CIMA: BA3 Flashcards
(143 cards)
1
Q
What are the types of business entities?
A
Sole Trader: Business owned and managed by one person. The owner contributes the capital, benefits from all profits and is responsible for all liabilities.
Partnership: Business owned by 2 or more people. Partners contribute Capital, profits are shared according to agreement & are jointly liable for any liabilities.
Limited Liability Company: The owners (Shareholders) and managers (Board of Directors) of the business are separate. The shareholders may receive profit share in the form of dividends. Liability is limited to their individual investment.
2
Q
Bookkeeping vs Accounting?
A
Bookkeeping: The recording of monetary transactions in a business.
Accounting: The process of recording, analysing & summarising the transactions of a business.
3
Q
Who could be users of financial information?
A
Investors
Managers of business
Customers
Suppliers
Lenders
Tax Authorities
Government and their agencies
The public.
4
Q
What are the criteria of Financial Accounting?
A
Solely concerned with summarising historical data.
Use same information as management accounts but in different ways.
External users have different interests from Managers.
Prepared under constraints that do not apply to management accounts.
5
Q
What is the separate entity concept?
A
Always treat business as a separate entity from it’s owners.
Personal transactions of the owner should never be mixed with business transactions, regardless of the type of business entity.
6
Q
What is the Statement of Profit / Loss?
A
A record of income generated and expenses incurred over a given period.
7
Q
What is the statement of financial position?
A
A list of all the assets owned & liabilities owed at a particular date.
8
Q
How to calculate gross profit?
A
GP = Revenue - Cost of Sales
9
Q
How to calculate Cost of Sales?
A
Cost of Sales = Opening inventory + Purchases - Closing inventory
10
Q
How to calculate net profit?
A
NP = Gross profit - expenses
11
Q
What is an asset / liability / capital?
A
Asset: Something valuable which a business owns or has use of ( Factory, Inventory, Cash)
Liability: Something owed to somebody else. (Bank loan, Payables, Tax)
Capital: Funds which belong to the owners. (Capital = Cap Contribution + Profit - Drawings)
12
Q
What is capital expenditure vs revenue expenditure?
A
CAPEX = Acquisition of non-current assets, or an increase in pre-existing NCA’s earning capacity.
Revenue Expenditure = Expenditure incurred for the purpose of trade or to maintain the existing earning capacity of NCAs.
13
Q
Capital income vs Revenue Income?
A
Capital income: Sales proceeds from NCAs.
Revenue Income: Sales, interest received, dividends received.
14
Q
What are the advantages of coding systems?
A
Unique
Saves time
Saves storage space
15
Q
What is the accounting equation?
A
Assets = Opening capital + profit - Drawings + Liabilities
16
Q
What are examples of source documents?
A
Sales & PO
Delivery Notes
Invoices
Credit Notes
17
Q
What are the books of prime entry?
A
Sales & Sales returns day books
Purchase & Purchase returns day books
Cash & Petty Cash books
18
Q
What are the Sales & Purchase day books?
A
Sales day book: Used to keep a list of invoices sent out to customers each day.
Purchase day book: Used to keep a record of invoices a business receives.
19
Q
What is the cash book?
A
Cash book: A record of cash receipts and payments.
20
Q
What is the imprest system of petty cash?
A
The imprest system is a method of controlling petty cash using a voucher system to an agreed preset limit.
Cash still held in petty cash + Voucher payments = Agreed sum/float.
21
Q
Which day book is summarised and posted to the nominal ledger?
A
Cash book - Receipts
22
Q
What is a nominal ledger?
A
An accounting record which summarises the financial affairs of a business. (Sales, Rent, Inventory, PPE accounts)
23
Q
What are the principles of double entry bookkeeping?
A
Every accounting transaction has two equal but opposite effects.
I.e Every transaction must have a debit and a credit.
24
Q
What do debits signify?
A
An increase in an Expense
An increase in an asset
A decrease in a liability
25
What do credits signify?
An increase in income
An increase in a liability
A decrease in an asset
26
What would be the transactions if a business sold goods for £700 to a credit customer?
Debit: Receivables £700
Credit: Sales £700
27
Where are the totals from the nominal ledger posted after period end?
They are posted to the Trial Balance.
These numbers should balance. I.e Debits should equal the Credits.
If they don’t balance there has been an error in the double entry.
28
What balance is brought down in the nominal ledger at the start of the next financial period?
Petty cash
29
What are PPE?
PPE are tangible items that:
A) Are held for use in the production of supply of goods/services.
B) Expected to be used during more than one period.
30
What is the accounting entry for a purchase of a non-current asset for cash?
Debit: NCA Cost (SOFP)
Credit: Bank (SOFP)
31
What are tangible NCA?
Non-current assets are assets what are used in the business on a continuing basis.
They are capitalised on the SOFP and dedicated to reflect the cost to the business of using the asset.
32
What can be included in the cost of PPE?
- Purchase Price
- Any directly attributable costs.
Eg Delivery costs, costs of construction, site preparation, installation and assembly, testing, professional fees.
33
What is depreciation?
The process of spreading the original cost of a non-current asset over the useful life of the asset.
34
How is depreciation accounted?
Charged annually - recognised in an accumulated depreciation account in SOFP.
This account is a credit balance and reflects the amount of the assets original cost which has so far been written off.
35
How to calculate depreciation?
Straight line: Cost - Residual Value / Useful life.
Reducing balance: Depreciation rate % x Carrying amount.
36
What is the double entry for depreciation?
Debit: Depreciation Charges (SPL)
Credit: Non-current asset accumulated depreciation.
37
How to calculate the revised charge following a change in the useful life of an asset?
Carrying amount at that date / Remaining useful life.
38
What are the complete double entry’s for a disposal of a NCA?
Step 1: Eliminate cost & Acc Dep’n:
-Debit: Disposals (SPL)
-Credit: NCA Cost (SOFP)
-Debit NCA Acc Dep’n (SOFP)
-Credit: Disposals (SPL)
Step 2: Account for Sales Proceeds:
-Debit: Bank (SOFP)
-Credit: Disposals (SFP)
Step 3: Transfer any balance on Disposals account to SPL.
39
What is the asset register?
A list of all non-current assets owned. It assist in the reconciliation of carrying amount of the assets to the nominal ledger and is important for Audit purposes.
40
How to recognise a revaluation gain?
Debit: Non-Current Asset Cost (Revalued amount - Original Cost.)
Debit: Accumulated depreciation (Total Dep’n to date)
Credit: Revaluation surplus (Revalued amount less carrying amount)
41
Where are revaluation gains/losses recognised?
Gains: Recognised in other comprehensive income.
Loss: Reverse/Offsets any past gains in other comp income, any excess goes to SPL
42
Do we subtract the residual value when calculating depreciation using the reducing balance method?
NO - it’s already included in the % rate
43
How are intangible assets identified?
Identifiable:
Can be sold seperately without selling the business.
Or
Arises from a contractual or legal right.
44
When should an intangible asset be recognised?
Recognise when:
It’s probable that the expected future economic benefits that are attributable to the asset will flow to the entity.
And
The cost of the asset can be measured reliably.
45
How to measure intangible assets purchased separately?
Measure at cost.
Examples: Licences, Patents, Trademarks.
46
What is goodwill?
Goodwill: The excess of the value of a business over it’s individual assets and liabilities.
47
What is purchased goodwill and how is it treated?
Definition: Arises on the acquisition of another entity.
Treatment: It’s capitalised as an intangible and tested annually for impairment.
48
How is internally generated goodwill treated?
It is not recognised as cannot be measured reliably.
49
Examples of internally generated assets not to be recognised?
Brands
Mastheads
Publishing titles
Customer lists
50
How are research costs treated?
Treatment: Research costs are written off as an expense in SPL as they’re incurred.
51
When can development costs be capitalised?
P: Probable future economic benefits will be generated.
I: Intention to complete and use/sell asset.
R: Resources are available to complete the asset
A: Ability to use/sell asset.
T: Technically feasibility of completing the asset.
E: Expenditure can be reliably measured.
52
How are intangible assets with indefinite useful lifes treated?
They should not be amortised but should be reviewed each year for impairment.
53
What is carriage inwards vs outwards?
Carriage inwards: The cost paid by the purchasers of having goods transported into his business.
It’s added to cost of purchases.
Carriage outwards: Cost to the seller, paid by the seller of having goods transported out to customer. (Selling expense to seller)
54
What are the year end entries for inventory account?
Debit: Closing inventory (SOFP)
Credit: Closing inventory (SPL)
55
How should inventory be valued?
Inventory should be valued at the lower of cost and net realisable value.
56
What constitutes inventory cost?
- Cost of purchase
- Cost of conversion (Includes Labour)
-Costs bringing inventory to current location & condition.
Exclude: Storage costs and selling costs
57
What constitutes inventory NRV?
NRV is the net selling proceeds after deduction of any completion costs.
Estimated selling price
Less estimated costs of completion
Less estimated selling and distribution costs.
58
What are the 3 inventory valuation methods?
FIFO (First in first out): Remaining inventory relate to the most recent purchases/production.
Average cost: Weightged average calculate each time new items are purchases
LIFO: (Last in Last out): Remaining inventories relate to the oldest/earliest purchases.
*Where prices rise FIFO tends to give higher inventory values and higher profits*
59
What is the double entry when an owner takes goods out of the business?
Debit: Drawings
Credit: Purchases.
Drawings are always valued at their cost price.
60
How to calculate cost of NCA which included part ex?
Cost = Amount paid + part ex figure.
61
Why should a trial balance be extracted from ledger accounts prior to preparing final accounts?
It confirms the arithmetical accuracy of the entries made in the ledger accounts.
62
How to account for a definite irrecoverable debt?
Debit: Irrecoverable debts expense
Credit: Recievables
63
How to account for irrecoverable debits written off and subsequently paid?
Debit: Bank
Credit: Irrecoverable Debts Expense.
64
How do we account for allowance for receivables?
Debit: Irrecoverable debts expense
Credit: Allowance for receivables
Note: Only the movement in the irrecoverable debt allowance needs to be accounted for.
65
What are accrued expenses?
Expenses incurred by the business during the accounting period. But which are unpaid at the period end.
66
What is the double entry for accrued expenses?
Debit: Expenses
Credit: Accruals
67
What are prepaid expenses?
Expenses that arise when a. Business has paid for an expense but the period has not been used at period end.
(Expenses paid for in advance)
68
What is the double entry for Prepayments?
To remove full amount from expenses:
Debit: Prepayments
Credit: Expenses
To release in the accounting period cost relates to:
Debit: Expenses
Credit: Prepayments.
69
What is accrued income?
Accrued income occurs when income has been earned during the accounting period but has not been invoiced or received by period end.
70
What is the double entry for accrued income?
Debit: Accrued Income
Credit Income
71
What is prepaid income?
This occurs when income is received in advance of it being earned. It’s also called deferred income.
72
What is the double entry for prepaid income?
Debit: Income
Credit Prepaid income
This will then be reversed at the next accounting period.
73
What is sales tax?
An indirect tax levied on the sale of goods/services.
74
What is output vs input sales tax?
Output: Sales tax charged by the business on goods/services
Input: Sales tax on purchases made by the business.
If output > input = Pay to tax authorities.
If Input > output = Refund due from tax authorities.
75
How to calculate sales tax?
Sales tax = Net amount x Rate of sales tax.
76
What are the sales tax rules for Credit Sales?
- Include sales tax in sales day book
-Include gross receipts from receivables in cashbook
-Exclude sales tax element from revenue in the SPL.
-Credit sales tax control account with sales tax from credit sales.
77
What are the sales tax rules for Credit Purchases?
-Include sales tax in purchases day book
-Include gross payments in cash book
-Exclude recoverable sales tax element from purchases/expenses in SPL
-Include irrecoverable sales tax element from purchases/expenses in SPL
-Debit sales tax control with sales tax from credit purchases.
78
What are examples of discounts?
- Trade discounts
- Bulk discounts (Calculate on the amount after trade discounts)
-Settlement discount (Calculated on the amount after all discounts.)
79
What are zero rated & exempt supplies?
ZERO:
-Zero rated supplies are charged sales tax at 0%.
-Businesses which make Zero rated supplies can still recover input sales tax on purchases.
Eg Basic foods, books, newspapers.
EXEMPT:
-Not taxable supplies
-Business which only make exempt supples cannot reclaim input sales tax.
Eg: Betting, gaming, finance & banking services.
80
What are the payroll deductions?
Statutory: Income tax & NI
Voluntary: Pension, trade union fees.
81
How to calculate the full cost to employer of employing an employee is?
Gross Pay + Employers social security contribution + Employers pension contribution.
82
A company has been notified that a customer has been declared bankrupt. The company had previously made an allowance for this debt. What is the double entry?
Debit: Irrecoverable Debts Expense
Credit: Trade receivables
83
How to calculate charge for receivables expense in SPL?
Step 1: Calculate closing allowance ( Closing receivables - debts written off * allowance rate.)
Then:
Opening allowance x
Increase/Decrease in allowance (x)
Debts written off x
Total = SPL Charge.
84
What is the double entry for an allowance for receivables where no previous allowance has been made?
Debit: Increase/Decrease in Allowance
Credit: Allowance for receivables
85
What is the proforma for Expense accruals/prepayments?
Expenses
—————————————-
PP B/F | Accrual B/F
Cash | SPL Charge
Accruals C/F | PP C/F
|
|
86
What is the proforma for income prepayments/accruals?
Income
—————————————-
Accrual B/F | PP B/F
SPL Charge |Cash
PP C/F | Accruals C/F
|
|
87
What is the bank rec statement?
Balance per bank statement: X
Less: Unpresented cheques (X)
Plus: Unrecorded lodgements X
Plus/Less: Bank errors. X / (X)
Balance as per correct, adjusted cash book. X
88
What are the differences between the cash book and bank statement?
Timing differences:
- Unrecorded lodgements (Paid into bank not on statement.)
- Unpresented cheques (Paid out of bank not on statement. )
Omissions: Items on the bank statement but not in the cash book (Direct debits, bank charges, interest)
Errors: Either on cash book or bank statement.
89
What is the double entry for payment of net wages?
Dr: Wages Control Account
Cr: Bank
90
What is the double entry to record both employee and employer social security payments?>
Employees
Debit: Wages Ctrl
Credit: Tax
Employers:
Debit: Wages Expense
Credit: Tax
91
Where are net vs gross wages debited to?
Net: Wages Control account
Gross: Wages expense Account.
92
How should a business account for a settlement discount that is expected to be taken?
If the business believes the customer will take advantage of the settlement discount, the sale will be recorded in the nominal ledger net of the discount. And vice versa.
93
How are discounts received accounted?
The purchaser initially records the purchase at full cost and don’t consider whether or not they are going to take the settlement discount.
94
What is a control account?
A control account is a total account:
- it’s balance represents an asset or a liability which is the grand total of many individual assets or liabilities.
- These individual assets/liabilities must be separately detailed in subsidiary ledger accounts, but their total is conveniently available in the control account ready for immediate use.
95
What are the reasons for maintaining control accounts?
- Control accounts provide a convenient total which can be used immediately in extracting a trial balance or preparing accounts.
- A reconciliation between the control account total and sales ledger will help to detect errors, providing an important control.
96
Where does a casting error in a day book require adjustment?
In the control account not the individual balances from purchase/sales ledger.
97
What types of errors will allow the TB to balance?
- Errors of omission
-Errors of original entry
-Reversal of entries. E.g NCA purchase recorded at correct amount but with debit and credit reversed.
Errors of principle: E.g treating capex as opex
Errors of commission: Putting phone expenses in the electricity expense account.
98
What types of error cause an imbalance in the TB?
-Unequal amounts errors: Writing 381 as 318. (Difference always divisible by 9)
-Single entry error: Debit with no corresponding credit.
-Two debits or credits error
-Balance transfer error: Finance balance on ledger account is transferred to TB incorrectly.
99
What are the steps to clear a suspense account?
1: Determine the original entry
2: Decide what entry should have need made.
3: Make the required adjustment.
100
Inventory is taken by the owner of a business - what effect does this have on profit & net assets?
Profit will rise.
Net assets stay the same.
101
Is closing inventory included in a normal TB?
NO - its entered twice in an extended TB (SPL & SOFP)
102
What is the alternate way to calculate profit?
P = increase in net assets + drawings - increase in capital.
103
How to calculate closing SLCA balance?
Opening SLCA balance + Sales - Cash receipts = Closing SLCA balance.
104
How to calculate PLCA closing balance?
Opening balance + Purchases - Cash payments = Closing PLCA balance.
105
What is GAAP and where is it drawn from?
-Generally Accepted Accounting Practice
Drawn from:
-Company Law
-Accounting Standards
-IFRs
-Stock Exchange
106
What are accounting standards for?
To provide information as to how transactions and events should be reflected in the financial statements.
Issued by IASB, includes IFRS and IAS.
107
What does IAS 1 state financial statements should comprise?
- SPL
- Statement of Changes in Equity``
-SOFP
-Statement of cash flows.
-Notes
108
What are the characteristics of ordinary shares?
Generally carry voting rights
No right to a fixed dividend
Entitled to remaining profits after preference dividend
Entitles to surplus on repayment of capital
109
What are the accounting entries for an issue of shares at nominal value vs share premium?
Nominal:
Debit Bank
Credit Share capital
Premium:
Debit bank (Total)
Credit share capital (Nominal Value)
Credit Share premium (Premium)
110
What are a bonus issue of shares and how to account?
Issue of extra shares at no cost
Debit Share premium
Credit Share capital
Effectively moves premium to capital.
111
What is a rights issue of shares and how to account?
Issue of extra shares to existing shareholders at below market value.
Debit Bank
Credit Share Capital (Nominal Value)
Credit Share premium (Premium)
112
How are redeemable preference shares treated?
Redeemable preference shares are treated as a liability in the financial statements. And any dividend is shown in SPL as a finance charge.
113
How to calculate cost of finished goods?
Prime Cost (Cost of raw materials (Opening + Purchases - Closing) + Direct Labour) X
Indirect Cost _X_
Factory Cost of Production X
Adjustment for WIP (Opening WIP - Closing WIP) X
Cost of finished goods _X_
114
What constitutes the prime cost of goods manufactured?
Raw materials consumed + Direct Labour + Direct expenses
115
What is the purpose of a statement of cash flows?
Shows the effect of an enterprises commercial transactions on it’s cash balance.
116
In a statement of cash flows, where does interest paid appear?
Cash flows from operating activities
117
How to calculate the net cash generated from financing activities?
= Issue of shares + Share prem received + proceeds of rights issue - loan repaid.
118
How to calculate the cash flows from NCA?
Cash flow = Sales proceeds - purchases.
119
How to calculate sales proceeds of NCA?
Sales proceeds = carrying amount + Profit.
120
Which heading in cash flow does purchase of NCA & issue of shares appear?
NCA: Investing activities
Issue of Shares: Financing activities
121
How to calculate gross, net and operating profit margins?
Gross/Net/Operating profit / Revenue
122
How to calculate ROCE & Asset Turnover?
ROCE: Operating Profit / Capital Employed (Assets - Current Liabilities)
NCA Turnover: Revenue / NCA
123
How to calculate Current & Quick ratio and Inventory Turnover ?
Current: Current assets / Current liabilities
Quick: Current assets - inventory / current liabilities
Inventory: COS / Inventory
124
How to calculate trade receivables, payables collection & Inventory days?
TR: Trade Receivables / Revenue * 365
TP: Payables / COS * 365
(Use purchases if information available)
Inventory: Inventory / COS * 365
125
How to calculate the working capital cycle?
Inventory days + Receivables days - payables days
126
How to calculate gearing & interest cover?
Gearing: Non-current liabilities / total equity + NCL
Interest cover: Operating profit / Finance costs
127
What is working capital?
Current assets - current liabilities
128
What is equity?
The residual interest in the assets of an entity after deducting all liabilities.
Equity = Net assets
Equity = Share capital + Reserves
129
What constitutes faithful representation?
Information has the quality of faithful representation when its complete, neutral and free from material error.
130
What must be the case for an item to be recognised in the financial statements?
An item must:
Meet the definition of an element
Be relevant to the entity
A faithful representation of the transactions of an entity.
131
What is the purpose of financial statements?
To provide financial information about the entity that is useful to existing & potential investors and creditors in making decisions about providing resources to the entity.
132
What are the fundamental qualitative characteristics of financial information?
Relevance
Faithful representation
133
What are the enhancing qualitative characteristics of financial information?
Comparability
Verifiability
Timeliness
Understandability
134
What is the value in use?
THe discounted value of all future cash flows relating to the asset / liability.
135
What is the role of the IFRS interpretations committee?
To issue guidance on how to apply IFRS standards
136
What is the role of IFRS?
To provide instructions as to how items should be shown in a set of financial statements.
137
Who raises finance to support the regulatory system?
IFRS Foundation
138
Which body liaises with national accounting standard setters to achieve convergence?
IASB
139
What are the influences upon financial accounting?
Company Law
IFRS
140
Formulating IFRSs is the role of who?
IASB
141
Who does the IFRS Interpretations committee report to?
IASB
142
Which bodies do the IFRS foundation appoint the members?
IFRS advisory council, IASB & IFRS Interpretations committee.
143
What is an objective of the IFRS foundation?
To bring about convergence of national accounting standards and IFRS.
