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Preparing Financial Statements > Revision > Flashcards

Revision Flashcards

1
Q

What is the accrual concept

A

Transactions should be reflected in the period they occur, not when the cash is received or paid.

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2
Q

What is a Disposal account used for

A

Ledger account used to account for all the entries relating to the disposal of an asset.

Works out the profit or loss on an asset.

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3
Q

When disposing an asset what ledger accounts must you clear?

A
  • The cost account of the asset (asset account)
  • The accumulated depreciation account for the asset.

These are cleared off to the disposal account.

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4
Q

How do you work out the profit/loss on a disposal?

A

Sale value of disposal

Minus

Carrying amount (cost of asset - acc. dep.)

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5
Q

4 steps of disposing a non-current asset

With accounting entries

A

1) Remove og cost from asset account.
DR Disposal acc
CR Asset cost acc

2) Remove accumulated depreciation of the asset.
DR Accu. Dep. acc for asset
CR Disposal acc

3) Enter cash received from asset.
DR Bank
CR Disposals

4) balance off disposal account & determine if a profit or loss is made.
(CRS > DRS = Profit)

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6
Q

Double entry to remove the cost of a disposed asset

A

DR Disposals
CR Asset account (cost)

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7
Q

Double entry to remove accumulated depreciation from a disposed asset

A

DR Accumulated Depreciation
CR Disposals

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8
Q

Double entry to record cash received for a disposed asset

A

DR Bank
CR Disposals

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9
Q

How do you know if a disposed asset has made a profit or loss
Using the disposals asset account

A

If CR>DR then a profit is made
If DR>CR then a loss is made

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10
Q

How do you account for a part exchange on a disposed asset

A

DR New asset account (as the p/x is part of the cost)
CR Disposals of old asset account.

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11
Q

What are the two differences when a disposed asset is part exchanged and when it’s just sold.

A

If it’s part exchanged you account for the part exchange value instead of accounting for the money received for the disposal.
DR New asset account (instead of bank)
CR Disposals.

and

you must account for the rest of the payment for the new asset
DR New asset account (cost)
CR Bank

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12
Q

How does VAT change disposals accounting

A

Must account for VAT on the purchase of a new asset and on the part exchange value of the disposed asset.

DR New asset
DR VAT
CR Bank

DR New asset
CR VAT
CR Disposals

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13
Q

Do you remove a disposed asset from Non-current asset register?

A

Yes, value should be 0.
There’s a disposed amount column.

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14
Q

If an accrual expense is omitted from the ledger does this effect assets?

A

No

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15
Q

What is the difference between zero-rated and exempt from VAT

A

Zero rated VAT can:
register for vat
charge output vat at 0%
recover input tax.

Exempt cannot

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16
Q

What is Gross pay for wages

A

The total due to the employee (before deductions)

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17
Q

What is Net pay for wages

A

The money actually received from the employee (after deductions)

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18
Q

What is capital expenditure and what financial statement is it shown in

A

Any spending on non-current assets (buying or improving)

Shown in the SofFP (Asset)

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19
Q

What is Revenue Expenditure and what financial statement is it shown in

A

All other expenditure that’s not capital expenditure (helps with daytoday running of the business)

Shown in SPL
(DR as an expense).

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20
Q

What is IAS 16

A

Explains how to treat non-current assets.

Tells you what can and can’t be recorded as a non-current asset.

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21
Q

If you make a cash sale where is this recorded?
(Cash upfront)

A

In the Cashbook

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22
Q

Are overheads included in cost of sales?

A

NO

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23
Q

What is an asset

A

A resource owned or controlled by a business

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24
Q

How do you calculate cost of sales

A

Open inventory + purchases -closing inventory

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25
Q

What is IAS 2

A

Deals with how inventory is valued.
States inventory should be valued at the lower value between cost and realisable value.

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26
Q

How should you value Closing Inventory

A

At the lower value between the cost and Realisable value.

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27
Q

What is the Net Realisable Value (NRV)

A

The actual or estimated selling price of stock less any future costs that are incurred selling the product.
(Selling price - Selling cost)

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28
Q

What does it mean if the Net Realisable Value (NRV) is higher than cost

A

A Profit is made.

Inventory should be valued at the cost price as this is lower (using IAS 2)

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29
Q

Why do we use IAS 2

A

We value stock at the lower value between net realisable value and cost so we don’t account for the profit or loss of the stock before it is sold.

If stock was valued at the NRV value and a profit was made, this profit is already on account through the stock valuation and the same with a loss.

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30
Q

What are the two methods of costing inventory ( and what they mean)

A

FIFO (First in First Out): Goods being sold are the earliest purchased goods (oldest stock)

Weighted Average Cost (An average cost for all items of that stock is calculated).

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31
Q

How do you account for closing inventory
(and what is open inv on financial statements)

A

DR SofFP Closing Inventory
CR SPL Closing Inventory

Dr SPL Opening inventory

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32
Q

What does ROCE show you
(Return on Capital Employed)

A

How much net profit is generated for every £1 capital invested in the business.

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33
Q

How do you calculate ROCE
(Return on Capital Employed)

A

(Net Profit / Capital Employed) X 100

Capital Employed = capital + non-current liabilites.

34
Q

How do you calculate Capital Employed for ROCE
(Return on Capital Employed)

A

Capital + non-current liabilities

35
Q

What does Expense over revenue ratio show you and how do you calculate it

A

Shows you the relationship between an expense or group of expenses and ratio.

= (Expenses / Revenue) X 100

36
Q

What does materiality principle mean
and material mistatement

A

Relates to how significant a transaction in the SofFP if it was wrong / omitted.
Material misstatement = its omission or misstatement changes the perspective of the business. e.g profits missing a 0.
Materiality relates to how significant it is.

37
Q

What does Going Concern mean

A

Going Concern is when you presume a business is going to continue operating and has no intention / need to liquidate or scale operations down.

38
Q

What does Prudence mean

A

You show good and careful judgement.
Financial Statements should be drawn up with prudence.

39
Q

What does the money measurement principle mean

A

Something should only be accounted for if it can be expressed in terms of money.

40
Q

What are the fundamental qualitative characteristics of financial information and what do they mean

A

Relevance (must be relevant, must influence the decision of the user)

Faithful Representation (financial info must be complete and accurate, no errors or bias)

41
Q

What are the enhancing qualitative characteristics of financial information and what do they mean

A

Comparability (Compare financial info over time or with competitors)

Verifiability (verify financial info so it is credible and trusting e.g. through an audit)

Timeliness (Info should be within a timescale to allow users to make their decisions)

Understandability (Easy to understand and use for users)

42
Q

What does the consistency principle mean

A

Users should be able to compare financial statements of the business over the years.
Presentation / classification should stay the same

43
Q

What are the 5 key ethical principles and what do they mean

A

Integrity (be straightforward + honest)

Objectivity (No bias or conflict of interest)

Professional Competence and Due Care (Have the right knowledge & competence to take on your tasks)

Confidentiality (keep private (confidential) info private unless by law or professional right)

Professional Behaviour (Don’t discredit aat and accountancy, follow the law and code of conduct.

44
Q

Why wouldn’t the cashbook and bank statement balance (3)

A
  • Uncleared lodgments (cheques not cleared in bank but on cashbook that (MONEY RECEIVED)
  • Unpresented cheques (Cheques added to the cashbook but not in bank yet (MONEY PAID)
  • Unrecorded transactions (Cashbook missing charges e.g. bank charges / DDs)
45
Q

Steps to reconciling the bank balance and cashbook

A
  • Make sure opening balances are the same (if not find the balances missing and add)
  • Compare Debit and Credit sides of both (opposites)
  • Any items not in the cashbook but in the bank must be added to the cashbook.
  • Any items in the cashbook but not in bank must be reconciled as an uncleared lodgement / unpresented cheque (can’t add to the bank balance)
46
Q

How do you reconcile the bank and cashbook when they don’t match.

A

Anything missing from the cashbook can instantly be added.

Anything on the cashbook and not on the bank will be added as a proforma as you can’t add the balance to the bank until cheques have cleared:
Bank Balance:
Add: uncleared lodgements
Less: Unpresented cheques
= Cashbook balance

47
Q

What balances are added to the bank reconciliation proforma

(when the bank doesn’t equal cashbook)

A

Only Unpresented cheques and uncleared lodgements (cheques)- the balances on the cashbook but not on the bank.

If there’s a balance on the bank but not on cashbook that can just be added straight away and not added to the proforma.

48
Q

When adding the Purchases value to the PLCA do you include VAT

(answer same for sales and slca)

A

Yes

Double entry:
Dr Purchases (Net)
Dr VAT (VAT)
CR PLCA (Gross)

49
Q

If there’s a specific allowance for a doubtful debt before the period begins is this taken from the Doubtful Debt Allowance?

A

NO

and the amount should be taken from SLCA balance before the amount for doubtful debt allowance is calculated.

50
Q

What does Profit Appropriation Mean

A

In a partnership, how profits are shared.

51
Q

What does profit appropriation include

A
  • Salaries
  • Interest on Drawings (only one that increases profit to split)
  • Interest on Capital
  • Commission
  • Profit split
52
Q

How do you work out profit appropriation

A

Net Profit

  • Any deductions (e.g. salary / commission / interest on capital.

+ Any interest on Drawings taken.

The remaining balance is divided using the profit share ratio and shared among partners.

53
Q

What figures do you take away for net profit for profit appropriation

A
  • Salaries
  • Interest on Capital
  • Comission
54
Q

What figures do you add to net profit for profit appropriation

A

Any interest gained from Drawings

55
Q

What is a Partners current account

A

Shows how much the business owes the partner (profit share / salaries etc.)

56
Q

How do you transfer profit from the appropriation account to the partners current account

A

DR Appropriation Account
CR Current account

57
Q

Double entry for a partner giving the business a loan

A

DR Cash
CR Loan

58
Q

Double entry for interest earned by a partner from loaning the business money

A

DR Interest expense

CR Bank (if already paid)
or
CR Partners current account (if still outstanding)

59
Q

How is a partnerships SofFP different to a soletrades

A

Partnerships SofFP capital account shows all the partners Capital Balances + their current account balances.

Soletrades show Closing Capital
(Open capital + Profit - Drawings)

60
Q

What is Residual Value

A

The cost the asset is estimated to be sold at after it’s estimated useful life.

61
Q

How is residual value and useful life used

A

You take it away from the non-current assets cost before calculating depreciation.

This is then worked out using the expected life of the asset

62
Q

Is insurance included in the non-current assent cost

A

No

This is accounted for separately as an expense

63
Q

What is the Depreciable amount

A

Asset cost - residual value divided by useful life (or depreciable percentage if given).

64
Q

What is Useful life

A

Expected life of a non-current asset (estimated number of years of output).

65
Q

How would you account for legal fees of a non-current asset

A

= part of the cost.
Included in asset cost.
= asset.

66
Q

What is involved in the cost of a non-current asset.

A

The purchase price
+any additional costs to get the asset to where it is and in working condition.

e.g. delivery cost / legal & professional costs / installation costs / test run costs etc.

Training is not part of this cost.

67
Q

How to you reconcile Sales and Purchase Ledger Control accounts

A

Compare the total of the control account with the total sum of all the individual balances in the subsidiary ledger.

If this doesn’t match there is an error.
You must find and correct this.

68
Q

What errors could cause the control accounts not to reconcile

A

Error in casting (adding e.g. adding up daybooks wrong so posting to control account is wrong).

Transposition error (reversing two digits)

Contra entry not recorded in both the control account and subsidiary ledger account

Balance omitted from only one account.

Dr entered as a Cr or vice versa

69
Q

3 Reasons why a business may have incomplete records.

A

Limited records (small business’ only keep minimal records)

Destroyed records (records destroyed in a fire or stolen etc.)

Missing figures (a particular figure may be missing e.g. drawings from the till is a common one).

70
Q

The 4 techniques to deal with incomplete information

A

The Net asset approach (accounting equation)

The Cash and Bank account

receivables and payables control accounts

mark ups and margins

71
Q

What is the net asset approach

A

For incomplete records. You use the accounting equation to find a missing figure

Capital = assets - Liabilities

If one of those figures is missing, you can use the formula to work it out.

Also can be used as:
Increase in net assets (assets - liabilities)
=
capital introduced + profit - drawings.

72
Q

What are the two formulas you can use for the net assets approach for incomplete records

A

Increase in net assets (assets - liabilities)

Capital = assets - liabilities

&

Capital introduced + profit - drawings

73
Q

How do you use the cash and bank technique for incomplete records

A

If you have a cash and bank account and you know the:
Opening balance
Closing balance
All other entries apart from one

Then you can find the missing figure by drawing up the account and working it out.

74
Q

What must you be careful of when combing the cash and bank account

A

When you bank cash you must enter both of the double entries.

Dr Bank
Cr Cash

Not just one, both must go into the joint account.

75
Q

How do you account for banking cash

A

DR Bank
CR Cash

76
Q

How do you use the sales and purchase ledger control account technique for incomplete records

A

If you know the
Opening balance
Closing balance
and all figures apart from one

Then this figure can be found as the balancing figure.

This usually tends to be purchases or sales missing.

77
Q

Can you combine the cash and bank technique and the SLCA/PLCA technique for incomplete records

A

Yes

E.g. can use the cash/bank technique to work out payments from customers
then use the SLCA technique to work out sales
etc…

78
Q

What is the difference between a margin and a mark-up

A

Margin = revenue = 100%
Mark-up = Cost = 100%

79
Q
A
80
Q

What does net vat mean for purchases

A

Before vat

81
Q

If a payment is overvalued for plca, do you add or subtract the difference to the purchases list

A

Add

82
Q

What’s the aim of depreciation

A

To match asset cost to the income generated throughout its life

Preparing Financial Statements (3 decks)

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