Flashcards · 9706 · A Level Topic 3

Financial accounting (A Level) flashcards

46 cards on A Level Topic 3, subtopics 3.1 to 3.5. Pick a subtopic or study them all.

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3.1 Preparation of financial statements

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.

3.2 Regulatory and ethical considerations

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.

3.3 Business acquisition and merger

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.

3.4 Computerised accounting systems

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.

3.5 Analysis and communication of accounting information

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.