Accounting A Level P3 Flashcards
goodwill + types (2)
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)
- 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.
- 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.
factors that affect goodwill (5)
- location
- customer loyalty
- staff loyalty
- brand
- skill of management
purpose of clubs & societies
not to make profit but to promote the members’ cultural, social and recreational interests to the community.
difference in terms for clubs & societies
Capital = Accumulated Fund
Income Statement = Income & Expenditure
Profit/(loss) for the year = Surplus/(deficit) for the year
Bank account / Cash Book = Receipts & Payments account
accumulated fund
total surplus of funds built up over time used to finance future activities and expenses.
reasons why a business may account for manufacturing profit (3)
- to determine pricing decisions
- track how much profit is made from production before selling goods
- evaluate factory performance
IAS 2
Inventories
inventories should be valued at NRV and at lower of the cost
IAS 10 + treatment + examples + concept
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)
IAS 16 + treatment
Property, plant & equipment (handles how to value, record, and depreciate NCA)
prepare NCA schedule
IAS 36 + treatment + journal entry
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
IAS 37 + treatment + journal entry + examples
Provisions, contingent assets & liabilities
- probable (>50%)
adjusted in the FS and disclosed by way of notes
examples: legal cost (dr) other payables (cr) - possible (<50%)
disclosed to the notes
the need for an ethical framework in accounting
to ensure transparency, honesty, and fairness in financial reporting
why should a company comply with IAS (3)
- to ensure true & fair view of the financial statements
- forms the auditor’s opinion
- used to assess whether an investor should continue their investment
role and responsibilities of the auditor (2)
- provides reassurance ot trade holders that the business is providing financial statements with true & fair view
- to check for any fraudulent activities
differences between an external audit and an internal audit (3)
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
difference between a qualified and unqualified audit report
A qualified audit report indicates issues or limitations in financial statements
unqualified audit report confirms they are accurate and comply fully with accounting standards.
stewardship (2)
- directors manage the company on behalf of shareholders
- directors are accountable and report to shareholders
shareholders vs directors (3)
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
why aren’t sole traders required to do audits
- they are not listed in the stock exchange
- owners of their own company
intangible asset
an identifiable non-monetary asset with no physical manifestation where future benefits are expected
why are audits addressed to shareholders and not directors (2)
they are appointed by shareholders in the AGM
auditors are accountable to shareholders
advantages & disadvantages of an audit (2)
advantages:
- increases reliability
- better decision making for investor
disadvantages:
- costly
- sole traders don’t need
purpose of merger
to combine resources, expertise, and market share to create a stronger, more competitive new business entity
advantages and disadvantages of the acquisition or merger (3)
pros:
- EOS
- increased market share
- access to resources
cons:
- culture clash
- employee redundancies
- Customer & Supplier Disruptions (loss of)
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
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)
advantages of ratios (3)
- used for benchmarking
- for manager to use as a evaluation of efficiency
- to evaluate financial performance
decision making
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
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
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
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
how to convert loans to debenture
loan amount x (% on loan / % on debentures) = debenture
reasons for partnership dissolution (3)
death of partner
disagreements
partnership making a loss
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
no partnership agreement (3)
- equal share profit ratio
- no interest on drawings, capital, and salary
- interest on loan at 5%
items included in the appropriation account before the division of residual profit (3)
- interest on drawings
- interest on capital
- partner’s salary
ways a partnership could raise funds (4)
bank loan
loan from family members
partner contributing additional capital
selling of non current assets
advantages & disadvantages of new partner (2)
advantages:
- synergy
- share responsibilities and risk
disadvantages:
- shared profits
- longer decision making
- risk of disagreements
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
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
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
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 investmen
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
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.
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
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.
why should life membership be credited in the income & expenditure account for a long period of time
(2 concepts)
matching & prudence
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
