the hala at Kekele hiki i keia la. Noho iho la laua me
was planted for her and it grows Kaulu a hiki i ko laua make ana,
to this day. They lived as aohe loaa keiki. [532]
husband and wife until their
death without having any
children. [523]
1 Lewanuu and Lewalani; two spheres

of cloud land, Lewanuu being the
highest. ↑
2 This has reference to a figurative
power possessed by the hands,
referred to here as upper and lower
jaws. ↑
3 Momona, food; fat things of the land;
although the term momona is
generally used in qualification of food,
not food itself. ↑
4 Kikoo-lia, or ia; same as pupuu-lia,
or ia. ↑
5 Makalii, god of plenty. ↑
6 Ulu ana a manamana, growing and
branching. ↑
7 Here perhaps is the origin of the
term ia, fish, for the Milky Way, it
being the spirit of Kukamaulunuiakea,
the monster king of sharks. ↑
8 Ka, swinging by pulling, not pushing.
The Hawaiian swing was a single
rope, usually a cord of twisted
convolvulus vine kowali, written also
koali, hence its name. ↑
9 Opihi, a small limpet (Neritina
granosa). ↑
10 Koko, a net for carrying or hanging
calabashes. ↑
11 Inamona, a table delicacy from
pounded kukui nuts. ↑
[Contents]
Legend of Kaao no
Hoamakeikekula. Hoamakeikekula.
Hoamakeikekula was a very He wahine maikai loa o

beautiful woman and was very Hoamakeikekula, a he nani loa
pleasant to look upon. Her skin kona mau helehelena ke nana
was like the covering of the aku; o kona ili, ua like ia me ka ili
young banana shoot; 1 her eyes o ka Opuu-maia o ka hua hou
were like the weleweka 2 blossom ana iho; o kona maka, ua like
and her form was erect and me ka pua o ka weleweka, a o
faultless. Hooleipalaoa was the kona kino ua pololei a kina ole.
father, and Pili was the mother, O Hooleipalaoa ka makuakane,
and the land of o Pili ka makuahine, o
[Hoamakeikekula’s] birth was Oioiapaiho i Kohala ka aina
Oioiapaiho in Kohala. hanau; he mau alii lakou no
Hooleipalaoa and Pili were of Kohala i ka wa kahiko. Hapai o
very high chief rank of Kohala in Pili, a hanau he keiki kane, o
ancient time. Pili conceived and Waikuaala kona inoa, a nui,
gave birth to a son Waikuaala by hapai o Pili a hanau, oia ka mea
name. After he was grown up Pili kinaole o Hoamakeikekula. He
again conceived and gave birth kino ala o Hoamakeikekula,
to the faultless one, aohe kino maoli, kiola ia a ka
Hoamakeikekula. puainako e Pili, ko laua
Hoamakeikekula upon her birth makuahine, waiho.
was in the form of an ala (taro), 3
and not having human form was
thrown aside with a lot of sugar-
cane trash by Pili the mother.
Makapailu, the mother of Pili Aia hoi o Makapailu he

who was a great fortune-teller, in makuahine no Pili, he ano
a vision saw the spirit of kilokilo hewahewa kona, ma ka
Hoamakeikekula standing before hihio, ike aku la ia i ke kino
her; and on being asked: “What wailua o Hoamakeikekula e ku
does this beautiful young mai ana. Ninau aku la ia: “Heaha
woman, whom I have not seen kau e ka wahine ui maikai a’u i
before, want?” Hoamakeikekula ike ole ai mamua aku nei?” Olelo
answered: “I am your mai o Hoamakeikekula: “Owau
granddaughter who has been no kau moopuna kaikamahine i
thrown away by your daughter hoolei ia e kau kaikamahine e
Pili. I am the younger child, next Pili; ka muli hoi au o Waikuaala.
to Waikuaala, therefore I want Nolaila, e kii ae oe ia’u, aia au i
you to come for me. I am in a ka puainako, he kino ala ko’u, e
pile of sugar-cane trash in the wiki oe o pau au i ka ilio.” A lohe
form of a taro bulb. Make haste o Makapailu i keia olelo a kana
or I shall be devoured by dogs.” moopuna, ku ae la ia a hele aku
When Makapailu heard this call la me ka waimaka helelei.
from her grandchild, she rose
and started on her journey, Hiki aku la o Makapailu i ka
weeping. When Makapailu puainako, wehewehe ae la i ka
arrived at the pile of sugar-cane ainako, ia wa ku mai la imua ona
trash, she looked it over and lo he onohi i loko o ka ohu, a kau
she beheld a small rainbow in a pono mai la i mua ona; ia ia i
thick fog, which moved toward nana mau aku ai, paia ae la
her until it stood in her very kona mau maka, a nana iho la e
presence. As she kept gazing waiho ana he kino ano ala, lalau
thereon, her eyes grew dim and iho la ia a wahi i ka pukohukohu.
after a while she closed them. Hoi mai la ia a kona wahi, noho
When she looked again she saw iho la me kana kane o
a taro bulb; she took it up and Hawaimake ka inoa. Elua
wrapped it in a red kapa 4 and anahulu i hala o ka waiho ana o
returned home. Upon arriving at Hoamakeikekula [535]me ka nana
her home, she told her husband, ole ia aku, a hala ia, aia hoi,
Hawaimake by name of what wehe ae la o Makapailu i ka
she [534]had done. At the end of wahi o waho. Nana iho la ia i ke
twenty days the outside covering kino, aole he kina i loaa, ua nani
of the package was removed loa, a ua maikai ke nana iho.
and Makapailu looked and saw Nolaila, hookapu loa kona mau
that the taro had changed and kupuna ia ia, a paa mau i ka
was in the form of a very palama. Pela kona noho ana a
beautiful female child, one hala na makahiki he iwakalua,
without a blemish and very me ka ike ole o na mea a pau
pleasant to look upon. The loa, a me kona mau makua.
grandparents from this time on
brought her up with great He mea mau ia ia ka hele me
surveillance under very strict kona kahu i ke kui lehua, ma ka
kapu. 5 This was maintained until nahelehele ohia, me ka ike ole
she was twenty years of age, ia. Eha la i hala ia laua o ka hele
without the knowledge of ana i ke kui lei, hiki aku la laua
anybody, even her own parents. nei, i kekahi kula e aku, ua
After she grew up it was her haiamu i ka lehua; walea laua i
usual custom to go with her ka ako lehua me ka nanea, ku
attendant in the woods to string ana o Elepaio, he elele na
lehua blossoms into leis, without Kalamaula, ka moo alii o
the knowledge of any one. On Keawewai. He wahi manu o
their fourth day out in the woods Elepaio, he ano kanaka no nae i
to string wreaths of lehua, they kekahi wa. Kahea ana:
reached a section 6 in the thick
woods, a place to them unknown
where the lehua was plentiful.
While they were picking the
lehua there came Elepaio, the
messenger of Kalamaula, the
lizard king of Keawewai.
Elepaio 7 was a bird that changed
at times into a human form. It
called out:
The wi is at Waiaha, the wi is at I Waiaha ka wi, i Waiaha ka wi.

Waiaha. Ono ka ia, ono ka ia.
The fish is good, the fish is good.
Hoamakeikekula said to her I aku o Hoamakeikekula: “E, he

companion: “Say, there is a bird manu hoi keia e hea nei.” I mai
calling.” The attendant ke kahu: “He wi laau paha, he
answered: “Perhaps it is the makani paha, e hoolohe kaua.”
squeak of a tree rubbing one E kani hou ana ua wahi manu
against another, or it may be the nei:
wind. Let us listen.” The bird
again sang out:
The wi is at Waiaha, the wi is at I Waiaha ka wi, i Waiaha ka wi.

Waiaha. Ono ka ia, ono ka ia.
The fish is good, the fish is good.
Hoamakeikekula upon hearing I aku o Hoamakeikekula: “Aia hoi

the call the second time said: paha la, he manu.” Huli aku la
“There you see, it is a bird.” So laua e nana pono, ia laua i
the two looked more closely. hoomau aku ai i ka nana, loli ae
While they continued watching la ke ano o ka manu a lilo i
the bird, it changed its form and kanaka. Ku ana he keiki ui
assumed that of a human being. opiopio, i mai la: “Aloha olua,” a
There stood a young man of no ka ike ana mai i ka wahine
handsome appearance who maikai o Hoamakeikekula, kau
said: “My greetings to you two.” mai la kela, i ke mele me ke
But when he saw the beauty of kaona pu:
Hoamakeikekula he chanted and
interpreted the following mele:
Haili, the plain of lehua [flowers] O Haili kula lehua,

Where the birds twine them into I wili ia e ka manu,
wreaths. O ka oo kani leo lea,
The oo with its sweet note I ka nahele o Hilo,
In the leafy dell of Hilo; O ka pololei kani kuamauna
Like the voice of the Achatinella Ke lawe la ke awa,
Gathering the awa 8 Kau laau o Puna.
That grows on the trees in the
forests of Puna.
Upon hearing this the attendant Ia wa, olelo aku ke kahu ia

said to Hoamakeikekula: “Let us Hoamakeikekula: “E hoi kaua,
return home; the time for ua pau ka wa kui lehua. E inoino
stringing wreaths is ended. Your mai auanei ka mano ou kupuna
grandparents will be worried if ia kaua i ka loihi loa.” Ia laua i eu
we remain much longer.” As they mai ai e hoi, e olelo ae ana o
were about to return, Elepaio Elepaio i ka ohu:
spoke to the fog:
Ye fog that creeps in the upland, E ka ohu kolo mai i uka

Ye fog that creeps seaward; E ka ohu kolo mai i kai,
Ye ugly seas, ye mad seas, E kai pupuka,
Ye kapu-breaking seas. E kai hehena,
[536] E kai piliaiku.
[537]
At this the fog came down and Ia manawa uhi ka ohu, paa ka

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Acknowledgements Cengage Learning New Zealand

End-of-Chapter image: Tolimir

2 Developing a business plan: Cost–volume–profit analysis ...................................................... 44

Appendix: CVP analysis for cups of coffee .......................................................................86

3 Developing a business plan: Applied budgeting..................................................................... 94

4 The accounting system: Concepts and applications............................................................... 132

5 Recording, storing and reporting accounting information ..................................................... 179

6 Internal control: Managing and reporting working capital ................................................... 226

7 The income statement: Components and applications........................................................... 263

Appendix: Calculating the cost and the amount of inventory .............................................299

8 The balance sheet: Components and applications ................................................................ 308

9 The cash flow statement: Components and applications ....................................................... 352

10 Sustainable and profitable business practices ...................................................................... 398

11 Short-term planning decisions ............................................................................................. 440

12 Capital expenditure decisions.............................................................................................. 473

Chapter 1 Introduction to business accounting and the role of professional skills...................... 1

Chapter 2 Developing a business plan: Cost–volume–profit analysis ...................................... 44

Chapter 3 Developing a business plan: Applied budgeting .................................................... 94

Chapter 4 The accounting system: Concepts and applications .............................................. 132

Chapter 5 Recording, storing and reporting accounting information .................................... 179

Chapter 6 Internal control: Managing and reporting working capital.................................. 226

Chapter 7 The income statement: Components and applications .......................................... 263

7.4 Defining and classifying expenses ........................................................... 274

Chapter 8 The balance sheet: Components and applications................................................ 308

Chapter 9 The cash flow statement: Components and applications....................................... 352

Chapter 10 Sustainable and profitable business practices ..................................................... 398

Chapter 11 Short-term planning decisions ............................................................................ 440

Chapter 12 Capital expenditure decisions............................................................................. 473

Two great ingredients that brew one great text

Sometimes you feel like a debit, sometimes you don’t

The house roast (the approach of this text)

First things first

The simpler things

Short black or cappuccino with extra foam (a scaffolded approach)

New and improved flavour

Orientation of the Book

Framework of the Book

Sharelle Simmons, Leaders Institute

Accounting, Management Accounting, Strategic Management Accounting, Accounting Information

Doctor Christina James, University of Southern Queensland Christina (BA(Hons),

Suppliers Carriers Manufacturer Carrier Coffee shop

Stop & think

What factors are affecting

Exhibit 1.2 Factors affecting the complexity of the business environment

Evolving forms Technological

Getty Images/Monty Rakusen

The successful businessperson What are three

Stop & think

The language of business

1.2 Business enterprise categories 4

What are the three main

The relationship between types of

Exhibit 1.3 Relationship of manufacturing and merchandising businesses