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FFMA > FFMA Spring Week 2 > Flashcards

FFMA Spring Week 2 Flashcards

1
Q

What is a trial balance?

A

A summary of closing balances of all ledger accounts at a specific period end.

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2
Q

What method is used to record transactions throughout the year?

A

Double-entry bookkeeping.

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3
Q

When is a trial balance typically prepared?

A

At the period end, usually year-end.

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4
Q

How many columns does a trial balance have?

A

Two columns: debits on the left and credits on the right.

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5
Q

What is the main purpose of a trial balance?

A

To ensure that total debits equal total credits, indicating correct entries.

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6
Q

What does it indicate if the debits and credits do not match in a trial balance?

A

It indicates an error in the ledger entries.

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7
Q

What are the elements of financial statements into which ledger accounts are classified?

A

Assets, liabilities, equity, income, and expenses.

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8
Q

What type of balances do assets and expenses typically have?

A

Debit balances.

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9
Q

What type of balances do liabilities, income, and equity typically have?

A

Credit balances.

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10
Q

Can a balanced trial balance still contain errors?

A

Yes, errors can exist if debits and credits are posted to the wrong accounts.

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11
Q

What financial statements are prepared using the trial balance?

A

Statement of profit or loss and statement of financial position.

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12
Q

What items from the trial balance are used to calculate the profit for the period?

A

Revenue and expenses.

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13
Q

What are retained earnings?

A

Accumulated profits made by the company, added to equity.

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14
Q

Why are year-end adjustments necessary?

A

To ensure financial statements present a true and fair view.

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15
Q

What might year-end adjustments include?

A

Accounting for bad debts or recording transactions not yet included in the ledger.

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16
Q

What indicates an error if the trial balance totals are not equal?

A

It indicates that debits and credits were not equal in the ledger entries.

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17
Q

How are assets and liabilities presented in the statement of financial position?

A

Assets and liabilities are listed, with equity calculated as the difference between total assets and total liabilities.

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18
Q

Why is it important to classify ledger accounts into financial statement elements?

A

To correctly place them in financial statements and understand their nature.

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19
Q

What role does the trial balance play in preparing financial statements?

A

It provides the balances needed to create the statements.

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20
Q

What does the term “fair presentation” in financial statements mean?

A

Showing a true and fair view of the company’s financial performance and position.

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21
Q

What accounting principle is the basis of the concepts discussed?

A

Accruals accounting.

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22
Q

When should income be recognized according to accruals accounting?

A

Income should be recognized as it is earned.

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23
Q

When should expenses be recognized according to accruals accounting?

A

Expenses should be recognized when the entity is receiving the benefit.

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24
Q

When does an entity receive benefits from its inventory?

A

When the inventory is sold.

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25
Q

How do we match the expense of inventory to sales in accruals accounting?

A

By recognizing it as cost of sales.

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26
Q

How is inventory initially recognized when purchased?

A

Inventory is recognized at cost.

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27
Q

What is the double entry for purchasing inventory on credit?

A

Debit inventory and credit trade payables.

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28
Q

What is the double entry for purchasing inventory with cash?

A

Debit inventory and credit cash.

29
Q

What is the double entry when an item of inventory is sold?

A

Debit cost of sales (expense) and credit inventory (asset).

30
Q

What is the double entry for recording a sale made on credit?

A

Debit trade receivables and credit revenue.

31
Q

What is the double entry for recording a cash sale?

A

Debit cash and credit revenue.

32
Q

How do we record the cost of sales for the goods sold?

A

Debit cost of sales and credit inventory.

33
Q

What is the difference between revenue and cost of sales?

A

The difference is the profit made on the sale.

34
Q

How do most businesses account for cost of sales today?

A

Using an integrated sales invoice system with accounting software.

35
Q

How was cost of sales calculated traditionally?

A

Cost of sales was calculated at the end of the year.

36
Q

Where are sales and purchases recorded during the year in the traditional approach?

A

In the sales ledger and the purchase ledger.

37
Q

How is inventory counted in the traditional approach?

A

Inventory is counted once a year in an annual stocktake.

38
Q

What are the components needed to calculate cost of sales at year-end?

A

Opening inventory, purchases during the year, and closing inventory.

39
Q

What is the equation to calculate closing inventory?

A

Opening inventory + Purchases - Cost of sales = Closing inventory.

40
Q

How can we rearrange the equation to find cost of sales?

A

Cost of sales = Opening inventory + Purchases - Closing inventory.

41
Q

Where is the cost of sales figure used?

A

In the statement of profit or loss.

42
Q

How is the cost of sales calculation often shown in accounting?

A

Vertically, as an equation: Opening inventory + Purchases - Closing inventory.

43
Q

What do the brackets around closing inventory in the calculation indicate?

A

They indicate that closing inventory is subtracted.

44
Q

What standard governs the measurement of inventory?

A

IAS2 Inventories.

45
Q

How is inventory initially measured according to IAS2?

A

Inventory is initially measured at cost.

46
Q

How do you measure the cost of finished goods purchased for resale?

A

The cost is the amount paid, as indicated on the purchase invoice.

47
Q

What is an example of measuring inventory cost in a deli business?

A

Buying 100 jars of olives for £200, resulting in a cost per jar of £2.

48
Q

How do you recognize revenue when selling 50 jars for £4 each?

A

Recognize revenue of £200 (50 jars x £4).

49
Q

How do you calculate the cost of sales for selling 50 jars at £2 each?

A

Cost of sales = £100 (50 jars x £2).

50
Q

What is the gross profit from selling 50 jars at £4 each if the cost per jar is £2?

A

Gross profit = £100 (revenue of £200 - cost of sales of £100).

51
Q

What happens when you buy additional inventory at a higher cost?

A

You need to account for the new cost: 50 jars at £2.50 each, total inventory cost = £225.

52
Q

How do you calculate the cost of sales for selling 60 jars using FIFO?

A

Sell 50 jars at £2 + 10 jars at £2.50. Total cost of sales = £125.

53
Q

What is the remaining inventory value after selling 60 jars using FIFO?

A

Remaining inventory = 40 jars at £2.50 each, total value = £100.

54
Q

How do you calculate the average cost per jar using AVCO after purchasing additional jars?

A

Average cost per jar = (£2 for 50 jars + £2.50 for 50 jars) / 100 jars = £2.25 per jar.

55
Q

How do you calculate the cost of sales for selling 60 jars using AVCO?

A

Cost of sales = 60 jars x £2.25 per jar = £135.

56
Q

What is the remaining inventory value after selling 60 jars using AVCO?

A

Remaining inventory = 40 jars at £2.25 each, total value = £90.

57
Q

How do FIFO and AVCO methods impact cost of sales and gross profit?

A

Both methods result in different figures for cost of sales and gross profit, but revenue remains the same.

58
Q

Are both FIFO and AVCO acceptable under IAS2?

A

Yes, both methods are acceptable under IAS2.

59
Q

What is important to disclose about the chosen inventory measurement method?

A

Disclose the chosen method in the accounting policy section and apply it consistently.

60
Q

Is the LIFO method permitted by IAS2?

A

No, the Last-In, First-Out (LIFO) method is not permitted by IAS2.

61
Q

How is inventory measured for manufacturing businesses?

A

Inventory is measured at cost, including raw materials and production costs.

62
Q

What costs are included in the manufacturing of a product?

A

Costs include raw materials, production costs, labor, and overhead.

63
Q

What are the three elements of year-end inventory for manufacturing businesses?

A

Raw materials, finished goods, and work in progress (WIP).

64
Q

How is raw materials inventory measured?

A

Measured at cost using either FIFO or AVCO.

65
Q

How is finished goods inventory measured?

A

Measured at the cost of raw materials plus production costs.

66
Q

How is work in progress (WIP) inventory measured?

A

Measured based on the costs incurred up to that point in the production process.

67
Q

Why is consistent application of the inventory measurement method important?

A

To ensure transparency and comparability in financial statements.

68
Q

What is the difference between FIFO and AVCO?

A

FIFO (First-In, First-Out) assumes that the oldest inventory items are sold first, so the cost of sales is based on the cost of the oldest inventory. This method often aligns with the physical flow of goods, especially for perishable items. AVCO (Average Cost) calculates the cost of sales and remaining inventory based on the average cost of all inventory items available during the period. This method smooths out price fluctuations over time. Both methods result in different figures for cost of sales and ending inventory but are acceptable under IAS2.

FFMA (18 decks)

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