Accounting basics

Question 1

1. What is the Accounting Equation?
2. Rewrite the accounting equation to calculate net assets
3. Rewrite the accounting equation to calculate profit

Answer 1

1. Assets = Capital + Liabilities
2. Assets - Liabilities = Capital
3. Profit = Assets - Liabilities + Capital - Drawings
   (Capital = Capital + Profit - Drawings)

Question 2

Which of the following costs can be capitalised?

a) Building alterations needed to use the new asset

b) Testing costs

c) Installation costs

d) Training costs

e) Obligations known to the company on acquisition of asset, e.g. costs of disposal, site restoration

f) Replacement parts that increase the operating capacity of the asset

g) Repairs and renewals

h) Costs of opening a new facility

Answer 2

a, b, c, e & f

h is marketing / advertising costs

Question 3

What is the necessary journal when revaluing an asset upwards?

Answer 3

DR Asset W/ revaluation amount
DR Acc dep Full balance
CR Reval surplus (OCI) ᵦ

Question 4

What is the necessary journal when revaluing an asset downwards for the first time?

What is the necessary journal when revaluing an asset downwards, following a previous revaluation upwards?

Answer 4

First time losses are expenses to the P/L (gains are NEVER recognised in P/L, only reval surplus. Unless there has been a PY loss that was recognised in the PL, then the P/L expense can be reversed when there is a gain, net of the depn saving)

DR P/L Loss on revaluation
CR Asset

DR Reval surplus w/ until balance is 0
DR P/L Loss on revaluation ᵦ
CR Asset w/ full revaluation difference

Question 5

On an impairment review, what is the recoverable amount?

a) Fair Value less Costs to sell (10k)

b) Value in use (15k)

Answer 5

b - impairment reviews are based on is the highest recoverable amount. This is the business choice that would be made - if more valuable to keep or sell

Question 6

Does a firm HAVE to capitalise borrowing costs?

Answer 6

Yes, but there is an accounting policy choice as to how to release the expense

Question 7

What disclosures are necessary when borrowing costs have been capitalised?

Answer 7

The entity should disclose the AMOUNT of borrowing costs that have been capitalised
The entity should disclose the RATE used to determine the amount of borrowing costs

Question 8

What are the two types of funds an entity may have that may need to be capitalised as borrowing costs?

Answer 8

a) Funds borrowed specifically for construction - one given interest rate

b) General borrowing that is then used for construction - weighted average cost of borrowing needs to be determined

Question 9

What is the impact of any interest income earnt by a loan when it comes to capitalising borrowing costs

Answer 9

The borrowing costs capitalised should be reduced by the investment income

Question 10

How do you calculate the weighted average cost of borrowing?

Answer 10

Total Interest costs / Total borrowing

Question 11

a) In what situations are changes in accounting policy acceptable?

b) What situations are not considered changes in accounting policy?

Answer 11

a)
If required by IFRS
If the change will result in the FSs providing more relevant information
if a business has recently merged with one with different acc policies

b)
Adopting an acc policy for a new type of transaction or event

Question 12

If a company changes their acc policies voluntarily and it has a material impact on the CY or PY, how should this be reflected in the disclosures?

Answer 12

Disclosure note should explain;
The nature of the change
The reasons for change
The amount of the adjustment for CY
The amount of the adjustments in PY
Whether PY has been restated

Question 13

Name some examples of accounting estimates

Answer 13

Allowances for receivables
Useful lives of depreciated assets
Warranty provisions

Question 14

a) Are changes in accounting policies recognised prospectively or retrospectively?

b) Are changes in accounting estimates recognised prospectively or retrospectively?

Answer 14

a) Retrospectively

b) Prospectively

Question 15

Should changes in accounting estimates be disclosed?

Answer 15

Yes, if they have material impacts. The disclosure should detail;
- Nature of change
- Amount of change

Question 16

How is a HFS asset measured?

Answer 16

Lower of CA & FV-CTS

Question 17

What is a key criterion for the classification of a HFS asset?

Answer 17

That is is highly probably that it will be sold within 12 months of classification

Question 18

What is a key criterion for the classification of a Discontinued Operation?

Answer 18

Component entity that has either been disposed of or held for sale, and

• Represents a separate major line of business or geographical area of operations

OR

• is part of a single co-ordinated plan to dispose of a separate line of business or geographical area of operations

OR

• Is a subsidiary acquired exclusively with a view to resell

The operations and cash flow of the entity need to be clearly distinguishable from the rest of the entity

Question 19

How should a discontinued operation be disclosed in the FS?

Answer 19

A single line should be disclosed in FS, being the total of;

• the post tax P/L of the discontinued operation
• the post tax P/L on the measurement to FV-CTS

This single amount should then be broken down in the disclosure note

Question 20

What do related party disclosures need to contain?

Answer 20

Nature of relationship,
Transactions between those parties
Balances outstanding at the end of the period

Prices do not need to be discloses

Question 21

Identify the related parties in the following scenarios;

Scenario 1
Person A owns 30% of entity B and entity C owns 40% of entity B

a) Who are related parties to B
b) Who are related parties to C

Scenario 2
Person A and Entity B have joint control over entity C

c) Who are related parties to entity B
d) Who are related parties to entity C

Scenario 3
Person A owns 70% of entity B and is a director of entity C

e) Who are related parties to entity B
f) Who are related parties to entity C

Answer 21

a) A & C
b) B

c) C
d) A & B

e) A & C
f) A & B

Question 22

a) Is a transaction still classed as a RPT if no price is charged

b) Does a transaction need to be disclosed as a RPT if it is made at full market price?

Answer 22

a) Yes, must be disclosed

b) Yes, all RPT must be disclosed

Question 23

How do you calculate EPS generally

Answer 23

(Profit for year - dividends on EQUITY preference shares) / weighted average number of shares in issue

Ignore ordinary dividends or dividends on preference shares included as liabilities

Question 24

Which companies need to calculate EPS

Answer 24

Listed companies

Question 25

When calculating EPS, how should you deal with equity preference dividends in arrears paid in CY?

Answer 25

they should be excluded from the equity preference dividend figure deducted from PFY when calculating EPS as they are included in the year they arise

Question 26

What is the formula needed to restate the PYEPS when there has been a rights issue?

Answer 26

PYEPS * TERP/MV

Rights fraction = MV / Terp

TERP = Total Value / Total Shares

Value is on top - flip it for PYEPS

Total value = value of shares before rights issue + value of rights issue

Total shares = number of shares before rights issue + rights issue

Question 27

a) How should an entity deal with and present a change in accounting estimates?
- What are some examples?

b) How should an entity deal with and present a change in accounting policy?
- What are some examples?

Answer 27

a)

b) Applied

Question 28

Identify whether the following are current or non current assets;

a) Cars held for resale by a motor dealer

b) Cars held for use by employees

Answer 28

a) Current asset, inventory

b) PPE, Non current asset

Question 29

How do you discern whether an event is adjusting or non adjusting?

Should they be disclosed?

Answer 29

Adjusting events provide extra evidence over conditions that already existed at the end of the reporting period
If accounts have been adjusted you do not also need to disclose

A non adjusting event does not relate to things that were already there at year end
Should be disclosed if material