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Accounting flashcards

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AS Topic 1: Financial accounting

Sole trader: liability and the accounts it keeps: Unlimited liability. Keeps a capital account and records drawings.
Partnership: liability and the accounts it keeps: Unlimited liability (usually). Keeps capital and current accounts for each partner, and an appropriation account.
Limited company: liability and the accounts it keeps: Limited liability. Keeps share capital, reserves and records dividends.
What does unlimited liability mean?: The owner's personal assets can be taken to settle the business's debts.
One advantage and one disadvantage of a limited company compared with a sole trader: Advantage: limited liability and easier access to larger amounts of capital. Disadvantage: more regulation and disclosure, and (for a plc) some loss of control as ownership spreads across shareholders.
Name the sources of finance listed in 9706 topic 1.1: Loans (secured or unsecured), bank overdrafts, payment by instalments, rental or leasing, and trade credit.
Are debentures share capital?: No. Debentures are long-term loans. Debenture interest is an expense, not an appropriation of profit, and debenture holders have no vote.
The accounting equation: Assets = liabilities + capital. Every transaction changes it in a way that keeps both sides equal.
Put the stages of the accounting system in order: Source documents → books of prime entry → ledgers → trial balance → financial statements.
What goes in the sales journal, and what does not?: Credit sales of goods only. Cash sales go to the cash book; sales of non-current assets go to the general journal.
Name the six books of prime entry: Sales journal, sales returns journal, purchases journal, purchases returns journal, cash book and general journal.
Business entity concept: why does capital appear with liabilities, and why do drawings not reduce profit?: The business is separate from its owner, so capital is an amount the business owes back to the owner. Drawings reduce capital, not profit.
Prudence concept: Profits are not overstated; losses and liabilities are not understated.
Realisation concept: Revenue is recorded when it is earned, not necessarily when cash is received.
Matching (accruals) concept: Income and expenses are recorded in the period they relate to, not when cash moves.
Substance over form: Transactions are recorded by their real economic substance, not just their legal form.
Going concern concept: The accounts assume the business will continue operating for the foreseeable future.
Computerised accounting: two advantages, two disadvantages and the usual data safeguards: Advantages: speed, fewer arithmetic errors, easier reports. Disadvantages: set-up and training cost; reliance on system reliability and data security. Safeguards: passwords, access levels and regular backups.
Capital expenditure vs revenue expenditure: Capital: acquiring or improving a non-current asset; benefits more than one period. Revenue: day-to-day running costs, including repairs; benefits the current period only.
Effect of recording capital expenditure as revenue expenditure: Profit is understated and the non-current asset is understated. (Recording revenue expenditure as capital overstates both.)
Four causes of depreciation: Physical wear and tear, economic obsolescence, the passing of time (a fixed useful life) and depletion (for example mineral reserves).
Straight-line depreciation: formula, and the charge on a $20,000 van with a $2,000 residual value and a 4-year life: (Cost − residual value) ÷ useful life. ($20,000 − $2,000) ÷ 4 = $4,500 every year.
Reducing balance at 40% on a $20,000 van: charges for years 1 and 2: Year 1: 40% × $20,000 = $8,000 (carrying value $12,000). Year 2: 40% × $12,000 = $4,800. The percentage is applied to carrying value, not cost.
Cost model vs revaluation model: Cost model: the asset stays at cost less accumulated depreciation. Revaluation model: the asset is revalued to current value; gains generally go to a revaluation reserve, not straight to profit.
A machine (cost $15,000, accumulated depreciation $9,000) is part-exchanged for an allowance of $4,500. Profit or loss on disposal?: Carrying value $15,000 − $9,000 = $6,000. $6,000 − $4,500 = $1,500 loss on disposal, taken to the statement of profit or loss.
Disposal account: the three main entries: Debit disposal, credit the asset account with cost. Debit accumulated depreciation, credit disposal. Credit disposal with the proceeds or part-exchange allowance. The balance is the profit or loss on disposal.
What logic do the trial balance, bank reconciliation and control accounts share?: Take two independently produced figures that should agree, compare them, and investigate any difference.
Name the six errors that do not affect the balancing of the trial balance: Omission, commission, principle, original entry, complete reversal and compensating errors.
Error of commission vs error of principle: Commission: right type of account, wrong account (for example the wrong customer). Principle: wrong class of account altogether (for example an expense posted to an asset).
$600 of stationery is posted to Office Equipment. Type of error and correcting entry?: Error of principle (asset instead of expense). Debit Stationery expense $600, credit Office equipment $600. No suspense account: the trial balance still balanced.
When is a suspense account opened?: Only when an error makes the trial balance disagree. It holds the difference until correcting journal entries clear it.
Cash book $1,850; bank statement $2,100; unpresented cheque $400; bank charges $150 not in the cash book. Reconcile.: Updated cash book: $1,850 − $150 = $1,700. Bank statement $2,100 − unpresented cheque $400 = $1,700. Both agree.
Are unpresented cheques and outstanding lodgements errors?: No. They are timing differences. The cash book is not changed for them; the bank reconciliation statement explains them.
Control account: one benefit and one limitation: Benefit: an independent check that locates errors faster, since only that ledger needs checking. Limitation: the control account can itself contain errors, and agreement does not prove every transaction is right.
Year-end entries for an expense owing and an expense prepaid: Owing: debit the expense, credit other payables. Prepaid: debit prepayments, credit the expense.
Rent paid $7,200; $600 owing at the start and $900 owing at the end. Rent expense for the year?: Cash paid + closing accrual − opening accrual. $7,200 + $900 − $600 = $7,500.
Insurance of $3,600 is paid for 12 months from 1 October. Year end 31 December. Expense and prepayment?: Expense: 3 months = $900. Prepayment: 9 months = $2,700.
Receivables $20,000 before writing off $1,000. Allowance 4%; old allowance $650. Total charge?: Remaining receivables $19,000 × 4% = $760. Increase $760 − $650 = $110. Charge = $1,000 irrecoverable debt + $110 = $1,110.
Inventory cost $5,200, net realisable value $4,600. Value and write-down?: Lower of cost and NRV: $4,600. Write-down $600.
Incomplete records: opening capital $21,500, closing $26,300, drawings $11,000, capital introduced $2,000. Profit?: Profit = closing − opening + drawings − capital introduced. $26,300 − $21,500 + $11,000 − $2,000 = $13,800.
No partnership agreement: what does the Partnership Act 1890 provide?: Profits and losses shared equally; no partners' salaries; no interest on capital; no interest on drawings; 5% a year interest on partners' loans.
Where does interest on a partner's loan go?: It is an expense charged before profit for the year, not an appropriation. Interest on capital is an appropriation.
X (capital $50,000) and Y ($30,000): 6% interest on capital, Y salary $9,000, profit $40,000 shared equally. Each partner's total?: Interest: X $3,000, Y $1,800. Residual $40,000 − $3,000 − $1,800 − $9,000 = $26,200, so $13,100 each. X: $16,100. Y: $23,900.
A 2 for 5 rights issue on 90,000 $1 shares at $1.80. Entries?: 36,000 new shares. Debit bank $64,800; credit share capital $36,000; credit share premium $28,800.
Bonus issue: entry, and can the revaluation reserve fund it?: Debit a reserve, credit share capital. No cash is received. The revaluation reserve is not used for a bonus issue.
Capital reserves vs revenue reserves: examples: Capital reserves: share premium, revaluation reserve. Revenue reserves: retained earnings, general reserve.
Revenue $480,000, cost of sales $288,000. Gross profit margin and mark-up?: Gross profit $192,000. Margin: 192,000 ÷ 480,000 × 100 = 40.0%. Mark-up: 192,000 ÷ 288,000 × 100 = 66.7%.
Return on capital employed: formula and what capital employed includes: Profit from operations ÷ capital employed × 100. Capital employed = issued shares + reserves + non-current liabilities.
Current assets $96,000 (inventory $40,000), current liabilities $56,000. Current ratio and acid test ratio?: Current ratio 96,000 : 56,000 = 1.7 : 1. Acid test (96,000 − 40,000) : 56,000 = 1.0 : 1.
Trade receivables turnover in days: formula, and the figure for receivables $45,000 and credit sales $438,000: Trade receivables ÷ credit sales × 365. 45,000 ÷ 438,000 × 365 = 37.5 days.
Opening inventory $30,000, closing $42,000, cost of sales $216,000. Inventory days and rate of inventory turnover?: Average inventory $36,000. Days: 36,000 ÷ 216,000 × 365 = 60.8 days. Rate: 216,000 ÷ 36,000 = 6.0 times.
Which ratios would a supplier check before granting credit?: The current ratio, the acid test ratio and trade payables turnover (days).
Possible causes of a fall in gross profit margin: Dearer materials, discounts given to customers, or a change in product mix.
Three limitations of accounting information when comparing businesses: Any three: historic cost and past data; estimates such as depreciation affect profit; non-financial factors left out; a year-end snapshot may be unrepresentative; different policies, size and year ends limit comparison.

AS Topic 2: Cost and management accounting

Direct cost and prime cost: Direct cost: traceable to a cost unit (direct materials, direct labour, direct expenses). Prime cost: the total of direct costs.
Semi-variable cost vs stepped cost: Semi-variable: a fixed part plus a variable part. Stepped: fixed within a range of activity, then jumps at a threshold.
High-low method: total cost $8,000 at 1,000 units and $10,000 at 1,500 units. Variable and fixed parts?: Variable cost per unit = change in cost ÷ change in output = $2,000 ÷ 500 = $4. Fixed = $8,000 − (1,000 × $4) = $4,000.
One supervisor ($2,500) is needed per 20 workers or part. Cost for 65 workers?: 65 ÷ 20 = 3.25, rounded up to 4 supervisors. 4 × $2,500 = $10,000.
Opening 50 units at $4.00, bought 50 at $5.00, issued 60. Closing inventory under FIFO and AVCO?: FIFO: 40 × $5.00 = $200 (issues $250). AVCO: average $450 ÷ 100 = $4.50; 40 × $4.50 = $180 (issues $270).
When prices are rising, which of FIFO and AVCO gives the higher profit?: FIFO. Issues are priced at the older, lower costs, so closing inventory is higher and so is profit.
Just in time (JIT): two benefits and two risks: Benefits: lower storage cost, less cash tied up, less obsolescence. Risks: stoppages from late deliveries, lost bulk discounts, higher ordering costs.
Classify a factory supervisor's salary by traceability and by behaviour: Indirect labour (an overhead) and fixed.
Unit, job and batch costing: when each is used: Unit: identical output or a repeated service (cost per patient visit). Job: work to a customer's order (custom furniture). Batch: groups of identical items (a bakery batch).
Allocate, apportion and reapportion overheads: Allocate: charge a whole overhead to one cost centre. Apportion: share an overhead on a fair basis (rent on floor area). Reapportion: recharge service department costs to production departments.
Overhead absorption rate: formula and choice of basis: OAR = budgeted overhead ÷ budgeted activity. Use machine hours for machine-led work and labour hours for labour-led work. Absorbed overhead = actual activity × OAR.
Budgeted overhead $90,000, budgeted 15,000 labour hours. Actual: 14,200 hours, overhead $88,000. Result?: OAR $6.00 per hour. Absorbed 14,200 × $6 = $85,200. Under-absorbed by $2,800, which reduces profit.
Price $50, variable cost $30, fixed costs $80,000. Contribution, break-even point and C/S ratio?: Contribution $20 per unit. Break-even 80,000 ÷ 20 = 4,000 units ($200,000 revenue). C/S ratio 20 ÷ 50 = 40%.
Same product (contribution $20, fixed costs $80,000): units for a $30,000 target profit, and margin of safety at a budget of 6,000 units: Target: (80,000 + 30,000) ÷ 20 = 5,500 units. Margin of safety: 6,000 − 4,000 = 2,000 units, or 33.3% of budget.
Inventory rises by 400 units; fixed overhead is absorbed at $5 per unit. Which profit is higher, marginal or absorption, and by how much?: Absorption profit is higher by 400 × $5 = $2,000, because fixed overhead is carried forward in closing inventory.
Make or buy: 8,000 units, variable cost $9.00, avoidable fixed cost $10,000, supplier quote $10.50. Decision?: Make cost = $9.00 + ($10,000 ÷ 8,000 = $1.25) = $10.25 per unit. Make: it saves $0.25 × 8,000 = $2,000.
Closing a product line: what do you compare?: Its contribution with the fixed costs that closure would avoid. Ignore unavoidable shared costs such as allocated head office costs.
Limiting factor: how are products ranked?: By contribution per unit of the scarce resource (not contribution per unit). Fill demand in that order until the resource runs out.
Special order: when should it be accepted on financial grounds?: When the price is above variable cost and there is spare capacity. Then weigh non-financial factors such as the effect on regular customers.

A Level Topic 3: Financial accounting

Inherent goodwill vs purchased goodwill: Inherent: built up by the business itself (reputation, location, customers); not recorded in the books. Purchased: price paid above the fair value of net identifiable assets; recorded as an asset.
Ana and Bo share 2:1 and admit Cy, all sharing equally. Goodwill $24,000, not kept in the books. Net entry for each?: Ana: credit $16,000, debit $8,000 = net credit $8,000. Bo: credit $8,000, debit $8,000 = nil. Cy: debit $8,000.
Revaluation account vs realisation account: Revaluation: restates asset values while the partnership continues; the gain or loss is shared in the old ratio. Realisation: used on dissolution; takes the assets, proceeds and liabilities settled.
Profit $48,000. B salary $6,000. Interest on capital A $2,000, B $1,500. Interest on drawings A $400, B $250. Shared 3:2. Totals?: Residual: 48,000 − 6,000 − 3,500 + 650 = $39,150; A $23,490, B $15,660. A: 2,000 − 400 + 23,490 = $25,090. B: 6,000 + 1,500 − 250 + 15,660 = $22,910.
Receipts and payments account vs income and expenditure account: Receipts and payments: a summary of the cash book, capital and revenue items, starts and ends with bank. Income and expenditure: accruals basis, revenue items only, includes depreciation, ends with a surplus or deficit.
Subscriptions received $6,300. Arrears: $400 start, $250 end. In advance: $150 start, $220 end. Subscriptions income?: 6,300 − 400 + 250 + 150 − 220 = $6,080.
Accumulated fund: A club's total assets minus total liabilities. A surplus increases it; a deficit reduces it.
A life member pays $2,400, spread over 8 years. Annual release and balance after one year?: $300 a year released to income. $2,100 remains as a liability.
Prime cost and cost of production in a manufacturing account: Prime cost = raw materials used + direct wages + direct expenses. Cost of production = prime cost + factory overheads + opening work in progress − closing work in progress.
Closing finished goods $33,000 at transfer price, which is cost plus 10%. Provision for unrealised profit and SOFP value?: Provision = 33,000 × 10/110 = $3,000. Inventory shown at cost: $30,000. Only the change in the provision goes to the statement of profit or loss.
Profit before tax $50,000, depreciation $8,000, receivables up $4,000, payables up $2,500 (no interest). Cash generated from operations?: 50,000 + 8,000 − 4,000 + 2,500 = $56,500.
IAS 2: how is inventory valued, and which cost method is not allowed?: At the lower of cost and net realisable value (NRV = selling price − costs to complete and sell). FIFO or weighted average; LIFO is not permitted.
IAS 36: carrying amount $300,000, fair value $210,000, disposal costs $10,000, value in use $185,000. Impairment loss?: Recoverable amount = higher of fair value less costs of disposal ($200,000) and value in use ($185,000) = $200,000. Impairment loss: $300,000 − $200,000 = $100,000.
IAS 10: adjusting vs non-adjusting events: Adjusting: gives new evidence of a condition that existed at the reporting date, so change the figures. Non-adjusting: arose afterwards, so disclose if material. A dividend declared after the date is not a liability at it.
IAS 37: when is a provision recognised, and what happens to a possible obligation?: Provision: a present obligation, an outflow that is probable, and a reliable estimate. Possible: disclose as a contingent liability. Remote: nothing.
IAS 8: change in accounting policy vs change in accounting estimate: Policy change: applied retrospectively. Estimate change: applied prospectively, from now on, with no restatement. A prior period error: restate the comparatives.
Cost $60,000, residual $5,000, 5-year life. After 2 years the remaining life is revised to 2 years. New annual charge?: Old charge $11,000; carrying amount after 2 years $38,000. New charge (38,000 − 5,000) ÷ 2 = $16,500 a year, with no restatement of past years.
IAS 38: research vs development costs: Research is expensed. Development is capitalised as an intangible asset if the criteria are met. Internally generated goodwill is never recognised.
The five fundamental ethical principles: Integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour.
Qualified vs unqualified audit report: Unqualified: the statements give a true and fair view. Qualified: a true and fair view "except for" a stated material matter or missing evidence.
External audit vs internal audit: External: independent, appointed by and reporting to the shareholders on the financial statements. Internal: within the business, reports to management, reviews controls and efficiency.
IAS 1: the five parts of a complete set of financial statements: Statement of financial position; statement of profit or loss and other comprehensive income; statement of changes in equity; statement of cash flows; notes.
Merger vs acquisition: Merger: two or more businesses join to form a new business entity. Acquisition: one entity buys another business, so it becomes larger.
Assets at agreed values $52,000, liabilities taken over $9,500. Paid with 18,000 $1 shares issued at $2.50 plus $5,500 cash. Goodwill?: Net assets $42,500. Consideration $45,000 + $5,500 = $50,500. Goodwill $50,500 − $42,500 = $8,000 (an intangible non-current asset).
In that acquisition, 18,000 $1 shares are issued at $2.50. Credits to share capital and share premium?: Share capital $18,000 (nominal value). Share premium 18,000 × $1.50 = $27,000.
Business purchase account vs realisation account: Business purchase account: in the buyer's books; collects the price and is cleared when the consideration is settled. Realisation account: in the seller's books; records the sale of the assets and liabilities.
A partnership sharing 3:1 revalues before admitting a partner: premises up $6,000, inventory down $600. How is the result shared?: Revaluation profit $5,400, shared in the old ratio: $4,050 and $1,350.
A company buys only individual assets, not a whole business. What goodwill arises?: None. The purchase is recorded asset by asset at cost; goodwill arises only when a single price is paid for a whole business.
A buyer pays $65,000 for a business with book net assets of $60,500. Seller's realisation profit and where it goes?: $4,500 profit, credited to the seller's capital account (or to the partners in their profit-sharing ratio).
Paying for an acquisition with shares vs debentures or cash: Shares: save cash, but dilute existing shareholders. Debentures or cash: no dilution, but interest must be paid (and gearing rises) or the bank balance falls.
Control total vs record count vs hash total: Control total: a meaningful sum (total of balances). Record count: how many accounts. Hash total: a sum with no meaning in itself (total of account codes). All three compare the system with the source.
Validation vs verification: Validation: the system tests that an entry is reasonable (format, range, existing code). Verification: checking an entry against its source. A balance can pass validation and still be wrong.
Why is a period end the usual cut-over date for a transfer?: The opening balances are the closing balances of a finished period, so the manual books can be finalised and there is a clear point to compare against.
Direct, parallel and phased changeover: Direct: cheapest, highest risk. Parallel: gives a comparison, at the cost of double work. Phased: limits faults to one ledger, but prolongs the changeover.
A balance of 960 is keyed as 690. What is the difference, and what does it suggest?: Difference 270 = 9 × 30. A difference divisible by 9 points towards a transposition but does not prove it, so the figures must still be compared.
A supplier credit balance of $1,730 is entered as a debit. Effect on the trial balance?: The totals differ by twice the amount: 2 × $1,730 = $3,460. A difference of exactly double a balance suggests an entry on the wrong side.
Customer codes 6101 to 6105 have a hash total of 30,515. The system shows 24,411. What is missing?: 30,515 − 24,411 = 6,104, so account 6104 is missing.
An invoice dated 30 June is in the manual closing payables. Cut-over is 1 July. Should it be keyed as a July transaction?: No. It is already in the opening balance, so keying it again would count it twice.
Working capital cycle: formula, and the cycle for inventory 58 days, receivables 42 days, payables 61 days: Receivables days + inventory days − payables days. 42 + 58 − 61 = 39 days.
Net working assets to revenue: formula: (Inventories + trade receivables − trade payables) ÷ revenue × 100, shown as a percentage.
Interest cover: formula, and the figure for profit from operations $840,000 and interest payable $210,000: Profit from operations ÷ interest payable. 840,000 ÷ 210,000 = 4.0 times.
Gearing: formula, and the figure for non-current liabilities 600, share capital 1,000 and reserves 1,400 ($000): Non-current liabilities ÷ (issued ordinary share capital + all reserves + non-current liabilities) × 100. 600 ÷ 3,000 × 100 = 20.0%.
Profit for the year $450,000; 1,800,000 ordinary shares; market price $3.50. EPS and P/E?: EPS = 450,000 ÷ 1,800,000 = $0.25 = 25.0 cents. P/E = 3.50 ÷ 0.25 = 14.0.
Dividend per share, dividend yield and dividend cover: formulae: DPS = (interim dividend paid + final dividend proposed) ÷ number of ordinary shares. Yield = DPS ÷ market price per share. Cover = profit available for ordinary dividend ÷ annual ordinary dividend.
What does a high P/E ratio with a low dividend yield suggest?: Investors expect growth: they pay a high price relative to current earnings and accept a small cash return.
A company issues new loan notes. Effect on gearing and interest cover?: Gearing rises; interest payable rises, so interest cover falls. Earnings per share also become more sensitive to changes in profit.

A Level Topic 4: Cost and management accounting

Cost pool and cost driver: Cost pool: the overhead cost collected for one activity. Cost driver: the factor that causes the cost of an activity and measures each product's use of it.
An inspection pool of $45,000 is driven by 150 inspections. A product needs 12 inspections for 800 units. Cost per unit?: Driver rate 45,000 ÷ 150 = $300 per inspection. 12 × $300 = $3,600; $3,600 ÷ 800 = $4.50 per unit.
Total cost $13.50 per unit. Selling price with a 40% mark-up, and the margin that gives: Price = 13.50 × 1.40 = $18.90. Profit $5.40; margin = 5.40 ÷ 18.90 = 28.6% of selling price.
Selling price from a margin on selling price: formula: Selling price = total cost ÷ (1 − margin %). Mark-up is profit as a percentage of cost; margin is profit as a percentage of selling price.
What makes a good cost driver?: It causes the pool cost (cause and effect), can be measured for each product, the data is available at reasonable cost, and products use it in different proportions.
Why can ABC raise the cost of a low-volume product?: Low-volume products use set-ups, inspections and orders heavily for their size. Labour-hour absorption spreads these costs over high-volume lines; ABC moves them back to the products that cause them.
400 units are in closing inventory. Overhead is $6.00 per unit under ABC and $4.50 traditionally. Effect on total profit?: Profit is 400 × $1.50 = $600 higher under ABC, because more overhead is carried forward in inventory. If all output is sold, total profit is the same under both.
Three limitations of ABC: Costly and time-consuming to set up and run; the choice of pools and drivers needs judgement; some overheads have no clear driver; savings appear only if resources are actually removed.
Direct material price and usage variance formulae: Price = (standard price − actual price) × actual quantity bought. Usage = (standard quantity for actual output − actual quantity used) × standard price.
Standard 3 m at $4.00 per unit. 500 units made using 1,540 m costing $6,468. Price and usage variances?: Price: 1,540 × $4.00 − $6,468 = $308 A. Usage: (1,500 − 1,540) × $4.00 = $160 A.
Standard 2 hours at $9.00 per unit. 300 units made in 590 hours costing $5,605. Rate and efficiency variances?: Rate: 590 × $9.00 − $5,605 = $295 A. Efficiency: (600 − 590) × $9.00 = $90 F.
Fixed overhead expenditure and volume variances, and how volume splits: Expenditure = budgeted − actual fixed overhead. Volume = (actual output − budgeted output) × standard fixed overhead per unit. Volume = capacity + efficiency sub-variances.
Budget 1,000 hours, fixed overhead $12 per hour. Actual 950 hours worked; standard hours for actual output 920. Capacity and efficiency variances?: Capacity: (950 − 1,000) × $12 = $600 A. Efficiency: (920 − 950) × $12 = $360 A. Volume: $960 A.
Sales price and sales volume variances: Price = (actual price − standard price) × actual units sold. Volume = (actual units sold − budgeted units) × standard profit per unit.
Material price favourable with usage adverse; labour rate favourable with efficiency adverse. Likely causes?: Materials: cheaper material that was wasted more. Labour: trainees or less skilled staff, paid less but working slower.
Two advantages and two disadvantages of standard costing: Advantages: management by exception; variances assigned to managers; targets can motivate; simpler inventory valuation. Disadvantages: standards are costly to set and update; out-of-date standards mislead; variances are known only after the event.
Master budget: The summary of all the budgets: usually the budgeted statement of profit or loss, budgeted statement of financial position and cash budget.
Production budget formula. Sales 450 units, opening inventory 60, closing 90?: Production = sales + closing inventory − opening inventory. 450 + 90 − 60 = 480 units.
Material used 1,200 kg; opening inventory 150 kg; closing 200 kg; $3.20 per kg. Purchases?: 1,200 + 200 − 150 = 1,250 kg. 1,250 × $3.20 = $4,000.
Sales: January $10,000, February $12,000. Customers pay 70% one month after sale, 30% two months after. Cash received in March?: 30% × $10,000 + 70% × $12,000 = $3,000 + $8,400 = $11,400.
Why is depreciation left out of a cash budget?: It is a non-cash expense: no money leaves the business. It is still included in the budgeted statement of profit or loss.
Variable costs are $18,000 at 600 units. Flexed figure at 750 units, and what happens to fixed costs?: $18,000 ÷ 600 = $30 per unit; 750 × $30 = $22,500. Fixed costs are not flexed (within the normal activity range).
Why compare actual results with a flexed budget rather than a fixed budget?: Both relate to the same output, so the remaining differences come from price, efficiency and spending, not volume. Managers are not blamed for volume they did not control.
Limiting factor in budgeting: The scarce resource or condition that caps activity (demand, labour, materials, machine hours, cash). Budget that function first and fit the others to it.
Participative vs imposed budgets: one risk of each: Participative: managers may build slack into their requests. Imposed: quick and aligned with objectives, but managers may resent and reject targets they did not help set.
Discount factor formula, and the factor for year 3 at 8%: 1 ÷ (1 + r)ⁿ. 1 ÷ 1.08³ = 0.7938.
Cost $50,000; inflows $15,000, $20,000, $25,000, $10,000 in years 1–4. Payback?: Cumulative $15,000, $35,000 after 2 years; $15,000 still needed from year 3's $25,000. 2 + 15,000 ÷ 25,000 = 2.6 years (about 2 years 7 months).
ARR: formula. Cost $40,000, 4 years, total net cash inflows $56,000, no residual value?: ARR = average profit ÷ average investment × 100. Profit $16,000; average profit $4,000; average investment $20,000; ARR = 20%.
Cost $30,000; $12,000 a year for 3 years; factors at 10%: 0.9091, 0.8264, 0.7513. NPV and decision?: Present values 10,909 + 9,917 + 9,016 = $29,842. NPV = 29,842 − 30,000 = ($158). Negative, so reject.
NPV is $2,000 at 12% and ($1,500) at 16%. Estimate the IRR: IRR ≈ 12 + [2,000 ÷ (2,000 + 1,500)] × 4 = 14.3%. It is an estimate from interpolation; accept only if above the cost of capital.
Forecast profit $9,000 after depreciation $6,000 and an apportioned overhead of $1,500 that would be paid anyway. Net cash inflow?: 9,000 + 6,000 + 1,500 = $16,500. Depreciation is non-cash and the apportioned overhead is not a relevant cash flow.
Which appraisal techniques ignore the time value of money, and which uses profit rather than cash?: Payback and ARR ignore the time value of money. ARR uses profit; payback, NPV and IRR use cash flows.
One strength and one weakness each of payback and NPV: Payback: simple, shows speed of cash recovery; ignores later cash flows and the time value of money. NPV: uses all cash flows and the time value of money, shows value added; needs a cost of capital and relies on forecasts.

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Written for Cambridge International AS & A Level Accounting (9706), syllabus 9706 (2026-2028).

Cards by Marlbridge Academic Team; 146 restate definitions from the 9706 revision notes. This deck was reviewed by Javaid Iqbal Sabri on 2026-11-05. Report an error.

All 9706 notes, practice and topics