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Accounting A Level P3 Flashcards

(48 cards)

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1
Q

goodwill + types (2)

A

the difference between the purchase price of the business over the net assets of the business when it is sold as a going-concern entity (intangible assets)

  1. Purchased goodwill Arise when one business buys another, if the purchaser pays more for the business than the net book value of its assets and its difference is goodwill.
  2. Inherent goodwill
    Goodwill which has not been paid for and doesn’t have objective value; usually will be written off immediately in the accounts when the change in the partnership occurs.
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2
Q

factors that affect goodwill (5)

A
  • location
  • customer loyalty
  • staff loyalty
  • brand
  • skill of management
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3
Q

purpose of clubs & societies

A

not to make profit but to promote the members’ cultural, social and recreational interests to the community.

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4
Q

difference in terms for clubs & societies

A

Capital = Accumulated Fund

Income Statement = Income & Expenditure

Profit/(loss) for the year = Surplus/(deficit) for the year

Bank account / Cash Book = Receipts & Payments account

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5
Q

accumulated fund

A

total surplus of funds built up over time used to finance future activities and expenses.

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6
Q

reasons why a business may account for manufacturing profit (3)

A
  • to determine pricing decisions
  • track how much profit is made from production before selling goods
  • evaluate factory performance
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7
Q

IAS 2

A

Inventories

inventories should be valued at NRV and at lower of the cost

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8
Q

IAS 10 + treatment + examples + concept

A

Events after reporting date (prudence)

adjusting events: adjust in FS (bad debts DR, trec CR)

non adjusting: not adjusted, disclosed by way of notes (natural disasters)

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9
Q

IAS 16 + treatment

A

Property, plant & equipment (handles how to value, record, and depreciate NCA)

prepare NCA schedule

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10
Q

IAS 36 + treatment + journal entry

A

impairment of assets

ensures that a company’s assets are recorded at their recoverable amount

impairment loss (DR) NCA (CR)

ensures that a company’s assets are recorded at their recoverable amount

NBV > fair value = impairment loss

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11
Q

IAS 37 + treatment + journal entry + examples

A

Provisions, contingent assets & liabilities

  1. probable (>50%)
    adjusted in the FS and disclosed by way of notes
    examples: legal cost (dr) other payables (cr)
  2. possible (<50%)
    disclosed to the notes
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12
Q

the need for an ethical framework in accounting

A

to ensure transparency, honesty, and fairness in financial reporting

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13
Q

why should a company comply with IAS (3)

A
  • to ensure true & fair view of the financial statements
  • forms the auditor’s opinion
  • used to assess whether an investor should continue their investment
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14
Q

role and responsibilities of the auditor (2)

A
  • provides reassurance ot trade holders that the business is providing financial statements with true & fair view
  • to check for any fraudulent activities
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15
Q

differences between an external audit and an internal audit (3)

A

internal:
- employees
- reviews business practices to prevent mistakes
- report to senior management

external:
- external independent persons
- examine financial statements to ensure true & fair view
- report to shareholders

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16
Q

difference between a qualified and unqualified audit report

A

A qualified audit report indicates issues or limitations in financial statements

unqualified audit report confirms they are accurate and comply fully with accounting standards.

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17
Q

stewardship (2)

A
  • directors manage the company on behalf of shareholders
  • directors are accountable and report to shareholders
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18
Q

shareholders vs directors (3)

A

shareholders:
- owners of the company
- not involved in operations
- makes decisions in the AGM in regards to directions & external auditors appointment

directors:
- the steward/managers of the company
- responsible and involved in daily operations
- makes daily decision regarding the operating, investing, and financing activities of the company

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19
Q

why aren’t sole traders required to do audits 


A
  • they are not listed in the stock exchange
  • owners of their own company
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20
Q

intangible asset 


Study These Flashcards
A

an identifiable non-monetary asset with no physical manifestation where future benefits are expected

21
Q

why are audits addressed to shareholders and not directors (2)

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A

they are appointed by shareholders in the AGM

auditors are accountable to shareholders

22
Q

advantages & disadvantages of an audit (2)

Study These Flashcards
A

advantages:
- increases reliability
- better decision making for investor

disadvantages:
- costly
- sole traders don’t need

23
Q

purpose of merger

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A

to combine resources, expertise, and market share to create a stronger, more competitive new business entity

24
Q

advantages and disadvantages of the acquisition or merger (3)

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A

pros:
- EOS
- increased market share
- access to resources

cons:
- culture clash
- employee redundancies
- Customer & Supplier Disruptions (loss of)

25
process of transferring the business accounts to a computerised accounting system (4)
- prepare data - train & test employees & system - Operate both manual and computerized systems simultaneously for a trial period to compare results and ensure reliability. - monitor
26
ways in which the integrity of the accounting data can be ensured during the transfer to a computerised accounting system (2)
- verify data accuracy (cross check with real data) - conduct parallel accounting (Run both manual and computerized systems simultaneously for a period to compare results)
27
advantages of ratios
(3)
- used for benchmarking - for manager to use as a evaluation of efficiency - to evaluate financial performance decision making
28
limitations of ratio analysis (4)
- must be timely to be of use - ratios don't explain the reasons behind the values - don't recognise external factors - one is likely not enough
29
solvency ratios (4)
working capital cycle (days): t/rec turnover + inv turnover - t/pay turnover (all in days) net working assets to revenue: (inventories + t/rec - t/pay)/rev interest cover (times): profit from operations/interest payable gearing ratio: NCL/issued OS + reserves - NCL
30
investment ratios (5)
earnings per share: PFTY/#OS price earnings ratio: market price per share/EPS dividend per share: dividend paid/#OS - dividend paid = interim dividend paid + final dividend proposed dividend yield: (dividend per share + proposed) / market price per share dividend cover: PFTY - preference share dividend / dividend on ordinary shares OR EPS/dividend per share
31
profitability ratios (6)
GP margin: GP/rev mark-up: GP/COS Profit margin: profit/rev ROCE: profit from operations/capital employed - capital employed = issued share + reserves + NCL expenses to revenue ratio: expenses/rev operating expenses to revenue ratio: operating expenses/rev
32
how to convert loans to debenture

loan amount x (% on loan / % on debentures) = debenture
33
reasons for partnership dissolution (3)

death of partner disagreements partnership making a loss
34
why a partner may provide/charge interest on drawings and capital
(2 each)
drawings: - prevent overdrawing - prevent bank overdraft and maintain liquidity capital: - give return on investment for investment - increase liquidity
35
no partnership agreement (3)
- equal share profit ratio - no interest on drawings, capital, and salary - interest on loan at 5%
36
items included in the appropriation account before the division of residual profit
(3)
- interest on drawings - interest on capital - partner's salary
37
ways a partnership could raise funds
(4)
bank loan loan from family members partner contributing additional capital selling of non current assets
38
advantages & disadvantages of new partner
(2)
advantages: - synergy - share responsibilities and risk disadvantages: - shared profits - longer decision making - risk of disagreements
39
why would partners have seperate capital & current accounts
(5)
- to facilitate for the calculation of interest on capital & drawings - shows the impact of any changes in capital - shows the permanent investment - identify excessive drawings - shows the amount of drawings compared to the share of profit
40
why partners may not maintain a goodwill account when they admit a new partner
(2)
goodwill is eliminated in the capital accounts so that it will not be shown in the SFP as if the business is going to be sold as a going concern prospective buyers may not agree with the goodwill value as it is subjective
41
why would a partnership adjust goodwill when they admit a new partner

to reward existing partners for growing the business up to its current state
42
why the information in the statement of cash flow is important to shareholders
(2)
they need to know if... - the business has enough cash to fund its operations, so that they can generate enough profits to provide returns to shareholders - the business has enough cash to pay its obligations, so that the business won't go bankrupt and there is less risk of investors losing their investment
43
why would a business prepare a statement of cash flow?
(3)
- legal requirement for some limited companies - shows how cash & cash equivalents have been used and generated - links the two balance sheets of cash & profit
44
difference between statement of cash flows & cash budget

statement of cash flow: historical financial report that shows actual cash inflows and outflows from operating, investing, and financing activities over a specific period cash budget: financial plan that estimates expected cash receipts and payments to ensure sufficient liquidity for future operations.
45
why are bonus issues funded from share premium and general reserves only?

- to keep reserves in their most flexible/distributable form - to use capital reserves before revenue reserves
46
why can a business make a profit but still have an overdraft

profit is not cash, even if the business has made enough profit, it may not have generated enough cash to cover major expenditures, leading to a bank overdraft.
47
why should life membership be credited in the income & expenditure account for a long period of time
 (2 concepts)
matching & prudence
48
why should a club capitalise their donations (3)
- set up/allocated for a specific purpose - not part of regular income - the amount received is not fixed

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