Technical Flashcards
IAS 18 Revenue [A]
Revenue recognition is straightforward in most business transactions, but some situations are more complicated. Generally, revenue is recognised (1) When the entity has transferred to the buyer significant risks and rewards of ownership AND (2) When the revenue can be measured reliably.
Ethical decision making
Ethical decision making is influenced by individual and situational factors. Individual factors include age, gender, beliefs, education and personal integrity. Situational factors include the systems of reward, authority, work roles and organisational factors.
Environmental Reporting
Although not compulsory, environmental reports are becoming increasingly important. You should distinguish between (1) Items that affect the financial statements and (2) Items that affect the environmental report.
Integrated Reporting
Integrated reporting is concerned with conveying a wider message on organisational performance.
It is intended that integrated reporting should lead to a holistic view when assessing organisational performance.
IAS 16/20/23 Definition of Asset / 3 important characteristics [B]
(1) Transaction to acquire control has taken place. (2) Have acquired control (Ownership). (3) Future economic benefit.
IAS 40 Investment Property
Property held to earn rentals or for capital appreciation or both.
IAS 38 Non-Tangible Assets
Non-monetary assets without physical substance.
Goodwill
(Sales) Value of the business as a going concern is > the value of its separate tangible assets. Non-purchased goodwill is never shown as an asset in the financial statements.
IAS 19 Employee Benefits
IAS 19 is a long and complex standard covering both short term and long term (post employment) benefits. The complications arise when dealing with post employment benefits. (1) The accounting for short term benefits is the same principle as any expense that is accrued over a period. (2) There are two types of post employment benefit plan (a) Defined Contribution Plan and (b) Defined Benefit Plan. There is a four stage method for recognising and measuring the expense and liability of a defined benefit plan.
IAS 12 Income Taxes (Current Tax & Deferred Tax)
Current tax - is the amount payable to the tax authorities in relation to the trading activities during the period. It is generally straight-forward. Deferred Tax - is an accounting measure used to match the accounting effect and tax effect of transactions. It is quite complex. Deferred tax assets and liabilities arise from taxable and deductible temporary differences.
IAS 9 IFRS 39 Financial Instruments
Financial instruments can be complex, particularly derivative instruments, although primary instruments are more straightforward. The important definitions to learn are Financial Assets, Financial Liabilities and Equity Instruments.
PRIMARY INSTRUMENTS
DERIVATIVE INSTRUMENTS
EQUITY INSTRUMENTS
FINANCIAL ASSETS
FINANCIAL LIABILITIES
IFRS 2 Share based payments
Share based payment transactions should be recognised in the financial statements. You need to be able to understand and be able to advise on (1) Recognition (2) Measurement and (3) Disclosure of both equity and cash settled transactions.
IAS 37 Provisions, Contingent Assets, Contingent Liabilities [C]
A provision should be recognised when (1) Present obligation (2) Transfer of economic benefits probable
(3) Reliable estimate can be made. A contingent asset or liability is identified when possible not probable, and cannot be measured reliably. An entity should not recognise a contingent asset or liability, but they should be disclosed.
Related Party Transactions and Disclosures
In the absence of information to the contrary, it is assumed that a reporting entity has independent discretionary power over its resources and transactions and pursues its activities independently of the interests of its individual owners, managers and others. These assumptions may not be justified when related party transactions exist because the requisite conditions for competitive, free market dealings may not be present. While the parties may endeavour to achieve arm’s length bargaining, the very nature of the relationship may preclude this occurring.
IAS 17 Leases (Definitions)
There are 2 forms of lease (1) Finance Lease and (2) Operating Lease. The definition of a Finance Lease is very important ; it is a lease that transfers all the risks and rewards of ownership of the asset, regardless of whether legal title passes.
IAS 17 Leases (Lessee Accounting & Lessor Accounting)
Lessee Accounting - Finance leases - Record an asset in the statement of financial position and a liability to pay for it ; Apportion the finance charge to give a constant rate of return. Operating leases - Write off rentals on a straight-line basis.
Lessor Accounting - Finance leases - Record the amount due from the lessor in the statement of financial position at the net investment in the lease ; recognise income to give a constant periodic rate of return. Operating lease - Record as a long-term asset and depreciate over useful life ; record income on a straight-line basis over the lease term.
You should also know how to deal with Manufacturer/Dealer Lessors (Offer customers a choice of either buying or leasing the asset) AND Sale and Leaseback (an asset is sold by a vendor and then the same asset is leased back to the same vendor).
UK Accounting Standards
(1) UK adopted International Accounting Standards.
(2) FRS 100 Application of Financial Reporting Requirements - FRS 100 sets out the financial reporting requirements for UK and ROI entities.
(3) FRS 101 Reduced Disclosure Framework - FRS 101 sets out a reduced disclosure framework which addresses the financial reporting requirements and disclosure exemptions for the individual financial statements and ultimate parents.
(4) FRS 102 The Financial Reporting Standard applicable in the UK and ROI - FRS 102 is a single financial reporting standard that applies to the financial statements of entities that are not adopting IFRS, FRS 101 or FRS 105.
(5) FRS 105 The Financial Reporting Standard Applicable to Micro-Entities Regime - FRS 105 is intended for use in the preparation of the financial statements of companies that qualify for the micro-entities regime.
IAS 7 - The Statement of Cash Flows
..Provides historical information about cash and cash equivalents, classifying cash flows between Operating, Investing & Financing.
IAS 7 - Definitions around cash flows (5)
Cash - compromises cash on hand and demand deposits.
Cash Equivalents - are short-term, highly-liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value (Gold, Shares) .
Operating Activities - are the principle revenue-producing activities of the entity, and other activities that are not investing or financing activities.
Investing Activities - are the acquisition and disposal of non-current assets and other investments not included in cash equivalents.
Financing Activities - are activities that result in changes in the size and composition of the equity capital and borrowings of the entity.
IAS 7 - Types of Operating Activities (Statements of Cash Flows)
(1) Cash receipts from Sale of Goods and Rendering of Services. (2) Cash receipts from Other Revenues, and Royalties, Fees, Commissions (RFC). (3) Cash payments to suppliers. (4) Cash payments to and on behalf of employees.
IAS 7 - Types of Investing Activities (Statements of Cash Flows)
(1) Cash Payments and Receipts to acquire Tangible and Intangible Assets.
(2) Cash Payments and Receipts relating to Interests in other Entities.
(3) Cash Payments and Receipts relation to Advances and Loans to other parties.
IAS 7 - Types of Financing Activities (Statements of Cash Flows)
(1) Cash proceeds from issuing shares.
(2) Cash payments to acquire or redeem shares.
(3) Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings.
(4) Cash repayments of amounts borrowed.
IAS 7 - Direct Method of Compilation (Statement of Cash Flows)
CASH FLOW FROM OPERATING ACTIVITIES
Cash receipts from customers
Cash paid to suppliers and employees
CASH GENERATED FROM OPERATIONS
Interest paid
Income taxes paid
NET CASH FROM OPERATING ACTIVITIES
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property, plant & equipment
Proceeds from sale of equipment
Interest received
Dividends received
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuing of share capital
Dividends paid
Proceeds from long-term borrowings
NET CASH FROM FINANCING ACTIVITIES
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT START OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD
IAS 7 - Indirect Method of Compilation (Statement of Cash Flows)
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit before taxation
Adjustments for; NON-CASH EXPENSES
Depreciation
Investment income
Interest expense
OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES
Increase/Decrease in trade and other receivables
Increase/Decrease in trade and other receivables
Increase/Decrease in inventories
CASH GENERATED FROM OPERATIONS
Interest received
Interest paid
Dividends paid
Tax paid
NET CASH FLOW FROM OPERATING ACTIVITIES
CASH FLOW FROM INVESTING ACTIVITIES
Payments / Receipts relating to property, plant & equipment
Payments / Receipts relating to intangible, non-current assets
NET CASH FLOW FROM INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Issue/redemption of share capital
Receipts / payments long term loan
NET CASH FLOW FROM FINANCING ACTIVITIES
INCREASE/DECREASE IN CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT START OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD
IAS 7 - Advantages of Cash Flow Accounting (Statement of Cash Flows)
3 - 2 - 2
Cash is a critical component. Not dependent on accounting conventions and concepts. Forecasts can be monitored. More easily understood. Offers to all users. Comparable. Creditors like.
IAS 7 - Disadvantages of Cash Flow Accounting (Statement of Cash Flows)
(1) Essentially the advantages of accrual accounting (matching of related items. (2) Practical proper records at current time as basis of cash flow.
Direct and Indirect Cost
Direct Cost - A cost that can be traced in full to a product, service or department that is being costed. Indirect Cost - A cost that cannot be traced directly to a product, service or department that is being costed.
Functional Cost
Functional Cost - Costs attributable to functions - Production, Administration, Marketing, Distribution.
Once costs classified?
A coding system can be applied to make it easier to manage the cost data.
Cost Unit / Cost Centre
A Cost Unit is a unit of product or service to which costs can be related. The basic control unit for costing purposes. A Cost Centre is a collecting place for costs before they are analysed further. Costs are further analysed into cost units once they have been traced to cost centres.
Revenue Centre / Cost Centre / Profit Centre / Investment Centre
Revenue Centre - Accountable for revenues only. Profit Centre - Accountable for revenues and costs. Investment Centre - A Profit Centre with additional responsibilities for capital investment and financing, and whose performance is measured by its return on investment.
Cost Behaviour - Definition / Principle / 4 types
(1) Cost Behaviour is the way in which costs are affected by changes in the volume of output. (2) The basic principle of cost behaviour is that as level of activity arises, costs will usually rise. (3) A Fixed Cost is a cost that tends to be unaffected by increases or decreases in the volume of output. (4) A Step Cost is a cost which is fixed in nature but only within certain levels of activity. (5) A Variable Cost is a cost which tends to vary directly with the volume of output. (6) A semi-variable/semi-fixed/mixed cost is a cost which contains both fixed and variable components and so is partly affected by changes in the level of activity.
The investment in inventory is very important one.
The investment in inventory is very important one for most businesses, both in terms of (1) monetary value and (2) relationships with customers (no inventory, no sale, loss of customer goodwill). It is therefore vital that management establish and maintain an effective inventory control system.
Every movement of material/inventory in a business should be recorded…
3 (purchase) + 3 (internal).
..using the following as appropriate; Purchase Requisition, Purchase Order, Good Received Note (GNR), Materials Requisition Note, Materials Transferred Note and Materials Returned Note.
Inventory costs include..
..[ Purchase costs, Ordering costs, Holding costs, and (Interestingly) Running out of inventory (cost of). ]
Inventory control levels.
Inventory control levels can be calculated in order to maintain inventories at the optimum level. The three critical control levels are (1) Reorder Level (2) Minimum Level and (3) Maximum Level.
The EOQ. The Economic Order Quantity.
The Economic Order Quantity (EOQ) is the order quantity calculated to minimise inventory costs.
The EBQ. The Economic Batch Quantity.
A modification of the Order Economic Quantity and is used when resupply is gradual rather than instantaneous. (EOQ is the order quantity calculated to minimise inventory costs).
Correct pricing and valuation of inventory.
The correct pricing and valuation of inventory are of the utmost importance because they have a direct effect on the calculation of profit. Several different methods can be used in practice. (1) FIFI (2) LIFO and (3) weighted Average (AVCO).
Production and Productivity.
Production is the quantity or volume of output produced. Productivity is a measure of the efficiency with which output has been produced. An increase in production without an increase in productivity will not reduce unit costs.
3 basis groups of remuneration
(1) Time work (2) Piecework schemes and (3) Bonus/Incentive schemes.
Idle Time?
Idle time is a cost because employees will still be paid their basic wage or salary for these unproductive hours and so there should be a record of idle time.
Labour Turnover and associated costs.
The cost of labour turnover can be divided into (1) Preventative costs (2) Labour costs and (3) Replacement costs
Overheads
An overhead is the cost incurred in the course of making a product, providing a service or running a department, but which cannot be traced directly and in full to a product, service or department.
Absorption Costing
The objective of absorption costing is to include in the total cost of a product an appropriate share of the organisation’s total overhead. An appropriate share is generally taken to mean an amount which reflects the amount of time and effort that has gone into producing a unit or completing a job.
Three main reasons for using absorption costing
(1) Pricing decisions. (2) Establishing the profitability of different products. (3) Inventory valuations.
The three stages of absorption costing
(1) Allocation (2) Apportionment (3) Absorption
Allocation - is the process by which whole cost items are charged direct to a cost unit or cost centre.
Apportionment - is the procedure whereby indirect costs are spread fairly between cost centres.
Absorption - is including an appropriate share of the organisation’s total overhead in the total cost of a product.
Overhead absorption is the process whereby overhead costs allocated and apportioned to production cost centres are added to unit, batch or job costs. Overhead absorption is sometimes called overhead recovery.
Overabsorption of overheads
Overabsorption of overheads occurs because the predetermined overhead absorption rates are based on estimates.
