IMPORTANT Flashcards
Inventory Valuation Questions and how to do them
Create a table
Columns: Date, Purchases, Sales, Balance (Within each of PS&B you should have 3 extra columns that say: Quantity, price per unit, value)
Balance column should measure the difference between purchases and sales.
Rows: Different dates. Cost of Sales and Closing Inventory at bottom
Summary: should be a summary table which includes: Cost of Sales, Closing Inventory, Sum of Debit Balance
Sum of debit balance should always be the same for LIFO, FIFO, Weighted Average
Statement of Cash Flows:
Two methods of calculating Operating Cash Flow
Direct Method: Subtract cash payments from cash receipts in the given period
direct method layout
Cash recieved from Customers: Sales + decrease in accounts recievable
Cash Paid to Suppliers = CoGS + Increase in Inventory + dECREASE IN aCCOUNTS pAYABLE
Cash paid for Operating Expenses
Cash paid to employees
Interest
Corporation Tax
Indirect: Take net income from the Income Statement and add back Depreciation & other non-cash expenses, + changes in working capital (current assets - current liabilities). If not given income statement, you should construct one from info given e.g. Balance Sheet
What is the opposite double entry for both Inventory and Purchases
Cost of Sales
So if you are doing T Accounts and need to debit Inventory, you should credit Cost of Sales
Absorption Costing Profit Statement
Sales - Multiply sales volume by price per unit
Opening stock
Production costs (treat the same as purchases in CoGS calc)
Closing stock
Calculate CoGS
Over/under absorption
Adjusted cost of goods sold (CoGS add/less over/under absorption amount)
Gross Margin
Other expenses
Profit
Overhead Analysis Sheet
Create a table with columns being:
- Cost (include all indirect costs)
- Base (what you have decided to base the cost on e.g. the rent cost you might attribute to the Square Meterage number you’re given)
- the different departments
Total
Once you’ve created that you then need to do your absorption costing. It will say: 40% of this departments time is spent on this department so allocate the cost accordingly to get a FINAL COST FIGURE FOR EACH DEPARTMENT.
This is done through another table with column titled:
Indirect costs from above
Absorption from XYZ department
Total
3 Ratios to determine cash operating cycle
Inventory days: (average inventory / cost of sales) x 365
Recievables days: (average receivables / credit sales) x 365
Less payables days: (average payables / credit purchases) x 365
Averages calculated by using: opening balance + closing balance / 2 w.g. Opening inventory + closing inventory / 2
Cash operating cycle
Measures how quickly cash spent on inventory is recovered when that inventory is sold
NPV Long Questions
Divisible and non-divisible
Create table for each project with: Year, Cash flow, discount rate, Present Value
Find NPV and Benefit Cost Ratio (NPV/Initial Outlay) of each project.
Rank based on BCR.
If divisible, allocate fund to best two that can afford, and then a percentage of the project that cant be fully completed. E.g if have £10,000 left over for a project that requires outlay of £50,000 and find the NPV of that project, which would be NPV /5.
Add all NPVs together to give total NPV.
INDIVISIBLE PROJECTS
Create every single combination of the projects and calculate NPV for these projects. Take the project with highest NPV
Key Factor Analysis
Find constraining
factor
Find contribution per unit (revenue-variable costs) and then divide this by constraining factor. This gives us contribution per unit of the constraining factor.
Rank the products by this.
Allocate accordingly.
Key Factor Analysis
Find constraining
factor
Find contribution per unit (revenue-variable costs) and then divide this by constraining factor. This gives us contribution per unit of the constraining factor.
Rank the products by this.
Allocate accordingly.
Open ended 15 marker:
- Accrual accounting
- Prudence
- Matching
Going Concern
Accounting control system - different types of errors and how to correct them
Accrual accounting: Matches transactions to the period they were registered, regardless of whether cash has flowed
Prudence: exercise of caution when making a decision in uncertain conditions
Matching: Matching transactions to their period
Going concern: The assumption that an entity will continue to operate in the foreseeable future
Accounting control system - different types of errors and how to correct them. The 2 main control accounts are the Sales Ledger Control Account and the Purchase Ledger Control Account
These simply summarise the totals of the trade receivables general ledger and trade payables general ledger
Accounting Control System
+ 4 Common errors and how to correct them
The 2 main control accounts are the Sales Ledger Control Account and the Purchase Ledger Control Account
These simply summarise the totals of the trade receivables general ledger and trade payables general ledger.
Common errors: Error of omission (missing something
Error of commission (entry to wrong subsidiary ledger)
Error of principle (entry to wrong type of account)
Compensating errors (two different types of error of equal amount that cancel each other out)
Advantages of using control accounts
3
Detection of errors: if the balance on the control account is not equal to the total of the subsidiary ledger then one mistake must have been made
Instant information: A running summary of trade receivables and payables gives instant info on what is owed
Prevention of fraud: Duties of the general ledger and subsidiary ledger can be segregated, reducing the likelihood of one person committing fraud
How does absorption costing assist decision making?
3
Provides information for making economic decisions I.w. Profitability
Justify costs
Measuring income for external parties
Pros of absorption costing vs Marginal costing
3
Recognises importance of Fixed Manufacturing Overhead in production costs
Conforms to international financial reporting standards (marginal costing doesn’t)
More realistic view of seasonal businesses as fictitious losses when production is built outside of sales seasons are avoided (marginal costing doesn’t
